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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File Number: 0-13273
June 30, 2002 -------
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(540) 896-8941
--------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes ..X. No ....
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at June 30, 2002
------------------------------------ -----------------------------
Common Stock, par value - $5 2,423,878 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 2002 and 2001 2
Consolidated Statements of Income - Three Months
Ended June 30, 2002 and 2001 3
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8K 17
SIGNATURES 18
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Six Months Ended
June 30,
2002 2001
------ ------
Interest Income
Interest and fees on loans $ 7,230 $ 6,952
Interest on federal funds sold 47 486
Interest on interest bearing deposits 280 67
Interest and dividends on investment securities 1,252 1,215
--------- ---------
Total Interest Income 8,809 8,720
--------- ---------
Interest Expense
Interest on demand accounts 156 262
Interest on savings deposits 367 483
Interest on time deposits 2,628 3,156
--------- ---------
Total interest on deposits 3,151 3,901
Interest on short-term debt 56 198
Interest on long-term debt 624 516
--------- ---------
Total Interest Expense 3,831 4,615
--------- ---------
Net Interest Income 4,978 4,105
Provision for Loan Losses 174 69
--------- ---------
Net Interest Income after Provision for Loan Losses 4,804 4,036
--------- ---------
Noninterest Income
Service charges 360 316
Other 341 278
Security gains 452 1,284
--------- ---------
Total Noninterest Income 1,153 1,878
--------- ---------
Noninterest Expense
Salaries 1,364 1,215
Employee benefits 450 348
Occupancy expense 156 145
Equipment expense 170 159
Intangibles amortization 89 114
Other 926 778
--------- ---------
Total Noninterest Expense 3,155 2,759
--------- ---------
Income before Income Taxes 2,802 3,155
Provision for Income Taxes 852 998
--------- ---------
Net Income $ 1,950 $ 2,157
========= =========
Per Share Data
Net Income $ .80 $ .89
========= =========
Cash Dividends $ .32 $ .31
========= =========
Equivalent Shares Outstanding 2,433,377 2,431,818
========== ==========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Amounts)
Three Months Ended
June 30,
2002 2001
------ ------
Interest Income
Interest and fees on loans $ 3,709 $ 3,581
Interest on federal funds sold 15 337
Interest on interest bearing deposits 115 52
Interest and dividends on investment securities 651 595
--------- --------
Total Interest Income 4,490 4,565
--------- --------
Interest Expense
Interest on demand deposits 82 131
Interest on savings accounts 186 248
Interest on time deposits 1,261 1,693
--------- --------
Total interest on deposits 1,529 2,072
Interest on short-term debt 27 83
Interest on long-term debt 337 299
--------- --------
Total Interest Expense 1,893 2,454
--------- --------
Net Interest Income 2,597 2,111
Provision for Loan Losses 107 38
--------- --------
Net Interest Income after Provision for Loan Losses 2,490 2,073
--------- --------
Noninterest Income
Service charges 180 166
Other 204 147
Security gains 371 93
--------- --------
Total Noninterest Income 755 406
--------- --------
Noninterest Expense
Salaries 686 626
Employee benefits 215 168
Occupancy expense 78 77
Equipment expense 87 87
Intangibles amortization 44 58
Other 463 418
--------- --------
Total Noninterest Expense 1,573 1,434
--------- --------
Income before Income Taxes 1,672 1,045
Provision for Income Tax 511 314
--------- --------
Net Income $ 1,161 $ 731
========= ========
Per Share Data
Net Income $ .48 $ .30
========= ========
Cash Dividends $ .16 $ .16
========= ========
Equivalent Shares Outstanding 2,429,733 2,431,223
========== =========
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
ASSETS 2002 2001
------ ------
Cash and due from banks $ 4,909 $ 5,364
Interest bearing deposits in banks 6,474 14,199
Securities held to maturity (note 2) 1,880 1,883
Securities available for sale (note 2) 59,067 58,252
Other investments 4,935 3,852
Loans, net of unearned discount (note 3) 200,472 176,625
Less allowance for loan losses (note 4) (1,424) (1,288)
-------- -------
Net Loans 199,048 175,337
Bank premises and equipment 4,442 4,412
Other real estate 593 567
Interest receivable 1,709 1,541
Goodwill (note 5) 2,639 2,639
Deposit intangibles (note 5) 2,440 2,529
Bank owned life insurance (note 6) 2,226
Other assets 2,161 2,098
------- --------
Total Assets $292,523 $272,673
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 28,529 $ 25,741
Interest bearing
Demand 31,327 29,735
Savings deposits 39,299 34,787
Time deposits 115,113 118,016
------- -------
Total Deposits 214,268 208,279
Short-term debt 11,196 10,696
Long-term debt 33,076 20,983
Accrued expenses 5,054 4,118
------- -------
Total Liabilities 263,594 244,076
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,423,878 and 2,438,563
shares issued and outstanding in 2002 and 2001,
respectively 12,119 12,193
Surplus 306 525
Retained earnings 16,660 15,488
Accumulated other comprehensive income (loss) (156) 391
-------- -------
Total Stockholders' Equity 28,929 28,597
------- -------
Total Liabilities and Stockholders' Equity $292,523 $272,673
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
2002 2001
------ ------
Cash Flows from Operating Activities:
Net income $ 1,950 $ 2,157
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 170 141
Amortization of security premiums 56 11
Gain on security transactions (452) (1,284)
Income from life insurance investment (54)
Provision for loan losses 174 69
Increase in interest receivable (168) (10)
Decrease in other assets 67 235
Intangibles amortization 89 122
Increase (decrease) in accrued expenses 330 (248)
Losses on limited partnership investments 140 196
------- -------
Total Adjustments 352 (768)
------- -------
Net Cash Provided by Operating Activities 2,302 1,389
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 3,322 2,685
Proceeds from maturity of investments available
for sale 13,548 15,857
Proceeds from maturity of investments held
to maturity 110
Purchase of investments available for sale (18,605) (13,607)
Purchase of investments held to maturity (19,990)
Change in federal funds sold 826
Net increase in loans (23,884) (16,886)
Purchase of property and equipment (200) (1,015)
Net change in interest bearing bank deposits 7,725 (13,675)
Purchase of goodwill (5,470)
Purchase of life insurance (2,172)
------- -------
Net Cash Used in Investing Activities (20,266) (51,165)
-------- -------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 8,892 17,058
Net increase (decrease) in time deposits (2,903) 29,653
Net increase (decrease) in short-term debt 500 (519)
Repurchase of common stock (293) (51)
Repayment of long-term debt (2,907) (1,905)
Proceeds from long-term debt 15,000 7,000
Payment of dividends (780) (730)
-------- -------
Net Cash Provided by Financing Activities 17,509 50,506
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (455) 730
Cash and Cash Equivalents, Beginning of Period 5,364 3,808
------- -------
Cash and Cash Equivalents, End of Period $ 4,909 $ 4,538
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 3,931 $ 4,604
Income taxes 400 750
Noncash Transaction
In 2002, the Company bought an additional investment in low income housing.
The cost was $750,000, all of which was financed.
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Six Months Ended
June 30,
2002 2001
------ ------
Balance, beginning of period $ 28,597 $ 27,198
Comprehensive Income:
Net income 1,950 2,157
Net change in unrealized appreciation on securities
available for sale, net of taxes (547) 167
-------- -------
Total comprehensive income 1,403 2,324
Repurchase of common stock (293) (51)
Dividends declared (778) (754)
-------- -------
Balance, end of period $ 28,929 $ 28,717
======= =======
The accompanying notes are an integral part of these statements.
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements conform to generally
accepted accounting principles and to general industry practices. In
the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2002 and the results of operations for the
six and three month periods ended June 30, 2002 and June 30, 2001.
The notes included herein should be read in conjunction with the
notes to financial statements included in the 2001 annual report to
stockholders of the F & M Bank Corp.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values are as
follows:
June 30 December 31,
2002 2001
------ ------
Market Market
Cost Value Cost Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 112 $ 110 $ 114
State and municipal
Other securities 1,770 1,833 1,773 1,830
------- ------- ------- -------
Total $ 1,880 $ 1,945 $ 1,883 $ 1,944
======= ======= ======= =======
June 30, December 31,
2002 2001
------ ------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 33,513 $ 33,085 $ 29,428 $ 29,097
Equity securities 8,816 9,920 10,500 10,683
Mortgage-backed
securities 6,324 6,296 7,921 7,853
Other securities 10,414 10,005 10,403 10,012
------- ------- ------- -------
Total $ 59,067 $ 59,306 $ 58,252 $ 57,645
======= ======= ======= =======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
June 30, December 31,
2002 2001
------ ------
Real Estate
Construction $ 8,284 $ 5,521
Mortgage 119,325 105,305
Commercial and agricultural 47,686 41,256
Installment loans to individuals 23,861 23,106
Credit cards 1,258 1,348
Other 58 89
------ -------
Total $200,472 $176,625
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Balance, beginning of period $1,288 $ 1,108 $1,338 $ 1,212
Provisions charged to operating
expenses 174 69 107 38
Other Adjustments 84
Net (charge offs) recoveries
Loan recoveries 55 35 29 12
Loan charge-offs (93) (49) (50) (15)
------ ------ ------ ------
Total Net Charge-offs* (38) (14) (21) (3)
------ ------ ------ ------
Balance, End of Period $1,424 $ 1,247 $1,424 $ 1,247
===== ====== ===== ======
Components of net charge-offs:
Real estate - Mortgages $ $ 1 $ $
Commercial (6)
Installment loans to
individuals (38) (15) (15) (3)
------ ------ ------ ------
Total $ (38) $ (14) $ (21) $ (3)
====== ====== ====== ======
9
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 GOODWILL AND CORE DEPOSIT INTANGIBLE
During the first quarter of 2002, the Company completed an assessment of the
Financial Accounting Standards Board (FASB) Statement 141 "Business
Combinations" and Statement 142 "Goodwill and Other Intangible Assets." As a
result of this review management determined that a portion of its acquisition
costs related to the two Shenandoah County branches should be considered
Goodwill. The remaining portion of these acquisition costs has been
identified as a Core Deposit Intangible (CDI).
Under the new accounting standards, Goodwill will be tested periodically for
impairment, but will not be subject to regular amortization expense. As of June
30, 2002, there is no impairment to Goodwill. The CDI will continue to be
amortized using the straight-line method over a fifteen year period.
NOTE 6 BANK OWNED LIFE INSURANCE (BOLI)
The Company's subsidiary bank has obtained single-premium whole-life
insurance policies on several of its senior executives. The Bank is both owner
and beneficiary of the policies. Under regulatory guidelines there are four
primary purposes for which a Bank may purchase life insurance: (i) key-person
insurance, (ii) insurance on borrowers, (iii) insurance purchased in connection
with employee compensation and benefit plans, and (iv) insurance taken as
security for loans.
The Bank currently offers a variety of benefit plans to all full time
employees. While the costs of these plans are generally tax deductible to the
Bank, the cost has been escalating greatly in recent years. In order to attract
and retain good employees, the Bank has determined that the benefits offered are
necessary.
To help offset the growth in these costs, the Bank decided to enter into the
BOLI contracts. Dividends received on these policies are tax-deferred and the
death benefits under the policies are tax exempt. Rates of return on a
tax-equivalent basis are very favorable when compared to other long-term assets
which the Bank could obtain.
10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company's net interest margin continued its recovery in the second
quarter of 2002. Due to relatively short average maturities, rate sensitive
liabilities (primarily time deposits) continued to reprice at much lower levels.
Deposits have increased $5,989,000 in the first six months of 2002. However,
customers appear to favor more liquid savings and interest bearing demand
accounts as time deposits decreased $2,903,000.
The loan portfolio has grown quickly, with the year to date increase
totaling $23,847,000 or 13.5%. Most of the growth came from a broad variety of
real estate loans, both residential and commercial.
Year to date income from operations, exclusive of securities gains and net
of income taxes, increased $355,000 or 27.8%. Net income, including securities
transactions decreased, $207,000, resulting from a $552,000 decrease in
net after tax securities gains realized.
Results of Operations - Six Months Ending June 30, 2001
The tax equivalent net interest margin increased $857,000 or 20.4% compared
to the same period in 2001. The yield on earning assets decreased .91%, while
the cost of funds decreased 1.30% compared to the same period of 2001. These
decreases resulted from market rates of interest stabilizing in 2002 following
the aggressive rate cutting by the Federal Reserve in 2001. This stability
contributed to the improved net interest margin as rate sensitive liabilities
have repriced in greater volumes throughout the first six months of 2002. The
net interest margin increased from 3.71% in the first half of 2001 to 3.91% in
2002. In addition to the improvements resulting from asset/liability repricing,
the margin improved as a result of greater balance sheet leverage. Higher rated
earning assets (primarily loans) have increased substantially, with funding
coming from a reduction in lower yielding federal funds sold. A schedule of the
net interest margin for 2002 and 2001 is shown on page 15 as Table 1.
Noninterest income decreased $725,000 in the first six months of 2002.
Exclusive of securities transactions, other noninterest income items
increased $107,000. Service charges on deposit accounts increased $44,000,
primarily due to the 2001 acquisition of the two branches in Shenandoah County
and an increase in overdraft fees collected throughout all branches. Other
noninterest income increased $63,000. Most of this increase came from earnings
on life insurance policies owned by the bank (see note 6).
Noninterest expense increased $396,000 or 14.3% for the period, however,
noninterest expense expressed as a percentage of total assets decreased from
2.19% to 2.16% compared to the first six months of 2001. $251,000 of the
increase in expenses can be attributed salaries and employee benefits. Compared
to the prior year this increase includes normal salary increases, a full six
months of expenses for the Shenandoah County offices, (versus four months in
2001) and an increase in group health insurance premiums of approximately 40%.
Result of Operations - Quarter Ending June 30, 2002
Net income for the quarter ending June 30, 2002 increased $430,000 compared
to the same quarter in 2001 while net interest income increased $480,000 over
2001 amounts. As stated above, interest bearing liabilities have repriced
downward much faster than the change in interest bearing assets. During 2001,
declining rates and significant amounts of short-term funds resulting from the
assumption of First Union branch deposits put a strain on the net interest
margin. Throughout 2002, as time deposits have matured and repriced at lower
levels and loans have increased to absorb the excess short term investments, the
margin has steadily improved. The tax equivalent net interest margin increased
forty-two basis points, from 3.56% in the second quarter of 2001 to 3.98% in
2002.
Noninterest income increased $349,000, with $278,000 of the increase coming
from additional securities gains realized. All other noninterest income,
including service charges on deposit accounts increased by $71,000 or 22.7% over
2001. This increase included increases in ATM and debit card exchange income,
commissions on insurance sales and returns on bank owned life insurance
policies.
11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Noninterest expense increased $139,000, or 9.7%. Of this amount, $107,000
relates to increases in salaries and benefits. These increases come from the
previously mentioned group health insurance premiums, normal salary increases
and additional staffing for investment sales and the accounting department.
Financial Condition
Securities
The Company's securities portfolio is held to assist the Company in
liquidity and asset liability management. The securities portfolio consists of
investment securities (commonly referred to as "securities held to maturity")
and securities available for sale. Securities are classified as investment
securities when management has the intent and ability to hold the securities to
maturity. Investment securities are carried at amortized cost. Securities
available for sale include securities that may be sold in response to general
market fluctuations, general liquidity needs and other similar factors.
Securities available for sale are recorded at market value. Unrealized holding
gains and losses on available for sale securities are excluded from earnings and
reported (net of deferred income taxes) as a part of other comprehensive income.
As of June 30, 2002, the amortized cost of all securities available for sale
exceeded their market value by $239,000 ($156,000 after the consideration of
income taxes). Unrealized losses on equity securities are partially offset by
unrealized gains on the Bank's bond portfolio. Management has traditionally held
debt securities (regardless of classification) until maturity and thus it does
not expect these fluctuations in value to have a direct impact on earnings.
Investments in debt securities were relatively stable in the first six
months of 2002. Opportunities for investments in the bond portfolio at favorable
rates have been limited due to falling rates and economic uncertainties. The
Bank continues to invest in relatively short-term maturities in its bond
portfolio due to uncertainty in the direction of rates. This philosophy allows
for greater flexibility in an environment of rapidly changing rates and has
served the Company well over the years. Of the investments in securities
available for sale, 14.9% are invested in equity securities, most of which are
dividend producing and subject to the corporate dividend exclusion for taxation
purposes. The Company believes these investments render adequate returns and
have historically resulted in significant increases in value.
Loan Portfolio
The Company operates in an agriculturally dominated area, which includes the
counties of Rockingham, Page and Shenandoah in the western portion of Virginia.
The Company does not make a significant number of loans to borrowers outside its
primary service area. The Company is very active in local residential
construction mortgages. Commercial lending includes loans to small and medium
sized businesses within its service area.
The allowance for loan losses (see subsequent section) provides for the risk
that borrowers will be unable to repay their obligations and is reviewed
quarterly for adequacy. The risk associated with real estate and installment
notes to individuals is based upon employment, the local and national economies,
and consumer confidence. All of these affect the ability of borrowers to repay
indebtedness. The risk associated with commercial lending is substantially based
on the strength of the local and national economies.
While lending is geographically diversified within the service area, the
Company does have some concentration in agricultural loans (primarily poultry
farming). In March 2002, a mild strain of Avian Influenza (AI) was discovered in
the Shenandoah Valley. Several of the Bank's customers have been affected by the
contamination. Their flocks were destroyed; poultry houses cleaned and allowed
to set idle for several weeks. All have since been returned to production.
Although the Bank does not anticipate any losses as a result of this outbreak of
AI, it has been necessary, in some cases to extend additional operating
funds and/or modify payment terms in the short-term. In addition to direct
agricultural loans, a significant percentage of residential real estate
loans and consumer installment loans are made to borrowers employed in the
agricultural sector of the economy. The Company continues to monitor its past
due loans closely and has not experienced higher delinquencies in this sector
compared to the overall loan portfolio.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan Portfolio (Continued)
The first six months of 2002 resulted in an increase of $23,846,000 in loans
outstanding. This level of growth is unprecedented for the Bank. Although loan
demand has been strong in most of the Bank's offices, much of the growth came
from several large commercial real estate loans.
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have changed due to
financial hardship. Nonperforming loans totaled $1,090,000 at June 30, 2002
compared to $1,096,000 at December 31, 2001. Approximately 85% of these
nonperforming loans are secured by real estate. Although the potential exists
for some loan losses, management believes the Bank is generally well secured and
continues to actively work with these customers to effect payment.
As of June 30, 2002, the Company held $286,000 of real estate that was
acquired through foreclosure. The property is currently listed with a realtor
for sale and the bank does not anticipate any loss at this time.
Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature and volume of
the loan portfolio and industry standards. Specific factors considered by
management in determining the adequacy of the level of the allowance include
internally generated loan review reports, past due reports, historical loan loss
experience and individual borrower's financial position. This review also
considers concentrations of loans in terms of geography, business type
and level of risk. Management evaluates nonperforming loans relative to their
collateral value and makes the appropriate adjustments to the allowance for
loan losses when needed.
In evaluating the adequacy of the allowance, loans are segregated into a
variety of pools including: substandard, watch list and past due over 90 days
(by type). Each of these pools is assigned loss potentials based on industry
standards or management estimates. The remainder of the portfolio is
segregated by loan type. Potential losses on these pools are evaluated based on
historic loss rates and are adjusted due to inherent uncertainties within the
portfolio. Finally, loss percentages are assigned to loan commitments. The Board
of Directors of the Bank reviews and approves the allowance on a quarterly
basis.
The provision for loan losses and changes in the allowance for loan losses
are shown in note 4, page 8.
The allowance for loan losses of $1,424,000 at June 30, 2002 was up $136,000
from its level at December 31, 2001. The allowance was equal to .71% and .73% of
total loans at June 30, 2002 and December 31, 2001, respectively. Although
management has increased its monthly funding of the reserve to $35,000 due to
the rapid growth in the portfolio, the overall level of the allowance is well
below peer group averages. Management feels this is appropriate based on its
loan loss history and the composition of its loan portfolio; the current
allowance for loan losses is equal to approximately nine years average loan
losses. Based on historical losses, delinquency rates, collateral values of
delinquent loans and a thorough review of the loan portfolio, management is of
the opinion that the allowance for loan losses is adequate to absorb estimated
losses in the current portfolio.
13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Deposits and Long-Term Debt
The Company's main source of funding is customer deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit. Total deposits increased $5,989,000
during the first half of 2002. Certificates of deposit decreased $2,903,000
during this period. Demand deposits, interest and noninterest bearing,
increased a total of $8,892,000, compared to December 31, 2001. Management
believes this increase resulted from frequent advertising of its free
checking account and accounts gained from BB&T following its takeover of the
local F&M Bank branches.
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be
an important source of funding real estate loan growth. The Company's subsidiary
bank borrows funds on a fixed rate basis. These borrowings are used to fund
either a fifteen-year fixed rate loan or a twenty-year loan, of which the first
ten years have a fixed rate. This program allows the Bank to match the maturity
of its fixed rate real estate portfolio with the maturity of its debt and thus
reduce its exposure to interest rate changes. Scheduled repayments totaled
$2,907,000 in the first half of the year. An additional $15,000,000 was borrowed
in 2002 at an average rate of 4.54%. Final maturity of this obligation is seven
years.
As part of the approval process for the acquisition of new branches, F & M
Bank Corp. was required to contribute $6,000,000 million into Farmers &
Merchants Bank as additional equity. F & M Bank Corp. funded this
contribution in part by borrowing $4,000,000 million from SunTrust Bank. The
loan is amortized over a three-year period with quarterly principal payments of
$333,333. The loan is collateralized by $6 million of marketable securities
and carries an interest rate of LIBOR + 1.10%. In September 2001, the Company
entered into a rate swap agreement with SunTrust Robinson Humphrey, which fixed
the rate at 4.60% for the remaining term of the obligation.
Capital
The Company seeks to maintain a strong capital position to expand
facilities, promote public confidence, support current operations and grow at a
manageable level. As of June 30, 2002, the Company's total risk based capital
and tier 1 risk based capital ratios were 14.27% and 13.47%, respectively. Both
ratios are in excess of regulatory minimums and are in line with the ratios of
the Company's peers. Earnings have been sufficient to allow an increase in
regular quarterly dividends in 2002 over those in 2001.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, investments and loans maturing within one
year. The Company's ability to obtain deposits and purchase funds at favorable
rates determines its liquidity exposure. As a result of the Company's management
of liquid assets and the ability to generate liquidity through liability
funding, management believes that the Company maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchase of federal funds. To further meet
its liquidity needs, the Bank maintains lines of credit with correspondent
14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
financial institutions. The Bank also has a line of credit with the Federal Home
Loan Bank of Atlanta that allows for secured borrowings. In the past, growth in
deposits and proceeds from the maturity of investment securities have been
sufficient to fund most of the net increase in loans and investment securities.
Interest Rate Sensitivity
Liquidity as of June 30, 2002 is strong. The Bank historically has had a
stable core deposit base and, therefore, does not have to rely on volatile
funding sources. Because of the stable core deposit base, changes in interest
rates should not have a significant effect on liquidity. During 2002, the Bank
has used maturing investments, interest bearing bank deposits, deposit growth
and fed funds purchased to meet its liquidity needs. The Bank's membership in
the federal Home Loan Bank System also provides liquidity, as the Bank borrows
money that is repaid over a 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 monitors its interest rate sensitivity periodically and makes
adjustments as needed. There are no off balance sheet items that will impair
future liquidity. A summary of asset and liability repricing opportunities is
shown on page 16 as Table II.
As of June 30, 2002, the Company had a cumulative Gap Rate Sensitivity Ratio
of (7.70)% for the one-year repricing period. This generally indicates that net
interest income would improve in a declining or stable interest rate environment
as liabilities reprice more quickly than assets. Conversely, earnings would
normally decrease in periods during which interest rates are rising. In actual
practice, this may not be the case, as deposits may not reprice concurrently or
to the same degree as changes to rates within the general economy. Management
constantly monitors the Company's interest rate risk and has decided its
current position is acceptable for a well-capitalized community bank
operating in a rural environment.
Stock Repurchase
On April 20, 2000, the Company announced that the Board of Directors had
authorized the repurchase of up to 50,000 shares of the Company's outstanding
common stock. Repurchases are authorized to be made by the Company from time to
time in the open market or through privately negotiated transactions during the
subsequent twelve months as, in the opinion of management, market conditions
warrant. The repurchased shares are held as unissued stock and are available for
general corporate purposes. Through the end of the second quarter of 2002, a
total of 41,084 shares have been repurchased. Of this amount, 14,685 shares have
been repurchased in 2002.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including F & M Bank
Corp., and the address is (http://www.sec.gov).
15
TABLE I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1, 4 $ 188,510 $ 7,255 7.76% $ 161,306 $ 6,974 8.72%
Federal funds sold 5,707 47 1.66% 20,913 486 4.65%
Bank deposits 15,214 280 3.71% 2,772 67 4.83%
Investments
Taxable3 40,919 1,029 5.07% 31,540 1,000 6.34%
Partially taxable 2,3 10,517 279 5.35% 10,035 290 5.78%
-------- ------- ----- -------- ----- ----
Total Earning Assets 260,867 8,890 6.87% 226,566 8,817 7.78%
-------- -------- ------ -------- -------- -----
Interest Expense
Demand deposits 31,177 156 1.01% 26,088 262 2.01%
Savings 38,167 367 1.94% 30,592 483 3.16%
Time deposits 115,825 2,628 4.58% 107,713 3,156 5.86%
Short-term debt 8,804 56 1.28% 8,718 198 4.54%
Long-term debt 26,929 624 4.67% 19,100 516 5.40%
-------- ------- ----- -------- -------- -----
Total Interest Bearing
Liabilities 220,902 3,831 3.50% 192,211 4,615 4.80%
-------- ------- ----- --------- -------- -----
Net Interest Income 1 $ 5,059 $ 4,202
======= ========
Net Yield on Interest
Earning Assets 1 3.91% 3.71%
===== =====
1 Interest income on loans includes loan fees.
2 An incremental tax rate of 34% was used to calculate the tax equivalent income
on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value
4 Average balances include non-accrual loans.
15
TABLE I (Continued)
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1, 4 $ 195,547 $ 3,722 7.63% $ 166,247 $ 3,593 8.67%
Federal funds sold 3,609 15 1.67% 30,461 337 4.42%
Bank deposits 12,393 115 3.72% 4,220 52 4.93%
Investments
Taxable3 44,311 530 4.80% 31,990 493 6.16%
Partially taxable 2,3 10,286 149 5.81% 9,754 137 5.62%
------ -------- ----- -------- -------- -----
Total Earning Assets 266,146 4,531 6.83% 242,672 4,612 7.60%
-------- -------- ----- -------- -------- -----
Interest Expense
Demand deposits 32,041 82 1.03% 28,246 131 1.85%
Savings 39,445 186 1.89% 32,867 248 3.01%
Time deposits 115,208 1,261 4.39% 117,439 1,693 5.77%
Short-term debt 8,469 27 1.28% 8,495 83 3.91%
Long-term debt 28,913 337 4.67% 21,627 299
-------- -------- ----- -------- --------
5.53%
Total Interest Bearing
Liabilities 224,076 1,893 3.39% 208,674 2,454 4.70%
-------- -------- ----- -------- -------- -----
Net Interest Income 1 $ 2,638 $ 2,158
======== ========
Net Yield on Interest
Earning Assets 1 3.98% 3.56%
===== =====
1 Interest income on loans includes loan fees.
2 An incremental tax rate of 34% was used to calculate the tax equivalent income
on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value
4 Average balances include non-accrual loans.
16
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
JUNE 30, 2002
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $28,385 $ 3,361 $14,206 $ 1,385 $ $47,337
Installment 252 956 21,883 2,283 25,374
Real estate 13,871 9,809 66,039 36,784 126,503
Credit cards 1258 1,258
Interest bearing
bank deposits 5,978 496 6,474
Federal Funds Sold
Investment securities 11,006 15,550 22,929 2,642 13,755 65,882
------ ------ ------ ------ ------ ------
Total 60,750 30,172 125,057 43,094 13,755 272,828
------ ------ ------- ------ ------ -------
Sources of Funds
Demand deposits 2,938 6,853 17,621 3,915 31,327
Savings deposits 7,860 23,579 7,860 39,299
Certificates of deposit
$100,000 and over 4,069 8,277 5,115 17,461
Other certificates
of deposit 22,733 45,327 29,592 97,652
Short-term borrowings 11,196 11,196
Long-term debt 1,333 1,333 22,731 7,679 33,076
------ ------ ------ ------ ----- ------
Total 42,269 69,650 98,638 19,454 230,011
------ ------ ------ ------ ----- -------
Discrete Gap 18,481 (39,478) 26,419 23,640 13,755 42,817
Cumulative Gap 18,481 (20,997) 5,422 29,062 42,817
Ratio of Cumulative Gap 6.77% (7.70)% 1.99% 10.65% 15.69%
to Total Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 2002. In preparing the above table no
assumptions are made with respect to loan prepayments. Loan principal payments
are included in the earliest period in which the loan matures or can be
repriced. Principal payments on installment loans scheduled prior to maturity
are included in the period of maturity or repricing. Proceeds from the
redemption of investments and deposits are included in the period of maturity.
Estimated maturities of deposits, which have no stated maturity dates, were
derived from guidance contained in FDICIA 305.
17
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - On April 13, 2002, the stockholders held
their annual meeting. The following items
were approved by the shareholders by the
required majority:
1) Election of the Board of Directors as
proposed in the proxy material without
any additions or exceptions.
2) Appointment of S.B. Hoover & Co. LLP.
as independent accountants as proposed
in the proxy materials.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K
(a)Exhibits
3 i Restated Articles of Incorporation of F & M Bank Corp.
are incorporated by reference to Exhibits to F & M Bank
Corp.'s 2001 Form 10-K filed March 1, 2002.
3 ii Amended and Restated Bylaws of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank
Corp.'s 2001 Form 10-K filed March 1, 2002.
21 Subsidiaries of the small business issuers are incorporated
by reference to Exhibits to F & M Bank Corp.'s 1995
Form 10-KSB filed March 26, 1996.
(b)Reports on Form 8-K
The Company did not file any reports on form 8-K for the quarter
ended June 30, 2002.
18
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
/s/ JULIAN D. FISHER
-----------------------------------------
Julian D. Fisher
President and Chief Executive Officer
/s/ NEIL W. HAYSLETT
-----------------------------------------
Neil W. Hayslett
Vice President and Chief Financial Officer
Date August 13, 2002
----------------