UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File Number: 0-13273
-----------
June 30, 2001
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(540) 896-8941
--------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at June 30, 2001
------------------------------------ -----------------------------
Common Stock, par value - $5 2,431,181 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 2001 and 2000 2
Consolidated Statements of Income - Three Months
Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibit and Reports on Form 8K 16
SIGNATURES 17
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Six Months Ended
June 30,
2001 2000
---------- ----------
Interest Income
Interest and fees on loans $ 6,952 $ 6,282
Interest on federal funds sold 486 17
Interest on interest bearing deposits 67 28
Interest and dividends on
investment securities 1,215 1,253
------- ------
Total Interest Income 8,720 7,580
------- ------
Interest Expense
Interest on demand accounts 262 238
Interest on savings deposits 483 485
Interest on time deposits 3,156 2,032
------- ------
Total interest on deposits 3,901 2,755
Interest on short-term debt 198 214
Interest on long-term debt 516 480
------- ------
Total Interest Expense 4,615 3,449
------- ------
Net Interest Income 4,105 4,131
Provision for Loan Losses 69 59
------- ------
Net Interest Income after Provision
for Loan Losses 4,036 4,072
------- ------
Noninterest Income
Service charges 316 267
Other 278 358
Security gains 1,284 771
------- ------
Total Noninterest Income 1,878 1,396
------- ------
Noninterest Expense
Salaries 1,215 1,071
Employee benefits 348 337
Occupancy expense 145 100
Equipment expense 159 140
Other 892 652
------- ------
Total Noninterest Expense 2,759 2,300
------- ------
Income before Income Taxes 3,155 3,168
Provision for Income Taxes 998 949
------- ------
Net Income $ 2,157 $ 2,219
======= ======
Per Share Data
Net Income $ .89 $ .90
======= ======
Cash Dividends $ .31 $ .29
======= ======
Equivalent Shares Outstanding 2,431,818 2,453,618
========= =========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
2001 2000
---------- ----------
Interest Income
Interest and fees on loans $ 3,581 $ 3,193
Interest on federal funds sold 337 1
Interest on interest bearing deposits 52 14
Interest and dividends on investment
securities 595 649
------- ------
Total Interest Income 4,565 3,857
------- ------
Interest Expense
Interest on demand deposits 131 118
Interest on savings accounts 248 237
Interest on time deposits 1,693 1,055
------- ------
Total interest on deposits 2,072 1,410
Interest on short-term debt 83 129
Interest on long-term debt 299 235
------- ------
Total Interest Expense 2,454 1,774
------- ------
Net Interest Income 2,111 2,083
Provision for Loan Losses 38 30
------- ------
Net Interest Income after Provision for
Loan Losses 2,073 2,053
------- ------
Noninterest Income
Service charges 166 141
Other 147 225
Security gains 93
------- ------
Total Noninterest Income 406 366
------- ------
Noninterest Expense
Salaries 626 534
Employee benefits 168 163
Occupancy expense 77 51
Equipment expense 87 65
Other 476 351
------- ------
Total Noninterest Expense 1,434 1,164
------- ------
Income before Income Taxes 1,045 1,255
Provision for Income Tax 314 342
------- ------
Net Income $ 731 $ 913
======= ======
Per Share Data
Net Income $ .30 $ .37
======= ======
Cash Dividends $ .16 $ .15
======= ======
Equivalent Shares Outstanding 2,431,223 2,451,933
========= =========
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
ASSETS 2001 2000
------------ -----------
Cash and due from banks $ 4,538 $ 3,808
Fed Funds Sold 83 909
Interest bearing deposits in banks 13,988 313
Securities held to maturity (note 2) 21,876 2,886
Securities available for sale (note 2) 35,794 38,680
Other investments 3,822 3,756
Loans, net of unearned discount (note 3) 168,991 152,035
Less allowance for loan losses (note 4) (1,247) (1,108)
--------- --------
Net Loans 167,744 150,927
Construction In Progress 579
Bank premises and equipment 4,531 3,069
Other real estate 426 426
Interest receivable 1,491 1,481
Goodwill 5,351
Other assets 1,750 1,984
-------- --------
Total Assets $261,394 $208,818
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 22,396 $ 18,615
Interest bearing
Demand 27,198 20,349
Savings deposits 32,834 26,406
Time deposits 116,638 86,985
------- -------
Total Deposits 199,066 152,355
Short-term debt 8,179 8,698
Long-term debt 21,480 16,386
Accrued expenses 3,952 4,181
------- -------
Total Liabilities 232,677 181,620
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,431,181 and
2,433,373 shares issued and outstanding
in 2001 and 2000, respectively 12,156 12,167
Surplus 439 479
Retained earnings 15,194 13,791
Accumulated other comprehensive income 928 761
------- -------
Total Stockholders' Equity 28,717 27,198
------- -------
Total Liabilities and Stockholders' Equity $261,394 $208,818
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
2001 2000
---------- ----------
Cash Flows from Operating Activities:
Net income $ 2,157 $ 2,219
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 141 129
Amortization of security premiums 11 15
Gain on security transactions (1,284) (771)
Provision for loan losses 69 59
Increase in interest receivable (10) (91)
(Increase) decrease in other assets 235 (179)
Goodwill amortization 122
Increase (decrease) in accrued expenses (248) 588
Losses on limited partnership investments 196 94
------- -------
Total Adjustments (768) (156)
-------- -------
Net Cash Provided by Operating Activities 1,389 2,063
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 2,685 1,685
Proceeds from maturity of investments available
for sale 15,857 2,390
Proceeds from maturity of investments held
to maturity 110
Purchase of investments available for sale (13,607) (6,899)
Purchase of investments held to maturity (19,990) (7)
Change in federal funds sold 826
Net increase in loans (16,886) (6,787)
Purchase of property and equipment (1,015) (303)
Net increase in interest bearing bank deposits (13,675) (346)
Purchase of goodwill (5,470)
Sale of other real estate 79
------- -------
Net Cash Used in Investing Activities (51,165) (10,188)
-------- -------
Cash Flows from Financing Activities:
Net increase (decrease) in demand and
savings deposits 17,058 (1,267)
Net increase in time deposits 29,653 9,410
Net increase (decrease) in short-term debt (519) 1,588
Repurchase of common stock (51) (221)
Repayment of long-term debt (1,905) (1,581)
Proceeds from long-term debt 7,000
Payment of dividends (730) (686)
-------- -------
Net Cash Provided by Financing Activities 50,506 7,243
------- -------
Net Increase (Decrease) in Cash and
Cash Equivalents 730 (882)
Cash and Cash Equivalents, Beginning of Period 3,808 4,799
------- -------
Cash and Cash Equivalents, End of Period $ 4,538 $ 3,917
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 4,604 $ 3,403
Income taxes 750 785
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Six Months Ended
June 30,
2001 2000
---------- ----------
Balance, beginning of period $ 27,198 $ 25,286
Comprehensive Income:
Net income 2,157 2,219
Net change in unrealized appreciation
on securities available for sale, net
of taxes 167 (677)
------- -------
Total comprehensive income 2,324 1,542
Repurchase of common stock (51) (221)
Dividends declared (754) (711)
-------- -------
Balance, end of period $ 28,717 $ 25,896
======= =======
The accompanying notes are an integral part of these statements.
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry practices. In
the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2001 and the results of operations for the
six and three month periods ended June 30, 2001 and June 30, 2000.
The notes included herein should be read in conjunction with the
notes to financial statements included in the 2000 annual report
to stockholders of the F & M Bank Corp.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values are as
follows:
June 30 December 31,
2001 2000
--------------------- --------------------
Market Market
Cost Value Cost Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 20,101 $ 20,101 $ 1,109 $ 1,107
State and municipal
Other securities 1,775 1,819 1,777 1,752
------- ------- ------- -------
Total $ 21,876 $ 21,920 $ 2,886 $ 2,859
======= ======= ======= =======
June 30, December 31,
2001 2000
---------------- --------------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 8,100 $ 7,848 $ 15,418 $ 15,326
Equity securities 11,518 10,706 11,942 10,854
Mortgage-backed
securities 6,339 6,329 1,840 1,839
Other securities 9,837 9,519 9,480 9,500
------- ------- ------- -------
Total $ 35,794 $ 34,402 $ 38,680 $ 37,519
======= ======= ======= =======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
June 30, December 31,
2001 2000
---------- ---------
Real Estate
Construction $ 5,420 $ 4,372
Mortgage 103,486 92,464
Commercial and agricultural 35,038 32,987
Installment and consumer demand notes 23,762 20,927
Credit cards 1,230 1,249
Other 55 36
------ -------
Total $ 168,991 $152,035
======== =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Balance, beginning of period $1,108 $ 1,090 $1,212 $ 1,127
Provisions charged to
Operating expenses 69 59 38 30
Other Adjustments 84
Net (charge offs) recoveries
Loan recoveries 35 21 12 6
Loan charge-offs (49) (34) (15) (27)
------ ------ ------ ------
Total Net Charge-offs* (14) (13) (3) (21)
------ ------ ----- -------
Balance, End of Period $1,247 $ 1,136 $1,247 $ 1,136
===== ====== ===== ======
* Components of net charge-offs:
Real estate - Mortgages $ 1 $ (2) $ 0 $ (2)
Commercial 0 (2) (3)
Installment (15) (9) (3) (16)
------ ------ ------ ------
Total $ (14) $ (13) $ (3) $ (21)
====== ====== ====== ======
9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
In spite of rapidly declining interest rates and a decrease in the net
interest margin, the overall financial condition of F & M Bank Corp. remained
strong through the first six months of 2001. During the first six months, total
deposits grew $46,711,000, which includes $37,287,000 of purchased deposits.
Loans grew $16,956,000 including $9,734,000 of loans acquired from First Union.
Annualized growth of loans and deposits, exclusive of the acquisitions, totaled
9.50% and 12.37%, respectively.
Net income decreased $73,000 for the first six months and is discussed in
detail in the following sections.
Results of Operations - Six Months Ending June 30, 2001
The tax equivalent net interest margin decreased $32,000 or .76% compared to
the same period in 2000. The Federal Reserve has cut interest rates six times,
totaling 2.75% since the beginning of 2001. Rates on interest sensitive assets
have decreased much faster than interest bearing liabilities. Returns on
total earning assets have decreased 45 basis points, while the cost of funds
is up 28 basis points compared to the same period of 2000. The cost of
funds increased relative to 2000 because of two factors. First, Federal
Reserve rate hikes in the first half of 2000 were not fully reflected in
the cost of funds for that period. Second, due to a high loan to deposit
ratio and strong competition for deposits during 2000, certificate of
deposit rate "specials" were used throughout much of 2000 to attract new
deposits. Although these specials were predominantly short-term, many will not
mature until the third and fourth quarters of 2001.
In the first six months of 2001, the combined effect of the decline in yield
on earning assets of 45 basis points and the increase in the cost of funds of 28
basis points is equivalent to a $775,000 decrease in the tax equivalent net
interest margin. A schedule of the net interest margin for 2001 and 2000 is
shown on page 14 as Table 1.
Noninterest income increased $482,000 in the first six months of 2001. This
includes a $513,000 increase in gains realized on securities transactions.
Service charges on deposit accounts increased $49,000, primarily due to the
acquisition of the two branches in Shenandoah County and an increase in
overdraft fees collected throughout all branches. Other noninterest
income decreased $80,000. Returns on low income housing projects declined
$32,000 due to a more rapid write-off of one of the investment projects. The
remaining decrease was primarily the result of a decline in earnings from the
sale of credit life and accident & health insurances.
Noninterest expense increased $459,000 or 19.95% for the period, however,
noninterest expense expressed as a percentage of total assets decreased from
2.23% to 2.19%. $330,000 of the increase in expenses can be attributed to
operating expenses and amortization of intangibles for the two Shenandoah County
offices acquired. Exclusive of these items, noninterest expenses increased 5.61%
($129,000) in the remaining five offices.
Result of Operations - Quarter Ending June 30, 2001
Net income for the quarter ending June 30, 2001 decreased $182,000 compared
to the same quarter in 2000 while net interest income increased $24,000 over
2000 amounts. As stated above, interest bearing assets have repriced downward
much faster than the change in interest bearing liabilities.
With significant amounts of short-term funds resulting form the assumption of
branch deposits from First Union, declining rates have put a strain on the net
interest margin. Compared to the same quarter in 2000, the yield on earning
assets has declined 62 basis points (from 8.22% to 7.60%) while the cost of
funds has increased nine basis points. The reasons for the increase in the cost
of funds are similar to those stated previously. Related overhead expenses
increased $270,000 (23.20%) compared to 2000. Of this amount, $243,000 relates
to the new branches. Exclusive of the new offices, noninterest expense only
increased 2.32% for the quarter.
10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Financial Condition
Securities
The Company's securities portfolio is held to assist the Company in
liquidity and asset liability management. The securities portfolio consists of
investment securities (commonly referred to as "securities held to maturity")
and securities available for sale. Securities are classified as investment
securities when management has the intent and ability to hold the securities to
maturity. Investment securities are carried at amortized cost. Securities
available for sale include securities that may be sold in response to general
market fluctuations, general liquidity needs and other similar factors.
Securities available for sale are recorded at market value. Unrealized holding
gains and losses on available for sale securities are excluded from earnings and
reported (net of deferred income taxes) as a part of other comprehensive income.
As of June 30, 2001, the amortized cost of all securities available for sale
exceeded their market value by $1,392,000 ($928,000 after the consideration of
income taxes). The increase in the second quarter of unrealized security gains
is primarily the result of gains in the value of the Bank's bond portfolio.
Management has traditionally held debt securities (regardless of classification)
until maturity and thus it does not expect these fluctuations in value to have a
direct impact on earnings.
Investments in securities increased $16,104,000 (38.74%) in the first six
months of 2001. This increase is directly related to the funds received in the
acquisition of the two Shenandoah County offices. The Bank has invested in
relatively short-term maturities in its bond portfolio due to uncertainty in the
direction of rates. This philosophy allows for greater flexibility in an
environment of rapidly changing rates and has served the Company well over the
years. Of the investments in securities available for sale, 32% are invested in
equity securities, most of which are dividend producing and subject to the
corporate dividend exclusion for taxation purposes. The Company believes these
investments render adequate returns and have significantly increased in
value.
Loan Portfolio
The Company operates in an agriculturally dominated area, which includes the
counties of Rockingham, Page and Shenandoah in the western portion of Virginia.
The Company does not make a significant number of loans to borrowers outside its
primary service area. The Company is very active in local residential
construction mortgages. Commercial lending includes loans to small and medium
sized businesses within its service area.
An inherent risk in the lending of money is that the borrower will not be
able to repay the loan under the terms of the original agreement. The allowance
for loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. The risk associated with real estate and installment
notes to individuals is based upon employment and the local and national
economies. All of these affect the ability of borrowers to repay indebtedness.
The risk associated with commercial lending is substantially based on the
strength of the local and national economies.
While lending is geographically diversified within the service area, the
Company does have some concentration in agricultural loans (primarily poultry
farming). In addition to direct agricultural loans, a significant percentage of
residential real estate loans and consumer installment loans are made to
borrowers employed in the agricultural sector of the economy. The Company
continues to monitor its past due loans closely and has not experienced higher
delinquencies in this sector compared to the overall loan portfolio.
The first six months of 2001 resulted in an increase of $16,956,000 in the
loan portfolio. This included $9,734,000 of purchased loans, with the balance of
the growth generated internally. Most of the increase was in residential real
estate loans.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan Portfolio (Continued)
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have changed due to
financial hardship. Nonperforming loans totaled $1,247,000 at June 30, 2001
compared to $1,085,000 at December 31, 2000. Approximately 85% of these
nonperforming loans are secured by real estate. Although the potential exists
for some loan losses, management believes the bank is generally well secured and
continues to actively work with these customers to effect payment. As of June
30, 2001, the Company did not hold any real estate that was acquired through
foreclosure.
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic trends, changes in the nature and volume of the portfolio and industry
standards. Specific factors considered by management in determining the adequacy
of the level of the allowance include internally generated loan review reports,
past due reports, historical loan loss experience and individual borrowers
financial position. This review also considers concentrations of loans
in terms of geography, business type and level of risk. Management evaluates
nonperforming loans relative to their collateral value and makes the appropriate
adjustments to the allowance for loan losses when needed.
The provision for loan losses and changes in the allowance for loan losses
are shown in note 4, page 8.
The allowance for credit losses of $1,247,000 at June 30, 2001 was up
$139,000 from its level at December 31, 2000. The allowance was equal to .74%
and .73% of total loans at June 30, 2001 and December 31, 2000, respectively.
The overall level of the allowance is well below peer group averages. Management
feels this is appropriate based on its loan loss history and the composition of
its loan portfolio; the current allowance for loan losses is equal to
approximately eight years average loan losses. Based on historical losses,
delinquency rates, collateral values of delinquent loans and a thorough review
of the loan portfolio, management is of the opinion that the allowance for loan
losses is adequate to absorb estimated losses in the current portfolio.
Deposits and Long-Term Debt
The Company's main source of funds is customer deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit. Total deposits decreased $709,000 during the
second quarter of 2001 from amounts at March 31, 2001. The primary decline was
in interest bearing demand deposits which is believed to be the result of
aggressive rate cuts.
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be
an important source of funding real estate loan growth. The Company's subsidiary
bank borrows funds on a fixed rate basis. These borrowings are used to fund
either a fifteen-year fixed rate loan or a twenty-year loan, of which the first
ten years have a fixed rate. This program allows the Bank to match the maturity
of its fixed rate real estate portfolio with the maturity of its debt and thus
reduce its exposure to interest rate changes. Scheduled repayments totaled
$703,467 in the second quarter of the year. An additional $2,000,000 was
borrowed in June 2001 at a rate of 5.18%. Final maturity of this obligation is
five years.
12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
As part of the approval process for the acquisition of new branches, F & M
Bank Corp. was required to contribute $6 million into Farmers & Merchants Bank
as additional equity. F & M Bank Corp. funded this contribution in part by
borrowing $4 million from SunTrust Bank. The loan is amortized over a three year
period with quarterly payments of $333,333. The loan is collateralized
by $6 million of marketable securities and carries an interest rate of LIBOR +
1.10%. The first principal payment was made in June 2001.
Capital
The Company seeks to maintain a strong capital position to expand
facilities, promote public confidence, support current operations and grow at a
manageable level. As of June 30, 2001, the Company's total risk based capital
and total capital to total assets ratios were 14.64% and 10.98%, respectively.
Both ratios are in excess of regulatory minimums and are in line with the ratios
of the Company's peers. Earnings have been sufficient to allow an increase in
regular quarterly dividends in 2001 over those in 2000.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, investments and loans maturing within one
year. The Company's ability to obtain deposits and purchase funds at favorable
rates determines its liquidity exposure. As a result of the Company's management
of liquid assets and the ability to generate liquidity through liability
funding, management believes that the Company maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchase of federal funds. To further meet
its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions. The Company's subsidiary bank also has a
line of credit with the Federal Home Loan Bank of Atlanta that allows for
secured borrowings. In the past, growth in deposits and proceeds from the
maturity of investment securities have been sufficient to fund most of the net
increase in loans and investment securities.
Interest Rate Sensitivity
Liquidity as of June 20, 2001 is very strong. The Bank historically has had
a stable core deposit base and, therefore, does not have to rely on volatile
funding sources. Because of the stable core deposit base, changes in interest
rates should not have a significant effect on liquidity. During 2001, the Bank
has used maturing investments and deposit growth to meet its liquidity needs.
The Bank's membership in the federal Home Loan Bank System also provides
liquidity, as the Bank borrows money that is repaid over a ten-year period and
uses the money to make fixed rate loans. The matching of the long-term
receivables and liabilities helps the Bank reduce its sensitivity to
interest rate changes.
The Company monitors its interest rate sensitivity periodically and makes
adjustments as needed. There are no off balance sheet items that will impair
future liquidity. A summary of asset and liability repricing opportunities is
shown on page 15 as Table II.
13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Stock Repurchase
On April 20, 2000, the Company announced that the Board of Directors had
authorized the repurchase of up to 50,000 shares of the Company's outstanding
common stock. Repurchases are authorized to be made by the Company from time to
time in the open market or through privately negotiated transactions during the
subsequent twelve months as, in the opinion of management, market conditions
warrant. The repurchased shares are held as unissued stock and are available for
general corporate purposes. Through the end of the second quarter of 2001, a
total of 20,721 shares have been repurchased.
Effect of Accounting Standards to be Issued
The Company allocated $5,472,000 of the cost of acquiring the loan and
deposit accounts from First Union to goodwill. The Financial Accounting
Standards Board anticipates establishing new accounting principles for
intangibles and goodwill in the second quarter of 2001. The new principles
will probably require that goodwill not be amortized, however, it would be
tested for impairment and adjusted to fair value using one of several valuation
methods. Management anticipates that the goodwill, related to the above
purchase, would be valued before December 31, 2001 and adjusted if appropriate.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including F & M Bank
Corp., and the address is (http://www.sec.gov).
14
TABLE I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $161,306 $ 6,974 8.72% $142,813 $ 6,301 8.82%
Federal funds
sold 20,913 486 4.65% 580 17 5.86%
Bank deposits 2,772 67 4.83% 1,135 28 4.93%
Investments
Taxable3 31,540 1,000 6.34% 31,624 1,011 6.39%
Partially
taxable 2,3 10,035 290 5.78% 10,555 326 6.18%
------- ------- ----- ------- ------ ----
Total Earning
Assets 226,566 8,817 7.78% 186,707 7,683 8.23%
------- ------- ----- ------- ------ ----
Interest Expense
Demand deposits 26,088 262 2.01% 20,928 238 2.27%
Savings 30,592 483 3.16% 29,526 485 3.29%
Time deposits 107,713 3,156 5.86% 76,758 2,032 5.29%
Short-term debt 8,718 198 4.54% 7,630 214 5.61%
Long-term debt 19,100 516 5.40% 17,613 480 5.45%
------- ------- ----- ------- ------ ----
Total Interest
Bearing
Liabilities 192,211 4,615 4.80% 152,455 3,449 4.52%
------- ------- ----- ------- ------ ----
Net Interest
Margin 1 $ 4,202 $ 4,234
======= ======
Net Yield on Interest
Earning Assets 1 3.71% 4.54%
===== ====
1 Interest income on loans includes loan fees.
2 An incremental tax rate of 34% was used to calculate the tax equivalent
income on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has
not been adjusted for changes in market value.
14
TABLE I (continued)
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $166,247 $ 3,593 8.67% $145,620 $ 3,202 8.80%
Federal funds
sold 30,461 337 4.42% 57 1 7.01%
Bank deposits 4,220 52 4.93% 1,021 14 5.48%
Investments
Taxable3 31,990 493 6.16% 33,088 524 6.33%
Partially
taxable 2,3 9,754 137 5.62% 10,479 167 6.37%
----- ------ ------ ------- ------- -----
Total Earning
Assets 242,672 4,612 7.60% 190,265 3,908 8.22%
------- ------ ------ ------- ------- ----
Interest Expense
Demand deposits 28,246 131 1.85% 20,714 118 2.28%
Savings 32,867 248 3.01% 29,144 237 3.25%
Time deposits 117,439 1,693 5.77% 78,364 1,055 5.39%
Short-term debt 8,495 83 3.91% 8,628 129 5.98%
Long-term debt 21,627 299 5.53% 17,227 235 5.46%
------ ------ ------ ------- ------- -----
Total Interest
Bearing
Liabilities 208,674 2,454 4.70% 154,077 1,774 4.61%
------- ------ ------ ------- ------- -----
Net Interest
Margin 1 $ 2,158 $ 2,134
====== =======
Net Yield on
Interest
Earning Assets 1 3.56% 4.49%
====== =====
1 Interest income on loans includes loan fees.
2 An incremental tax rate of 34% was used to calculate the tax equivalent
income on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has
not been adjusted for changes in market value.
15
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
JUNE 30, 2001
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $19,914 $ 2,180 $12,269 $ 675 $ $ 35,038
Installment 477 836 20,608 1,896 23,817
Real estate 14,306 10,153 61,452 22,995 108,906
Credit cards 1,230 1,230
Interest bearing 1,947 12,041 13,988
bank deposits
Federal Funds Sold 83 83
Investment
securities 19,990 6,216 19,857 88 15,341 61,492
------ ------ ------ ------- ------ -------
Total 57,947 31,426 114,186 25,654 15,341 244,554
Sources of Funds
Interest bearing
demand deposits 7,833 11,679 7,686 27,198
Regular savings 6,567 13,134 13,133 32,834
Certificates of
deposit 1,718 10,062 4,836 16,616
$100,000 and over
Other certificates
of deposit 12,945 52,853 34,224 100,022
Short-term
borrowings 8,179 8,179
Long-term debt 4,556 3,496 11,221 2,207 21,480
------ ------ ------ ------- ------ -------
Total 27,398 80,811 75,094 23,026 206,329
------ ------ ------ ------- ------ -------
Discrete Gap 30,549 (49,385) 39,092 2,628 15,341 38,225
Cumulative Gap 30,549 (18,836) 20,256 22,884 38,225
Ratio of Cumulative Gap 12.49% (7.70)% 8.28% 9.36% 15.63%
to Total Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 2001. In preparing the above table no
assumptions are made with respect to loan prepayments or deposit runoffs. Loan
principal payments are included in the earliest period in which the loan matures
or can be repriced. Principal payments on installment loans scheduled
prior to maturity are included in the period of maturity or repricing. Proceeds
from the redemption of investments and deposits are included in the period of
maturity. Estimated maturities of deposits, which have no stated maturity dates,
were derived from guidance contained in FDICIA 305.
16
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior
Securities - Not Applicable
Item 4. Submission of Matters
to a Vote of Security
Holders - On April 14, 2001, the stockholders held
their annual meeting. The following item
was approved by the shareholders by the
required majority:
1) Election of the Board of Directors as
proposed in the proxy material without
any additions or exceptions.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K
(a)Exhibits
3 i Articles of Incorporation of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank
Corp.'s Form S14 filed February 17, 1984.
3 ii Bylaws of F & M Bank Corp. are incorporated by reference
to Exhibits to F & M Bank Corp.'s Form S14 filed February
17, 1984.
21 Subsidiaries of the small business issuers are incorporated
by reference to Exhibits to F & M Bank Corp.'s 1995
Form 10-KSB filed March 26, 1996.
(b)Reports on Form 8-K
The Company did not file any reports on form 8-K for the quarter
ended June 30, 2001.
17
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
JULIAN D. FISHER
---------------------------------------
Julian D. Fisher
President and Chief
Executive Officer
NEIL W. HAYSLETT
-----------------------------------------
Neil W. Hayslett
Vice President and
Chief Financial Officer
Date August 13, 2001
-------------------------------