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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission File No. 0-13273
F & M BANK CORP.
(Exact name of registrant as specified in its charter)
Virginia 54-1280811
- ------------------------------ --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Drawer 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices, Including 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 issuer is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
----- ------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of April 15, 2004,
2,418,148 shares of Common Stock, $5 Par Value
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2004 and 2003 2
Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibit and Reports on Form 8-K 19
SIGNATURES 20
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
2004 2003
Interest Income
Interest and fees on loans $ 3,460 $ 3,588
Interest on federal funds sold 10 32
Interest on interest bearing deposits 51 48
Interest and dividends on investment securities 450 632
------- ------
Total Interest Income 3,971 4,300
------- ------
Interest Expense
Interest on demand accounts 51 58
Interest on savings deposits 108 142
Interest on time deposits 838 1,074
------- ------
Total interest on deposits 997 1,274
Interest on short-term debt 8 14
Interest on long-term debt 255 342
------- ------
Total Interest Expense 1,260 1,630
------- ------
Net Interest Income 2,711 2,670
Provision for Loan Losses 60 72
------- ------
Net Interest Income after Provision for Loan Losses 2,651 2,598
------- ------
Noninterest Income
Service charges 224 173
Other 247 231
Income on Bank owned life insurance 63 47
Security gains (losses) 175 (110)
------- -------
Total Noninterest Income 709 341
------- ------
Noninterest Expense
Salaries 807 753
Employee benefits 297 260
Occupancy expense 95 95
Equipment expense 105 89
Intangibles amortization 69 69
Other 515 466
------- ------
Total Noninterest Expense 1,888 1,732
------- ------
Income before Income Taxes 1,472 1,207
Income Taxes 439 354
------- ------
Net Income $ 1,033 $ 853
======= ======
Per Share Data
Net Income $ .43 $ .35
======= ======
Cash Dividends $ .18 $ .17
======= ======
Equivalent Shares Outstanding 2,419,172 2,423,678
========= =========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
ASSETS 2004 2003
---------- ------------
Cash and due from banks $ 5,952 $ 5,665
Interest bearing deposits in banks 9,801 9,003
Federal funds sold 5,639 5,035
Securities held to maturity (note 2) 872 873
Securities available for sale (note 2) 48,158 54,896
Other investments 5,422 5,461
Loans, net of unearned discount (note 3) 217,924 211,231
Less allowance for loan losses (note 4) (1,517) (1,484)
-------- --------
Net Loans 216,407 209,747
Bank premises and equipment 5,007 5,001
Interest receivable 1,275 1,496
Goodwill 2,639 2,639
Deposit intangibles 1,909 1,978
Bank owned life insurance (note 5) 4,895 4,832
Other assets 2,311 2,500
------- -------
Total Assets $310,287 $309,126
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 34,698 $ 33,124
Interest bearing
Demand 38,882 37,875
Savings deposits 49,321 47,545
Time deposits 118,933 122,171
------- -------
Total Deposits 241,834 240,715
Short-term debt 7,339 6,389
Long-term debt 22,676 24,784
Accrued expenses 5,448 4,919
------- -------
Total Liabilities 277,297 276,807
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,418,148 and
2,420,478 shares
issued and outstanding, respectively 12,091 12,102
Surplus 242 286
Retained earnings 20,308 19,710
Accumulated other comprehensive income 349 221
------- -------
Total Stockholders' Equity 32,990 32,319
------- -------
Total Liabilities and Stockholders' Equity $310,287 $309,126
======= =======
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Three Months Ended
March 31,
2004 2003
Balance, beginning of period $ 32,319 $ 29,541
Comprehensive Income:
Net income for period 1,033 853
Net change in unrealized appreciation
(depreciation) on investment securities
available for sale, net of taxes 130 (205)
------- --------
Total comprehensive income 1,163 648
Repurchase of common stock (2,330 shares) (56)
Dividends declared (436) (412)
-------- --------
Balance, end of period $ 32,990 $ 29,777
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Three Months Ended
March 31,
2004 2003
Cash Flows from Operating Activities:
Net income $ 1,033 $ 853
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 116 93
Amortization of security premiums 114 41
Provision for loan losses 60 72
Intangibles amortization 69 69
(Increase)decrease in interest receivable 221 183
Decrease in other assets 400 260
Increase(decrease) in accrued expenses 264 (356)
(Gain)Loss on security transactions (175) 110
Amortization of limited partnership investments 61 64
Income from life insurance investment (63) (47)
--------- ---------
Net adjustments 1,067 489
------- -------
Net Cash Provided by Operating Activities 2,100 1,342
------- -------
Cash Flows from Investing Activities:
Purchase of investments available for sale (614) (9,474)
Proceeds from sales of investments available
for sale 830 277
Proceeds from maturity of investments available
for sale 6,746 15,002
Net increase in loans (6720) 2,886
Purchase of property and equipment (122) (101)
Change in federal funds sold (604) (9,027)
Net increase in interest bearing bank deposits (798) (2,884)
Purchase of life insurance (1,870)
Construction in progress payments (99)
------- -------
Net Cash Used in Investing Activities (1,282) (5,290)
-------- --------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 4,323 1,564
Net increase (decrease) in time deposits (3,238) 4,327
Net increase (decrease) in short-term debt 984 (359)
Cash dividends paid (436) (412)
Repurchases of common stock (56)
Repayment of long-term debt (2,108) (1,775)
-------- -------
Net Cash Provided by Financing Activities (531) 3,345
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 287 (603)
Cash and Cash Equivalents, Beginning of Period 5,665 6,017
------- -------
Cash and Cash Equivalents, End of Period $ 5,952 $ 5,414
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 1,301 $ 1,647
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements include the accounts of F & M
Bank Corp. and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
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 March 31, 2004 and the results of operations for the
three-month periods ended March 31, 2004 and March 31, 2003.
These unaudited consolidated financial statements and notes should
be read in conjunction with the audited consolidated financial
statements and notes included in the Company's annual report on Form
10-K for the year ended December 31, 2003.
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 at
March, 2004 and December 31, 2003 follows:
2004 2003
---------------------- --------------------
Carrying Market Carrying Market
Value Value Value Value
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 111
Other securities 762 776 763 787
------- ------- ------- --------
Total $ 872 $ 886 $ 873 $ 898
======= ======= ======= =======
2004 2003
--------------------- --------------------
Market Market
Value Cost Value Cost
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 20,459 $ 20,333 $ 25,444 $ 25,387
Equity securities 9,334 9,044 9,245 9,110
Mortgage-backed securities 8,208 8,236 8,989 9,004
Other securities 10,157 10,003 11,218 11,035
------- ------- ------- --------
Total $ 48,158 $ 47,616 $54,896 $54,536
======= ======== ======== ========
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding at March 31, 2004 and December 31, 2003 are
summarized as follows:
2004 2003
Real Estate
Construction $16,061 $ 15,329
Mortgage 121,244 118,677
Commercial and agricultural 60,238 56,000
Consumer 18,954 19,630
Credit cards 1,355 1,463
Other 72 132
----- -------
Total $217,924 $211,231
======= ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2004 and 2003 follows:
2004 2003
Balance, beginning of period $ 1,484 $ 1,477
Provisions charged to operating expenses 60 72
Net (charge offs) recoveries
Loan recoveries 40 19
Loan charge-offs (67) (23)
------- ---------
Total Net (Charge-offs) Recoveries (27) (4)
------- ---------
Balance, End of Period $ 1,517 1,545
====== ========
Components of net (charge-offs) recoveries:
Real Estate $
Commercial (48) 1
Consumer 21 (5)
------ ---------
$ (27) (4)
======= =========
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 BANK OWNED LIFE INSURANCE (BOLI)
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 additional benefits 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. The
Bank is both owner and beneficiary of the policies.
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.
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements
presented in Item 1, Part 1 of this Form 10-Q.
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are statements that include projections,
predictions, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often characterized
by the use of qualified words (and their derivatives) such as "expect,"
"believe," "estimate," "plan," "project," or other statements concerning
opinions or judgment of the Company and its management about future events.
Although the Company believes that its expectations with respect to
certain forward-looking statements are based upon reasonable assumptions within
the bounds of its existing knowledge of its business and operations, there can
be no assurance that actual results, performance or achievements of the Company
will not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual future results
and trends may differ materially from historical results or those anticipated
depending on a variety of factors, including, but not limited to, the effects of
and changes in: general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new products and
delivery systems, inflation, changes in the stock and bond markets, technology,
and consumer spending and savings habits.
We do not update any forward-looking statements that may be made from time
to time by or on behalf of the Company.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
financial information contained within the statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. The
Company uses historical loss factors as one factor in determining the inherent
loss that may be present in its loan portfolio. Actual losses could differ
significantly from the historical factors that are used. The fair value of the
investment portfolio is based on period end valuations but changes daily with
the market. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of these transactions would be
the same, the timing of events that would impact these transactions could
change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles
of accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance.
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
Net income year to date increased $180,000 compared to 2003. Yields on
earning assets declined 55 basis points compared to 2003 while rates paid on
interest bearing liabilities fell 60 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 3.43% in 2003 to 2.78% in 2004. Total average earning assets are virtually
unchanged at $281 million versus $280 million in 2003, however balance sheet
leverage has improved. Loans, the highest yielding earning asset, as a
percentage of earning assets have increased from 71.7% in 2003 to 76.1% in 2004.
A schedule of the net interest margin for 2004 and 2003 can be found in Table I
on page 16.
Noninterest income increased $368,000 in the first three months of 2004.
Exclusive of securities transactions, other noninterest income increased $83,000
or 18.4%. The growth in noninterest income came from overdraft fees, commissions
on sales of investments and insurance products and increases in the value of
bank owned life insurance.
Noninterest expense increased $156,000 (9.0%). Salaries and benefits
accounted for $91,000, (also a 9.0% increase) of this total. This increase was
caused by a combination of normal salary increases and increases in the cost of
group health insurance and pension expense. The remaining increase is made up of
increases in a number of areas, including: data processing fees, equipment
maintenance, and professional fees.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 a market rate 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 slightly due to continued deposit growth, and maturing
securities.
Securities
The Company's securities portfolio is held to assist the Company in
liquidity and asset liability management. The securities portfolio consists of
securities held to maturity and securities available for sale. Securities are
classified as held to maturity when management has the intent and ability to
hold the securities to maturity. These securities are carried at their amortized
cost. Securities available for sale include securities that may be sold in
response to general market fluctuations, general liquidity needs and other
similar factors. Securities available for sale are recorded at market value.
Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported (net of deferred income taxes) as a separate
component of shareholders' equity. As of March 31, 2004, the market value of all
securities available for sale exceeded their cost by $542,000. This includes
increases in value in both the equity securities held by the Company and in the
value of government obligations held by the Bank. Management has traditionally
held debt securities (regardless of classification) until maturity and thus it
does not expect the fluctuations in value of these securities to have a direct
impact on earnings.
Investments in securities decreased $6,739,000 in the first quarter of 2004
with proceeds of maturing securities funding the growth of the loan portfolio.
The Company generally invests in relatively short-term maturities due to the
uncertainty in the direction of interest rates. Recent purchases of debt
securities have been primarily U.S. Agency obligations with contractual
maturities of two to three years.
Of the investments in securities available for sale, 19.4% are invested in
equity securities, most of which are dividend producing and subject to the
corporate dividend exclusion for income taxation purposes. The Company believes
these investments offer adequate returns and have the potential for significant
increases in value. A review of these investments as of March 31, 2004, did not
reveal any additional impairment to be recognized in excess of that which was
recognized in the fourth quarter of 2002.
Loan Portfolio
The Company operates in an agriculturally dominated area in the western
portion of Virginia which includes the counties of Rockingham, Page and
Shenandoah. The Company does not make a significant number of loans to borrowers
outside its primary service area. The Company is very active in local
residential construction mortgages. Commercial lending includes loans to small
and medium sized businesses within its service area.
The allowance for loan losses (see subsequent section) provides for the risk
that borrowers will be unable to repay their obligations and is reviewed
quarterly for adequacy. The risk associated with real estate and installment
notes to individuals is based upon employment, the local and national economies
and consumer confidence. All of these affect the ability of borrowers to repay
indebtedness. The risk associated with commercial lending is primarily based on
the strength of the local economy.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
While lending is geographically diversified within the service area, the
Company has a concentration in agricultural loans (primarily poultry farming).
Subsequent to the date of this report, Pilgrim's Pride announced the planned
sale or closure of its turkey processing plant in Hinton, Virginia. Bank
management has evaluated the loan portfolio to determine its potential exposure
with growers that are associated with Pilgrim's Pride. Management has determined
that its exposure is limited due to a combination of strong collateral positions
on most of the loans, the potential for some of these borrowers to contract
these poultry houses with other processors, the potential to convert the houses
to other uses and other sources of income for some of the borrowers.
The risks within the portfolio related to this plant sale or closure are not
limited only to growers, but also include those individuals employed at this
location and businesses that provide services to the plant, growers or
employees. The complete impact on the portfolio of the decision by Pilgrim's
Pride will not be known until the plant's disposition has been settled. The
Company will continue to monitor its past due loans closely throughout this
process and will take appropriate actions to mitigate its risks, as well as to
work with its customers to facilitate timely payment on their loans.
The first three months of 2004 resulted in a $6,693,000 increase in the loan
portfolio. This increase compares to a $2,890,000 decrease in the loan portfolio
in 2003. The increase in the loan portfolio is reflective of the strengthening
local economy. Subsequent to the end of the first quarter, the Bank began
purchasing a significant volume of short-term loan participations. These loans
are single family mortgage loans that have been pre-sold into the secondary
market. The Bank will hold these loans for an average of ten days to two weeks,
until all documentation requirements of the secondary market purchaser have been
met and the purchaser takes final delivery on the loan(s). While the potential
exists that this participation arrangement may add significantly to loan income,
the volume and timing of loans purchased is highly dependent on fluctuations in
market rates of interest for qualifying secondary market loans and the
corresponding impact on demand for these products.
Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans,
on which the original interest rate or repayment terms have been changed due to
financial hardship. Nonperforming loans totaled $1,010,000 at March 31, 2004
compared to $1,614,000 of loans at December 31, 2003. Approximately 86% of these
past due loans are secured by real estate. Although the potential exists for
some loan losses, management believes the bank is generally well secured and
continues to actively work with these customers to effect payment.
As of March 31, 2004 the Company did not hold any real estate that was
acquired through foreclosure.
Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with
identified potential losses, and pools of loans by type (commercial,
residential, consumer, credit cards). Loans with identified potential losses
include examiner and bank classified loans. Classified relationships in excess
of $100,000 are reviewed individually for impairment under FAS 114. A variety of
factors are taken into account when reviewing these credits, including borrower
cash flow, payment history, fair value of collateral, company management,
industry and economic factors. Loan relationships that are determined to have no
impairment are placed back into the appropriate loan pool and reviewed under FAS
5.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Loan pools are further segmented into watch list, past due over 90 days and
all other. Watch list loans include loans that are 60 days past due, and may
include restructured loans, borrowers that are highly leveraged, loans that have
been upgraded from classified or loans that contain policy exceptions (term,
collateral coverage, etc.). Loss estimates on these loans reflect the increased
risk associated with these assets due to any of the above factors. The past due
pools contain loans that are currently 90 days or more past due. Loss rates
assigned reflect the fact that these loans bear a significant risk of
charge-off. Loss rates vary by loan type to reflect the likelihood that
collateral values will offset a portion of the anticipated losses.
The remainder of the portfolio falls into pools by type of homogenous loans
that do not exhibit any of the above described weaknesses. Loss rates are
assigned based on historical loss rates over the prior five years. A multiplier
has been applied to these loss rates to reflect the time for loans to season
within the portfolio and the inherent imprecision of these estimates.
All potential losses are evaluated within a range of low to high. An
unallocated reserve has been established to reflect other unidentified losses
within the portfolio. It helps to offset the increased risk of loss associated
with fluctuations in past due trends, changes in the local and national
economies, and other unusual events (ie. Avian influenza). The Board approves
the loan loss provision for the following quarter based on this evaluation and
an effort is made to keep the actual allowance at or above the midpoint of the
range established by the evaluation process.
The allowance for loan losses of $1,517,000 at March 31, 2004 is equal to
..70% of total loans. This compares to an allowance of $1,484,000 (.70%) at
December 31, 2003. Although management has decreased its funding of the
allowance compared to the first quarter of 2003, funding for the quarter of
$60,000 exceeded net charge-offs by $33,000.
The allowance of .70% of loans outstanding remains well below the peer
group average of 1.35%. 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 seven 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.
Deposits and Long-Term Debt
The Company's main source of funds is customer deposits received from
individuals, governmental entities and businesses located within the Company's
service area. Deposit accounts include demand deposits, savings, money market
and certificates of deposit. The Company realized annualized deposit growth of
1.9% in the first quarter of 2004. Certificates of deposit decreased $3,238,000,
while all other deposit types increased a total of $4,357,000 during the
quarter. Management believes that much of the decrease in certificates of
deposits funded a portion of the increase in other deposit types, as customers
moved monies to liquid interest bearing accounts rather than tying up funds for
longer terms at current market rates. It is anticipated that as rates rise these
funds may once again migrate into certificates of deposits. The Bank has
advertised a free checking account product, but has not offered any other
deposit promotions during the first quarter. The remaining growth in
non-interest bearing liabilities appears to be a result of accounts gained from
larger institutions and customer funds being held in short-term accounts due to
low rates of interest and stock market volatility.
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be
an important source of funding real estate loan growth. The Company's subsidiary
bank borrows funds on a fixed rate basis.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
These borrowings are used to fund either a fifteen-year fixed rate loan or a
twenty-year loan, of which the first ten years have a fixed rate. This program
allows the Bank to match the maturity of its fixed rate real estate portfolio
with the maturity of its debt and thus reduce its exposure to interest rate
changes. Scheduled repayments totaled $1,441,000 in the first quarter of the
year. Additional borrowings were not necessary due to the overall liquidity
position.
As part of the approval process for the acquisition of the new branches, the
Company was required to contribute $6 million into the Bank as additional equity
capital. The Company funded this contribution in part by borrowing $4 million
from SunTrust Bank. The loan was amortized over a three year period with
quarterly payments of $333,333, plus interest. The loan was collateralized by
marketable securities and carried 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. The final payment on this loan was made in March 2004. 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
$230,769, plus interest, will begin in the second quarter of 2004 for a period
of thirteen quarters. Proceeds of this loan were used to provide an additional
capital contribution to the Bank and to pay off an intercompany loan.
Capital
The Company maintains a strong capital base to expand facilities, promote
public confidence, support operations and grow at a manageable level. As of
March 31, 2004, the Company's total risk based capital and total capital to
total average assets ratios were 14.78% and 10.70%, respectively. Both ratios
are in excess of regulatory minimums and exceed the ratios of the Company's
peers. Earnings have been sufficient to allow an increase in dividends in 2004
and management has no reason to believe this increased level of dividends will
not continue.
The Federal Reserve Act restricts the amount of dividends the Bank may pay.
Approval by the Board of Governors of the Federal Reserve System is required if
the dividends declared by a state member bank, in any year, exceed the sum of
(1) net income of the current year and (2) income net of dividends for the
preceding two years. As of January 1, 2004, approximately $1,965,000 was
available for dividend distribution without permission of the Board of
Governors.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are not
limited to, loan repayments, deposits obtained through the adjustment of
interest rates and purchases of federal funds. To further meet its liquidity
needs, the Company also maintains lines of credit with correspondent financial
institutions. The Company's subsidiary bank also has a line of credit with the
Federal Home Loan Bank of Atlanta that allows for secured borrowings. In the
past, growth in deposits and proceeds from the maturity of investment securities
has been sufficient to fund most of the net increase in loans and investment
securities.
Interest Rate Sensitivity
As a result of the continued growth in deposits, and through maturities of
investments, the liquidity position at March 31, 2004 remains very strong. The
Bank historically has had a stable core deposit base and, therefore, does not
have to rely on volatile funding sources. Because of the stable core deposit
base, changes in interest rates should not have a significant effect on
liquidity.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Bank's membership in the Federal Home Loan Bank System also provides
liquidity, as the Bank borrows money that is repaid over a five to ten year
periods and uses the money to make fixed rate loans. The matching of the
long-term receivables and liabilities helps the Bank reduce its sensitivity to
interest rate changes. The Company reviews its interest rate gap periodically
and makes adjustments as needed.
There are no off-balance-sheet items that will impair future liquidity.
Table II (page 17) contains an analysis which shows the repricing
opportunities of earning assets and interest bearing liabilities as of March 31,
2004.
Interest Rate Sensitivity (continued)
As of March 31, 2004, the Company had a cumulative Gap Rate Sensitivity Ratio
of .67% for the one year repricing period. This generally indicates that
earnings would improve in an increasing interest rate environment as assets
reprice more quickly than liabilities. However, in actual practice, this may
not be the case as deposit customers may move funds into longer term higher
rate time deposits as rates rise rather than maintaining the same general
maturity schedules as that which currently exists. Management constantly
monitors the Company's interest rate risk and has decided the current position
is acceptable for a well-capitalized community bank operating in a rural
environment.
Stock Repurchase
On June 12, 2003, the Company announced that the Board of Directors had
authorized the repurchase of up to 50,000 shares of the Company's outstanding
common stock. Repurchases were authorized to be made by the Company from time to
time in the open market or privately negotiated transactions during the year as,
in the opinion of management, market conditions warrant. The repurchased shares
are accounted for as retired stock. Shares repurchased through March 31, 2004
total 6,904. Shares repurchased during the first quarter of 2004 totaled 2,330
shares at an average cost of $23.83 per share.
Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including F & M Bank
Corp., and the address is (http://www.sec.gov).
16
TABLE 1
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
-------------------- --------------------
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
------- ------- ----- ------- ------- -----
Interest Income
Loans1 $213,808 $3,474 6.50% $200,832 $3,604 7.28%
Federal funds sold 4,264 10 .94 11,137 32 1.17
Interest bearing
deposits 9,411 51 2.17 6,875 48 2.83
Investments
Taxable 3 43,475 347 3.19 52,431 522 3.98
Partially taxable 9,687 132 5.45 8,990 136 6.05
Tax exempt 2,3 375 4 4.27
------ ----- ---- ------ ----- ---
Total Earning
Assets 281,020 4,018 5.72 280,265 4,342 6.27
-------- ----- ---- ---------- ----- ----
Interest Expense
Demand deposits 37,915 51 .54 33,605 58 .70
Savings 47,916 108 .90 42,387 142 1.36
Time deposits 120,434 838 2.78 127,125 1,074 3.43
Short-term debt 6,744 8 .53 7,533 14 .75
Long-term debt 23,762 255 4.28 31,360 342 4.42
------ --- ----- ------ ----- ----
Total Interest
Bearing
Liabilities $236,771 1,260 2.13 $242,010 1,630 2.73
========== ----- ----- ========== ----- ----
Net Interest Margin 1 2,758 $2,712
===== =====
Net Yield on Interest
Earning Assets 3.93% 3.91%
===== =====
1 Interest income on loans includes loan fees.
2 An incremental income tax rate of 34% was used to calculate the tax
equivalent income on nontaxable and partially taxable investments.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
17
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
MARCH 31, 2004
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans 49,205 25,233 113,789 29,697 217,924
Interest bearing
bank deposits 2,786 6,421 594 9,801
Investment securities 3,795 9,178 26,389 625 14,465 54,452
Federal funds sold 5,639 5,639
------ ------ ------ ------ ----- ------
Total 61,425 40,832 140,772 30,322 14,465 287,816
------ ------ --------- ------ ------ -------
Sources of Funds
Interest bearing demand
deposits 11,685 22,026 5,171 38,882
Savings deposits 9,864 29,593 9,864 49,321
Time deposits
$100,000 and over 2,996 7,204 10,882 21,082
Other time deposits 16,767 36,409 44,675 97,851
Short-term borrowings 7,339 7,339
Long-term debt 1,886 6,229 13,454 1,107 22,676
----- ------- ------- ------- ------- ------
Total 28,988 71,391 120,630 16,142 237,151
------ ------- ------- ------ ------- ----------
Discrete Gap 32,437 (30,559) 20,142 14,180 14,465 50,665
Cumulative Gap 32,437 1,878 22,020 36,200 50,665
Ratio of Cumulative Gap
to Total Earning
Assets 11.27% .65% 7.65% 12.58% 17.60%
Table II reflects the earlier of the maturity or repricing dates for
various assets and liabilities at March 31, 2004. In preparing the above table
no assumptions are made with respect to loan prepayments. Loan principal
payments are included in the earliest period in which the loan matures or can be
repriced. Principal payments on installment loans scheduled prior to maturity
are included in the period of maturity or repricing. Proceeds from the
redemption of investments are included in the period of maturity. Estimated
maturities of deposits, which have no stated maturity dates, were derived from
guidance contained in FDICIA 305.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information
provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
of the Company's 2003 Form 10-K.
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 now required to include in those reports
certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws. Under
rules adopted by the Securities and Exchange Commission effective August 29,
2002, these disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports it files or submits under the Act, is
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to 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.
The Company's Chief Executive Officer and Chief Financial Officer, based on
their evaluation as of the end of the period covered by this quarterly report of
the Company's disclosure controls and procedures (as defined in Rule 13(a)-14(e)
of the Securities Exchange Act of 1934), have concluded that the Company's
disclosure controls and procedures are adequate and effective for purposes of
Rule 13(a)-14(e) and timely, alerting them to financial information relating to
the Company required to be included in the Company's filings with the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of F & M Bank Corp. pertaining to its financial reporting and
control of its assets or in other factors that could significantly affect these
controls.
Due to the nature of the Company's business as stewards of assets of
customers, internal controls are of the utmost importance. The Company has
established procedures undertaken during the normal course of business to
reasonably ensure that fraudulent activity of either an amount material to these
results or in any amount is not occurring. In addition to these controls and
review by executive officers, the Company retains the services of Yount, Hyde &
Barbour, P.C., a public accounting firm, to complete regular internal audits,
which examine the processes and procedures of the Company and the Bank to ensure
that these processes are reasonably effective to prevent internal or external
fraud and that the processes comply with relevant regulatory guidelines of all
relevant banking authorities. The findings of Yount, Hyde & Barbour are
presented to management of the Bank and to the Audit Committee of the Company.
19
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 Restated Articles of Incorporation of F & M Bank
Corp. are incorporated by reference to Exhibits to
F & M Bank Corp.'s 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
Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63,
Title 18 USC Section 1350(A) and (B))
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63,
Title 18 USC Section 1350(A) and (B))
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Title 18 USC Section 1350).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter
ending March 31, 2004.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
/s/ Julian D. Fisher
---------------------------------------
Julian D. Fisher
President and Chief Executive Officer
/s/ Neil W. Hayslett
---------------------------------------
Neil W. Hayslett
Senior Vice President and Chief Financial
Officer
May 13, 2004