FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2002 Commission file number: 0-13273
F & M Bank Corp.
(Exact name of registrant as specified in its charter)
Virginia 54-1280811
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P. O. Box 1111, Timberville, Virginia 22853
(Address of principal executive offices) (Zip Code)
(540) 896-8941
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par value per share
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 requirements for the past 90 days. Yes _X
No
Check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes No X
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Registrant's revenues for its most recent fiscal year: $19,043,772
The registrant's Common Stock is traded Over-the-Counter under the symbol
FMBM. The aggregate market value of the 2,161,107 shares of Common Stock of the
registrant issued and outstanding held by nonaffiliates on March 4, 2003 was
approximately $41,925,476 based on the closing sales price of $19.40 per share
on that date. For purposes of this calculation, the term "affiliate" refers to
all directors and executive officers of the registrant.
As of the close of business on March 4, 2003, there were 2,423,678 shares of
the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held on May 10,
2003 (the "Proxy Statement").
2
F & M Bank Corp.
Index
Forward-Looking Statements 2
Form 10-K Cross Reference Sheet 3
F & M Bank Corp. 4
Report Format 4
Selected Financial Data 5
Market for Common Equity and Related Stockholder Matters 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-22
Consolidated Financial Statements 23-26
Notes to Consolidated Financial Statements 27-42
Report of Independent Auditors 43
Other Material Required by Form 10-K 44-48
Description of Business
Properties
Exhibits, Financial Statements, and Reports on Form 8-K
Signatures
Forward-Looking Statements
F & M Bank Corp. makes forward-looking statements in the Management's Discussion
and Analysis of Financial Condition and Results of Operations and in other
portions of this Annual Report on Form 10-K that are subject to risks and
uncertainties. These forward-looking statements include: estimates of risks and
of future costs and benefits; assessments of probable loan losses and statements
of goals and expectations. These forward-looking statements are subject to
significant uncertainties because they are based upon management's estimates and
projections of future interest rates and other economic conditions; future laws
and regulations; and a variety of other matters. As a result of these
uncertainties, actual results may be materially different from the results
indicated by these forward-looking statements. In addition, the Company's past
results of operations do not necessarily indicate its future results.
3
F & M Bank Corp.
Form 10-K Cross Reference Sheet Material Incorporated by Reference
The following table shows the location in this Annual Report on Form 10-K or in
the Proxy Statement of the information, which requires disclosure in SEC Form
10-K. As indicated below, information has been incorporated by reference in the
Report from the Proxy Statement. Other portions of the Proxy Statement are not
included in this Report. This Report is not part of the Proxy Statement. Page
references are in this report unless indicated otherwise.
Item of Form 10-K Location
PART I
Item 1 Business "Forward-Looking Statements"
on page 2, "F&M Bank Corp."
and "Report Format" on page
4 and "Business on pages 44
to 45.
Item 2 Properties "Properties" on page 46.
Item 3 Legal Proceedings Note 17 "Litigation" on page
37.
Item 4 Submission of Matters No matters have been submitted
to a Vote of Security to a vote of security holders
Holders during the fourth quarter
of 2002.
PART II
Item 5 Market for "Market for Registrant's
Registrant's Common Common Equity and Related
Equity and Related Stockholder Matters" on
Stockholder Matters page 6.
Item 6 Selected Financial "Selected Financial Data"
Data on page 5.
Item 7 Management's "Management's Discussion and
Discussion and Analysis of Financial
Analysis of Financial Condition and Results
Condition and Results of Operations" on
of Operations pages 7-22.
Item 7a Quantitative and "Forward-Looking Statements"
Qualitative Disclosures on page 2 and "Market
about Market Risk Risk Management" on page
20-21.
Item 8 Financial Statements Pages 23 to 42.
and Supplementary
Information
Item 9 Changes in and There were no changes in or
Disagreements with disagreements with accountants
Accountants on on accounting and financial
Accounting and disclosure during the last
Financial Disclosure two fiscal years.
PART III
Item 10 Directors and The material labeled "Section
Executive Officers of 16(a) Beneficial Ownership
the Registrant Reporting Compliance" and
"Information Concerning Directors and
Nominees" in the Proxy Statement is
incorporated in this Report by
reference.
Item 11 Executive Compensation The material labeled
"Summary Compensation" and
"Salary Committee Report on
Executive Compensation" in
the Proxy Statement is
incorporated in this Report by
reference.
Item 12 Security Ownership of The material labeled
Certain Beneficial "Stock Ownership of
Owners and Management Directors and Executive
Officers" in the Proxy Statement is
incorporated in this Report by
reference.
Item 13 Certain Relationships The material labeled "
and Related Indebtedness and Other
Transactions Transactions" in the Proxy
Statement is incorporated in this
Report by reference.
Item 14 Controls and Procedures "Other Material Required in
Form 10-K" on page 44.
PART IV
Item 15 Exhibits, Financial "Exhibits, Financial
Statement Schedules and Statements, and Reports
Reports on Form 8-K on Form 8-K" on page 47.
Signatures "Signatures" on page 48.
4
F & M Bank Corp.
F & M Bank Corp. is the holding company for Farmers & Merchants Bank, the oldest
banking business native to Rockingham County, Virginia. Operating as an
independent community bank, Farmers & Merchants Bank was originally organized as
Farmers & Merchants Bank of Timberville in 1908. The bank provides a wide range
of financial services to individuals and businesses through 8 offices located in
Rockingham and Shenandoah Counties.
Report Format
The format of this report was changed in 2001 in order to increase information
distributed to shareholders and to reduce expenses related to preparing and
distributing annual financial information. Prior to that time, F & M Bank Corp.
provided an annual report to shareholders along with the annual proxy materials,
and also prepared and filed a separate Annual Report on Form 10-K under the
rules of the United States Securities and Exchange Commission ("SEC"). Beginning
in 2001 and for subsequent years, we are distributing the Form 10-K report to
shareholders with the annual proxy materials for the annual meeting. This report
includes the entire Form 10-K, other than exhibits, as filed with the SEC.
Please see page 47 for information regarding how to obtain copies of exhibits
and additional copies of the Form 10-K.
The SEC has not approved or disapproved this Report or passed upon its accuracy
or adequacy.
5
Five Year Summary of Selected Financial Data
(Dollars in thousands, except per share data)
2002 2001 2000 1999 1998
Income Statement Data:
Interest and Dividend
Income $ 17,846 $ 17,681 $ 15,509 $ 14,321 $ 14,147
Interest Expense 7,390 9,494 7,411 6,475 6,931
-------- ------- ------- ------- -------
Net Interest Income 10,456 8,187 8,098 7,846 7,216
Provision for Loan
Losses 387 204 123 140 110
------- ------ ----- ------ -----
Net Interest Income
after Provision
for Loan Losses 10,069 7,983 7,975 7,706 7,106
Noninterest Income 1,380 1,158 1,038 916 616
Securities Gains
(Losses) (182) 1,252 770 1,179 1,249
Noninterest Expenses 6,448 5,728 4,653 4,313 3,880
-------- ------- ------- ------- -------
Income before Income
Taxes 4,819 4,665 5,130 5,488 5,091
Income Tax Expense 1,315 1,435 1,486 1,682 1,590
-------- ------- ------- ------- -------
Net Income $ 3,504 $ 3,230 $ 3,644 $ 3,806 $ 3,501
======= ======= ======= ======= =======
Per Share Data:1
Net Income $ 1.44 $ 1.33 $ 1.49 $ 1.55 $ 1.43
Dividends Declared .66 .63 .59 .52 .73
Book Value 12.19 11.74 11.18 10.30 9.80
Balance Sheet Data:
Assets $303,149 $272,673 $208,818 $195,338 $191,495
Loans 201,980 176,625 152,035 140,318 132,301
Securities 69,602 63,987 45,323 44,422 46,357
Deposits 228,284 208,279 152,354 139,507 135,139
Shareholders' Equity 29,541 28,597 27,198 25,286 24,078
Average Shares
Outstanding 2,429 2,431 2,446 2,454 2,456
Financial Ratios:
Return on Average
Assets 2 1.21% 1.26% 1.76% 1.96% 1.94%
Return on Average
Equity 2 12.12% 11.47% 13.88% 15.47% 15.00%
Net Interest Margin 4.03% 3.52% 4.32% 4.52% 4.39%
Efficiency Ratio 3 51.28% 56.93% 50.93% 49.23% 51.41%
Dividend Payout Ratio 45.72% 47.45% 39.53% 33.55% 51.22%
Capital and Credit Quality Ratios:
Average Equity to
Average Assets 2 9.98% 11.02% 12.70% 12.65% 12.97%
Allowance for Loan
Losses to Loans .73% .73% .73% .78% .88%
Nonperforming Assets
to Total Assets .86% .40% .52% .98% 1.08%
Net Charge-offs to
Total Loans .10% .06% .07% .16% .05%
1 Reflects adjustments for three for one stock split declared in 1998.
2 Ratios are primarily based on daily average balances.
3 The Efficiency Ratio equals noninterest expenses divided by the sum of tax
equivalent net interest income and noninterest income. Noninterest
expenses exclude intangible asset amortization. Noninterest income
excludes gains on sales of securities.
6
Market for Common Equity and Related Stockholder Matters
Stock Listing
The Company's Common Stock trades under the symbol "FMBM" on the OTC Bulletin
Board. The bid and asked price of the Company's stock is not published in any
newspaper. Although several firms in both Harrisonburg and Richmond, Virginia
occasionally take positions in the Company stock, they typically only match
buyers and sellers.
Transfer Agent and Registrar
Farmers & Merchants Bank
205 South Main Street
P.O. Box 1111
Timberville, VA 22853
Recent Stock Prices and Dividends
Dividends to shareholders totaled $1,601,823 and $1,532,752 in 2002 and 2001,
respectively. Regular quarterly dividends have been declared for forty
consecutive quarters. Dividends per share increased 4.76% in 2002.
The ratio of dividends per share to net income per share was 45.72% in 2002,
compared to 47.45% in 2001. The decision as to timing, amount and payment of
dividends is at the discretion of the Company's Board of Directors. The payment
of dividends depends on the earnings of the Company and its subsidiaries, the
financial condition of the Company and other factors including capital adequacy,
regulatory requirements, general economic conditions and shareholder
returns.
In April 2000, the Board of Directors approved a stock repurchase plan, which
allows the repurchase of up to 50,000 shares of its outstanding common stock.
Shares are purchased either through broker-arranged transactions or directly
from the shareholder at the discretion of management. The decision to purchase
shares is based on factors including market conditions for the stock and the
availability of cash. Shares repurchased totaled 14,885, 3,810 and 22,589 in
2002, 2001 and 2000, respectively.
The number of common shareholders of record was approximately 1,546 as of March
4, 2003. This amount includes all shareholders, whether titled individually
or held by a brokerage firm or custodian in street name.
Quarterly Stock Information
These quotes were obtained from Davenport & Company and include the terms of
trades transacted through a broker. The terms of exchanges occurring between
individual parties may not be known to the Company.
2002 2001
- -------------------------------------------------------------------------------
Stock Price Range Per Share Stock Price Range
Per Share
Quarter Low High Dividend Low High Dividend
1st 18.50 22.00 .16 22.00 31.00 .15
2nd 18.00 20.25 .16 17.00 23.50 .16
3rd 15.70 19.20 .17 18.60 21.00 .16
4th 17.20 19.20 .17 16.05 22.50 .16
--- --
Total .66 .63
--- --
7
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion provides information about the major components of the
results of operations and financial condition, liquidity and capital resources
of F & M Bank Corp. and its subsidiaries. This discussion and analysis should be
read in conjunction with the Consolidated Financial Statements and the Notes to
the Consolidated Financial Statements presented in Item 8, Financial Statements
and Supplementary Information, of this Form 10-K.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). The financial
information contained within the statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. The
Company uses historical loss factors as one factor in determining the inherent
loss that may be present in its loan portfolio. Actual losses could differ
significantly from the historical factors that are used. The fair value of the
investment portfolio is based on period end valuations but changes daily with
the market. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of these transactions would be
the same, the timing of events that would impact these transactions could
change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable and (ii) SFAS No. 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.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Additionally, it further clarifies the criteria for the
initial recognition and measurement of intangible assets separate from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of SFAS No. 142 discontinue the amortization
of goodwill and intangible assets with indefinite lives. Instead, these assets
will be subject to at least an annual impairment review and more frequently if
certain impairment indicators are in evidence. SFAS No. 142 also requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company adopted SFAS No. 142 on January 1, 2002. Goodwill totaled $2,639,000
at December 31, 2002 and 2001. The goodwill is no longer amortized, but is
instead tested for impairment at least annually. Based on this testing, there
were no impairment charges for 2002. Application of the non-amortization
provisions of the Statement resulted in additional net income of $190,000 for
the year ended December 31, 2002.
Core deposit intangibles are amortized on a straight-line basis over ten years.
Core deposits, net of amortization, amounted to $2,254,000 and $2,530,000 at
December 31, 2002 and 2001, respectively. The Company adopted SFAS 147 on
January 1, 2002 and determined that the core deposit intangible will continue to
be amortized over the estimated useful life.
Securities Impairment
The Company evaluates each of its investments in securities, debt and equity,
under guidelines contained in SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities. These guidelines require the Company to determine
whether a decline in value, below original cost, is other than temporary. In
making its determination, management considers current market conditions,
historical trends in the individual securities, and historical trends in the
total market. Expectations are developed regarding potential returns from
dividend reinvestment and price appreciation over a reasonable holding period
(five years).
Overview
The Company's net income for 2002 increased $273,000 or 8.46% from 2001
earnings. Net income per share increased from $1.33 in 2001 to $1.45 in 2002.
Return on average equity increased in 2002 to 12.12% from 11.47% in 2001, while
the return on average assets decreased from 1.26% to 1.21%. This decrease was
due to the rate of balance sheet growth (11.18%) outpacing the increase in net
income (8.46%). The Company's operating earnings, which are net earnings
excluding gains (losses) on the sale of investments and the non-cash
amortization of acquisition intangibles, were $3,785,000 for 2002 versus
$2,587,000 in 2001, an increase of 46.31%. Core profitability improved as net
interest income increased by 27.71% and non-interest income, exclusive of
securities transactions, were up 19.21%.
See page 5 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
2002 to 2001 2001 to 2000
- -------------------------------------------------------------------------------
Prior Year Net Income Per Share $ 1.33 $ 1.49
Change from differences in:
Net interest income .93 .04
Provision for credit losses (.08) (.03)
Noninterest income, excluding securities gains .09 .05
Securities gains (.59) .20
Noninterest expenses, excluding intangibles (.31) (.32)
amortization
Amortization of intangibles .01 (.13)
Income taxes .05 .02
Shares outstanding .01 .01
- -------------------------------------------------------------------------------
Total Change .11 (.16)
- -------------------------------------------------------------------------------
Net Income Per Share $1.44 $ 1.33
- -------------------------------------------------------------------------------
9
Net Interest Income
The largest source of operating revenue for the Company is net interest income,
which is calculated as the difference between the interest earned on earning
assets and the interest expense paid on interest-bearing liabilities. The net
interest margin is net interest income expressed as a percentage of
interest-earning assets. Changes in the volume and mix of interest earning
assets and interest bearing liabilities, along with their yields and rates, have
a significant impact on the level of net interest income.
Net interest income for 2002 was $10,456,000 representing an increase of
$2,269,000 or 27.71% from 2001. A 1.11% increase in 2001 versus 2000 resulted in
total net interest income of $8,187,000. In this discussion and in the tabular
analysis of net interest income performance, entitled "Consolidated Average
Balances, Yields and Rates," (found on page 10) the interest earned on
tax-exempt loans and investment securities has been adjusted to reflect the
amount that would have been earned had these investments been subject to normal
income taxes. This is referred to as tax-equivalent net interest income.
The analysis on the next page reveals a rapidly declining net interest margin in
2001 followed by partial recovery in 2002. The decrease in NIM from 4.32% in
2000 to 3.52% 2001 is part of an industry-wide trend towards tighter margins
following eleven rate cuts by the Federal Reserve. As short-term interest rates
dropped, interest sensitive assets (primarily adjustable rate loans and federal
funds sold) repriced downward more quickly and by greater percentages than
interest bearing liabilities.
This trend began to reverse in the fourth quarter of 2001. Large amounts of time
deposits matured and repriced at current market rates. Changes in the
distribution of earning assets have also resulted in a portion of the decline in
the NIM. Prior to 2001, the Bank had a balance sheet, which was highly
leveraged. Longer-term, higher yielding assets (loans and securities)
accounted for approximately 99% of earning assets in 2000. In 2001, following
the acquisition of two branches from First Union National Bank, this percentage
dropped to 88%. Approximately $21,800,000 of excess funds were received in this
acquisition and were held primarily as overnight funds or as short-term deposits
until they could be loaned to customers in the normal course of business.
The reversal of the trend toward a lower NIM continued throughout 2002 as
$83,000,000 in time deposits matured and renewed at much lower rates. Loans also
grew rapidly during the first half of 2002, resulting in a reduction in lower
yielding short-term investments. Longer-term, higher yielding assets (loans and
securities) now account for 93.6% of earning assets. In the prior year, the
margin suffered as rate sensitive assets (adjustable rate loans and fed funds)
repriced more quickly than rate sensitive liabilities. Although assets have
continued to reprice at somewhat lower levels (down .72%), repricing
opportunities on deposits was much greater, resulting in a decline in the cost
of funds of 1.32%.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Average Balances, Yields and Rates1
2002 2001 2000
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Loans: 2
Commercial $ 46,917 $ 3,201 6.82% $ 40,093 $ 3,297 8.22% $ 37,770 $ 3,573 9.46%
Real estate 121,999 9,248 7.58 101,858 8,486 8.33 88,485 7,340 8.30
Installment 27,114 2,465 9.09 24,487 2,426 10.09 20,483 2,047 9.99
------ ------ ----- ------- ------ --- ------ ------ ----
Total Loans 196,030 14,914 7.61 166,438 14,209 8.54 146,738 12,960 8.83
Investment securities: 3
Fully taxable 43,347 2,083 4.81 31,264 1,910 6.11 31,704 1,975 6.23
Partially taxable 10,260 610 5.95 10,415 581 5.58 10,892 646 5.93
------ ------ ----- ------ ----- ---- ------ ----- ----
Total Investment
Securities 53,607 2,693 5.02 41,679 2,491 5.98 42,596 2,621 6.15
Interest bearing deposits
in banks 10,319 438 4.24 9,140 405 4.43 659 37 5.61
Federal funds sold 6,992 109 1.56 20,212 759 3.75 322 19 5.90
------ ------ ----- ------ ----- ---- ------ ----- ----
Total Earning
Assets 266,948 18,154 6.80 237,469 17,864 7.52 190,315 15,637 8.22
------ ----- ------ ---- ------ ----
Allowance for loan
losses (1,400) (1,229) (1,129)
Nonearning assets 24,147 19,427 17,578
-------- ------- ------
Total Assets $289,695 $ 255,667 $206,764
======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Interest
bearing $ 32,094 $ 307 .96 $ 27,299 $ 436 1.60 $ 20,378 $ 466 2.29
Savings 39,624 710 1.79 32,063 873 2.72 28,264 944 3.34
Time deposits 116,699 4,898 4.20 113,035 6,385 5.65 80,791 4,565 5.65
------- ----- ----- ------- ------ ---- ------ ----- ------
Total Deposits 188,417 5,915 3.14 172,397 7,694 4.46 129,433 5,975 4.62
Short-term debt 8,497 104 1.22 9,127 312 3.42 8,379 499 5.96
Long-term debt 30,645 1,372 4.48 20,632 1,488 7.21 17,037 937 5.50
------ ----- ---- ------ ------ ---- ------ ----- ------
Total Interest Bearing
Liabilities 227,559 7,391 3.25 202,156 9,494 4.69 154,849 7,411 4.79
----- ---- ------ ---- ----- ------
Noninterest bearing
deposits 28,300 22,567 18,035
Other liabilities 4,932 2,779 7,622
------ ------ -------
Total Liabilities 260,791 227,502 180,506
Stockholders' equity 28,904 28,165 26,258
------ ------ ------
Total Liabilities
and Stockholders'
Equity $ 289,695 $255,667 $206,764
========= ======= ========
Net Interest Earnings $10,763 $ 8,370 $ 8,226
======= ====== ======
Net Yield on Interest
Earning Assets (NIM) 4.03% 3.52 4.32%
==== ==== =====
1 Income and yields are presented on a tax-equivalent basis using the
applicable federal income tax rate.
2 Interest income on loans includes loan fees.
3 Average balance information is reflective of historical cost and has not been
adjusted for changes in market value.
11
The following table illustrates the effect of changes in volumes and rates.
2002 Compared to 2001 2001 Compared to 2000
- -------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change Increase Due to Change Increase
in Average: or in Average: or
Volume Rate (Decrease) Volume Rate (Decrease)
- -------------------------------------------------------------------------------
Interest income:
Loans $ 2,527 $(1,822) $ 705 $1,740 $ (491) $1,249
Investment securities:
Taxable 738 (565) 173 (28) (37) (65)
Partially Taxable (9) 38 29 (28) (37) (65)
Interest bearing deposits
in banks 52 (19) 33 476 (108) 368
Federal funds sold (496) (154) (650) 1,174 (434) 740
------ ------- ------ ----- ----- ----
Total Interest Income $2,194 $(1,904) $ 290 $3,876 $(1,649) $2,227
====== ====== ===== ===== ===== =====
Interest expense:
Deposits:
Demand $ 77 $ (206) $ (129) $ 158 $ (188) $ (30)
Savings 206 (369) (163) 127 (198) (71)
Time deposits 207 (1,694) (1,487) 1,822 (2) 1,820
Short-term debt (22) (186) (208) 45 (232) (187)
Long-term debt 722 (838) (116) 198 353 551
----- ------- ------- ---- ---- ----
Total Interest
Expense $1,191 (3,294) $(2,103) $2,266 $ (183) $ 2,083
----- ---- ----- ------- ------ ----
Net Interest Income $1,003 $ 1,390 $ 2,393 $1,610 $(1,466) $ 144
====== ====== ====== ===== ===== ======
NOTE: Variances are computed line-by-line and may not add to the totals
shown.
Interest Income
Tax equivalent interest income increased by 1.62% or $290,000 in 2002 and 14.24%
or $2,227,000 in 2001. This improvement was primarily the result of a second
year of significant growth in earning assets. A $47,154,000 increase in 2001
(including $37,244,000 from the acquisition of two branches) was followed by a
$29,179,000 increase in 2002. The increase in net interest income is in spite of
a combined two year decrease in average yields of 1.42%.
During 2002, average loans outstanding increased $29,592,000 to $196,030,000.
All three major loan categories increased. The greatest percentage increase was
in real estate loans which increased 19.77%. Average total securities, yielding
5.02% increased 11,928,000 during 2002. Funding for this increase came from
deposit growth and conversion of short-term investments (bank deposits and fed
funds sold). With rates at historically low levels, the Bank continued to look
for favorable yields on investment securities primarily in the eighteen to
thirty month time-frame.
Interest Expense
Interest expense decreased $2,103,000 or 22.15% during 2002. The average cost of
funds of 3.25% declined 1.44% compared to 2001. Average interest bearing
liabilities increased $25,403,000 and seems to be reflective of customers
seeking safety during stock market volatility and economic uncertainty. The Bank
also enjoyed growth as a result of continued consolidation among larger banks
within its markets. Expense of time deposits decreased $1,487,000 or 23.29%, due
to market conditions. This decrease resulted as customer accounts renewed at
rates that were often 2.50% to 3.00% lower than rates paid as recently as early
2001. Expense of long-term debt decreased $116,000. This decrease was in spite
of a
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
$10,013,000 increase in average long-term debt. The Bank borrowed on
additional $15,000,000 from the Federal Home Loan Bank (FHLB) at very favorable
rates, with the proceeds used to support growth in the residential real estate
loan portfolio. This decrease in the cost of long-term debt followed a
significant increase in 2001 ($1,488,000 vs. $937,000 in 2000). Much of the
increase in 2001 resulted from early repayment penalties paid by the Bank to
refinance a portion of its long-term debt with the FHLB.
Noninterest Income
Noninterest income is becoming an increasingly important factor
in maintaining profitability. Management is conscious of the need to constantly
review fee income and develop additional sources of complementary revenue. The
Bank continues to enjoy increased revenue from its subsidiary Farmers &
Merchants Financial Services (FMFS). Gross revenue for FMFS increased
$38,000. This increase was a combination of greater levels of commissions from
its partnerships in Bankers Title Shenandoah, LLC, Bankers Insurance, LLC and
from sales of investment products through UVEST Financial Services. Sales of
credit life and accident & health insurance continue to increase with the growth
of the consumer loan portfolio. Credit life and accident & health sales have
more than doubled since 1998 when a sales incentive program was introduced for
loan officers. At that same time changes were made in the health screening
questionnaire for these credit insurance products. The result has been a
reduction by over 50% in claims paid on these products.
Exclusive of securities gains and losses, overall noninterest income
increased 19.21% in 2002 from 2001 and 11.51% in 2001 versus 2000. Investments
in bank owned life insurance (BOLI) on key executives of the Company resulted in
tax-free revenues of $130,000 in 2002. This revenue should almost double in 2003
as the Bank has recently acquired more BOLI on a larger group of Bank officers.
In an effort to generate more fee income, the Bank opened a mortgage and
investments office in Harrisonburg, Virginia during December 2002. The office
employs three people, all of whom have previous experience in mortgage lending
or investments at other institutions in the Harrisonburg area.
In 2002, the Company suffered its first year of net securities losses since
1991. Losses in 2002 totaled $182,430, and were the result of the Company
writing down the carrying value of several of its equity holdings. Based on
current market conditions, historical trends of the individual securities and
trends during previous increasing and declining markets,
management determined that several holdings met the definition of impairment.
The write downs were based on management's expectations of potential total
returns from dividend reinvestment and price appreciation over a reasonable
holding period (five years). This analysis resulted in a total write down of
$503,000 affecting five equities held by the Company.
Noninterest Expense
Noninterest expenses increased from $5,728,000 in 2001 to $6,448,000 in 2002.
Salary and benefits increased 13.67% to $3,601,000 in 2002, and 13.77% in 2001
compared to 2000. The increase in salaries and benefits in 2002 was primarily
the result of a full year of salaries and benefits for the Shenandoah County
offices, which were acquired in 2001, and higher insurance and pension costs.
The 2001 increase included ten months of salaries and benefits for the
Shenandoah County offices.
Occupancy and equipment expense increased $46,000 (7.18%) in 2002. This includes
a full year of expenses in Shenandoah County as well as a full year of
depreciation on the remodeled Broadway office. The increase of 28.38% in 2001
also resulted from additional depreciation of the remodeled Broadway office, as
well as expenses related to the newly acquired Edinburg and Woodstock Offices.
13
Other operating expense increased $269,000 in 2002, following a $549,000
increase in 2001. Much of the increase can be traced to the Bank's expansion
into Shenandoah County, including greater advertising costs, contributions,
telephone, and data communications related expenses. The Bank franchise tax
(which is a tax based on capital of the Bank), increased substantially as a
result of additional contributed capital from the Company to the Bank to support
the branch acquisition. Also increasing were fees paid for training and
technology consultants who are under contracts that began mid-year 2001.
Although noninterest expenses have increased substantially in both 2002 and
2001, they have actually declined slightly as a percentage of average assets;
2.22%, 2.24% and 2.25% in 2002, 2001, and 2000, respectively. The Company
continues to compare very favorably to its peer group which average
approximately 3.10% over the same time period.
The expense of intangibles amortization decreased slightly as the Bank changed
assumptions with the implementation of FAS 142.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic
trends, changes in the nature and value of the portfolio and industry standards.
Specific factors considered by management in determining the adequacy of the
level of the allowance for loan losses include internally generated loan review
reports, past due reports and historical loan loss experience. This review also
considers concentrations of loans in terms of geography, business type and
level of risk. Management evaluates nonperforming loans relative
to their collateral value and makes the appropriate adjustments to the allowance
for loan losses when needed. Based on the factors outlined above, the current
year provision for loan losses increased from $204,000 in 2001 to $387,000 in
2002. Actual loan charge-offs were $199,000 in 2002 and $107,000 in 2001. Loan
losses as a percentage of average loans totaled .10% in 2002 and .06% in 2001,
respectively. Losses continue at approximately one-third that of the Bank's peer
group average.
Balance Sheet
Total assets increased 11.12% during the year to $303,149,000, an increase of
$30,476,000 from $272,673,000 in 2001. Earning assets increased 10.64% or
$27,112,000 to $281,924,000 at December 31, 2002. In 2001, earning assets
increased $56,232,000 following the February acquisition of two branch offices
from First Union National Bank, one each in Edinburg and Woodstock, Virginia.
These offices became the Bank's first venture outside Rockingham County,
Virginia and also its first branch acquisition. The acquisition included
deposits totaling $37,244,000, and loans totaling $9,800,000. The Woodstock
facility was also purchased at a cost of $625,000, while the Edinburg facility
is leased. Equipment and fixtures acquired as part of the transaction totaled
$55,000. The cost of deposit intangibles, goodwill and other acquisition costs
totaled $5,472,000. These costs are being amortized using the straight-line
method over a ten-year period. Other acquisition costs include legal,
accounting, investment advisory and data conversion support by both First Union
and the Bank's core software vendor.
Investment Securities
Average balances in investment securities increased 28.62% in 2002 to
$53,607,000. This increase was funded by the decline of short-term
investments received in the branch acquisition and from normal growth in the
Bank's deposit base. The Company maintains a high level of earning assets as
investment securities to provide liquidity, as security for public deposits and
to secure repurchase agreements. Management strives to match the types and
maturities of securities owned to balance projected liquidity needs, interest
rate sensitivity and to maximize earnings through a portfolio bearing low credit
risk.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Analysis of Securities
The composition of securities at December 31 was:
(Dollars in thousands) 2002 2001 2000
Available for Sale:1
U.S. Treasury and Agency $38,475 $29,428 $ 15,418
Mortgage-backed2 5,069 7,922 1,840
Corporate bonds 11,338 10,402 9,480
Marketable equity securities 8,026 10,500 11,942
------ ------ -------
Total 62,908 58,252 38,680
Held to Maturity and Other Equity Investments:
U.S. Treasury and Agency 110 111 1,109
Corporate bonds 1,767 1,772 1,777
Other equity investments 4,817 3,852 3,757
------ ----- ------
Total 6,694 5,735 6,643
------ ----- -----
Total Securities $69,602 $63,987 $ 45,323
====== ====== ======
1 At estimated fair value.
2 Issued by a U.S. Government Agency or secured by U.S. Government Agency
collateral.
Maturities and weighted average yields of debt securities at December 31, 2002
are presented in the table below. Amounts are shown by contractual maturity;
expected maturities will differ as issuers may have the right to call or prepay
obligations.
Years to Maturity
- ----------------------------------------------------------------------------------------------
Less One to Over
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) than one Five Five
- -----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Total Yield
Debt Securities
Available
for Sale:
U.S. Treasury &
Agency $27,205 2.59% $11,270 4.17% $ $38,475 3.05%
Mortgage-backed 5,069 5.13 5,069 5.13
Corporate bonds 4,567 6.22 6,285 6.27 486 7.38 11,338 6.30
-------- --------- -------- --------
Total $31,772 3.11% $17,555 4.92% $ 5,555 5.33% $54,882 3.91%
------- ------- ----- -------
Debt Securities Held to
Maturity:
U.S. Treasury &
Agency $ 110 5.20% $ % $ % $ 110 5.20%
Corporate bonds 1,767 6.15 1,767 6.21
------ ------- ---------- ------
Total $ 110 5.20% $ 1,767 6.15% $ n/a $ 1,877 6.15%
====== ======= ======== ======
Analysis of Loan Portfolio
The Company's loan portfolio totaled $201,980,000 at December 31, 2002 compared
with $176,625,000 at the beginning of the year. The Company's policy has been to
make conservative loans that are held for future interest income. Collateral
required by the Company is determined on an individual basis depending on the
purpose of the loan and the financial condition of the borrower.
15
Commercial loans, including agricultural loans, increased 14.45% during 2002 to
$47,218,000. Real estate mortgages increased 12.49% to $118,453,000, while
construction loans increased $6,538,000 or 118.43%. Consumer installment loans
were down slightly at $22,704,000, a decrease attributable to aggressive
auto financing packages offered throughout the year by the major auto
manufacturers. Credit card balances increased $129,000 to $1,477,000.
The following table presents the changes in the loan portfolio over the previous
five years.
December 31
- ----------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate - mortgage $118,453 $105,305 $ 92,464 $ 84,019 $78,349
Real estate - construction 12,059 5,521 4,372 5,481 4,376
Consumer installment 22,704 23,106 20,927 18,082 17,125
Commercial 35,769 28,552 25,628 22,880 21,478
Agricultural 10,966 11,835 6,656 8,392 8,670
Multi-family residential 484 869 703 414 1,419
Credit cards 1,477 1,348 1,249 1,016 832
Other loans 68 89 36 34 52
----- ------ ----- ------ ------
Total Loans $201,980 $176,625 $152,035 $140,318 $132,301
-------- -------- -------- -------- -------
The following table shows the Company's loan maturity and interest rate
sensitivity as of December 31, 2002:
Less Than 1-5 Over
(Dollars in thousands) 1 Year Years 5 Years Total
- ------------------------------------------------------------------------------
Commercial and
agricultural loans $ 30,464 $ 15,627 $ 1,127 $ 47,218
Real Estate - mortgage 14,212 65,158 39,083 118,453
Real Estate - construction 12,059 12,059
Consumer - installment/other 2,778 21,472 24,250
- ------------------------------------------------------------------------------
Total $ 59,513 $102,257 $ 40,210 $201,980
- ------------------------------------------------------------------------------
Loans with predetermined rates $ 4,204 $ 29,382 $ 24,321 $ 57,907
Loans with variable or
adjustable rates 55,309 72,875 15,889 144,073
- ------------------------------------------------------------------------------
Total $ 59,513 $102,257 $ 40,210 $201,980
- ------------------------------------------------------------------------------
Residential real estate loans are generally made for a period not to exceed 25
years and are secured by a first deed of trust which normally does not exceed
90% of the appraised value. If the loan to value ratio exceeds 90%, the Company
requires additional collateral, guarantees or mortgage
insurance. On approximately 80% of the real estate loans, interest is adjustable
after each three or five year period. Fixed rate loans are generally made for a
fifteen-year or a twenty-year period with an interest rate adjustment after ten
years.
Since 1992, fixed rate real estate loans have been funded with fixed rate
borrowings from the Federal Home Loan Bank, which allows the Company to control
its interest rate risk. In addition, the Company makes home equity loans secured
by second deeds of trust with total indebtedness not to exceed 90% of
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
the appraised value. Home equity loans are made for three, five or seven year
periods at a fixed rate or as a revolving line of credit.
The majority of commercial loans are made to small retail, manufacturing and
service businesses. Consumer loans are made for a variety of reasons, however,
approximately 60% of the loans are secured by automobiles and trucks.
The Company's market area has a stable economy, which tends to be less cyclical
than the national economy. Major industries in the market area include
agricultural production and processing, higher education, retail sales, services
and light manufacturing. The agricultural production and processing industry is
a major contributor to the local economy and its performance and growth tend to
be cyclical in nature, however, this cyclical nature is offset by other stable
industries in the trade area. In addition to direct agricultural loans, a large
percentage of residential real estate loans and consumer installment loans are
made to borrowers whose income is derived from the agricultural sector of the
economy. A large percentage of the agricultural loans are made to poultry
growers.
During 2002, a mild strain of Avian Influenza (AI) affected many poultry growers
in the area. This strain of AI resulted in the birds being underweight, and
could only be eliminated by destroying the flocks and allowing the house to
remain empty for a period of several weeks. The Bank had several customers that
were affected. Some were able to continue required payments due to other sources
of income, while a few required interest only payments or advances on lines of
credit for several months. Federal assistance checks were received in late 2002
or early 2003 and all growers are now back in full production.
During recent years, real estate values in the Company's market area for
commercial, agricultural and residential property increased, on the average,
between 2% and 5% annually depending on the location and type of property.
Approximately 80% of the Company's loans are secured by real estate, however,
policies relating to appraisals and loan to value ratios are adequate to control
the related risk. Unemployment rates in the Company's market area continue to be
below both the national and state averages. The national economic slowdown that
has resulted since the September 11th tragedies has not had a significant impact
within the local area and as yet does not appear to be the cause of increased
loan delinquencies.
Nonaccrual and Past Due Loans
The following table shows loans placed in a nonaccrual status and loans
contractually past due 90 days or more as to principal or interest payments.
December 31,
- -------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Nonaccruing loans None None $ 664 None None
Loans past due 90 days or more 2,594 $1,096 $ 421 $1,917 $2,059
Percentage to total loans 1.28% .62% .71% 1.37% 1.56%
Interest accruals are continued on past due, secured loans until the principal
and accrued interest equal the value of the collateral and on unsecured loans
until the financial condition of the borrower deteriorates to the point that any
further accrued interest would be determined to be uncollectible. Past due loans
at December 31, 2002 include loans to two commercial customers, in cyclical
businesses, with balances totaling $1,705,000. These loans were all brought
current during the month of February 2003. Excluding these relationships, past
due loans at December 31, 2002 equaled .44% of total loans. At December 31,
2002, 2001 and 2000, there were no restructured loans on which interest was
accruing at a reduced rate or on which payments had been extended.
17
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating
results, liquidity or capital resources. Nor do they represent material credits
about which management is aware of any information, which causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms. As of December 31, 2002, management is not aware of any
potential problem loans, which are not already classified for regulatory
purposes or classified substandard or watch as part of the Bank's internal
grading system.
Loan Concentrations
At December 31, 2002, no industry category exceeded ten percent of total loans.
Loan Losses and the Allowance for Loan Losses
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.
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 five 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. Avian influenza). 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 $1,477,000 at December 30, 2002 is equal to
..73% of total loans. This compares to an allowance of $1,289,000 (.73%) at
December 31, 2001. Although management has increased its funding of the reserve
during 2002, due to the rapid growth in the portfolio and an increase in charge
offs, the overall level of the allowance remains well below the peer group
average of 1.34%. Management feels this is appropriate based on its loan loss
history and the composition of its loan portfolio; the current allowance for
loan losses is equal to approximately eight years 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 $199,000, which is equivalent to .10% of
total loans. In recent years the company has had an average loss rate of .09%
which is approximately one-third the loss rate of its peer group.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
A summary of the activity in the allowance for loan losses follows:
(Dollars in thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------
Balance at beginning of period $1,289 $1,108 $1,090 $1,162 $1,121
Provision charged to expenses 387 204 123 140 110
Other adjustments 84
Loan losses:
Commercial 20 22 21 107 4
Installment 249 138 125 150 170
Real estate 31 2 2
- --------------------------------------------------------------------------------
Total loan losses 300 160 148 259 174
Recoveries:
Commercial 28 3 3 5 7
Installment 73 49 39 40 98
Real Estate 1 1 2
- -------------------------------------------------------------------------------
Total recoveries 101 53 43 47 105
Net loan losses 199 107 105 212 69
- -------------------------------------------------------------------------------
Balance at end of period $1,477 $1,289 $1,108 $1,090 $1,162
- ------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of loans .73% .73% .73% .78% .88%
Net loan losses to average loans
outstanding .10% .06% .07% .16% .05%
The Company has allocated the allowance according to the amount deemed to be
reasonably necessary to provide for the possibility of losses being incurred
within each of the above categories of loans. The allocation of the allowance as
shown below should not be interpreted as an indication that loan losses in
future years will occur in the same proportions or that the allocation indicates
future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
The following table shows the balance and percentage of the Company's allowance
for loan losses allocated to each major category of loans:
at December 31
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------
Commercial $ 443 23 $451 23% $ 332 25% $327 26% $ 392 27%
Real estate 369 65 323 63 277 61 327 60 350 59
Installment 591 12 451 14 333 14 273 14 260 14
Unallocated 74 64 166 163 160
- -----------------------------------------------------------------------------------------------------
Total $ 1,477 100% $1,289 100% $1,108 100% $1,090 100% $1,162 100%
19
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2002 of 9.60%. The Bank
experienced an increase in all account types. Rates of interest were falling
throughout all of 2002 and, with the exception of advertising a free checking
account, the Bank did not have any special promotions to generate its deposit
growth. Management believes that economic uncertainty and the volatility of the
stock market contributed to the growth in deposits.
The Bank has traditionally avoided brokered and large deposits believing that
they were unstable and, thus not desirable. This has proven to be a good
strategy as the local deposit base is very stable and small increases in rates
above the competition have usually resulted in deposit gains in past years.
Beginning in 2001 the Bank has, on occasion, accepted certificates of deposit
from other financial institutions at below market rates of interest. Typically
this has been done to meet loan demand or if liquidity was sufficient, the Bank
has reinvested these deposits in certificates of deposit at other institutions
which were offering above market rates. Certificates of deposit over $100,000
totaled $18,955,000 at December 31, 2002. The maturity distribution of these
certificates is as follows:
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------
Less than 3 months $ 2,427 $ 4,376
3 to 12 months 8,573 9,105
1 year to 5 years 7,955 4,006
---------- ---------
Total $ 18,955 $ 17,487
========= ==========
Non-deposit borrowings include repurchase agreements, federal funds purchased
and long-term debt obtained through the Federal Home Loan Bank and SunTrust
Bank. Repurchase agreements continue to be an important source of funding and
provide commercial customers the opportunity to earn market rates of interest on
funds that are secured by specific securities owned by the Bank.
Borrowings from the Federal Home Loan Bank are used to support the Bank's
mortgage lending program and allow the Bank to offer longer-term mortgages.
During 2002, the Bank borrowed an additional $15,000,000 from the FHLB to
support the demand for longer-term mortgages. Quarterly installment payments on
FHLB debt totaled $5,337,000, resulting in a net increase of $9,663,000 owed to
the FHLB. These loans carry an average rate of approximately 4.61% at year end
2002. During 2001, the Bank paid off approximately $8,500,000 in FHLB debt with
a combination of liquid assets and a new loan of $6,000,000. This refinancing
allowed the Bank to reposition its cash flows to more closely match payments
received on customer mortgages. It also reduced the amount of low yielding
liquid assets which the Bank held while paying off higher rate obligations.
Stockholder's Equity
Total stockholders' equity increased $944,000 or 3.3% in 2002. Earnings retained
from operations were the primary source of the increase. As of December 31,
2002, the book value per share was $12.19 compared to $11.74 as of December 31,
2001. Dividends are paid to stockholders on a quarterly basis in uniform amounts
unless unexpected fluctuations in net income indicate a change to this policy is
needed.
Banking regulators have established a uniform system to address the adequacy of
capital for financial institutions. The rules require minimum capital levels
based on risk-adjusted assets. Simply stated, the riskier an entity's
investments, the more capital it is required to maintain. The Bank, as well as
the Company, is required to maintain these minimum capital levels. The two types
of capital guidelines are Tier I capital (referred to as core capital) and Tier
II capital (referred to as supplementary capital). At
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
December 31, 2002, the Company had Tier I capital of 13.67% of risk weighted
assets and combined Tier I and II capital of 14.48% of risk weighted assets.
Regulatory minimums at this date were 4% and 8%, respectively. The Bank has
maintained capital levels far above the minimum requirements throughout the
year. In the unlikely event that such capital levels are not met, regulatory
agencies are empowered to require the Company to raise additional capital and/or
reallocate present capital.
In addition, the regulatory agencies have issued guidelines requiring the
maintenance of a capital leverage ratio. The leverage ratio is computed by
dividing Tier I capital by actual total assets. The regulators have
established a minimum of 3% for this ratio, but can increase the minimum
requirement based upon an institution's overall financial condition. At December
31, 2002, the Company reported a leverage ratio of 8.76%. The Bank's leverage
ratio was also substantially above the minimum.
Market Risk Management
Most of the Company's net income is dependent on the Bank's net interest income.
As the rapid change in short-term interest rates demonstrated in 2001, net
interest income is subject to interest rate risk to the extent that imbalances
exist between the maturities or repricing of interest bearing liabilities and
interest earning assets. In 2001 for example,
interest-earning assets repriced much more quickly than interest bearing
liabilities; this resulted in a decrease in the net interest margin compared to
2000. During 2002, the net interest margin increased as the interest bearing
liabilities matured and repriced at significantly lower levels. Net interest
income is also affected by changes in the mix of funding that supports earning
assets. For example, higher levels of non-interest bearing demand deposits and
leveraging earning assets by funding with stockholder's equity would result in
greater levels of net interest income than if most of the earning assets were
funded with higher cost interest-bearing liabilities, such as certificates of
deposit.
Liquidity as of December 31, 2002 is very strong. The Bank historically has had
a stable core deposit base and, therefore, does not have to rely on volatile
funding sources. Because of the stable core deposit base, changes in interest
rates should not have a significant effect on liquidity. During 2002, the Bank
used funds received in the 2001 branch acquisition, maturing investments, and
deposit growth to meet its liquidity needs. The Bank's membership in the Federal
Home Loan Bank also provides liquidity as the Bank borrows money that is repaid
over a five to ten year period and uses the money to make fixed rate loans. The
matching of the long-term receivables and liabilities helps the Bank reduce its
sensitivity to interest rate changes. The Company reviews its interest rate gap
periodically and makes adjustments as needed. There are no off balance sheet
items that will impair future liquidity.
The following table depicts the Company's interest rate sensitivity, as measured
by the repricing of its interest sensitive assets and liabilities as of December
31, 2002. As the notes to the table indicate, the data was based in part on
assumptions as to when certain assets or liabilities would mature or reprice.
The analysis indicates a liability sensitive one-year cumulative GAP position of
2.76% of total earning assets. Approximately 36% of rate sensitive assets and
45% of rate sensitive liabilities are subject to repricing within one year. The
one-year cumulative GAP narrowed during 2002, as the Bank held more short-term
liquid assets. With rates falling throughout 2002, the Investment Committee and
management choose to not reinvest bond maturities, loan repayments and cash in
longer-term investments. Management believes that remaining liquid and keeping
investments short-term in nature will allow it to achieve greater earnings in
the future when rates stabilize at higher levels.
21
The following GAP analysis shows the time frames from December 31, 2002, in
which the Company's assets and liabilities are subject to repricing:
1-90 91-365 1-5 Over 5 Not Total
(Dollars in thousands) Days Days Years Years Classified
Rate Sensitive Assets:
Loans $44,787 $14,726 $102,257 $40,210 $201,980
Investments
securities 14,503 17,379 19,322 5,555 8,026 64,785
Federal Funds Sold 4,476 4,476
Interest bearing
bank deposits 2,297 2,776 793 5,866
- -------------------------------------------------------------------------------
Total $66,063 $34,881 $122,372 $45,765 $ 8,026 $277,107
Rate Sensitive
Liabilities:
Interest bearing
demand deposits 10,328 19,314 4,493 34,135
Savings 8,332 24,997 8,332 41,661
Certificates of
deposit
$100,000 and over 2,427 8,573 7,955 18,955
Other certificates
of deposit 21,692 40,416 28,416 13,563 104,087
- -------------------------------------------------------------------------------
Total Deposits 24,119 67,649 80,682 26,388 198,838
Short-term debt 8,308 8,308
Long-term debt 2,775 5,753 22,391 1,393 32,312
- -------------------------------------------------------------------------------
Total 35,202 73,402 103,073 27,781 239,458
- -------------------------------------------------------------------------------
Discrete Gap 30,861 (38,521) 19,299 17,984 8,026 37,649
- -------------------------------------------------------------------------------
Cumulative Gap 30,861 (7,660) 11,639 29,623 37,649
- -------------------------------------------------------------------------------
As a % of Earning Assets 11.11% (2.76%) 4.20% 10.69% 13.59%
- -------------------------------------------------------------------------------
* In preparing the above table, no assumptions are made with respect to
loan prepayments or deposit run offs. Loan principal payments are
included in the earliest period in which the loan matures or can be
repriced. Principal payments on installment loans scheduled prior to
maturity are included in the period of maturity or repricing. Proceeds
from the redemption of investments and deposits are included in the
period of maturity. Estimated maturities on deposits which have no stated
maturity dates were derived from guidance contained in FDICIA 305.
Recent Accounting Pronouncements
In December 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 01-6, Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. SOP No.
01-6 is effective for annual and interim financial statements issued for fiscal
years beginning after December 15, 2001, and did not have a material impact on
the Company's consolidated financial statements.
In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 amends previous interpretive guidance on the
application of the purchase method of accounting to acquisitions of financial
institutions, and requires the application of SFAS No. 141, Business
Combinations, and SFAS No. 142 to branch acquisitions if such transactions
meet the definition of a business combination. The provisions of SFAS No. 147
do not apply to transactions between two or more mutual enterprises. In
addition, SFAS No. 147 amends SFAS No. 144, Accounting for the
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Impairment of Long-Lived Assets, to include in its scope core deposit
intangibles of financial institutions. Accordingly, such intangibles are subject
to a recoverability test based on undiscounted cash flows, and to the impairment
recognition and measurement provisions required for other long-lived assets held
and used.
Quarterly Results
The table below lists the Company's quarterly performance for the years ended
December 31, 2002 and 2001:
2002
------------
Dollars in thousands Fourth Third Second First Total
-------- -------- --------- -------- --------
Interest Income $ 4,538 $ 4,499 $ 4,490 $ 4,319 $17,846
Interest Expense 1,756 1,803 1,893 1,938 7,390
Net Interest Income 2,782 2,696 2,597 2,381 10,456
Provision For Loan 106 107 107 67 387
Losses
Net Interest Income 2,676 2,589 2,490 2,314 10,069
After Provision
Non-Interest Income (341) 386 755 398 1,198
Non-Interest Expense 1,729 1,564 1,573 1,582 6,448
Income before taxes 606 1,411 1,672 1,130 4,819
Income Tax Expense 60 403 511 341 1,315
Net Income $ 546 $ 1,008 $ 1,161 $ 789 $ 3,504
Net Income Per Share $ .22 $ .42 $ .48 $ .32 $ 1.44
2001
------------
Fourth Third Second First Total
--------- ------- -------- ----------- --------
Interest Income $ 4,457 $ 4,504 $ 4,565 $ 4,155 $17,681
Interest Expense 2,543 2,336 2,454 2,161 9,494
Net Interest Income 1,914 2,168 2,111 1,994 8,187
Provision 67 68 38 31 204
Net Interest Income 1,847 2,100 2,073 1,963 7,983
After Provision
Non-Interest Income 239 293 406 1,472 2,410
Non-Interest Expense 1,534 1,435 1,434 1,325 5,728
Income Before Taxes 552 958 1,045 2,110 4,665
Income Tax Expense 129 307 314 684 1,434
Net Income $ 423 $ 651 $ 731 $ 1,426 $3,231
Net Income Per Share $ .17 $ .27 $ .30 $ .59 $ 1.33
The fourth quarter results in 2002 include a $503,000 pre-tax write down on
securities that Management determined were impaired. During the fourth quarter
of 2001, the Company incurred pre-tax prepayment penalties of $359,000 to
refinance a portion of its FHLB debt.
23
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS 2002 2001
-------------- ---------
Cash and due from banks (notes 3 and 13) $ 6,017,446 $5,363,722
Interest bearing deposits (note 13) 5,886,439 14,198,842
Federal funds sold 4,476,000
Securities -
Held to maturity - fair value of $1,905,012
in 2002 and
$1,944,405 in 2001 (note 4) 1,877,258 1,882,781
Available for sale (note 4) 62,908,016 58,252,017
Other investments (note 4) 4,816,386 3,852,394
Loans (notes 5 and 13) 201,979,842 176,625,383
Less allowance for loan losses (note 6) (1,477,007) (1,288,506)
------------ -----------
Net Loans 200,502,835 175,336,877
Bank premises and equipment, net (note 7) 4,485,813 4,411,526
Other real estate 719,268 566,966
Interest receivable 1,655,122 1,541,541
Core deposit intangible (notes 2 and 20) 2,253,525 2,529,467
Goodwill (notes 2 and 20) 2,638,677 2,638,677
Bank owned life insurance (note 21) 2,302,655
Other assets 2,609,469 2,097,959
----------- ---------
Total Assets 303,148,909 $272,672,769
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing 29,445,922 $25,740,570
Interest bearing:
Demand 22,464,540 20,485,481
Money market accounts 11,669,676 9,249,751
Savings 41,661,219 34,787,009
Time deposits over $100,000 (note 8) 18,955,379 17,487,077
All other time deposits (note 8) 104,087,160 100,528,887
----------- -----------
Total Deposits 228,283,896 208,278,775
----------- -----------
Short-term debt (note 9) 8,308,382 10,695,695
Accrued liabilities 4,703,427 4,118,402
Long-term debt (note 10) 32,312,024 20,982,698
----------- ----------
Total Liabilities 273,607,729 244,075,570
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 3,000,000 shares
authorized, 2,423,678 and 2,438,563
shares issued and outstanding,
for 2002 and 2001, respectively 12,118,390 12,192,815
Capital surplus 302,795 525,015
Retained earnings (note 16) 17,390,478 15,488,406
Accumulated other comprehensive income (loss) (270,483) 390,963
------------ ---------
Total Stockholders' Equity 29,541,180 28,597,199
----------- ----------
Total Liabilities and Stockholders' Equity 303,148,909 $272,672,769
=========== ===========
The accompanying notes are an integral part of this statement.
24
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2002 2001 2000
-------------------------- --------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans 14,846,527 $14,162,330 $12,920,610
Interest on deposits and federal
funds sold 438,330 1,163,750 62,510
Interest on debt securities 2,004,119 1,837,897 1,980,466
Dividends on equity securities 557,470 517,435 545,654
--------- -------- --------
Total Interest and Dividend Income 17,846,446 17,681,412 15,509,240
---------- ---------- ----------
INTEREST EXPENSE:
Interest on demand deposits 306,730 435,919 466,086
Interest on savings deposits 710,489 873,462 944,232
Interest on time deposits over $100,000 657,069 723,697 462,019
Interest on all other time deposits 4,240,390 5,661,394 4,102,688
--------- --------- ---------
Total interest on deposits 5,914,678 7,694,472 5,975,025
Interest on short-term debt 103,951 311,240 498,846
Interest on long-term debt 1,371,774 1,488,569 936,822
--------- --------- --------
Total Interest Expense 7,390,403 9,494,281 7,410,693
--------- --------- ---------
NET INTEREST INCOME 10,456,043 8,187,131 8,098,547
---------- --------- ---------
PROVISION FOR LOAN LOSSES (note 6) 387,000 204,000 123,000
--------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,069,043 7,983,131 7,975,547
---------- --------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 716,590 674,366 554,685
Insurance and other commissions 209,579 141,116 143,682
Other operating income 453,587 341,969 339,582
Gain (loss) on security transactions
(note 4) (182,430) 1,252,500 769,704
--------- --------- ---------
Total Noninterest Income 1,197,326 2,409,951 1,807,653
--------- --------- ---------
NONINTEREST EXPENSES:
Salaries 2,853,483 2,473,605 2,120,549
Employee benefits (note 12) 747,074 693,933 663,704
Occupancy expense 337,038 324,092 215,312
Equipment expense 350,701 317,597 284,514
Amortization of intangibles
(notes 2 and 20) 275,942 304,008
Other operating expenses 1,883,657 1,614,519 1,369,139
--------- --------- ---------
Total Noninterest Expenses 6,447,895 5,727,754 4,653,218
--------- --------- ---------
Income before Income Taxes 4,818,474 4,665,328 5,129,982
INCOME TAX EXPENSE (note 11) 1,314,579 1,434,798 1,486,097
--------- --------- ---------
NET INCOME $3,503,895 $3,230,530 $3,643,885
========== ========== ==========
PER SHARE DATA
NET INCOME $ 1.44 $ 1.33 $ 1.49
========= ======== ========
CASH DIVIDENDS .66 $ .63 $ .59
========= ======== ========
AVERAGE COMMON SHARES OUTSTANDING 2,428,722 2,430,993 2,445,509
========= ========= =========
The accompanying notes are an integral part of this statement.
25
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
BALANCE - December 31, 1999 $12,279,810 $ 868,132 $11,587,061 $ 551,393 $25,286,396
Comprehensive Income:
Net income 3,643,885 3,643,885
Net change in other
comprehensive income(note 2) 209,876 209,876
--------
Comprehensive Income 3,853,761
Dividends on common stock (1,440,318) (1,440,318)
Shares repurchased (22,589
shares) (112,945) (388,664) (501,609)
-------- ----------- --------- ------ ------
BALANCE - December 31, 2000 12,166,865 479,468 13,790,628 761,269 27,198,230
Comprehensive Income:
Net income 3,230,530 3,230,530
Net change in other
comprehensive income(note 2) (370,306) (370,306)
---------
Comprehensive Income 2,860,224
Dividends on common stock (1,532,752) (1,532,752)
Shares sold to ESOP (9,000) 45,000 110,250 155,250
Shares repurchased (3,810 shares) (19,050) (64,703) (83,753)
---------- ---------- ----------- ---------- ------
BALANCE - December 31, 2001 12,192,815 525,015 15,488,406 390,963 28,597,199
Comprehensive Income:
Net income 3,503,895 3,503,895
Net change in other
comprehensive income (note 2) (661,446) (661,446)
Comprehensive Income 2,842,449
Dividends on common stock (1,601,823) (1,601,823)
Shares repurchased (14,885
shares) (74,425) (222,220) (296,645)
-------- ----------- --------- ------ ------
BALANCE - December 31, 2002 $12,118,390 $302,795 $17,390,478 $ (270,483) $29,541,180
============ ======== =========== =========== =========
The accompanying notes are an integral part of this statement.
26
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2002 2001 2000
---------------------------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 3,503,895 $3,230,530 $3,643,885
Adjustments to reconcile net income to
net cash provided by operating
activities:
(Gain) loss on sale of securities 182,430 (1,252,500) (769,704)
Depreciation 347,867 308,152 257,586
Amortization of security premiums 125,412 40,266 19,222
Provision for loan losses 387,000 204,000 123,000
Provision for deferred taxes (240,106) (43,982) (90,867)
Increase in interest receivable (113,581) (60,509) (108,325)
Increase (decrease) in other assets (178,301) 51,166 (514,236)
Increase (decrease) in accrued
expenses 757,679 84,173 (52,373)
Amortization of limited partnership
investments 255,850 218,804 360,893
Amortization of intangibles 275,942 304,008
Income from life insurance
investment (130,531)
(Gain) loss on sale of other
real estate 22,161 (21,484)
--------- ----------- --------
Net Cash Provided by Operating
Activities 5,195,717 3,062,624 2,869,081
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing bank
deposits 8,312,403 (13,886,318) 149,603
Net (increase) decrease in federal
funds sold (4,476,000) 909,000 (909,000)
Proceeds from maturities of securities
held to maturity 20,100,747 1,430,967
Proceeds from maturities of
securities available for sale 25,794,446 40,828,490 3,326,438
Proceeds from sales of securities
available for sale 5,062,045 3,051,910 2,185,135
Purchases of securities held to maturity (19,990,333) (6,771)
Purchases of securities available
for sale (37,983,540) (62,216,028) (7,233,362)
Net increase in loans (25,748,188) (24,955,943)(11,822,428)
Purchase of life insurance (2,172,124)
Purchase of property and equipment (330,302) (1,072,265) (225,456)
Purchase of other real estate (243,204)
Construction in progress payments (91,850) (578,586)
Purchase of intangible assets (5,472,152)
Sale of other real estate 263,970 138,774 79,489
--------- -------- --------
Net Cash Used in Investing Activities(31,612,344) (62,564,118)(13,603,971)
--------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand and savings
deposits 14,978,546 24,893,136 (2,538,209)
Net increase in time deposits 5,026,575 31,031,240 15,385,656
Net change in short-term debt (2,387,313) 1,997,660 978,666
Dividends paid in cash (1,580,138) (1,532,752) (1,419,147)
Proceeds from long-term debt 18,000,000 13,000,000 1,000,000
Payments to repurchase common stock (296,645) (83,753) (501,609)
Proceeds from issuance of common stock 155,250
Repayments of long-term debt (6,670,674) (8,403,140) (3,162,438)
----------- ----------- --------
Net Cash Provided by Financing
Activities 27,070,351 61,057,641 9,742,919
--------- ------------- ----------
Net Increase (decrease) in Cash and
Cash Equivalents 653,724 1,556,147 (991,971)
Cash and Cash Equivalents, Beginning
of Year 5,363,722 3,807,575 4,799,546
======== ============ ============
Cash and Cash Equivalents, End of Year 6,017,446 $5,363,722 $3,807,575
========= ========= =========
Supplemental Disclosure:
Cash paid for:
Interest expense $7,538,614 $9,458,909 $7,218,051
Income taxes 1,100,000 1,050,000 1,322,000
The accompanying notes are an integral part of this statement
27
Notes to the Consolidated Financial Statements
NOTE 1 NATURE OF OPERATIONS:
F & M Bank Corp. ("Company"), through its subsidiary Farmers & Merchants Bank
("Bank"), operates under a charter issued by the Commonwealth of Virginia and
provides commercial banking services. As a state chartered bank, the Bank is
subject to regulation by the Virginia Bureau of Financial Institutions and the
Federal Reserve Bank. The Bank provides services to customers located mainly in
Rockingham County, Virginia, and the adjacent counties of Page, Shenandoah and
Augusta. Services are provided at eight branch offices. In addition, the Company
offers insurance and financial services through its subsidiaries, TEB Life
Insurance, Inc. and Farmers & Merchants Financial Services, Inc.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its
subsidiaries conform to generally accepted accounting principles and to accepted
practice within the banking industry.
The following is a summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Farmers and Merchants Bank, the TEB Life Insurance Company and Farmers &
Merchants Financial Services, Inc. Significant intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts in those statements;
actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes are the
determination of the allowance for loan losses, which is sensitive to changes in
local and national economic conditions, and the other than temporary impairment
of investments in the investment portfolio.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and deposits at other financial
institutions whose initial maturity is ninety days or less.
Investment Securities
Management reviews the securities portfolio and classifies all securities as
either held to maturity or available for sale at the date of acquisition.
Securities that the Company has both the positive intent and ability to hold to
maturity (at time of purchase) are classified as held to maturity securities.
All other securities are classified as available for sale. Securities held to
maturity are carried at historical cost and adjusted for amortization of
premiums and accretion of discounts, using the effective interest method.
Securities available for sale are carried at fair value with any valuation
adjustments reported, net of deferred taxes, as a part of other accumulated
comprehensive income. Also included in securities available for sale are
marketable equity securities.
Interest, amortization of premiums and accretion of discounts on securities are
reported as interest income using the effective interest method. Gains (losses)
realized on sales and calls of securities are determined on the specific
identification method.
Accounting for Historic Rehabilitation and Low Income Housing Partnerships
The Company periodically invests in low income housing partnerships whose
primary benefit is the distribution of federal tax credits to partners. The
Company recognizes these benefits and the cost of the investments over the life
of the partnership (usually 15 years). In addition, state and federal historic
rehabilitation credits are generated from a recent investment in a partnership
organized for this purpose.
28
Notes to the Consolidated Financial Statements
Amortization of this investment is based on the amount or benefits received in
the current year to total estimated benefits over the life of the project. All
benefits have been shown as investment income since income tax benefits are the
only anticipated benefits of ownership.
Loans
Loans are carried on the balance sheet net of any unearned interest and the
allowance for loan losses. Interest income on loans is determined using the
effective interest method on the daily amount of principal outstanding except
where serious doubt exists as to collectibility of the loan, in which case the
accrual of income is discontinued.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable and (ii) SFAS No. 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.
Nonaccrual Loans
Interest accruals are continued on past due, secured loans until the principal
and accrued interest equal the value of the collateral and on unsecured loans
until the financial condition of the borrower deteriorates to the point that any
further accrued interest would be determined to be uncollectible.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to income over the estimated useful lives of the assets
on a combination of the straight-line and accelerated methods. The ranges of the
useful lives of the premises and equipment are as follows:
Buildings and Improvements 10 - 40 years
Furniture and Fixtures 5 - 20 years
Maintenance, repairs, and minor improvements are charged to operations as
incurred. Gains and losses on dispositions are reflected in other income or
expense.
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over ten years.
Core deposits, net of amortization amounted to $2,254,000 and $2,530,000 at
December 31, 2002 and 2001, respectively. The Company adopted SFAS 147 on
January 1, 2002 and determined that the core deposit intangible will continue to
be amortized over the estimated useful life.
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Additionally, it further clarifies the criteria for the
initial recognition and measurement of intangible assets separate from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of SFAS No. 142 discontinue the amortization
of goodwill and intangible assets with indefinite lives. Instead, these assets
will be subject to at least an annual impairment review, and more frequently if
certain impairment indicators are in evidence. SFAS No. 142 also requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
29
The Company adopted SFAS No. 142 on January 1, 2002. Goodwill is included in
other assets and totaled $2,639,000 at December 31, 2002 and 2001. The goodwill
is no longer amortized, but instead tested for impairment at least annually.
Based on the testing, there were no impairment charges for 2002. Application of
the nonamortization provisions of the Statement resulted in additional net
income of $190,000 for the year ended December 31, 2002.
Pension Plans
Substantially all employees are covered by a pension plan. The net periodic
pension expense includes a service cost component, estimated normal return on
plan assets, and the effect of deferring and amortizing certain actuarial gains
and losses.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as
incurred. Total advertising costs included in other operating expenses for 2002,
2001 and 2000 were $139,527, $141,461 and $116,668 respectively.
Income Taxes
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under income
tax laws. Deferred taxes, which arise principally from temporary differences
between the period in which certain income and expenses are recognized for
financial accounting purposes and the period in which they affect taxable
income, are included in the amounts provided for income taxes.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities and gains
or losses on certain derivative contracts, are reported as a separate component
of the equity section of the balance sheet. Such items, along with operating net
income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
Changes in: 2002 2001 2000
---- ---- ----
Unrealized holding gain (loss)
on interest rate swap 4,137 (30,106)
Unrealized holding gains (losses)
on available-for-sale
securities (1,141,553) $ 698,279 $ 1,134,127
Reclassification adjustment for
gains (losses) realized
in income 182,430 (1,252,500) (769,704)
------- ---------- --------------
Net Unrealized Gains (Losses)(954,986) (584,327) 364,423
Tax effect 293,540 214,021 (154,547)
--------- -------- ---------
Net Change (661,446) $(370,306) $ 209,876
========== ========= ========
30
Notes to the Consolidated Financial Statements
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding.
NOTE 3 CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a percentage
of deposits. The average balance of cash, which the Federal Reserve Bank
requires to be on reserve, was $ 1,005,000 and $764,000 for the years ended
December 31, 2002 and 2001, respectively.
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair value of securities held to maturity are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------------------- ----------
December 31, 2002
U. S. Treasuries
and Agencies $ 110,000 $ $ $ 110,000
Corporate bonds $1,767,258 $ 27,754 $ $1,795,012
---------- --------- --------- ----------
Total Securities
Held to Maturity$1,877,258 $ 27,754 $ $1,905,012
========= ======== ======== =========
December 31, 2001
U. S. Treasuries
and Agencies $ 110,465 $ 3,385 $ $ 113,850
Corporate bonds 1,772,316 58,239 1,830,555
--------- -------- --------- ---------
Total Securities
Held to Maturity$1,882,781 $ 61,624 $ $1,944,405
========= ======== ======== =========
The amortized cost and fair value of securities available for sale are as
follows:
December 31, 2002
U.S. Agencies $38,023,227 $ 453,565 $ 1,834 $38,474,958
Mortgage-backed
obligations of
federal agencies 5,033,202 36,371 708 5,068,865
Marketable equities 9,103,662 488,951 1,566,930 8,025,683
Corporate bonds 11,088,828 263,682 14,000 11,338,510
---------- -------- -------- ----------
Total Securities
Available for
Sale $63,248,919 $1,242,569 $1,583,472 $62,908,016
========== ========= ========= ==========
31
December 31, 2001
U.S. Treasuries and $29,097,413 $ 332,543 $ 2,189 $29,427,767
Agencies
Mortgage-backed 7,853,039 68,966 436 7,921,569
obligations of
federal agencies
Marketable equities 10,682,587 1,411,532 1,594,000 10,500,119
Corporate bonds 10,012,271 390,291 10,402,562
---------- -------- -------- ----------
Total Securities
Available for
Sale $57,645,310$2,203,332 $1,596,625 $58,252,017
========== ========= ========= ==========
The amortized cost and fair value of securities at December 31, 2002, by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities Held to MaturitySecurities Available for Sale
--------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or
less $1,110,000 $1,113,700 $31,500,474 $31,773,269
Due after one year
through five years 767,258 791,312 22,644,783 23,109,064
--------- ---------- ---------- -------------
Total 1,877,258 1,905,012 54,145,257 54,882,333
Marketable equities 9,103,662 8,025,683
-------- -------- --------- ---------
$1,877,258 $1,905,012 $63,248,919 $62,908,016
========= ========= ========== ==========
Realized gains and losses and the gross proceeds from the sale of debt
securities were not material in 2002, 2001 or 2000. Gains and losses on
marketable equity transactions are summarized below:
2002 2001 2000
------------------------ ------
Gains 318,354 $1,283,189 $ 798,563
Losses 500,784 30,689 28,859
--------- -------- --------
Net Gains $(182,430) $1,252,500 $ 769,704
========= ========= ========
Based on a review of its portfolio, the Company wrote down the carrying basis of
five of its equity holdings by $503,034 as of December 31, 2002. This write down
was a result of management's evaluation and determination that these assets met
the definition for impairment under SFAS 115.
The carrying value (which approximates fair value) of securities pledged by the
Bank to secure deposits and for other purposes amounted to $ 23,487,000 at
December 31, 2002 and $19,341,000 at December 31, 2001. The Company has pledged
$5,882,000 of equity securities to secure the $5,000,000 in loans it obtained
from SunTrust Bank (see note 10).
There were no state or political subdivision obligations of a single issuer that
exceeded 10% of stockholders' equity at December 31, 2002, 2001 or 2000
32
Notes to the Consolidated Financial Statements
Other investments consist of investments in seven low-income housing and
historic equity partnerships (carrying basis of $2,794,714) and stock in the
Federal Home Loan Bank, Community Bankers Bank, Federal Reserve Bank, Shenandoah
Title, LLC and Virginia Bankers' Insurance Center, LLC (carrying basis of
$2,021,672). The interests in the low-income housing and historic equity
partnerships have limited transferability and the interests in the other stocks
are restricted as to sales. The market values of these securities are estimated
to approximate their carrying value as of December 31, 2002.
At December 31, 2002, the Company was committed to invest an additional
$2,853,922 in four low-income housing limited partnerships. These funds will be
paid as requested by the general partner to complete the projects. This
additional investment has been reflected in the above carrying basis and in
accrued liabilities on the balance sheet.
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
2002 2001
-------------- ---------
Real Estate
Construction $12,059,185 $ 5,520,815
Mortgage 118,453,009 105,304,862
Commercial and agricultural 47,218,287 41,256,218
Installment 22,703,677 23,106,243
Credit cards 1,477,436 1,348,372
Other 68,248 88,873
---------- ----------
Total $201,979,842 $176,625,383
=========== ========
The Company has pledged mortgage loans as collateral for borrowings with the
Federal Home Loan Bank of Atlanta totaling $32,914,047 and $22,923,410 as of
December 31, 2002 and 2001, respectively.
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses is shown in the following
schedule:
2002 2001 2000
------------------------ --------
Balance, beginning of year $1,288,506 $1,107,917 $1,090,262
Other adjustments 84,000
Provision charged to operating
expenses 387,000 204,000 123,000
Loan recoveries 100,985 52,848 42,697
Loans charged off (299,484) (160,259) (148,042)
---------- ---------- ---------
Balance, End of Year $1,477,007 $1,288,506 $1,107,917
========= ========= =========
Percentage of gross loans .73% .73% .73%
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as follows:
2002 2001
-------------- ---------
Land $ 549,723 $ 549,723
Buildings and improvements 4,090,723 3,957,920
Furniture and equipment 2,973,131 2,683,780
---------- ----------
7,613,577 7,191,423
Less - accumulated depreciation (3,127,764) (2,779,897)
----------- --------
Net $ 4,485,813 $ 4,411,526
========== =========
33
Provisions for depreciation of $347,687 in 2002, $ 308,152 in 2001, and $257,586
in 2000 were charged to operations.
NOTE 8 TIME DEPOSITS:
At December 31, 2002, the scheduled maturities of time deposits are as follows:
2003 $73,108,692
2004 17,823,483
2005 14,564,247
2006 6,686,209
Thereafter 10,859,908
----------
Total $123,042,539
===========
NOTE 9 SHORT-TERM DEBT:
Short-term debt information is summarized as follows:
Weighted
Maximum Outstanding Average Average Year End
Outstanding at at Balance Interest Interest
Any Month End Year End Outstanding 1 Rate Rate
-------------------------------- ---------- -----
2002
Treasury, tax
and loan $ 29,213 $ 21,667 $22,229 n/a n/a
Federal funds
purchased 3,882,000 77,323 2.23% n/a
Notes payable 343,684 156,326 5.45% n/a
Securities sold under
agreements to
repurchase 9,497,671 8,286,715 8,240,723 1.14% .72%
--------- ------- ---------- ------ -----
Totals $8,308,382 $8,496,601 1.23% .72%
======== ========= ====== ======
2001
Treasury, tax
and loan $ 69,746 $ 69,746 $ 18,655 n/a n/a
Federal funds 936,000 936,000 89,315 6.22% n/a
purchased
Notes payable 266,065 198,260 74,592 5.14% 4.35%
Securities sold under
agreements to
repurchase 10,853,937 9,491,689 8,946,884 3.38% 1.50%
------- -------- ----------- --------- -----
Totals $10,695,695 $9,129,446 3.42% 1.51%
========== ========== ===== ======
2000
Treasury, tax
and loan $ 29,205 $ $ 16,931 n/a n/a
Federal funds
purchased 6,040,000 2,037,910 6.74% n/a
Notes payable 359,302 68,105 8.92% n/a
Securities sold under
agreements to
repurchase 8,698,035 8,698,035 6,255,820 5.68% 5.76%
--------- ----------- ---------- ------ ------
Totals $ 8,698,035 $8,378,766 5.95% 5.76%
======== =========== ====== ======
1 Based on daily amounts outstanding
34
Notes to the Consolidated Financial Statements
The Bank issues repurchase agreements to customers desiring short-term
investments. These agreements are issued on a daily basis and are secured by
United States Agency obligations and corporate bonds. The market value of these
securities approximates their carrying value. All securities sold under
agreements to repurchase are under the Company's control.
As of December 31, 2002, the Company had lines of credit with correspondent
banks totaling $18,091,000, which are used in the management of short-term
liquidity.
NOTE 10 LONG-TERM DEBT:
New borrowings from the Federal Home Loan Bank of Atlanta (FHLB) totaled
$15,000,000 in 2002 and $13,000,000 in 2001. The interest rates on the notes
payable are fixed at the time of the advance and range from 4.02% to 5.33%; the
weighted average interest rate is 4.64% at December 31, 2002. During 2001, the
Company paid $358,955 in prepayment penalties to refinance portions of this
debt. These penalties were expensed in 2001 when paid. The long-term debt is
secured by qualifying mortgage loans owned by the Company.
The Company borrowed $4,000,000 of long-term debt in March 2001 and an
additional $3,000,000 of long-term debt in September 2002. Both loans are from
SunTrust Bank. Of these borrowings, $6,000,000 was used as contributed capital
to the Bank, $900,000 was used to payoff a loan from the Bank for securities
purchases and the balance was used for working capital needs. The combined
outstanding balance at December 31, 2002 was $5,000,000 with quarterly principal
payments of $333,333 over the remaining four year period. The interest rate is a
floating rate of LIBOR plus 1.10% adjustable monthly. 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 first obligation. As
a result of a continued decline in market interest rates, had the Company
cancelled this swap agreement at December 31, 2002 it would have suffered a
$25,969 pretax loss on the transaction. The second loan continues to float at
LIBOR plus 1.10%. The average rate paid on this note from inception to December
31, 2002 was 2.79%.
Repayments of long-term debt are due either quarterly or semi-annually and
interest is due monthly. Interest expense of $1,371,774, $1,488,569 and
$936,822, was incurred on these debts in 2002, 2001, and 2000, respectively. The
maturities of long-term debt as of December 31, 2002 are as follows:
2002 $8,527,817
2003 7,527,817
2004 7,527,817
2005 5,692,857
2006 1,642,857
Thereafter 1,392,859
---------
Total $32,312,024
==========
NOTE 11 INCOME TAX EXPENSE:
The components of the income tax expense are as follows:
2002 2001 2000
------------------------ -------
Current expense
Federal $1,554,685 $1,448,500 $1,538,275
State 30,280 38,689
Deferred benefit
Federal (240,106) (43,982) (90,867)
--------- --------- ---------
Total Income Tax Expense $1,314,579 $1,434,798 $1,486,097
========= ========= =========
Amounts in above arising
from gains
(losses) on security
transactions $ (96,711) $ 455,188 $ 293,322
=========== ========== =========
35
The deferred tax effects of temporary differences are as follows:
2002 2001 2000
------------------------ -------
Tax Effects of Temporary Differences:
LIH Partnership Losses $ 7,944 $ 19,107 $ (43,697)
Securities write-offs (171,032)
Provision for loan losses (62,050) $ (30,800) 4,983
Split dollar life insurance 30,780 (10,629) (8,506)
Non-qualified deferred
compensation (41,612) (52,147) (54,828)
Depreciation 44,271 39,177 56,362
Core deposit amortization (33,113)
Pension expense (13,611) (1,736) (40,163)
Other (1,683) (6,954) (5,018)
--------- --------- ---------
Deferred Income Tax Benefit $(240,106) $ (43,982) $ (90,867)
========= ========= =========
The components of the deferred taxes as of December 31 are as follows:
2002 2001
------------ --------
Deferred Tax Assets:
Allowance for loan losses $ 349,908 $ 287,858
Split dollar life insurance 74,224 105,004
Nonqualified deferred compensation 226,261 181,895
Securities write-off 171,032
Core deposit amortization 33,113
State historic tax credits 99,591 99,591
Securities available for sale 90,372
Other 21,917 24,793
-------- --------
Total Assets $1,066,418 $699,141
--------- ---------
Deferred Tax Liabilities:
Securities available for sale $ $194,340
Unearned low income housing credits 450,157 353,978
Depreciation 185,856 141,585
Pension 110,252 123,863
Other 21,210 9,418
-------- --------
Total Liabilities 767,475 823,184
-------- --------
Deferred Tax Asset (Liability) $ 298,943 $(124,043)
======== =========
The following table summarizes the differences between the actual income tax
expense and the amounts computed using the federal statutory tax rates:
2002 2001 2000
----------------------------- ------
Tax expense at federal
statutory rates $1,638,281 $1,586,212 $1,744,194
Increases (decreases) in taxes
resulting from:
State income taxes, net (16,421) 31,613 39,512
Partially exempt income (141,923) (134,909) (126,828)
Tax-exempt income (68,507) (79,739) (180,486)
Goodwill amortization (61,424)
Other (35,427) 31,621 9,705
--------- -------- --------
Total Income Tax Expense $1,314,579 $1,434,798 $1,486,097
========= ========= =========
36
Notes to the Consolidated Financial Statements
NOTE 12 EMPLOYEE BENEFITS:
The Bank participates in the Virginia Bankers' Association Master Defined
Benefit Pension Plan and Trust. Substantially all bank employees are covered by
the plan. Benefits are based upon the participant's length of service and annual
earnings with vesting of benefits after five years of service. Plan assets
consist primarily of investments in stocks and bonds. Pension expense totaled
$189,215, $140,622 and $165,509, for 2002, 2001, and 2000, respectively.
The Company sponsors an employee stock ownership plan which provides stock
ownership to substantially all employees of the Bank. The Plan provides total
vesting upon the attainment of five years of service. Contributions to the plan
are made at the discretion of the Board of Directors and are allocated based on
the compensation of each employee relative to total compensation paid by the
Bank. All shares issued and held by the Plan are considered outstanding in the
computation of earnings per share. Dividends on Company stock are allocated and
paid to participants at least annually. Shares of Company stock,
when distributed, have restrictions on transferability. The
Company contributed $190,000 in 2002, $155,250 in 2001 and $159,000 in 2000 to
the Plan and charged this expense to operations.
NOTE 13 CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks totaling $10,165,063 and
$17,669,293 at December 31, 2002 and 2001, respectively.
The Company grants commercial, residential real estate and consumer loans to
customers located primarily in the northwestern portion of the State of
Virginia. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the agribusiness economic sector, specifically the poultry
industry. Collateral required by the Company is determined on an individual
basis depending on the purpose of the loan and the financial condition of the
borrower. Approximately 70% of the loan portfolio is secured by real estate.
NOTE 14 COMMITMENTS:
The Company makes commitments to extend credit in the normal course of business
and issues standby letters of credit to meet the financing needs of its
customers. The amount of the commitments represents the Company's exposure to
credit loss that is not included in the balance sheet. As of the balance sheet
dates, the Company had the following commitments outstanding:
2002 2001
------------ --------
Commitments to loan money $51,315,690 $42,837,337
Standby letters of credit 594,840 714,090
The Company uses the same credit policies in making commitments to lend money
and issue standby letters of credit as it does for the loans reflected in the
balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Collateral required, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment.
37
NOTE 15 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by them) were
customers of and had transactions with the Company in the normal course of
business. These transactions were made on substantially the same terms as those
prevailing for other customers and did not involve any abnormal risk.
Loan transactions with related parties are shown in the following schedule:
2002 2001
------------ -------
Total loans, beginning of year $1,783,345 $1,403,599
Change in directorship 162,097
Designation of new executive officers 216,384
New loans 2,226,099 1,174,549
Repayments (1,343,701) (956,900)
----------- --------
Total loans, end of year $2,882,127 $1,783,345
========= =========
NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
The principal source of funds of F & M Bank Corp. is dividends paid by the
Farmers and Merchants Bank. The Federal Reserve Act restricts the amount of
dividends the Bank may pay. Approval by the Board of Governors of the Federal
Reserve System is required if the dividends declared by a state member bank, in
any year, exceed the sum of (1) net income of the current year and (2) income
net of dividends for the preceding two years. As of January 1, 2003,
approximately $2,448,000 was available for dividend distribution without
permission of the Board of Governors. Dividends paid by the Bank to the Company
totaled $1,760,000 in 2002, $954,000 in 2001 and $1,345,000 in 2000.
NOTE 17 LITIGATION
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, or other activities of the Company. Management
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures
About the Fair Value of Financial Statements" defines the fair value of a
financial instrument as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced liquidation sale. As the majority of the Bank's financial instruments
lack an available trading market, significant estimates, assumptions and
present value calculations are required to determine estimated fair value.
38
Notes to the Consolidated Financial Statements
Estimated fair value and the carrying value of financial instruments at December
31, 2002 and 2001 are as follows (in thousands):
2002 2001
---------------------- --------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- --------- ---------- ---------
Financial Assets
Cash $ 6,017 $ 6,017 $ 5,364 $ 5,364
Interest bearing
deposits 5,873 5,866 14,506 14,506
Federal funds sold 4,476 4,476
Securities available
for sale 62,908 62,908 58,252 58,252
Securities held to
maturity 1,905 1,877 1,944 1,883
Other investments 4,816 4,816 3,852 3,852
Loans 208,022 201,980 182,474 176,625
Bank owned life
insurance 2,303 2,303
Accrued interest
receivable 1,655 1,655 1,542 1,542
Financial Liabilities
Demand Deposits:
Non-interest bearing 29,446 29,446 25,741 25,741
Interest bearing 34,134 34,134 29,735 29,735
Savings deposits 41,661 41,661 34,787 34,787
Time deposits 125,186 123,042 120,620 118,016
Accrued liabilities 4,703 4,703 4,118 4,118
Short-term debt 8,308 8,308 10,696 10,696
Long-term debt 33,181 32,312 21,013 20,983
The carrying value of cash and cash equivalents, other investments, deposits
with no stated maturities, short-term borrowings, and accrued interest
approximate fair value. The fair value of securities was calculated using the
most recent transaction price or a pricing model, which takes into
consideration maturity, yields and quality. The remaining financial
instruments were valued based on the present value of estimated future cash
flows, discounted at various rates in effect for similar instruments during the
month of December 2002.
NOTE 19 REGULATORY MATTERS:
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
39
Quantitative measures established by regulation, to ensure capital adequacy,
require the Company to maintain minimum amounts and ratios. These ratios are
defined in the regulations and the amounts are set forth in the table below.
Management believes, as of December 31, 2002, that the Company and its
subsidiary bank meet all capital adequacy requirements to which they are
subject.
As of the most recent notification from the Bureau of Financial Institutions,
the subsidiary bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Company's actual capital ratios are presented in the following table:
Actual Regulatory Requirements
-------------------------------------------------------
December 31, Adequately Well
2002 2001 Capitalized Capitalized
Total risk-based ratio 14.48% 14.65% 8.00% 10.00%
Tier 1 risk-based ratio 13.67% 13.87% 4.00% 6.00%
Total assets leverage
ratio 8.76% 9.20% 3.00% 5.00%
NOTE 20 BRANCH ACQUISITIONS:
During the third quarter of 2000, F&M Bank Corp. entered into an agreement to
purchase the First Union National Bank branches located in Edinburg and
Woodstock, Virginia. Closing was held on February 23, 2001, with the branches
reopening as branches of Farmers & Merchants Bank on February 26, 2001.
The acquisition included deposits totaling $37,244,000, and loans totaling
$9,800,000. The Woodstock facility was also purchased at a cost of $625,000,
while the Edinburg facility is leased. Equipment and fixtures acquired as part
of the transaction totaled $54,893. The cost of deposit intangibles and other
acquisition costs totaled $5,472,153. These costs are being amortized using the
straight-line method over a ten-year period. Other acquisition costs include
legal, accounting, investment advisory and data conversion support by both First
Union and the Bank's core software vendor.
NOTE 21 INVESTMENT IN LIFE INSURANCE CONTRACTS
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 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.
40
Notes to the Consolidated Financial Statements
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31,
ASSETS 2002 2001
------------- --------
Cash and cash equivalents $ 292,501 $ 189,345
Investment in subsidiaries 26,476,470 22,942,514
Securities available for sale 7,470,322 9,883,785
Limited partnership investments 2,794,715 2,300,563
Due from subsidiaries 190,354 15,998
Income tax receivable 215,109 218,291
Other real estate 307,891 307,891
Deferred income taxes 139,306
--------- ---------
Total Assets $37,886,668 $35,858,387
========== ==========
LIABILITIES
Notes payable $5,000,000 $4,333,333
Margin payable 198,260
Accrued interest payable 46,091 39,532
Other liabilities 33,450 30,106
Dividends payable 412,025 390,340
Demand obligations for low income
housing investment 2,853,922 2,118,074
Deferred income taxes 151,543
-------- --------
Total Liabilities 8,345,488 7,261,188
--------- ---------
STOCKHOLDERS' EQUITY
Common stock par value $5 per share,
3,000,000 shares authorized, 2,423,678
and 2,438,563 shares issued and outstanding
for 2002 and 2001, respectively
12,118,390 12,192,815
Capital surplus 302,795 525,015
Retained earnings 17,390,478 15,488,406
Accumulated other comprehensive income (270,483) 390,963
--------- --------
Total Stockholders' Equity 29,541,180 28,597,199
---------- ----------
Total Liabilities and Stockholders' Equity $37,886,668 $35,858,387
========== ==========
41
Statements of Net Income and Retained Earnings
Years Ended December 31,
2002 2001 2000
---------------------------- ---------
INCOME
Dividends from affiliate $1,760,000 $ 954,000 $1,345,000
Interest on loans 8,489 16,543
Investment income 100 11,621 20,933
Dividend income 408,817 382,108 415,533
Security gains (losses) (307,480) 1,160,235 798,563
Net limited partnership income 20,915 81,361 147,008
Other 2,960 20,537 831
--------- ---------- ---------
Total Income 1,885,312 2,618,351 2,744,411
--------- ---------- ---------
EXPENSES
Interest expense 189,915 194,488 6,087
Administrative expenses 132,787 119,167 111,740
--------- ---------- ---------
Total Expenses 322,702 313,655 117,827
--------- ---------- ---------
Net income before income tax expense
and increase in undistributed equity
of affiliates 1,562,610 2,304,696 2,626,584
INCOME TAX EXPENSE (BENEFIT) (208,706) 384,990 200,018
---------- ---------- ---------
Income before increase in undistributed
equity of affiliates 1,771,316 1,919,706 2,426,566
Increase in undistributed income
of affiliates 1,732,579 1,310,824 1,217,319
--------- ---------- ---------
NET INCOME 3,503,895 3,230,530 3,643,885
Retained earnings, beginning of year 15,488,406 13,790,628 11,587,061
Dividends on common stock (1,601,823) (1,532,752) (1,440,318)
----------- ----------- -----------
Retained Earnings, End of Year $17,390,478 $15,488,406 $13,790,628
========== ========== ==========
42
Notes to the Consolidated Financial Statements
Statements of Cash Flows
Years Ended December 31,
2002 2001 2000
--------------- ------------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,503,895 $3,230,530 $3,643,885
Adjustments to reconcile net income
to net cash provided by
operating activities:
Undistributed subsidiary income (1,732,579) (1,310,824) (1,217,319)
Gain (Loss) on sale of securities 307,480 (1,160,235) (798,563)
Deferred tax (benefit) expense (148,606) 49,387 (90,608)
Decrease (increase) in interest
receivable 736 (637)
Decrease (increase) in due from
subsidiary (174,356) 52,764 (68,762)
Decrease (increase) in other
receivables 3,182 29,795 (120,414)
Increase (decrease) in due to
subsidiary (176,743)
Increase in other liabilities 14,039 39,530
Increase in deferred tax credits 96,179 65,537
Amortization of limited partnership
investments 255,850 218,804 360,893
Gain on sale of land (20,537)
--------- --------- --------
Net Cash Provided by Operating
Activities 2,125,084 1,195,487 1,531,732
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributed to subsidiary (2,000,000) (6,000,000)
Proceeds from sales of securities
available for sale 4,377,753 2,695,063 2,185,135
Proceeds from maturity of securities
available for sale 298 690
Purchase of securities available for
sale (2,977,153 ) (1,273,759) (1,428,879)
Investments in low income housing
partnerships (14,152) (33,692) (316,043)
Proceeds from sale of real estate 138,775
Decrease in loans receivable 194,902 51,983
--------- -------- --------
Net Cash Provided by (Used in)
Investing Activities (613,552) (4,278,413) 492,886
---------- ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt 3,000,000 5,000,000
Payments on long-term debt (2,333,333) (666,667)
Increase (decrease) in short-term debt (198,260) 198,260 (116,739)
Payments to repurchase common stock (296,645) (83,753) (501,609)
Proceeds from issuance of common stock 155,250
Dividends paid in cash (1,580,138) (1,507,418) (1,419,147)
----------- ----------- ---------
Net Cash Provided by (Used in)
Financing Activities (1,408,376) 3,095,672 (2,037,495)
-------------- ------- -----------
Net Increase (decrease) in Cash
and Cash Equivalents 103,156 12,746 (12,877)
Cash and Cash Equivalents, Beginning
of Year 189,345 176,599 189,476
---------- ---------- ----------
Cash and Cash Equivalents, End of Year $ 292,501 $ 189,345 $ 176,599
========= ======== ========
43
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
F & M Bank Corp.
Timberville, Virginia
We have audited the accompanying consolidated balance sheets of F & M Bank Corp.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of F & M Bank Corp. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2002, in conformity with U.S. generally accepted accounting
principles.
January 31, 2003 /s/ S. B. Hoover & Company, L.L.P.
Harrisonburg, Virginia
44
Other Material Required by Form 10-K
BUSINESS
General
F & M Bank Corp., incorporated in Virginia in 1983, is a one-bank holding
company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and
owns 100% of the outstanding stock of its two affiliates, Farmers & Merchants
Bank (Bank) and TEB Life Insurance Company (TEB). Farmers & Merchants Financial
Services, Inc. (FMFS) is a wholly owned subsidiary of Farmers & Merchants Bank.
Farmers & Merchants Bank was chartered on April 15, 1908, as a state
chartered bank under the laws of the Commonwealth of Virginia. TEB was
incorporated on January 27, 1988, as a captive life insurance company under the
laws of the State of Arizona. FMFS is a Virginia chartered corporation and was
incorporated on February 25, 1993.
The Bank offers all services normally offered by a full-service
commercial bank, including commercial and individual demand and time deposit
accounts, repurchase agreements for commercial customers, commercial and
individual loans, and drive-in banking services. TEB was organized to re-insure
credit life and accident and health insurance currently being sold by the Bank
in connection with its lending activities. FMFS was organized to write title
insurance but now provides other financial services to customers of Farmers &
Merchants Bank.
The Bank makes various types of commercial and consumer loans and has a
heavy concentration of residential and agricultural real estate loans. The Bank
has continued to experience good loan demand throughout 2002 due to the strong
local and national economies. The local economy is relatively diverse with
strong employment in the agricultural, manufacturing, service and governmental
sectors.
On December 31, 2002, F & M Bank Corp., the Bank, TEB and FMFS had full-time and
part-time employees. No one employee devotes full-time services to F&M Bank
Corp.
The Company's and the Bank's principal executive office is at 205 South Main
Street, Timberville, VA 22853, and its phone number is (540) 896-8941.
Competition
The Bank's offices compete with approximately sixteen
financial institutions. These other institutions include state and
nationally chartered banks, as well as nationally chartered savings banks.
The main office and the Broadway branch serve the northern portion of Rockingham
County, Virginia and the southwestern portion of Shenandoah County. The Elkton
branches serve the town of Elkton, the eastern portion of Rockingham County, and
the southern portion of Page County. The Bridgewater office serves the town of
Bridgewater, the southern portion of Rockingham County and the northwestern
portion of Augusta County. The offices in Shenandoah County serve the towns of
Edinburg and Woodstock and the surrounding areas. Bank competition in the area
of all offices is very strong.
45
Regulation and Supervision
The operations of F & M Bank Corp. and the Bank are subject to federal and state
statutes, which apply to state member banks of the Federal Reserve System.
The stock of F & M Bank Corp. is subject to the registration requirements of the
Securities Act of 1934. F & M Bank Corp. is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934. These include, but are not
limited to, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission. As an Exchange Act reporting company, the
Corporation is directly affected by the recently enacted Sarbanes-Oxley Act of
2002, which is aimed at improving corporate governance and reporting procedures.
The Corporation is already complying with new SEC and other rules and
regulations implemented pursuant to Sarbanes-Oxley and intends to comply with
any applicable rules and regulations implemented in the future.
F & M Bank Corp., as a bank holding company, is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Act"). It is registered as
such and is supervised by the Federal Reserve Board. The Act requires F & M Bank
Corp. to secure the prior approval of the Federal Reserve Board before F & M
Bank Corp. acquires ownership or control of more than 5% of the voting shares,
or substantially all of the assets of any institution, including another bank.
As a bank holding company, F & M Bank Corp. is required to file with the Federal
Reserve Board an annual report and such additional information as it may require
pursuant to the Act. The Federal Reserve Board may also conduct examinations of
F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the
1970 Amendments to the Act and the regulations of the Federal Reserve Board, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with an extension of credit, provision
of credit, sale, or lease of property or furnishing of services.
Federal Reserve Board regulations permit bank holding companies to engage in
non-banking activities closely related to banking or to managing or
controlling banks. These activities include the making or servicing of loans,
performing certain data processing services, and certain leasing and insurance
agency activities. TEB Life acts as the primary re-insurer for credit life
insurance sold through the Bank. F & M Bank Corp. owns an interest in the
Johnson Williams Project in Berryville, Virginia which provides housing for the
elderly and lower income tenants. Since 1994, the Company has entered into
agreements with the Virginia Community Development Corporation to purchase
equity positions in the Housing Equity Fund of Virginia II, III, IV, V, VII and
Historic Equity Fund I. These funds provide housing for low-income individuals
throughout Virginia. Approval of the Federal Reserve Board is necessary to
engage in any of the activities described above or to acquire interests engaging
in these activities.
The Bank as a state member bank is supervised and regularly examined by the
Virginia Bureau of Financial Institutions and the Federal Reserve Board. Such
supervision and examination by the Virginia Bureau of Financial Institutions and
the Federal Reserve Board is intended primarily for the protection of depositors
and not for the stockholders of F & M Bank Corp.
The information required by Guide 3 has been included under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
46
Other Material Required by Form 10-K
Description of Properties
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
Timberville Main Office Elkton Branch
205 South Main Street 127 West Rockingham Street
Timberville, VA 22853 Elkton, VA 22827
Broadway Branch Elkton Plaza Branch
126 Timberway Rt. 33 West
Broadway, VA 22815 Elkton, VA 22827
Bridgewater Branch Edinburg Branch
100 Plaza Drive 120 South Main Street
Bridgewater, VA 22812 Edinburg, VA 22824
Woodstock Branch Harrisonburg Office
161 South Main Street (Mortgage Origination & Investment Sales)
Woodstock, VA 22664 207 University Blvd, Suite 100
Harrisonburg, VA 22801
With the exception of the Edinburg Branch, all facilities are owned by Farmers &
Merchants Bank. ATMs are available at all locations, with the exception of the
Edinburg Branch.
Through an agreement with Nationwide Money ATM Services the Bank also operates
cash only ATMs at nine Food Lion grocery stores, one in Woodstock, VA, one in
Mt. Jackson, VA, four in Harrisonburg, VA, three in
Charlottesville, VA and one ATM at a convenience store in Edinburg, VA.
Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this Annual Report
on Form 10-K. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
47
Exhibits, Financial Statements, and Reports on Form 8-K
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Notes to the Consolidated Financial Statements
Report of the Independent Auditors
All financial statement schedules have been omitted, as the required information
is either inapplicable or included in the consolidated financial statements or
related notes.
The following exhibits are filed as a part of this report:
Exhibit No.
3 i Restated Articles of Incorporation of F & M Bank Corp. as
incorporated by reference to F & M Bank Corp.'s 10-K filed March
8, 2002.
3 ii Amended and Restated Bylaws of F & M Bank Corp. as incorporated
by reference to F & M Bank Corp.'s 10-K filed March 8, 2002.
21 Subsidiaries of the registrant are attached
23 Consent of Certified Public Accountant attached
The Corporation did not file any reports on Form 8-K for the quarter ending
December 31, 2002.
Shareholders may obtain, free of charge, a copy of the exhibits to this
Report on Form 10-K by writing Larry A. Caplinger, Corporate Secretary, at F
& M Bank Corp., P.O. Box 1111, Timberville, VA 22853.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
F & M Bank Corp.
(Registrant)
By: /s/ Julian D. Fisher March 25, 2003
--------------------------- -------------------------
Julian D. Fisher Date
Director, President and Chief Executive Officer
By: /s/ Neil W. Hayslett March 25, 2003
--------------------------- --------------------
Neil W. Hayslett Date
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
Director
- -------------------------- ----------------
Thomas L. Cline
/s/ John N. Crist Director March 25, 2003
- --------------------------- ----------------
John N. Crist
/s/ Ellen R. Fitzwater Director March 25, 2003
- --------------------------- ----------------
Ellen R. Fitzwater
/s/ Robert L. Halterman Director March 25, 2003
- --------------------------- ----------------
Robert L. Halterman
/s/ Daniel J. Harshman Director March 25, 2003
- --------------------------- ---------------
Daniel J. Harshman
Director, Chairman
- ------------------------- ----------------
Lawrence H. Hoover, Jr
/s/ Richard S. Myers Director March 25, 2003
- -------------------------- ---------------
Richard S. Myers
Director
- ------------------------- ----------------
Michael W. Pugh
Director
- -------------------------- ----------------
Ronald E. Wampler
49
CERTIFICATION
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C.
In connection with the Annual Report on Form 10-K for the year ended December
31, 2002 of F & M Bank Corp. (the "Company"), as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned Chief
Executive Officer and Chief Financial Officer of the Company hereby certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: (1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company as of and for the periods covered in the Report.
/s/ Julian D. Fisher
Julian D. Fisher
President & Chief Executive Officer
/s/ Neil W. Hayslett
Neil W. Hayslett
Senior Vice President &
Chief Financial Officer
50
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 annual report on Form 10-K of F & M Bank Corp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 25, 2003 /s/ Julian D. Fisher
------------------------------
Julian D. Fisher
President and Chief Executive
Officer
51
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 annual report on Form 10-K of F & M Bank Corp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 25, 2003 /s/ Neil W. Hayslett
------------------------------
Neil W. Hayslett
Senior Vice President &
Chief Financial Officer