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, 2002
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 September 30, 2002
- ------------------------------------- -----------------------------------
Common Stock, par value - $5 2,423,678 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, 2002 and 2001 2
Consolidated Statements of Income - Three Months
Ended September 30, 2002 and 2001 3
Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 5
Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibit and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 21
CERTIFICATION OF CHIEF FINANCIAL OFFICER 22
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,
2002 2001
---------- ------
Interest Income
Interest and fees on loans $11,030 $10,565
Interest on federal funds sold 76 658
Interest on interest bearing deposits 307 234
Interest and dividends on investment securities 1,895 1,767
------ ------
Total Interest Income 13,308 13,224
------ ------
Interest Expense
Interest on demand deposits 244 367
Interest on savings accounts 548 696
Interest on time deposits 3,760 4,810
------ ------
Total interest on deposits 4,552 5,873
Interest on short-term debt 76 264
Interest on long-term debt 1,006 814
------ ------
Total Interest Expense 5,634 6,951
------ ------
Net Interest Income 7,674 6,273
Provision for Loan Losses 281 137
------ ------
Net Interest Income after Provision for Loan Losses 7,393 6,136
------ ------
Noninterest Income
Service charges 536 485
Other 541 432
Security gains 494 1,254
------ ------
Total Noninterest Income 1,571 2,171
------ ------
Noninterest Expense
Salaries 2,066 1,835
Employee benefits 664 523
Occupancy expense 236 227
Equipment expense 261 234
Intangibles amortization 134 200
Other 1,390 1,175
------ ------
Total Noninterest Expense 4,751 4,194
------ ------
Income before Income Taxes 4,213 4,113
Provision for Income Tax 1,255 1,305
------ ------
Net Income $ 2,958 $ 2,808
====== ======
Per Share Data
Net Income $ 1.22 $ 1.15
======= =======
Cash Dividends $ .49 $ .47
======= =======
Equivalent Shares Outstanding 2,430,161 2,431,417
========= =========
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,
2002 2001
---------- --------
Interest Income
Interest and fees on loans $ 3,800 $ 3,613
Interest on federal funds sold 29 172
Interest on interest bearing deposits 27 167
Interest and dividends on investment securities 643 552
------ ------
Total Interest Income 4,499 4,504
------ ------
Interest Expense
Interest on demand deposits 88 105
Interest on savings accounts 181 213
Interest on time deposits 1,132 1,654
------ ------
Total interest on deposits 1,401 1,972
Interest on short-term debt 20 66
Interest on long-term debt 382 298
------ ------
Total Interest Expense 1,803 2,336
------ ------
Net Interest Income 2,696 2,168
Provision for Loan Losses 107 68
------ ------
Net Interest Income after Provision for Loan Losses 2,589 2,100
------ ------
Noninterest Income
Service charges 176 169
Other 168 135
Security gains (losses) 42 (11)
------ ------
Total Noninterest Income 386 293
------ ------
Noninterest Expense
Salaries 702 620
Employee benefits 182 175
Occupancy expense 80 82
Equipment expense 91 75
Intangible amortization 45 86
Other 464 397
------ ------
Total Noninterest Expense 1,564 1,435
------ ------
Income before Income Taxes 1,411 958
Provision for Income Tax 403 307
------ ------
Net Income $ 1,008 $ 651
====== ======
Per Share Data
Net Income $ .42 $ .27
======= =======
Cash Dividends $ .17 $ .16
======= =======
Equivalent Shares Outstanding 2,423,834 2,430,628
========= =========
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 2002 2001
------------ ------------
Cash and due from banks $ 4,551 $ 5,364
Fed funds sold 8,275
Interest bearing deposits in banks 4,627 14,199
Securities held to maturity (note 2) 1,878 1,883
Securities available for sale (note 2) 48,713 58,252
Other investments 4,865 3,852
Loans, net of unearned discount (note 3) 204,150 176,625
Less allowance for loan losses (note 4) (1,451) (1,288)
------- --------
Net Loans 202,699 175,337
Bank premises and equipment 4,396 4,412
Interest receivable 1,556 1,541
Other real estate 671 567
Deposit intangible (note 5) 2,396 2,529
Goodwill (note 5) 2,639 2,639
Bank owned life insurance (note 6) 2,264
Other assets 2,429 2,098
------ -------
Total Assets $291,959 $272,673
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $26,730 $ 25,741
Interest bearing
Demand 32,009 29,735
Savings deposits 40,527 34,787
Time deposits 117,031 118,016
------- -------
Total Deposits 216,297 208,279
Short-term debt 7,068 10,696
Long-term debt 34,301 20,983
Accrued expenses and other liabilities 5,335 4,118
------ -------
Total Liabilities 263,001 244,076
------- -------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 2,423,678 and
2,438,563 issued and outstanding,
in 2002 and 2001, respectively 12,118 12,193
Surplus 303 525
Retained earnings 17,256 15,488
Accumulated other comprehensive income (loss) (719) 391
------- -------
Total Stockholders' Equity 28,958 28,597
------ -------
Total Liabilities and Stockholders' Equity $291,959 $272,673
======= =======
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,
2002 2001
---------- -------
Cash Flows from Operating Activities:
Net income $ 2,958 $ 2,808
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 257 220
Amortization of security premiums 92 23
Gain on security transactions (494) (1,254)
Provision for loan losses 281 136
Increase in interest receivable (15) (72)
Decrease in other assets 75 218
Intangible amortization 133 213
Increase in accrued expenses 604 728
Gain on sale of land (20)
Income from life insurance investment (92)
Losses on limited partnership investments 209 294
------ ------
Total Adjustments 1,050 486
------ ------
Net Cash Provided by Operating Activities 4,008 3,294
------ ------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 3,538 2,945
Proceeds from maturity of investments available
for sale 25,181 19,697
Proceeds from maturity of investments held
to maturity 20,100
Purchase of investments available for sale (20,923) (39,533)
Purchase of investments held to maturity (19,990)
Net decrease (increase) in interest bearing
bank deposits 9,572 (17,912)
Net change in federal funds sold (8,275) 120
Net increase in loans (27,719) (20,293)
Sale of other real estate 139
Expenditures on other real estate (27)
Purchase of goodwill and deposit intangible (5,470)
Purchase of life insurance (2,172)
Purchase of property and equipment (241) (1,017)
------- ------
Net Cash Used in Investing Activities (21,066) (61,214)
-------- -------
Cash Flows from Financing Activities:
Net change in demand and savings deposits 9,003 20,139
Net change in time deposits (985) 31,682
Net change in short-term borrowings (3,628) 132
Repurchase of common stock (297) (80)
Repayment of long-term borrowings (4,682) (3,128)
Proceeds of long-term borrowings 18,000 11,000
Payment of dividends (1,166) (1,119)
------- ------
Net Cash Provided by Financing Activities 16,245 58,626
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents (813) 706
Cash and Cash Equivalents, Beginning of Period 5,364 3,808
------ ------
Cash and Cash Equivalents, End of Period $ 4,551 $ 4,514
====== ======
Noncash Transaction
In 2002, the Company made an additional investment of $750,000 in low income
housing. The cost of which was financed.
Supplemental Disclosure
Cash paid for:
Interest expense $ 5,800 $ 6,858
Income taxes 800 777
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,
2002 2001
---------- ---------
Balance, beginning of period $28,597 $27,198
Net income for period 2,958 2,808
Net change in unrealized appreciation on securities
available for sale, net of taxes (1,110) (800)
------- ------
Total comprehensive income 1,848 2,008
Repurchase of common stock (297) (80)
Dividends declared (1,190) (1,143)
------- ------
Balance, end of period $28,958 $27,983
====== ======
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,
2002, and the results of operations for the three and nine month
periods ended September 30, 2002 and 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.
Critical Accounting Policy
The allowance for loan losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two
basic principles of accounting: (i) SFAS 5, Accounting for
Contingencies, which requires that losses be accrued when they are
probable of occurring and estimatable and (ii) SFAS 114, Accounting
by Creditors for Impairment of a Loan, which requires that losses
be accrued based on the differences between the value of
collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance. See
Management's Discussion and Analysis for a more complete
description of the allowance for loan losses.
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, 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 $ 110 $ 111 $ 114
Other debt securities 1,768 1,791 1,772 1,830
------ ------- ------- ------
Total $ 1,878 $ 1,901 $ 1,883 $ 1,944
====== ======= ======= ======
2002 2001
----------------------- -----------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $24,628 $ 24,140 $ 29,428 $29,097
Equity securities 7,967 9,920 10,500 10,683
Mortgage-backed
securities 5,689 5,656 7,922 7,853
Other debt securities 10,429 10,023 10,402 10,012
------ ------- ------- ------
Total $48,713 $ 49,739 $ 58,252 $57,645
====== ======= ======= ======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
September 30,December 31,
2002 2001
---------- --------
Real Estate
Construction $10,350 $ 5,521
Mortgage 120,219 105,305
Commercial and agricultural 48,562 41,256
Installment 23,620 23,106
Credit cards 1,348 1,348
Other 51 89
------ -------
Total $204,150 $176,625
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
periods ended September 30, 2002 and 2001 follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Balance, beginning of period $1,288 $1,108 $1,424 $1,247
Provisions charged to
operating expenses 281 137 107 70
Other adjustments 83
Net charge-offs
Loan recoveries 75 41 21 6
Loan charge-offs (193) (91) (101) (45)
------ ----- ------ -----
Total Net Charge-Offs * (118) (50) (80) (39)
------ ----- ------ -----
Balance, End of Period $1,451 $1,278 $1,451 $1,278
===== ===== ===== =====
*Components of Net Charge-Offs
Real Estate (31) 1 (31)
Commercial (1) (4) (1) (4)
Installment (86) (47) (48) (35)
------ ----- ------ -----
Total $ (118) $ (50) $ (80) $ (39)
====== ===== ====== =====
9
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 required
by 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 has 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 amortization. As of September 30, 2002,
there is no impairment to goodwill. The CDI will continue to be amortized using
the straight-line method.
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 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 are 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.
10
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 increased $150,000, primarily due to a 31 basis
point increase in the net interest margin. Yields on earning assets have
declined 80 basis points compared to 2001 while rates paid on interest bearing
liabilities have fallen 129 basis points for the same period. Much of the
decrease in the cost of funds resulted from maturing time deposits which
repriced at much lower rates. Overall the cost of time deposits has decreased
from 5.77% in 2001 to 4.36% in 2002. Rates on long-term debt has 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 2002 and 2001 can be found in Table I on page 16.
Noninterest income, exclusive of gains on the sale of securities and real
estate, increased $179,000 in 2002. The increase is a result of increases
in customer service charges, other account related fees, insurance
commissions and earnings on bank owned life insurance (BOLI).
Noninterest expense increased $557,000 in 2002. This increase includes a
full nine months of expenses related to the two Shenandoah County offices
acquired in March 2001, compared to seven months of expenses in 2001. The
Company also experienced a forty percent increase in health insurance costs;
higher legal and professional fees related to technology and marketing
consultants, and higher franchise tax and examination expenses resulting
from the growth in the
balance sheet. Noninterest expense as an annualized percentage
of average assets increased
slightly to 2.29% from 2.24% in the prior year. Operating costs continue to
compare very favorably to the peer group, as identified in the Carson Medlin
Company's Southeastern Independent Bank Review (SIBR). Peer group noninterest
expenses average approximately 3.20% of average assets. The Company's operating
costs have always compared favorably to the peer group due to an excellent asset
to employee ratio and below average facilities costs.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quarter Ending September 30
The Company's net income increased 55% to $1.008 million compared to the
third quarter of 2001. After adjusting to exclude nonrecurring securities gains,
earnings and earnings per share increased 48% to $973,000 and $.40,
respectively. Earnings growth for the quarter was driven by a 49 basis point
expansion in the net interest margin which now stands at 4.07%. Deposit
repricing at significantly lower rates has continued throughout the period,
driving the overall cost of funds down 126 basis points. The margin has also
benefited from the Company's more efficient mix of earning assets. Average loans
have increased $31 million while average balances of lower yielding federal
funds and interest bearing bank deposits have declined $21 million. As a result
of these changes, net interest income for the quarter rose 25%.
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, 2002, the market value of all securities available for sale was
$1,026,000 less than their amortized cost.
The value of the Bank's bond portfolio exceeds carrying cost by $927,000.
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 $1,953,000 due in large part to the stock
market volatility and economic uncertainty that has continued following the
September 11, 2001 terrorist attacks. The Company continues to hold equity
investments in a number of large, regional financial institutions, a diversified
portfolio of REITs 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.
12
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 2002 resulted in a $27,525,000 increase in the loan portfolio.
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 $2,544,000 at September 30,
2002 compared to $1,776,000 December 31, 2001. 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, 2002, the Company holds two pieces of real
estate which were acquired through foreclosure. Both pieces of property are
under sales contracts, with closing expected during the fourth quarter.
The following is a summary of information pertaining to risk elements
and impaired loans for the periods ended September 30, 2002 and December
31, 2001.
September 30, December 31,
2002 2002
Nonaccrual loans $ 0 $ 0
Loans past due 90 days or
more and still accruing
interest 1,865 1,097
Restructured loans 679 679
-------- --------
$ 2,544 $ 1,776
======== ========
The increase in 90 days past due includes a credit of $521,000 that moved
to this category in 2002. On October 2, 2002, the borrowers paid off the
principal and interest in full.
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 volume of
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 loans with
identified potential losses, and pools of loans by type (commercial,
residential, consumer, credit cards). Loans with identified potential losses
include examiner and bank classified loans. Classified relationships in excess
of $100,000 are reviewed individually for impairment under FAS 114. A variety of
factors are taken into account when reviewing these credits; including borrower
cash flow, payment history, fair value of collateral, company management,
industry and economic factors. Loan relationships that are determined to have no
impairment are placed back into the appropriate loan pool and reviewed under FAS
5.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan pools are further segmented into watch list, past due over 90 days and
all other. Watch list loans include loans that are 60 days past due, and may
include restructured loans, borrowers that are highly leveraged, loans that have
been upgraded from classified or loans that contain policy exceptions (term,
collateral coverage, etc.). Loss estimates on these loans reflect the increased
risk associated with these assets due to any of the above factors. The past due
pools contain loans that are currently 90 days or more past due. Loss rates
assigned reflect the fact that these loans bear a significant risk of
charge-off. Loss rates vary by loan type to reflect the likelihood that
collateral values will offset a portion of the anticipated losses.
The remainder of the portfolio falls into pools by type of homogenous loans
that do not exhibit any of the above described weaknesses. Loss rates are
assigned based on historical loss rates over the prior 5 years. A multiplier has
been applied to these loss rates to reflect the time for loans to season within
the portfolio and the inherent imprecision of these estimates.
All potential losses are evaluated within a range of low to high.
An unallocated reserve has been established
to reflect other unidentified losses within the portfolio. It helps to
offset the increased risk of loss associated with fluctuations in past due
trends, changes in the local and national economies, and other unusual events
(ie. Avain flu). The Board then 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 $1,451,000 at September 30, 2002 is equal
to .71% of total loans. This compares to an allowance of $1,288,000 (.73%) at
December 31, 2001. Although management has increased its monthly funding of the
reserve to $35,000, due to the rapid growth in the portfolio and because of the
weakening of the local and national economies, the overall level of the
allowance is well below the peer group average of 1.32%. 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 of 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
fairly states the estimated losses in the current portfolio.
Loan losses, net of recoveries, total $118,000 through first three quarters
of 2002. This is equivalent to an annualized loss rate of .08%. 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.
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 $8,018,000 since
December 31, 2001. 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 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, 2002, balances in repo
accounts totaled $7,068,000 and are included as short-term debt on the balance
sheet.
14
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 $15 million in 2002 at an average rate of 4.54% and an average
repayment period of seven years. Scheduled repayments of this debt totaled
$1,682,000 through September 30, 2002.
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 marketable securities and carries an interest rate of LIBOR +
1.10%. In September 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. In September 2002, the Company borrowed an additional $3
million from SunTrust Bank. This loan carries an interest rate of LIBOR + 1.10%
and is variable. Payments of interest only will be due quarterly for seven
calendar quarters, followed by payments of $230,769 plus interest for a period
of thirteen quarters. Proceeds of this loan were used to provide an additional
capital contribution to the Bank and to pay off an intercompany loan.
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, 2002, the Company's total risk based
capital and total capital to total assets ratios were 14.36% and 9.92%,
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 the third quarter dividend in 2002 of 6.25%.
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 have been sufficient to fund most of the
increase in loans.
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.
15
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 2002, a total of 41,284 shares have been repurchased. Of this amount 14,885
shares have been repurchased in 2002.
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).
16
Table I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans1 $193,256 $ 11,079 7.66% $ 164,667 $10,599 8.58%
Federal funds
sold 6,097 76 1.67% 20,552 658 4.27%
Bank deposits 11,965 306 3.42% 6,450 233 4.59%
Investments
Taxable 3 41,717 1,544 4.93% 31,391 1,449 6.15%
Partially
taxable 2,3 10,362 445 5.73% 10,291 418 5.42%
------ ---- ----- ------ --- -----
Total Earning
Assets 263,397 13,450 6.83% 233,351 13,357 7.63%
------- --------- ------ -------- ------ -------
Interest Expense
Demand deposits 31,902 244 1.02% 26,737 367 1.83%
Savings 38,770 548 1.89% 31,472 696 2.95%
Time deposits 115,351 3,760 4.36% 111,090 4,810 5.77%
Other short-
term debt 8,661 76 1.17% 8,793 264 4.00%
Long-term debt 28,721 1,006 4.68% 20,826 814 5.21%
------ ----- ----- ------ --- -----
Total Interest
Bearing
Liabilities 223,405 5,634 3.37% 198,918 6,951 4.66%
------- -------- ------- ------- ----- -------
Net Interest
Margin 1 $ 7,816 $ 6,406
===== =====
Net Yield on
Interest
Earning Assets 1 3.97% 3.66%
===== =====
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 (Continued)
Table I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans1 $202,747 $ 3,824 7.48% $ 171,390 $3,625 8.46%
Federal funds
sold 6,878 29 1.67% 19,830 172 3.47%
Bank deposits 5,467 26 1.89% 13,806 166 4.81%
Investments
Taxable 3 43,314 515 4.76% 31,093 449 5.78%
Partially
taxable 2,3 10,053 166 6.60% 10,802 128 4.74%
------ ---- ----- ------ --- -----
Total Earning
Assets 268,459 4,560 6.74% 246,921 4,540 7.35%
------- -------- ------ --------- ----- -------
Interest Expense
Demand deposits 33,352 88 1.04 28,034 105 1.50%
Savings 39,977 181 1.80 33,232 213 2.56%
Time deposits 114,403 1,132 3.93 117,844 1,654 5.61%
Other short-
term debt 8,374 20 1.09 8,944 66 2.95%
Long-term debt 32,304 382 4.69% 24,278 298 4.91%
------ ---- ----- ------ --- -----
Total Interest
Bearing
Liabilities 228,410 1,803 3.13% 212,332 2,336 4.39%
------- ------- ------ ------- ----- -------
Net Interest
Margin 1 $ 2,757 $ 2,204
===== =====
Net Yield on
Interest
Earning Assets 1 4.07% 3.58%
===== =====
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.
17
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
September 30, 2002
(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 $30,835 $1,666 $15,628 $1,364 $ $49,493
Installment 193 1,023 22,386 2,449 26,051
Real estate 13,983 8,085 67,980 37,210 127,258
Credit cards 1,348 1,348
Interest bearing
bank deposits 4,627 4,627
Federal funds sold 8,275 8,275
Securities 1,057 21,339 19,666 562 12,832 55,456
----- ------ ------ ----- ------ ------
Total 60,318 32,113 125,660 41,585 12,832 272,508
------ ------ ------- ------ ------ -------
Sources of Funds
Interest bearing
demand deposits 6,402 19,205 6,402 32,009
Savings deposits 11,602 23,150 5,775 40,527
Certificates of
deposit
$100,000
and over 4,242 7,688 7,490 19,420
Other certificates
of deposit 23,380 39,559 34,672 97,611
Short-term
borrowings 7,068 7,068
Long-term
borrowings 1,989 6,539 24,094 1,679 34,301
------ ----- ------ ----- ------- ------
Total 36,679 71,790 108,611 13,856 230,936
------ ------ ------- ------ ------ -------
Discrete Gap 23,639 (39,677) 17,049 27,729 12,832 41,572
Cumulative Gap 23,639 (16,038) 1,011 28,740 41,572
Ratio of Cumulative
Gap to Total 8.67% (5.89)% .37% 10.54% 15.26%
Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 2002. 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.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as F & M Bank Corp. that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are now required to include in those reports
certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws. Under
rules adopted by the Securities and Exchange Commission effective August 29,
2002, these disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports it files or submits under the Act, is
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to F & M Bank Corp. is made known to our principal
executive officers and principal finance officer on a regular basis, in
particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the President and the Chief Financial
Officer, and the
other executive officers of F & M Bank Corp. and its subsidiaries to identify
any new transactions, events, trends, contingencies or other matters that may be
material to the Company's operations. As required, we will evaluate the
effectiveness of these disclosure controls and procedures on a quarterly
basis, and most recently did so as of November 8, 2002, a date
within 90 days prior to the filing of this
quarterly report. Based on this evaluation, the management of F & M Bank Corp.
including the Chief Financial Officer, concluded that such disclosure controls
and procedures were operating effectively as designed as of the date of such
evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of F & M Bank Corp. pertaining to its financial reporting and
control of its assets or in other factors that could significantly affect these
controls.
19
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 Restated Articles of Incorporation of F & M Bank Corp.
are incorporated by reference to Exhibits to F & M Bank
Corp.'s 2001 Form 10K filed March 1, 2002.
3 ii Amended and Restated Bylaws of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank
Corp.'s Form 10K filed March 1, 2002.
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, 2002.
20
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
November 13, 2002
Certification of the CEO and CFO under Section 906 of the Sarbanes-Oxley
Act of 2002 is attached as correspondence.
21
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Julian D. Fisher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F & M Bank
Corp;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ JULIAN D. FISHER
----------------- ------------------------
Julian D. Fisher
President and Chief Executive
Officer
22
CERTIFICATION
CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Neil W. Hayslett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F & M Bank
Corp;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ NEIL W. HAYSLETT
------------------------
Neil W. Hayslett
Vice President & Chief
Financial Officer