8
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
March 31, 2002
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Drawer 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 March 31, 2002
------------------------------------ ------------------------------
Common Stock, par value - $5 2,438,170 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2002 and 2001 2
Consolidated Balance Sheets - March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
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)
Three Months Ended
March 31,
2002 2001
---------- ----------
Interest Income
Interest and fees on loans $ 3,521 $ 3,371
Interest on federal funds sold 32 149
Interest on interest bearing deposits 165 15
Interest and dividends on investment securities 601 620
------- ------
Total Interest Income 4,319 4,155
------- ------
Interest Expense
Interest on demand accounts 74 131
Interest on savings deposits 181 235
Interest on time deposits 1,367 1,463
------- ------
Total interest on deposits 1,622 1,829
Interest on short-term debt 29 115
Interest on long-term debt 287 217
------- ------
Total Interest Expense 1,938 2,161
------- ------
Net Interest Income 2,381 1,994
Provision for Loan Losses 67 31
------- ------
Net Interest Income after Provision for
Loan Losses 2,314 1,963
------- ------
Noninterest Income
Service charges 180 150
Other 137 131
Security gains 81 1,191
------- ------
Total Noninterest Income 398 1,472
------- ------
Noninterest Expense
Salaries 678 589
Employee benefits 235 180
Occupancy expense 78 68
Equipment expense 83 72
Intangibles amortization 45 56
Other 463 360
------- ------
Total Noninterest Expense 1,582 1,325
------- ------
Income before Income Taxes 1,130 2,110
Income Taxes 341 684
------- ------
Net Income $ 789 $ 1,426
======= ======
Per Share Data
Net Income $ .32 $ .59
======= ======
Cash Dividends $ .16 $ .15
======= ======
Equivalent Shares Outstanding 2,437,854 2,432,419
========= =========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
ASSETS 2002 2001
------------ -----------
Cash and due from banks $ 4,724 $ 5,364
Federal funds sold 2,357
Interest bearing deposits in banks 21,464 14,199
Securities held to maturity (note 2) 1,881 1,883
Securities available for sale (note 2) 51,517 58,252
Other investments 4,832 3,852
Loans, net of unearned discount (note 3) 185,363 176,625
Less allowance for loan losses (note 4) (1,339) (1,288)
-------- --------
Net Loans 184,024 175,337
Other real estate 572 567
Bank premises and equipment 4,457 4,412
Interest receivable 1,646 1,541
Goodwill (note 5) 2,639 2,639
Deposit intangibles (note 5) 2,485 2,529
Bank owned life insurance (note 6) 2,150
Other assets 1,810 2,098
------- -------
Total Assets $286,558 $272,673
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 27,412 $ 25,741
Interest bearing
Demand 31,040 29,735
Savings deposits 39,582 34,787
Time deposits 115,312 118,016
------- -------
Total Deposits 213,346 208,279
Short-term debt 9,263 10,696
Long-term debt 29,886 20,983
Accrued expenses 5,005 4,118
------- -------
Total Liabilities 257,500 244,076
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,438,170 and
2,438,563 shares issued and outstanding
in 2002 and 2001, respectively 12,191 12,193
Surplus 520 525
Retained earnings 15,889 15,488
Accumulated other comprehensive income 458 391
------- -------
Total Stockholders' Equity 29,058 28,597
------- -------
Total Liabilities and Stockholders' Equity $286,558 $272,673
======= =======
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Three Months Ended
March 31,
2002 2001
---------- ----------
Balance, beginning of period $ 28,597 $ 27,198
Comprehensive Income:
Net income for period 789 1,426
Net change in unrealized appreciation on
investment securities available for sale,
net of taxes 67 (170)
------- -------
Total comprehensive income 856 1,256
Repurchase of common stock (7) (37)
Dividends declared (388) (365)
-------- -------
Balance, end of period $ 29,058 $ 28,052
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net income $ 789 $ 1,426
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 83 66
Amortization of security premiums 32 1
Provision for loan losses 68 31
Intangibles amortization 44 56
Increase in interest receivable (105) (146)
(Decrease) increase in other assets (1,876) 342
Increase in accrued expenses 887 207
Gain on security transactions (81) (1,191)
Losses on limited partnership investments 70 98
------- -------
Net adjustments (878) (536)
-------- -------
Net Cash Provided by (Used in) Operating
Activities (89) 890
-------- -------
Cash Flows from Investing Activities:
Purchase of investments available for sale (7,503) (11,055)
Proceeds from sales of investments available
for sale 441 2,435
Proceeds from maturity of investments available
for sale 12,874 5,362
Proceeds from maturity of investments held
to maturity 110
Net increase in loans (8,755) (11,401)
Purchase of property and equipment (128) (864)
Change in federal funds sold (2,357) (30,213)
Net increase in interest bearing bank deposits (7,265) (1,014)
Purchase loan and deposit accounts from
First Union (5,470)
------- -------
Net Cash Used in Investing Activities (12,693) (52,110)
-------- -------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 7,771 17,581
Net (increase) decrease in time deposits (2,704) 29,839
Net increase (decrease) in short-term debt (1,433) 697
Cash dividends paid (388) (365)
Repurchases of common stock (7) (37)
Additional long-term debt 10,000 5,000
Repayment of long-term debt (1,097) (869)
-------- -------
Net Cash Provided by Financing Activities 12,142 51,846
------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents (640) 626
Cash and Cash Equivalents, Beginning of Period 5,364 3,808
------- -------
Cash and Cash Equivalents, End of Period $ 4,724 $ 4,434
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 1,980 $ 2,125
The accompanying notes are an integral part of these statements.
6
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 March 31,
2002 and the results of operations for the three-month periods ended
March 31, 2002 and March 31, 2001. The notes included herein should be
read in conjunction with the notes to financial statements included in
the 2001 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
March 31, 2002 and December 31, 2001 follows:
2002 2001
------------------ ------------------
Carrying Market Carrying Market
Value Value Value Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 113 $ 110 $ 114
Other securities 1,771 1,837 1,773 1,830
------- ------- ------- --------
Total $ 1,881 $ 1,950 $ 1,883 $ 1,944
======= ======= ======= =======
2002 2001
-------------------- ---------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 23,369 $ 23,110 $ 29,428 $ 29,097
Equity securities 10,720 10,747 10,500 10,683
Mortgage-backed
securities 7,018 6,969 7,921 7,853
Other securities 10,410 10,009 10,403 10,012
------- ------- ------- --------
Total $ 51,517 $ 50,835 $ 58,252 $ 57,645
======= ======== ======= =======
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
March 31, December 31,
2002 2001
---------- ----------
Real Estate
Construction $ 6,587 $ 5,521
Mortgage 112,312 105,305
Commercial and agricultural 41,143 41,256
Consumer 23,965 23,106
Credit cards 1,282 1,348
Other 74 89
------ --------
Total $ 185,363 $176,625
======== ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2002 and 2001 follows:
2002 2001
---------- --------
Balance, beginning of period $ 1,289 $ 1,108
Provisions charged to operating expenses 67 31
Allowance established for loans purchased 84
Net (charge offs) recoveries
Loan recoveries 26 23
Loan charge-offs (43) (34)
------- ---------
Total Net (Charge-offs) Recoveries (17) (11)
------- ---------
Balance, End of Period $ 1,339 1,212
====== ========
Components of net (charge-offs) recoveries:
Real Estate $ $ 1
Commercial 6
Consumer (23) (12)
------- ---------
$ (17) (11)
======= =========
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 GOODWILL AND CORE DEPOSIT INTANGIBLE
During the first quarter of 2002, the Company completed an assessment of the
Financial Accounting Standards Board (FASB) Statement 141 "Business
Combinations" and Statement 142 "Goodwill and Other Intangible Assets." As a
result of this review management determined that a portion of its acquisition
costs related to the two Shenandoah County branches should be considered
Goodwill. The remaining portion of these acquisition costs have been identified
as a Core Deposit Intangible (CDI).
Under the new accounting standards, goodwill will be tested periodically for
impairment, but will not be subject to regular amortization expense. As of March
31, 2002, there is no impairment to goodwill. The CDI will continue to be
amortized on a straight-line basis over a 15 year period.
NOTE 6 BANK OWNED LIFE INSURANCE (BOLI)
The Company's subsidiary bank has obtained single-premium whole-life
insurance policies on several of its senior executives. The Bank is both owner
and beneficiary of the policies. Under regulatory guidelines there are four
primary purposes for which a Bank may purchase life insurance: (i) key-person
insurance, (ii) insurance on borrowers, (iii) insurance purchased in connection
with employee compensation and benefit plans, and (iv) insurance taken as
security for loans.
The Bank currently offers a variety of benefit plans to all full time
employees. While the costs of these plans are generally tax deductible to the
Bank, the cost has been escalating greatly in recent years. In order to attract
and retain good employees, the Bank has determined that the additional
benefits offered are necessary.
To help offset the growth in these costs, the Bank decided to enter into the
BOLI contracts. Dividends received on these policies are tax-deferred and the
death benefits under the policies is tax exempt. Rates of return on a
tax-equivalent basis are very favorable when compared to other long-term assets
which the Bank could obtain.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Interest rates stabilized following the Federal Reserve's last rate cut in
late 2001. The Company's net interest margin began to recover in the first
quarter of 2002 as rate sensitive liabilities (primarily time deposits) repriced
at much lower rates. Deposits grew $5,067,000 during the quarter, with all the
growth in demand and savings deposits. Time deposits decreased $2,704,000, as
customers appear to prefer more liquid deposits in this low-rate environment.
Loans grew rapidly in the first quarter, increasing a total of
$8,738,000. This level of growth is unusual as the first quarter is often a low
growth period. Most of the growth came from an increase in real estate secured
loans, both for residential and commercial purposes.
Income from operations, exclusive of securities transactions and net of
income taxes, increased $96,000. Net income including securities
transactions decreased $637,000 as a result of a decrease of $733,000
in net after tax security gains realized.
Results of Operations
The dollar amount of the tax equivalent net interest margin increased
$377,000 or 18.44% in the first quarter of 2002 compared to the first quarter of
2001. The yield on earning assets decreased 1.18%, while the cost of funds on
interest bearing liabilities decreased 1.38%. These decreases are the result of
a general decline in market rates. The dollar value of the increase in the net
interest margin also improved because of the growth in the balance sheet (ie.
volume increase) as average earning assets increased $45,126,000 over the prior
year.
Noninterest income decreased $1,074,000 in the first three months of 2002.
Exclusive of securities transactions, other noninterest income increased
$36,000 or 12.81%. The increase was primarily the result of increased service
charges on deposit accounts. Approximately half of the additional noninterest
income came from the two Shenandoah County offices, which were only owned for
one month of the comparable quarter in 2001.
Noninterest expense increased $257,000 (19.39%). Salaries and benefits
accounted for $144,000 of this total. This increase was caused by a combination
of normal salary increases, a substantial increase in the cost of group
insurance and a full quarter of expenses related to the staffing of the two
acquired offices. The remaining increase is made up of increases in a number of
areas, including: correspondent bank fees, courier fees, data processing fees,
ATM processing fees, all of which increased due to greater volumes relating to
normal growth and the acquired branches. Telephone expense increased $26,000,
but is primarily the result of large credits received in the prior year related
to rate base adjustments.
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
securities held to maturity and securities available for sale. Securities are
classified as held to maturity when management has the intent and ability to
hold the securities to maturity. These securities are carried at their 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 separate
component of shareholders' equity. As of March 31, 2002, the market value of all
securities available for sale exceeded their amortized cost by $682,000. This
excess is the result of increases in the value of debt securities held by the
bank, net of decreases in the value of equity securities held by the parent.
Management has traditionally held debt securities (regardless of
classification) until maturity and thus it does not expect the fluctuations
in value of these securities to have a direct impact on earnings.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Securities (Continued)
Investments in securities decreased $7,740,000 in the first quarter of 2002
with proceeds used to support loan growth. The Company generally invests in
relatively short-term maturities due to the uncertainty in the direction of
interest rates. Recent purchases of debt securities have been a blend of
short-term United States Treasury obligations and longer term mortgage-backed
securities. Of the investments in securities available for sale, 20.81% are
invested in equity securities, most of which are dividend producing and subject
to the corporate dividend exclusion for income taxation purposes. The Company
believes these investments offer adequate returns and have the potential for
significant increases in value.
Loan Portfolio
The Company operates in an agriculturally dominated area in the western
portion of Virginia which includes the counties of Rockingham, Page and
Shenandoah. 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.
The allowance for loan losses (see subsequent section) provides for the risk
that borrowers will be unable to repay their obligations and is reviewed
quarterly 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 primarily based on
the strength of the local economy.
While lending is geographically diversified within the service area, the
Company does have some concentration in agricultural loans (primarily poultry
farming). Recently a mild strain of Avian Influenza has been discovered in the
Shenandoah Valley. Several of the Bank's customers have been affected by the
contamination. Their flocks have been destroyed and after clean-up is complete,
the poultry houses will have to set idle for a number of weeks. Although the
Bank does not anticipate any losses as a result of this outbreak, it is likely
that the terms of some loans may have to be modified or payments extended in the
short-term. 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 delinquencies
in this sector compared to the overall loan portfolio.
The first three months of 2002 resulted in an $8,738,000 increase in the loan
portfolio. As stated previously, this level of growth in the first quarter is
unusual. Although loan demand has been strong in most of the Bank's markets,
much of the growth came from several large commercial 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,
on which the original interest rate or repayment terms have been changed due to
financial hardship. Nonperforming loans totaled $806,000 at March 31, 2002
compared to $1,096,000 of loans at December 31, 2001. Approximately 80% of these
past due 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. The Company
had $684,000 of restructured loans at March 31, 2002.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan Portfolio (Continued)
As of March 31, 2002 the Company held $265,000 of real estate that was
acquired through foreclosure. The property will be placed on the market during
the second quarter of 2002. No losses are anticipated at this time.
Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature and value of
the portfolio and industry standards. Specific factors considered 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
borrower's financial position. This review also considers concentrations of
loans in terms of geography, business type or level of risk. Management also
evaluates nonperforming loans relative to their collateral value and makes the
appropriate adjustments to the allowance when needed.
In evaluating the adequacy of the allowance, loans are segregated into a
variety of pools including: substandard, watch and past due over 90 days (by
type). Each of these pools is assigned loss potentials based on industry
standards or management estimates. The remainder of the portfolio is
segregated by loan type. Potential losses on these pools are evaluated based on
historic loss rates and are adjusted due to 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.
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 $1,339,000 at March 31, 2002 is equal to
...72% of total loans. This compares to an allowance of $1,289,000 (.73%) at
December 31, 2001. Peer group reserves were 1.29% based on the most recently
available public information.
Loan losses, net of recoveries, total $17,000 through one quarter of 2002.
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 allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of March
31, 2002 and December 31, 2001:
March 31, 2002 December 31, 2001
-------------- -----------------
Percentage Percentage
Loan Allowance of Percentage of Allowance of Percentage of
Type Allocation Allowance Total Loans Allocation Allowance Total Loans
Commercial $ 455 34% 22% $ 451 35% 23%
Mortgage 335 25% 64% 323 25% 63%
Consumer 495 37% 16% 451 35% 14%
Unallocated 540 4% 0% 64 5% 0%
----- ---- ---- ----- ---- ---
Totals $1,339 100% 100% $1,289 100% 100%
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Allowance for Loan Losses (Continued)
Commercial loans carry a high 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 the highest source of losses in prior periods.
The Company believes that its allowance should be viewed in its entirety and,
therefore, is available for potential credit losses in its entire portfolio,
including loans, credit related commitments and other financial instruments. 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 nine 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 future losses in the current portfolio.
The provision for credit losses and changes in the allowance for loan losses
are shown in Note 4, Page 7.
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. The Company realized annualized deposit
growth of 9.50% in the first quarter of 2002. While time deposits decreased
slightly, all other deposit types increased during the quarter. The Bank has
advertised a free checking account, but has not offered any other deposit
promotions during the first quarter. The growth appears to be a result of
accounts gained from larger institutions and customer funds being held
short-term due to low rates of interest and stock market volatility.
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
$763,000 in the first quarter of the year. An additional $10,000,000 was
borrowed in during the quarter at an average rate of 4.62%. Two $5,000,000
borrowings make up the total and each was a fixed rate obligation with a five
year term. Proceeds were used to fund longer-term real estate loans.
As part of the approval process for the new branches acquisition, F & M Bank
Corp. was required to contribute $6,000,000 million into Farmers & Merchants
Bank as an equity contribution. To fund this contribution, F & M Bank Corp.
borrowed the $4,000,000 million from SunTrust Bank. The loan is amortized over a
three year period with quarterly payments of $333,333. The loan is
collateralized by $6,000,000 million of marketable securities and carries an
interest rate of LIBOR + 1.10%. On September 30, 2001, the Company entered into
a rate swap agreement with SunTrust Robinson Humphrey, which fixed the rate at
4.60% for the remaining term of the obligation.
Capital
The Company maintains a strong capital base to expand facilities, promote
public confidence, support operations and grow at a manageable level. As of
March 31, 2001, the Company's total risk based capital and total capital to
total average assets ratios were 14.32% and 8.89%, respectively. Both ratios are
in excess of regulatory minimums and exceed the ratios of the Company's peers.
Earnings have been sufficient to allow an increase in dividends in 2002 and
management has no reason to believe this increased level of dividends will not
continue.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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, deposits obtained through the adjustment of
interest rates and purchases 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
As a result of the branch acquisitions in 2001 and continued growth in
deposits in 2002, the liquidity position at March 31, 2002 remains 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 2002, 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 five to ten year periods 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 reviews its
interest rate gap periodically and makes adjustments as needed.
There are no off-balance-sheet items that will impair future liquidity.
Table II (page 15) contains an analysis, which shows the repricing
opportunities of earning assets and interest bearing liabilities as of March 31,
2002.
As of March 31, 2002, the Company had a cumulative Gap Rate Sensitivity Ratio
of (9.57%) for the one year repricing period. This generally indicates that
earnings would improve in a declining interest rate environment as liabilities
reprice more quickly than assets. Conversely, earnings would probably decrease
in periods during which interest rates are increasing. However, in actual
practice, this may not be the case as deposits may not reprice concurrently with
changes in rates within the general economy. Management constantly monitors the
Company's interest rate risk and has decided the current position is acceptable
for a well-capitalized community bank operating in a rural environment.
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 were authorized to be made by the Company from time to
time in the open market or privately negotiated transactions during the year as,
in the opinion of management, market conditions warrant. The repurchased shares
are accounted for as retired stock.
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 1
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
-------------------------- --------------------------------
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
Interest Income
Loans1 $181,472 $ 3,533 7.90% $ 156,366 $3,381 8.77%
Federal funds sold 7,806 32 1.66 11,366 149 5.32
Interest bearing
deposits 18,035 165 3.71 1,323 15 4.60
Investments
Taxable 3 37,526 499 5.32 31,090 507 6.52
Partially taxable 2,3 10,747 130 4.84 10,315 153 5.93
------- ------- ----- -------- ------ -----
Total Earning Assets 255,586 4,359 6.92 210,460 4,205 8.10
------- ------ ---- -------- ----- ------
Interest Expense
Demand deposits 30,312 74 .99 23,931 129 2.19
Savings 36,889 181 1.99 28,316 236 3.38
Time deposits 116,442 1,367 4.76 97,987 1,464 6.06
Short-term debt 9,139 29 1.29 8,940 115 5.22
Long-term debt 24,945 287 4.67 16,574 217 5.31
------ ------ ---- ------ ----- ------
Total Interest
Bearing
Liabilities $217,727 1,938 3.61 $ 175,748 2,161 4.99
======== ------ ---- ======== ----- ------
Net Interest Margin 1 $ 2,421 $2,044
====== =====
Net Yield on Interest
Earning Assets 3.84% 3.94%
==== ======
1 Interest income on loans includes loan fees
2 An incremental income tax rate of 34% was used to calculate the tax
equivalent income on nontaxable and partially taxable investments and
loans.
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
MARCH 31, 2002
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $27,000 $ 2,265 $ 11,242 $ 675 $ $ 41,182
Installment 200 891 21,641 1,268 24,000
Real estate 12,709 11,764 58,312 36,114 118,899
Credit cards 1,282 1,282
Interest bearing
bank deposits 20,245 1,219 21,464
Investment securities 11,648 28,383 2,647 15,552 58,230
Federal funds sold 2,357 2,357
------ ------ ------- ------- ----- -------
Total 63,793 27,787 119,578 40,704 15,552 267,414
------ ------ ------- ------- ------ -------
Sources of Funds
Interest bearing
demand 9,349 17,577 4,114 31,040
Savings deposits 7,916 23,749 7,917 39,582
Time deposits
$100,000 and over 4,851 7,516 3,976 16,343
Other time deposits 19,260 51,199 28,510 98,969
Short-term borrowings 9,263 9,263
Long-term debt 1,810 6,002 21,431 643 29,886
------ ------ ------- ------- ----- -------
Total 35,184 81,982 95,243 12,674 225,083
------ ------ ------- ------- ----- -------
Discrete Gap 28,609 (54,195) 24,335 28,030 15,552 42,331
Cumulative Gap 28,609 (25,586) (1,251) 26,779 42,331
Ratio of Cumulative Gap
to Total Earning
Assets 10.70% (9.57)% (.47)% 10.01% 15.83%
Table II reflects the earlier of the maturity or repricing dates for
various assets and liabilities at March 31, 2002. In preparing the above table
no assumptions are made with respect to loan prepayments. 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 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 - 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 1998 Form 10-KSB filed March 31, 1999.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter
ending March 31, 2002.
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.
/s/ JULIAN D. FISHER
-----------------------------------
Julian D. Fisher
President and Chief Executive Officer
/s/NEIL W. HAYSLETT
---------------------------------
Neil W. Hayslett
Vice President and Chief Financial
Officer
Date: May 14, 2002
------------------