-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QyRQkL9/T54WCk1n8gXAJvVI+AQd3ia1Px9eoQ0t0OwHGblUEE9Ge3Ib4O/R1XTx YsQ5fCd0QqwhiExK0AIlUA== 0000930609-01-500032.txt : 20020410 0000930609-01-500032.hdr.sgml : 20020410 ACCESSION NUMBER: 0000930609-01-500032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: F&M BANK CORP CENTRAL INDEX KEY: 0000740806 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541280811 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13273 FILM NUMBER: 1788243 BUSINESS ADDRESS: STREET 1: PO BOX F CITY: TIMBERVILLE STATE: VA ZIP: 22853 BUSINESS PHONE: 7038968941 MAIL ADDRESS: STREET 1: DRAWER F CITY: TIMBERVILLE STATE: VA ZIP: 22853 10-Q 1 fmbank10qsept01.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended Commission File Number 0-13273 September 30, 2001 F & M BANK CORP. Virginia 54-1280811 - ------------------------------------ -------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Drawer F Timberville, Virginia 22853 (540) 896-8941 ------------------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ..X. No .... State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at September 30, 2001 - ----------------------------- --------------------------------- Common Stock, par value - $5 2,429,717 shares 1 F & M BANK CORP. INDEX Page PART I FINANCIAL INFORMATION 2 Item 1. Financial Statements Consolidated Statements of Income - Nine Months Ended September 30, 2001 and 2000 2 Consolidated Statements of Income - Three Months Ended September 30, 2001 and 2000 3 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 5 Consolidated Statements of Changes in Stockholders' Equity - Nine Months Ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 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 8-K 17 SIGNATURES 18 2 Part I Financial Information Item 1 Financial Statements F & M BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars Except per Share Amounts) Nine Months Ended September 30, 2001 2000 ------ ------ Interest Income Interest and fees on loans $ 10,565 $ 9,566 Interest on federal funds sold 658 17 Interest on interest bearing deposits 234 33 Interest and dividends on investment securities 1,767 1,886 ---------- --------- Total Interest Income 13,224 11,502 ---------- --------- Interest Expense Interest on demand deposits 367 350 Interest on savings accounts 696 721 Interest on time deposits 4,810 3,259 ---------- --------- Total interest on deposits 5,873 4,330 Interest on short-term debt 264 360 Interest on long-term debt 814 706 ---------- --------- Total Interest Expense 6,951 5,396 ---------- --------- Net Interest Income 6,273 6,106 Provision for Loan Losses 137 89 ---------- --------- Net Interest Income after Provision for Loan Losses 6,136 6,017 --------- --------- Noninterest Income Service charges 485 405 Other 413 401 Security gains 1,273 771 ---------- --------- Total Noninterest Income 2,171 1,577 ---------- --------- Noninterest Expense Salaries 1,835 1,579 Employee benefits 523 496 Occupancy expense 227 163 Equipment expense 234 214 Other 1,375 1,044 ---------- --------- Total Noninterest Expense 4,194 3,496 ---------- --------- Income before Income Taxes 4,113 4,098 Provision for Income Tax 1,305 1,141 ---------- --------- Net Income $ 2,808 $ 2,957 ========== ========= Per Share Data Net Income $ 1.15 $ 1.21 ========== ========= Cash Dividends $ .47 $ .44 ========== ========= Equivalent Shares Outstanding 2,431,417 2,449,421 ========== ========= The accompanying notes are an integral part of these statements. 3 F & M BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars Except per Share Amounts) Three Months Ended September 30, 2001 2000 ------ ------ Interest Income Interest and fees on loans $ 3,613 $ 3,284 Interest on federal funds sold 172 Interest on interest bearing deposits 167 5 Interest and dividends on investment securities 552 633 ---------- --------- Total Interest Income 4,504 3,922 ---------- --------- Interest Expense Interest on demand deposits 105 112 Interest on savings accounts 213 236 Interest on time deposits 1,654 1,227 ---------- --------- Total interest on deposits 1,972 1,575 Interest on short-term debt 66 146 Interest on long-term debt 298 226 ---------- --------- Total Interest Expense 2,336 1,947 ---------- --------- Net Interest Income 2,148 1,975 Provision for Loan Losses 70 30 ---------- --------- Net Interest Income after Provision for Loan Losses 2,078 1,945 ---------- --------- Noninterest Income Service charges 169 138 Other 135 115 Security gains (11) ----------- --------- Total Noninterest Income 293 253 ---------- --------- Noninterest Expense Salaries 620 508 Employee benefits 175 159 Occupancy expense 82 63 Equipment expense 75 74 Other 483 392 ---------- --------- Total Noninterest Expense 1,435 1,196 ---------- --------- Income before Income Taxes 958 1,002 Provision for Income Tax 307 264 ---------- --------- Net Income $ 651 $ 738 ========== ========= Per Share Data Net Income $ .27 $ .30 ========== ========= Cash Dividends $ .16 $ .15 ========== ========= Equivalent Shares Outstanding 2,430,628 2,441,118 ========== ========= The accompanying notes are an integral part of these statements. 4 F & M BANK CORP. CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars) September 30, December 31, ASSETS 2001 2000 ---------- ---------- Cash and due from banks $ 4,514 $ 3,808 Fed funds sold 789 909 Interest bearing deposits in banks 18,225 313 Securities held to maturity (note 2) 1,885 2,886 Securities available for sale (note 2) 56,197 38,680 Other investments 3,647 3,756 Loans, net of unearned discount (note 3) 172,362 152,035 Less allowance for loan losses (note 4) (1,278) (1,108) ------- ------- Net Loans 171,084 150,927 Construction in progress 579 Bank premises and equipment 4,485 3,069 Interest receivable 1,553 1,481 Other real estate 308 426 Intangible assets 5,259 Other assets 2,074 1,984 ------ ------- Total Assets $270,020 $208,818 ======= ======= LIABILITIES Deposits Noninterest bearing demand $ 24,056 $ 18,615 Interest bearing Demand 27,846 20,349 Savings deposits 33,607 26,406 Time deposits 118,667 86,985 ------- ------- Total Deposits 204,176 152,355 Short-term debt 8,830 8,698 Long-term debt 24,257 16,386 Accrued expenses 4,774 4,181 ------ ------- Total Liabilities 242,037 181,620 ------- ------- STOCKHOLDERS' EQUITY Common stock, $5 par value, 2,429,717 and 2,433,373 issued and outstanding, in 2001 and 2000, respectively 12,149 12,167 Surplus 417 479 Retained earnings 15,456 13,791 Accumulated other comprehensive income (loss) (39) 761 ------- ------- Total Stockholders' Equity 27,983 27,198 ------ ------- Total Liabilities and Stockholders' Equity $270,020 $208,818 ======= ======= The accompanying notes are an integral part of these statements. 5 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) Nine Months Ended September 30, 2001 2000 ------ ------ Cash Flows from Operating Activities: Net income $ 2,808 $ 2,957 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 220 194 Amortization of security premiums 23 16 Gain on security transactions (1,254) (771) Provision for loan losses 136 89 Increase in interest receivable (72) (159) Decrease in other assets 218 83 Goodwill amortization 213 Increase (decrease) in accrued expenses 728 (235) Gain on sale of land (20) Losses on limited partnership investments 294 158 -------- -------- Total Adjustments 486 (625) -------- -------- Net Cash Provided by Operating Activities 3,294 2,332 -------- -------- Cash Flows from Investing Activities: Proceeds from sales of investments available for sale 2,945 2,185 Proceeds from maturity of investments available for sale 19,697 2,466 Proceeds from maturity of investments held to maturity 20,100 Purchase of investments available for sale (39,533) (7,098) Purchase of investments held to maturity (19,990) (7) Net decrease (increase) in interest bearing bank deposits (17,912) 199 Net change in federal funds sold 120 Net increase in loans (20,293) (9,532) Sale of other real estate 139 79 Purchase of goodwill (5,470) Purchase of property and equipment (1,017) (440) --------- -------- Net Cash Used in Investing Activities (61,214) (12,148) --------- -------- Cash Flows from Financing Activities: Net increase in deposits 51,821 9,319 Net decrease in short-term borrowings 132 3,497 Repurchase of common stock (80) (461) Repayment of long-term borrowings (3,128) (2,414) Proceeds of long-term borrowings 11,000 Payment of dividends (1,119) (1,053) --------- -------- Net Cash Provided by Financing Activities 58,626 8,888 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 706 (928) Cash and Cash Equivalents at Beginning of Period 3,808 4,799 -------- -------- Cash and Cash Equivalents at End of Period $ 4,514 $ 3,871 ======== ======== Supplemental Disclosure Cash paid for: Interest expense $ 6,858 $ 5,269 Income taxes 777 1,052 The accompanying notes are an integral part of these statements. 6 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands of Dollars) Nine Months Ended September 30, 2001 2000 ------ ------ Balance, beginning of period $27,198 $25,286 Net income for period 2,808 2,957 Net change in unrealized appreciation on securities available for sale, net of taxes (800) 21 ------- ------ Total comprehensive income 2,008 2,978 Repurchase of common stock (80) (461) Dividends declared (1,143) (1,076) ------- ------ Balance, end of period $27,983 $26,727 ====== ====== The accompanying notes are an integral part of these statements. 7 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING PRINCIPLES: The consolidated financial statements conform to generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2001, and the results of operations for the three and nine month periods ended September 30, 2001 and 2000. The notes included herein should be read in conjunction with the notes to financial statements included in the 2000 annual report to stockholders of the F&M Bank Corp. NOTE 2 INVESTMENT SECURITIES: The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2001 and December 31, 2000 follows: 2001 2000 Carrying Market Carrying Market Value Value Value Value Securities Held to Maturity U. S. Treasury and Agency obligations $ 111 $ 111 $ 1,109 $ 1,107 Other debt securities 1,774 1,845 1,777 1,752 ------ ------- ------- ------ Total $ 1,885 $ 1,956 $ 2,886 $ 2,859 ====== ======= ======= ====== 2001 2000 Market Market Value Cost Value Cost Securities Available for Sale U. S. Treasury and Agency obligations $27,252 $ 26,919 $ 15,418 $15,326 Equity securities 9,706 10,676 11,942 10,854 Mortgage-backed securities 9,261 9,151 1,840 1,839 Other debt securities 9,978 9,516 9,480 9,500 ------ ------- ------- ------ Total $56,197 $ 56,262 $ 38,680 $37,519 ====== ======= ======= ====== 8 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE 3 LOANS: Loans outstanding are summarized as follows: September 30, December 31, 2001 2000 ------ ------ Real Estate Construction $ 4,991 $ 4,372 Mortgage 105,703 92,464 Commercial and agricultural 35,829 32,987 Installment 24,494 20,927 Credit cards 1,248 1,249 Other 97 36 -------- ------- Total $ 172,362 $152,035 ======== ======= NOTE 4 ALLOWANCE FOR LOAN LOSSES: A summary of transactions in the allowance for loan losses for the periods ended September 30, 2001 and 2000 follows: Nine Months Ended Three Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Balance, beginning of period $1,108 $1,090 $1,247 $1,136 Provisions charged to operating expenses 137 89 70 30 Other adjustments 83 Net charge-offs Loan recoveries 41 31 6 10 Loan charge-offs (91) (62) (45) (28) ------ ----- ------ ----- Total Net Charge-Offs * (50) (31) (39) (18) ------ ----- ------ ----- Balance, End of Period $1,278 $1,148 $1,278 $1,148 ===== ===== ===== ===== *Components of Net Charge-Offs Real Estate 1 (2) Commercial (4) (4) (4) (2) Installment (47) (25) (35) (16) ------ ----- ------ ----- Total $ (50) $ (31) $ (39) $ (18) ====== ===== ====== ===== 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview F & M Bank Corp. (Company) is a one-bank holding company organized under Virginia law which provides financial services through its wholly-owned subsidiaries (Farmers & Merchants Bank (Bank) and TEB Life Insurance Company (TEB). Farmers & Merchants Financial Services (FMFS) is a wholly-owned subsidiary of the Bank. The Bank is a full service commercial bank offering a wide range of banking and financial services through its seven branch offices. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides title insurance, brokerage services and property/casualty insurance to customers of the Bank. The Company's primary trade area services customers in Rockingham County, Shenandoah County, the southern part of Page County and the northern part of Augusta County. Management's discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. Results of Operations Year to Date Net income year to date is down $149,000, primarily due to a reduction in the net interest margin. The reduced margin is the result of interest bearing liabilities repricing much more slowly than assets. The cost of short-term debt, primarily commercial repurchase agreements (REPOs), are the only liabilities that track directly with changes in the Federal Funds rate. Rates on non-maturing deposits, such as interest bearing checking and savings accounts have fallen dramatically. However, as relatively low rate, liquid accounts, their decline has not kept pace with rate declines on earning assets. Average rates on time deposits began to fall during the current quarter. Throughout much of 2000, the Bank offered promotional rates to attract deposits to support its growing loan portfolio. The costs of these deposits are not fully reflected in the prior year and have resulted in higher costs in the current year. Many of these deposits, along with deposits purchased from First Union Bank in the branches acquisition, do not begin repricing until the fourth quarter of 2001. Rates on long-term debt have fallen as the Bank has continued to borrow from the Federal Home Loan Bank at favorable rates to support its longer term mortgage lending. A schedule of the net interest margin for 2001 and 2000 can be found in Table I. Noninterest income, exclusive of securities gains has increased $92,000 in 2001. In the prior period, however, there was a pre-tax adjustment of $72,000, which decreased other income. This adjustment was necessary as a result of the discovering of errors in the processing of premiums on sales of credit life and accident and health insurance. The third-party insurance company, which handles underwriting and policy issuance, mistakenly overbooked premium income and related policy claims. The error was discovered by management during the third quarter of 2000 when a single large life insurance claim was reported twice. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The remaining increase in noninterest income results from increases in a variety of service charges and customer fees. Service charges should continue to increase as an initial six-month service charge fee moratorium period for accounts acquired from First Union expired in late August. Noninterest expense increased $698,000 in 2001, however, $213,000 of this amount is related to amortization of deposit premiums and startup costs resulting from the Banks acquisition of the First Union branches. All areas of noninterest expense have increased as a result of the addition of these offices (ie. salaries, benefits, occupancy expenses). Noninterest expense as a percentage of average assets has decreased from 2.32% in 2000 to 2.10% in 2001. This has resulted from the branch acquisitions and the Banks ability to absorb this growth with relatively little increase in administrative staff (operations and support staff) and with no increase in costs of the account processing infrastructure. Operating costs have always compared favorable to the peer group due to an excellent asset to employee ratio and lower than average facilities costs. Quarter Ending September 30, 2001 Net income decreased $87,000 in 2001 compared to 2000 operations. Results of operations for the quarter are very similar to those highlighted for the first nine months of 2001. The net interest yield of 3.58% did show a slight increase over the second quarter (3.56%) and should continue to improve as approximately 25% of time deposits will reprice during the fourth quarter of 2001. Financial Condition Securities The Company's securities portfolio serves several purposes. Portions of the portfolio are held to assist the Company with liquidity, asset liability management, as security for certain public funds and repurchase agreements and for long-term growth potential. The securities portfolio consists of investment securities (commonly referred to as "securities held to maturity") and securities available for sale. Securities are classified as investment securities when management has the intent and ability to hold the securities to maturity. Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders' equity. As of September 30, 2001, the market value of all securities available for sale was $65,000 less than their amortized cost. The value of the Bank's bond portfolio exceeds carrying cost by $905,000. This is the result of rapidly declining interest rates causing the market value of existing higher rate bonds to increase dramatically. The Company's equity securities portfolio was down by $970,000 due in large part to the stock market volatility and economic uncertainty following the September 11, 2001 terrorist attacks. The Company continues to hold equity investments in a number of large, regional financial institutions and a variety of other predominantly blue-chip securities. The Company continues to believe that these investments offer adequate current returns (dividends) and have the potential for future increases in value. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Loan Portfolio The Company operates in a predominately rural area that benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities/colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid size businesses and farms within its primary service area. An inherent risk in the lending of money is that the borrower will not be able to repay the loan under the terms of the original agreement. The allowance for loan losses (see subsequent section) provides for this risk and is reviewed periodically for adequacy. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies. While lending is geographically diversified within the service area, the Company does have some concentration in agricultural loans (primarily poultry farming). In addition to direct agricultural loans, a significant percentage of residential real estate loans and consumer installment loans are made to borrowers employed in the agricultural sector of the economy. The Company monitors its past due loans closely and has not experienced higher loan delinquencies in this sector compared to the overall loan portfolio. The first nine months of 2001 resulted in a $20,327,000 increase in the loan portfolio, which included $9,734,000 of loans purchased as part of the branches acquisition. This increase is indicative of the continued strength of the local economy as much of the increase has been in residential real estate loans. Nonperforming loans include nonaccrual loans, loans 90 days or more past due and restructured loans. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans, which have had the original interest rate or repayment terms changed due to financial hardship. Nonperforming loans totaled $2,183,000 at September 30, 2001 compared to $1,085,000 December 31, 2000. Approximately 90% of these past due loans are secured by real estate. The increase in non-performing loans is almost exclusively single-family residential properties. Although the potential exists for some loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of September 30, 2000, the Company did not hold any real estate that was acquired through foreclosure. Allowance for Loan Losses Management and the Board evaluate the allowance for loan losses on a quarterly basis. Consideration is given to national and local economic trends, changes in the loan portfolio, including past due and criticized loan trends. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Banks watch list or schedule of classified loans. In evaluating the portfolio, loans are segregated into a variety of pools including: substandard, watch and past due over 90 days (by type). Each of these pools are assigned loss potentials based on industry standards or management estimates. The remainder of the portfolio is segregated by loan type. Potential losses are evaluated based on historic losses and are adjusted due to the 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. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) All potential losses are evaluated within a range of low to high. 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 $1,278,000 at September 30, 2001 is equal to .74% of total loans. This compares to an allowance of $1,108,000 (.73%) at December 31, 2000. Peer group reserves were 1.28% based on the most recently available public information. Loan losses, net of recoveries, total $50,000 through three quarters of 2001. This is equivalent to an annualized loss rate of .04%. In recent years the company has had an average loss rate of .07% which is approximately one-third the loss rate of its peer group. Based on its excellent loss history, high percentage of loans secured by real estate, conservative lending philosophy and the strong local economy, management believes the allowance is adequate to absorb reasonably estimated credit losses within the portfolio. The following table shows the type of loans in the loan portfolio and the corresponding amounts of the allowance allocated by loan types as of September 30, 2001 and December 31, 2000:
September 30, 2001 December 31, 2000 ------------------ ----------------- Loan Type as a Loan Type as a Loan Allowance Percentage Percentage of Allowance Percentage Percentage of Type Allocation of Allowance Total Loans Allocation of Allowance Total Loans Commercial $ 647 51% 21% $ 332 47% 25% Mortgage 308 24% 64% 277 25% 61% Consumer 273 21% 14% 333 24% 13% Credit cards 50 4% 1% 166 4% 1% ---- ---- ---- ---- --- ---- Totals $1,278 100% 100% $1,108 100% 100% ===== === ==== ===== === ====
Commercial loans carry the largest percentage of the allowance as these loans tend to be more sensitive to changes in economic conditions and generally show losses earlier than consumer and mortgage lending. Mortgage lending carries a lower percentage of the allowance as losses on these types of loans have shown a lower loss rate in previous periods and tend to be well collateralized. Consumer and credit card losses tend to have a loss rate that is reflective both of the current economy and the levels of collateral required by the lender and have been a moderate source of losses in prior periods. Deposits and Other Borrowings The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits have increased $51,821,000 since December 31, 2000, including $37,287,000 of purchased deposits. Deposit growth in the most recent quarter totals $5,110,000, with the growth spread over all deposit types. This growth has been experienced in spite of rapidly falling rates and appears to be a result of economic uncertainty and stock market volatility. The Company offers repurchase agreements (a/k/a "repos") to customers desiring such investments. Repos are designed for companies and individuals desiring a higher rate of return than traditional deposit accounts and who will accept the risk of not being covered by FDIC insurance. As of September 30, 2001, balances in repo accounts totaled $8,830,000 and are included as short-term debt on the balance sheet. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be an important mechanism in funding real estate loans. The Company's subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund longer term fixed rate mortgage loans. This program allows the Bank to match the maturity of its fixed rate real estate portfolio with the maturity of its debt and reduce its exposure to interest rate changes. The Bank borrowed an additional $3 million during the third quarter of 2001 at an average rate of 5.02% and an average repayment period of eight years. As part of the approval process for the acquisition of new branches, the Company was required to contribute $6 million into the Bank as additional equity capital. The Company funded this contribution in part by borrowing $4 million from SunTrust Bank. The loan is amortized over a three year period with quarterly payments of $333,333, plus interest. The loan is collateralized by $6 million of marketable securities and carries an interest rate of LIBOR + 1.10%. At September 30, 2001, the principal balance is $3,333,333. Capital The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level. As of September 30, 2001, the Company's total risk based capital and total capital to total assets ratios were 17.99% and 10.38%, respectively. Both ratios are in excess of regulatory minimums and exceed the ratios of the Company's peers. Earnings have been satisfactory to allow an increase in regular dividends in 2001 of 6.82%. Liquidity Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company also maintains lines of credit with correspondent financial institutions. The Company's subsidiary bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. In the past, growth in deposits and proceeds from the maturity of investment securities has been sufficient to fund most of the net increase in loans and investment securities. Interest Rate Sensitivity In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity. A summary of asset and liability repricing opportunities is shown in Table II. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Stock Repurchase On April 20, 2000, the Company announced that the Board of Directors had authorized the repurchase of up to 50,000 shares of the Company's outstanding common stock. Management has been authorized to repurchase shares, from time to time in the open market or through privately negotiated transactions, when market conditions warrant. The repurchased shares are held as unissued stock and are available for general corporate purposes. Through the end of the third quarter of 2001, a total of 22,185 shares have been repurchased. Effect of Newly Issued Accounting Standards The Company does not believe that any newly issued but as yet unapplied accounting standards will have a material impact on the Company's financial position or operations. Existence of Securities and Exchange Commission Web Site The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov). 15 Table I F & M BANK CORP. NET INTEREST MARGIN ANALYSIS (Dollar Amounts in Thousands) Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 ------------------ ------------------ Average Income/ Rates Average Income/ Rates Balance Expense Balance Expense Rate Related Income Loans 1 $164,667 $ 10,599 8.58% $144,659 $ 9,596 8.84% Federal funds sold 20,552 658 4.27% 387 17 5.86% Bank deposits 6,450 233 4.59% 862 33 5.10% Investments Taxable 3 31,391 1,449 6.15% 31,700 1,545 6.50% Partially taxable 2,3 10,291 418 5.42% 10,736 467 5.80% ------- ------- ------ ------- ------- ----- Total Earning Assets 233,351 13,357 7.63% 188,344 11,658 8.25% ------- ------- ------ ------- ------- ------ Interest Expense Demand deposits 26,737 364 1.81% 20,626 350 2.26% Savings 31,472 693 2.94% 28,908 721 3.33% Time deposits 111,090 4,810 5.77% 79,093 3,259 5.49% Other short-term debt 8,793 264 4.00% 8,147 350 5.73% Long-term debt 20,826 814 5.21% 17,218 706 5.47% ------- ------- ------ ------- ------- ------ Total Interest Bearing Liabilities 198,918 6,945 4.66% 153,992 5,386 4.66% ------- ------- ------ ------- ------- ------ Net Interest Margin 1 $ 6,412 $ 6,272 ======= ======= Net Yield on Interest Earning Assets 1 3.66% 4.44% ===== ===== 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. 15 (Continued) Table I (Continued) F & M BANK CORP. NET INTEREST MARGIN ANALYSIS (Dollar Amounts in Thousands) Three Months Ended Three Months Ended September 30, 2001 September 30, 2000 ------------------ ------------------ Average Income/ Rates Average Income/ Rates Balance Expense Balance Expense Rate Related Income Loans 1 $171,390 $ 3,625 8.46% $148,311 $ 3,295 8.89% Federal funds sold 19,830 172 3.47% Bank deposits 13,806 166 4.81% 322 5 6.21% Investments Taxable 3 31,093 449 5.78% 31,851 534 6.71% Partially taxable 2,3 10,802 128 4.74% 11,095 141 5.08% ------- ------- ------ ------- ------- ----- Total Earning Assets 246,921 4,540 7.35% 191,579 3,975 8.30% ------- ------- ------ ------- ------- ----- Interest Expense Demand deposits 28,034 102 1.46% 20,022 112 2.24% Savings 33,232 210 2.53% 27,672 236 3.41% Time deposits 117,844 1,654 5.61% 83,764 1,227 5.86% Other short-term debt 8,944 66 2.95% 9,181 136 5.93% Long-term debt 24,278 298 4.91% 16,427 226 5.50% ------- ------- ------ ------- -------- ----- Total Interest Bearing Liabilities 212,332 2330 4.39% 157,066 1,937 4.93% ------- ------- ------ ------- ------- ----- Net Interest Margin 1 $ 2210 $ 2,038 ======= ======= Net Yield on Interest Earning Assets 1 3.58% 4.26% ===== ===== 1 Interest income on loans includes loan fees. 2 An incremental tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments. 3 Average balance information is reflective of historical cost and has not been adjusted for changes in market value. 16 TABLE II F & M BANK CORP. INTEREST SENSITIVITY ANALYSIS September 30, 2001 (In Thousands of Dollars) The following table presents the Company's interest sensitivity. 0 - 3 4 - 12 1 - 5 Over 5 Not Months Months Years Years Classified Total Uses of Funds Loans Commercial $ 21,591 $ 1,902 $11,689 $ 647 $ $ 35,829 Installment 262 12,287 9,517 2,525 24,591 Real estate 14,489 10,396 59,857 25,952 110,694 Credit cards 1,248 1,248 Interest bearing bank deposits 5,069 13,156 18,225 Federal funds sold 789 789 Securities 20,187 9,986 16,047 2,156 13,353 61,729 ------- ------ ------ ------ ------ ------- Total 63,635 47,727 97,110 31,280 13,353 253,105 ------- ------ ------ ------ ------ ------- Sources of Funds Interest bearing demand deposits 8,113 11,968 7,765 27,846 Regular savings 6,721 13,443 13,443 33,607 Certificates of Deposit $100,000 and over 4,124 9,638 3,236 16,998 Other certificates of deposit 25,116 47,842 28,711 101,669 Short-term borrowings 8,830 8,830 Long-term borrowings 4,249 4,053 13,170 2,785 24,257 ------- ------ ------ ------ ------ ------- Total 42,319 76,367 70,528 23,993 213,207 ------- ------ ------ ------ ------ ------- Discrete Gap 21,316 (28,640) 26,582 7,287 13,353 39,898 Cumulative Gap 21,316 (7,324) 19,258 26,545 39,898 Ratio of Cumulative Gap to Total 8.42% (2.89)% 7.61% 10.49% 15.76% Earning Assets Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2001. In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305. 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-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. 21 Subsidiaries of the small business issuers are incorporated by reference to Exhibits to F & M Bank Corp.'s 1997 Form 10-KSB filed March 27, 1998. (b) Reports on Form 8-K The Corporation did not file any reports on Form 8-K for the quarter ending September 30, 2000. 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. JULIAN D. FISHER ------------------------------------------ Julian D. Fisher President and Chief Executive Officer NEIL W. HAYSLETT ------------------------------------------ Neil W. Hayslett Vice President and Chief Financial Officer Date: November 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----