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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, 2001 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 if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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: $20,091,363
The registrant's Common Stock is traded Over-the-Counter under the symbol
FMBM. The aggregate market value of the 2,193,152 shares of Common Stock of the
registrant issued and outstanding held by nonaffiliates on February 14, 2002 was
approximately $43,314,752 based on the closing sales price of $19.75 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 February 14, 2002, there were 2,438,170 shares
of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held on April
13, 2002 (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 7-18
Consolidated Financial Statements 19-22
Notes to Consolidated Financial Statements 23-38
Management's Statement of Responsibility 39
Report of Independent Auditors 40
Other Material Required by Form 10-K 41-45
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 41 to 42.
Item 2 Properties "Properties" on page 43.
Item 3 Legal Proceedings Note 17 "Litigation" on page 33.
Item 4 Submission of Matters No matters have been submitted to a
to a Vote of Security vote of security holders during the
Holders fourth quarter of 2001.
PART II
Item 5 Market for "Market for Registrant's Common Equity
Registrant's Common and Related Stockholder Matters" on page
Equity and Related 6.
Stockholder Matters
Item 6 Selected Financial Data "Selected Financial Data" on page 5.
Item 7 "Management's Discussion "Management's Discussion and Analysis
and Analysis of Financial of Financial Condition and Results of
Condition and Results of Operations" on pages 7-18.
Operation
Item 7a Quantitative and "Forward-Looking Statements" on page 2
Qualitative Disclosures and "Market Risk Management" on page
about Market Risk 17-18.
Item 8 Financial Statements Pages 19 to 38.
and Supplementary
Information
Item 9 Changes in and There were no changes in or
Disagreements with disagreements with accountants on
Accountants 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 16(a)
Executive Officers of Beneficial Ownership Reporting
the Registrant 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 "Stock Ownership
Certain Beneficial of Directors and Executive Officers"
Owners and Management in the Proxy Statement is
incorporated in this Report by
reference.
Item 13 Certain Relationships and The material labeled "Indebtedness and
Related Transactions Other Transactions" in the
Proxy Statement is incorporated in
this Report by reference.
PART IV
Item 14 Exhibits, Financial Statement "Exhibits, Financial Statements, and
Schedules and Reports on Reports on Form 8-K" on page 44.
Form 8-K
Signatures "Signatures" on page 45.
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 7 offices located in
Rockingham and Shenandoah Counties.
Report Format
The format of this report has been changed in order to increase information
distributed to shareholders and to reduce expenses related to preparing and
distributing annual financial information. In the past, F & M Bank Corp. has
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").
This year, we are distributing the 2001 Form 10-K report to shareholders with
the annual proxy materials for the 2001 annual meeting. This report includes the
entire Form 10-K, other than exhibits, as filed with the SEC. Please see page 43
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) 2001 2000 1999 1998 1997
Income Statement Data:
Interest and Dividend
Income $ 17,681 $ 15,509 $ 14,321 $ 14,147 $ 13,532
Interest Expense 9,494 7,411 6,475 6,931 6,319
------- ------- ------- ------- -------
Net Interest Income 8,187 8,098 7,846 7,216 7,213
Provision for Loan
Losses 204 123 140 110 180
----- ---- ---- ----- ----
Net Interest Income
after Provision
for Loan Losses 7,983 7,975 7,706 7,106 7,033
Noninterest Income 1,158 1,038 916 616 528
Securities Gains 1,252 770 1,179 1,249 345
Noninterest Expenses 5,728 4,653 4,313 3,880 3,568
------- ------- ------- ------- -------
Income before Income
Taxes 4,665 5,130 5,488 5,091 4,338
Income Tax Expense 1,435 1,486 1,682 1,590 1,330
------- ------- ------- ------- -------
Net Income $ 3,230 $ 3,644 $ 3,806 $ 3,501 $ 3,008
======= ======= ======= ======= =======
Per Share Data:1
Net Income $ 1.33 $ 1.49 $ 1.55 $ 1.43 $ 1.22
Dividends Declared .63 .59 .52 .73 .35
Book Value 11.74 11.18 10.30 9.80 9.33
Balance Sheet Data:
Assets $272,673 $208,818 $195,338 $191,495 $173,810
Loans 176,625 152,035 140,318 132,301 123,190
Securities 63,987 45,323 44,422 46,357 40,328
Deposits 208,279 152,354 139,507 135,139 126,351
Shareholders' Equity 28,617 27,198 25,286 24,078 22,902
Average Shares
Outstanding 2,431 2,445 2,454 2,456 2,456
Financial Ratios:
Return on Average
Assets 2 1.26% 1.76% 1.96% 1.94% 1.77%
Return on Average
Equity 2 11.47% 13.88% 15.47% 15.00% 14.44%
Net Interest Margin 3.52% 4.32% 4.52% 4.39% 4.61%
Efficiency Ratio 3 58.04% 50.93% 49.23% 51.41% 46.10%
Dividend Payout Ratio 47.45% 39.53% 33.55% 51.22% 28.89%
Capital and Credit
Quality Ratios:
Average Equity to
Average Assets 2 11.02% 12.70% 12.65% 12.97% 12.22%
Allowance for Loan
Losses to Loans .73% .73% .78% .88% .91%
Nonperforming Assets
to Total Assets .40% .52% .98% 1.08% .47%
Net Charge-offs to
Total Loans .06% .07% .16% .05% .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 as a percentage of net
interest income plus 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 $1,532,752 and $1,440,318 in 2001 and 2000,
respectively. Regular quarterly dividends have been declared for forty
consecutive quarters. Dividends per share increased 6.78% in 2001.
The ratio of dividends per share to net income per share was 47.45% in 2001,
compared to 39.53% in 2000. 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 3,810 and 22,589 in 2001 and 2000, respectively.
The number of common shareholders of record was approximately 1,530 as of
February 14, 2002. 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.
2001 2000
- -------------------------------------------------------------------------------
Stock Price Range Per Share Stock Price Range Per Share
Quarter Low High Dividend Low High Dividend
1st 22.00 31.00 .15 18.50 24.25 .14
2nd 17.00 23.50 .16 18.00 24.00 .15
3rd 18.60 21.00 .16 19.50 22.88 .15
4th 16.05 22.50 .16 20.00 33.00 .15
-- --
Total .63 .59
-- --
7
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company's net income for 2001 decreased $413,355 or 11.34% from 2000
earnings. Net income per share declined from $1.49 in 2000 to $1.33 in 2001.
Although net income declined in 2001, according to the latest Bank Holding
Company Performance Report from the Federal Reserve, the Company's Return on
Equity (ROE) for the nine months ended September 30, 2001 was in the 75th
percentile of all U.S. Bank Holding Companies with assets between $150-300
million.
The Company's operating earnings, which are net earnings excluding gains on the
sale of investments and the non-cash amortization of acquisition intangibles,
were $2,635,000 for 2001 versus $3,168,000 in 2000, a decline of 16.82%. Return
on average equity decreased in 2001 to 11.47% from 13.88% in 2000, while the
return on average assets declined from 1.75% to 1.26%. This decrease was due
primarily to a lower net interest margin.
See page 5 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
2001 to 2000 2000 to 1999
- -------------------------------------------------------------------------------
Prior Year Net Income Per Share $ 1.49 $ 1.55
Change from differences in:
Net interest income .04 .11
Provision for credit losses (.03) (.01)
Noninterest income, excluding securities gains .05 .05
Securities gains .20 (.16)
Noninterest expenses, excluding intangibles (.32) (.14)
amortization
Amortization of intangibles (.13)
Income taxes .02 .08
Shares outstanding .01 .01
- -------------------------------------------------------------------------------
Total Change (.16) (.06)
- -------------------------------------------------------------------------------
Net Income Per Share $ 1.33 $ 1.49
- -------------------------------------------------------------------------------
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.
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 2001 was $8,187,000 representing an increase of $89,000
or 1.11% from 2000. A 3.22% increase in 2000 versus 1999 resulted in total net
interest income of $8,098,000.
In this discussion and in the tabular analysis of net interest income
performance, entitled "Consolidated Average Balances, Yields and Rates," the
interest earned on tax-exempt 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.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Average Balances, Yields and Rates 1
2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Loans: 2
Commercial $40,093 $ 3,297 8.22% $ 37,770 $ 3,573 9.46% $ 35,799 $ 3,147 8.79%
Real estate 101,858 8,486 8.33 88,485 7,340 8.30 80,693 6,944 8.61
Installment 24,487 2,426 10.09 20,483 2,047 9.99 17,131 1,681 9.81
------ ----- ----- ------ ----- ---- ------ ----- ------
Total Loans 166,438 14,209 8.54 146,738 12,960 8.83 133,623 11,772 8.81
Investment securities: 3
Fully taxable 31,264 1,910 6.11 31,704 1,975 6.23 32,530 1,983 6.10
Partially taxable 10,415 581 5.58 10,892 646 5.93 8,278 605 7.31
------ ----- ----- ------ ----- ---- ------ ----- ------
Total Investment
Securities 41,679 2,491 5.98 42,596 2,621 6.15 40,808 2,588 6.34
Interest bearing deposits
in banks 9,140 405 4.43 659 37 5.61 893 38 4.26
Federal funds sold 20,212 759 3.75 322 19 5.90 2,135 105 4.92
------ ----- ----- ----- ----- ---- ------ ----- ------
Total Earning
Assets 237,469 17,864 7.52 190,315 15,637 8.22 177,459 14,503 8.17
------ ----- ------ ---- ------ ------
Allowance for loan
losses (1,229) (1,129) (1,109)
Nonearning assets 19,427 17,578 18,085
------ ------ ------
Total Assets $255,667 $ 206,764 $194,435
======= ========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand -
Interest bearing $ 27,299 436 1.60 $ 20,378 466 2.29 $ 20,771 467 2.25
Savings 32,063 873 2.72 28,264 944 3.34 29,532 975 3.30
Time deposits 113,035 6,385 5.65 80,791 4,565 5.65 69,964 3,637 5.20
----- ----- ----- ----- ----- ----- ------- ------ ---------
Total Deposits 172,397 7,694 4.46 129,433 5,975 4.62 120,267 5,079 4.22
Short-term debt 9,127 312 3.42 8,379 499 5.96 6,726 301 4.48
Long-term debt 20,632 1,488 7.21 17,037 937 5.50 20,010 1,095 5.47
------ ----- ----- ------ ----- ---- ------ ----- ------
Total Interest Bearing
Liabilities 202,156 9,494 4.69 154,849 7,411 4.79 147,003 6,475 4.40
----- ----- ----- ---- ----- ------
Noninterest bearing
deposits 22,567 18,035 16,618
Other liabilities 2,779 7,622 6,211
----- ----- ------
Total Liabilities 227,502 180,506 169,832
Stockholders' equity 28,165 26,258 24,603
------ ------ ------
Total Liabilities and
Stockholders'
Equity $ 255,667 $ 206,764 $ 194,435
======== ======= =========
Net Interest Earnings $ 8,370 $ 8,226 $ 8,028
====== ======= =======
Net Yield on Interest
Earning Assets (NIM) 3.52% 4.32% 4.52%
==== ======= ====
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.
9
The analysis on the facing page reveals declining net interest margins and a
significant increase in average earning assets from 1999 to 2001. Although
earning assets have increased 33.82%, net interest income only increased 4.26%
during the same period. Decreases in the net interest margin from 1999 to 2000
were caused by competition for deposits creating a need to run frequent rate
"specials" to attract and retain time deposits, which were used to support loan
growth. These time deposit rate specials carried terms ranging from eight to
thirty-three months.
The decrease in 2001 from 4.32% to 3.52% NIM is part of an industry-wide trend
towards tighter margins following eleven rate cuts by the Federal Reserve. As
short-term interest rates have fallen, interest sensitive assets (primarily
adjustable rate loans and federal funds sold) have 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. Should market rates
remain low, this trend will continue throughout 2002 as $83,000,000 in time
deposits will mature and be subject to renewal at lower rates. This represents
in excess of 70% of total time deposits held by the Bank.
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 1999 and 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 following table illustrates the effect of changes in volumes and rates.
2001 Compared to 2000 2000 Compared to 1999
- -------------------------------------------------------------------------------
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 $1,740 $(491) $1,249 $1,155 $33 $1,188
Investment securities:
Taxable (28) (37) (65) (50) 42 8
Partially Taxable (28) (37) (65) 191 (150) 41
Interest bearing deposits
in banks 476 (108) 368 (10) 9 (1)
Federal funds sold 1,174 (434) 740 (89) 3 (86)
----- ------ ----- ----- ---- -----
Total Interest Income $3,876 $1,649) $2,227 $1,050 $ 84 $1,134
===== ==== ==== ==== ==== ======
Interest expense:
Deposits:
Demand $ 158 $ (188) $ (30) $ (9) $ 8 $ (1)
Savings 127 (198) (71) (42) 11 (31)
Time deposits 1,822 (2) 1,820 563 365 928
Short-term debt 45 (232) (187) 74 124 198
Long-term debt 198 353 551 (163) 5 (158)
---- ----- ----- ----- ---- ----
Total Interest Expense $2,266 $ (183) $2,083 $ 345 $ 591 $ 936
---- ---- --- ---- ---- ---
Net Interest Income $1,610 $(1,466) $ 144 $ 705 $ (507)$ 198
====== ===== ====== ==== === ===
NOTE: Variances are computed line-by-line and may not add to the totals
shown.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Interest Income
Tax equivalent interest income increased by 14.24% or $2,227,000 in 2001. This
improvement was primarily the result of a $47,154,000 increase in earning
assets. The increase in interest income was in spite of a decrease in average
yields earned from 8.22% to 7.52%.
During 2001, average loans outstanding increased
$19,700,000 to $166,438,000. All three major loan categories increased. The
greatest percentage increase was in consumer installment and credit card loans
which increased 19.55%. Average balances of real estate loans increased 15.11%
or $13,373,000. Average total securities, yielding 5.98% decreased slightly
during 2001. This was in part due to sales of equity securities, the proceeds of
which were contributed by the Company to the Bank as capital surplus. The
largest increase in average earning assets was in interest bearing bank
deposits and in federal funds sold. These short-term investments
increased an average of $28,371,000 or 2,992%. The increase is primarily
attributed to excess funds received in the acquisition of deposits from First
Union National Bank, that were temporarily held as short-term investments until
they can be loaned to customers in the normal course of business.
Interest Expense
Interest expense increased $2,083,000 or 28.11% during 2001. The average cost of
funds of 4.69% declined .10% compared to 2000. However, the increase in average
interest bearing liabilities totaling $47,307,000 resulted in the
significant increase in interest expense. Interest expense on demand deposits,
savings deposits and short-term debt decreased $288,000 (15.10%) as the Bank was
able to rapidly decrease rates paid in response to a sharp decline in market
rates. Expense of time deposits, however, increased $1,820,000 or 39.87%. This
increase mirrored the increase in average time deposits as the average rate paid
was unchanged from 2000. Expense of long-term debt increased $551,000. Much of
the increase was due to $359,000 of prepayment penalties paid the Federal Home
Loan Bank on debt that are either paid off early or refinanced at lower interest
rates and on different terms.
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 increases in
revenue from its partnership in Bankers Title Shenandoah, LLC. During 2001, the
Bank also received its first commissions from the referral of commercial
insurance products to Bankers Insurance, LLC. In 2002, these revenues should
increase as product offerings will increase to include personal lines of
insurance. 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.
Overall noninterest income increased 11.51% in 2001 from 2000 and 13.33% in 2000
versus 1999. Noninterest income should increase in 2002 as service charges on
acquired deposits were waived from February to August of 2001.
Securities gains totaled $1,253,000 in 2001, $769,000 in 2000 and
$1,180,000 in 1999. Management continues to evaluate the securities
portfolio for opportunities to recognize gains and increase portfolio
diversification. Gains in each of the last three years have included substantial
amounts from regional bank stocks following announcements of mergers or
acquisitions.
11
Noninterest Expense
Noninterest expenses increased from $4,653,000 in 2000 to $5,728,000 in 2001.
This followed an increase of $340,000 in 2000 from 1999.
Salary and benefits increased 13.77% to $3,168,000 in 2001, and 7.78% in 2000
compared to 1999. The increase in salaries and benefits in 2001 was primarily
the result of the addition of the employees of the two acquired branch offices.
The 2000 increase was principally the result of normal salary increases and
higher benefits costs for pensions and insurance.
Occupancy and equipment expense increased $142,000 (28.38%) in 2001. This
increase resulted from additional depreciation of the remodeled Broadway office,
as well as expenses related to the newly acquired Edinburg and Woodstock
offices. The increase of 9.56% in 2000 resulted from a full year's depreciation
and equipment maintenance expenses related to the operations center that was
built in 1999.
Other operating expenses increased $549,000 during 2001, including $304,000 of
intangibles amortization. The remaining increase of $245,000 (17.97%) included
additional costs associated with stationary, supplies, postage and advertising
of the new branches; higher correspondent bank fees which are based on the
additional volume of transactions processed; and fees for technology and
marketing consulting contracts.
Although noninterest expenses increased substantially in 2001, they have
remained steady as a percentage of average assets; 2.24%, 2.25% and 2.22% in
2001, 2000, and 1999, respectively. This compares favorably to peer group
averages, which ranged between 3.06% and 3.13% over the same period.
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 or 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 $123,000 in
2000 to $204,000 in 2001. Actual loan charge-offs were $107,411 in 2001 and
$105,345 in 2000. Loan losses as a percentage of average loans totaled .06% in
2001 and .07% in 2000, respectively. Losses continue at approximately one-third
that of the Bank's peer group average.
Balance Sheet
Total assets increased 30.58% during the year to $272,672,769, an increase of
$63,854,875 from $208,817,894 at December 31, 2000. Earning assets increased
28.32% or $56,232,145 to $254,811,417 at December 31, 2001. In February 2001,
the Bank completed its 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 acquisitions. 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
fifteen-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.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Investment Securities
Average balances in investment securities decreased 2.15% in 2001 to
$41,679,000. 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.
Analysis of Securities
The composition of securities at December 31 was:
(Dollars in thousands) 2001 2000 1999
Available for Sale:1
U.S. Treasury and Agency $ 29,428 $ 15,418 $ 13,913
Mortgage-backed 2 7,922 1,840 2,571
Corporate bonds 10,402 9,480 7,345
Marketable equity securities 10,500 11,942 12,339
---- ---- -----
Total 58,252 38,680 36,168
Held to Maturity and Other Equity Investments:
U.S. Treasury and Agency 111 1,109 2,469
Mortgage-backed 2 80
Corporate bonds 1,772 1,777 1,781
Other equity investments 3,852 3,757 3,923
----- ----- ----
Total 5,735 6,642 8,253
------ ------ ------
Total Securities $ 63,986 $ 45,323 $ 44,421
====== ===== =====
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, 2001
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 $11,996 1.63% $15,335 4.33% $2,097 4.90% $29,428 3.26%
Mortgage-backed 16 6.38 7,906 4.04 7,922 4.04
Corporate bonds 1,031 5.85 8,871 6.50 500 7.38 10,402 6.50
-------- --------- -------- --------
Total $13,027 1.96% $24,222 5.13% $10,503 4.37% $47,752 4.10%
------- ------- ------- -------
Debt Securities Held to
Maturity:
U.S. Treasury & Agency 111 5.25 111 5.25
Corporate bonds 1,772 6.15 1,772 6.15
-------- --------- --------
Total $ 111 5.25% $1,772 6.15% $1,883 6.10%
--- -------- -----
13
Analysis of Loan Portfolio
The Company's loan portfolio totaled $176,625,383 at December 31, 2001 compared
with $152,034,979 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.
All major loan categories increased in 2001. The increase includes
approximately $9.8 million of loans purchased from First Union National Bank in
the Shenandoah County market. Commercial loans, including
agricultural loans, increased 25.07% during 2001 to $41,256,218. Real estate
mortgages increased 13.89% to $105,304,862, while construction loans increased
$1,148,856 or 26.28%. Consumer installment and credit cards increased 10.41% and
7.95%, respectively.
The following table presents the changes in the loan portfolio over the previous
five years.
December 31
- -----------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate - mortgage $105,305 $ 92,464 $ 84,019 $78,349 $73,611
Real estate-
construction 5,521 4,372 5,481 4,376 4,708
Consumer installment 23,106 20,927 18,082 17,125 16,977
Commercial 28,552 25,628 22,880 21,478 16,601
Agricultural 11,835 6,656 8,392 8,670 8,679
Multi-family residential 869 703 414 1,419 1,769
Credit cards 1,348 1,249 1,016 832 818
Other loans 89 36 34 52 27
- -------------------------------------------------------------------------------
Total Loans $176,625 $152,035 $140,318 $132,301 $123,190
- ------------------------------------------------------------------------------
The following table shows the Company's loan maturity and interest rate
sensitivity as of December 31, 2001:
Maturity Range
- -------------------------------------------------------------------------------
Less Than 1-5 Over
(Dollars in thousands) 1 Year Years 5 Years Total
- -------------------------------------------------------------------------------
Commercial and
agricultural loans $ 28,160 $ 12,516 $ 580 $ 41,256
Real Estate - mortgage 16,587 57,082 31,636 105,305
Real Estate - construction 5,521 5,521
Consumer - installment/other 3,066 21,477 24,543
- --------------------------------------------------------------------------------
Total $ 53,334 $ 91,075 $ 32,216 $176,625
- -------------------------------------------------------------------------------
Loans with predetermined rates $ 2,257 $ 28,711 $ 22,599 $ 53,567
Loans with variable or
adjustable rates 51,077 62,364 9,617 123,058
- ------------------------------------------------------------------------------
Total $ 53,334 $ 91,075 $ 32,216 $176,625
- ------------------------------------------------------------------------------
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.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 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 2001, two major poultry producers that were headquartered in the
Company's market area were sold to national poultry producers. Although the
sales resulted in some managerial restructuring, the day-to-day operations of
these companies continue with little noticeable change. Management has not seen
any change in past due loans that relate to these major employers changing
ownership.
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 have resulted in 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) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Nonaccruing loans None $ 664 None None None
Loans past due 90 days or more $ 1,096 $ 421 $ 1,917 $2,059 $ 823
Percentage to total loans .62% 71% 1.37% 1.56% .67%
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. At December
31, 2001, 2000 and 1999, there were no restructured loans on which interest
was accruing at a reduced rate or on which payments had been extended.
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.
15
As of December 31, 2001, 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, 2001, no industry category exceeded ten percent of total loans.
Loan Losses and the Allowance for Loan Losses
For each period presented, the provision for loan losses charged to operations
is based on management's judgment after taking into
consideration all factors connected with the collectibility of the existing
portfolio. Management evaluates the loan portfolio in light of economic
conditions, changes in the nature and value of the portfolio, industry standards
and other relevant factors. Specific factors considered by management in
determining the amounts charged to operations 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 or level of risk. Management evaluates
nonperforming loans relative to their collateral value and makes appropriate
adjustments to the allowance for loan losses when needed.
The Bank has not experienced significant loan losses in any of the last three
years. While 1999 losses increased relative to the Bank's normal experience, the
loss rate of .16% of average loans outstanding was still below the Company's
peer group. During 2000, losses returned to historic levels and continued to be
well below peer averages throughout 2001. While the overall level of the
allowance is well below peer group averages, management feels this is
appropriate based on its loan loss history and the composition of its loan
portfolio. The current allowance for loan losses is equal to approximately eight
years average loan losses. Based on historical losses, delinquency rates, a
thorough review of the loan portfolio and after considering the elements of the
preceding paragraph, management is of the opinion that the allowance for loan
losses is adequate to absorb future losses in the current portfolio.
A summary of the activity in the allowance for loan losses follows:
(Dollars in thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of period $1,108 $1,090 $1,162 $1,121 $1,003
Provision charged to expenses 204 123 140 110 180
Other adjustments 84
Loan losses:
Commercial 22 21 107 4 10
Installment 138 125 150 170 91
Real estate 2 2
- -------------------------------------------------------------------------------
Total loan losses 160 148 259 174 101
Recoveries:
Commercial 3 3 5 8
Installment 49 39 40 98 31
Real Estate 1 1 2
- -------------------------------------------------------------------------------
Total recoveries 53 43 47 105 39
Net loan losses 107 105 212 69 62
Balance at end of period $1,289 $1,108 $1,090 $1,162 $1,121
Allowance for loan losses
as a percentage of loans .73% .73% .78% .88% .91%
Ratio of net loan losses during the
period to average loans outstanding
during the period .06% .07% .16% .05% .05%
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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) 2001 2000 1999 1998 1997
Percent Percent Percent Percent Percent
of of of of of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------
Commercial $ 451 23% $ 332 25% $ 327 26% $ 392 27% $ 376 22%
Real estate 323 63 277 61 327 60 350 59 320 64
Installment 451 14 333 14 273 14 260 14 250 14
Unallocated 64 166 163 160 120
- ------------------------------------------------------------------------------------------------------------
Total $1,289 100% $1,108 100% $1,090 100% 1,162 100% $1,162 100%
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2001 of 36.71%. Growth
in deposits included $37,422,974 of deposits that were purchased in Shenandoah
County. Internally generated loan growth totaled $18,501,402. The Bank
experienced deposit growth in all deposit types, even though interest rates paid
on deposits fell throughout most of the year. 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 considered very stable and small increases
in rates above the competition have resulted in deposit gains in past years.
Certificates of deposit over $100,000 totaled $17,487,077 at December 31, 2001.
The maturity distribution of these certificates is as follows:
Less than 3 months $4,375,715
3 to 12 months 9,104,788
1 year to 5 years 4,006,574
---------
Total $17,487,077
==========
Non-deposit borrowings include repurchase agreements, federal
funds purchased and long-term debt obtained through the Federal Home Loan 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.
17
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 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 $1,399,571 or 5.15% in 2001. Earnings
retained from operations were the primary source of the increase. As of December
31, 2001, the book value per share was $11.74 compared to $11.18 as of December
31, 2000. 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 December 31, 2001, the
Company had Tier I capital of 13.87% of risk weighted assets and combined Tier I
and II capital of 14.65% 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, 2001, the
Company reported a leverage ratio of 9.20%. The Bank's leverage ratio was also
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. Conversely, in a period of rapidly
rising rates, if interest earning assets reprice more quickly than interest
bearing liabilities the resulting effect would be an increase in the net
interest margin. Also, 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, 2001 is very strong. The Bank historically has had
a stable core deposit base and, therefore, does not have to rely on volatile
funding sources. Because of the stable core deposit base, changes in interest
rates should not have a significant effect on liquidity. During 2001, the Bank
used funds received in the branch acquisition, maturing investments, deposit
growth and an increase in short-term debt 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.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, 2001. 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
10.78% of total earning assets. Approximately 35% of rate sensitive assets and
55% of rate sensitive liabilities are subject to repricing within one year. The
one-year cumulative GAP narrowed during 2001, as the Bank held more short-term
liquid assets. With rates falling throughout 2001, the Investment Committee and
management choose to not reinvest bond maturities, loan repayments and cash
acquired from First Union 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.
The following GAP analysis shows the time frames from December 31, 2001, in
which the Company's assets and liabilities are subject to repricing:
1-90 91-365 1-5 Over 5 Not
(Dollars in thousands) Days Days Years Years Classified Total
- -------------------------------------------------------------------------------
Rate Sensitive Assets:
Loans $ 39,224 $ 14,110 $ 91,075 $ 32,216 $ $176,625
Investments securities 11,996 8,974 25,994 2,671 14,352 63,987
Interest bearing
bank deposits 3,207 10,992 14,199
- --------------------------------------------------------------------------------
Total 54,427 34,076 117,069 34,887 14,352 254,811
Rate Sensitive Liabilities:
Interest bearing
demand deposits 4,097 8,194 8,194 20,485
Savings 11,582 18,540 13,915 44,037
Certificates of deposit
$100,000 and over 4,375 9,105 4,007 17,487
Other certificates
of deposit 23,081 47,229 30,218 100,528
- -------------------------------------------------------------------------------
Total Deposits 27,456 72,013 60,959 22,109 182,537
Short-term debt 10,696 10,696
Long-term debt 1,096 4,717 14,420 750 20,983
- -------------------------------------------------------------------------------
Total 39,248 76,730 75,379 22,859 214,216
- -------------------------------------------------------------------------------
Discrete Gap 15,179 (42,654) (41,690) 12,028 14,352
- -------------------------------------------------------------------------------
Cumulative Gap* 15,179 (27,475) 14,215 26,243 40,595
- ----------------------------------------------------------------------------
Percent of Earning
Assets 5.96% (10.78)% 5.58% 10.30% 15.93%
- --------------------------------------------------------------------------
* 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.
19
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS 2001 2000
-------------- ---------
Cash and due from banks (note 3) $ 5,363,722 $3,807,575
Interest bearing deposits 14,198,842 312,524
Federal funds sold 909,000
Securities -
Held to maturity - fair value
of $ 1,944,405 in 2001
and $ 2,859,536 in 2000(note 4) 1,882,781 2,886,336
Available for sale (note 4) 58,252,017 38,679,896
Other investments (note 4) 3,852,394 3,756,537
Loans (note 5) 176,625,383 152,034,979
Less allowance for loan losses (note 6) (1,288,506) (1,107,917)
----------- ----------
Net Loans 175,336,877 150,927,062
Construction in progress 578,586
Bank premises and equipment, net (note 7) 4,411,526 3,068,827
Other real estate 566,966 426,128
Interest receivable 1,541,541 1,481,032
Intangible assets 5,168,144
Other assets 2,097,959 1,984,391
---------- ---------
Total Assets $272,672,769 $208,817,894
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing $25,740,570 $18,614,720
Interest bearing:
Demand 20,485,481 14,371,795
Money market accounts 9,249,751 5,977,576
Savings 34,787,009 26,405,584
Time deposits over $100,000 (note 8) 17,487,077 12,574,718
All other time deposits (note 8) 100,528,887 74,410,006
----------- ----------
Total Deposits 208,278,775 152,354,399
Short-term debt (note 9) 10,695,695 8,698,035
Accrued liabilities 4,118,402 4,181,392
Long-term debt (note 10) 20,982,698 16,385,838
---------- ----------
Total Liabilities 244,075,570 181,619,664
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 3,000,000
shares authorized, 2,438,563 and 2,433,373
shares issued and outstanding
for 2001 and 2000, respectively 12,192,815 12,166,865
Capital surplus 525,015 479,468
Retained earnings (note 16) 15,488,406 13,790,628
Accumulated other comprehensive income 390,963 761,269
---------- ---------
Total Stockholders' Equity 28,597,199 27,198,230
---------- ----------
Total Liabilities and Stockholders' Equity $272,672,769 $208,817,894
=========== ===========
The accompanying notes are an integral part of this statement.
20
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2001 2000 1999
------------------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $14,162,330 $12,920,610 $11,740,753
Interest on deposits and federal
funds sold 1,163,750 62,510 143,132
Interest on debt securities 1,837,897 1,980,466 1,904,852
Dividends on equity securities 517,435 545,654 532,173
-------- -------- --------
Total Interest and Dividend Income 17,681,412 15,509,240 14,320,910
---------- ---------- ----------
INTEREST EXPENSE:
Interest on demand deposits 435,919 466,086 467,082
Interest on savings deposits 873,462 944,232 974,507
Interest on time deposits over $100,000 723,697 462,019 312,233
Interest on all other time deposits 5,661,394 4,102,688 3,324,936
--------- --------- ---------
Total interest on deposits 7,694,472 5,975,025 5,078,758
Interest on short-term debt 311,240 498,846 301,216
Interest on long-term debt 1,488,569 936,822 1,095,059
--------- -------- ---------
Total Interest Expense 9,494,281 7,410,693 6,475,033
--------- --------- ---------
NET INTEREST INCOME 8,187,131 8,098,547 7,845,877
--------- --------- ---------
PROVISION FOR LOAN LOSSES (note 6) 204,000 123,000 140,000
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,983,131 7,975,547 7,705,877
--------- --------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 674,366 554,685 470,623
Insurance and other commissions 141,116 143,682 145,007
Other operating income 341,969 339,582 300,227
Gain on security transactions (note 4) 1,252,500 769,704 1,179,683
--------- -------- ---------
Total Noninterest Income 2,409,951 1,807,653 2,095,540
--------- --------- ---------
NONINTEREST EXPENSES:
Salaries 2,473,605 2,120,549 1,972,167
Employee benefits (note 12) 693,933 663,704 611,060
Occupancy expense 324,092 215,312 201,983
Equipment expense 317,597 284,514 254,220
Amortization of intangibles 304,008
Other operating expenses 1,614,519 1,369,139 1,273,926
--------- --------- ---------
Total Noninterest Expenses 5,727,754 4,653,218 4,313,356
--------- --------- ---------
Income before Income Taxes 4,665,328 5,129,982 5,488,061
INCOME TAX EXPENSE (note 11) 1,434,798 1,486,097 1,681,856
--------- --------- ---------
NET INCOME $3,230,530 $3,643,885 $3,806,205
========= ========= =========
PER SHARE DATA
NET INCOME $ 1.33 $ 1.49 $ 1.55
======== ======== ========
CASH DIVIDENDS $ .63 $ .59 $ .52
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 2,430,993 2,445,509 2,454,250
========= ========= =========
The accompanying notes are an integral part of this statement.
21
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income Total
BALANCE - December 31, 1998 $12,279,810 $ 866,694 $ 9,057,266 $1,874,700 $24,078,470
Comprehensive Income:
Net income 3,806,205 3,806,205
Net change in other
comprehensive income
(note 2) (1,323,307) (1,323,307)
-----------
Comprehensive Income 2,482,898
Dividends on common stock (1,276,410) (1,276,410)
Shares repurchased
(2,655 shares) (13,275) (46,352) (59,627)
Shares sold to ESOP (2,655 shares) 13,275 47,790 61,065
-------- -------- --------- ----------- ----------
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
======= ========== ========= ======= =========
The accompanying notes are an integral part of this statement.
22
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2001 2000 1999
---------------------------- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,230,530 $ 3,643,885 $ 3,806,205
Adjustments to reconcile net income to
net cash provided by operating
activities:
Gain on sale of securities (1,252,500) (769,704) (1,179,683)
Depreciation 308,152 257,586 218,134
Amortization of security premiums 40,266 19,222 198,559
Provision for loan losses 204,000 123,000 140,000
Provision for deferred taxes (43,982) (90,867) 9,410
Increase in interest receivable (60,509) (108,325) (20,895)
Increase (decrease) in other assets 54,166 (514,236) (154,134)
Increase (decrease) in accrued
expenses 84,173 (52,373) 386,151
Amortization of limited partnership
investments 218,804 360,893 121,685
Amortization of intangibles 304,008
Gain on sale of land (21,484)
--------- -------- --------
Net Cash Provided by Operating
Activities 3,065,624 2,869,081 3,525,432
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest
bearing bank deposits (13,886,318) 149,603 1,682,811
Net (increase) decrease in federal
funds sold 909,000 (909,000) 2,436,000
Proceeds from maturities of securities
held to maturity 20,100,747 1,430,967 4,436,157
Proceeds from maturities of securities
available for sale 40,828,490 3,326,438 12,349,066
Proceeds from sales of securities
available for sale 3,051,910 2,185,135 3,764,619
Purchases of securities held to
maturity (19,990,333) (6,771) (1,523,000)
Purchases of securities available
for sale (62,216,028) (7,233,362)(16,827,648)
Purchase of other securities (1,500)
Net increase in loans (24,955,943) (11,822,428) (8,228,731)
Purchase of property and equipment (1,072,265) (225,456) (1,296,207)
Construction in progress payments (578,586)
Purchase of intangible assets (5,472,152)
Sale of other real estate 138,774 79,489
-------- -------- --------
Net Cash Used in Investing Activities (62,564,118) (13,603,971) (3,208,433)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand and savings
deposits 24,893,136 (2,538,209) 4,036,901
Net increase in time deposits 31,031,240 15,385,656 347,781
Net increase in short-term debt 1,997,660 978,666 430,322
Dividends paid in cash (1,532,752) (1,419,147) (1,227,072)
Proceeds from long-term debt 13,000,000 1,000,000
Payments to repurchase common stock (83,753) (501,609) (59,627)
Proceeds from issuance of common stock 155,250 61,065
Repayments of long-term debt (8,403,140) (3,162,438) (3,305,295)
----------- --------- ----------
Net Cash Provided by Financing
Activities 61,054,641 9,742,919 284,075
-------- -------- ------
Net Increase (decrease) in Cash
and Cash Equivalents 1,556,147 (991,971) 601,074
Cash and Cash Equivalents,
Beginning of Year 3,807,575 4,799,546 4,198,472
-------- -------- -------
Cash and Cash Equivalents, End of Year $ 5,363,722 $ 3,807,575 $4,799,546
========= ========= =========
Supplemental Disclosure:
Cash paid for:
Interest expense $ 9,458,909 $ 7,218,051 $6,467,192
Income taxes 1,050,000 1,322,000 1,345,000
The accompanying notes are an integral part of this statement
23
F & M Bank Corp. and Subsidiaries
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 seven 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. A
material estimate that is particularly susceptible to significant
changes is the determination of the allowance for loan losses, which is
sensitive to changes in local and national economic conditions.
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.
24
Notes to the Consolidated Financial Statements
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. 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 based upon management's knowledge and review of
the loan portfolio. Estimation of an adequate allowance for loan losses involves
the exercise of judgement, the use of assumptions with respect to present
economic conditions and knowledge of the environment in which the Bank operates.
Among the factors considered in determining the level of the allowance are the
changes in composition of the loan portfolio, the amount of delinquent and
nonaccrual loans, past loan loss experience and the value of collateral securing
the loans.
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.
Pension Plans
Substantially all employees are covered by a pension plan. The net periodic
pension expense includes a service cost component, reflecting the actual return
on plan assets, and the effect of deferring and amortizing certain actuarial
gains and losses and the unrecognized net transition asset.
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.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding.
25
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,
------------------------
2001 2000 1999
---- ---- ----
Unrealized holding gain (loss)
on interest rate swap $ (30,106) $ $
Unrealized holding gains
(losses)on available-
for-sale securities 698,279 1,134,127 (915,573)
Reclassification adjustment
for gains realized
in income (1,252,500) (769,704) (1,179,683)
-------- ------- --------
Net Unrealized Gains (Losses) (584,327) 364,423 (2,095,256)
Tax effect 214,021 (154,547) 771,949
-------- --------- --------
Net Change $ (370,306) $ 209,876 $(1,323,307)
========= ======== ==========
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, 2001 and 2000, 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, 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
========= ======== ======== =========
December 31, 2000
U. S. Treasuries
and Agencies $ 1,109,274 $ $ 1,786 $1,107,488
Corporate bonds 1,777,062 25,014 1,752,048
--------- -------- --------- ---------
Total Securities
Held to
Maturity $2,886,336 $ $ 26,800 $2,859,536
========= ======== ======== =========
26
Notes to the Consolidated Financial Statements
The amortized cost and fair value of securities available for sale are as
follows:
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
========== ========= ========= ==========
December 31, 2000
U.S. Agencies $15,326,434 $ 137,478 $ 45,452 $15,418,460
Mortgage-backed
obligations of
federal agencies 1,839,058 7,445 6,808 1,839,695
Marketable equities 10,853,533 2,416,151 1,327,793 11,941,891
Corporate bonds 9,499,943 57,652 77,745 9,479,850
--------- -------- -------- ---------
Total Securities
Available for
Sale $37,518,968 $2,618,726 $1,457,798 $38,679,896
========== ========= ========= ==========
The amortized cost and fair value of securities at December 31, 2001, 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 Securities Available
to Maturity for Sale
--------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or
less $ $ $13,006,324 $13,027,565
Due after one year
through five years 1,882,781 1,944,405 33,956,399 34,724,333
Total 1,882,781 1,944,405 46,962,723 47,751,898
Marketable equities 10,682,587 10,500,119
-------- -------- ---------- ----------
$1,882,781 $1,944,405 $57,645,310 $58,252,017
========= ========= ========== ==========
27
Realized gains and losses and the gross proceeds from the sale of debt
securities were not material in 2001, 2000 or 1999. Realized gains and losses on
marketable equity transactions are summarized below:
2001 2000 1999
------------------------ --------
Gains $1,283,189 $ 798,563 $1,239,207
Losses 30,689 28,859 59,524
-------- -------- --------
Net Gains $1,252,500 $ 769,704 $1,179,683
========= ======== =========
The carrying value (which approximates fair value) of securities pledged by the
Bank to secure deposits and for other purposes amounted to $ 19,341,970 at
December 31, 2001 and $18,107,053 at December 31, 2000. The Company has pledged
$6,000,000 of equity securities to secure the $4,000,000 loan 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, 2001, 2000 or 1999
Other investments consist of investments in six low-income housing and historic
credit partnerships (carrying basis of $2,300,564) 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 $1,551,830). The
interests in the low-income housing and historic credit 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, 2001.
At December 31, 2001, the Company was committed to invest an additional
$2,118,074 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 as an
accrued liability on the balance sheet.
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
2001 2000
-------------- ---------
Real Estate
Construction $ 5,520,815 $ 4,371,959
Mortgage 105,304,862 92,463,872
Commercial and agricultural 41,256,218 32,987,085
Installment 23,106,243 20,927,176
Credit cards 1,348,372 1,249,068
Other 88,873 35,819
---------- ----------
Total $176,625,383 $152,034,979
========== ==========
The Company has pledged mortgage loans as collateral for borrowings with the
Federal Home Loan Bank of Atlanta totaling $22,923,410 and $21,293,076 as of
December 31, 2001 and 2000, respectively.
28
Notes to the Consolidated Financial Statements
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses is shown in the following
schedule:
2001 2000 1999
------------------------ ------
Balance, beginning of year $1,107,917 $1,090,262 $1,162,176
Other adjustments 84,000
Provision charged to operating
expenses 204,000 123,000 140,000
Loan recoveries 52,848 42,697 47,107
Loans charged off (160,259) (148,042) (259,021)
---------- ---------- --------
Balance, End of Year $1,288,506 $1,107,917 $1,090,262
========= ========= =========
Percentage of gross loans .73% .73% .78%
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as follows:
2001 2000
-------------- ---------
Land $ 549,723 $ 424,723
Buildings and improvements 3,957,920 2,797,386
Furniture and equipment 2,683,780 2,661,095
---------- ----------
7,191,423 5,883,204
Less - accumulated depreciation (2,779,897) (2,814,377)
Net $4,411,526 $ 3,068,827
======= =========
Provisions for depreciation of $ 308,152 in 2001, $257,586 in 2000, and $218,134
in 1999 and were charged to operations.
NOTE 8 DEPOSITS:
At December 31, 2001, the scheduled maturities of time deposits are as follows:
2002 $83,153,552
2003 20,483,810
2004 5,438,221
2005 6,118,613
Thereafter 2,821,768
----------
Total $118,015,964
===========
29
NOTE 9 SHORT-TERM DEBT:
Short-term debt information is summarized as follows:
Maximum Outstanding Weighted Year
Outstanding at Average Average End
at Any Year Balance Interest Interest
Month End End Outstanding 1 Rate Rate
-------------------------------- ---------- -----
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%
========= ========= ======= ======
1999
Treasury, tax
and loan $ 26,246 $ 17,081 $ 22,214 n/a n/a
Federal funds
purchased 1,072,000 963,000 136,827 5.66% 5.77%
Notes payable 116,739 116,739 9,598 8.00% 8.00%
Securities sold under
agreements to
repurchase 7,762,956 6,622,549 6,557,376 4.46% 4.88%
--------- --------- --------- ------- ------
Totals $7,719,369 $6,726,015 4.47% 5.03%
========= ========= ======= ======
1 Based on daily amounts outstanding
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, 2001, the Company had lines of credit with correspondent
banks totaling $16,232,000, which are used in the management of short-term
liquidity.
30
Notes to the Consolidated Financial Statements
NOTE 10 LONG-TERM DEBT:
Advances from the Federal Home Loan Bank of Atlanta (FHLB) were $13,000,000 in
2001 and $1,000,000 in 2000. 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 4.69% at December 31, 2001. 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 incurred $4,000,000 of long-term debt from SunTrust Bank in March
2001. Proceeds of this debt were used as contributed surplus to the Bank. The
balance at December 31, 2001 was $3,333,333 with quarterly principal payments of
$333,333. The interest rate is a floating rate of LIBOR plus 1.10% adjustable
quarterly. On September 30, 2001, the Company entered into a rate swap agreement
with SunTrust Robinson Humphrey, which fixed the rate a 4.60% for the remaining
term of the obligation. As a result of a continued decline in market interest
rates, had the Company cancelled this swap agreement at December 31, 2001 it
would have suffered a $30,106 pretax loss on the transaction.
Repayments of long-term debt are due either quarterly or semi-annually and
interest is due monthly. Interest expense of $1,488,569, $936,822, and
$1,095,059 was incurred on these debts in 2001, 2000, and 1999,
respectively. The maturities of long-term debt as of December 31, 2001 are as
follows:
2002 $5,813,531
2003 4,813,531
2004 4,146,865
2005 3,480,199
2006 1,978,571
Thereafter 750,001
--------
Total $20,982,698
==========
NOTE 11 INCOME TAX EXPENSE:
The components of the income tax expense are as follows:
2001 2000 1999
------------------------ -------
Current expense
Federal $1,448,500 $1,538,275 $1,626,377
State 30,280 38,689 46,069
Deferred expense
Federal (43,982) (90,867) 9,410
--------- --------- --------
Total Income Tax Expense $1,434,798 $1,486,097 $1,681,856
========= ========= =========
Amounts in above arising from gains
on security transactions $ 455,188 $ 293,322 $ 427,980
======== ======== ========
31
The deferred tax effects of temporary differences are as follows:
2001 2000 1999
------------------------ -------
Tax Effects of Temporary Differences:
LIH Partnership Losses $ 19,107 $ (43,697) $
Provision for loan losses (30,800) 4,983 24,451
Split dollar life insurance (10,629) (8,506) (2,422)
Non-qualified deferred
compensation (52,147) (54,828) (42,932)
Depreciation 39,177 56,362 19,902
Pension expense (1,736) (40,163) 7,992
Other (6,954) (5,018) 2,419
--------- --------- --------
Deferred Income Tax Benefit $(43,982) $ (90,867) $ 9,410
======== ========= ========
The components of the deferred taxes as of December 31 are as follows:
2001 2000
------------ --------
Deferred Tax Assets:
Bad debt allowance $ 287,858 $ 257,058
Split dollar life insurance 105,004 94,375
Nonqualified deferred compensation 181,895 129,747
Low income housing partnership losses 10,636 29,743
State historic tax credits 99,591 129,871
Other 14,157 7,205
-------- --------
Total Assets 699,141 647,999
-------- ---------
Deferred Tax Liabilities:
Securities available for sale 194,340 375,693
Unearned low income housing credits 353,978 288,438
Depreciation 141,585 102,409
Pension 123,863 125,599
Other 9,418 9,418
-------- --------
Total Liabilities 823,184 901,557
-------- --------
Net Liability $(124,043) $(253,558)
========= ========
The following table summarizes the differences between the actual income tax
expense and the amounts computed using the federal statutory tax rates:
2001 2000 1999
----------------------------- ----
Tax expense at federal
statutory rates $1,586,212 $1,744,194 $1,865,941
Increases (decreases) in taxes
resulting from:
State income taxes, net 31,613 39,512 56,038
Partially exempt income (134,909) (126,828) (146,584)
Tax-exempt income (79,739) (180,486) (47,212)
Other 31,621 9,705 (46,327)
-------- -------- --------
Total Income Tax Expense $1,434,798 $1,486,097 $1,681,856
========= ========= =========
32
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
$140,622, $165,509, and $153,667, for 2001, 2000, and 1999, respectively.
The Company has established 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 $155,250 in 2001, $159,000 in 2000, and $160,000 in 1999 to the Plan
and charged this expense to operations.
NOTE 13 CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks totaling
$17,669,293 and $2,580,337 at December 31, 2001 and 2000, 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:
2001 2000
------------ --------
Commitments to loan money $42,837,337 $23,266,949
Standby letters of credit 714,090 596,922
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.
33
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:
2001 2000
------------ -------
Total loans, beginning of year $1,403,599 $1,345,420
Change in directorship 162,097
New loans 1,174,549 594,748
Repayments (956,900) (536,569)
--------- --------
Total Loans, End of Year $1,783,345 $1,403,599
========= =========
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, 2002,
approximately $2,094,000 was available for dividend distribution without
permission of the Board of Governors. Dividends paid by the Bank to the Company
totaled $954,000 in 2001, $1,345,000 in 2000 and $1,419,000 in 1999.
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.
34
Notes to the Consolidated Financial Statements
Estimated fair value and the carrying value of financial instruments at December
31, 2001 and 2000 are as follows (in thousands):
2001 2000
-------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- --------- ---------- ---------
Financial Assets
Cash $ 5,364 $ 5,364 $ 3,808 $ 3,808
Interest bearing
deposits 14,506 14,506 313 313
Federal funds sold 909 909
Securities available
for sale 58,252 57,645 38,680 38,680
Securities held to
maturity 1,944 1,883 2,860 2,886
Other investments 3,852 3,852 3,757 3,757
Loans 182,474 176,625 150,833 150,927
Accrued interest
receivable 1,542 1,542 1,481 1,481
Financial Liabilities
Demand Deposits:
Non-interest bearing 25,741 25,741 18,615 18,615
Interest bearing 29,735 29,735 20,349 20,349
Savings deposits 34,787 34,787 26,406 26,406
Time deposits 120,620 118,015 87,385 86,985
Accrued liabilities 4,099 4,099 4,181 4,181
Short-term debt 10,696 10,696 8,698 8,698
Long-term debt 21,013 20,983 16,219 16,386
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 2001.
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.
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, 2001, that the Company and
its subsidiary bank meet all capital adequacy requirements to which they are
subject.
35
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
2001 2000 Capitalized Capitalized
Total risk-based ratio 14.65% 18.95% 8.00% 10.00%
Tier 1 risk-based ratio 13.87% 18.20% 4.00% 6.00%
Total assets leverage
ratio 9.20% 12.96% 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 for 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 fifteen-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 EMERGING ACCOUNTING STANDARDS:
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement 141, "Business Combinations" and Statement 142 "Goodwill and Other
Intangible Assets". These statements change the accounting for business
combinations and goodwill in two significant ways. First, Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is now prohibited. Second, Statement 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of this Statement, which was effective for
fiscal years beginning after December 15, 2001.
At the present time, the FASB's position with regard to deposit intangibles is
that they will continue to be amortized under Statement 72 "Accounting for
Certain Acquisitions of Banking and Thrift Institutions". The American Bankers
Association (ABA) has requested that the FASB reconsider its position and allow
Bank acquisitions of branch offices to fall under the two new Statements. If
this were to occur, it could result in a substantial decrease or the elimination
of the intangibles amortization related to the two branch offices purchased from
First Union National Bank.
Until such time as the FASB determines to amend its position, these intangibles
will continue to be amortized by the Company using the straight-line method over
a period of fifteen years.
36
Notes to the Consolidated Financial Statements
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31,
ASSETS 2001 2000
------------- --------
Cash and cash equivalents $ 189,345 $ 176,599
Investment in subsidiaries 22,942,514 15,147,934
Loans receivable 194,902
Securities available for sale 9,883,785 11,409,194
Other securities 2,300,563 2,519,666
Accrued interest receivable 736
Due from subsidiaries 15,998 68,762
Income tax receivable 218,291 248,086
Other real estate 307,891 426,128
-------- --------
Total Assets $35,858,387 $30,192,007
========== ==========
LIABILITIES
Notes payable $ 4,333,333 $
Margin payable 198,260
Accrued interest payable 39,532
Other liabilities 30,106
Dividends payable 390,340 365,006
Demand obligations for low income
housing investment 2,118,074 2,151,766
Deferred income taxes 151,543 477,005
-------- --------
Total Liabilities 7,261,188 2,993,777
--------- ---------
STOCKHOLDERS' EQUITY
Common stock par value $5 per share,
3,000,000 shares authorized, 2,438,563
and 2,433,373 shares issued and outstanding
for 2001 and 2000, respectively
12,192,815 12,166,865
Capital surplus 525,015 479,468
Retained earnings 15,488,406 13,790,628
Accumulated other comprehensive income 390,963 761,269
-------- --------
Total Stockholders' Equity 28,597,199 27,198,230
---------- ----------
Total Liabilities and Stockholders' Equity $35,858,387 $ 30,192,007
========== ==========
37
Statements of Net Income and Retained Earnings
Years Ended December 31,
2001 2000 1999
---------------------------- ---------
INCOME
Dividends from affiliate $ 954,000 $ 1,345,000 $1,419,000
Interest on loans 8,489 16,543 21,022
Investment income 11,621 20,933 12,759
Dividend income 382,108 415,533 422,640
Security gains 1,160,235 798,563 1,127,882
Net limited partnership income 81,361 147,008 36,302
Other 20,537 831 2,504
--------- ---------- ---------
Total Income 2,618,351 2,744,411 3,042,109
--------- ---------- ---------
EXPENSES
Interest expense 194,488 6,087 965
Administrative expenses 119,167 111,740 112,531
--------- ---------- ---------
Total Expenses 313,655 117,827 113,496
--------- ---------- ---------
Net income before income tax expense
and increase in undistributed equity
of affiliates 2,304,696 2,626,584 2,928,613
INCOME TAX EXPENSE 384,990 200,018 401,790
--------- ---------- ---------
Income before increase in undistributed
equity of affiliates 1,919,706 2,426,566 2,526,823
Increase in undistributed income
of affiliates 1,310,824 1,217,319 1,279,382
--------- ---------- ---------
NET INCOME 3,230,530 3,643,885 3,806,205
Retained earnings, beginning of year 13,790,628 11,587,061 9,057,266
Stock split effected in the form
of a dividend
Dividends on common stock (1,532,752) (1,440,318) (1,276,410)
----------- ----------- ----------
Retained Earnings, End of Year $15,488,406 $13,790,628 $11,587,061
========== ========== ==========
38
Notes to the Consolidated Financial Statements
Statements of Cash Flows
Years Ended December 31,
2001 2000 1999
---------------------------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,230,530 $3,643,885 $3,806,205
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed subsidiary income (1,310,824) (1,217,319) (1,279,382)
Gain on sale of securities (1,160,235) (798,563) (1,127,882)
Deferred tax (benefit) expense 49,387 (90,608) 10,628
Decrease (increase) in interest
receivable 736 (637) (168)
Decrease (increase) in due from
subsidiary 52,764 (68,762) 4,393
Decrease (increase) in other
receivables 29,795 (120,414) 81,929
Increase (decrease) in due to
subsidiary (176,743) 234,492
Increase in other liabilities 39,530
Increase in deferred tax credits 65,537
Amortization of limited partnership
investments 218,804 360,893 121,685
Gain on sale of land (20,537)
---------- -------- --------
Net Cash Provided by Operating
Activities 1,195,487 1,531,732 1,851,900
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributed to subsidiary (6,000,000)
Proceeds from sales of securities
available for sale 2,695,063 2,185,135 3,556,512
Proceeds from maturity of securities
available for sale 298 690 1,987
Purchase of securities available
for sale (1,273,759) (1,428,879) (5,167,543)
Purchase of other securities (1,500)
Proceeds from sale of real estate 138,775
Decrease in loans receivable 194,902 51,983 12,944
--------- -------- --------
Net Cash Provided by (Used in)
Investing Activities (4,244,721) 808,929 (1,597,600)
----------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt 5,000,000
Payments on long-term debt (666,667)
Increase (decrease) in short-term debt 198,260 (116,739) 116,739
Decrease in demand obligations payable (33,692) (316,043)
Payments to repurchase common stock (83,753) (501,609) (59,627)
Proceeds from issuance of common stock 155,250 61,065
Dividends paid in cash (1,507,418) (1,419,147) (1,227,072)
-------- ------- -------
Net Cash Used in Financing Activities 3,061,980 (2,353,538) (1,108,895)
-------- --------- --------
Net Increase (decrease) in Cash and
Cash Equivalents 12,746 (12,877) (854,595)
Cash and Cash Equivalents, Beginning
of Year 176,599 189,476 1,044,071
----- ------ --------
Cash and Cash Equivalents, End of Year $ 189,345 $ 176,599 $ 189,476
========= ======== ========
39
Management's Statement of Responsibility
Management acknowledges its responsibility for financial reporting (both audited
and unaudited) which provides a fair representation of the Company's operations
and is reliable and relevant to a meaningful appraisal of the Company.
Management has prepared these statements in accordance with Generally Accepted
Accounting Principles. Where appropriate, estimates have been used and
management has exercised its best judgement in determining these estimates,
including consideration of whether the items and amounts will have a material
effect on the statements when taken as a whole. All financial information
presented in Management's Discussion and Analysis is consistent with the audited
financial statements, with the exception of tax equivalency adjustments that
were presented to aid in comparative analysis.
Oversight of the financial reporting process is provided by the Audit Committee
of the Board of Directors, which consists of five outside directors. This
Committee meets regularly, to discuss the scope and schedule of the audit
function, review and discuss the adequacy of internal control systems and the
financial reporting process. At least annually the committee meets with the
internal audit firm and with representatives of the independent public
accounting firm to discuss the results of the annual financial statement audit.
The independent public accounting firm of S.B. Hoover & Company, LLP has
examined the Company's financial records. The resulting opinion statement, which
follows, is based upon knowledge of the Company's accounting systems, as well as
on tests and other audit procedures performed in accordance with Generally
Accepted Auditing Standards.
Julian D. Fisher Neil W. Hayslett, CPA
President & Chief Vice President & Chief
Executive Officer Financial Officer
40
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2001, in conformity with U.S. generally accepted accounting
principles.
S. B. Hoover & Company, L.L.P.
January 29,2002
Harrisonburg, Virginia
41
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 2001 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, 2001, F & M Bank Corp., the Bank, TEB and FMFS had sixty-three
full-time and twenty-eight 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 newly acquired 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.
42
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.
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 persons 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.
43
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
161 South Main Street
Woodstock, VA 22664
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 seven Food Lion grocery stores, one in Mt. Jackson, VA, three
in Harrisonburg, VA and three in Charlottesville, VA.
44
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, 2001 and 2000
Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December
31, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999
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.
3 ii Amended and Restated Bylaws of F & M Bank Corp.
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, 2001.
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.
45
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 1, 2002
-------------------------- ----------------------------
Julian D. Fisher Date
Director, President and Chief
Executive Officer
By: /s/ Neil W. Hayslett March 1, 2002
--------------------------- --------------------
Neil W. Hayslett Date
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 1, 2002
- --------------------------- ----------------
John N. Crist
/s/ Ellen R. Fitzwater Director March 1, 2002
- --------------------------- ----------------
Ellen R. Fitzwater
/s/ Robert L. Halterman Director March 1, 2002
- --------------------------- ----------------
Robert L. Halterman
/s/ Daniel J. Harshman Director March 1, 2002
- -------------------------- ----------------
Daniel J. Harshman
Director, Chairman
- ------------------------- ----------------
Lawrence H. Hoover, Jr
/s/ Richard S. Myers Director March 1, 2002
- --------------------------- ----------------
Richard S. Myers
Director
- ------------------------- ----------------
Michael W. Pugh
Director
- ---------------------------- ----------------
Ronald E. Wampler