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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
-----------
March 31, 2003
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Drawer 1111
Timberville, Virginia 22853
(540) 896-8941
--------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes ..X. No ....
Check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes ..... No ..X..
The registrant's Common Stock is traded Over-the-Counter under the symbol
FMBM. The aggregate market value of the 2,161,107 shares of Common Stock of the
registrant issued and outstanding held by nonaffiliates on May 12, 2003 was
approximately $42,357,697 based on the closing sales price of $19.60 per share
on that date. For purposes of this calculation, the term "affiliate" refers to
all directors and executive officers of the registrant.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at March 31, 2003
- ----------------------------- ------------------------------
Common Stock, par value - $5 2,423,678 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2003 and 2002 2
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Controls and Procedures 18
Item 4. Quantitative and Qualitative Disclosures about Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibit and Reports on Form 8K 19
SIGNATURES 20
Certification of Chief Executive Officer 21
Certification of Chief Financial Officer 22
2
Part I Financial Information
Item 1. Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
2003 2002
---- ----
Interest Income
Interest and fees on loans $ 3,588 $ 3,521
Interest on federal funds sold 32 32
Interest on interest bearing deposits 48 165
Interest and dividends on investment
securities 632 601
---------- ---------
Total Interest Income 4,300 4,319
---------- ---------
Interest Expense
Interest on demand accounts 58 74
Interest on savings deposits 142 181
Interest on time deposits 1,074 1,367
---------- ---------
Total interest on deposits 1,274 1,622
Interest on short-term debt 14 29
Interest on long-term debt 342 287
---------- ---------
Total Interest Expense 1,630 1,938
---------- ---------
Net Interest Income 2,670 2,381
Provision for Loan Losses 72 67
---------- ---------
Net Interest Income after Provision
for Loan Losses 2,598 2,314
---------- ---------
Noninterest Income
Service charges 173 180
Other 278 137
Security gains (losses) (110) 81
----------- ---------
Total Noninterest Income 341 398
---------- ---------
Noninterest Expense
Salaries 753 678
Employee benefits 260 235
Occupancy expense 95 78
Equipment expense 89 83
Intangibles amortization 69 45
Other 466 463
---------- ---------
Total Noninterest Expense 1,732 1,582
---------- ---------
Income before Income Taxes 1,207 1,130
Income Taxes 354 341
---------- ---------
Net Income $ 853 $ 789
========== =========
Per Share Data
Net Income $ .35 $ .32
========== =========
Cash Dividends $ .17 $ .16
========== =========
Equivalent Shares Outstanding 2,423,678 2,437,854
========== =========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
ASSETS 2003 2002
---- ----
Cash and due from banks $ 5,414 $ 6,017
Federal funds sold 13,503 4,476
Interest bearing deposits in banks 8,770 5,886
Securities held to maturity (note 2) 876 1,877
Securities available for sale (note 2) 57,431 62,908
Other investments 4,979 4,817
Loans, net of unearned discount (note 3) 199,090 201,980
Less allowance for loan losses (note 4) (1,545) (1,477)
-------- --------
Net Loans 197,545 200,503
Other real estate 587 719
Bank premises and equipment 4,725 4,486
Interest receivable 1,472 1,655
Goodwill 2,639 2,639
Deposit intangibles 2,185 2,254
Bank owned life insurance (note 5) 4,220 2,303
Other assets 2,435 2,609
------- -------
Total Assets $306,781 $303,149
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 29,767 $ 29,446
Interest bearing
Demand 34,624 34,134
Savings deposits 42,414 41,661
Time deposits 127,370 123,043
------- -------
Total Deposits 234,175 228,284
Short-term debt 7,949 8,308
Long-term debt 30,537 32,312
Accrued expenses 4,343 4,704
------- -------
Total Liabilities 277,004 273,608
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,423,678 shares
issued and outstanding 12,118 12,118
Surplus 303 303
Retained earnings 17,832 17,390
Accumulated other comprehensive loss (476) (270)
-------- --------
Total Stockholders' Equity 29,777 29,541
------- -------
Total Liabilities and Stockholders' Equity $306,781 $303,149
======= =======
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Three Months Ended
March 31,
2003 2002
Balance, beginning of period $ 29,541 $ 28,597
Comprehensive Income:
Net income for period 853 789
Net change in unrealized appreciation (depreciation)
on investment securities available for sale,
net of taxes (206) 67
-------- -------
Total comprehensive income 647 856
Repurchase of common stock (7)
Dividends declared (411) (388)
-------- --------
Balance, end of period $ 29,777 $ 29,058
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
2003 2002
Cash Flows from Operating Activities:
Net income $ 853 $ 789
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 93 83
Amortization of security premiums 41 32
Provision for loan losses 72 68
Intangibles amortization 69 44
(Increase)decrease in interest receivable 183 (105)
(Decrease) increase in other assets 260 (1,876)
Increase (decrease) in accrued expenses (356) 887
(Gain) loss on security transactions 110 (81)
Amortization of limited partnership investments 64 70
Income from life insurance investment (47)
--------- --------
Net adjustments 489 (878)
------- -------
Net Cash Provided by Operating Activities 1,342 (89)
------- -------
Cash Flows from Investing Activities:
Purchase of investments available for sale (9,474) (7,503)
Proceeds from sales of investments available
for sale 277 441
Proceeds from maturity of investments available
for sale 15,002 12,874
Proceeds from maturity of investments
held to maturity
Net (decrease) increase in loans 2,886 (8,755)
Purchase of property and equipment (101) (128)
Change in federal funds sold (9,027) (2,357)
Net increase in interest bearing bank deposits (2,884) (7,265)
Purchase of life insurance (1,870)
Construction in progress payments (99)
--------- --------
Net Cash Used in Investing Activities (5,290) (12,693)
-------- -------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 1,564 7,771
Net increase in time deposits 4,326 (2,704)
Net increase (decrease) in short-term debt (359) (1,433)
Cash dividends paid (411) (388)
Repurchases of common stock (7)
Additional long-term debt 10,000
Repayment of long-term debt (1,775) (1,097)
-------- -------
Net Cash Provided by Financing Activities 3,345 12,142
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (603) (640)
Cash and Cash Equivalents, Beginning of Period 6,017 5,364
------- -------
Cash and Cash Equivalents, End of Period $ 5,414 $ 4,724
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 1,647 $ 1,980
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements include the accounts of F & M
Bank Corp. and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
These statements conform to generally accepted accounting
principles and to general industry practices. In the opinion of
management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of March 31, 2003 and the results of operations for the three-month
periods ended March 31, 2003 and March 31, 2002.
These unaudited condensed consolidated financial statements and
notes should be read in conjunction with the audited consolidated
financial statements and notes included in the Company's annual report
on Form 10-K for the year ended December 31, 2002.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values at
March 31, 2003 and December 31, 2002 follows:
2003 2002
---- ----
Carrying Market Carrying Market
Value Value Value Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 110
Other securities 766 801 1,767 1,795
------- ------- ------- --------
Total $ 876 $ 911 $ 1,877 $ 1,905
======= ======= ======= =======
2003 2002
---- ----
Market Amortized Market Amortized
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 32,363 $ 31,980 $ 38,475 $ 38,023
Equity securities 7,642 8,876 8,026 9,104
Mortgage-backed
securities 5,463 5,430 5,069 5,033
Other securities 11,963 11,783 11,338 11,089
------- ------- ------- --------
Total $ 57,431 $ 58,069 $ 62,908 $ 63,249
======= ======= ======= =======
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
March 31, December 31,
2003 2002
Real Estate
Construction $ 11,104 $ 12,059
Mortgage 116,085 118,453
Commercial and agricultural 46,999 47,218
Consumer 23,436 22,704
Credit cards 1,415 1,478
Other 51 68
------- --------
Total $199,090 $201,980
======= ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2003 and 2002 follows:
2003 2002
Balance, beginning of period $ 1,477 $ 1,289
Provisions charged to operating expenses 72 67
Net charge offs
Loan recoveries 19 26
Loan charge-offs (23) (43)
------ -------
Total Net Charge-offs (4) (17)
------ ------
Balance, end of period $ 1,545 1,339
====== =======
Components of net charge-offs
Commercial $ 1 $ 6
Consumer (5) (23)
------ -------
$ (4) $ (17)
====== =======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 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.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion provides information about the
major components of the results of operations and financial condition, liquidity
and capital resources of F & M Bank Corp. and its subsidiaries. This discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements presented in
Item 1, Part 1 of this Form 10-Q.
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are statements that include
projections, predictions, expectations or beliefs about future events or results
or otherwise are not statements of historical fact. Such statements are often
characterized by the use of qualified words (and their derivatives) such as
"expect," "believe," "estimate," "plan," "project," or other statements
concerning opinions or judgment of the Company and its management about future
events.
Although the Company believes that its expectations with respect to
certain forward-looking statements are based upon reasonable assumptions within
the bounds of its existing knowledge of its business and operations, there can
be no assurance that actual results, performance or achievements of the Company
will not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual future results
and trends may differ materially from historical results or those anticipated
depending on a variety of factors, including, but not limited to, the effects of
and changes in: general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new products and
delivery systems, inflation, changes in the stock and bond markets, technology,
and consumer spending and savings habits.
We do not update any forward-looking statements that may be made from time
to time by or on behalf of the Company.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
financial information contained within the statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. The
Company uses historical loss factors as one factor in determining the inherent
loss that may be present in its loan portfolio. Actual losses could differ
significantly from the historical factors that are used. The fair value of the
investment portfolio is based on period end valuations but changes daily with
the market. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of these transactions would be
the same, the timing of events that would impact these transactions could
change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles
of accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Additionally, it further clarifies the criteria for the
initial recognition and measurement of intangible assets separate from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of SFAS No. 142 discontinue the amortization
of goodwill and intangible assets with indefinite lives. Instead, these assets
will be subject to at least an annual impairment review and more frequently if
certain impairment indicators are in evidence. SFAS No. 142 also requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
Core deposit intangibles are amortized on a straight-line basis over ten
years. The Company adopted SFAS 147 on January 1, 2002 and determined that the
core deposit intangible will continue to be amortized over the estimated useful
life.
Securities Impairment
The Company evaluates each of its investments in securities, debt and
equity, under guidelines contained in SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. These guidelines require the Company
to determine whether a decline in value, below original cost, is other than
temporary. In making its determination, management considers current market
conditions, historical trends in the individual securities, and historical
trends in the total market. Expectations are developed regarding potential
returns from dividend reinvestment and price appreciation over a reasonable
holding period (five years).
Overview
Net income for the first quarter of 2003 was $853,000, up 8.1% from
$789,000 for the same period in 2002. This increase was primarily the result
of significant increases in the net interest margin and in other income. Income
from operations, exclusive of securities transactions and intangibles
amortization, net of income taxes, increased $219,000.
Total assets increased slightly, from $303,149,000 at December 31, 2002 to
$306,781,000 at March 31, 2003. The increase is concentrated in liquid assets as
Fed Funds Sold and Interest Bearing Bank Deposits both of which increased
significantly. Total loans have contracted by approximately $3 million since
year end. Management believes this is consistent with the economic climate and
its reluctance to aggressively cut long-term loan rates when they are already at
historically low levels.
Total deposits at March 31, 2003 were $234,175,000, up 2.6% from year end.
This growth has continued as management focuses on growing lower cost deposit
products (demand and savings), while also attempting to lock in current lower
rates with longer (3-5 year) CD rates in an effort to maintain a lower cost of
funds.
Results of Operations
The dollar amount of the tax equivalent net interest margin increased
$291,000 or 12.0% in the first quarter of 2003 compared to the first quarter of
2002. The yield on earning assets decreased .65%, while the cost of funds on
interest bearing liabilities decreased .88%. These decreases are the result of
assets and liabilities continuing to reprice at lower rates. The dollar value of
the increase in the net interest margin also improved because of the growth in
the balance sheet (ie. volume increase) as average earning assets increased
$24,679,000 over the prior year.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Results of Operations (Continued)
Noninterest income decreased $57,000 in the first three months of 2003.
Exclusive of securities transactions, other noninterest income increased
$134,000 or 42.3%. The growth in noninterest income came from increases in
secondary market origination fees, commissions on sales of investments and
insurance products and from increases in the value of bank owned life insurance.
Noninterest expense increased $150,000 (9.5%). Salaries and benefits
accounted for $100,000 of this total. This increase was caused by a combination
of normal salary increases, a substantial increase in the cost of group
insurance and expenses related to the staffing of the Harrisonburg mortgage and
investments office which began operations in December 2002. The remaining
increase is made up of increases in a number of areas, including: data
processing fees, occupancy and equipment expenses and intangibles amortization.
Securities
The Company's securities portfolio is held to assist the Company in
liquidity and asset liability management. The securities portfolio consists of
securities held to maturity and securities available for sale. Securities are
classified as held to maturity when management has the intent and ability to
hold the securities to maturity. These securities are carried at their amortized
cost. Securities available for sale include securities that may be sold in
response to general market fluctuations, general liquidity needs and other
similar factors. Securities available for sale are recorded at market value.
Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported (net of deferred income taxes) as a separate
component of shareholders' equity. As of March 31, 2003, the amortized cost of
all securities available for sale exceeded their market value by $638,000. This
decrease in value is the result of the decline in value of equity securities
held by the parent company. An increase above cost on debt securities held by
the subsidiary bank partially offsets the decline in value in the equities
portfolio. Management has traditionally held debt securities (regardless of
classification) until maturity and thus it does not expect the fluctuations in
value of these securities to have a direct impact on earnings.
Investments in securities decreased $6,478,000 in the first quarter of 2003
with proceeds of maturing securities held as either Fed Funds Sold or interest
bearing bank deposits. The Company generally invests in relatively short-term
maturities due to the uncertainty in the direction of interest rates. Recent
purchases of debt securities have been a blend of short-term United States
Treasury obligations and longer term corporate obligations.
Of the investments in securities available for sale, 13.3% are invested in
equity securities, most of which are dividend producing and subject to the
corporate dividend exclusion for income taxation purposes. The Company believes
these investments offer adequate returns and have the potential for significant
increases in value. A review of these investments as of March 31, 2003, did not
reveal any additional impairment to be recognized in excess of that which was
recognized in the fourth quarter of 2002.
Loan Portfolio
The Company operates in an agriculturally dominated area in the western
portion of Virginia which includes the counties of Rockingham, Page and
Shenandoah. The Company does not make a significant number of loans to borrowers
outside its primary service area. The Company is very active in local
residential construction mortgages. Commercial lending includes loans to small
and medium sized businesses within its service area.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The allowance for loan losses (see subsequent section) provides for the risk
that borrowers will be unable to repay their obligations and is reviewed
quarterly for adequacy. The risk associated with real estate and installment
notes to individuals is based upon employment, the local and national economies
and consumer confidence. All of these affect the ability of borrowers to repay
indebtedness. The risk associated with commercial lending is primarily based on
the strength of the local economy.
While lending is geographically diversified within the service area, the
Company does have some concentration in agricultural loans (primarily poultry
farming). Recently a mild strain of Avian Influenza was discovered in the
Shenandoah Valley. Several of the Bank's customers were affected by the
contamination. The Bank does not anticipate any losses as a result of this
outbreak, however, the terms of some loans were modified and/or payments
extended in the short-term. In addition to direct agricultural loans, a
significant percentage of residential real estate loans and consumer
installment loans are made to borrowers employed in the agricultural sector of
the economy. The Company monitors its past due loans closely and has not
experienced higher delinquencies in this sector compared to the overall loan
portfolio.
The first three months of 2003 resulted in a $2,890,000 decrease in the loan
portfolio. Although a decrease in the loan portfolio is unusual, the first
quarter of the year is typically one of only modest growth. Management believes
the decline results from a combination of factors, including a generally
sluggish economy, lagging consumer confidence, management's
unwillingness to aggressively reduce long-term interest rates to stimulate
growth and referrals of mortgages to the secondary market origination office.
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans,
on which the original interest rate or repayment terms have been changed due to
financial hardship. Nonperforming loans totaled $1,806,000 at March 31, 2003
compared to $2,594,000 of loans at December 31, 2002. Approximately 85% of these
past due loans are secured by real estate. Although the potential exists for
some loan losses, management believes the bank is generally well secured and
continues to actively work with these customers to effect payment.
As of March 31, 2003 the Company held $195,000 of real estate that was
acquired through foreclosure. This consists of two properties, one of which is
under contract, with settlement scheduled during the second quarter. No
additional losses are anticipated at this time.
Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with
identified potential losses, and pools of loans by type (commercial,
residential, consumer, credit cards). Loans with identified potential losses
include examiner and bank classified loans. Classified relationships in excess
of $100,000 are reviewed individually for impairment under FAS 114. A variety of
factors are taken into account when reviewing these credits, including borrower
cash flow, payment history, fair value of collateral, company management,
industry and economic factors. Loan relationships that are determined to have no
impairment are placed back into the appropriate loan pool and reviewed under FAS
5.
Loan pools are further segmented into watch list, past due over 90 days and
all other. Watch list loans include loans that are 60 days past due, and may
include restructured loans, borrowers that are highly leveraged, loans that have
been upgraded from classified or loans that contain policy exceptions (term,
collateral coverage, etc.). Loss estimates on these loans reflect the increased
risk associated with these assets due to any of the above factors. The past due
pools contain loans that are currently 90 days or more past due. Loss rates
assigned reflect the fact that these loans bear a significant risk of
charge-off. Loss rates vary by loan type to reflect the likelihood that
collateral values will offset a portion of the anticipated losses.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The remainder of the portfolio falls into pools by type of homogenous loans
that do not exhibit any of the above described weaknesses. Loss rates are
assigned based on historical loss rates over the prior five years. A multiplier
has been applied to these loss rates to reflect the time for loans to season
within the portfolio and the inherent imprecision of these estimates.
All potential losses are evaluated within a range of low to high. An
unallocated reserve has been established to reflect other unidentified losses
within the portfolio. It helps to offset the increased risk of loss associated
with fluctuations in past due trends, changes in the local and national
economies, and other unusual events (ie. Avian Influenza). The Board approves
the loan loss provision for the following quarter based on this evaluation and
an effort is made to keep the actual allowance at or above the midpoint of the
range established by the evaluation process.
The allowance for loan losses of $1,545,000 at March 31, 2003 is equal to
..78% of total loans. This compares to an allowance of $1,477,000 (.73%) at
December 31, 2002. Although management has decreased its funding of the reserve
during the first quarter of 2003, compared to the last nine months of 2002,
funding for the quarter is slightly higher than during the same period in 2002.
Based on the recent decline in the loan portfolio and the previously mentioned
evaluation of the loan portfolio, management anticipates that funding of the
reserve will be significantly less for the remainder of the year than for the
full year of 2002.
Although the reserve has increased as a percentage of loans outstanding, it
remains well below the peer group average of 1.34%. Management feels this is
appropriate based on its loan loss history and the composition of its loan
portfolio; the current allowance for loan losses is equal to approximately nine
years of average loan losses. Based on historical losses, delinquency rates,
collateral values of delinquent loans and a thorough review of the loan
portfolio, management is of the opinion that the allowance for loan losses
fairly states the estimated losses in the current portfolio.
Losses during the first quarter were only $4,000, while this is unusually
low, it is not uncommon for the first quarter of the year to reflect lower than
average charge-offs compared to the remainder of the year. Historically this has
followed higher than average charge-offs in the fourth quarter and a spike in
recoveries during the first quarter resulting from sales of collateral and
payments received on loans previously charged-off when customers receive income
tax refund checks. In recent years the company has had an average loss rate of
..09% which is approximately one-third the loss rate of its peer group.
Deposits and Long-Term Debt
The Company's main source of funds is customer deposits received from
individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit. The Company realized annualized deposit
growth of 10.3% in the first quarter of 2003. All deposit types increased during
the quarter. Although time deposits increased more rapidly than other deposit
types, approximately three-fourths of the growth in time deposits resulted from
deposits which were purchased by other financial institutions at below market
rates. These funds were subsequently reinvested in other financial institutions
with similar terms, but at higher rates of interest. Overall, the growth of
core deposits was similar for all deposit types. The Bank has advertised a free
checking account, but has not offered any other deposit promotions during the
first quarter. The growth appears to be a result of accounts gained from larger
institutions and customer funds being held short-term due to low rates of
interest and stock market volatility.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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
$1,442,000 in the first quarter of the year. Additional borrowings were not
necessary due to the overall liquidity position and lower loan demand.
As part of the approval process for the acquisition of the new branches,
the Company was required to contribute $6 million into the Bank as additional
equity capital. The Company funded this contribution in part by borrowing $4
million from SunTrust Bank. The loan is amortized over a three year period with
quarterly payments of $333,333, plus interest. The loan is collateralized by
marketable securities and carries an interest rate of LIBOR + 1.10%. In
September 2001, the Company entered into a rate swap agreement with SunTrust
Robinson Humphrey, which fixed the rate at 4.60% for the remaining term of the
obligation. In September 2002, the Company borrowed an additional $3 million
from SunTrust Bank. This loan carries an interest rate of LIBOR + 1.10% and is
variable. Payments of interest only will be due quarterly for seven calendar
quarters, followed by payments of $230,769 plus interest for a period of
thirteen quarters. Proceeds of this loan were used to provide an additional
capital contribution to the Bank and to pay off an intercompany loan.
Capital
The Company maintains a strong capital base to expand facilities, promote
public confidence, support operations and grow at a manageable level. As of
March 31, 2003, the Company's total risk based capital and total capital to
total average assets ratios were 14.73% and 8.73%, respectively. Both ratios are
in excess of regulatory minimums and exceed the ratios of the Company's peers.
Earnings have been sufficient to allow an increase in dividends in 2003 and
management has no reason to believe this increased level of dividends will not
continue
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, deposits obtained through the adjustment of
interest rates and purchases of federal funds. To further meet its liquidity
needs, the Company also maintains lines of credit with correspondent
financial institutions. The Company's subsidiary bank also has a line of credit
with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.
In the past, growth in deposits and proceeds from the maturity of investment
securities has been sufficient to fund most of the net increase in loans and
investment securities.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Interest Rate Sensitivity
As a result of the continued growth in deposits in 2003, and through
maturities of investments, the liquidity position at March 31, 2003 remains very
strong. The Bank historically has had a stable core deposit base and, therefore,
does not have to rely on volatile funding sources. Because of the stable core
deposit base, changes in interest rates should not have a significant effect on
liquidity. The Bank's membership in the Federal Home Loan Bank System also
provides liquidity, as the Bank borrows money that is repaid over a five to ten
year periods and uses the money to make fixed rate loans. The matching of the
long-term receivables and liabilities helps the Bank reduce its sensitivity to
interest rate changes. The Company reviews its interest rate gap periodically
and makes adjustments as needed.
There are no off-balance-sheet items that will impair future liquidity.
Table II (page 17) contains an analysis, which shows the repricing
opportunities of earning assets and interest bearing liabilities as of March 31,
2003.
As of March 31, 2003, the Company had a cumulative Gap Rate Sensitivity
Ratio of 1.86% for the one year repricing period. This generally indicates that
earnings would improve in an increasing interest rate environment as assets
reprice more quickly than liabilities. However, in actual practice, this may not
be the case as deposit customers may move funds into longer term higher rate
time deposits as rates rise rather than maintaining the same general maturity
schedules as that which currently exists. Management constantly monitors the
Company's interest rate risk and has decided the current position is acceptable
for a well-capitalized community bank operating in a rural environment.
Stock Repurchase
On April 20, 2000, the Company announced that the Board of Directors had
authorized the repurchase of up to 50,000 shares of the Company's outstanding
common stock. Repurchases were authorized to be made by the Company from time to
time in the open market or privately negotiated transactions during the year as,
in the opinion of management, market conditions warrant. The repurchased shares
are accounted for as retired stock. Shares repurchased through March 31, 2003
total 41,284.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including F & M Bank
Corp., and the address is (http://www.sec.gov).
16
TABLE 1
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Average Income/ Average Income/
Balance2 Expense Rates Balance2 Expense Rates
Interest Income
Loans1 $200,832 $3,604 7.28% $ 181,472 $3,533 7.90%
Federal funds sold 11,137 32 1.17 7,806 32 1.66
Interest bearing
deposits 6,875 48 2.83 18,035 165 3.71
Investments
Taxable 3 52,431 522 3.98 37,526 499 5.32
Partially
taxable 2,3 8,990 136 6.05 10,747 130 4.84
------ ------ ---- -------- ----- ----
Total Earning
Assets 280,265 4,342 6.27 255,586 4,359 6.92
======= ------ ---- ======== ----- ----
Interest Expense
Demand deposits 33,605 58 .70 30,312 74 .99
Savings 42,387 142 1.36 36,889 181 1.99
Time deposits 127,125 1,074 3.43 116,442 1,367 4.76
Short-term debt 7,533 14 .75 9,139 29 1.29
Long-term debt 31,360 342 4.42 24,945 287 4.67
------- ------ ----- -------- ----- ----
Total Interest
Bearing
Liabilities $242,010 1,630 2.73 $ 217,727 1,938 3.61
======= ----- ---- ======== ----- ----
Net Interest Margin 1 $2,712 $2,421
===== =====
Net Yield on Interest
Earning Assets 3.91% 3.84%
==== ====
1 Interest income on loans includes loan fees
..
2 An incremental income tax rate of 34% was used to calculate the tax
equivalent income on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
17
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
MARCH 31, 2002
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $ 26,258 $ 2,840 $ 16,504 $ 1,397 $ $ 46,999
Installment 262 992 19,889 2,344 23,487
Real estate 10,849 13,500 65,331 37,509 127,189
Credit cards 1,415 1,415
Interest bearing
bank deposits 2,032 5,747 991 8,770
Investment
securities 12,370 22,451 15,352 492 7,642 58,307
Federal funds sold 13,503 13,503
------- ------ ------- ------ ----- -------
Total 66,689 45,530 118,067 41,742 7,642 279,670
------- ------ ------- ------ ----- -------
Sources of Funds
Interest bearing
demand 10,758 19,497 4,369 34,624
Savings deposits 8,483 25,448 8,483 42,414
Time deposits
$100,000 and over 3,571 8,895 10,825 23,291
Other time deposits 7,722 42,106 44,251 104,079
Short-term borrowings 7,949 7,949
Long-term debt 1,989 5,539 21,902 1,107 30,537
------- ------ ------- ------ ----- -------
Total 31,231 75,781 121,923 13,959 242,894
------- ------ ------- ------ ----- -------
Discrete Gap 35,458 (30,251) (3,856) 27,783 7,642 36,776
Cumulative Gap 35,458 5,207 1,351 29,134 36,776
Ratio of Cumulative Gap
to Total Earning
Assets 12.68% 1.86% .48% 10.42% 13.15%
Table II reflects the earlier of the maturity or repricing dates for
various assets and liabilities at March 31, 2003. In preparing the above table
no assumptions are made with respect to loan prepayments. Loan principal
payments are included in the earliest period in which the loan matures or can be
repriced. Principal payments on installment loans scheduled prior to
maturity are included in the period of maturity or repricing. Proceeds from the
redemption of investments are included in the period of maturity. Estimated
maturities of deposits, which have no stated maturity dates, were derived from
guidance contained in FDICIA 305.
18
Item 3. Controls and Procedures
Evalution of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as F & M Bank Corp. that file periodic reports under Securities Exchange
Act of 1934 (the "Act") are now required to include in those reports certain
information concerning the issuer's controls and procedures for complying with
the disclosure requirements of the federal securities laws. Under rules adopted
by the Securities and Exchange Commission effective August 29, 2002, these
disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports it files or submits under the Act, is communicated to
the issuer's management, including its principal executive officer or officers
and principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to F & M Bank Corp. is made known to our principal
executive officers and principal finance officer on a regular basis, in
particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the President and the Chief Financial Officer,
and the other executive officers of F & M Bank Corp. and its subsidiaries to
identify any new transactions, events, trends, contingencies or
other matters that may be material to the Company's operations. As required, we
will evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and most recently did so as of May 7, 2003, a date within 90
days prior to the filing of this quarterly report. Based on this evaluation, the
management of F & M Bank Corp. including the Chief Financial Officer, concluded
that such disclosure controls and procedures were operating effectively as
designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of F & M Bank Corp. pertaining to its financial reporting and
control of its assets or in other factors that could significantly affect these
controls.
Item 4. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
19
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use
of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K
(a) Exhibits
3 i Articles of Incorporation of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank
Corp.'s Form S14 filed February 17, 1984.
3 ii Bylaws of F & M Bank Corp. are incorporated by reference
to Exhibits to F & M Bank Corp.'s Form S14 filed
February 17, 1984.
2 i Subsidiaries of the small business issuers are
incorporated by reference to Exhibits to F & M Bank
Corp.'s 1998 Form 10-KSB filed March 31, 1999.
99.1 Statement of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter
ending March 31, 2003.
20
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
/s/ JULIAN D. FISHER
-----------------------------------------
Julian D. Fisher
President and Chief Executive Officer
/s/ NEIL W. HAYSLETT
-----------------------------------------
Neil W. Hayslett
Senior Vice President and Chief Financial
Officer
Date May 15, 2003
-----------------
21
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Julian D. Fisher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2002 /s/ JULIAN D. FISHER
------------ -----------------------------
Julian D. Fisher
President and Chief Executive
Officer
22
CERTIFICATION
CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Neil W. Hayslett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 /s/ NEIL W. HAYSLETT
------------ -----------------------------
Neil W. Hayslett
Senior Vice President & Chief
Financial Officer
23
EXHIBIT 99.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 of F & M Bank Corp. (the "Company"), as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned Chief
Executive Officer and Chief Financial Officer of the Company hereby certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: (1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company as of and for the periods covered in the Report.
/s/ JULIAN D. FISHER
- -----------------------------------
Julian D. Fisher
President & Chief Executive Officer
/s/ NEIL W. HAYSLETT
- -----------------------------------
Neil W. Hayslett
Senior Vice President &
Chief Financial Officer
Date: May 15, 2003
------------
A signed original of this written statement required by Section 906 has been
provided to F&M Bank Corp, Inc. and will be retained by F&M Bank Corp, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.