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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, 2005
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 March 31, 2005,
2,409,201 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, 2005 and 2004 2
Consolidated Balance Sheets - March 31, 2005 and
December 31, 2004 3
Consolidated Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2005 and 2004 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2005 and 2004 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 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 8-K 20
SIGNATURES 21
2
Part I Financial Information Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended
March 31,
2005 2004
Interest Income
Interest and fees on loans held for investment $ 4,067 $ 3,460
Interest and fees on loans held for sale 132
Interest on federal funds sold 16 10
Interest on interest bearing deposits 27 51
Dividends on equity securities 101 109
Interest on debt securities 183 341
------- ------
Total Interest Income 4,526 3,971
------- ------
Interest Expense
Interest on demand accounts 44 51
Interest on savings deposits 110 108
Interest on time deposits over $100,000 208 165
Interest on all other time deposits 681 673
------- ------
Total interest on deposits 1,043 997
Interest on short-term debt 130 8
Interest on long-term debt 314 255
------- ------
Total Interest Expense 1,487 1,260
------- ------
Net Interest Income 3,039 2,711
Provision for Loan Losses 90 60
------- ------
Net Interest Income after Provision for Loan Losses 2,949 2,651
------- ------
Noninterest Income
Service charges 205 224
Insurance and other commissions 55 83
Other 320 164
Income on bank owned life insurance 62 63
Security gains (losses) 175
------- ------
Total Noninterest Income 642 709
------- ------
Noninterest Expense
Salaries 830 807
Employee benefits 304 297
Occupancy expense 102 95
Equipment expense 106 105
Intangibles amortization 69 69
Other 630 515
------- ------
Total Noninterest Expense 2,041 1,888
------- ------
Income before Income Taxes 1,550 1,472
Income Taxes 383 439
------- ------
Net Income $ 1,167 $ 1,033
======= ======
Per Share Data
Net Income $ .48 $ .43
======= ======
Cash Dividends $ .19 $ .18
======= ======
Equivalent Shares Outstanding 2,410,697 2,419,172
========= =========
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 2005 2004
----------- ------------
Cash and due from banks $ 6,245 $ 7,938
Interest bearing deposits in banks 3,759 9,231
Federal funds sold 1,017
Securities held to maturity (note 2) 110 110
Securities available for sale (note 2) 39,900 30,756
Other investments 6,754 7,934
Loans held for sale 12,843 47,150
Loans held for investment (note 3) 266,484 248,972
Less allowance for loan losses (note 4) (1,566) (1,511)
-------- --------
Net Loans Held for Investment 264,918 247,461
Bank premises and equipment 4,736 4,824
Interest receivable 1,261 1,231
Goodwill 2,639 2,639
Core deposit intangible 1,633 1,702
Bank owned life insurance (note 5) 5,144 5,083
Other assets 2,794 2,881
------- -------
Total Assets $352,736 $369,957
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 41,464 $ 40,694
Interest bearing
Demand 38,885 37,425
Savings deposits 48,693 48,883
Time deposits over $100,000 27,430 24,661
Time deposits 99,093 94,842
------- -------
Total Deposits 255,565 246,505
Short-term debt 27,686 57,362
Long-term debt 29,539 26,462
Accrued expenses 5,262 5,368
------- -------
Total Liabilities 318,052 335,697
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,409,201
and 2,411,541 shares
issued and outstanding, respectively 12,046 12,058
Surplus 79 128
Retained earnings 22,983 22,273
Accumulated other comprehensive income (424) (199)
-------- --------
Total Stockholders' Equity 34,684 34,260
------- -------
Total Liabilities and Stockholders' Equity $352,736 $369,957
======= =======
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,
2005 2004
Balance, beginning of period $ 34,260 $ 32,319
Comprehensive Income:
Net income for period 1,167 1,033
Net change in unrealized appreciation
(depreciation) on investment securities
available for sale, net of taxes (225) 130
-------- -------
Total comprehensive income 942 1,163
Repurchase of common stock (61) (56)
Dividends declared (457) (436)
-------- --------
Balance, end of period $ 34,684 $ 32,990
======== =======
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,
2005 2004
Cash Flows from Operating Activities:
Net income $ 1,167 $ 1,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 116 116
Amortization of security premiums 36 114
Net (increase) decrease in loans held for sale 34,306 (821)
Provision for loan losses 90 60
Intangibles amortization 69 69
(Increase)decrease in interest receivable (30) 221
Decrease in other assets 87 400
Increase(decrease) in accrued expenses 19 264
(Gain)Loss on security transactions (175)
Amortization of limited partnership investments 64 61
Income from life insurance investment (62) (63)
--------- ---------
Net adjustments 34,695 246
------- -------
Net Cash Provided by Operating Activities 35,862 1,279
------- -------
Cash Flows from Investing Activities:
Purchase of investments available for sale (10,044) (614)
Proceeds from sales of investments available
for sale 830
Proceeds from maturity of investments
available for sale 1,630 6,746
Net increase in loans (17,546) (5,899)
Purchase of property and equipment (28) (122)
Change in federal funds sold 1,017 (604)
Net (increase) decrease in interest bearing
bank deposits 5,472 (798)
--------- --------
Net Cash Used in Investing Activities (19,499) (461)
-------- --------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 2,041 4,323
Net increase (decrease) in time deposits 7,018 (3,238)
Net increase (decrease) in short-term debt (31,695) 984
Cash dividends paid (457) (436)
Repurchases of common stock (61) (56)
Change in federal funds purchased 2,020
Proceeds from long-term debt 5,000
Repayment of long-term debt (1,922) (2,108)
-------- -------
Net Cash Provided by Financing Activities (18,056) (531)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (1,693) 287
Cash and Cash Equivalents, Beginning of Period 7,938 5,665
------- -------
Cash and Cash Equivalents, End of Period $ 6,245 $ 5,952
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 1,445 $ 1,301
Income taxes $ 220
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, 2005 and the results of operations for the
three-month periods ended March 31, 2005 and March 31, 2004.
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, 2004.
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, 2005 and December 31, 2004 follows:
2005 2004
---------------------- ---------------------
Carrying Market Carrying Market
Value Value Value Value
-------- ------- -------- ----------
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 110
------ ------ ------- -------
Total $ 110 $ 110 $ 110 $ 110
======= ======= ======= =======
2005 2004
---------------------- -----------------------
Market Market
Value Cost Value Cost
--------- -------- --------- ---------
Securities Available for Sale
U. S. Treasury and
Agency obligations $ 25,939 $ 26,062 $ 16,011 $ 16,086
Equity securities 6,244 6,626 6,485 6,619
Mortgage-backed
securities 4,899 4,984 5,425 5,472
Corporate bonds 2,452 2,500 2,466 2,500
Municipals 366 375 369 375
------- ------- ------- --------
Total $ 39,900 $ 40,547 $30,756 $31,052
======= ======== ======== ========
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding at March 31, 2005 and December 31, 2004 are
summarized as follows:
2005 2004
Real Estate
Construction $22,070 $ 17,365
Mortgage 152,816 147,281
Commercial and agricultural 70,257 62,786
Consumer 19,944 20,006
Credit cards 1,351 1,478
Other 46 56
----- ------
Total $266,484 $248,972
======= ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2005 and 2004 follows:
2005 2004
Balance, beginning of period $ 1,511 $ 1,484
Provisions charged to operating expenses 90 60
Net (charge offs) recoveries
Loan recoveries 19 40
Loan charge-offs (54) (67)
------- ---------
Total Net (Charge-offs) Recoveries (35) (27)
------- ---------
Balance, End of Period $ 1,566 1,517
====== ========
Components of net (charge-offs) recoveries:
Real Estate $
Commercial 1 (48)
Consumer (36) 21
------- --------
$ (35) (27)
======= =========
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.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Additionally, it further clarifies the criteria for the
initial recognition and measurement of intangible assets separate from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of SFAS No. 142 discontinue the amortization
of goodwill and intangible assets with indefinite lives. Instead, these assets
will be subject to at least an annual impairment review and more frequently if
certain impairment indicators are in evidence. SFAS No. 142 also requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
Core deposit intangibles are amortized on a straight-line basis over ten
years. The Company adopted SFAS 147 on January 1, 2002 and determined that the
core deposit intangible will continue to be amortized over the estimated useful
life.
Securities Impairment
The Company evaluates each of its investments in securities, debt and
equity, under guidelines contained in SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. These guidelines require the Company
to determine whether a decline in value, below original cost, is other than
temporary. In making its determination, management considers current market
conditions, historical trends in the individual securities, and historical
trends in the total market. Expectations are developed regarding potential
returns from dividend reinvestment and price appreciation over a reasonable
holding period (five years).
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net income year to date increased $134,000 compared to 2004. Yields on
earning assets increased 19 basis points compared to 2004 while rates paid on
interest bearing liabilities increased 16 basis points for the same period. The
increase in the yield on earning assets is a function of increased balance sheet
leverage, as the percentage of loans held for investment (the highest yielding
asset) relative to total earning assets has increased from 76.1% in 2004 to
82.8% in 2005. Total average earning assets have increased to $313 million in
2005 versus $281 million in 2004. A schedule of the net interest margin for 2005
and 2004 can be found in Table I on page 16.
Noninterest income decreased $67,000 in the first three months of 2005.
Exclusive of securities transactions, other noninterest income increased
$108,000. During the quarter the Company recognized $93,000 of other income
related to the receipt of deferred tax credits on low income housing projects.
These credits have been classified as a return on investment rather than as a
reduction of income tax expense. This was done to reflect the fact that the
Company entered into these investments with the expectation that tax credits
would be the primary source of investment return and to avoid a distortion to
income tax expense for the period.
Noninterest expense increased $153,000 (8.1%). Salaries and benefits
accounted for $30,000, (a 2.7% increase) of this total. This increase was caused
by a combination of normal salary increases and increases in the cost of group
health insurance. The remaining increase is made up of increases in a number of
areas, including: data processing fees, occupancy expense, and professional
fees.
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 at quarter end was
benchmarked at 2.75% 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 declined due to continued strong loan demand.
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, 2005, the cost of all securities available for sale exceeded
their market value by $647,000. This includes declines in value in both the
equity securities held by the Company and in the value of government obligations
held by the Bank. Declines in the value of the bond portfolio are the result of
recent changes in short term rates within the market for fixed income
secuirites. 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.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Investments in debt securities increased $9,385,000 in the first quarter of
2005; all of this increase was the result of holding a short term $10,000,000
U.S. Treasury obligation over the end of the calendar quarter. This Treasury
obligation matured in early April. The Company generally invests in relatively
short-term maturities due to the uncertainty in the direction of interest rates.
Other than this security, the Bank did not make any additional investment in
bonds during the first quarter.
The decline in the value of the equities portfolio is consistent with the
overall market declines of the first quarter. To minimize risk the Company holds
a diversified portfolio of equity securities, including blue chip stocks listed
in the Dow Jones Industrial Average (DJIA), Real Estate Investment Trusts
(REITs), Financial Stocks, Pharmaceuticals, and Utilities. Many of these
equities have attractive dividend yields and are owned both for the income
stream and potential growth in value. A review of these investments as of March
31, 2005, did not reveal any additional impairment to be recognized in excess of
that which was recognized in either 2002 or 2004.
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.
While lending is geographically diversified within the service area, the
Company has loan concentrations in agricultural loans (primarily poultry
farming), construction, hotels, churches, assisted living facilities and
mortgage participations with Gateway Bank (California). Management and the Board
of Directors review these concentrations quarterly.
Management has entered into an agreement with Gateway Bank (of California)
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 fifteen days. These loans originate in several states
throughout the country, however, a significant portion are from the state of
California. These loans have been included with mortgage loans that the Bank has
originated within its own market and designated on the balance sheet as "Loans
Held for Sale".
Management has funded its loans held for sale primarily 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
first quarter, these loan participations have averaged $13,572,000, with a
maximum balance of $47,150,000 and a quarter end balance of $12,843,000.
Throughout the first quarter, the Bank had a commitment to purchase up to a
maximum of $55,000,000 of these loans; however subsequent to quarter end this
commitment was reduced to $30,000,000. Short-term borrowings from the FHLB to
fund this program (and other short term needs) averaged $14,396,000, with a
maximum balance of $50,500,000 and quarter end balance of $18,500,000.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The first three months of 2005 resulted in a $17,512,000 increase in the
portfolio of loans held for investment. The increase in the loan portfolio is
reflective of the strong local economy. This growth has been concentrated within
the real estate portfolio, both residential and commercial properties. Within
the last year the bank hired two commercial lenders that brought experience from
larger regional banks. Both these lenders have been successful in bringing loan
customers from their former banks which has added to the recent growth in the
portfolio.
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 $1,616,000 at March 31, 2005
compared to $2,243,000 of loans at December 31, 2004. Approximately 90% 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.
The following is a summary of information pertaining to risk elements and
impaired loans:
March 31, December 31,
2005 2004
----------- ---------
Nonaccrual loans $887,000 $864,000
Loans past due 90 days or more
and still accruing interest 729,000 1,379,000
Restructured loans 0 0
------- -------
$1,616,000 $2,243,000
Percent of total loans .61% .90%
As of March 31, 2005 the Company did not hold any real estate that was
acquired through foreclosure.
Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature and volume of
the loan portfolio and the trend of past due and criticized loans. Specific
factors evaluated include internally generated loan review reports, past due
reports, historical loss experience and changes in the financial strength of
individual borrowers that have been included on the Banks watch list or schedule
of classified loans.
In evaluating the portfolio, loans are segregated into loans with
identified potential losses, and pools of loans by type (commercial,
residential, consumer, credit cards). Loans with identified potential losses
include examiner and bank classified loans. Classified relationships in excess
of $100,000 are reviewed individually for impairment under FAS 114. A variety of
factors are taken into account when reviewing these credits, including borrower
cash flow, payment history, fair value of collateral, company management,
industry and economic factors. Loan relationships that are determined to have no
impairment are placed back into the appropriate loan pool and reviewed under FAS
5.
14
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 $1,566,000 at March 31, 2005 is equal to
..59% of total loans. This compares to an allowance of $1,511,000 (.61%) at
December 31, 2004. Management has increased its funding of the allowance
compared to the first quarter of 2004 by $30,000. Total funding for the quarter
of $90,000 exceeded net charge-offs by $55,000.
The allowance of .59% of loans outstanding remains well below the peer
group average of 1.27%. 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
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
14.7% in the first quarter of 2005. Certificates of deposit increased
$7,020,000, while all other deposit types increased a total of $2,040,000 during
the quarter. Due to the growth in its loan portfolio and competition for
deposits within its market, the Bank has advertised two short term certificate
of deposit rate specials to attract new funds. The Bank also continues to
advertise a free checking account product. The growth in deposits appears to be
a result of advertising of these accounts and continued account growth resulting
from accounts gained at the expense of larger financial institutions.
Short-term debt
Short-term debt consists of federal funds purchased, commercial repurchase
agreements (repos.) and daily rate credit from the Federal Home Loan Bank
(FHLB). Commercial customers deposit operating funds into their checking account
and by mutual agreement with the bank their excess funds are swept daily into
the repurchase accounts. These accounts are not considered deposits
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
and are not insured by the 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. Daily rate credit from
the FHLB has been used to finance the loans held for sale.
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
$1,691,000 in the first quarter of the year. Additional borrowings totaled
$5,000,000.
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
primarily to provide a capital contribution to the Bank.
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, 2005, the Company's total risk based capital and total capital to
total average assets ratios were 13.56% and 9.43%, 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 2005 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, 2005, approximately $1,789,000 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.
16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity, management
must also control the degree of interest rate risk assumed on the balance sheet.
Managing this risk involves regular monitoring of interest sensitive assets
relative to interest sensitive liabilities over specific time intervals. The
Company monitors its interest rate sensitivity periodically and makes
adjustments as needed. There are no off balance sheet items that will impair
future liquidity. There are no off-balance-sheet items that will impair future
liquidity.
Table II (page 18) contains an analysis which shows the repricing
opportunities of earning assets and interest bearing liabilities as of March 31,
2005.
As of March 31, 2005, the Company had a cumulative Gap Rate Sensitivity Ratio
of (4.39%) for the one year repricing period. This generally indicates that
earnings would decrease in an increasing interest rate environment as
liabilities reprice more quickly than assets. However, in actual practice, this
may not be the case as loans tied to the prime rate of interest will reprice
immediately with an increase in short term market rates, while deposit rates
will remain stable until competitive market conditions dictate the necessity for
an increase in rates. 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, 2005
total 25,061. Shares repurchased during the first quarter of 2005 totaled 2,340
shares at an average cost of $26.11 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
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, 2005 March 31, 2004
-------------------- --------------------
Average Income/ Average Income/
Balance 2 Expense Rates Balance 2 Expense Rates
------- ------- ----- ------- ------- -----
Interest Income
Loans held for investment 1,2 $ 259,055 $ 4,082 6.39% $ 213,808 $ 3,474 6.50%
Loans held for sale 13,904 132 3.85
Federal funds sold 2,530 16 2.56 4,264 10 .94
Interest bearing
deposits 6,495 27 1.69 9,411 51 2.17
Investments
Taxable 3 23,693 199 3.36 43,475 347 3.19
Partially taxable 6,974 104 5.97 9,687 132 5.45
Tax exempt 2,3 375 4 4.27 375 4 4.27
------ ----- ---- ------ ----- ----
Total Earning Assets 313,026 4,564 5.91 281,020 4,018 5.72
------- ----- ---- ------- ----- ---
Interest Expense
Demand deposits 38,155 44 .47 37,915 51 .54
Savings 49,034 110 .91 47,916 108 .90
Time deposits 123,128 890 2.93 120,434 838 2.78
Short-term debt 21,749 130 2.42 6,744 8 .53
Long-term debt 31,442 314 4.05 23,762 255 4.28
------ --- ----- ------ ----- ----
Total Interest
Bearing Liabilities $ 263,508 1,488 2.29 $ 236,771 1,260 2.13
========== ----- ----- ========== ----- ----
Net Interest Margin 1 3,076 $ 2,758
===== =====
Net Yield on Interest
Earning Assets 3.98% 3.93%
===== =====
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 and
loans.
3 Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
18
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
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 held for investment 58,407 20,238 160,600 27,239 266,484
Loans held for sale 12,843 12,843
Interest bearing
bank deposits 2,372 693 694 3,759
Investment securities 10,981 3,741 18,558 13,484 46,764
------- ------- ------- ------- ------ -------
Total 84,603 24,672 179,852 27,239 13,484 329,850
------- ------- -------- ------ ------ -------
Sources of Funds
Interest bearing demand
deposits 11,704 22,022 5,159 38,885
Savings deposits 9,738 29,216 9,739 48,693
Time deposits
$100,000 and over 4,710 9,536 13,184 27,430
Other time deposits 14,811 38,987 45,295 99,093
Short-term borrowings 27,686 27,686
Long-term debt 3,515 4,846 17,570 3,608 29,539
----- ------- ------- ------- ------- ------
Total 50,722 74,811 127,287 18,506 271,326
-------- ------- ------- ------ ------- -------
Discrete Gap 33,881 (50,139) 52,565 8,733 13,484 60,541
Cumulative Gap 33,881 (16,258) 36,307 45,040 58,524
Ratio of Cumulative Gap
to Total Earning Assets 10.27% (4.39)% 11.01% 13.65% 17.74%
Table II reflects the earlier of the maturity or repricing dates for
various assets and liabilities at March 31, 2005. 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.
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 2004 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 S. B. Hoover,
LLP, 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 S.B. Hoover are presented to
management of the Bank and to the Audit Committee of the Company.
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 - 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).
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
May 13, 2005