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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File Number: 0-13273
June 30, 2004
F & M BANK CORP.
Virginia 54-1280811
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Drawer 1111
Timberville, Virginia 22853
(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 ....
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at June 30, 2004
Common Stock, par value - $5 2,415,030 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 2004 and 2003 2
Consolidated Statements of Income - Three Months
Ended June 30, 2004 and 2003 3
Consolidated Balance Sheets - June 30, 2004 and
December 31, 2003 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2004 and 2003 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2004 and 2003 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 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 8K 20
SIGNATURES 21
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
2004 2003
Interest Income
Interest and fees on loans $ 7,020 $ 7,125
Interest on federal funds sold 18 98
Interest on interest bearing deposits 93 90
Interest and dividends on investment securities 858 1,189
------- ------
Total Interest Income 7,989 8,502
------- ------
Interest Expense
Interest on demand accounts 103 114
Interest on savings deposits 219 273
Interest on time deposits 1,657 2,116
------- ------
Total interest on deposits 1,979 2,503
Interest on short-term debt 37 27
Interest on long-term debt 490 664
------- ------
Total Interest Expense 2,506 3,194
------- ------
Net Interest Income 5,483 5,308
Provision for Loan Losses 120 133
------- ------
Net Interest Income after Provision for Loan Losses 5,363 5,175
------- ------
Noninterest Income
Service charges 467 419
Income on bank owned life insurance 126 110
Other 513 516
Security gains 321 289
------- ------
Total Noninterest Income 1,427 1,334
------- ------
Noninterest Expense
Salaries 1,602 1,522
Employee benefits 593 500
Date processing expenses 130 109
Occupancy expense 197 200
Equipment expense 213 192
Audit and professional fees 136 99
Intangibles amortization 138 138
Other 816 794
------- ------
Total Noninterest Expense 3,825 3,554
------- ------
Income before Income Taxes 2,965 2,955
Provision for Income Taxes 890 879
------- ------
Net Income $ 2,075 $ 2,076
======= ======
Per Share Data
Net Income $ .86 $ .86
======= ======
Cash Dividends $ .36 $ .34
======= ======
Equivalent Shares Outstanding 2,417,925 2,423,015
========= =========
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
June 30,
2004 2003
Interest Income
Interest and fees on loans $ 3,560 $ 3,537
Interest on federal funds sold 8 66
Interest on interest bearing deposits 42 42
Interest and dividends on investment securities 408 557
------- ------
Total Interest Income 4,018 4,202
------- ------
Interest Expense
Interest on demand deposits 52 56
Interest on savings accounts 111 131
Interest on time deposits 819 1,042
------- ------
Total interest on deposits 982 1,229
Interest on short-term debt 28 13
Interest on long-term debt 236 322
------- ------
Total Interest Expense 1,246 1,564
------- ------
Net Interest Income 2,772 2,638
Provision for Loan Losses 60 61
------- ------
Net Interest Income after Provision for Loan Losses 2,712 2,577
------- ------
Noninterest Income
Service charges 243 246
Security gains 146 399
Other 266 285
Income on bank owned life insurance 63 63
------- ------
Total Noninterest Income 718 993
------- ------
Noninterest Expense
Salaries 795 769
Employee benefits 296 240
Occupancy expense 102 105
Data processing expenses 68 69
Equipment expense 108 103
Audit and professional fees 64 56
Intangibles amortization 69 69
Other 435 411
------- ------
Total Noninterest Expense 1,937 1,822
------- ------
Income before Income Taxes 1,493 1,748
Provision for Income Tax 451 525
------- ------
Net Income $ 1,042 $ 1,223
======= ======
Per Share Data
Net Income $ .43 $ .50
======= ======
Cash Dividends $ .18 $ .17
======= ======
Equivalent Shares Outstanding 2,416,678 2,422,359
========= =========
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
ASSETS 2004 2003
---------- -------------
(Unaudited) (Audited)
Cash and due from banks $ 6,547 $ 5,665
Interest bearing deposits in banks 10,346 9,003
Federal funds sold 5,035
Securities held to maturity (note 2) 870 873
Securities available for sale (note 2) 52,814 54,896
Other investments 5,473 5,461
Loans, net of unearned discount (note 3) 226,043 211,231
Less allowance for loan losses (note 4) (1,512) (1,484)
-------- -------
Net Loans 224,531 209,747
Bank premises and equipment 4,939 5,001
Interest receivable 1,318 1,496
Goodwill 2,639 2,639
Deposit intangibles 1,840 1,978
Bank owned life insurance (note 5) 4,957 4,832
Other assets 2,371 2,500
------- --------
Total Assets $318,645 $309,126
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 37,357 $ 33,124
Interest bearing
Demand 37,052 37,875
Savings deposits 51,461 47,545
Time deposits 118,513 122,171
------- -------
Total Deposits 244,383 240,715
Short-term debt 11,491 6,389
Long-term debt 25,020 24,784
Accrued expenses 4,945 4,919
------- -------
Total Liabilities 285,839 276,807
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,415,030 and
2,420,478 shares issued and outstanding
in 2003 and 2002, respectively 12,075 12,102
Surplus 180 286
Retained earnings 20,915 19,710
Accumulated other comprehensive income (loss) (364) 221
-------- -------
Total Stockholders' Equity 32,806 32,319
------- -------
Total Liabilities and Stockholders' Equity $318,645 $309,126
======= =======
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)
Six Months Ended
June 30,
2004 2003
Cash Flows from Operating Activities:
Net income $ 2,075 $ 2,076
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 207 202
Amortization of security premiums 214 100
Gain on security transactions (321) (289)
Income from life insurance investment (126) (110)
Provision for loan losses 120 133
Decrease in interest receivable 178 220
Decrease in other assets 341 225
Intangibles amortization 138 138
Increase in accrued expenses 108 245
Losses on limited partnership investments 122 129
------- -------
Total Adjustments 981 993
------- -------
Net Cash Provided by Operating Activities 3,056 3,069
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 10,330 1,241
Proceeds from maturity of investments available
for sale 8,906 28,453
Proceeds from maturity of investments held
to maturity 1,000
Purchase of investments available for sale (18,054) (24,150)
Net change in federal funds sold 5,035 (6,679)
Net change in loans (14,903) 1,199
Purchase of property and equipment (145) (323)
Net change in interest bearing bank deposits (1,344) (4,128)
Construction in progress payments (161)
Proceeds from sale of other real estate owned 65
Purchase of life insurance (1,870)
------- --------
Net Cash Used in Investing Activities (10,175) (5,353)
-------- -------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 7,291 5,739
Net increase (decrease) in time deposits (3,658) 3,096
Net increase (decrease) in short-term debt 5,137 (1,526)
Repurchase of common stock (133) (97)
Repayment of long-term debt (3,764) (3,764)
Proceeds from long-term debt 4,000
Payment of dividends (872) (823)
-------- -------
Net Cash Provided by Financing Activities 8,001 2,625
------- -------
Net Increase in Cash and Cash Equivalents 882 341
Cash and Cash Equivalents, Beginning of Period 5,665 6,017
------- -------
Cash and Cash Equivalents, End of Period $ 6,547 $ 6,358
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 2,553 $ 3,258
Income taxes 700 375
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)
Six Months Ended
June 30,
2004 2003
Balance, beginning of period $ 32,319 $ 29,541
Comprehensive Income:
Net income 2,075 2,076
Net change in unrealized appreciation on securities
available for sale, net of taxes (583) 76
-------- -------
Total comprehensive income 1,492 2,152
Repurchase of common stock (133) (97)
Dividends declared (872) (823)
-------- -------
Balance, end of period $ 32,806 $ 30,773
======= =======
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 accounting
principles generally accepted in the United States 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 June 30, 2004 and the results of
operations for the six and three month periods ended June 30, 2004 and
June 30, 2003. The notes included herein should be read in conjunction
with the notes to financial statements included in the 2003 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 at
June 30, 2004 and December 31, 2003 follows:
2004 2003
---------- ------------
Market Market
Cost Value Cost Value
Securities Held to
Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 111
Other securities 760 807 763 787
------- ------- ------- -------
Total $ 870 $ 917 $ 873 $ 898
======= ======= ======= =======
2004 2003
----------- -----------
Market Market
Value Cost Value Cost
Securities Available
for Sale
U. S. Treasury and
Agency obligations $ 27,453 $ 27,592 $ 25,444 $ 25,387
Equity securities 9,219 9,554 9,245 9,110
Mortgage-backed
securities 6,929 7,043 8,989 9,004
Other securities 9,213 9,141 11,218 11,035
------- ------- ------- -------
Total $ 52,814 $ 53,330 $ 54,896 $ 54,536
======= ======= ======= =======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
June 30, December 31,
2004 2003
Real Estate
Construction $15,529 $ 15,329
Residential 135,857 118,677
Commercial and agricultural 50,460 56,000
Installment loans to individuals 22,713 19,630
Credit cards 1,361 1,463
Other 123 132
------ -------
Total $226,043 $211,231
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
Six Months Ended Three Months Ended
June 30, June 30,
2004 2003 2004 2003
------ ------ ------ -----
Balance, beginning of period $1,484 $ 1,477 $1,517 $ 1,545
Provisions charged to
Operating expenses 120 133 60 61
Net (charge offs) recoveries:
Loan recoveries 49 38 9 19
Loan charge-offs (141) (82) (74) (59)
------ ------ ------ ------
Total Net Charge-offs * (92) (44) (65) (40)
------ ------ ------ ------
Balance, End of Period $1,512 $ 1,566 $1,512 $ 1,566
===== ====== ===== ======
* Components of net charge-offs:
Real estate - Residential $ (7) $ $ (7) $
Commercial (57) (3) (9) (4)
Installment loans to
individuals (28) (41) (49) (36)
------ ------ ------ ------
Total $ (92) $ (44) $ (65) $ (40)
====== ====== ====== ======
9
Page 9
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 the benefits offered are necessary.
To help offset the growth in these costs, the Bank decided to enter
into BOLI contracts. Dividends received on these policies are
tax-deferred and may be tax exempt as the death benefits under the
policies are exempt from income taxation. 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
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.
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.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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).
Overview
Net income in the second quarter 2004 was $1,042,000 or $.43 per share,
compared to $1,223,000 or $.50 per share the second quarter of 2003, a decrease
of 14.80% in earnings per share. Core operating earnings, (exclusive of
securities gains, net of tax effect) totaled $944,000 in 2004 and $960,000 in
2003, a decrease of 1.46%. For the six months ended June 30, 2004, net income
was $2,075,000 or $.86 per share compared to $2,076,000 in 2003 or $.86 per
share. Net interest income through the end of the second quarter increased 3.30%
compared with the prior year. Noninterest income increased 6.97% and noninterest
expense increased 7.63% during the same period.
On an annualized basis, return on average assets through the end of the
second quarter 2004 was 1.32% and return on average shareholders' equity was
12.66%. As of June 30, 2004, assets increased 3.08%, deposits increased 1.53%
and loans increased 7.01% compared to amounts at December 31, 2003. The
allowance for loan losses at the end of the second quarter was $1,512,000 or
..67% of loans while shareholders' equity totaled $32,806,000. A quarterly
dividend of $.18 per share was paid to shareholders of record.
Results of Operations
Year to Date
The 2004 year to date tax equivalent net interest margin increased
$173,000 or 3.20% compared to the same period in 2003. The yield on earning
assets decreased .50%, while the cost of funds decreased .57% compared to the
same period of 2003. These decreases resulted as maturing assets and liabilities
continued to reprice at significantly lower rates. The lower market rates
resulted from aggressive rate cutting by the Federal Reserve's Federal Open
Market Committee (FOMC); which began in January 2001 and included thirteen
separate rate cuts through June 2003. Recently the FOMC reversed its monetary
policy by stating "With underlying inflation still expected to be relatively
low, the Committee believes that policy accommodation can be removed at a pace
that is likely to be measured." The FOMC raised the federal rate by 1/4
percent at both its June 30 and August 10 meetings. Although the Interest
Sensitivity Analysis on page 18 indicates the Company is in a liability
sensitive position, management anticipates the increase in rates should prove
beneficial to the net interest margin in future periods. A large percentage of
rate sensitive liabilities (checking and savings) do not reprice immediately
with changes in market rates, but are adjusted at the discretion of management
based on funding needs and competitive factors. However, the rapid growth in
the loan portfolio and competition within the Bank's market for deposit
accounts could have a material effect on the speed at which Bank management
adjusts rates to meet liquidity needs.
12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
A schedule of the net interest margin for 2004 and 2003 is shown on
page 17 as Table 1.
Noninterest income increased $93,000 in the first six months of 2004.
Exclusive of securities transactions, other noninterest income items increased
$61,000, or 5.84%. Service charges on deposit accounts have increased following
the implementation of an overdraft privilege program which commenced during the
second quarter of 2003.
Noninterest expense increased $271,000 or 7.63% through June 30, 2004. Of
the total, $173,000 (an 8.56% increase) can be attributed to salaries and
employee benefits. This increase includes normal salary increases, an increase
in pension expense of approximately 18% and an increase in the cost of group
insurance of approximately 17%. The increase in pension expense is a result of
lower market rates of interest, lower earnings on investments and an increase
in the number of employees covered by the plan. Group insurance costs increased
due to an increase in the number of employees covered by the plan and premium
increases passed through to the Bank by its primary insurance provider.
Quarter Ending June 30
The Company's net income decreased $181,000 to $1.042 million in 2004 as
compared to the second quarter of 2003. After adjusting to exclude securities
transactions, core earnings and earnings per share decreased $14,000 or less
than $.01 per share, respectively. Net interest income increased $134,000,
while the net interest margin increased 6 bps to 3.87%. For the quarter,
noninterest income, exclusive of securities transactions, declined slightly
to $572,000 compared to $594,000 in 2003. The decline was primarily the result
of a reduction in origination fees generated on mortgage loans sold on the
secondary market. Noninterest expense increased 6.31%, or $115,000 in 2004.
Of this amount, $82,000 related to increases in salaries and benefits expenses.
Total salaries and benefits increased 8.13%, and include normal increases in
base salaries, an increase in staffing of three full-time equivalent positions,
and increases in group health and pension expense.
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 was benchmarked at
1.00% by the Federal Reserve until the last day of the quarter when it was
raised to 1.25%. 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 federal
funds sold decreased due to increases in loan demand, while balances in interest
bearing bank deposits increased as proceeds from maturing securities were placed
in short term certificates as a temporary investment with the intent that as
these mature they will fund additional loan commitments.
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 securities held to maturity when management has the intent and
ability to hold the securities to maturity. These securities are carried at
amortized cost. Securities available for sale include securities that may be
sold in response to general market fluctuations, general liquidity needs and
other similar factors. Securities available for sale are recorded at market
value. Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported (net of deferred income taxes) as a part of
other comprehensive income. As of June 30, 2004, the amortized cost of all
securities available for sale exceeded their market value by $516,000 ($364,000
after the consideration of income taxes). Management has traditionally held debt
securities (regardless of classification) until maturity and thus it does not
expect these fluctuations in value of debt securities to have a direct impact on
earnings.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Securities (Continued)
Investments in debt securities have declined approximately two million
dollars during 2004. Proceeds from maturing bonds have been used to fund loan
growth during the period. 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. Treasury and Agency
obligations with contractual maturities of a month or less to three years.
Of the investments in securities available for sale, 17.4% are invested in
equity securities, most of which are dividend producing and subject to the
corporate dividend exclusion for taxation purposes. The Company believes these
investments render adequate returns and have historically resulted in
significant increases in value. A review of these investments as of June 30,
2004, did not reveal any additional impairment to be recognized in excess of
that which was recognized in the fourth quarter of 2003.
Loan Portfolio
The Company operates in an agriculturally dominated area, which includes
the counties of Rockingham, Page and Shenandoah in the western portion of
Virginia. The Company does not make a significant number of loans to borrowers
outside its primary service area. The Company is very active in local
residential construction mortgages. Commercial lending includes 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 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 April 2004, Pilgrim's Pride announced the planned sale or closure
of its turkey processing plant in Hinton, Virginia. A group of local growers
have organized the Virginia Poultry Growers Cooperative and have signed a
non-binding letter of intent to purchase the plant. At present, it is not known
whether this effort will be successful.
Management has reviewed its poultry related loans that are contracted with
Pilgrim's Pride Turkey Division and 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. In addition to direct agricultural
loans, a significant percentage of residential real estate loans and consumer
installment loans are made to borrowers employed in the agricultural sector of
the economy. The Company continues to monitor its past due loans closely and has
not experienced higher delinquencies in this sector compared to the overall loan
portfolio.
Management has entered into an agreement with Gateway Bank to purchase
short-term real estate loan participations. These loans have been purchased by
Gateway from mortgage brokers and will be held until sold to the ultimate holder
in the secondary market. All loans have firm take-out commitments and are held
for periods ranging from two to sixty days, but averaging approximately fourteen
days. These loans originate in several states through the country, however, a
significant portion are from the state of California.
Management has funded these loans with short-term liquid assets and at
times through short-term borrowings. The yield on these loans is based on a
discount to the prime rate, but offers a premium over other comparable
short-term investments. During the second quarter, these participations averaged
$10,590,000, with a maximum outstanding balance of $29,730,000. The Bank has
made a commitment to purchase up to a maximum of $40,000,000 in these loans.
There were no loans of this type outstanding at June 30, 2004.
The first six months of 2004 resulted in an increase of $14,812,000 in
loans outstanding. Most of the increase was in the real estate portfolio, both
residential and commercial properties. As secondary market rates increased
during the first half of the year, the Bank's in-house three and five year
adjustable loan rates became more attractive and contributed to the growth in
the portfolio.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Loan Portfolio (Continued)
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 changed due to
financial hardship. Nonperforming loans totaled $1,361,000 at June 30, 2004
compared to $1,614,000 at December 31, 2003. Approximately 85% of these
nonperforming 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 June 30, 2004, the Company did not hold any of 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.
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 due to the inherent imprecision of these estimates.
All potential losses are evaluated within a range of low to high. An
unallocated allowance 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. 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 $1,512,000 at June 30, 2004 is equal to
..67% of total loans. This compares to an allowance of $1,484,000 (.70%) at
December 31, 2003. Although management has slightly decreased the funding of the
allowance compared to the first six months of 2003, funding for the quarter at
$120,000 exceeds charge-offs by $28,000.
The allowance as a percentage of loans outstanding remains well below the
peer group average of 1.36%. The Bank compares favorably to the peer group in
all other measures relating to the allowance as of the most recently available
information, including: net losses to average loans, earnings coverage of net
losses, allowance to net losses and non-current loans to gross loans.
Management feels the level of the allowance is appropriate based upon the
above factors and on its loan loss history, the composition of its loan
portfolio, the recent downward trend in non-performing loans and collateral
values of delinquent loans. The current allowance for loan losses is equal to
approximately seven years of average loan losses. Based upon its thorough review
of the portfolio, management is of the opinion that the allowance for loan
losses fairly states the estimated losses in the current portfolio.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Allowance for Loan Losses (Continued)
Net charge offs during the first six months of 2004 were $92,000, which
annualizes to a loss rate of .08%. Although losses through six months of 2003
only totaled $44,000, full year losses of $219,000 were equivalent to .10%. The
Bank's average loss rate in recent years of .09% is approximately one-third the
loss rate of its peer group.
Deposits
The Company's main source of funding 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. Total deposits increased $3,678,000 during the
first half of 2004. Certificates of deposit decreased $3,658,000 during this
period while demand deposits and savings deposits increased a total of
$7,326,000, compared to December 31, 2003. Management believes this increase
resulted from frequent advertising of its free checking account and accounts
gained from BB&T following its takeover of the F & M National Corp. branches.
Management has not offered any special rate promotions during the period
to attract certificates of deposit as the growth in other deposits, use of
federal funds and maturities in the securities portfolio have been sufficient to
fund loan growth. Historically the Bank has had a heavier concentration in
certificates of deposit than its peers. Management is willing to accept some
level of run-off in certificates of deposit as the shift to lower costing
deposits will result in improvements in the net interest margin.
Short-term debt
Short-term debt consists of federal funds purchased and commercial
repurchase agreements (repos.) Commercial customers deposit operating funds into
their checking account and by mutual agreement with the bank; their excess funds
are swept daily into the repo accounts. These accounts are not considered
deposits and are not insured by FDIC. The Bank pledges securities held in its
investment portfolio as collateral for these short-term loans. Federal funds
purchased are overnight borrowings obtained from the Bank's primary
correspondent bank to manage short-term liquidity needs.
Long-term debt
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to
be an important source of funding real estate loan growth. The Company's
subsidiary bank borrows funds on a fixed rate basis. These borrowings are used
to fund either a fifteen-year fixed rate loan or a twenty-year loan, of which
the first ten years have a fixed rate. This program allows the Bank to match the
maturity of its fixed rate real estate portfolio with the maturity of its debt
and thus reduce its exposure to interest rate changes. Scheduled repayments
totaled $3,764,000 in the first half of the year. Additional borrowings of
$4,000,000 were obtained to assist in funding the growth in the loan portfolio.
In September 2002, the Company borrowed $3 million from SunTrust Bank.
This loan carries an interest rate of LIBOR + 1.10% and is variable. Payments of
$230,769 plus interest began in the second quarter of 2004 and will continue for
a period of thirteen quarters. Proceeds of this loan were used to provide a
capital contribution to the Bank and to pay off an intercompany loan.
Capital
The Company seeks to maintain a strong capital position to expand
facilities, promote public confidence, support current operations and grow at a
manageable level. As of June 30, 2004, the Company's total risk based capital
and tier 1 risk based capital ratios were 14.39% and 13.66%, respectively. Both
ratios are in excess of regulatory minimums and are favorable compared with the
ratios of the Company's peers. Earnings have been sufficient to allow an
increase in regular quarterly dividends in 2004 over those in 2003.
16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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, 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 purchase of federal funds. To
further meet its liquidity needs, the Bank maintains lines of credit with
correspondent financial institutions. The 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 continued growth in deposits and through maturities of
investments, the Bank has been able to meet its liquidity needs through the
first half of 2004. The Bank historically has had a stable core deposit base
and, therefore, does not have to rely on volatile funding sources. Because of
the stable core deposit base, changes in interest rates should not have a
significant effect on liquidity. The Bank's membership in the federal Home Loan
Bank System also provides liquidity, as the Bank borrows money that is repaid
over a five to ten year period and uses the money to make fixed rate loans. The
matching of long-term receivables and liabilities helps the Bank reduce its
sensitivity to interest rate changes.
There are no off-balance-sheet items that will impair future liquidity.
The Company monitors its interest rate sensitivity periodically and makes
adjustments as needed. A summary of asset and liability repricing opportunities
is shown on page 18 as Table II.
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 since
the program was initiated through June 30, 2004 total 10,022 shares. Shares
repurchased during the second quarter of 2004 totaled 3,118 shares, at an
average cost of $24.99 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).
17
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Average Income/ Rates Average Income/ Rates Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense Balance Expense Balance Expense
Rate Related Income
Loans 1 $222,327 $ 7,050 6.34% $200,693 $ 7,154 7.19% $230,847 $ 3,576 6.20% $200,554 $ 3,550 7.08%
Federal funds sold 3,792 18 .95% 16,996 98 1.16% 3,319 8 .96% 22,855 66 1.16%
Bank deposits 9,555 93 1.95% 7,633 90 2.38% 9,698 42 1.73% 8,392 42 2.00%
Investments
Taxable 3 40,517 638 3.15% 47,725 984 4.12% 37,558 291 3.10% 43,018 462 4.30%
Partially taxable 2,3 9,675 276 5.71% 8,981 273 6.08% 9,664 144 5.96% 8,972 137 6.10%
Tax exempt 2,3 375 9 4.80% 375 5 5.33%
----- ------- ----- ------- ------ ----- ------- ----- ----- ------ ------ -----
Total Earning Assets 286,241 8,084 5.65% 282,028 8,599 6.15% 291,461 4,066 5.58% 283,791 4,257 6.01%
------- ----- ------ ------- ------ ----- ------ ------ ------ ------- ------ -----
Interest Expense
Demand deposits 37,887 103 .54% 34,246 114 .67% 37,859 52 .55% 34,886 56 .64%
Savings 48,731 219 .90% 43,080 273 1.28% 49,546 111 .90% 43,772 131 1.20%
Time deposits 120,077 1,657 2.76% 127,185 2,116 3.36% 119,720 819 2.74% 127,246 1,042 3.28%
Short-term debt 9,693 37 .76% 7,628 27 .71% 12,641 28 .89% 7,724 14 .73%
Long-term debt 23,114 490 4.24% 30,372 664 4.41% 22,466 236 4.20% 29,384 321 4.38%
------ ----- ---- ------ ----- ---- ------ ----- ----- -------- ----- -----
Total Interest Bearing
Liabilities 239,502 2,506 2.09% 242,511 3,194 2.66% 242,232 1,246 2.06% 243,012 1,564 2.58%
------- ------ ----- ------ ----- ----- ------ ------ ----- --------- ------ -----
Net Interest Income 1 $ 5,578 $ 5,405 $ 2,820 $ 2,693
======== ===== ===== ======
Net Yield on Interest
Earning Assets 1 3.90% 3.86% 3.87% 3.81%
===== ==== ===== =====
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.
4 Average balances include non-accrual loans.
18
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
JUNE 30, 2004
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $29,291 $ 5,874 $13,207 $ 2,088 $ $50,460
Installment 307 1,052 17,085 4,392 22,836
Real estate 13,435 20,575 94,343 23,033 151,386
Credit cards 1,361 1,361
Interest bearing
bank deposits 3,911 5,544 891 10,346
Investment securities 8,651 6,740 29,074 14,692 59,157
------ ------ ------ ------ ------ ------
Total 56,956 39,785 154,600 29,513 14,692 295,546
------ ------ ------- ------ ------ -------
Sources of Funds
Demand deposits 11,148 20,985 4,919 37,052
Savings deposits 10,292 30,877 10,292 51,461
Certificates of deposit
$100,000 and over 3,162 9,729 9,394 22,285
Other certificates
of deposit 16,450 34,948 44,830 96,228
Short-term borrowings 11,491 11,491
Long-term debt 1,772 6,745 15,324 1,179 25,020
------ ------ ------ ------ ----- ------
Total 32,875 72,862 121,410 16,390 243,537
------ ------ ------- ------ ----- -------
Discrete Gap 24,081 (33,077) 33,190 13,123 14,692 52,009
Cumulative Gap 24,081 (8,996) 24,194 37,317 52,009
Ratio of Cumulative Gap 8.15% (3.04)% 8.19% 12.63% 17.60%
to Total Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 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 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
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 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 disclosure controls and procedures to ensure that
material information related to F & M Bank Corp. is made known to our principal
executive officer and principal financial officer on a regular basis, in
particular during the periods in which our quarterly and annual reports are
being prepared. As required, we evaluate the effectiveness of these disclosure
controls and procedures on a quarterly basis, and have done so as of the end of
the period covered by this report. Based on this evaluation, F & M Bank Corp.'s
management, including the Chief Executive Officer and the Chief Financial
Officer, concluded that F & M Bank Corp.'s disclosure controls and procedures
were operating effectively as designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in the
internal controls of F & M Bank Corp. pertaining to its financial reporting and
control of its assets or in other factors that could significantly affect these
controls.
20
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 - On May 8, 2004, the
stockholders held their annual meeting. The
following items were approved by the
shareholders by the required majority:
1) Election of the Board of Directors as
proposed in the proxy material without
any additions or exceptions.
Votes Votes
"For" by "Against" by
Proxy Proxy Abstain
Thomas L. Cline 1,799,684 15,081 2,193
Robert L.
Halterman 1,800,548 14,217 2,193
Michael W. Pugh 1,800,548 14,217 2,193
2) Appointment of S.B. Hoover & Co. LLP. as
independent accountants as proposed in
the proxy materials; 1,815,658 votes for,
800 votes against, 500 abstained.
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 10-K 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
2001 Form 10-K 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).
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(b)Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter
ending June 30, 2004.
21
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/ DEAN W. WITHERS
-----------------------------------
Dean W. Withers
President and Chief Executive Officer
/s/ NEIL W. HAYSLETT
-----------------------------------
Neil W. Hayslett
Senior Vice President and
Chief Financial Officer
August 13, 2004