<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                         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 February 15, 2001, the aggregate market value of 10,570,710 shares of
Common Stock outstanding and held by non-affiliates of Registrant was
$261,625,073.

    DOCUMENTS INCORPORATED BY REFERENCE: Portions of F&M Bancorp's 2000 Annual
Report to Shareholders are incorporated herein by reference into Part II.
Portions of the Proxy Statement dated March 16, 2000 relating to the 2000 Annual
Meeting of Stockholders of the Registrant are incorporated herein by reference
into Part III.

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                               TABLE OF CONTENTS

<TABLE>
<S>          <C>                                                           <C>
PART 1

Item 1       Business....................................................    3
        The Companies....................................................    3
             Farmers & Mechanics National Bank...........................    3
             Home Federal Savings Bank...................................    4
             Bank Deposits and Lending Activities........................    4
             Financial Information about Industry Segments...............    4
             Banking Products and Services...............................    4
             Environmental Liabilities...................................    4
             Seasonal Aspects............................................    4
             Employees...................................................    4
             Competition.................................................    4
        Supervision and Regulation.......................................    5
             Bank Holding Company Regulations............................    5
             Bank Regulations............................................    5
             Savings Bank Regulations....................................    6
             Support of Subsidiary Banks.................................    6
             Payment of Dividends and Other Restrictions.................    6
             Capital Requirements........................................    7
             Monetary Policy.............................................    7
             Legislation.................................................    7
Item 2       Properties..................................................    8
Item 3       Legal Proceedings...........................................    9
Item 4       Submission of Matters to a Vote of Security Holders.........    9

PART II

Item 5       Market for Registrant's Common Equity and Related
               Stockholder Matters.......................................    9
Item 6       Selected Financial Data.....................................   10
Item 7       Management's Discussion and Analysis of Financial Condition
               and Results of Operations.................................   11
Item 7A      Quantitative and Qualitative Disclosures About Market
               Risk......................................................   29
Item 8       Financial Statements and Supplementary Data.................   30
Item 9       Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure..................................   62

PART III

Item 10      Directors and Executive Officers of the Registrant..........   63
Item 11      Executive Compensation......................................   63
Item 12      Security Ownership of Certain Beneficial Owners and
               Management................................................   64
Item 13      Certain Relationships and Related Transactions..............   64

PART IV

Item 14      Exhibits, Financial Statement Schedules, and Reports on
               Form 8-K..................................................   64
             Signatures..................................................   67
</TABLE>

                                       2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

THE COMPANIES:

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

    On December 31, 2000, Bancorp had consolidated assets of $1.795 billion,
total loans of $1.220 billion, total deposits of $1.364 billion, and total
shareholders' equity of $158 million. The principal executive offices of Bancorp
are located at 110 Thomas Johnson Drive, Frederick, Maryland 21702 and its
telephone number is (301) 694-4000.

    On December 30, 1999, Bancorp completed the acquisition of Patapsco Valley
Bancshares, Inc. ("PVB") and its commercial banking subsidiary, Commercial &
Farmers Bank ("C&F"), Ellicott City, MD, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Under the terms of the merger
agreement, C&F was merged with and into the Bank at closing, increasing the
Bank's assets by approximately $173 million, loans by approximately
$118 million, and deposits by approximately $150 million.

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

    On June 18, 1999, Bancorp, through Farmers & Mechanics National Bank,
purchased assets and liabilities associated with the Fairfield, Pennsylvania
office of Farmers Bank, a subsidiary of Allfirst. Under the terms of the
agreement, Farmers & Mechanics National Bank assumed responsibility for services
related to checking, savings, and certificates of deposit products totaling
$10.8 million and purchased the branch office and real estate of Farmers Bank
located at 20 East Main Street, Fairfield, PA.

    On November 30, 1998, Bancorp completed the acquisition of Monocacy
Bancshares, Inc. ("MNOC") and its commercial banking subsidiary, Taneytown
Bank & Trust Company ("TBT"), Taneytown, MD, in a tax-free exchange of shares
accounted for as a pooling-of-interests. Under the terms of the merger
agreement, TBT was merged with and into Farmers & Mechanics National Bank at
closing, increasing the Bank's assets by approximately $304 million, loans by
approximately $167 million, and deposits by approximately $244 million.

    On May 29, 1998, Bancorp acquired Keller Stonebraker Insurance, Inc. ("KS"),
Hagerstown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. KS operates as an independent, wholly-owned subsidiary of
the Bank and provides a full line of consumer and commercial business insurance
products through offices in Hagerstown and Cumberland, MD and Keyser, WV.
Consumer insurance products include annuities, homeowners, automobile, life and
personal umbrellas. Commercial business products include property and casualty
packages, workers' compensation, bonds, professional liability, umbrella, and
401(k) and other benefit plans.

    FARMERS & MECHANICS NATIONAL BANK:  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. The
Bank, the deposits of which are insured by the Federal Deposit Insurance
Corporation, conducts general banking and trust company business through 44
full-service offices and 56 automated teller machines located in Frederick,
Carroll, Montgomery, Baltimore and Howard

                                       3
<PAGE>
Counties, Maryland, and in Adams County, Pennsylvania. The Bank also operates
the East Coast's first full-service mobile unit, Express Bank, and delivers
electronic services throughout its market with personal and business PC internet
banking access and with its 24-hour telephone banking service, ExpressLine.

    HOME FEDERAL SAVINGS BANK:  Home Federal Savings Bank ("the Savings Bank")
is federally chartered and provides consumer, commercial banking, mortgage and
brokerage services, and offers full-service banking through 10 community
offices, 21 automated teller machines, and other electronic banking systems in
Washington and Allegany Counties, MD.

    BANK DEPOSIT AND LENDING ACTIVITIES:  As of December 31, 2000, the Bank had
deposits of $1.182 billion and the Savings Bank had deposits of $182 million. No
material portion of either bank's deposits has been obtained from any single
depositor or group of related depositors, including federal, state and local
governments and agencies. As of December 31, 2000, the Bank had $1.029 billion
in loans representing approximately 66% of its total assets of $1.540 billion
and the Savings Bank had approximately $197 million in loans representing
approximately 78% of its total assets of $252 million. No material portion of
either bank's loans is concentrated within a single industry or group of related
industries. Neither the Bank nor the Savings Bank is dependent upon any single
borrower or a few principal borrowers. The loss of any individual or of a few
principal borrowers would not have a material adverse effect on the operations
or earnings of the Bank or the Savings Bank.

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

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

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

    EMPLOYEES:  As of December 31, 2000, Bancorp had no full-time equivalent
employees. As of that date, the Bank and its subsidiaries had 657 full-time
equivalent employees and the Savings Bank and its subsidiaries had 113 full-time
equivalent employees. A total of 770 full-time equivalent employees work for
Bancorp and its direct and indirect subsidiaries.

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

    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

                                       4
<PAGE>
houses, investment managers, mortgage companies, consumer finance companies,
leasing companies, insurance carriers, other insurance agencies, automobile
manufacturers and their financing units, and commercial loan syndicates.

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

SUPERVISION AND REGULATION

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

    BANK HOLDING COMPANY REGULATION:  F&M Bancorp is registered with the Federal
Reserve Board (the "FRB") as a bank holding company and is subject to reporting
requirements, supervision and examination by the 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.

    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 REGULATIONS:  Farmers and Mechanics National Bank ("the Bank") is
subject to supervision and regulation by the Comptroller of the Currency
("OCC"), the Board, and the Federal Deposit Insurance Corporation ("FDIC") as of
December 31, 2000. On December 14, 2000 the Bank announced that it had made
application with the Maryland State Commissioner of Financial Regulation to
become a state chartered Bank. Approval from the Commissioner would make the
Bank subject to supervision by the State of Maryland, with the Federal Reserve
Bank serving as the primary regulator. The Bank would no longer be supervised by
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,

                                       5
<PAGE>
management practices, compensation policies, and other aspects of operations are
subject to regulation by the appropriate Federal supervisory authorities and the
applicable banking laws of the State of Maryland. The Bank may establish branch
banking offices and engage in certain corporate activities without geographic
limitation with the prior approval. Mergers of the Bank with any other bank
would require approval of, and involve review by, various governmental agencies.

    Some of the aspects of the lending and deposit business of the Bank which
are subject to regulation by the 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 REGULATIONS:  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.

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

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

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

                                       6
<PAGE>
    CAPITAL REQUIREMENTS:  Under regulatory capital adequacy guidelines
discussed below, Bancorp, the Bank and the Savings Bank were "well capitalized"
at December 31, 2000 and 1999.

    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 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, 2000, Bancorp's tangible capital ratio was 8.84%.

    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, 2000, Bancorp's Tier 1 and Total risk-weighted
capital ratios were 11.84% and 12.86%, respectively.

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

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

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

    MONETARY POLICY:  The earnings and growth of Bancorp, 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:  The enactment of the Gramm-Leach-Bliley Act in 1999
significantly changed the business of banking. Also known as the "Financial
Services Modernization Act" the Act became effective March 12, 2000. This act,
among other things, repealed the sections of the Glass-Steagall Act

                                       7
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which have prohibited the affiliation of banks with securities firms, allowing a
bank holding company to affiliate with any financial company, for example
insurance or securities, and to cross sell an affiliate's products thus allowing
any financial company to offer to its customers any financial product or
service.

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

    The new standard is much broader than the previous permissible activities
standard. The broader standard allows bank holding companies to expand their
product mix and to adapt to changing market conditions.

    State laws prohibiting such affiliations are expressly pre-empted.
Significantly, the act removes the ability of commercial businesses to acquire
or establish a thrift holding company or receive a thrift charter and requires
existing unitary thrift holding companies to be sold only to financial companies
in the future.

    The act also confirms state regulation of insurance, subject, however, to a
standard that no state may discriminate against affiliates of a bank, thus
attempting to provide for equal treatment of both bank affiliated insurance
agencies and non-bank affiliated insurance agencies. The act also allows
national banks to engage in new and existing financial activities through
subsidiaries without regard to geographic limitation, and streamlines bank
holding company supervision and clarifies the roles of various regulators.
Regulations are currently being promulgated to implement the provisions of the
act. The effect of the act and the implementing regulations on Bancorp will not
be known for some time.

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

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

ITEM 2.  PROPERTIES

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

    The Bank owns a fee simple interest in its principal executive offices and
main banking facility, totaling approximately 115,000 square feet, located at
110 Thomas Johnson Drive, Frederick, MD. The 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 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 54 full-service branch offices of the Bank and
the Savings Bank at December 31, 2000, 29 were owned and 25 were leased.
Information concerning Bancorp's lease commitments is included in Note 12,
Commitments and Contingencies, Notes to Consolidated Financial Statements.

                                       8
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

    Bancorp and its subsidiaries become involved, from time to time, in various
legal proceedings incidental to their respective businesses. As disclosed in
Note 12, Commitments and Contingencies, Notes to Consolidated Financial
Statements, in the opinion of the management, there were no legal matters
pending as of December 31, 2000 which would have a material effect on the
consolidated financial statements.

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

    There were no matters submitted to a vote of security holders since the 2000
Annual Shareholder meeting.

                                    PART II

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

    The principal market on which F&M Bancorp Common Stock is traded is The
NASDAQ Stock Market. Incorporated herein by reference is the information on the
last page of the Bancorp's 2000 annual report to shareholders Form 10-K under
the heading "Stock Price and Dividends".

                                       9
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

                         SELECTED FINANCIAL INFORMATION
                          F&M BANCORP AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                      --------------------------------------------------------------
(IN THOUSAND, EXCEPT PER SHARE DATA)     2000         1999         1998         1997         1996
------------------------------------  ----------   ----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>          <C>          <C>
OPERATING INCOME
Interest income....................   $  126,178   $  113,798   $  111,020   $  107,011   $  100,237
Interest expense...................       61,142       52,041       50,627       47,599       45,523
                                      ----------   ----------   ----------   ----------   ----------
Net interest income................       65,036       61,757       60,393       59,412       54,714
Provision for credit losses........        3,236        1,295        3,056        2,910        1,822
                                      ----------   ----------   ----------   ----------   ----------
Net interest income after provision
  for credit losses................       61,800       60,462       57,337       56,502       52,892
Non-interest income................       28,769       24,988       26,289       22,354       18,227
Non-interest expense...............       62,774       67,208       63,393       56,852       55,196
                                      ----------   ----------   ----------   ----------   ----------
Income before provision for income
  taxes............................       27,795       18,242       20,233       22,004       15,923
Provision for income taxes.........        8,471        5,179        5,600        6,119        4,057
                                      ----------   ----------   ----------   ----------   ----------
Net income.........................   $   19,324   $   13,063   $   14,633   $   15,885   $   11,866
                                      ==========   ==========   ==========   ==========   ==========

PER SHARE DATA
Net income--basic..................   $     1.76   $     1.19   $     1.34   $     1.47   $     1.10
Net income--diluted................         1.75         1.18         1.33         1.46         1.09
Cash dividend paid.................         1.08         0.97         0.92         0.61         0.45
Book value.........................        14.35        13.07        13.58        13.05        12.00

KEY RATIOS
Return on average assets...........         1.11%        0.80%        0.96%        1.11%        0.87%
Return on average shareholders'
  equity...........................        12.98         8.80        10.02        11.77         9.45
Average shareholders' equity to
  total average assets.............         8.56         9.06         9.60         9.42         9.22
Dividend Payout ratio(1)...........        61.71        81.51        68.66        41.50        40.91

SELECT AVERAGE BALANCES
Total average assets...............   $1,739,635   $1,639,789   $1,521,435   $1,431,523   $1,361,478
Total average shareholders'
  equity...........................      148,834      148,508      146,021      134,911      125,594

AT PERIOD END
Total loans........................    1,220,130    1,114,734      991,756      981,023      914,660
Total assets.......................    1,795,244    1,719,334    1,620,490    1,479,690    1,407,703
Total deposits.....................    1,364,032    1,314,073    1,285,261    1,173,057    1,137,442
Total shareholders' equity.........      158,036      143,820      148,187      141,755      129,760

ASSET QUALITY
Nonperforming assets...............   $    3,726   $    7,366   $    7,249   $   13,746   $   16,564
Nonperforming assets / total
  assets...........................         0.21%        0.43%        0.45%        0.93%        1.18%
Net charge-offs to average loans
  outstanding......................         0.26         0.22         0.25         0.26         0.12
</TABLE>

------------------------

(1) Reflects the percentage relationship of cash dividends paid to basic
    earnings per share.

                                       10
<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 ("the Bancorp") for the
three years in the period ended December 31, 2000, and is intended to assist
readers in their analysis and understanding of the accompanying consolidated
financial statements and notes thereto.

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

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

FORWARD-LOOKING STATEMENTS

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

2000 COMPARED TO 1999

OVERVIEW

    The U. S. economy continued at a moderately strong pace in the first half of
2000, continuing its tenth successive year of expansion. Economic expansion
continued amidst growing concerns over potential inflation, excessive consumer
spending and tight labor markets. These concerns prompted the Federal Reserve
Bank to raise short-term rates a quarter of a percentage point in February and
March of 2000 and a half of a percentage point in May of 2000. As a result of
these rate increases, the economy in the second half of 2000 slowed more rapidly
than businesses anticipated causing some backup in inventories. The equity
markets fell and lenders turned more cautious. This tightening of financial
conditions contributed to a restraint on consumer spending. Against this
background, economic conditions within the Bancorp's operating area in Maryland
remained generally strong and credit quality has remained at traditionally
strong levels.

    The Bancorp's net income for 2000 totaled $19.3 million or $1.75 per diluted
share compared with $13.1 million or $1.18 per diluted share in 1999. Results
for both years included nonrecurring charges and gains, which totaled
$(187) thousand after-tax in 2000 and $3.8 million after-tax in 1999 primarily
for merger-related expenses. Excluding the after-tax impact of nonrecurring
charges, net income on an operating basis was $19.1 million or $1.73 per diluted
share in 2000 versus $16.9 million or $1.53 per diluted share in 1999.

                                       11
<PAGE>
TABLE 1.  NET INCOME EXCLUDING SPECIAL ITEMS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)          2000      EPS(1)      1999      EPS(1)      1998      EPS(1)
-------------------------------------        --------   --------   --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>
Net income as reported.....................  $19,324     $1.75     $13,063     $1.18     $14,633     $1.33
Adjustments (net of income taxes)
  Merger-related expense...................      202       .02       3,839       .35       2,332       .21
  Special provision for credit losses......       --        --          --        --         460       .04
  Gain on the sale of property.............       --        --          --        --        (270)     (.02)
  Security losses (gains)..................     (389)     (.04)         (6)       --        (661)     (.06)
                                             -------     -----     -------     -----     -------     -----
Operating net income.......................  $19,137     $1.73     $16,896     $1.53     $16,494     $1.50
                                             =======     =====     =======     =====     =======     =====
</TABLE>

------------------------

(1) Diluted earnings per share

RESULTS OF OPERATIONS

    The Bancorp's operating results for the year reflected strong revenue
growth, with total revenues rising $7.1 million or 8.1% to $93.8 million.
Increases occurred in both net interest income and fee-generating business as
Bancorp's strategies and growth initiatives continued to generate strong revenue
momentum. Credit losses continued to be modest while loan quality remained
strong. The Bancorp continues to initiate technology enhancements and capitalize
on acquisition synergies to moderate expense growth.

NET INTEREST INCOME

    F&M Bancorp's principal source of revenue is net interest income, the
difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income for purposes of analysis, is presented
on a tax-equivalent basis to recognize associated tax benefits. The presentation
provides a basis for comparison of yields with taxable earning assets. The
discussion on net interest income should be read in conjunction with Table
2--"Average Balances, Interest, and Average Rates (Consolidated)" and Table
3--"Analysis of Changes in Net Interest Income."

    The Bancorp's taxable equivalent net interest income rose $3.1 million or
4.8% in 2000 to $68.2 million. Strong loan demand, particularly in commercial
real estate and residential mortgage lending, drove the increase, resulting in a
net yield on interest-earning assets of 7.97% or 27 basis points higher than
1999. Most of the new loan growth was funded with the proceeds from maturing
securities, core deposit growth and alternative funding sources such as the
Federal Home Loan Bank.

    Average yields on both sides of the balance sheet increased from 1999 as the
overall rate environment increased throughout 2000. The increase in rates had a
greater effect on interest-bearing liabilities due to a spike in the short-term
rates that these instruments were tied to. Although securities yields increased,
the impact on the net interest margin was minimized, due to shrinking volumes
and its smaller proportion of interest-earning assets. During 2000, the
securities portfolio was allowed to decline to fund part of the loan growth. At
December 31, 2000, there were more than sufficient securities to meet the
collateral needs for public funds deposits and other financial arrangements
requiring the pledging of securities.

    The Bancorp funds it's balance sheet with a balanced mix of retail core
deposits, customer repurchase agreements and wholesale funding products. During
2000, the average cost of funds increased 40 basis points due to higher rates on
most funding sources. In addition to a less favorable average rate environment,
a less favorable mix in core deposit funding also impacted the Bancorp's net
interest margin. Most of the deposit increase was in the Bancorp's T-bill Plus
money market product.

                                       12
<PAGE>
The combined effect of the change in mix and higher deposit rates resulted in a
23 basis point increase in the average cost of deposits.

    Noninterest-bearing funds had a positive effect on net interest margin. The
average balances of both shareholders' equity and noninterest-bearing
liabilities increased a total of $11.2 million or 5.7%, while the average
balance of noninterest-bearing assets declined $1.9 million or 1.6%. The net
effect was an additional $13.1 million in noninterest-bearing funds available to
fund interest-earning assets. Noninterest-bearing demand deposits contributed
$12.5 million of the increase in available noninterest-bearing funds.

    Borrowed funds increased $69.2 million or 38.1% as the Bancorp sought to
fund loan growth. These funds were primarily short-term in nature and the
average rate paid on all borrowed funds increased by 90 basis points to 5.96%.

    Future growth in net interest income will depend upon consumer and
commercial loan demand, growth in deposits and the general level of interest
rates. Please refer to the section entitled "Market Risk and Asset/Liability
Management" for further discussion of the impact of current trends on net
interest income in 2000.

                                       13
<PAGE>
TABLE 2.  AVERAGE BALANCES, INTEREST, AND AVERAGE RATES (CONSOLIDATED)
<TABLE>
<CAPTION>
                                               2000                               1999                         1998
                                 --------------------------------   --------------------------------   ---------------------
                                  AVERAGE                AVERAGE     AVERAGE                AVERAGE     AVERAGE
(IN THOUSANDS)                    BALANCE     INTEREST     RATE      BALANCE     INTEREST     RATE      BALANCE     INTEREST
--------------                   ----------   --------   --------   ----------   --------   --------   ----------   --------
<S>                              <C>          <C>        <C>        <C>          <C>        <C>        <C>          <C>
ASSETS
INTEREST EARNING ASSETS:
Short-term funds...............  $   14,603   $    745     5.10%    $   41,503   $  2,051     4.94%    $   41,045   $  2,481
                                 ----------   --------              ----------   --------              ----------   --------
Investment securities:
  Taxable......................     282,157     18,563     6.58        316,143     19,424     6.14        268,551     16,480
  Tax-exempt(1)................     128,364      8,768     6.83        130,466      9,066     6.95        101,158      7,093
                                 ----------   --------              ----------   --------              ----------   --------
Total investment securities....     410,521     27,331     6.66        446,609     28,490     6.38        369,709     23,573
Loans, net, including loans
  held for sale(1).............   1,197,648    101,280     8.46      1,032,955     86,601     8.38        996,094     87,621
                                 ----------   --------              ----------   --------              ----------   --------
Total interest-earning
  assets.......................   1,622,772    129,356     7.97      1,521,067    117,142     7.70      1,406,848    113,675
Total noninterest-earning
  assets.......................     116,863                            118,722                            114,587
                                 ----------                         ----------                         ----------
Total assets...................  $1,739,635                         $1,639,789                         $1,521,435
                                 ==========                         ==========                         ==========

LIABILITIES AND SHAREHOLDERS'
  EQUITY
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
  Checking.....................  $  191,544   $  3,931     2.05     $  180,281   $  3,163     1.75     $  157,204   $  3,024
  Savings......................     156,936      3,422     2.18        179,124      4,175     2.33        179,407      4,628
  Money market accounts........     257,490     10,451     4.06        198,170      6,732     3.40        164,537      5,293
  Certificates of deposit......     526,823     28,376     5.39        556,161     28,779     5.17        537,196     29,322
                                 ----------   --------              ----------   --------              ----------   --------
    Total interest bearing
      deposits.................   1,132,793     46,180     4.08      1,113,736     42,849     3.85      1,038,344     42,267
                                 ----------   --------              ----------   --------              ----------   --------
Other borrowed funds:
  Federal funds purchased and
    securities sold under
    agreements to repurchase...     113,172      6,305     5.57         73,151      3,304     4.52         55,084      2,680
  Other borrowed funds.........     137,844      8,658     6.28        108,642      5,888     5.42        100,667      5,680
                                 ----------   --------              ----------   --------              ----------   --------
Total borrowed funds...........     251,016     14,963     5.96        181,793      9,192     5.06        155,751      8,360
                                 ----------   --------              ----------   --------              ----------   --------
Total interest bearing
  liabilities..................   1,383,809     61,143     4.42      1,295,529     52,041     4.02      1,194,095     50,627
NONINTEREST-BEARING
  LIABILITIES:
Demand deposits................     189,470                            176,946                            166,541
Other liabilities..............      17,522                             18,806                             14,778
                                 ----------                         ----------                         ----------
  Total noninterest-bearing
    liabilities................     206,992                            195,752                            181,319
                                 ----------                         ----------                         ----------
Total liabilities..............   1,590,801                          1,491,281                          1,375,414
Shareholders' equity...........     148,834                            148,508                            146,021
                                 ----------                         ----------                         ----------
Total liabilities and
  shareholders' equity.........  $1,739,635                         $1,639,789                         $1,521,435
                                 ==========                         ==========                         ==========
Net interest income............               $ 68,213                           $ 65,101                           $ 63,048
                                              --------                           --------                           --------
Net interest spread............                            3.55%                              3.67%
                                                           ====                               ====
Net interest margin............                            4.20%                              4.28%
                                                           ====                               ====

<CAPTION>
                                   1998
                                 --------
                                 AVERAGE
(IN THOUSANDS)                     RATE
--------------                   --------
<S>                              <C>
ASSETS
INTEREST EARNING ASSETS:
Short-term funds...............    6.04%

Investment securities:
  Taxable......................    6.14
  Tax-exempt(1)................    7.01

Total investment securities....    6.38
Loans, net, including loans
  held for sale(1).............    8.80

Total interest-earning
  assets.......................    8.08
Total noninterest-earning
  assets.......................

Total assets...................

LIABILITIES AND SHAREHOLDERS'
  EQUITY
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
  Checking.....................    1.92
  Savings......................    2.58
  Money market accounts........    3.22
  Certificates of deposit......    5.46

    Total interest bearing
      deposits.................    4.07

Other borrowed funds:
  Federal funds purchased and
    securities sold under
    agreements to repurchase...    4.87
  Other borrowed funds.........    5.64

Total borrowed funds...........    5.37

Total interest bearing
  liabilities..................    4.24
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............    3.84%
                                   ====
Net interest margin............    4.48%
                                   ====
</TABLE>

------------------------------

(1) 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.

                                       14
<PAGE>
TABLE 3.  ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                        -------------------------------------------------------------------
                                                 2000 OVER 1999                     1999 OVER 1998
                                        --------------------------------   --------------------------------
                                                           DUE TO                             DUE TO
                                                        CHANGE IN(1)                       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............    $14,679    $13,926    $   753      $(1,020)    $3,176    $(4,196)
Interest and dividends on investment
  securities:
  Taxable.............................       (861)    (2,471)     1,610        2,944      3,144       (200)
  Tax-exempt..........................       (298)      (183)      (115)       1,973      2,067        (94)
Short-term funds......................     (1,306)    (1,527)       221         (430)        76       (506)
                                          -------    -------    -------      -------     ------    -------
  Total...............................     12,214      9,745      2,469        3,467      8,463     (4,996)
INTEREST EXPENSE
Interest on deposits..................    $ 3,331        413      2,918          582      2,556     (1,974)
Interest on federal funds purchased
  and securities sold under agreements
  to repurchase.......................      3,001      2,104        897          624        828       (204)
Interest on other short-term
  borrowings..........................       (836)      (980)       144         (538)      (599)        61
Interest on long-term borrowings......      3,606      2,655        951          746        997       (251)
                                          -------    -------    -------      -------     ------    -------
  Total...............................      9,102      4,192      4,910        1,414      3,782     (2,368)
                                          -------    -------    -------      -------     ------    -------
Net interest income...................    $ 3,112    $ 5,553    $(2,441)     $ 2,340     $4,681    $(2,628)
                                          =======    =======    =======      =======     ======    =======
</TABLE>

------------------------

(1) The change in interest due to both rate and volume has been allocated to
    rate and volume changes in proportion to the relationship of the absolute
    dollar amounts of the change in each.

PROVISION FOR CREDIT LOSSES

    Provisions for credit losses are charges to earnings to bring the total
allowance for credit losses to a level considered by management as adequate to
provide for estimated losses based on management's evaluation of the
collectibility of the loan portfolio. Management considers the nature of the
loan portfolio, credit-concentrating trends in historical loan experience,
specific impaired loans and economic conditions. Management also considers the
level of problem assets that the Bancorp classifies in accordance with
regulatory requirements. The provision for credit losses was $3.2 million in
2000, which was $1.3 million higher than in 1999. This increase in the provision
resulted primarily from growth in commercial and commercial real estate loans
which carry higher levels of credit risk.

NONINTEREST INCOME

    Total noninterest income rose $3.8 million or 15.1% to $28.8 million for the
year. Growth occurred in all major categories except gains on sale of loans from
mortgage banking activities, with the highest increases in insurance income,
deposit account service charges and alternative investment/stock brokerage
income. Management expects total noninterest income to continue to increase in
2001, based on a stable but slower economic growth outlook and continued focus
on insurance, deposit account services, technology-based banking, and financial
and investment advisory services.

    Insurance commission income grew $1.1 million or 16.1% to $7.9 million,
principally due to the integration of Keller Stonebreaker and Potomac Basin
insurance subsidiaries into the referral network of the bank's and savings
bank's customer base. Team-based selling efforts between the insurance

                                       15
<PAGE>
subsidiaries and the bank affiliates have brought a vast array of consumer and
commercial insurance products to the community bank customer.

    Revenues from service charges on deposit accounts rose $822 thousand or
11.6%. This increase resulted from the conversion of Commercial & Farmers Bank
customers to the Bank's deposit fee schedule in March 2000 as well as the
overall level of new deposit account customers.

    Commissions and fees from alternative investments and brokerage services
increased $303 thousand or 8.4% to $3.9 million. This increase is associated
with the expansion of The Investment Center, an affiliation with Raymond James
Financial Services, as well as fee increases in the trust services business. The
experts in these groups provide innovative financial solutions individually
designed for the affluent, emerging affluent and small business customer. A full
range of products is offered including, trust services, portfolio management,
financial planning, estate planning, brokerage services, investment counseling
and insurance.

    Bank card income rose $535 thousand or 26.4% to $2.6 million. This income is
derived from debit card interchange transactions. The increase in this product
results from increased consumer acceptance of the service, greater marketing
focus to raise awareness and higher consumer spending.

    Gains on sales of loans from mortgage banking activities declined
$576 thousand or 26.0% to $1.6 million for the year, reflecting reduced sales of
fixed-rate mortgages due to lower origination volumes. Rising interest rates
resulted in a shift in consumer demand toward adjustable-rate mortgages, which
are generally held in the loan portfolio. Rising interest rates also slowed
refinancing activity, resulting in lower origination fees which are also
included in this category.

TABLE 4.  ANALYSIS OF CHANGES IN NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                ------------------------------   % CHANGE    % CHANGE
(IN THOUSANDS)                                    2000       1999       1998     2000-1999   1999-1998
--------------                                  --------   --------   --------   ---------   ---------
<S>                                             <C>        <C>        <C>        <C>         <C>
Service charges on deposit accounts...........  $ 7,905    $ 7,083    $ 6,810       11.6 %       4.0 %
Insurance income..............................    7,993      6,887      5,793       16.1        18.9
Gains on sales of loans.......................    1,643      2,219      3,930      (26.0)      (43.5)
Gains on sales of securities..................      633         10      1,104     6230.0       (99.1)
Gains (losses) on sales of property...........       51        (14)       450     (464.3)     (103.1)
Alternative investment & stock brokerage
  income......................................    3,890      3,587      3,090        8.4        16.1
Bank card income..............................    2,574      2,039      1,558       26.2        30.9
Other operating income........................    4,080      3,177      3,554       28.4       (10.6)
                                                -------    -------    -------     ------      ------
                                                $28,769    $24,988    $26,289       15.1 %      (4.9)%
                                                =======    =======    =======     ======      ======
</TABLE>

NONINTEREST EXPENSE

    Total noninterest expense declined $4.4 million or 6.6%, primarily due to
nonrecurring charges taken in 1999. In 1999, the Bancorp incurred merger
expenses of $5.0 million related to the Patapsco Valley Bancshares merger.
Excluding these merger charges, noninterest expense on an operating basis
totaled $62.5 million in 2000 and grew $292 thousand or less than 1% from 1999's
expense level of $62.2 million. In 2001, noninterest expense is expected to
continue to increase moderately with investments in strategic initiatives offset
by aggressive cost containment efforts.

    The Bancorp's efficiency ratio (the ratio of noninterest expense to the sum
of net interest income on a tax equivalent basis and noninterest income)
decreased to 64.40% for December 31, 2000 from 73.52% at December 31, 1999.

                                       16
<PAGE>
    Total personnel expense grew $70 thousand or 0% for 2000. Salaries expense
rose $501 thousand or 1.8%, primarily due to expanded incentive pay for
revenue-generation provided for by the Bancorp's Stakeholders Incentive Pay
Program and successful recruiting of a large number of open positions. Employee
benefits declined by $431 thousand or 7.3% to $5.5 million primarily due to
favorable experience in medical and health programs.

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

    Professional services increased $205 thousand or $7.9% due to increased
outsourcing of non-strategic processes as well as fee increases for audit, legal
and tax services. Telephone expense increased $232 thousand or 14.4% primarily
due to the Bancorp's increased geographic reach into Howard County as a result
of the recent bank acquisition. Computer software and maintenance costs rose
$348 thousand or 23.1%. The increase reflected continuing growth in technology
investments to improve customer service and provide productivity enhancements to
the organization.

TABLE 5.  ANALYSIS OF CHANGES IN NONINTEREST EXPENSE

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                ------------------------------   % CHANGE    % CHANGE
(IN THOUSANDS)                                    2000       1999       1998     2000-1999   1999-1998
--------------                                  --------   --------   --------   ---------   ---------
<S>                                             <C>        <C>        <C>        <C>         <C>
NONINTEREST EXPENSE
  Salaries....................................  $28,893    $28,392    $28,052        1.8 %       1.2 %
  Pension and other employee benefits.........    5,525      5,956      6,256       (7.2)       (4.8)
  Merger-related expenses.....................      318      5,044      3,217      (93.7)       56.8
  Occupancy and equipment expense.............    9,313      9,315      9,555       (0.0)       (2.5)
  Stationary and supplies.....................    1,446      1,437      1,439        0.6        (0.1)
  Professional services.......................    2,812      2,607      2,845        7.9        (8.4)
  Postage.....................................    1,011      1,122      1,084       (9.9)        3.5
  Telephone...................................    1,840      1,608      1,338       14.4        20.2
  Computer software and maintenance...........    1,852      1,504        882       23.1        70.5
  Other real estate owned.....................       29         78        262      (62.8)      (70.2)
  Amortization of intangibles.................    1,173      1,152        790        1.8        45.8
  Other.......................................    8,562      8,993      7,673       (4.8)       17.2
                                                -------    -------    -------      -----       -----
Total noninterest expense.....................  $62,774    $67,208    $63,393       (6.6)%       6.0 %
                                                =======    =======    =======      =====       =====
</TABLE>

INCOME TAXES

    Income tax expense increased by 64% to $8.5 million for 2000, from
$5.2 million for 1999, largely related to a 52% increase 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 the 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 to 30.5% for 2000 compared with 28.4% for 1999.

                                       17
<PAGE>
FINANCIAL CONDITION

    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 management ("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.

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

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
U.S. Treasury and government corporations and agencies......  $171,234   $137,554   $131,158
Obligations of state and political subdivisions.............   125,852    131,711    125,842
Mortgage-backed securities..................................   127,556    146,704    154,848
Other securities............................................    16,788     14,875     23,305
                                                              --------   --------   --------
    Total...................................................  $441,430   $430,844   $435,153
                                                              ========   ========   ========
</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.

                                       18
<PAGE>
TABLE 7.  INVESTMENT PORTFOLIO ANALYSIS--DECEMBER 31, 2000
<TABLE>
<CAPTION>
                                                                       MATURING IN:
                                   -------------------------------------------------------------------------------------
                                                              AFTER ONE            AFTER FIVE
                                        ONE YEAR               THROUGH               THROUGH              AFTER TEN
                                         OR LESS             FIVE YEARS             TEN YEARS               YEARS
                                   -------------------   -------------------   -------------------   -------------------
(IN THOUSANDS)                      AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD
--------------                     --------   --------   --------   --------   --------   --------   --------   --------
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Available-for-sale:(1)
U.S. Treasury and government
  corporations and agencies......  $43,462      5.90%    $ 69,995     6.14%    $ 57,777     6.48%    $     --       --%
Obligations of state and
  political subdivisions(2)......      676      7.23        6,643     6.79       21,868     6.62       15,631     7.09
Mortgage-backed securities(3)....    7,414      6.40          423     6.00        3,627     6.07      107,721     6.59
Equity securities................       --        --           --       --           --       --       16,788     6.05
                                   -------      ----     --------     ----     --------     ----     --------     ----
    Total available-for-sale.....  $51,552      5.99%    $ 77,061     6.20%    $ 83,272     6.50%    $140,140     6.58%
                                   =======      ====     ========     ====     ========     ====     ========     ====
Held-to-maturity:
Obligations of state and
  political subdivisions(2)......  $ 6,027      7.10%    $ 31,071     7.44%    $ 18,437     7.17%    $ 25,499     7.25%
Mortgage-backed securities(3)....       --        --        1,104     7.50           --       --        7,267     7.68
                                   -------      ----     --------     ----     --------     ----     --------     ----
    Total held-to-maturity.......    6,027      7.10       32,175     7.44       18,437     7.17       32,766     7.35
                                   -------      ----     --------     ----     --------     ----     --------     ----
    Total investment
      securities.................  $57,579      6.11%    $109,236     6.56%    $101,709     6.62%    $172,906     6.73%
                                   =======      ====     ========     ====     ========     ====     ========     ====

<CAPTION>
                                      MATURING IN:
                                   -------------------

                                          TOTAL
                                   -------------------
(IN THOUSANDS)                      AMOUNT     YIELD
--------------                     --------   --------
<S>                                <C>        <C>
Available-for-sale:(1)
U.S. Treasury and government
  corporations and agencies......  $171,234     6.18%
Obligations of state and
  political subdivisions(2)......    44,818     6.82
Mortgage-backed securities(3)....   119,185     6.56
Equity securities................    16,788     6.05
                                   --------     ----
    Total available-for-sale.....  $352,025     6.38%
                                   ========     ====
Held-to-maturity:
Obligations of state and
  political subdivisions(2)......  $ 81,034     7.29%
Mortgage-backed securities(3)....     8,371     7.66
                                   --------     ----
    Total held-to-maturity.......    89,405     7.32
                                   --------     ----
    Total investment
      securities.................  $441,430     6.57%
                                   ========     ====
</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 2000 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 6, Investment Portfolio Distribution, displays the year-end amortized
cost of the investment securities portfolio, which increased to $441 million at
December 31, 2000 from $431 million at December 31, 1999.

    As shown in Table 7, Investment Portfolio Analysis, the amortized cost of
AFS securities totaled $352 million and represented 80% of the total securities
portfolio and 20% of consolidated total assets at December 31, 2000. AFS
securities provide substantial liquidity, chiefly for unexpected loan growth or
deposit withdrawal requirements. Conversely, HTM securities, which amounted to
$89.4 million, or 20% of the total portfolio at December 31, 2000, 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, 2000. All obligations of states and political
subdivisions were rated A or higher by either Moody's Investors Service or
Standard and Poors, and approximately 85% were rated AAA at December 31, 2000.

    LOANS:  Average loans increased 16% in 2000, whereas total loans at
December 31, 2000 increased 9% to $1.2 billion from $1.1 billion at
December 31, 1999 as shown in Table 8, Loan Portfolio Mix. This loan growth was
fueled by a strong economy in F&M Bancorp's lending area. Given management's
outlook for a slower growth economic environment in 2001, management anticipates
that loan growth will moderate from the strong demand witnessed in 2000.

    In response to 2000's strong economy, construction lending increased
$13.2 million or 19.5% and commercial real estate rose $16.2 million or 5.9%.
Other commercial loans increased $11.6 million or

                                       19
<PAGE>
6.8%. Consumer loans continued to show strong increases of $25.8 million or 9.1%
fueled primarily by increases in indirect automobile sales financing and home
equity loans. Residential mortgages increased $41.6 million or 13.6% as rising
interest rates shifted consumer appetites to adjustable rate mortgages that are
held in this 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 8.  LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                   -----------------------------------------------------------------------------------------
                                           2000                    1999                   1998                  1997
                                   ---------------------   ---------------------   -------------------   -------------------
(IN THOUSANDS)                       AMOUNT        %         AMOUNT        %        AMOUNT       %        AMOUNT       %
--------------                     ----------   --------   ----------   --------   --------   --------   --------   --------
<S>                                <C>          <C>        <C>          <C>        <C>        <C>        <C>        <C>
Real estate:
  Construction and land
    development..................  $   80,632      6.6%    $   67,452      6.1%    $ 73,934      7.5%    $ 73,778      7.5%
  Secured by farmland............       6,508      0.5          7,884      0.7        8,452      0.9        8,479      0.9
  Residential mortgage...........     347,440     28.5        305,834     27.4      275,955     27.8      268,999     27.4
  Other mortgage.................     292,661     24.0        276,414     24.8      226,380     22.8      200,119     20.4
Agricultural.....................         550      0.0            656      0.1          560      0.1          819      0.1
Commercial and industrial........     182,020     14.9        170,379     15.3      134,573     13.6      143,615     14.6
Consumer.........................     308,818     25.3        283,000     25.4      264,199     26.6      282,027     28.7
Other Loans......................       1,501      0.1          3,115      0.3        7,703      0.8        3,187      0.3
                                   ----------              ----------              --------              --------
    Total Loans..................  $1,220,130    100.0     $1,114,734    100.0     $991,756    100.0     $981,023    100.0
                                   ==========              ==========              ========              ========

<CAPTION>
                                      DECEMBER 31,
                                   -------------------
                                          1996
                                   -------------------
(IN THOUSANDS)                      AMOUNT       %
--------------                     --------   --------
<S>                                <C>        <C>
Real estate:
  Construction and land
    development..................  $ 67,659      7.4%
  Secured by farmland............     9,006      1.0
  Residential mortgage...........   253,506     27.7
  Other mortgage.................   186,648     20.4
Agricultural.....................       985      0.1
Commercial and industrial........   123,520     13.5
Consumer.........................   265,173     29.0
Other Loans......................     8,163      0.9
                                   --------
    Total Loans..................  $914,660    100.0
                                   ========
</TABLE>

TABLE 9.  LOAN MATURITIES AND INTEREST SENSITIVITY(1) AT DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                     MATURING IN:
                                                -------------------------------------------------------
                                                 ONE YEAR        AFTER ONE        AFTER FIVE
(IN THOUSANDS)                                  OR LESS(2)   THROUGH FIVE YEARS     YEARS       TOTAL
--------------                                  ----------   ------------------   ----------   --------
<S>                                             <C>          <C>                  <C>          <C>
Real estate:
  Construction and land development...........    $36,537         $ 32,063          $12,032    $ 80,632
  Secured by farmland.........................        690            5,818               --       6,508
Agricultural..................................        270              280               --         550
Commercial and industrial.....................     60,991           88,674           32,355     182,020
Other loans...................................        630              871               --       1,501
                                                  -------         --------          -------    --------
  Total.......................................    $99,118         $127,706          $44,387    $271,211
                                                  =======         ========          =======    ========
Rate sensitivity:
  Predetermined rate..........................                    $115,536          $34,302
  Floating rate...............................                      12,170           10,085
                                                                  --------          -------
  Total.......................................                    $127,706          $44,387
                                                                  ========          =======
</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.

    DEPOSITS:  Representing the principal source of funds for loans and
investments, average total deposits, as shown in Table 10, Average Deposits and
Rates Paid, increased by 2% in 2000 over 1999. Noninterest checking and interest
checking grew by 7.1% and 6.2%, respectively. Money market

                                       20
<PAGE>
accounts grew substantially, generating $59.3 million or 29.9% growth in
deposits, primarily in the T-bill Plus money market product. Consumers showed a
strong preference for the flexibility and competitive rates of these accounts.
Savings and certificate of deposit customers also migrated to the T-bill Plus
accounts which is reflected in the lower balances in those products.

    Table 11, Maturity of Time Deposits $100,000 or More, reflects a growth rate
of 16% for 2000, most notably in the over 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 levels of 10% of total deposits.

TABLE 10.  AVERAGE DEPOSITS AND RATES PAID

<TABLE>
<CAPTION>
                                                       2000                    1999                    1998
                                               ---------------------   ---------------------   ---------------------
                                                AVERAGE                 AVERAGE                 AVERAGE
(IN THOUSANDS)                                  BALANCE       RATE      BALANCE       RATE      BALANCE       RATE
--------------                                 ----------   --------   ----------   --------   ----------   --------
<S>                                            <C>          <C>        <C>          <C>        <C>          <C>
Noninterest-bearing demand deposits..........  $  189,470              $  176,946              $  166,541
Interest-bearing deposits:
  Checking...................................     191,544     2.05%       180,281     1.75%       157,204     1.92%
  Money market...............................     257,490     4.06        198,170     3.40        164,537     3.22
  Savings....................................     156,936     2.18        179,124     2.33        179,407     2.58
  Certificates of deposit....................     526,823     5.39        556,161     5.17        537,196     5.46
                                               ----------     ----     ----------     ----     ----------     ----
Total interest-bearing deposits..............   1,132,793     4.08      1,113,736     3.85      1,038,344     4.07
                                               ----------     ----     ----------     ----     ----------     ----
Total average deposits.......................  $1,322,263     3.49%    $1,290,682     3.32%    $1,204,885     3.51%
                                               ==========              ==========              ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
Maturing in:
  3 months or less..........................................  $ 23,382   $25,630    $26,986
  Over 3 months through 6 months............................    15,786    19,961     14,654
  Over 6 months through 12 months...........................    39,670    34,495     23,140
  Over 12 months............................................    35,708    18,909     14,124
                                                              --------   -------    -------
  Total.....................................................  $114,546   $98,995    $78,904
                                                              ========   =======    =======
</TABLE>

    BORROWINGS:  Short-term borrowings increased $119.7 million to
$207.6 million on average in 2000 and long-term borrowings decreased
$50.5 million to $43.4 million due to called or matured advances in 2000. With
the spike in interest rates that occurred in 2000, the Bancorp elected to
maintain short-term funding in anticipation of potentially lower rates in the
near future. Much of the remaining growth reflected in 2000 short-term
borrowings resulted from expanded relationships with our business customers
through our money management repurchase agreement product.

                                       21
<PAGE>
TABLE 12.  SHORT-TERM BORROWINGS

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
End of period outstanding...................................  $127,395   $ 94,083   $61,427
Highest month-end balance...................................   136,116    107,335    67,772
Average balance.............................................   113,172     73,151    55,084
Average rate of interest:
  At end of year............................................      6.17%      4.78%     4.12%
  During year...............................................      5.57       4.52      4.87
</TABLE>

Short-term Advances from Federal Home Loan Bank

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
End of period outstanding...................................  $109,000   $45,728    $14,228
Highest month-end balance...................................   133,650    45,728     63,353
Average balance.............................................    94,474    14,760     24,299
Average rate of interest:
  At end of year............................................      6.35%     5.65%      5.62%
  During year...............................................      6.72      5.73       5.63
</TABLE>

LIQUIDITY MANAGEMENT

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

    Parent company liquidity comes from short-term investments that can be sold
immediately and from dividends and interest income from subsidiaries. At
December 31, 2000, F&M Bancorp had $4.8 million in interest-bearing balances at
Farmers & Mechanics National Bank. During 2000, amounts available for the
payment of dividends aggregated $21.1 million.

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

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

                                       22
<PAGE>
MARKET RISK AND ASSET/LIABILITY MANAGEMENT

    Market risk is defined as the future changes in market prices that increase
or decrease the value of financial instruments, i.e. cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
risks. Bancorp's primary source of market risk is interest rate risk. Market
risk-sensitive financial instruments are entered into for purposes other than
trading.

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

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

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

    Management believes that interest rate risk is best measured by simulation
modeling which calculates expected net interest income based on projected
interest-earning assets and interest-bearing liabilities. The model projections
are based upon historical trends and management's expectations of balance sheet
growth patterns, spreads to market rates, historical market rate relationships,
prepayment behavior, current and expected product offerings and sales
activities. Various sensitivity analyses are performed on a regular basis to
segregate interest rate risk into separate components and understand the risk
attributable to prepayments, caps and floors, and other options. Assumption
testing is performed to understand the degree of impact from changing key
assumptions such as the speed of prepayments, the interest rate elasticity of
core deposit rates and balance sheet growth. The Bancorp's policy guideline
limit for net interest income simulation is a negative impact to net interest
income of 15.0 percent for the up or down 300 basis points scenarios when
compared with the flat rate scenario. Management has generally maintained a risk
position well within the policy guideline level. The model indicated the impact
of a 300 basis point rise in rates over the next 12 months would cause
approximately a 1.8 percent increase in net interest income at December 31,
2000. A 300 basis point decrease in rates over the next 12 months would cause
approximately a 2.3 percent decrease in net interest income.

    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.

                                       23
<PAGE>
    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, 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, 2000 and 1999.

    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 in 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.

RISK ELEMENTS

    NONPERFORMING ASSETS:  Table 13, Nonperforming Assets and Contractually
Past-Due Loans, displays a five-year history of steadily declining nonperforming
assets. Totaling just $3.7 million, or 0.21% of total consolidated assets at
December 31, 2000, Bancorp reduced its nonperforming assets at an average annual
rate of 28% over the period shown, largely reflecting substantial progress by
the Savings Bank in dealing with the legacy of the late-1980s.

    Loans that were past due 90 days or more and not classified as nonperforming
totaled $1.2 million at December 31, 2000, or 0.10% of year-end total loans,
compared with $1.5 million one year earlier, or 0.14% of total loans at
December 31, 1999. Historically, there has been no direct correlation between
loans past due 90 days or more and nonperforming loans or loan losses.

                                       24
<PAGE>
TABLE 13.  NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                      ----------------------------------------------------
(IN THOUSANDS)                                          2000       1999       1998       1997       1996
--------------                                        --------   --------   --------   --------   --------
<S>                                                   <C>        <C>        <C>        <C>        <C>
Nonperforming assets:
  Nonaccrual loans(1)..............................    $2,669     $6,181     $5,544    $ 8,554    $ 8,451
  Other real estate owned net of valuation
    allowance(2)...................................     1,057      1,185      1,705      5,192      8,113
                                                       ------     ------     ------    -------    -------
Total nonperforming assets.........................    $3,726     $7,366     $7,249    $13,746    $16,564
                                                       ======     ======     ======    =======    =======
Loans past due 90 or more days as to interest or
  principal(3).....................................    $1,230     $1,514     $2,371    $ 1,376    $ 3,025
Nonperforming loans to total loans.................      0.22%      0.55%      0.56%      0.87%      0.92%
Nonperforming assets to total loans plus other real
  estate owned.....................................      0.30%      0.66%      0.73%      1.39%      1.80%
Nonperforming assets to total assets...............      0.21%      0.43%      0.45%      0.93%      1.18%
Allowance for credit losses times nonperforming
  loans............................................      4.96       2.11       2.57       1.60       1.57
Allowance for credit losses times nonperforming
  assets...........................................      3.55       1.77       1.96       1.00       0.80
</TABLE>

------------------------

(1) Loans are placed on nonaccrual status when, in the opinion of management,
    reasonable doubt exists as to the full, timely collection of interest or
    principal or a specific loan meets the criteria for nonaccrual status
    established by regulatory authorities. When a loan is placed on nonaccrual
    status, all interest previously accrued but not collected is reversed
    against current period interest income. No interest is taken into income on
    nonaccrual loans unless received in cash or until such time as 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 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, 2000, there were $14.5 million in
loans that management had reasonable concerns might become contractually past
due or be classified as a nonperforming asset. These loans are subject to the
same close attention and regular credit reviews as extended to loans past due
90 days or more and nonperforming assets.

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

    - The Formula Allowance. The formula allowance is calculated by applying
      historically determined loss factors to outstanding business loans based
      on credit risk ratings and for pools of

                                       25
<PAGE>
      homogeneous loans. Individually risk rated loan loss factors are
      determined using average annual net charge-off rates for the most recent
      two years. Pooled loans are loans that are homogeneous in nature such as
      consumer installment and residential mortgage loans. Pooled loan loss
      factors are based on net charge-offs experienced over the past year. The
      historic loss factors on the risk rated loans and the pooled loans are
      then considered for either positive or negative adjustment in an attempt
      to reflect the current dynamics of the portfolios. These adjustments in
      the loss factors are tied to management's evaluation of a number of
      factors including: 1) changes in the trend of the volume and severity of
      past due, classified and non-accrual assets; 2) changes in the nature and
      volume of the portfolio; 3) changes in lending policies, underwriting
      standards, or collection practices; 4) changes in the experience, ability,
      depth of lending management and staff; 5) portfolio concentrations; and
      6) changes in the national or local economy.

    - Specific Allowances for Identified Problem Loans. The amount of specific
      reserves is determined through a loan-by-loan analysis of non-performing
      loans. The analysis considers expected future cash flows, the value of
      collateral, or other factors that may impact the borrower's ability to
      repay.

    - The Unallocated Allowance. The unallocated portion of the allowance is
      based on loss factors that cannot be associated with specific loans or
      loan categories. These factors include management's subjective evaluation
      of such conditions as credit quality trends, collateral values, portfolio
      concentrations, specific industry conditions in the regional economy,
      regulatory examination results, internal audit and loan review findings,
      recent loss experiences in particular portfolio segments, etc. The
      unallocated portion of the allowance for losses reflects management's
      attempt to ensure that the overall reserve appropriately reflects a margin
      for the imprecision necessarily inherent in estimates of credit losses.

    As reflected in Table 14, at December 31, 2000 the allowance for loan losses
was $13.2 million, or 1.08% of total loans and 496% of total non-accrual loans.
This compares to an allowance for loan losses at December 31, 1999 of
$13.1 million, equivalent to 1.17% of total loans and 211% of non-accrual loans.
Net charge-offs during 2000 were $604 thousand more than 1999.

    Table 14, Analysis of Allowance for Credit Losses, shows a five-year history
of activity reflecting relative stability in both the annual charge-off ratio
and the level of the allowance related to total loans. Bancorp had loans
amounting to approximately $2.7 million and $6.2 million at December 31, 2000
and December 31, 1999, respectively, that were specifically classified as
impaired and included in non-accrual loans in Table 13.

    At December 31, 2000 the allowance for loan losses was $13.2 million,
consisting of $12.1 million representing the formula allowance, a $140 thousand
specific allowance, and a $1.0 million unallocated allowance. Table 15,
Allocation of Allowance for Credit Losses, discloses management's allocation of
the allowance to various loan categories. This reflects the underlying trends in
loan growth and the change in mix. As they are estimates, this allocation is not
intended to limit the amount of the allowance available to absorb losses from
any type of loan and should not be viewed as an indicator of the specific amount
or specific loan category in which future charge-offs may ultimately occur.

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

    While management believes the allowance for credit losses was adequate at
December 31, 2000, the estimate of losses and related allowance may change in
the near term due to economic and other uncertainties inherent in the estimation
process.

                                       26
<PAGE>
TABLE 14.  ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                         --------------------------------------------------------
(IN THOUSANDS)                              2000         1999        1998       1997       1996
--------------                           ----------   ----------   --------   --------   --------
<S>                                      <C>          <C>          <C>        <C>        <C>
Average loans outstanding less average
  unearned income(1)...................  $1,197,648   $1,116,658   $993,104   $954,115   $868,356
                                         ----------   ----------   --------   --------   --------
Allowance for credit losses at
  beginning of year....................  $   13,068   $   14,241   $ 13,685   $ 13,302   $ 12,479
Charge-offs:
  Real estate..........................         630          586      1,053        879        617
  Commercial and industrial............       1,009          388        532        220        405
  Consumer.............................       3,887        4,144      4,093      4,474      3,660
                                         ----------   ----------   --------   --------   --------
Total charge-offs......................       5,526        5,118      5,678      5,573      4,682
                                         ----------   ----------   --------   --------   --------
Recoveries:
  Real estate..........................         189          310        430        441        470
  Commercial and industrial............          80          371        235        151      1,180
  Consumer.............................       2,185        1,969      2,513      2,454      2,033
                                         ----------   ----------   --------   --------   --------
Total recoveries.......................       2,454        2,650      3,178      3,046      3,683
                                         ----------   ----------   --------   --------   --------
Net charge-offs........................       3,072        2,468      2,500      2,527        999
                                         ----------   ----------   --------   --------   --------
Provision for credit losses............       3,236        1,295      3,056      2,910      1,822
Allowance for credit losses at end of
  year.................................  $   13,232   $   13,068   $ 14,241   $ 13,685   $ 13,302
                                         ==========   ==========   ========   ========   ========
Net charge-offs to average loans
  outstanding..........................        0.26%        0.22%      0.25%      0.26%      0.12%
</TABLE>

------------------------

(1) Excludes loans held for sale.

TABLE 15.  ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                             -------------------------------------------------------------------------------------
                                    2000                  1999                  1998                  1997
                             -------------------   -------------------   -------------------   -------------------
                                        % GROSS               % GROSS               % GROSS               % GROSS
(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............  $ 1,866       5.8%    $ 1,612       6.1%    $ 1,830       7.5%    $ 2,304       7.5%
  Residential mortgage.....      690      14.2         653      27.4         973      27.8         932      27.4
  Other mortgage...........    3,651      26.4       3,960      24.8       3,566      22.8       3,418      20.4
Commercial and
  industrial...............    2,073      11.7       2,388      15.3       1,976      13.6       1,819      14.6
Consumer...................    3,940      40.4       3,073      25.4       3,630      26.7       4,264      28.8
Unallocated................    1,012       1.5       1,382       1.0       2,266       1.6         948       1.3
                             -------     -----     -------     -----     -------     -----     -------     -----
  Total allowance for
    credit losses..........  $13,232     100.0%    $13,068     100.0%    $14,241     100.0%    $13,685     100.0%
                             =======     =====     =======     =====     =======     =====     =======     =====
</TABLE>

------------------------

(1) Reflects the percentage of loans in each category to total loans.

                                       27
<PAGE>
1999 COMPARED TO 1998

OVERVIEW

    Net income for 1999 decreased 8% to $13.1 million, or $1.18 per diluted
share, from $14.6 million, or $1.33 per diluted share, for 1998, largely
reflecting the influence of special items of an unusual or nonrecurring nature
recognized in the periods compared. Excluding special items in both years, net
income increased slightly to $16.9 million, or $1.53 per share, from
$16.5 million, or $1.50 per share, for 1998.

    SPECIAL ITEMS 1999:  Special items for 1999 included $3.839 million of
merger-related expense, or $0.35 per share. This amount included $117 thousand
($0.01 per share) related to the November 1998 acquisition of Taneytown Bank &
Trust Company ("TBT"), $115 thousand ($0.01 per share) related to the July 1999
acquisition of Potomac Basin Group Associates, Inc., and $3.608 million ($0.33
per share) related to the acquisition of Patapsco Valley Bancshares (which
includes C&F). The integration of Commercial & Farmer's ("C&F"), core processing
systems and administrative functions was completed in March, 2000.

    SPECIAL ITEMS 1998:  Special items for 1998 included $2.332 million of
merger-related expense, or $0.21 per share. This amount included $192 thousand
($0.01 per share) of merger-related expenses pertaining to the 1998 integration
of core processing systems and administrative functions at Home Federal
Corporation ("the Savings Bank"), acquired in November 1996, $190 thousand
($0.01 per share) related to the May 1998 acquisition of Keller Stonebraker
Insurance, Inc., and $1.922 million ($0.19 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 $0.04 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 ($0.06 per share), and Bancorp realized a net gain of
$270 thousand ($0.02 per share) on the sale of bank-owned real estate.

    NET INTEREST INCOME:  Net interest income, on a tax-equivalent basis,
increased 3% to $65.1 million for 1999, from $63.0 million for 1998. The yield
on average earning assets decreased 38 basis points. Although there was an
increased reliance on borrowed funds in 1999, the average rate paid on
interest-bearing liabilities declined 22 basis points. The net interest margin
decreased to 4.28% for 1999, from 4.48% for 1998.

    NONINTEREST INCOME:  Noninterest income decreased 5% in 1999, to
$25.0 million, from $26.3 million in 1998. Excluding special items of an unusual
or nonrecurring nature occurring during 1998 as described below, noninterest
income from continuing operations increased $166 thousand in 1999.

    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.

    Service charges on deposit accounts increased 4% in 1999, to $7.1 million,
from $6.8 million for 1998 related largely to transaction volume.

    Insurance income increased 19% to $6.9 million for 1999 from $5.8 million
for 1998 related to increased sales of consumer and commercial business
insurance products.

    Gains on sales of loans decreased 44% to $2.2 million for 1999 from
$3.9 million for 1998. The origination activity of 1999 could not keep pace with
the 1998 volumes. The historically low mortgage rate environment that was
sustained throughout 1998 triggered high refinancing volume that year.

                                       28
<PAGE>
    Alternative investment and stockbrokerage income increased 16% in 1999,
resulting primarily from an increase in estate administration fees, mutual fund
and annuity sales.

    Other operating income increased 2% to $5.2 million for 1999 from
$5.1 million for 1998.

    NONINTEREST EXPENSE:  Total noninterest expense, increased 6% to
$67.2 million for 1999 from $63.4 million for 1998. Excluding merger related
expense and other special items of an unusual or nonrecurring nature noninterest
expense increased 3%.

    Salaries increased 1% to $28.4 million for 1999 from $28.1 million for 1998.

    Pension and other employee benefits declined 5% to $6.0 million for 1999
from $6.3 million for 1998 related to favorable experience in medical and health
programs.

    Merger-related expense increased to $5.0 million for 1999 from $3.2 million
for 1998 largely associated with legal and accounting fees, severance payments,
contract terminations,and similar expenses incurred in connection with the
acquisition and merger of PVB which closed on December 30, 1999.

    Occupancy and equipment expense declined 3% to $9.3 million for 1999 from
$9.6 million for 1998 attributed to cost reductions associated with a systems
conversion at the Savings Bank completed in June 1998.

    Other operating expense increased 13% to $18.5 million for 1999 from
$16.3 million for 1998 related principally to professional services regarding a
number of bank initiatives, including a program designed to enhance fee income
opportunities, human resource development programs, and outsourcing
opportunities.

    INCOME TAXES:  Income tax expense decreased by 8% to $5.2 million for 1999,
from $5.6 million for 1998, largely related to a 10% decrease in income before
taxes. The effective tax rate was 28.4% for 1999 compared with 27.7% for 1998.

    FINANCIAL CONDITION:  Total assets were $1.719 billion at December 31, 1999,
up $98.8 million, or 6%, 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. All capital ratios were substantially in
excess of regulatory minimums for Bancorp and its subsidiaries at each of the
years ended December 31, 1999 and 1998.

    PROVISION AND ALLOWANCE FOR CREDIT LOSSES:  The provision for credit losses
was decreased by 58%, to $1.3 million for 1999, from $3.1 million for 1998. The
ratio of net charge-offs to average loans outstanding decreased to 0.22% for
1999, from 0.25% for 1998.

    NONPERFORMING ASSETS:  Nonperforming assets increased slightly in 1999, by
1.6% to $7.4 million at December 31, 1999, from $7.2 million at year-end 1998.
The ratio of nonperforming assets to total assets declined to 0.43% at
December 31, 1999 from .45% one year earlier.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       29
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

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

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

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

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

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

                                       30
<PAGE>
REPORT OF INDEPENDENT AUDITORS

                    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, 2000 and
1999, 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, 2000. These financial statements are the
responsibility of F&M Bancorp's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated statement of income and comprehensive income of Patapsco Valley
Bancshares, Inc., a bank holding company acquired during 1999 in a transaction
accounted for as a pooling-of interests, as discussed in Note 2, for the year
ended December 31, 1998. Such statement is included in the consolidated
financial statements of F&M Bancorp and subsidiaries and reflects 11% of
consolidated total income for 1998. That statement was audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Patapsco Valley Bancshares, Inc., is based solely on
the report of the other auditors.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.

                                          [LOGO]

Vienna, Virginia
January 16, 2001

                                       31
<PAGE>
The Board of Directors and Stockholders
Patapsco Valley Bancshares, Inc. and Subsidiaries
Ellicott City, Maryland

    We have audited the consolidated balance sheet of Patapsco Valley
Bancshares, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 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 consolidated financial position of
Patapsco Valley Bancshares, Inc. and Subsidiaries as of December 31, 1998, and
the consolidated results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.

                                          [LOGO]

Baltimore, Maryland
March 2, 1999

                                       32
<PAGE>
                          F&M BANCORP AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)                            2000         1999
-------------------------------------                         ----------   ----------
<S>                                                           <C>          <C>
                                       ASSETS
Cash and due from banks.....................................  $   55,490   $   60,888
Federal funds sold..........................................       3,052       11,304
Interest-bearing deposits with banks........................       6,625       14,128
                                                              ----------   ----------
  Total cash and cash equivalents...........................      65,167       86,320
Loans held for sale.........................................       5,994       15,497
Investment securities:
  Available for sale, at fair value.........................     349,806      317,945
  Held to maturity, fair value of $89,584 in 2000 and
    $97,357 in 1999.........................................      89,405       99,416
                                                              ----------   ----------
  Total investment securities...............................     439,211      417,361
Loans, net of unearned income...............................   1,220,130    1,114,734
Less: Allowance for credit losses...........................     (13,232)     (13,068)
                                                              ----------   ----------
  Net loans.................................................   1,206,898    1,101,666
Bank premises and equipment, net............................      35,647       35,494
Other real estate owned, net................................       1,056        1,185
Interest receivable.........................................      11,172       10,080
Intangible assets...........................................       5,566        6,696
Other assets................................................      24,533       45,035
                                                              ----------   ----------
  Total other assets........................................      77,974       98,490
                                                              ----------   ----------
Total assets................................................  $1,795,244   $1,719,334
                                                              ==========   ==========

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
  Noninterest-bearing.......................................  $  207,872   $  188,154
  Interest-bearing..........................................   1,156,160    1,125,919
                                                              ----------   ----------
    Total deposits..........................................   1,364,032    1,314,073
Short-term borrowings:
  Federal funds purchased and securities sold under
    agreements to repurchase................................     127,395       94,083
  Other short-term borrowings...............................     110,676       48,183
Long-term borrowings........................................      15,790      100,578
Accrued taxes and other liabilities.........................      19,315       18,597
                                                              ----------   ----------
Total liabilities...........................................   1,637,208    1,575,514
                                                              ----------   ----------
Shareholders' equity:
  Common stock, par value $5 per share; authorized
    50,000,000 shares; issued and outstanding 11,014,529 in
    2000 and 10,999,621 in 1999.............................      55,073       54,998
  Surplus...................................................      78,488       78,248
  Retained earnings.........................................      25,857       18,951
  Accumulated other comprehensive loss......................      (1,382)      (8,377)
                                                              ----------   ----------
Total shareholders' equity..................................     158,036      143,820
                                                              ----------   ----------
Total liabilities and shareholders' equity..................  $1,795,244   $1,719,334
                                                              ==========   ==========
</TABLE>

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

                                       33
<PAGE>
                          F&M BANCORP AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)                               2000       1999       1998
---------------------------------                             --------   --------   --------
<S>                                                           <C>        <C>        <C>
INTEREST INCOME
  Interest and fees on loans................................  $101,081   $ 86,339   $ 87,371
  Interest on deposits with banks...........................       566      1,099      1,386
  Interest and dividends on investment securities:
    Taxable.................................................    18,563     19,424     16,480
    Tax-exempt..............................................     5,789      5,984      4,688
  Interest on federal funds sold............................       179        952      1,095
                                                              --------   --------   --------
    Total interest income...................................   126,178    113,798    111,020
                                                              --------   --------   --------
INTEREST EXPENSE
  Interest on deposits......................................    46,179     42,849     42,267
  Interest on federal funds purchased and securities sold
    under agreements to repurchase..........................     6,305      3,304      2,680
  Interest on long-term borrowings..........................     2,310      5,796      5,529
  Interest on other short-term borrowings...................     6,348         92        151
                                                              --------   --------   --------
Total interest expense......................................    61,142     52,041     50,627
                                                              --------   --------   --------
Net interest income.........................................    65,036     61,757     60,393
Provision for credit losses.................................     3,236      1,295      3,056
                                                              --------   --------   --------
Net interest income after provision for credit losses.......    61,800     60,462     57,337
                                                              --------   --------   --------
NONINTEREST INCOME
  Service charges on deposit accounts.......................     7,905      7,083      6,810
  Insurance income..........................................     7,993      6,887      5,793
  Gains on sales of loans, net..............................     1,643      2,219      3,930
  Gains on sales of securities, net.........................       633         10      1,104
  Gains (losses) on sales of property, net..................        51        (14)       450
  Alternative investment and stock brokerage income.........     3,890      3,587      3,090
  Other operating income....................................     6,654      5,216      5,112
                                                              --------   --------   --------
Total noninterest income....................................    28,769     24,988     26,289
NONINTEREST EXPENSE
  Salaries..................................................    28,893     28,392     28,052
  Pension and other employee benefits.......................     5,525      5,956      6,256
  Merger-related expenses...................................       318      5,044      3,217
  Occupancy and equipment expense...........................     9,313      9,315      9,555
  Other operating expense...................................    18,725     18,501     16,313
                                                              --------   --------   --------
Total noninterest expense...................................    62,774     67,208     63,393
                                                              --------   --------   --------
  Income before provision for income taxes..................    27,795     18,242     20,233
  Provision for income taxes................................     8,471      5,179      5,600
                                                              --------   --------   --------
Net Income..................................................  $ 19,324   $ 13,063   $ 14,633
                                                              ========   ========   ========
Other comprehensive income (loss), net of tax:
  Unrealized gain/(losses) on securities....................  $  6,577   $ (8,659)  $   (787)
  Reclassification adjustment for gains included in net
    income..................................................       418          5        678
                                                              --------   --------   --------
Other comprehensive income (loss)...........................     6,995     (8,654)      (109)
                                                              --------   --------   --------
Comprehensive income........................................  $ 26,319   $  4,409   $ 14,524
                                                              ========   ========   ========
Earnings per Common Share--Basic
  Based on weighted average shares outstanding of 11,010,476
    in 2000, 10,981,125 in 1999, and 10,888,985 in 1998.....  $   1.76   $   1.19   $   1.34
Earnings per Common Share--Diluted
  Based on weighted average shares outstanding of 11,030,262
    in 2000, 11,040,986 in 1999, and 11,004,812 in 1998.....  $   1.75   $   1.18   $   1.33
</TABLE>

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

                                       34
<PAGE>
                          F&M BANCORP AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                                                       COMMON                               OTHER
                                                        STOCK                RETAINED   COMPREHENSIVE
(IN THOUSANDS, EXCEPT SHARE DATA)          SHARES     PAR VALUE   SURPLUS    EARNINGS   (LOSS) INCOME    TOTAL
---------------------------------        ----------   ---------   --------   --------   -------------   --------
<S>                                      <C>          <C>         <C>        <C>        <C>             <C>
Balance, December 31, 1997.............   9,264,782    $46,324    $56,254    $ 38,791      $   386      $141,755

Net income.............................          --         --         --      14,633           --        14,633
Dividend reinvestment plan.............      18,080         89        426        (126)          --           389
Cash dividend ($.92 per share).........          --         --         --     (10,023)          --       (10,023)
Stock consideration for options
  exercised............................      (3,217)       (16)       (19)        (90)          --          (125)
Stock options exercised................      56,930        285      1,382          --           --         1,667
Stock dividend.........................   1,102,859      5,514      6,977     (12,491)          --            --
Other comprehensive loss...............          --         --         --          --         (109)         (109)
                                         ----------    -------    -------    --------      -------      --------
Balance, December 31, 1998.............  10,439,434    $52,196    $65,020    $ 30,694      $   277      $148,187

Net income.............................          --         --         --      13,063           --        13,063
Dividend reinvestment plan.............      10,620         55        171        (138)          --            88
Cash dividend ($.97 per share).........          --         --         --     (10,646)          --       (10,646)
Stock consideration for options
  exercised............................     (11,554)       (58)       (50)        (81)          --          (189)
Stock options exercised................     105,437        527      1,444          --           --         1,971
Stock dividend.........................     455,684      2,278     11,663     (13,941)          --            --
Other comprehensive loss...............          --         --         --          --       (8,654)       (8,654)
                                         ----------    -------    -------    --------      -------      --------
Balance, December 31, 1999.............  10,999,621    $54,998    $78,248    $ 18,951      $(8,377)     $143,820

Net income.............................          --         --         --      19,324           --        19,324
Dividend reinvestment plan.............      (2,906)       (14)        13         (82)          --           (83)
Cash dividend ($1.08 per share)........          --         --         --     (12,332)          --       (12,332)
Stock consideration for options
  exercised............................        (651)        (3)        (5)         (4)          --           (12)
Stock options exercised................      18,465         92        232          --           --           324
Other comprehensive loss...............          --         --         --          --        6,995         6,995
                                         ----------    -------    -------    --------      -------      --------
Balance, December 31, 2000.............  11,014,529    $55,073    $78,488    $ 25,857      $(1,382)     $158,036
</TABLE>

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

                                       35
<PAGE>
                          F&M BANCORP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................................  $  19,324   $  13,063   $  14,633
Adjustments to reconcile net income to net cash provided by
  operating activities
  Provision for credit losses...............................      3,236       1,295       3,056
  Provision for other real estate owned.....................         --          --           2
  Depreciation and amortization.............................      3,617       3,764       3,272
  Amortization of intangibles...............................      1,130       1,152         790
  Net premium amortization on investment securities.........        (64)        342          37
  (Increase)/decrease in interest receivable................     (1,092)        103          69
  Increase in interest payable..............................         58         194         999
  Deferred income tax provision (benefits)..................        131         416        (532)
  Amortization (accretion) of net loan origination costs
    (fees)..................................................        124          24        (168)
  (Gain)/loss on sales of property..........................        (51)         14        (450)
  Gain on sales of securities...............................       (633)        (10)     (1,104)
  Decrease/(increase) in loans held for sale................      9,503      13,032     (17,765)
  Decrease/(increase) in other assets.......................     17,209     (23,176)       (814)
  Increase in other liabilities.............................        660       1,810         251
  Gains on sales of loans...................................     (1,643)     (2,219)     (3,930)
  Other operating activities................................          9       7,250       1,741
                                                              ---------   ---------   ---------
Net cash provided by operating activities...................     51,518      17,054          87
                                                              ---------   ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held to maturity...       (490)    (20,215)    (26,729)
Purchases of investment securities available for sale.......    (80,813)   (185,232)   (453,300)
Proceeds from calls of securities held to maturity..........         --          --      17,038
Proceeds from sales/calls of securities available for
  sale......................................................      2,941      14,976     156,645
Proceeds from maturing securities available for sale........     59,018     175,938     209,194
Proceeds from maturing securities held to maturity..........     10,033      18,507       6,103
Net increase in loans.......................................   (108,592)   (125,471)     (9,847)
Purchases of premises and equipment.........................     (3,770)     (3,701)     (5,367)
Proceeds from sales of property.............................        129           2       4,173
Other investing activities..................................         --         518        (608)
                                                              ---------   ---------   ---------
Net cash used in investing activities.......................   (121,544)   (124,678)   (102,698)
                                                              ---------   ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits,
  interest-bearing checking, savings and money market
  accounts..................................................     41,197      57,681      67,438
Net increase/(decrease) in certificates of deposit..........      8,762     (28,869)     44,766
Net increase in federal funds purchased and securities sold
  under agreements to repurchase............................     33,312      32,656      13,514
Net increase/(decrease) in other short-term borrowings......     62,493      33,407     (42,476)
Net (decrease)/increase in long-term borrowings.............    (84,788)      6,332      50,384
Cash dividends paid.........................................    (12,332)    (10,646)    (10,023)
Dividend reinvestment plan..................................        (83)         88         389
Proceeds from issuance of common stock......................        312       1,782       1,542
Other financing activities..................................         --          --        (445)
                                                              ---------   ---------   ---------
Net cash provided by financing activities...................     48,873      92,431     125,089
Net (decrease)/increase in cash and cash equivalents........    (21,153)    (15,193)     22,478
                                                              ---------   ---------   ---------
Cash and cash equivalents at beginning of year..............     86,320     101,513      79,035
                                                              ---------   ---------   ---------
Cash and cash equivalents at end of year....................  $  65,167   $  86,320   $ 101,513
                                                              =========   =========   =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest..................................     61,085      55,856      50,064
Cash payments for income tax................................      7,478       5,180       6,522

NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available for sale, net
  of income taxes...........................................      6,995      (8,654)       (109)
Net transfer to other real estate owned from loans..........         --          --         705
Retirement of common stock..................................         --          44         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, Howard, Montgomery and Washington Counties, MD, with
additional community office presence in Allegany, and Baltimore County, MD and
Adams County, PA. The Bank and the Savings Bank maintain correspondent banking
relationships that allow them to execute daily federal funds transactions on an
unsecured basis.

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

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

    COMPREHENSIVE INCOME:  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 a provision of $4,401,000 in 2000 and benefits
of $5,444,000 and $69,000 in 1999 and 1998, respectively.

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

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

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

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

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

    Securities classified as AFS are equity securities with readily determinable
fair values and those debt securities that Bancorp intends to hold for an
indefinite period of time but not necessarily to

                                       37
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 noninterest income in the consolidated statement of income and
comprehensive income.

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

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

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

    ALLOWANCE FOR CREDIT LOSSES:  The allowance for credit losses (the
"allowance") is maintained at a level 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

                                       38
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

    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

                                       39
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
plus 19,786 shares, 59,861 shares, and 115,827 shares, represented by
outstanding stock options assumed to be exercised for the years ended
December 31, 2000, 1999 and 1998, respectively.

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

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

    STOCK COMPENSATION:  Employee stock options are recorded under the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and disclosures
pertaining to fair value-based accounting of stock options under the provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation," are
included in Note 9. FASB Statement No. 123 provides for a fair value-based
method of accounting for 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 December 30, 1999, Bancorp completed the acquisition of all of the
outstanding capital stock of Patapsco Valley Bancshares, Inc. ("PVB"), Ellicott
City, Maryland, in a tax-free transaction, and the merger of its principal
subsidiary, Commercial & Farmers Bank ("C&F"), into the Bank. Shareholders of
PVB received 1.18 newly issued shares of Bancorp Common Stock, or a total of
1,635,872 shares for all 1,386,748 outstanding shares of PVB and cash in lieu of
each fractional share at the rate of $21.88. At closing, PVB had reported total
assets of $173.2 million, loans of $119 million, and deposits of
$150.5 million.

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

    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. ("KS"), a Hagerstown, MD-based independent insurance agency, in
a tax-free exchange of shares.

    All four acquisitions were accounted for as pooling of interests.

                                       40
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  INVESTMENT SECURITIES

    The amortized cost and estimated fair value of investments at December 31,
2000 and 1999, summarized by contractual maturity, are presented in a table that
follows. Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with, or without, call or
prepayment penalties.

    Proceeds from sales/calls of investment securities available-for-sale during
2000 were $2,941,000. Gross gains of $633,000 were realized on those sales.
Proceeds from sales/calls of investment securities available-for-sale during
1999 were $14,976,000. Gross gains of $36,000 and gross losses of $26,000 were
realized on those sales. Proceeds from sales/calls of investment securities
available-for-sale during 1998 were $156,645,000. 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.

    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 $226,957,000 at December 31, 2000, and $164,604,000 at December 31,
1999.

    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

                                       41
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  INVESTMENT SECURITIES (CONTINUED)
purchase or carry tax-exempt obligations. Such tax-exempt securities composed
28.6% and 31.1% of the total carrying value of the investment portfolio at
December 31, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 2000
                                                      -----------------------------------------------
                                                                    GROSS        GROSS      ESTIMATED
                                                      AMORTIZED   UNREALIZED   UNREALIZED     FAIR
(IN THOUSANDS)                                          COST        GAINS        LOSSES       VALUE
--------------                                        ---------   ----------   ----------   ---------
<S>                                                   <C>         <C>          <C>          <C>
Available-for-sale:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies:
  Within 1 year.....................................  $ 43,462      $   13       $   40     $ 43,434
  After 1 but within 5 years........................    69,995          91          362       69,724
  After 5 but within 10 years.......................    57,777          38          800       57,016
                                                      --------      ------       ------     --------
                                                       171,234         142        1,202      170,174
                                                      --------      ------       ------     --------
Obligations of states and political subdivisions:
Within 1 year.......................................       676           3            0          679
  After 1 but within 5 years........................     6,643          12           43        6,612
  After 5 but within 10 years.......................    21,868          99          181       21,786
  After 10 years....................................    15,631         152          301       15,482
                                                      --------      ------       ------     --------
                                                        44,818         266          525       44,559
Mortgage-backed securities..........................   119,185          73        1,980      117,279
                                                      --------      ------       ------     --------
Total debt securities...............................   335,237         481        3,707      332,012
Equity securities...................................    16,788       1,006           --       17,794
                                                      --------      ------       ------     --------
Total securities available-for-sale.................  $352,025      $1,487       $3,707     $349,806
                                                      ========      ======       ======     ========
Held-to-maturity:
  Obligations of states and political subdivisions:
  Within 1 year.....................................  $  6,027      $   20       $    0     $  6,047
  After 1 but within 5 years........................    31,071         355           10       31,416
  After 5 but within 10 years.......................    18,437         119           68       18,489
  After 10 years....................................    25,499          93          415       25,177
                                                      --------      ------       ------     --------
                                                        81,034         587          493       81,129
Mortgage-backed securities..........................     8,371          86            2        8,455
                                                      --------      ------       ------     --------
Total securities held-to-maturity...................  $ 89,405      $  673       $  495     $ 89,584
                                                      ========      ======       ======     ========
</TABLE>

                                       42
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 1999
                                                      -----------------------------------------------
                                                                    GROSS        GROSS      ESTIMATED
                                                      AMORTIZED   UNREALIZED   UNREALIZED     FAIR
(IN THOUSANDS)                                          COST        GAINS        LOSSES       VALUE
--------------                                        ---------   ----------   ----------   ---------
<S>                                                   <C>         <C>          <C>          <C>
Available-for-sale:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies:
  Within 1 year.....................................  $ 12,529       $  1        $    37    $ 12,493
  After 1 but within 5 years........................    70,939          8          1,871      69,076
  After 5 but within 10 years.......................    54,086         --          2,829      51,257
                                                      --------       ----        -------    --------
                                                       137,554          9          4,737     132,826
Obligations of states and political subdivisions:
  Within 1 year.....................................     1,040          2             --       1,042
  After 1 but within 5 years........................     4,338          9             27       4,320
  After 5 but within 10 years.......................    22,755         --            900      21,855
  After 10 years....................................    14,360         --          1,222      13,138
                                                      --------       ----        -------    --------
                                                        42,493         11          2,149      40,355
Mortgage-backed securities..........................   136,506          9          6,358     130,157
                                                      --------       ----        -------    --------
Total debt securities...............................   316,553         29         13,244     303,338
Equity securities...................................    14,875         --            268      14,607
                                                      --------       ----        -------    --------
Total securities available-for-sale.................  $331,428       $ 29        $13,512    $317,945
                                                      ========       ====        =======    ========
Held-to-maturity:
  Obligations of states and political subdivisions:
  Within 1 year.....................................  $  7,389       $ 35        $    --    $  7,424
  After 1 but within 5 years........................    33,298        258             83      33,473
  After 5 but within 10 years.......................    18,514         10            429      18,095
  After 10 years....................................    30,017         --          1,743      28,274
                                                      --------       ----        -------    --------
                                                        89,218        303          2,255      87,266
  Mortgage-backed securities........................    10,198         16            123      10,091
                                                      --------       ----        -------    --------
Total securities held-to-maturity...................  $ 99,416       $319        $ 2,378    $ 97,357
                                                      ========       ====        =======    ========
</TABLE>

                                       43
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.  LOANS

    Loans consist of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       -----------------------
(IN THOUSANDS)                                            2000         1999
--------------                                         ----------   ----------
<S>                                                    <C>          <C>
Real estate:
  Construction and land development..................  $   80,632   $   67,452
  Secured by farmland................................       6,508        7,884
  Residential mortgage...............................     347,440      305,834
  Other mortgage.....................................     292,661      276,414
Agricultural.........................................         550          656
Commercial and industrial............................     182,020      170,379
Consumer.............................................     308,818      283,000
Other Loans..........................................       1,501        3,115
                                                       ----------   ----------
    Total Loans......................................  $1,220,130   $1,114,734
                                                       ==========   ==========
</TABLE>

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

    Transactions in the allowance for credit losses were:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                   ------------------------------
(IN THOUSANDS)                                       2000       1999       1998
--------------                                     --------   --------   --------
<S>                                                <C>        <C>        <C>
Balance at beginning of year.....................  $13,068    $14,241    $13,685
Provision for credit losses......................    3,236      1,295      3,056
Recoveries of loans previously charged-off.......    2,454      2,650      3,178
Loans charged-off................................   (5,526)    (5,118)    (5,678)
                                                   -------    -------    -------
Balance at end of year...........................  $13,232    $13,068    $14,241
                                                   =======    =======    =======
</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 did not
involve more than normal risk of collectibility nor presented other unfavorable
features. The aggregate dollar amount of all loans to officers, directors, and
their affiliates was $14,280,000 and $12,346,000 at December 31, 2000 and 1999,
respectively. During 2000, $16,194,000 of new loans were made, or became
reportable, and repayments and other decreases totaled $14,260,000.

                                       44
<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,
2000, 1999, and 1998, and the effect on interest income for the years then
ended, are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                      ------------------------------
(IN THOUSANDS)                                          2000       1999       1998
--------------                                        --------   --------   --------
<S>                                                   <C>        <C>        <C>
Principal balance...................................   $2,669     $5,462     $5,544
Gross amount of interest which would have been
  recorded under original terms.....................   $  205     $  427     $  468
Recorded interest income on those loans.............   $  134     $  309     $  167
</TABLE>

    The net reduction in interest income on renegotiated loans was not material
in 2000, 1999, and 1998. At December 31, 2000, 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 $2,190,000 and $3,441,000 at December 31,
2000 and 1999, respectively, were specifically classified as impaired and are
included in nonaccrual loans disclosed above. The average balance of impaired
loans amounted to $3,590,000 and $1,857,000 for the years ended December 31,
2000 and 1999, respectively. Cash receipts totaling $1,002,124 and $1,618,000
during 2000 and 1999, 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 and $140,000 and
$317,000 at December 31, 2000 and 1999, respectively.

5.  BANK PREMISES AND EQUIPMENT

    Investments in bank premises and equipment are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
(IN THOUSANDS)                                                2000       1999
--------------                                              --------   --------
<S>                                                         <C>        <C>
Bank premises and land....................................  $32,024    $33,688
Furniture and equipment...................................   32,557     28,594
Leasehold improvements....................................    3,482      3,537
                                                            -------    -------
                                                             68,063     65,819
Less: accumulated depreciation and amortization...........   32,416     30,325
                                                            -------    -------
Net premises and equipment................................  $35,647    $35,494
                                                            =======    =======
</TABLE>

    Depreciation and amortization related to premises and equipment in the
consolidated statement of income and comprehensive income amounted to $3,617,000
in 2000, and $3,764,000 in 1999, and $3,272,000 in 1998.

                                       45
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  DEPOSITS

    The carrying amounts of deposits are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       -----------------------
(IN THOUSANDS )                                           2000         1999
---------------                                        ----------   ----------
<S>                                                    <C>          <C>
Noninterest-bearing demand deposits..................  $  207,872   $  188,154
Interest-bearing deposits:
  Checking...........................................     185,817      203,725
  Money market.......................................     282,084      173,011
  Savings............................................     145,200      214,886
  Certificates of deposit:
    Under $100,000...................................     428,513      435,302
    $100,000 and over................................     114,546       98,995
                                                       ----------   ----------
Total deposits.......................................  $1,364,032   $1,314,073
                                                       ==========   ==========
</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
Federal Home Loan Bank ("FHLB"), which are secured either by 1-4 family
residential properties, FHLB Stock, or other mortgage-related assets.

    Unused lines of credit for short-term borrowings totaled approximately
$344,249,000 at December 31, 2000.

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

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -------------------
(IN THOUSANDS)                                              2000       1999
--------------                                            --------   --------
<S>                                                       <C>        <C>
Maximum month end balance during the year...............  $251,689   $156,337
Average balance for the year............................   209,144     89,425
Average rate for the year...............................      6.10%      4.74%
Average rate at year end................................      6.25%      5.08%
Estimated fair value....................................  $238,071   $142,266
</TABLE>

    LONG-TERM BORROWINGS:  The table below presents a summary of long-term FHLB
advances:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -------------------
(IN THOUSANDS)                                               2000       1999
--------------                                             --------   --------
<S>                                                        <C>        <C>
Due after 1 but within 5 years...........................  $ 3,631    $ 31,704
Due after 5 but within 10 years..........................   12,035      68,745
Due after 10 years.......................................      124         129
                                                           -------    --------
                                                           $15,790    $100,578
                                                           =======    ========
</TABLE>

                                       46
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.  BORROWINGS (CONTINUED)
    These advances had weighted average interest rates of 5.39% and 5.31% at
December 31, 2000 and 1999, 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 2008, a $10.0 million advance is 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)                                                 2000       1999
--------------                                               --------   --------
<S>                                                          <C>        <C>
Deferred tax assets:
  Allowance for credit and other real estate owned
    losses.................................................   $4,604    $ 4,479
  Unrealized losses on securities available for sale.......      838      5,162
  Deferred compensation....................................    1,737      1,636
  Intangibles..............................................    1,146      1,191
  Other....................................................      982      1,296
                                                              ------    -------
    Total deferred tax assets..............................    9,307     13,764
  Valuation allowance for deferred tax assets..............     (474)      (474)
                                                              ------    -------
    Total deferred tax assets after valuation allowance....    8,833     13,290
                                                              ------    -------
Deferred tax Liabilities:
  Depreciation and amortization............................    1,219      1,222
  Other....................................................      357        356
                                                              ------    -------
    Total deferred tax liabilities.........................    1,576      1,578
                                                              ------    -------
    Net deferred tax assets................................   $7,257    $11,712
                                                              ======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                   ------------------------------
(IN THOUSANDS)                                       2000       1999       1998
--------------                                     --------   --------   --------
<S>                                                <C>        <C>        <C>
Income before income tax.........................  $27,795    $18,242    $20,233
Tax rate.........................................       35%        35%        35%
                                                   -------    -------    -------
Income tax at statutory rate.....................    9,728      6,385      7,081
(Decreases) Increases in tax resulting from:
  Tax-exempt interest income.....................   (2,142)    (2,261)    (1,805)
  State income tax, net of federal income tax
    benefit......................................      583        264        321
  Other..........................................      302        791          3
                                                   -------    -------    -------
Actual tax expense...............................  $ 8,471    $ 5,179    $ 5,600
                                                   =======    =======    =======
Effective tax rate...............................     30.5%      28.4%      27.7%
                                                   =======    =======    =======
</TABLE>

                                       47
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.  INCOME TAXES (CONTINUED)
    Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
(IN THOUSANDS)                                          2000       1999       1998
--------------                                        --------   --------   --------
<S>                                                   <C>        <C>        <C>
Currently payable:
  Federal...........................................   $7,297     $4,429     $5,805
  State.............................................    1,043        334        327
                                                       ------     ------     ------
    Total currently payable.........................    8,340      4,763      6,132
Deferred............................................      131        416       (532)
                                                       ------     ------     ------
Provision for income taxes..........................   $8,471     $5,179     $5,600
                                                       ======     ======     ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         ------------------------------
(IN THOUSANDS)                                             2000       1999       1998
--------------                                           --------   --------   --------
<S>                                                      <C>        <C>        <C>
Provision for credit losses............................   $(125)      $443      $(601)
Amortization of intangibles............................      45         11       (261)
Other..................................................     211        (38)       330
                                                          -----       ----      -----
    Deferred tax expense (benefit).....................   $ 131       $416      $(532)
                                                          =====       ====      =====
</TABLE>

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 $685,000
for 2000, $520,000 for 1999, and $478,000 for 1998. The Plan also provides for
employer matching contributions up to 4% of eligible compensation dependent on
the level of voluntary contributions. Employer matching contributions totaled
$802,000 in 2000, $352,000 in 1999, and $343,000 in 1998.

    Taneytown Bank & Trust Company ("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.

    HOME FEDERAL CORPORATION ("THE SAVINGS BANK") PROFIT PLAN:  Prior to 1999,
the Savings Bank provided a retirement savings plan and trust, which was a
deferred compensation plan (401(k)) and a profit sharing plan (the "Savings
Plan") for all employees who met certain age and eligibility requirements. The
Savings Plan allowed eligible participants to defer up to 15% of their annual
salary and allowed the Savings Bank to contribute to the 401(k) part of the
Savings Plan on a matching basis. The Savings Bank could also elect to
contribute a portion of its profits to the profit sharing portion of the Savings
Plan. During 1999, the Savings Plan merged into the Plan.

    Contributions were 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. In addition, the Savings Bank made profit sharing
contributions of $180,000 in 1998.

                                       48
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

<TABLE>
<CAPTION>
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
Change in plan assets
Fair value of plan assets at beginning of year..............  $1,085,848   $1,163,145
  Actual return on plan assets..............................     115,685       74,004
  Employer contributions....................................     189,159           --
  Benefits paid.............................................    (290,841)    (151,301)
                                                              ----------   ----------
    Fair value of plan assets at end of year................  $1,099,851   $1,085,848
                                                              ==========   ==========
Change in benefit obligation
  Benefit obligation at beginning of year...................   1,322,650    1,688,200
  Service cost..............................................          --      186,737
  Interest cost.............................................      99,164      113,140
  Benefits paid.............................................    (308,319)    (151,301)
  Actuarial (loss) gain.....................................      41,448      (30,165)
  Change in discount rate...................................      42,149     (183,250)
  Curtailment...............................................          --     (300,711)
                                                              ----------   ----------
    Benefit obligation at end of year.......................  $1,197,092   $1,322,650
                                                              ==========   ==========
Funded status...............................................     (97,241)    (236,802)
Unamortized prior service cost..............................     (88,467)    (103,772)
Unamortized net gain........................................    (238,949)    (296,700)
Unamortized net obligation from transition..................      (2,331)      (4,662)
                                                              ----------   ----------
    Accrued pension expense.................................  $ (426,988)  $ (641,936)
                                                              ==========   ==========
Net pension expense includes the following components
Service cost................................................  $       --   $  186,737
Interest cost...............................................      99,164      113,140
Expected return on assets...................................     (84,156)     (94,536)
Net amortization and deferral...............................     (23,319)      (2,721)
                                                              ----------   ----------
    Net pension expense.....................................  $   (8,311)  $  202,620
                                                              ==========   ==========
</TABLE>

    Effective December 30, 1999, benefits for participants of the defined
benefit pension plan which covered substantially all of the C&F employees, were
frozen and will not increase after that date. The curtailment of $300,711
reflected under the section "Change in benefit obligation" is a result of the
plan being frozen. C&F also had contributory thrift plans qualifying under
Section 401(k) of the Internal Revenue Code. All employees age 21 or more with
one year of service were eligible for

                                       49
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.  EMPLOYEE BENEFITS (CONTINUED)
participation in the plans. C&F's contributions to these plans, included in
expenses, were $370,765 and $84,812 for 1999 and 1998,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, 2000, 1999 and 1998 were $154,000, $392,000, and $372,000,
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 in order to provide retirement benefits. The expense for these
benefits was $160,000, $161,000, and $117,000, for 2000, 1999, and 1998,
respectively.

    EMPLOYEE STOCK PURCHASE PLAN:  Bancorp has an Employee Stock Purchase Plan
(the "ESPP") whereby eligible employees may authorize payroll deductions ranging
from $120 to $2,400 per year for the purpose of acquiring Bancorp Common Stock
at current market prices. To encourage employee participation in the ESPP,
Bancorp contributes an additional 20% of each participant's voluntary payroll
deduction. Bancorp's contributions amounted to $28,000, $7,000, and $17,000, for
2000, 1999, and 1998, respectively. Contributions to the ESPP are typically
transmitted to Bancorp's designated agent to acquire Bancorp Common Stock in the
open market. Under the terms of the ESPP, shares may also be purchased directly
from Bancorp at current market prices. A total of 63,814 shares of Bancorp
Common Stock are reserved for this purpose. Bancorp pays all administrative
costs of the ESPP and, at its discretion, reserves the right to amend, modify,
suspend, or terminate the ESPP at any time.

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

                                       50
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.  EMPLOYEE BENEFITS (CONTINUED)
market value of a share of Common Stock on the date of grant and are fully
exercisable after 6 months from the date of grant and expire after 10 years.

<TABLE>
<CAPTION>
                                            OPTIONS ISSUED
                                            AND OUTSTANDING           PRICE
                                            ---------------   ---------------------
<S>                                         <C>               <C>      <C>   <C>
Balance, December 31, 1997................      303,804       $10.15    to   $25.16
Exercised.................................      (61,620)       10.15    to    25.16
Granted...................................       69,396        16.10    to    32.09
Terminated................................       (6,595)       18.41    to    32.09
                                               --------       ------         ------
Balance, December 31, 1998................      304,985        10.15    to    32.09
Exercised.................................     (102,192)       10.15    to    32.09
Granted...................................       95,757        19.49    to    30.83
Terminated................................      (17,227)       23.22    to    32.09
                                               --------       ------         ------
Balance, December 31, 1999................      281,323        10.15    to    32.09
Exercised.................................      (18,465)       10.15    to    23.22
Granted...................................      114,962        18.25    to    19.00
Terminated................................      (32,395)       16.57    to    32.09
                                               --------       ------         ------
Balance, December 31, 2000................      345,425       $10.15    to   $32.09
                                               ========       ======         ======
</TABLE>

    At December 31, 2000, there were 175,943 options exercisable at prices
ranging from $10.15 to $32.09. Shares reserved for future grants totaled 408,726
at December 31, 2000.

    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>
                                                      2000       1999       1998
                                                    --------   --------   --------
<S>           <C>                                   <C>        <C>        <C>
Net Income:   As reported.........................  $19,324    $13,063    $14,633
              Pro forma...........................   19,168     12,917     14,252
EPS:          As reported, basic..................     1.76       1.19       1.34
              As reported, diluted................     1.75       1.18       1.33
              Pro forma, basic....................     1.74       1.18       1.31
              Pro forma, diluted..................     1.74       1.17       1.30
</TABLE>

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

                                       51
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.  EMPLOYEE BENEFITS (CONTINUED)
    A summary of the status of the Plans at December 31, 2000 and 1999, and
changes during the years then ended, is presented as follows:

<TABLE>
<CAPTION>
                                                 2000                   1999
                                         --------------------   --------------------
                                                    WTD. AVG.              WTD. AVG.
                                          SHARES    EX. PRICE    SHARES    EX. PRICE
                                         --------   ---------   --------   ---------
<S>                                      <C>        <C>         <C>        <C>
Outstanding at beginning of year.......  281,323     $23.23      304,985    $19.34
Granted................................  114,962      18.92       95,757     29.90
Exercised..............................  (18,465)     14.09     (102,192)    16.82
Forfeited..............................  (32,395)     22.10      (17,227)    29.38
                                         -------     ------     --------    ------
Outstanding at end of year.............  345,425      22.40      281,323     23.23
                                         -------     ------     --------    ------
Exercisable at end of year.............  175,943      21.33      172,949     19.30
                                         -------     ------     --------    ------
Weighted average fair value of options
  granted during the year..............              $18.92                 $29.90
</TABLE>

OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                      OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                               ---------------------------------   -------------------------------
                                  NUMBER       WEIGHTED AVERAGE      WEIGHTED          NUMBER          WEIGHTED
RANGE OF                       OUTSTANDING        REMAINING          AVERAGE        EXERCISABLE        AVERAGE
EXERCISE PRICES               AS OF 12/31/00   CONTRACTUAL LIFE   EXERCISE PRICE   AS OF 12/31/00   EXERCISE PRICE
---------------               --------------   ----------------   --------------   --------------   --------------
<S>                           <C>              <C>                <C>              <C>              <C>
$10.15 - $14.07.............      45,940             2.37             $12.48           45,940           $12.48
 16.10 - 19.49..............     134,250             8.35              18.78           34,662            18.09
 23.22 - 24.37..............      44,026             5.13              23.79           39,325            23.86
 25.16 - 25.16..............      20,039             5.21              25.16           20,039            25.16
 30.12 - 32.09..............     101,170             8.05              30.55           35,977            30.88
                                 -------             ----             ------          -------           ------
$10.15 - $32.09.............     145,425             6.87             $22.40          175,943           $21.33
                                 =======             ====             ======          =======           ======
</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 2000, 1999, and 1998, respectively: risk-free
interest rates of 4.9%, 6.8%, and 6.7%; expected dividend yields of 5.2%, 4.8%,
and 4.8%, expected lives of 3.06, 2.96, and 2.96 years; and expected volatility
of 23%, 21%, and 19%.

10.  OTHER OPERATING INCOME AND EXPENSE

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

<TABLE>
<CAPTION>
(IN THOUSANDS)                                          2000       1999       1998
--------------                                        --------   --------   --------
<S>                                                   <C>        <C>        <C>
Bank card income....................................   $2,574     $2,039     $1,558
Other...............................................    4,080      3,177      3,554
                                                       ------     ------     ------
    Total other operating income....................   $6,654     $5,216     $5,112
                                                       ======     ======     ======
</TABLE>

                                       52
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.  OTHER OPERATING INCOME AND EXPENSE (CONTINUED)

<TABLE>
<CAPTION>
(IN THOUSANDS)                                       2000       1999       1998
--------------                                     --------   --------   --------
<S>                                                <C>        <C>        <C>
Stationery and supplies..........................  $ 1,446    $ 1,437    $ 1,439
Professional services............................    2,812      2,607      2,845
Postage..........................................    1,011      1,122      1,084
Telephone........................................    1,840      1,608      1,338
Computer software and maintenance................    1,852      1,504        882
Other real estate owned..........................       29         78        262
Amortization of intangibles......................    1,173      1,152        790
Other............................................    8,562      8,993      7,673
                                                   -------    -------    -------
    Total other operating expense................  $18,725    $18,501    $16,313
                                                   =======    =======    =======
</TABLE>

    Transactions in the allowances for other real estate owned are summarized as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)                                           2000       1999       1998
--------------                                         --------   --------   --------
<S>                                                    <C>        <C>        <C>
Balance at beginning of year.........................   $ 374       $425     $ 1,792
Provision for increase (decline) in value and selling
  expenses...........................................    (261)        --           2
Losses charged to the allowances.....................     (15)       (51)     (1,369)
                                                        -----       ----     -------
  Balance at end of year.............................   $  98       $374     $   425
                                                        =====       ====     =======
</TABLE>

                                       53
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  CONDENSED FINANCIAL INFORMATION OF F&M BANCORP (PARENT COMPANY)

                   F&M BANCORP BALANCE SHEET (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
(IN THOUSANDS)                                                  2000       1999
--------------                                                --------   --------
<S>                                                           <C>        <C>
                                     ASSETS

Cash and cash equivalents...................................  $  4,868   $  6,518
Investment securities
  Available-for-sale, at fair value.........................     3,917      3,368
Investment in subsidiaries..................................   153,054    134,952
Other assets................................................        60      1,806
                                                              --------   --------
  Total assets..............................................  $161,899   $146,644
                                                              ========   ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Other liabilities...........................................  $  3,863   $  2,824
                                                              --------   --------
Common stock................................................    55,073     54,998
Surplus.....................................................    78,488     78,248
Retained earnings...........................................    25,857     18,951
Accumulated other comprehensive loss........................    (1,382)    (8,377)
                                                              --------   --------
  Total shareholders' equity................................   158,036    143,820
                                                              --------   --------
Total liabilities and shareholders' equity..................  $161,899   $146,644
                                                              ========   ========
</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>
                                                                       DECEMBER 31,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
INCOME
Interest on investment securities...........................  $   369    $   306    $   256
                                                              -------    -------    -------
  Net interest Income.......................................      369        306        256
Dividends from subsidiaries.................................    6,921     10,743     12,185
Other income................................................      582          4         68
                                                              -------    -------    -------
  Total income..............................................    7,872     11,053     12,509

EXPENSE
Other expense...............................................      358      1,386        801
                                                              -------    -------    -------
Income before income tax benefits and Equity in
  undistributed earnings of subsidiaries....................    7,513      9,667     11,708
Income tax expense (benefit)................................      233       (121)      (149)
                                                              -------    -------    -------
Income before equity in undistributed earnings of
  subsidiaries..............................................    7,280      9,788     11,857
Equity in undistributed earnings of subsidiaries............   12,045      3,275      2,776
                                                              -------    -------    -------
Net income..................................................  $19,324    $13,063    $14,633
                                                              =======    =======    =======
</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,
                                                              ------------------------------
(IN THOUSANDS)                                                  2000       1999       1998
--------------                                                --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................................  $ 19,324   $13,063    $ 14,633
Adjustments to reconcile net income to net cash provided by
  operating activities
Decrease (increase) in other assets.........................     1,746       507      (1,727)
Increase in other liabilities...............................     1,039       601       1,490
Equity in undistributed earnings of subsidiaries............   (12,045)   (3,275)     (2,776)
Other.......................................................      (326)       --          --
                                                              --------   -------    --------
  Net cash provided by operating activities.................     9,738    10,896      11,620
                                                              --------   -------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale........        --      (255)     (1,076)
Sale/ (Acquisition) of stock................................       715        --        (200)
Other investing activity....................................        --        44          --
                                                              --------   -------    --------
  Net cash provided by (used in) in investing activities....       715      (211)     (1,276)
                                                              --------   -------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid.........................................   (12,332)  (10,646)    (10,023)
Dividends reinvested........................................       (83)       88         389
Other financing activities..................................       312     1,941       1,761
                                                              --------   -------    --------
  Net cash used in financing activities.....................   (12,103)   (8,617)     (7,873)
                                                              --------   -------    --------
  Net (decrease) increase in cash and cash equivalents......    (1,650)    2,068       2,471
Cash and cash equivalents at beginning of year..............     6,518     4,450       1,979
                                                              --------   -------    --------
Cash and cash equivalents at end of year....................  $  4,868   $ 6,518    $  4,450
                                                              ========   =======    ========
</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>
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
(IN THOUSANDS)                                          2000       1999       1998
--------------                                        --------   --------   --------
<S>                                                   <C>        <C>        <C>
Bank premises.......................................   $2,014     $2,069     $1,841
Equipment...........................................       81        153         43
                                                       ------     ------     ------
  Total rental expense..............................   $2,095     $2,222     $1,884
                                                       ======     ======     ======
</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, 2000 is:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                       (IN THOUSANDS)
-----------------------                                       --------------
<S>                                                           <C>
2001........................................................     $ 1,999
2002........................................................       1,798
2003........................................................       1,907
2004........................................................       1,452
2005........................................................       1,488
Later Years.................................................       3,823
                                                                 -------
  Total minimum payments required...........................     $12,467
                                                                 =======
</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, 2000 that would have a
material effect on the consolidated financial statements.

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

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

                                       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)                                              2000       1999
--------------                                            --------   --------
<S>                                                       <C>        <C>
Financial instruments whose contractual amounts
  represents credit risk:
Commitments to extend credit............................  $234,908   $245,691
Stand-by letters of credit..............................    17,402     11,546
</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, 2000 and 1999. 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

                                       58
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
such estimates to be made with precision. Changes in assumptions or
methodologies could have a significant effect on the estimates.

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                    ---------------------------------------------
                                                            2000                    1999
                                                    ---------------------   ---------------------
                                                    CARRYING      FAIR      CARRYING      FAIR
(IN THOUSANDS)                                       AMOUNT       VALUE      AMOUNT       VALUE
--------------                                      ---------   ---------   ---------   ---------
<S>                                                 <C>         <C>         <C>         <C>
Financial Assets:
  Cash and cash equivalents.......................  $  65,167   $  65,167   $  86,320   $  86,320
  Loans held for sale.............................      5,994       5,994      15,497      15,497
  Investment securities held-to-maturity..........     89,405      89,584      99,416      97,357
  Investment securities available-for-sale........    349,806     349,806     317,945     317,945
  Net loans.......................................  1,206,898   1,185,673   1,101,666   1,097,546

Financial Liabilities:
  Deposits........................................  1,364,032   1,365,844   1,314,073   1,315,925
  Borrowings......................................    253,861     256,208     242,844     243,687
</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 securities was based on quoted market
prices or dealer quotes.

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

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

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

    DEPOSITS:  The fair value of deposits with no stated maturity, such as
noninterest-bearing deposits, interest-bearing checking, savings, and money
market accounts, was equal to the carrying amount. Carrying amount approximates
fair value for variable-rate certificates of deposit, because of the

                                       59
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
frequent repricing of these instruments at market rates. The fair value for
fixed-rate certificates of deposit was estimated by discounting contractual cash
flows using discount rates equal to the rates currently offered for deposits of
similar remaining maturities.

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

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

14.  REGULATORY RESTRICTIONS

    RESTRICTION ON DIVIDENDS:  Approval of 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 2000 aggregated $21,097,000. The
rules and regulations of the Office of Thrift Supervision ("OTS") require
prenotification of dividend payments by Home Federal Corporation ("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.

    RESTRICTION ON LENDING FROM AFFILIATES TO PARENT:  Section 23A of the
Federal Reserve Act (the "Act") prohibits affiliates from transferring funds to
the Parent Company in the form of loans or advances exceeding 10% of its capital
stock and surplus, as defined in the Act. In addition, all loans or advances to
nonbank affiliates must be secured by specific collateral. Based on this
limitation, there was approximately $16,838,000 available for loans or advances
to the Parent Company as of December 31, 2000, at which time there were no
material loans or advances outstanding.

    RESTRICTION ON CASH AND DUE FROM BANKS:  The Bank is required to maintain
average daily reserve balances with the Federal Reserve Bank. The amount of
these required reserves, calculated based on percentages of certain deposit
balances, was $19,990,000 at December 31,2000.

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

                                       60
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.  SHAREHOLDERS' EQUITY (CONTINUED)
corrective action, each entity is considered to be "well-capitalized" at
December 31, 2000, as disclosed in the following table:

<TABLE>
<CAPTION>
                                       BANCORP                              BANK                           SAVINGS BANK
                           --------------------------------   --------------------------------   --------------------------------
                           COMPONENTS    ACTUAL    REQUIRED   COMPONENTS    ACTUAL    REQUIRED   COMPONENTS    ACTUAL    REQUIRED
(IN THOUSANDS)             OF CAPITAL    RATIO      RATIO     OF CAPITAL    RATIO      RATIO     OF CAPITAL    RATIO      RATIO
--------------             ----------   --------   --------   ----------   --------   --------   ----------   --------   --------
<S>                        <C>          <C>        <C>        <C>          <C>        <C>        <C>          <C>        <C>
Tangible capital.........   $154,795      8.84%      3.00%     128,994       8.58%      3.00%      21,377       8.48%      1.50%
Core Capital.............    154,795     11.84       4.00      128,994      11.36       4.00       21,377       8.48       3.00
Core and supplemental
  Capital................    168,027     12.86       8.00      140,154      12.34       8.00       23,594      13.30       8.00
</TABLE>

16.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    Following is a summary of unaudited quarterly results of operations:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                          THREE MONTHS ENDED
                                       -----------------------------------------   -----------------------------------------
                                       DEC. 31    SEPT. 30   JUN. 30    MAR. 31    DEC. 31    SEPT. 30   JUN. 30    MAR. 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)    2000       2000       2000       2000       1999       1999       1999       1999
-------------------------------------  --------   --------   --------   --------   --------   --------   --------   --------
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest income..................      $32,749    $32,139    $31,241    $30,051    $29,520    $28,521    $27,956    $27,801
Interest expense.................       16,447     15,891     14,934     13,871     13,721     12,922     12,756     12,642
Net interest income..............       16,302     16,248     16,307     16,180     15,799     15,599     15,200     15,159
Provision for credit losses......          725      1,215        630        666        345        100        325        525
Income before provision for income
  tax............................        7,038      7,201      7,057      6,499        893      5,690      5,373      6,286
Net income.......................        4,847      4,971      4,862      4,644        421      4,120      4,042      4,480

Earnings per common share:
  Net income basic...............         0.44       0.44       0.44       0.43       0.04       0.37       0.37       0.41
  Net income diluted.............         0.44       0.44       0.44       0.43       0.04       0.37       0.37       0.41
</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
and comprehensive income. However, because non-derivative and non-financial
transactions are still measured using a mix of historical and current prices,
the Statement keeps special accounting for gains and losses when derivatives are
used in qualifying hedges of assets, liabilities, and future transactions. The
Statement unifies qualifying criteria for hedges involving all kinds of
derivatives, requiring that a company document, designate, and assess the
effectiveness of its hedges. For hedges that meet the Statement's criteria, the
derivative's gains and losses will be allowed to offset gains and losses on, or
forecasted cash flows of, the hedged item.

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

                                       61
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17.  FUTURE CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
    For calendar-year companies such as Bancorp, the Statement, as amended by
SFAS No. 137, will take effect beginning January 1, 2001. Historically, Bancorp
has not made use of hedges and other financial derivatives and is unable to
predict the impact, if any, that the application of Statement No.133 will have
on consolidated financial statements issued after 2000.

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

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

                                       62
<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 5 of Bancorp's definitive 2001 Proxy
Statement furnished to shareholders in connection with its Annual Meeting on
April 17, 2001 (the "2001 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 14 of the 2001 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 as of December 31, 1999 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 51, President of Bancorp and Farmers & Mechanics
National Bank ("the Bank") since 1993 and Chief Executive Officer of Bancorp and
the Bank since 1996.

    DAVID R. STAUFFER, age 53, 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 62, Vice President of Bancorp since 1996, when
Savings Bank was acquired by Bancorp, and President and Chief Executive Officer
of Home Federal Corporation ("the Savings Bank") since 1981 and Chairman of the
Board of the Savings Bank since 1999.

    KAYE A. SIMMONS, age 45, Treasurer of Bancorp since 2000 and Executive Vice
President and Chief Financial Officer of the Bank since 2000. Prior to that
time, Ms. Simmons served as Senior Vice President of Finance and Treasurer of
Citizens Bancorp from 1990 to 1997.

    (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 Kaye A.
Simmons who has been employed for one year.

    (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" and "Directors' Fees and Deferred Compensation Plan" located in
the 2001 Proxy Statement is hereby incorporated by reference.

                                       63
<PAGE>
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information in the section under "Security Ownership of Management" and the
notes thereto, and "Security Ownership of Certain Beneficial Owners" located in
the 2001 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 in the 2001 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>
<C>     <S>
 2      Agreement and Plan of Merger by and between F&M Bancorp and
          Patapsco Valley Bancshares, Inc. Filed as Appendix A to
          Registration Statement on Form S-4 (File #333-90083) and
          incorporated herein by reference. Post effective
          Amendment #1 to Deregister 39,939 shares was filed
          January 12, 2000, (File #333-90083).

 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.

10.1    1983 Stock Option Plan of F&M Bancorp as amended in April,
          1996. Filed as Exhibit 10.1 to Registration Statement on
          Form S-8 (File #002-88390) and incorporated herein by
          reference.

10.2    Unfunded Deferred Compensation Plan for Non-Employee
          Directors of F&M Bancorp as amended and restated effective
          August 18, 1998. Filed as Exhibit 10.2 of the Company's
          Annual Report on Form 10-K for the year ended
          December 31, 1998 and incorporated herein by reference.
</TABLE>

                                       64
<PAGE>
<TABLE>
<C>     <S>
10.3    Farmers & Mechanics National Bank Executive Supplemental
          Income Plan as amended and restated effective August 18,
          1998. Filed as Exhibit 10.3 of the Company's Annual Report
          on Form 10-K for the year ended December 31, 1998 and
          incorporated herein by reference.

10.4    F&M Bancorp Employee Stock Purchase Plan. Filed as
          Prospectus to Registration Statement on Form S-8 (File
          #33-39941) and incorporated herein by reference.

10.5    F&M Bancorp Dividend Reinvestment and Stock Purchase
          Plan.Filed as Prospectus to Registration Statement on
          Form S-3 (File #33-39940) and incorporated herein by
          reference.

10.6    1995 Stock Option Plan of F&M Bancorp. Filed as
          Exhibit 10.1 to Registration Statement on Form S-8
          (File #333-02433) and incorporated herein by reference.

10.7    Employment Agreement between F&M Bancorp, Home Federal
          Savings Bank and Richard W. Phoebus, Sr. Filed as an
          Exhibit hereto and incorporated herein by reference.

10.8    F&M Bancorp 1999 Employee Stock Option Plan. Filed as
          Exhibit 10.19 of the Company's quarterly report on
          Form 10-Q for the period ended March 31, 1999 and
          incorporated herein by reference.

10.9    F&M Bancorp 1999 Stock Option Plan for Non-Employee
          Directors.Filed as Exhibit 10.20 of the Company's
          quarterly report on Form 10-Q for the period ended
          March 31, 1999 and incorporated herein by reference.

10.10   Form of F&M Bancorp Stock Options substituted for Patapsco
          Valley Bancshares, Inc. stock options issued under the
          Patapsco Valley Bancshares, Inc. Incentive Stock Option
          Plan, Director Stock Option Plan and Employee Stock Option
          Plan. Filed as an Exhibit hereto and incorporated herein
          by reference.

10.11   Form of F&M Bancorp Stock Options substituted for Home
          Federal Corporation Stock Options granted under the Home
          Federal Corporation 1988 Stock Option and Stock
          Appreciation Rights Plan filed as Exhibit 99.3 to
          Registration Statement on Form S-8 (File #333-16709) and
          incorporated herein by reference.

10.12   Form of F&M Bancorp stock options substituted for Monocacy
          Bancshares, Inc. stock options issued under the Monocacy
          Bancshares, Inc. 1994 Stock Incentive plan and the
          Monocacy Bancshares, Inc. 1997 Independent Director Stock
          Option Plan. Filed as an Exhibit hereto and incorporated
          herein by reference.

10.13   F&M Bancorp Employment Agreement with Kaye A. Simmons as of
          April 10, 2000. Filed as Exhibit 10.13 of the Company's
          Annual Report on Form 10-Q for the quarter ended
          September 2000 and incorporated herein by reference.

10.14   F&M Bancorp Change in Control Employment Agreement. Filed as
          Exhibit 10.14 of the Company's Annual Report on Form 10-Q
          for the period ended September 30, 2000 and incorporated
          herein by reference.

10.15   Employment Agreement for Michael K. Walsch dated as of
          July 31,1998. Filed as Exhibit 10.15 of the Company's
          Annual Report on Form 10-K for the year ended
          December 31,1998 and incorporated herein by reference.
</TABLE>

                                       65
<PAGE>
<TABLE>
<C>     <S>
10.16   Supplemental Retirement Plan Agreement dated November 17,
          1994 by and between Taneytown Bank & Trust Company and
          Michael K. Walsch. Filed as Exhibit 10.16 to the Company's
          Annual Report on Form 10-K for the year ended
          December 31, 1998 and incorporated herein by reference.

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

    1.  A report on Form 8-K, Item 2. Acquisition and Disposition of Assets, was
       filed on January 3, 2000 to announce the completion of the Patapsco
       Valley Bancshares, Inc. acquisition effective December 30, 1999. File
       #000-12638).

    2.  A report on Form 8-K, Item 5. Other Event, was filed on February 16,
       2000 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).

    3.  A report on Form 8-K, Item 2. Acquisition and Disposition of Assets, and
       Item 7. Financial Statement and Exhibits, was filed on March 13, 2000 to
       announce the completion of the Patapsco Valley Bancshares, Inc.
       acquisition effective December 30, 1999. (File # 000-12638).

                                       66
<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, 2001                                  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.

<TABLE>
<S>                                                    <C>
                                    PRINCIPAL EXECUTIVE OFFICERS:

March 16, 2001                                                    /s/ CHARLES W. HOFF, III
                                                       ---------------------------------------------
                                                                    Charles W. Hoff, III
                                                                   CHAIRMAN OF THE BOARD

March 16, 2001                                                       /s/ FAYE E. CANNON
                                                       ---------------------------------------------
                                                                       Faye E. Cannon
                                                            PRESIDENT & CHIEF EXECUTIVE OFFICER

                              PRINCIPAL FINANCIAL & ACCOUNTING OFFICER:

March 16, 2001                                                      /s/ KAYE A. SIMMONS
                                                       ---------------------------------------------
                                                                      Kaye A. Simmons
                                                                  CHIEF FINANCIAL OFFICER

March 16, 2001                                                     /s/ GEORGE C. COFFMAN
                                                       ---------------------------------------------
                                                                     George C. Coffman
                                                                         CONTROLLER

                                A MAJORITY OF THE BOARD OF DIRECTORS:

March 16, 2001                                                       /s/ R. CARL BENNA
                                                       ---------------------------------------------
                                                                       R. Carl Benna
                                                                          DIRECTOR

March 16, 2001                                                      /s/ HOWARD B. BOWEN
                                                       ---------------------------------------------
                                                                      Howard B. Bowen
                                                                          DIRECTOR

March 16, 2001                                                       /s/ JOHN D. BRUNK
                                                       ---------------------------------------------
                                                                       John D. Brunk
                                                                          DIRECTOR
</TABLE>

                                       67
<PAGE>
<TABLE>
<S>                                                    <C>
March 16, 2001                                                      /s/ BEVERLY B. BYRON
                                                       ---------------------------------------------
                                                                      Beverly B. Byron
                                                                          DIRECTOR

March 16, 2001                                                       /s/ FAYE E. CANNON
                                                       ---------------------------------------------
                                                                       Faye E. Cannon
                                                                          DIRECTOR

March 16, 2001                                                      /s/ ALBERT H. COHEN
                                                       ---------------------------------------------
                                                                      Albert H. Cohen
                                                                          DIRECTOR

March 16, 2001                                                    /s/ MAURICE A. GLADHILL
                                                       ---------------------------------------------
                                                                    Maurice A. Gladhill
                                                                          DIRECTOR

March 16, 2001                                                   /s/ HOWARD E. HARRISON III
                                                       ---------------------------------------------
                                                                   Howard E. Harrison III
                                                                          DIRECTOR

March 16, 2001                                                    /s/ CHARLES W. HOFF, III
                                                       ---------------------------------------------
                                                                    Charles W. Hoff, III
                                                                          DIRECTOR

March 16, 2001                                                       /s/ DONALD R. HULL
                                                       ---------------------------------------------
                                                                       Donald R. Hull
                                                                          DIRECTOR

March 16, 2001                                                      /s/ JAMES K. KLUTTZ
                                                       ---------------------------------------------
                                                                      James K. Kluttz
                                                                          DIRECTOR

March 16, 2001                                                  /s/ RICHARD W. PHOEBUS, SR.
                                                       ---------------------------------------------
                                                                  Richard W. Phoebus, Sr.
                                                                          DIRECTOR

March 16, 2001                                                   /s/ H. DEETS WARFIELD, JR.
                                                       ---------------------------------------------
                                                                   H. Deets Warfield, Jr.
                                                                          DIRECTOR

March 16, 2001                                                     /s/ THOMAS R. WINKLER
                                                       ---------------------------------------------
                                                                     Thomas R. Winkler
                                                                          DIRECTOR
</TABLE>

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