UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
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, 1998
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, 1998
Common Stock, par value - $5 2,455,962 shares
<PAGE> 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, 1998 and 1997 2
Consolidated Statements of Income - Three Months
Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 1998 and 1997 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 19
<PAGE> 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,
1998 1997
Interest Income
Interest and fees on loans $ 8,734 $ 7,967
Interest on federal funds sold 128 79
Interest on interest bearing deposits 43 13
Interest and dividends on investment securities
Taxable 1,574 1,991
Nontaxable 11 11
------ ------
Total Interest Income 10,490 10,061
------ ------
Interest Expense
Interest on demand deposits 367 368
Interest on savings accounts 722 759
Interest on time deposits 2,742 2,647
------ ------
Total interest on deposits 3,831 3,774
Interest on short-term debt 169 118
Interest on long-term debt 1,072 829
------ ------
Total Interest Expense 5,072 4,721
------ ------
Net Interest Income 5,418 5,340
Provision for Loan Losses 95 135
------ ------
Net Interest Income after Provision for Loan Losses 5,323 5,205
------ ------
Noninterest Income
Service charges 309 295
Other 90 124
Security gains 1,572 226
------ ------
Total Noninterest Income 1,971 645
------ ------
Noninterest Expense
Salaries 1,267 1,195
Employee benefits 325 431
Occupancy expense 139 121
Equipment expense 181 203
Other 905 721
------ ------
Total Noninterest Expense 2,817 2,671
------ ------
Income before Income Taxes 4,477 3,179
Provision for Income Tax 1,437 987
------ ------
Net Income $ 3,040 $ 2,192
====== ======
Per Share Data
Net Income $ 1.24 $ .89
------- =======
Cash Dividends $ .61 $ .26
------- =======
Equivalent Shares Outstanding 2,455,962 2,455,962
========= =========
The accompanying notes are an integral part of these statements.
<PAGE> 3
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except per Share Amounts)
Three Months Ended
September 30,
1998 1997
Interest Income
Interest and fees on loans $ 2,990 $ 2,740
Interest on federal funds sold 51 40
Interest on interest bearing deposits 8 5
Interest and dividends on investment securities
Taxable 511 640
Nontaxable 3 4
------ ------
Total Interest Income 3,563 3,429
------ ------
Interest Expense
Interest on demand deposits 120 121
Interest on savings accounts 242 249
Interest on time deposits 947 925
------ ------
Total interest on deposits 1,309 1,295
Interest on short-term debt 60 46
Interest on long-term debt 462 267
------ ------
Total Interest Expense 1,831 1,608
------ ------
Net Interest Income 1,732 1,821
Provision for Loan Losses 15 45
------ ------
Net Interest Income after Provision for Loan Losses 1,717 1,776
------ ------
Noninterest Income
Service charges 106 106
Other 23 47
Security gains 2 251
------ ------
Total Noninterest Income 131 404
------ ------
Noninterest Expense
Salaries 436 433
Employee benefits 107 139
Occupancy expense 52 42
Equipment expense 58 64
Other 310 253
------ ------
Total Noninterest Expense 963 931
------ ------
Income before Income Taxes 885 1,249
Provision for Income Tax 251 408
------ ------
Net Income $ 634 $ 841
====== ======
Per Share Data
Net Income $ .26 $ .34
====== ======
Cash Dividends $ .11 $ .10
====== =======
Equivalent Shares Outstanding 2,455,962 2,455,962
========= =========
The accompanying notes are an integral part of these statements.
<PAGE> 4
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
September 30, December 31,
ASSETS 1998 1997
------------------------
Cash and due from banks $ 3,450 $ 3,574
Federal funds sold 1,365 2,255
Interest bearing deposits in banks 1,201 827
Securities held to maturity (note 2) 9,691 17,545
Securities available for sale (note 2) 29,860 21,171
Other investments 1,576 1,612
Loans, net of unearned discount (note 3) 131,476 123,190
Less allowance for loan losses (note 4) 1,203 1,121
------ ------
Net Loans 130,273 122,069
Bank premises and equipment 1,945 1,883
Interest receivable 1,318 1,278
Other real estate 453 454
Other assets 948 1,142
------ ------
Total Assets $182,080 $173,810
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $14,239 $14,388
Interest bearing
Demand 19,265 19,650
Savings deposits 27,465 27,024
Time deposits 69,735 65,289
------ ------
Total Deposits 130,704 126,351
Short-term debt 6,533 5,204
Long-term debt 19,456 16,977
Accrued expenses 2,104 2,376
------ ------
Total Liabilities 158,797 150,908
------- -------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 2,455,962 issued 12,280 4,093
and outstanding (818,654 in 1997) (note 5)
Surplus 867 867
Retained earnings 8,891 15,536
Unrealized gain on securities available for sale 1,245 2,406
------ ------
Total Stockholders' Equity 23,283 22,902
------ ------
Total Liabilities and Stockholders' Equity $182,080 $173,810
======= =======
The accompanying notes are an integral part of these statements.
<PAGE> 5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
Cash Flows from Operating Activities:
Net income $ 3,040 $ 2,192
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 153 177
Amortization of security premiums 90 73
Gain on security transactions (1,572) (226)
Provision for loan losses 95 135
Increase in interest receivable (40) (28)
(Increase) decrease in other assets 195 (30)
Increase in accrued expenses 411 257
Gain on sale of land (10)
Losses (gains) on limited partnership investments 94 (5)
------ ------
Total Adjustments (584) 353
------- ------
Net Cash Provided by Operating Activities 2,456 2,545
------ ------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 4,523 6,805
Proceeds from maturity of investments available
for sale 5,639 1,381
Proceeds from maturity of investments held to
maturity 10,551 6,432
Purchase of investments available for sale (19,575) (7,940)
Purchase of investments held to maturity (2,426) (5,949)
Net (increase) decrease in interest bearing
bank deposits (373) (64)
Net change in federal funds sold 890 1,181
Net increase in loans (8,326) (7,934)
Sale of other real estate 11
Purchase of property and equipment (191) (146)
------- ------
Net Cash Used in Investing Activities (9,277) (6,234)
------- ------
Cash Flows from Financing Activities:
Net increase in deposits 4,353 4,882
Net increase in short-term borrowings 1,329 498
Additions to long-term borrowings 14,953 1,000
Repayment of long-term borrowings (12,473) (2,379)
Payment of dividends (1,465) (573)
------- ------
Net Cash Provided by Financing Activities 6,697 3,428
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents (124) (261)
Cash and Cash Equivalents at Beginning of Period 3,574 3,568
------ ------
Cash and Cash Equivalents at End of Period $ 3,450 $ 3,307
====== ======
Supplemental Disclosure
Cash paid for:
Interest expense $ 5,028 $ 4,689
Income taxes 1,225 919
The accompanying notes are an integral part of these statements.
<PAGE> 6
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
Balance, beginning of period $22,902 $19,126
Net income for period 3,040 2,192
Change unrealized appreciation on securities
available for sale, net of taxes (1,161) 1,312
------ ------
Total comprehensive income 1,879 3,504
Dividends declared (1,498) (630)
------ ------
Balance, end of period $23,283 $22,000
====== ======
The accompanying notes are an integral part of these statements.
<PAGE> 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, 1998, and the results of operations for
the three and nine month periods ended September 30, 1998 and 1997.
The notes included herein should be read in conjunction with the notes
to financial statements included in the 1997 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, 1998 and December 31, 1997 follows:
1998 1997
------------------------------------------------
Carrying Market Carrying Market
Value Value Value Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 4,990 $ 5,044 $ 9,283 $ 9,314
State and municipal 250 250 405 405
Other debt securities 2,474 2,488 4,147 4,167
Mortgage-backed
securities 1,977 1,984 3,710 3,701
------- ------- ------- ------
Total $ 9,691 $ 9,766 $ 17,545 $17,587
====== ======= ======= ======
1998 1997
------------------------------------------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $11,459 $ 11,346 $ 3,494 $ 3,471
Equity securities 10,993 9,155 10,436 6,634
Mortgage-backed
securities 4,295 4,285 3,110 3,088
Other debt securities 3,113 3,076 4,131 4,101
------ ------- ------- ------
Total $29,860 $ 27,862 $ 21,171 $17,294
====== ======= ======= ======
<PAGE> 8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
September 30, December 31,
1998 1997
Real Estate
Construction $ 4,386 $ 4,708
Mortgage 77,869 73,611
Commercial and agricultural 30,266 27,049
Installment 18,148 16,977
Credit cards 775 818
Other 32 27
------ -------
Total $131,476 $123,190
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
periods ended September 30, 1998 and 1997, follows:
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Balance, beginning of period $1,121 $1,003 $1,184 $1,088
Provisions charged to
operating expenses 95 135 15 45
Net (charge offs) recoveries
Loan recoveries 90 33 60 13
Loan charge-offs (103) (36) (56) (11)
------ ----- ------ -----
Total Net Charge-Offs * (13) (3) 4 2
------ ----- ----- -----
Balance, End of Period $1,203 $1,135 $1,203 $1,135
===== ===== ===== =====
*Components of Net Charge-Offs
Commercial 3 (2) (1) 2
Installment (16) (1) 5
------ ----- ----- -----
Total $ (13) $ (3) $ 4 $ 2
====== ===== ===== =====
NOTE 5 STOCK SPLIT EFFECTED IN THE FORM OF A DIVIDEND
In September 1998, the Company declared a three for one stock
split to be distributed in the form of a dividend. Two additional
shares were distributed for each share outstanding as of September
28, 1998, with no change in the par value of the stock. All per
share computations have been restated to reflect the stock split.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
F & M Bank Corp. continued to experience strong earnings, strong loan demand
and modest deposit growth in the first nine months of 1998. Annualized growth in
total assets was 6.34% and annualized growth in deposits was 4.59%. Net income
for the first nine months of 1998 increased $848,000 or 38.69% compared to 1997.
Stockholders' equity increased 1.66%; this smaller than usual increase was a
result of a $1,161,000 net decrease in unrealized gains on securities available
for sale and a special 90th anniversary dividend totaling $737,000.
Results of Operations
Year to Date
The dollar amount of the tax equivalent, net interest margin increased 1.14%
($63,000) in the first nine months of 1998 compared to the first nine months of
1997. A decrease in the return on earning assets of .07%, combined with a
increase in the cost of funds of .23% (equivalent to a $314,000 decrease in the
net interest margin), was offset by a $377,000 increase in the net interest
margin due to volume increases. Prepayment interest penalties incurred to
refinance long-term debt of the subsidiary bank accounted for $243,000 of the
$351,000 increase in the cost of funds. This refinancing was done in an effort
to reduce interest expense in future periods. A schedule of the net interest
margin for 1998 and 1997 is shown on page 15 as Table I.
Noninterest income increased $1,326,000 in the first nine months of 1998.
Exclusive of increased securities gains of $1,346,000, noninterest income
decreased $20,000. This decrease resulted from an increase in losses related to
investments in low-income housing partnerships. The return on these investments
is reflected in income tax savings and these interests are all providing
positive returns overall.
Overall, noninterest expenses increased 5.47% in 1998 compared to 1997.
Salaries and employee benefits declined 2.09%. Increases in staffing and normal
salary adjustments were more than offset by savings on employee benefits.
Proceeds from the sale of securities received in the Trigon stock
demutualization were used to establish a trust to fund the payment of health
insurance costs through the first eight months of 1998. Other noninterest
expense increased 25.52%. Factors contributing to this increase include:
accruals for year 2000 testing and remediation, directors fees, supplies,
advertising related the subsidiary bank's 90th anniversary and training costs.
Quarter Ending September 30, 1998
Third quarter net income decreased 24.61% compared to the same quarter of
1997. Prepayment penalties incurred by the subsidiary bank to refinance
long-term debt totaled $167,000 while securities gains decreased $249,000.
Exclusive of these non-recurring items, earnings from operations, net of income
tax expense, increased $58,000 (8.47%).
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Financial Condition
Securities
The Company's securities portfolio is held to assist the Company in
liquidity and asset liability management. The securities portfolio consists of
investment securities (commonly referred to as "securities held to maturity")
and securities available for sale. Securities are classified as investment
securities when management has the intent and ability to hold the securities to
maturity. Investment securities are carried at amortized cost. Securities
available for sale include securities that may be sold in response to general
market fluctuations, general liquidity needs and other similar factors.
Securities available for sale are recorded at market value. Unrealized holding
gains and losses of 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, 1998, the market value of all securities available
for sale exceeded their amortized cost by $1,998,000 ($1,245,000 after the
consideration of income taxes). This excess is the result of unrecognized gains
in the value of equity securities, primarily stocks of financial institutions
held by the Company. Management has traditionally held debt securities
(regardless of classification) until maturity and thus it does not expect the
minor fluctuations in the value of the securities to have a direct impact on
earnings.
The carrying value of securities available for sale and held to maturity
increased $835,000 during the first nine months of 1998. Of the investments in
securities available for sale, 36.82% are invested in equities which are
dividend producing and subject to the dividend exclusion for taxation purposes.
The Company believes these investments render adequate current returns and have
the potential for future increases in value.
Loan Portfolio
The Company operates in an agriculturally dominated area, which includes the
counties of Rockingham, Page, Shenandoah and Augusta in the western portion of
Virginia. The Company does not make a significant number of loans to borrowers
outside its primary service area. The Company is very active in local
residential construction mortgages. Commercial lending includes small and medium
sized businesses within its 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 the past two and a half years, the poultry industry has suffered
due to high grain prices, excess supplies of all types of meat and high
mortality rates among poults. Recently there has been a sharp improvement in
grain prices and some improvement in mortality rates. However, these
improvements have not been sufficient to completely offset depressed turkey
prices caused by an over supply of meat. In addition to direct agricultural
loans, a significant percentage of residential real estate loans and consumer
installment loans are made to borrowers employed in the agricultural sector of
the economy. The Company continues to monitor its past due loans closely and has
not experienced an increase in loan delinquencies as a result of these economic
factors.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan Portfolio (Continued)
The first nine months of 1998 saw continued strong loan demand as loans grew
at an annualized rate of 8.97%. The Bank has made a conscious effort to increase
lending locally as loans represent the best return available in the present
credit markets. Funding for new loans was made possible primarily through
increases in time deposits, repurchase agreements and long-term debt. Overall,
management has been quite pleased with the loan program and believes that loan
growth will continue throughout the remainder of 1998.
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. Loans 90 days or more past due totaled $2,014,000 at
September 30, 1998 compared to $825,000 at December 31, 1997. 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 its customers to effect payment. The
Company had no nonaccrual or restructured loans at September 30, 1998.
Real estate acquired through foreclosure was $27,000 at September 30, 1998
and December 31, 1997. All foreclosed property held at September 30, 1998 was in
the Company's primary service area. The Company's practice is to value real
estate acquired through foreclosure at the lower of (i) an independent current
appraisal or market analysis less anticipated costs of disposal, or (ii) the
existing loan balance. The Company actively markets all foreclosed real estate
and does not anticipate material write-downs in value before disposition. As of
September 30, 1998, management is not aware of any significant potential problem
loans in which the debtor is currently meeting their obligations as stated in
the loan agreement but which may change in future periods.
Allowance for Loan Losses
Management evaluates the loan portfolio in light of national and local
economic trends, changes in the nature and value of the portfolio and industry
standards. Specific factors considered by management in determining the adequacy
of the level of the allowance include internally generated loan review reports,
past due reports, historical loan loss experience and individual borrowers
financial health. This review also considers concentrations of loans in terms of
geography, business type or level of risk. Management evaluates nonperforming
loans relative to their collateral value and makes the appropriate adjustments
to the allowance for loan losses when needed.
The provision for loan losses and changes in the allowance for loan losses
are shown in note 4, page 8.
The allowance for loan losses of $1,203,000 at September 30, 1998 was up
$82,000 from its level at December 31, 1997. The allowance was equal to .91% of
total loans at September 30, 1998 and December 31, 1997. The Company believes
that its allowance should be viewed in its entirety and, therefore, is available
for potential credit losses in its entire portfolio, including loans,
credit-related commitments and other financial instruments. In the opinion of
management, the allowance is adequate to absorb reasonably estimated credit
losses inherent in the Company's portfolio.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Deposits and Long-Term Debt
The Company's main source of 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. Growth of the deposit base continues to be
difficult to achieve due to increased competition from new banks entering the
Company's primary service area. Annualized deposit growth in the first nine
months of 1998 totaled 4.59%. All of this growth was in time deposits and was
achieved primarily from advertising of special promotional rates and terms.
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, 1998
balances in repo accounts total $6,189,000 and are included with short-term debt
on the balance sheet.
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be
an important mechanism in 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. Additional borrowings
obtained during 1998 total $14,893,000, of which $9,893,000 was for refinancing
existing debt. Normal repayments (in excess of amounts paid to refinance debt)
total $2,520,000 so far this year.
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, 1998, the Company's total risk based capital ratio
was 19.76%, far above the regulatory minimum of 8.00%. The ratio of total
capital to total assets was 12.79% at September 30, 1998, which exceeds that of
the Company's peers. Earnings have been satisfactory to allow an increase in
regular dividends in 1998 over those levels experienced in 1997 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, 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.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 the interest
sensitive assets relative to interest sensitive liabilities over specific time
intervals.
At September 30, 1998 the Company had a negative gap position. This
liability sensitive position typically produces an unfavorable contribution to
earnings during a period of increasing rates. With the largest amount of
interest sensitive assets and liabilities repricing within five years, the
Company monitors these areas very closely. Early withdrawal of deposits,
prepayments of loans and loan delinquencies are some of the factors that could
affect actual versus expected cash flows. In addition, changes in rates on
interest sensitive assets and liabilities may not be equal, which could result
in a change in the net interest margin. While the Company does not match each of
its interest sensitive assets against specific interest sensitive liabilities,
it does monitor closely the maturities of loans, investments and time deposits
to limit interest rate risk and the financial effect of market rate changes.
A summary of asset and liability repricing opportunities is shown on page 16
as Table II.
Disclosure of Year 2000 Issues
The Company has formed a year 2000 project team to identify information
technology and non-technology systems that require modification for the year
2000. A project plan has been established with goals and target dates. The
Company has completed the assessment phase and has begun the renovation and
validation phases of the project. Substantially all mission critical systems
will be tested prior to year-end 1998. Redeployment of renovated or new
equipment will continue through mid-1999.
The impact of year 2000 issues on the Company depends not only on corrective
actions that the Company takes, but also on the actions of governmental
agencies, businesses and other third parties that provide services to, or
receive services from, the Company. The Company has implemented an ongoing
process of identifying and contacting mission critical third parties to
determine their year 2000 readiness. Although the Company has undertaken these
measures, there can be no assurance that mission critical third parties will
adequately address their year 2000 issues.
The Company is developing contingency plans for implementation in the event
that testing of mission critical systems reveals significant problems. These
plans involve identifying alternate vendors to provide mission critical systems.
There may be certain mission critical third parties, such as utilities or
telecommunications companies, where alternative arrangements or sources are
limited or unavailable.
The Company has reviewed its significant loan customers to assess the risk
of increased problem loans and credit losses due to borrowers failure to
adequately address year 2000 issues. Although it is not possible to quantify the
potential impact of such credit losses at this time, management has designated a
portion of the allowance for loan losses as an undesignated reserve which can be
used to absorb uncertainties, including year 2000 problems, within the loan
portfolio.
<PAGE> 14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Disclosure of Year 2000 Issues (Continued)
The Company has incurred expenses throughout 1998 related to its year 2000
project. Additional funds have been budgeted in anticipation of costs related to
testing and renovation that will be incurred during the remainder of 1998 and
into 1999. At the present time, management of the Company does not believe that
the costs of addressing this issue will have a material adverse impact on the
Company's financial condition. If, however, the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. The Company plans to
continue to devote all resources necessary to resolve any significant year 2000
issues in a timely manner.
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).
<PAGE> 15
TABLE I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $ 127,378 $ 8,751 9.16% $ 115,868 $7,992 9.20%
Federal funds sold 3,104 128 5.50% 1,918 79 5.49%
Bank deposits 1,127 43 5.13% 310 13 5.59%
Investments
Taxable 26,856 1,261 6.26% 33,723 1,656 6.55%
Partially
taxable 1 8,476 440 6.92% 7,348 468 8.49%
Tax exempt 1 344 16 6.20% 360 17 6.30%
----- ---- ----- ----- --- -----
Total Earning Assets 167,285 10,639 8.48% 159,527 10,225 8.55%
--------- ------ ------ --------- ------ -------
Interest Expense
Demand deposits 19,609 367 2.50% 19,630 368 2.50%
Savings 27,148 722 3.55% 28,355 759 3.57%
Time deposits 67,574 2,742 5.41% 65,528 2,647 5.39%
Other short-term debt 4,621 169 4.88% 3,172 118 4.96%
Long-term debt 17,848 1,072 8.01% 16,998 829 6.50%
------ ----- ------ ------ --- -----
Total Interest Bearing
Liabilities 136,800 5,072 4.94% 133,683 4,721 4.71%
------- -------- ------- --------- ----- ------
Net Interest Margin 1 $ 5,567 $5,504
======== =====
Net Yield on Interest
Earning Assets 1 4.44% 4.60%
======== ========
1 On a taxable equivalent basis assuming a 34% tax rate.
<PAGE> 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, 1998 September 30, 1997
Average Income/ Rates Average Income/Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $130,550 $ 2,994 9.17% $118,076 $ 2,747 9.31%
Federal funds sold 3,675 51 5.55% 2,855 40 5.60%
Bank deposits 582 8 5.50% 336 5 5.95%
Investments
Taxable 26,717 406 6.08% 32,001 524 6.55%
Partially
taxable 1 8,853 148 6.69% 7,953 163 8.20%
Tax exempt 1 250 4 6.40% 405 6 5.93%
----- ---- ------ ----- --- -----
Total Earning Assets 170,627 3,611 8.46% 161,626 3,485 8.63%
--------- ----- ------ -------- ----- ------
Interest Expense
Demand deposits 19,431 120 2.47% 19,157 121 2.53%
Savings 27,087 242 3.57% 27,742 249 3.59%
Time deposits 69,060 947 5.49% 67,697 925 5.47%
Other short-term debt 5,272 60 4.55% 3,577 46 5.14%
Long-term debt 18,621 462 9.92% 16,266 267 6.57%
------ ---- ------ ------ --- -----
Total Interest Bearing
Liabilities 139,471 1,831 5.25% 134,439 1,608 4.78%
------- ------ ----- -------- ----- -----
Net Interest Margin 1 $1,780 $1,877
======= =====
Net Yield on Interest
Earning Assets 1 4.17% 4.65%
===== =====
1 On a taxable equivalent basis assuming a 34% tax rate.
<PAGE> 16
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
September 30, 1998
(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 $ 21,523 $ 3,123 $ 7,893 $ 507 $ $33,046
Installment 2,273 1,187 14,669 19 18,148
Real estate 6,254 9,654 46,238 17,361 79,507
Credit cards 775 775
Interest bearing
bank deposits 1,201 1,201
Investment securities 2,110 7,040 14,297 5,111 12,569 41,127
Federal funds sold 1,365 1,365
----- ----- ------ ----- ----- -----
Total 35,501 21,004 83,097 22,998 12,569 175,169
------ ------ ------ ------ ------ -------
Sources of Funds
Interest bearing
demand deposits 19,265 19,265
Regular savings 27,465 27,465
Certificates of
deposit $100,000
and over 676 3,405 2,653 6,734
Other certificates
of deposit 7,351 34,108 21,542 63,001
Short-term borrowings 6,533 6,533
Long-term borrowings 856 2,374 10,422 5,804 19,456
------- ------ ------ ------ ------ ------
Total 62,146 39,887 34,617 5,804 142,454
------ ------ ------- ----- ----- -------
Discrete Gap (26,645) (18,883) 48,480 17,194 12,569 32,715
Cumulative Gap (26,645) (45,528) 2,952 20,146 32,715
Ratio of Cumulative
Gap to Total
Earning Assets (15.21%) (25.99%) 1.69% 11.50% 18.68%
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 1998. In preparing the above table,
no assumptions are made with respect to loan prepayments or deposit runoff. Loan
principal repayments are included in the earliest period in which the loan
matures or can reprice. Proceeds from the redemption of investments and deposits
are included in the period of maturity.
<PAGE> 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.
27 Financial Data Schedule attached.
(b)Reports on Form 8-K
The Corporation did not file any reports on Form 8-K for the quarter
ending September 30, 1998.
<PAGE> 18
EXHIBIT INDEX
Exhibit
Index Page Number
27 Financial Data Schedule for the quarter
ending September 30, 1998 20
<PAGE> 19
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
November 11, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from F & M
Bank Corp. Form 10QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,450
<INT-BEARING-DEPOSITS> 1,201
<FED-FUNDS-SOLD> 1,365
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,860
<INVESTMENTS-CARRYING> 9,691
<INVESTMENTS-MARKET> 9,766
<LOANS> 131,476
<ALLOWANCE> 1,203
<TOTAL-ASSETS> 182,080
<DEPOSITS> 130,704
<SHORT-TERM> 6,533
<LIABILITIES-OTHER> 2,104
<LONG-TERM> 19,456
0
0
<COMMON> 12,280
<OTHER-SE> 11,003
<TOTAL-LIABILITIES-AND-EQUITY> 182,080
<INTEREST-LOAN> 8,734
<INTEREST-INVEST> 1,585
<INTEREST-OTHER> 171
<INTEREST-TOTAL> 10,490
<INTEREST-DEPOSIT> 3,831
<INTEREST-EXPENSE> 5,072
<INTEREST-INCOME-NET> 5,418
<LOAN-LOSSES> 95
<SECURITIES-GAINS> 1,572
<EXPENSE-OTHER> 2,817
<INCOME-PRETAX> 4,477
<INCOME-PRE-EXTRAORDINARY> 4,477
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,040
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 4.44
<LOANS-NON> 0
<LOANS-PAST> 2,014
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,121
<CHARGE-OFFS> 103
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 1,203
<ALLOWANCE-DOMESTIC> 1,203
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
