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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-13273
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2003
Common Stock, par value - $5 2,415,178 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, 2003 and 2002 2
Consolidated Statements of Income - Three Months
Ended September 30, 2003 and 2002 3
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2003 and 2002 5
Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibit and Reports on Form 8-K 20
SIGNATURES 21
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)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
Interest Income
Interest and fees on loans $10,637 $11,030
Interest on federal funds sold 141 76
Interest on interest bearing deposits 134 307
Interest and dividends on investment securities 1,693 1,895
------ ------
Total Interest Income 12,605 13,308
------ ------
Interest Expense
Interest on demand deposits 169 244
Interest on savings accounts 379 548
Interest on time deposits 3,100 3,760
------ ------
Total interest on deposits 3,648 4,552
Interest on short-term debt 36 76
Interest on long-term debt 965 1,006
------ ------
Total Interest Expense 4,649 5,634
------ ------
Net Interest Income 7,956 7,674
Provision for Loan Losses 165 281
------ ------
Net Interest Income after Provision for Loan Losses 7,791 7,393
------ ------
Noninterest Income
Service charges 663 536
Other 710 449
Income on bank owned life insurance 317 92
Security gains 287 494
------ ------
Total Noninterest Income 1,977 1,571
------ ------
Noninterest Expense
Salaries 2,329 2,066
Employee benefits 719 664
Occupancy expense 295 236
Equipment expense 293 261
Intangibles amortization 207 134
Other 1,557 1,390
------ ------
Total Noninterest Expense 5,400 4,751
------ ------
Income before Income Taxes 4,368 4,213
Provision for Income Tax 1,248 1,255
------ ------
Net Income $ 3,120 $ 2,958
====== ======
Per Share Data
Net Income $ 1.29 $ 1.22
======= =======
Cash Dividends $ .52 $ .49
======= =======
Equivalent Shares Outstanding 2,421,165 2,430,161
========= =========
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)
(Unaudited)
Three Months Ended
September 30,
2003 2002
Interest Income
Interest and fees on loans $ 3,512 $ 3,800
Interest on federal funds sold 43 29
Interest on interest bearing deposits 44 27
Interest and dividends on investment securities 504 643
------ ------
Total Interest Income 4,103 4,499
------ ------
Interest Expense
Interest on demand deposits 55 88
Interest on savings accounts 106 181
Interest on time deposits 984 1,132
------ ------
Total interest on deposits 1,145 1,401
Interest on short-term debt 9 20
Interest on long-term debt 301 382
------ ------
Total Interest Expense 1,455 1,803
------ ------
Net Interest Income 2,648 2,696
Provision for Loan Losses 32 107
------ ------
Net Interest Income after Provision for Loan Losses 2,616 2,589
------ ------
Noninterest Income
Service charges 244 176
Other 194 130
Income on bank owned life insurance 207 38
Security gains (losses) (2) 42
------- ------
Total Noninterest Income 643 386
------ ------
Noninterest Expense
Salaries 807 702
Employee benefits 219 182
Occupancy expense 95 80
Equipment expense 101 91
Intangible amortization 69 45
Other 555 464
------ ------
Total Noninterest Expense 1,846 1,564
------ ------
Income before Income Taxes 1,413 1,411
Provision for Income Tax 369 403
------ ------
Net Income $ 1,044 $ 1,008
====== ======
Per Share Data
Net Income $ .43 $ .42
======= =======
Cash Dividends $ .18 $ .17
======= =======
Equivalent Shares Outstanding 2,417,526 2,423,834
========= =========
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 2003 2002
------------ --------
(Unaudited) (Audited)
Cash and due from banks $ 4,658 $ 6,017
Interest bearing deposits in banks 9,467 5,886
Fed funds sold 14,972 4,476
Securities held to maturity (note 2) 874 1,877
Securities available for sale (note 2) 49,876 62,908
Other investments 5,130 4,816
Loans, net of unearned discount (note 3) 206,794 201,980
Less allowance for loan losses (note 4) (1,528) (1,477)
------- --------
Net Loans 205,266 200,503
Bank premises and equipment 4,829 4,486
Interest receivable 1,330 1655
Other real estate 532 719
Deposit intangible 2,047 2,254
Goodwill 2,639 2,639
Bank owned life insurance (note 5) 4,766 2,303
Other assets 1,953 2,610
------ -------
Total Assets $308,339 $303,149
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $32,401 $ 29,446
Interest bearing
Demand 35,445 34,134
Savings deposits 46,690 41,661
Time deposits 124,299 123,043
------- -------
Total Deposits 238,835 228,284
Short-term debt 6,441 8,308
Long-term debt 26,773 32,312
Accrued expenses and other liabilities 5,083 4,704
------ -------
Total Liabilities 277,132 273,608
------- -------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 2,415,178 and
2,423,678 issued and outstanding, in
2003 and 2002, respectively 12,076 12,118
Surplus 151 303
Retained earnings 19,253 17,390
Accumulated other comprehensive income (loss) (273) (270)
------- --------
Total Stockholders' Equity 31,207 29,541
------ -------
Total Liabilities and Stockholders' Equity $308,339 $303,149
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
Cash Flows from Operating Activities:
Net income $ 3,120 $ 2,958
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 311 257
Amortization of security premiums 201 92
Gain on security transactions (287) (494)
Income from life insurance investment (284) (92)
Provision for loan losses 165 281
(Increase) decrease in interest receivable 325 (15)
Decrease in other assets 406 75
Intangible amortization 207 133
Increase in accrued expenses 358 604
Losses on limited partnership investments 193 209
------- -------
Total Adjustments 1,595 1,050
------- -------
Net Cash Provided by Operating Activities 4,715 4,008
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 1,813 3,538
Proceeds from maturity of investments available
for sale 49,992 25,181
Purchase of investments available for sale (38,238) (20,923)
Net change in interest bearing bank deposits (3,581) 9,572
Net change in federal funds sold (10,496) (8,275)
Net increase in loans (4,928) (27,719)
Proceeds from sale of other real estate owned 194
Expenditures on other real estate (27)
Purchase of life insurance (1,871) (2,172)
Purchase of property and equipment (653) (241)
-------- --------
Net Cash Used in Investing Activities (7,768) (21,066)
-------- --------
Cash Flows from Financing Activities:
Net change in demand and savings deposits 9,295 9,003
Net change in time deposits 1,256 (985)
Net change in short-term debt (1,867) (3,628)
Repurchase of common stock (194) (297)
Repayment of long-term debt (5,539) (4,682)
Proceeds of long-term debt 18,000
Payment of dividends (1,257) (1,166)
-------- -------
Net Cash Provided by Financing Activities 1,694 16,245
------- -------
Net Decrease in Cash and Cash Equivalents (1,359) (813)
Cash and Cash Equivalents, Beginning of Period 6,017 5,364
------- -------
Cash and Cash Equivalents, End of Period $ 4,658 $ 4,551
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 4,758 $ 5,800
Income taxes 750 800
Noncash Transaction
In 2002, the Company bought an additional investment in low income housing.
The cost was $750,000, all of which was financed.
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
Balance, beginning of period $29,541 $28,597
Comprehensive Income
Net income 3,120 2,958
Net change in unrealized appreciation on securities
available for sale, net of taxes (3) (1,110)
------- ------
Total comprehensive income 3,117 1,848
Repurchase of common stock (194) (297)
Dividends declared (1,257) (1,190)
------- ------
Balance, end of period $31,207 $28,958
====== ======
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 include the accounts of F & M
Bank Corp. and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
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, 2003, and the results of operations for
the three and nine month periods ended September 30, 2003 and 2002 The
notes included herein should be read in conjunction with the notes to
financial statements included in the 2002 annual report to
stockholders of the F&M Bank Corp.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values are as
follows:
September 30, December 31,
2003 2002
------------- --------------
Market Market
Cost Value Cost Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 110
Other debt securities 764 792 1,767 1,795
------ ------- ------- ------
Total $ 874 $ 902 $ 1,877 $ 1,905
====== ======= ======= ======
September 30, December 31,
2003 2002
----------------- ----------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $22,577 $ 22,461 $ 38,475 $38,023
Equity securities 8,768 9,451 8,026 9,104
Mortgage-backed
securities 7,704 7,748 5,069 5,033
Other debt securities 10,827 10,568 11,338 11,089
------ ------- ------- ------
Total $49,876 $ 50,228 $ 62,908 $63,249
====== ======= ======= ======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
September 30, December 31,
2003 2002
Real Estate
Construction $14,348 $ 12,059
Residential 118,930 118,453
Commercial and agricultural 48,884 47,218
Installment loans to individuals 23,239 22,704
Credit cards 1,325 1,478
Other 68 68
------ -------
Total $206,794 $201,980
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Balance, beginning of period $1,477 $1,288 $1,566 $1,424
Provisions charged to
operating expenses 165 281 32 107
Net (charge-offs) recoveries:
Loan recoveries 56 75 18 21
Loan charge-offs (170) (193) (88) (101)
------ ----- ------ -----
Total Net Charge-Offs * (114) (118) (70) (80)
------ ----- ------ -----
Balance, End of Period $1,528 $1,451 $1,528 $1,451
===== ===== ===== =====
*Components of Net Charge-Offs
Real Estate (31) (31)
Commercial (23) (1) (20) (1)
Installment (91) (86) (50) (48)
------ ----- ------ -----
Total $ (114) $ (118) $ (70) $ (80)
====== ===== ====== =====
9
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.
10
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.
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
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
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).
Results of Operations - Year to Date
Net income year to date increased $162,000 compared to 2002. Yields on
earning assets declined 82 basis points compared to 2002 while rates paid on
interest bearing liabilities fell 81 basis points for the same period. Much of
the decrease in the cost of funds resulted from maturing time deposits which
repriced at much lower rates. Overall the cost of time deposits has decreased
from 4.36% in 2002 to 3.27% in 2003. Although yields on earning assets have
declined slightly more than yields on interest bearing liabilities, the growth
in the balance sheet has allowed for an increase of $272,000 in the tax
equivalent net interest income. A schedule of the net interest margin for 2003
and 2002 can be found in Table I on page 16.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Noninterest income, exclusive of gains on the sale of securities and real
estate, increased $613,000 in 2003. The increase includes an additional $150,000
in overdraft fees, secondary market mortgage fees increasing $163,000, an
increase in recurring income from earnings on bank owned life insurance (BOLI)
of $81,000, and non-recurring income from the surrender of split dollar life
insurance totaling $144,000.
Noninterest expense increased $649,000 in 2003. Salary and benefits expense
include nine months of operation of the mortgage and investment office which
opened in December 2002 in Harrisonburg, Virginia. Occupancy and equipment
expense have increased a total of $91,000, which includes additional
depreciation on a new computer system, amortization on the leasehold
improvements in Harrisonburg, and additional depreciation on two
renovated/expanded branch offices. Noninterest expense as an annualized
percentage of average assets increased slightly to 2.33% from 2.19% in the prior
year. Operating costs continue to compare very favorably to the peer group. As
stated in the most recently available Bank Holding Company Performance Report,
peer group noninterest expenses averaged approximately 3.20% of average assets.
The Company's operating costs have always compared favorably to the peer group
due to an excellent asset to employee ratio and below average facilities costs.
Quarter Ending September 30
The Company's net income increased $36,000 to $1.044 million compared to
the third quarter of 2002. After adjusting to exclude securities transactions,
amortization expense on the core deposit intangible and the aforementioned
non-recurring split dollar insurance transactions, core earnings and earnings
per share decreased $14,000 or less than $.01 per share, respectively. This
decrease resulted from a decrease in the net interest margin from 4.07% to
3.79%. The margin has suffered as the average yield on earning assets has
decreased .90% versus cost of funds decreasing .71%. The primary cause of the
decline resulted from a slight decline in the average loan portfolio and a $15
million increase in short term earning assets (fed funds sold and interest
bearing bank deposits). Deposit growth during the period continued to provide
management with investable funds; however, with current bond yields at
historical lows, management has not been willing to invest these funds in longer
term assets.
Financial Condition
Federal Funds Sold and Interest Bearing Bank Deposits
The Company's subsidiary bank invests a portion of its excess liquidity in
either federal funds sold or interest bearing bank deposits. Federal funds sold
offer daily liquidity and pay market rates of interest that is currently
benchmarked at 1.00% by the Federal Reserve. Actual rates received vary slightly
based upon money supply and demand among banks. Interest bearing bank deposits
are held either in money market accounts or as short-term certificates of
deposits. Balances in both federal funds sold and interest bearing bank deposits
have increased due to continued deposit growth, maturing securities and flat
loan demand.
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, 2003, the market value of
all securities available for sale was $352,000 less than their amortized cost.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The value of the Bank's bond portfolio exceeds its carrying cost by
$331,000. 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 $683,000 below cost due in large part
to declines in market values in 2001 and 2002. The equity securities portfolio
has recovered $1,270,000 in value since September 2002. The Company continues to
hold equity investments in a number of large, regional financial institutions, a
diversified portfolio of REITs and a variety of other predominantly blue-chip
securities. Management continues to believe that these investments offer
adequate current returns (dividends) and have the potential for future increases
in value.
Loan Portfolio
The Company operates in a predominately rural area that includes the
counties of Rockingham, Page and Shenandoah in the western portion of Virginia.
The local economy 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 2003 resulted in a $4,814,000 increase in the loan portfolio.
This is substantially slower loan growth than in the prior years and reflects a
somewhat sluggish local economy, a higher percentage of real estate loans being
placed in the secondary market due to historically low long term interest rates,
and management's unwillingness to commit to long term loans at current rates of
interest.
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 $2,739,000 at September 30,
2003 compared to $2,594,000 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 its customers to effect payment. As of September
30, 2003, the Company does not hold any real estate which was acquired through
foreclosure.
The following is a summary of information pertaining to risk elements and
impaired loans:
September 30, December 31,
2003 2002
Nonaccrual loans $ 0 $ 0
Loans past due 90 days or more
and still accruing interest 2,739 2,594
Restructured loans 0 0
------- -------
$ 2,739 $ 2,594
Percent of total loans 1.32% 1.28%
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature and volume of
the loan portfolio, 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 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 loans by type. 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.
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. This 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. 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 $1,528,000 at September 30, 2003 is equal
to .74% of total loans. This compares to an allowance of $1,477,000 (.73%) at
December 31, 2002. Management has decreased its monthly funding of the reserve
to $10,000 due to the slow growth in the portfolio and its analysis of the
potential losses within the portfolio. The overall level of the allowance is
well below the peer group average of 1.32%. 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.
Loan losses, net of recoveries, total $114,000 through first three quarters
of 2003. This is equivalent to an annualized loss rate of .07%. 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.
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 $10,551,000 since
December 31, 2002. This growth has been experienced in spite of rapidly falling
rates and appears to be a result of account growth in markets where the major
competing bank has gone through a merger/name change.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Company offers repurchase agreements (a/k/a "repos") to customers
desiring such investments. Repos are designed for companies 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, 2003, balances in repo
accounts totaled $6,441,000 and are included as 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 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. Due to lighter loan demand and
growth in deposits, the Bank has not borrowed any additional funds in 2003.
Scheduled repayments of this debt totaled $4,539,000 through September 30, 2003.
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
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 are 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.
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, 2003, the Company's total risk based capital and
total capital to total assets ratios were 14.66% and 10.12%, 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 the
third quarter dividend in 2003 of 5.88%.
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.
16
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 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.
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. On June 12, 2003, the Board authorized the repurchase of 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 2003, a total of 49,784 shares have been
repurchased. Of this amount 8,500 shares have been repurchased in 2003.
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).
17
TABLE I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------------- ------------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $201,023 $ 10,676 7.08% $ 193,256 $ 11,079 7.66%
Federal funds
sold 17,509 141 1.07% 6,097 76 1.67%
Bank deposits 8,071 131 2.16% 11,965 306 3.42%
Investments
Taxable 3 46,793 1,381 3.94% 41,717 1,544 4.93%
Partially
taxable 2,3 9,037 405 5.98% 10,362 445 5.73%
Exempt 88 3 4.55%
------ ----- ------ ----- --- ----
Total Earning
Assets 282,521 12,737 6.01% 263,397 13,450 6.83%
--------- ------ ------- ------- ------ -------
Interest Expense
Demand deposits 34,509 165 0.64% 31,902 244 1.02%
Savings 44,032 382 1.16% 38,770 548 1.89%
Time deposits 126,540 3,101 3.27% 115,351 3,760 4.36%
Other short-term
debt 7,372 36 0.65% 8,661 76 1.17%
Long-term debt 29,506 965 4.36% 28,721 1,006 4.68%
------ ---- ----- ------ ----- -----
Total Interest
Bearing
Liabilities 241,959 4,649 2.56% 223,405 5,634 3.37%
------- -------- ------ ------ ----- -----
Net Interest
Margin 1 $ 8,088 $ 7,816
===== =====
Net Yield on Interest
Earning Assets 1 3.82% 3.97%
===== =====
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.
17 (Continued)
TABLE I
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
--------------------------- -------------------------
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $201,683 $ 3,522 6.99% $ 202,747 $ 3,824 7.48%
Federal funds
sold 18,536 43 0.93% 6,878 29 1.67%
Bank deposits 8,948 41 1.83% 5,467 26 1.89%
Investments
Taxable 3 44,928 397 3.53% 43,314 515 4.76%
Partially
taxable 2,3 9,149 132 5.77% 10,053 166 6.60%
Exempt 262 3 4.58%
------ ----- ------ ----- ----- ----
Total Earning
Assets 283,506 4,138 5.84% 268,459 4,560 6.74%
------- -------- ------ -------- ----- -------
Interest Expense
Demand deposits 35,036 51 0.58% 33,352 88 1.04%
Savings 45,935 109 0.95% 39,977 181 1.80%
Time deposits 125,249 985 3.15% 114,403 1,132 3.93%
Other short-term
debt 6,859 9 0.52% 8,374 20 1.09%
Long-term debt 27,773 301 4.34% 32,304 382 4.69%
------ ---- ----- ------ --- -----
Total Interest
Bearing
Liabilities 240,852 1,455 2.42% 228,410 1,803 3.13%
------- -------- ------ ------- ----- ------
Net Interest
Margin 1 $ 2,683 $ 2,757
===== =====
Net Yield on
Interest
Earning Assets 1 3.79% 4.07%
===== =====
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.
18
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
September 30, 2003
(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 $26,502 $ 4,999 $ 15,719 $ 1,664 $ $ 48,884
Installment 308 1,009 19,026 2,964 23,307
Real estate 19,031 13,041 72,199 29,007 133,278
Credit cards 1,325 1,325
Interest bearing
bank deposits 4,513 4,063 891 9,467
Federal funds sold 14,972 14,972
Securities 6,641 12,570 22,650 121 8,768 50,750
------ ------ ------ ------ ------ ------
Total 73,292 35,682 130,485 33,756 8,768 281,983
------ ------ ------- ------ ------ -------
Sources of Funds
Interest bearing
demand deposits 10,748 20,048 4,649 35,445
Savings deposits 9,338 28,014 9,338 46,690
Certificates of
deposit
$100,000 and
over 3,302 7,886 11,195 22,383
Other certificates
of deposit 20,489 39,081 42,346 101,916
Short-term
borrowings 6,441 6,441
Long-term borrowings 2,989 6,861 15,530 1,393 26,773
------- ------- -------- ------- ------ -------
Total 33,221 73,914 117,133 15,380 239,648
------ ------ ------- ------- ------- -------
Discrete Gap 40,071 (38,232) 13,352 18,376 8,768 42,335
Cumulative Gap 40,071 1,839 15,191 33,567 42,335
Ratio of Cumulative
Gap to Total 14.21% .65% 5.39% 11.90% 15.01%
Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 2003 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.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls and Procedures
Evaluation 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 the Securities
Exchange Act of 1934 (the "Act") are 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. 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 the Company is made known to our principal
executive officers and principal financial 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 Chief Executive Officer and the Chief
Financial Officer, and the other executive officers of the Company 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 the end of the period covered by
this report.
Changes in Internal Controls
There were no significant changes in F & M Bank Corp.'s internal controls
pertaining to its financial reporting and control of its assets or in other
factors that could significantly affect these controls since the date of their
evaluation.
20
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 Restated Articles of Incorporation of F & M Bank Corp.
are incorporated by reference to Exhibits to F & M Bank
Corp.'s 2001 Form 10K filed March 1, 2002.
3 ii Amended and Restated Bylaws of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank Corp.'s
Form 10K filed March 1, 2002.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) (filed herewith).
32 Certifications of Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002 (filed herewith).
(b)Reports on Form 8-K
The Corporation did not file any reports on Form 8-K for the quarter
ending September 30, 2003.
21
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 14, 2003