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
September 30, 2001
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Drawer F
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 September 30, 2001
- ----------------------------- ---------------------------------
Common Stock, par value - $5 2,429,717 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months
Ended September 30, 2001 and 2000 2
Consolidated Statements of Income - Three Months
Ended September 30, 2001 and 2000 3
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 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 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8-K 17
SIGNATURES 18
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except per Share Amounts)
Nine Months Ended
September 30,
2001 2000
------ ------
Interest Income
Interest and fees on loans $ 10,565 $ 9,566
Interest on federal funds sold 658 17
Interest on interest bearing deposits 234 33
Interest and dividends on investment securities 1,767 1,886
---------- ---------
Total Interest Income 13,224 11,502
---------- ---------
Interest Expense
Interest on demand deposits 367 350
Interest on savings accounts 696 721
Interest on time deposits 4,810 3,259
---------- ---------
Total interest on deposits 5,873 4,330
Interest on short-term debt 264 360
Interest on long-term debt 814 706
---------- ---------
Total Interest Expense 6,951 5,396
---------- ---------
Net Interest Income 6,273 6,106
Provision for Loan Losses 137 89
---------- ---------
Net Interest Income after Provision
for Loan Losses 6,136 6,017
--------- ---------
Noninterest Income
Service charges 485 405
Other 413 401
Security gains 1,273 771
---------- ---------
Total Noninterest Income 2,171 1,577
---------- ---------
Noninterest Expense
Salaries 1,835 1,579
Employee benefits 523 496
Occupancy expense 227 163
Equipment expense 234 214
Other 1,375 1,044
---------- ---------
Total Noninterest Expense 4,194 3,496
---------- ---------
Income before Income Taxes 4,113 4,098
Provision for Income Tax 1,305 1,141
---------- ---------
Net Income $ 2,808 $ 2,957
========== =========
Per Share Data
Net Income $ 1.15 $ 1.21
========== =========
Cash Dividends $ .47 $ .44
========== =========
Equivalent Shares Outstanding 2,431,417 2,449,421
========== =========
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
September 30,
2001 2000
------ ------
Interest Income
Interest and fees on loans $ 3,613 $ 3,284
Interest on federal funds sold 172
Interest on interest bearing deposits 167 5
Interest and dividends on investment securities 552 633
---------- ---------
Total Interest Income 4,504 3,922
---------- ---------
Interest Expense
Interest on demand deposits 105 112
Interest on savings accounts 213 236
Interest on time deposits 1,654 1,227
---------- ---------
Total interest on deposits 1,972 1,575
Interest on short-term debt 66 146
Interest on long-term debt 298 226
---------- ---------
Total Interest Expense 2,336 1,947
---------- ---------
Net Interest Income 2,148 1,975
Provision for Loan Losses 70 30
---------- ---------
Net Interest Income after Provision
for Loan Losses 2,078 1,945
---------- ---------
Noninterest Income
Service charges 169 138
Other 135 115
Security gains (11)
----------- ---------
Total Noninterest Income 293 253
---------- ---------
Noninterest Expense
Salaries 620 508
Employee benefits 175 159
Occupancy expense 82 63
Equipment expense 75 74
Other 483 392
---------- ---------
Total Noninterest Expense 1,435 1,196
---------- ---------
Income before Income Taxes 958 1,002
Provision for Income Tax 307 264
---------- ---------
Net Income $ 651 $ 738
========== =========
Per Share Data
Net Income $ .27 $ .30
========== =========
Cash Dividends $ .16 $ .15
========== =========
Equivalent Shares Outstanding 2,430,628 2,441,118
========== =========
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
September 30, December 31,
ASSETS 2001 2000
---------- ----------
Cash and due from banks $ 4,514 $ 3,808
Fed funds sold 789 909
Interest bearing deposits in banks 18,225 313
Securities held to maturity (note 2) 1,885 2,886
Securities available for sale (note 2) 56,197 38,680
Other investments 3,647 3,756
Loans, net of unearned discount (note 3) 172,362 152,035
Less allowance for loan losses (note 4) (1,278) (1,108)
------- -------
Net Loans 171,084 150,927
Construction in progress 579
Bank premises and equipment 4,485 3,069
Interest receivable 1,553 1,481
Other real estate 308 426
Intangible assets 5,259
Other assets 2,074 1,984
------ -------
Total Assets $270,020 $208,818
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 24,056 $ 18,615
Interest bearing
Demand 27,846 20,349
Savings deposits 33,607 26,406
Time deposits 118,667 86,985
------- -------
Total Deposits 204,176 152,355
Short-term debt 8,830 8,698
Long-term debt 24,257 16,386
Accrued expenses 4,774 4,181
------ -------
Total Liabilities 242,037 181,620
------- -------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 2,429,717 and
2,433,373 issued and outstanding, in 2001
and 2000, respectively 12,149 12,167
Surplus 417 479
Retained earnings 15,456 13,791
Accumulated other comprehensive income (loss) (39) 761
------- -------
Total Stockholders' Equity 27,983 27,198
------ -------
Total Liabilities and Stockholders' Equity $270,020 $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)
Nine Months Ended
September 30,
2001 2000
------ ------
Cash Flows from Operating Activities:
Net income $ 2,808 $ 2,957
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 220 194
Amortization of security premiums 23 16
Gain on security transactions (1,254) (771)
Provision for loan losses 136 89
Increase in interest receivable (72) (159)
Decrease in other assets 218 83
Goodwill amortization 213
Increase (decrease) in accrued expenses 728 (235)
Gain on sale of land (20)
Losses on limited partnership investments 294 158
-------- --------
Total Adjustments 486 (625)
-------- --------
Net Cash Provided by Operating Activities 3,294 2,332
-------- --------
Cash Flows from Investing Activities:
Proceeds from sales of investments
available for sale 2,945 2,185
Proceeds from maturity of investments
available for sale 19,697 2,466
Proceeds from maturity of investments
held to maturity 20,100
Purchase of investments available for sale (39,533) (7,098)
Purchase of investments held to maturity (19,990) (7)
Net decrease (increase) in interest
bearing bank deposits (17,912) 199
Net change in federal funds sold 120
Net increase in loans (20,293) (9,532)
Sale of other real estate 139 79
Purchase of goodwill (5,470)
Purchase of property and equipment (1,017) (440)
--------- --------
Net Cash Used in Investing Activities (61,214) (12,148)
--------- --------
Cash Flows from Financing Activities:
Net increase in deposits 51,821 9,319
Net decrease in short-term borrowings 132 3,497
Repurchase of common stock (80) (461)
Repayment of long-term borrowings (3,128) (2,414)
Proceeds of long-term borrowings 11,000
Payment of dividends (1,119) (1,053)
--------- --------
Net Cash Provided by Financing Activities 58,626 8,888
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 706 (928)
Cash and Cash Equivalents at Beginning of Period 3,808 4,799
-------- --------
Cash and Cash Equivalents at End of Period $ 4,514 $ 3,871
======== ========
Supplemental Disclosure
Cash paid for:
Interest expense $ 6,858 $ 5,269
Income taxes 777 1,052
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)
Nine Months Ended
September 30,
2001 2000
------ ------
Balance, beginning of period $27,198 $25,286
Net income for period 2,808 2,957
Net change in unrealized appreciation on securities
available for sale, net of taxes (800) 21
------- ------
Total comprehensive income 2,008 2,978
Repurchase of common stock (80) (461)
Dividends declared (1,143) (1,076)
------- ------
Balance, end of period $27,983 $26,727
====== ======
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 September 30, 2001, and the results of operations
for the three and nine month periods ended September 30, 2001 and
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.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values at
September 30, 2001 and December 31, 2000 follows:
2001 2000
Carrying Market Carrying Market
Value Value Value Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 111 $ 111 $ 1,109 $ 1,107
Other debt securities 1,774 1,845 1,777 1,752
------ ------- ------- ------
Total $ 1,885 $ 1,956 $ 2,886 $ 2,859
====== ======= ======= ======
2001 2000
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $27,252 $ 26,919 $ 15,418 $15,326
Equity securities 9,706 10,676 11,942 10,854
Mortgage-backed
securities 9,261 9,151 1,840 1,839
Other debt securities 9,978 9,516 9,480 9,500
------ ------- ------- ------
Total $56,197 $ 56,262 $ 38,680 $37,519
====== ======= ======= ======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
September 30, December 31,
2001 2000
------ ------
Real Estate
Construction $ 4,991 $ 4,372
Mortgage 105,703 92,464
Commercial and agricultural 35,829 32,987
Installment 24,494 20,927
Credit cards 1,248 1,249
Other 97 36
-------- -------
Total $ 172,362 $152,035
======== =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
periods ended September 30, 2001 and 2000 follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Balance, beginning of period $1,108 $1,090 $1,247 $1,136
Provisions charged to
operating expenses 137 89 70 30
Other adjustments 83
Net charge-offs
Loan recoveries 41 31 6 10
Loan charge-offs (91) (62) (45) (28)
------ ----- ------ -----
Total Net Charge-Offs * (50) (31) (39) (18)
------ ----- ------ -----
Balance, End of Period $1,278 $1,148 $1,278 $1,148
===== ===== ===== =====
*Components of Net Charge-Offs
Real Estate 1 (2)
Commercial (4) (4) (4) (2)
Installment (47) (25) (35) (16)
------ ----- ------ -----
Total $ (50) $ (31) $ (39) $ (18)
====== ===== ====== =====
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
F & M Bank Corp. (Company) is a one-bank holding company organized under
Virginia law which provides financial services through its wholly-owned
subsidiaries (Farmers & Merchants Bank (Bank) and TEB Life Insurance Company
(TEB). Farmers & Merchants Financial Services (FMFS) is a wholly-owned
subsidiary of the Bank.
The Bank is a full service commercial bank offering a wide range of banking
and financial services through its seven branch offices. TEB reinsures
credit life and accident and health insurance sold by the Bank in connection
with its lending activities. FMFS provides title insurance, brokerage services
and property/casualty insurance to customers of the Bank.
The Company's primary trade area services customers in Rockingham County,
Shenandoah County, the southern part of Page County and the northern part of
Augusta County.
Management's discussion and analysis is presented to assist the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial
statements, footnotes, and other financial data presented. The discussion
highlights material changes from prior reporting periods and any identifiable
trends which may affect the Company. Amounts have been rounded for presentation
purposes.
Results of Operations
Year to Date
Net income year to date is down $149,000, primarily due to a reduction in
the net interest margin. The reduced margin is the result of interest bearing
liabilities repricing much more slowly than assets. The cost of short-term debt,
primarily commercial repurchase agreements (REPOs), are the only liabilities
that track directly with changes in the Federal Funds rate. Rates on
non-maturing deposits, such as interest bearing checking and savings accounts
have fallen dramatically. However, as relatively low rate, liquid accounts,
their decline has not kept pace with rate declines on earning assets. Average
rates on time deposits began to fall during the current quarter. Throughout much
of 2000, the Bank offered promotional rates to attract deposits to support its
growing loan portfolio. The costs of these deposits are not fully reflected in
the prior year and have resulted in higher costs in the current year. Many of
these deposits, along with deposits purchased from First Union Bank in the
branches acquisition, do not begin repricing until the fourth quarter of 2001.
Rates on long-term debt have fallen as the Bank has continued to borrow from the
Federal Home Loan Bank at favorable rates to support its longer term mortgage
lending. A schedule of the net interest margin for 2001 and 2000 can be found in
Table I.
Noninterest income, exclusive of securities gains has increased $92,000 in
2001. In the prior period, however, there was a pre-tax adjustment of $72,000,
which decreased other income. This adjustment was necessary as a result of the
discovering of errors in the processing of premiums on sales of credit life and
accident and health insurance. The third-party insurance company, which handles
underwriting and policy issuance, mistakenly overbooked premium income and
related policy claims. The error was discovered by management during the third
quarter of 2000 when a single large life insurance claim was reported twice.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The remaining increase in noninterest income results from increases in a
variety of service charges and customer fees. Service charges should
continue to increase as an initial six-month service charge fee moratorium
period for accounts acquired from First Union expired in late August.
Noninterest expense increased $698,000 in 2001, however, $213,000 of this
amount is related to amortization of deposit premiums and startup costs
resulting from the Banks acquisition of the First Union branches. All areas of
noninterest expense have increased as a result of the addition of these offices
(ie. salaries, benefits, occupancy expenses).
Noninterest expense as a percentage of average assets has decreased from
2.32% in 2000 to 2.10% in 2001. This has resulted from the branch
acquisitions and the Banks ability to absorb this growth with relatively little
increase in administrative staff (operations and support staff) and with no
increase in costs of the account processing infrastructure. Operating costs have
always compared favorable to the peer group due to an excellent asset to
employee ratio and lower than average facilities costs.
Quarter Ending September 30, 2001
Net income decreased $87,000 in 2001 compared to 2000 operations. Results
of operations for the quarter are very similar to those highlighted for the
first nine months of 2001. The net interest yield of 3.58% did show a slight
increase over the second quarter (3.56%) and should continue to improve as
approximately 25% of time deposits will reprice during the fourth quarter of
2001.
Financial Condition
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio are held to assist the Company with liquidity, asset liability
management, as security for certain public funds and repurchase agreements and
for long-term growth potential.
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, 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 separate component of shareholders' equity. As of
September 30, 2001, the market value of all securities available for sale was
$65,000 less than their amortized cost.
The value of the Bank's bond portfolio exceeds carrying cost by $905,000.
This is the result of rapidly declining interest rates causing the market value
of existing higher rate bonds to increase dramatically. The Company's equity
securities portfolio was down by $970,000 due in large part to the stock market
volatility and economic uncertainty following the September 11, 2001 terrorist
attacks.
The Company continues to hold equity investments in a number of large,
regional financial institutions and a variety of other predominantly
blue-chip securities. The Company continues to believe that these investments
offer adequate current returns (dividends) and have the potential for future
increases in value.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan Portfolio
The Company operates in a predominately rural area that benefits from a
variety of businesses including agri-business, manufacturing, service
businesses and several universities/colleges. The Bank is an active residential
mortgage and residential construction lender and generally makes commercial
loans to small and mid size businesses and farms within its primary 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, the local and national economies
and consumer confidence. 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
monitors its past due loans closely and has not experienced higher loan
delinquencies in this sector compared to the overall loan portfolio.
The first nine months of 2001 resulted in a $20,327,000 increase in the
loan portfolio, which included $9,734,000 of loans purchased as part of the
branches acquisition. This increase is indicative of the continued strength of
the local economy as much of the increase has been in residential real estate
loans.
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, which have had the original interest rate or repayment terms changed due
to financial hardship. Nonperforming loans totaled $2,183,000 at September 30,
2001 compared to $1,085,000 December 31, 2000. Approximately 90% of these past
due loans are secured by real estate. The increase in non-performing loans
is almost exclusively single-family residential properties. Although the
potential exists for some loan losses, management believes the bank is
generally well secured and continues to actively work with its customers to
effect payment. As of September 30, 2000, the Company did not hold any real
estate that was acquired through foreclosure.
Allowance for Loan Losses
Management and the Board evaluate the allowance for loan losses on a
quarterly basis. Consideration is given to national and local economic trends,
changes in the loan portfolio, including past due and criticized loan trends.
Specific factors evaluated include internally generated loan review reports,
past due reports, historical loan loss experience and changes in the financial
strength of individual borrowers that have been included on the Banks watch list
or schedule of classified loans.
In evaluating the portfolio, loans are segregated into a variety of
pools including: substandard, watch and past due over 90 days (by type).
Each of these pools are assigned loss potentials based on industry
standards or management estimates. The remainder of the portfolio is
segregated by loan type. Potential losses are evaluated based on historic
losses and are adjusted due to the inherent uncertainties within the
portfolio. Finally loss percentages are assigned to loan commitments. The
Board of Directors of the bank reviews and approves the allowance on a
quarterly basis.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
All potential losses are evaluated within a range of low to high. The Board
approves the loan loss provision for the following quarter based on this
evaluation and an effort is made to keep the actual allowance at or above the
midpoint of the range established by the evaluation process.
The allowance for loan losses of $1,278,000 at September 30, 2001 is equal
to .74% of total loans. This compares to an allowance of $1,108,000 (.73%) at
December 31, 2000. Peer group reserves were 1.28% based on the most recently
available public information.
Loan losses, net of recoveries, total $50,000 through three quarters of
2001. This is equivalent to an annualized loss rate of .04%. In recent years the
company has had an average loss rate of .07% which is approximately one-third
the loss rate of its peer group. Based on its excellent loss history, high
percentage of loans secured by real estate, conservative lending philosophy and
the strong local economy, management believes the allowance is adequate to
absorb reasonably estimated credit losses within the portfolio.
The following table shows the type of loans in the loan portfolio and the
corresponding amounts of the allowance allocated by loan types as of September
30, 2001 and December 31, 2000:
September 30, 2001 December 31, 2000
------------------ -----------------
Loan Type as a Loan Type as a
Loan Allowance Percentage Percentage of Allowance Percentage Percentage of
Type Allocation of Allowance Total Loans Allocation of Allowance Total Loans
Commercial $ 647 51% 21% $ 332 47% 25%
Mortgage 308 24% 64% 277 25% 61%
Consumer 273 21% 14% 333 24% 13%
Credit cards 50 4% 1% 166 4% 1%
---- ---- ---- ---- --- ----
Totals $1,278 100% 100% $1,108 100% 100%
===== === ==== ===== === ====
Commercial loans carry the largest percentage of the allowance as these
loans tend to be more sensitive to changes in economic conditions and generally
show losses earlier than consumer and mortgage lending. Mortgage lending carries
a lower percentage of the allowance as losses on these types of loans have shown
a lower loss rate in previous periods and tend to be well collateralized.
Consumer and credit card losses tend to have a loss rate that is reflective both
of the current economy and the levels of collateral required by the lender and
have been a moderate source of losses in prior periods.
Deposits and Other Borrowings
The Company's main source of funding is comprised of 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 have increased $51,821,000 since
December 31, 2000, including $37,287,000 of purchased deposits. Deposit growth
in the most recent quarter totals $5,110,000, with the growth spread over all
deposit types. This growth has been experienced in spite of rapidly falling
rates and appears to be a result of economic uncertainty and stock market
volatility.
The Company offers repurchase agreements (a/k/a "repos") to customers
desiring such investments. Repos are designed for companies and individuals
desiring a higher rate of return than traditional deposit accounts and who will
accept the risk of not being covered by FDIC insurance. As of September 30,
2001, balances in repo accounts totaled $8,830,000 and are included as
short-term debt on the balance sheet.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be
an important mechanism in funding real estate loans. The Company's subsidiary
bank borrows funds on a fixed rate basis. These borrowings are used to fund
longer term fixed rate mortgage loans. This program allows the Bank to match the
maturity of its fixed rate real estate portfolio with the maturity of its debt
and reduce its exposure to interest rate changes. The Bank borrowed an
additional $3 million during the third quarter of 2001 at an average rate of
5.02% and an average repayment period of eight years.
As part of the approval process for the acquisition of new branches, the
Company was required to contribute $6 million into the Bank as additional equity
capital. The Company 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, plus interest. The loan is collateralized by
$6 million of marketable securities and carries an interest rate of
LIBOR + 1.10%. At September 30, 2001, the principal balance is $3,333,333.
Capital
The Company seeks to maintain a strong capital base to expand
facilities, promote public confidence, support current operations and grow at a
manageable level. As of September 30, 2001, the Company's total risk based
capital and total capital to total assets ratios were 17.99% and 10.38%,
respectively. Both ratios are in excess of regulatory minimums and exceed the
ratios of the Company's peers. Earnings have been satisfactory to allow an
increase in regular dividends in 2001 of 6.82%.
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, federal funds sold,
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 purchasing 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 has been sufficient to fund most of the net
increase in loans and investment securities.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet. Managing this risk involves regular monitoring of interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals. 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 in Table
II.
14
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. Management has been authorized to repurchase shares, from time to
time in the open market or through privately negotiated transactions, when
market conditions warrant. The repurchased shares are held as unissued stock and
are available for general corporate purposes. Through the end of the third
quarter of 2001, a total of 22,185 shares have been repurchased.
Effect of Newly Issued Accounting Standards
The Company does not believe that any newly issued but as yet unapplied
accounting standards will have a material impact on the Company's financial
position or operations.
Existence of 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).
15
Table I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $164,667 $ 10,599 8.58% $144,659 $ 9,596 8.84%
Federal funds
sold 20,552 658 4.27% 387 17 5.86%
Bank deposits 6,450 233 4.59% 862 33 5.10%
Investments
Taxable 3 31,391 1,449 6.15% 31,700 1,545 6.50%
Partially
taxable 2,3 10,291 418 5.42% 10,736 467 5.80%
------- ------- ------ ------- ------- -----
Total Earning
Assets 233,351 13,357 7.63% 188,344 11,658 8.25%
------- ------- ------ ------- ------- ------
Interest Expense
Demand deposits 26,737 364 1.81% 20,626 350 2.26%
Savings 31,472 693 2.94% 28,908 721 3.33%
Time deposits 111,090 4,810 5.77% 79,093 3,259 5.49%
Other short-term
debt 8,793 264 4.00% 8,147 350 5.73%
Long-term debt 20,826 814 5.21% 17,218 706 5.47%
------- ------- ------ ------- ------- ------
Total Interest
Bearing
Liabilities 198,918 6,945 4.66% 153,992 5,386 4.66%
------- ------- ------ ------- ------- ------
Net Interest
Margin 1 $ 6,412 $ 6,272
======= =======
Net Yield on
Interest Earning
Assets 1 3.66% 4.44%
===== =====
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 (Continued)
Table I (Continued)
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $171,390 $ 3,625 8.46% $148,311 $ 3,295 8.89%
Federal funds
sold 19,830 172 3.47%
Bank deposits 13,806 166 4.81% 322 5 6.21%
Investments
Taxable 3 31,093 449 5.78% 31,851 534 6.71%
Partially
taxable 2,3 10,802 128 4.74% 11,095 141 5.08%
------- ------- ------ ------- ------- -----
Total Earning
Assets 246,921 4,540 7.35% 191,579 3,975 8.30%
------- ------- ------ ------- ------- -----
Interest Expense
Demand deposits 28,034 102 1.46% 20,022 112 2.24%
Savings 33,232 210 2.53% 27,672 236 3.41%
Time deposits 117,844 1,654 5.61% 83,764 1,227 5.86%
Other short-term
debt 8,944 66 2.95% 9,181 136 5.93%
Long-term debt 24,278 298 4.91% 16,427 226 5.50%
------- ------- ------ ------- -------- -----
Total Interest
Bearing
Liabilities 212,332 2330 4.39% 157,066 1,937 4.93%
------- ------- ------ ------- ------- -----
Net Interest
Margin 1 $ 2210 $ 2,038
======= =======
Net Yield on
Interest Earning
Assets 1 3.58% 4.26%
===== =====
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.
16
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
September 30, 2001
(In Thousands of Dollars)
The following table presents the Company's interest sensitivity.
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans
Commercial $ 21,591 $ 1,902 $11,689 $ 647 $ $ 35,829
Installment 262 12,287 9,517 2,525 24,591
Real estate 14,489 10,396 59,857 25,952 110,694
Credit cards 1,248 1,248
Interest bearing
bank deposits 5,069 13,156 18,225
Federal funds sold 789 789
Securities 20,187 9,986 16,047 2,156 13,353 61,729
------- ------ ------ ------ ------ -------
Total 63,635 47,727 97,110 31,280 13,353 253,105
------- ------ ------ ------ ------ -------
Sources of Funds
Interest bearing
demand deposits 8,113 11,968 7,765 27,846
Regular savings 6,721 13,443 13,443 33,607
Certificates of
Deposit $100,000
and over 4,124 9,638 3,236 16,998
Other certificates
of deposit 25,116 47,842 28,711 101,669
Short-term
borrowings 8,830 8,830
Long-term
borrowings 4,249 4,053 13,170 2,785 24,257
------- ------ ------ ------ ------ -------
Total 42,319 76,367 70,528 23,993 213,207
------- ------ ------ ------ ------ -------
Discrete Gap 21,316 (28,640) 26,582 7,287 13,353 39,898
Cumulative Gap 21,316 (7,324) 19,258 26,545 39,898
Ratio of Cumulative
Gap to Total 8.42% (2.89)% 7.61% 10.49% 15.76%
Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 2001. In preparing the above table,
no assumptions were made with respect to loan prepayments. Loan principal
payments are included in the earliest period in which the loan matures or can
reprice. 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.
17
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-Not Applicable
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 1997
Form 10-KSB filed March 27, 1998.
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K for the quarter
ending September 30, 2000.
18
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: November 14, 2001