UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-13273
F & M BANK CORP.
Virginia 54-1280811
- ------------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
(540) 896-8941
--------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes .[ X ] No [ ____ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 30, 2003
------------------------------------ -----------------------------
Common Stock, par value - $5 2,418,678 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, 2003 and 2002 2
Consolidated Statements of Income - Three Months
Ended June 30, 2003 and 2002 3
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 5
Consolidated Statements of Changes in Stockholders'
Equity - Six Months Ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 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,
2003 2002
----------- ----------
Interest Income
Interest and fees on loans $ 7,125 $ 7,230
Interest on federal funds sold 98 47
Interest on interest bearing deposits 90 280
Interest and dividends on investment securities 1,189 1,252
------- ------
Total Interest Income 8,502 8,809
------- ------
Interest Expense
Interest on demand accounts 114 156
Interest on savings deposits 273 367
Interest on time deposits 2,116 2,628
------- ------
Total interest on deposits 2,503 3,151
Interest on short-term debt 27 56
Interest on long-term debt 664 624
------- ------
Total Interest Expense 3,194 3,831
------- ------
Net Interest Income 5,308 4,978
Provision for Loan Losses 133 174
------- ------
Net Interest Income after Provision for Loan Losses 5,175 4,804
------- ------
Noninterest Income
Service charges 419 360
Other 626 341
Security gains 289 452
------- ------
Total Noninterest Income 1,334 1,153
------- ------
Noninterest Expense
Salaries 1,522 1,364
Employee benefits 500 450
Occupancy expense 200 156
Equipment expense 192 170
Intangibles amortization 138 89
Other 1,002 926
------- ------
Total Noninterest Expense 3,554 3,155
------- ------
Income before Income Taxes 2,955 2,802
Provision for Income Taxes 879 852
------- ------
Net Income $ 2,076 $ 1,950
======= ======
Per Share Data
Net Income $ .86 $ .80
======= ======
Cash Dividends $ .34 $ .32
======= ======
Equivalent Shares Outstanding 2,423,015 2,433,377
========= =========
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,
2003 2002
---------- ---------
Interest Income
Interest and fees on loans $ 3,537 $ 3,709
Interest on federal funds sold 66 15
Interest on interest bearing deposits 42 115
Interest and dividends on investment securities 557 651
------- ------
Total Interest Income 4,202 4,490
------- ------
Interest Expense
Interest on demand deposits 56 82
Interest on savings accounts 131 186
Interest on time deposits 1,042 1,261
------- ------
Total interest on deposits 1,229 1,529
Interest on short-term debt 13 27
Interest on long-term debt 322 337
------- ------
Total Interest Expense 1,564 1,893
------- ------
Net Interest Income 2,638 2,597
Provision for Loan Losses 61 107
------- ------
Net Interest Income after Provision for Loan Losses 2,577 2,490
------- ------
Noninterest Income
Service charges 246 180
Other 348 204
Security gains 399 371
------- ------
Total Noninterest Income 993 755
------- ------
Noninterest Expense
Salaries 769 686
Employee benefits 240 215
Occupancy expense 105 78
Equipment expense 103 87
Intangibles amortization 69 44
Other 536 463
------- ------
Total Noninterest Expense 1,822 1,573
------- ------
Income before Income Taxes 1,748 1,672
Provision for Income Tax 525 511
------- ------
Net Income $ 1,223 $ 1,161
======= ======
Per Share Data
Net Income $ .50 $ .48
======= ======
Cash Dividends $ .17 $ .16
======= ======
Equivalent Shares Outstanding 2,422,359 2,429,733
========= =========
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 2003 2002
---------- -----------
(Unaudited) (Audited)
Cash and due from banks $ 6,358 $ 6,017
Interest bearing deposits in banks 10,014 5,886
Federal funds sold 11,155 4,476
Securities held to maturity (note 2) 875 1,877
Securities available for sale (note 2) 57,174 62,908
Other investments 5,195 4,816
Loans, net of unearned discount (note 3) 200,737 201,980
Less allowance for loan losses (note 4) (1,566) (1,477)
-------- -------
Net Loans 199,171 200,503
Bank premises and equipment 4,900 4,486
Other real estate 522 719
Interest receivable 1,435 1,655
Goodwill (note 5) 2,639 2,639
Deposit intangibles (note 5) 2,116 2,254
Bank owned life insurance (note 6) 4,283 2,303
Other assets 2,337 2,609
------- --------
Total Assets $308,174 $303,149
======= =======
LIABILITIES
Deposits
Noninterest bearing demand $ 32,728 $ 29,446
Interest bearing
Demand 33,774 34,134
Savings deposits 44,478 41,661
Time deposits 126,139 123,043
------- -------
Total Deposits 237,119 228,284
Short-term debt 6,782 8,308
Long-term debt 28,548 32,312
Accrued expenses 4,952 4,704
------- -------
Total Liabilities 277,401 273,608
------- -------
STOCKHOLDERS' EQUITY
Common stock $5 par value, 2,418,678 and
2,423,678 shares issued and outstanding
in 2003 and 2002, respectively 12,093 12,118
Surplus 231 303
Retained earnings 18,644 17,390
Accumulated other comprehensive income (loss) (195) (270)
-------- --------
Total Stockholders' Equity 30,773 29,541
------- -------
Total Liabilities and Stockholders' Equity $308,174 $303,149
======= =======
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ---------
Cash Flows from Operating Activities:
Net income $ 2,076 $ 1,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 202 170
Amortization of security premiums 100 56
Gain on security transactions (289) (452)
Income from life insurance investment (110) (54)
Provision for loan losses 133 174
Increase in interest receivable 220 (168)
Decrease in other assets 225 67
Intangibles amortization 138 89
Increase in accrued expenses 245 330
Losses on limited partnership investments 129 140
------- -------
Total Adjustments 993 352
------- -------
Net Cash Provided by Operating Activities 3,069 2,302
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of investments available
for sale 1,241 3,322
Proceeds from maturity of investments available
for sale 28,453 13,548
Proceeds from maturity of investments held to
maturity 1,000
Purchase of investments available for sale (24,150) (18,605)
Net change in federal funds sold (6,679)
Net change in loans 1,199 (23,884)
Purchase of property and equipment (323) (200)
Net change in interest bearing bank deposits (4,128) 7,725
Construction in progress payments (161)
Proceeds from sale of other real estate owned 65
Purchase of life insurance (1870) (2,172)
------- --------
Net Cash Used in Investing Activities (5,353) (20,266)
-------- -------
Cash Flows from Financing Activities:
Net increase in demand and savings deposits 5,739 8,892
Net increase (decrease) in time deposits 3,096 (2,903)
Net increase (decrease) in short-term debt (1,526) 500
Repurchase of common stock (97) (293)
Repayment of long-term debt (3,764) (2,907)
Proceeds from long-term debt 15,000
Payment of dividends (823) (780)
-------- -------
Net Cash Provided by Financing Activities 2,625 17,509
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 341 (455)
Cash and Cash Equivalents, Beginning of Period 6,017 5,364
------- -------
Cash and Cash Equivalents, End of Period $ 6,358 $ 4,909
======= =======
Supplemental Disclosure
Cash paid for:
Interest expense $ 3,258 $ 3,931
Income taxes 375 400
Noncash Transaction
In 2002, the Company bought an additional investment in low income housing.
The cost was $750,000, all of which was financed.
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
2003 2002
-----------------------
Balance, beginning of period $ 29,541 $ 28,597
Comprehensive Income:
Net income 2,076 1,950
Net change in unrealized appreciation
on securities available for sale,
net of taxes 76 (547)
------- --------
Total comprehensive income 2,152 1,403
Repurchase of common stock (97) (293)
Dividends declared (823) (780)
-------- -------
Balance, end of period $ 30,773 $ 28,929
======= =======
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, 2003 and the results of
operations for the six and three month periods ended June 30, 2003 and
June 30, 2002. The notes included herein should be read in conjunction
with the notes to financial statements included in the 2002 annual
report to stockholders of the F & M Bank Corp.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values are as
follows:
June 30, December 31,
2003 2002
------------------ ------------
Market Market
Cost Value Cost Value
Securities Held to
Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 110
Other securities 765 807 1,767 1,795
------- ------- ------- -------
Total $ 875 $ 917 $ 1,877 $ 1,905
======= ======= ======= =======
June 30, December 31,
2003 2002
---------------- -------------
Market Market
Value Cost Value Cost
Securities Available
for Sale
U. S. Treasury and
Agency obligations $ 30,238 $ 29,994 $ 38,475 $ 38,023
Equity securities 7,534 8,355 8,026 9,104
Mortgage-backed securities 6,844 6,818 5,069 5,033
Other securities 12,558 12,224 11,338 11,089
------- ------- ------- -------
Total $ 57,174 $ 57,391 $ 62,908 $ 63,249
======= ======= ======= =======
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS:
Loans outstanding are summarized as follows:
June 30, December 31,
2003 2002
--------- --------
Real Estate
Construction $13,096 $ 12,059
Residential 114,794 118,453
Commercial and agricultural 48,311 47,218
Installment loans to individuals 23,045 22,704
Credit cards 1,397 1,478
Other 94 68
------ -------
Total $200,737 $201,980
======= =======
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,
2003 2002 2003 2002
------- ------ ------ ------
Balance, beginning of period $1,477 $ 1,288 $1,545 $ 1,338
Provisions charged to operating
expenses 133 174 61 107
Net (charge offs) recoveries:
Loan recoveries 38 55 19 29
Loan charge-offs (82) (83) (59) (50)
------ ------ ------ ------
Total Net Charge-offs * (44) (28) (40) (21)
------ ------ ------ ------
Balance, End of Period $1,566 $ 1,424 $1,566 $ 1,424
===== ====== ===== ======
* Components of net charge-offs:
Real estate - Residential $ $ $ $
Commercial (3) (4) (6)
Installment loans to
individuals (41) (28) (36) (15)
------ ------ ------ ------
Total $ (44) $ (28) $ (40) $ (21)
====== ====== ====== ======
9
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 BANK OWNED LIFE INSURANCE (BOLI):
The Company's subsidiary bank has obtained
single-premium whole-life insurance policies on several of its senior
executives. The Bank is both owner and beneficiary of the policies.
Under regulatory guidelines there are four primary purposes for which
a Bank may purchase life insurance: (i) key-person insurance, (ii)
insurance on borrowers, (iii) insurance purchased in connection with
employee compensation and benefit plans, and (iv) insurance taken as
security for loans.
The Bank currently offers a variety of benefit plans to all full
time employees. While the costs of these plans are generally tax
deductible to the Bank, the cost has been escalating greatly in recent
years. In order to attract and retain good employees, the Bank has
determined that the benefits offered are necessary.
To help offset the growth in these costs, the Bank decided to enter
into the BOLI contracts. Dividends received on these policies are
tax-deferred and the death benefits under the policies are tax exempt.
Rates of return on a tax-equivalent basis are very favorable when
compared to other long-term assets which the Bank could obtain.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion provides information about the
major components of the results of operations and financial condition, liquidity
and capital resources of F & M Bank Corp. and its subsidiaries. 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.
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.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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).
Overview
Net income in the second quarter 2003 was $1,223,000 or $.50 per share,
compared to $1,161,000 or $.48 per share the second quarter of 2002, an increase
of 5.63% in earnings per share. For the six months ended June 30, 2003, net
income was $2,076,000 or $.86 per share compared to $1,950,000 or $.80 per share
for the first six months of 2002. Net interest income through the end of the
second quarter increased 6.62% compared with a year ago; while noninterest
income increased 15.72% and noninterest expense increased 12.63% during the same
period.
On an annualized basis, return on average assets at the end of the second
quarter 2003 was 1.35% and return on average shareholders' equity was 13.86%. As
of June 30, 2003, assets increased 5.35%, deposits increased 10.66% and loans
increased .06% compared to a year ago. The allowance for loan losses at the end
of the second quarter was $1,566,000 or .78% of loans while shareholders' equity
totaled $30,773,000. A quarterly dividend of $.17 per share was paid August
5, 2003 to shareholders of record July 8, 2003.
Results of Operations
The 2002 year to date tax equivalent net interest margin increased
$346,000 or 6.8%% compared to the same period in 2002. The yield on earning
assets decreased .72%, while the cost of funds decreased .84% compared to the
same period of 2002. These decreases resulted as maturing assets and
liabilities continued to reprice at significantly lower rates following
aggressive rate cutting by the Federal Reserve, which began in 2001. The net
interest margin improved significantly throughout 2002, but has been
declining slightly since the beginning of 2003. This is primarily the result of
a decrease in the repricing opportunities on liabilities, while longer term
assets (loans and investment securities) continue to reprice at
significantly lower levels. A schedule of the net interest margin for 2003 and
2002 is shown on page 17 as Table 1.
12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Noninterest income increased $181,000 in the first six months of 2003.
Exclusive of securities transactions, other noninterest income
items increased $344,000, or 49.1%. Service charges on deposit accounts have
increased following the implementation of an overdraft privilege program which
commenced during the second quarter of 2003. Other noninterest income increased
$285,000; substantial increases in this area include $103,000 in mortgage
origination fees, $55,000 from earnings on bank owned life insurance and an
additional $63,000 in commissions from sales of investment and insurance
products.
Noninterest expense increased $399,000 or 12.6% through June 30, 2003. Of
the total, $208,000 can be attributed to salaries and employee benefits. This
increase includes normal salary increases, six months of expenses for the
Harrisonburg mortgage and investment office (versus none in 2002) and an
increase in pension expense of approximately 54%. This increase is a result of
the declining stock market (at the pension plan year end of September 20, 2002)
and lower market rates of interest. With less current assets and lower expected
returns, the current funding requirements to meet the pension payments
guaranteed in the future had to increase.
Financial Condition
Federal Funds Sold and Interest Bearing Deposits
The Company's subsidiary bank invests a portion of its excess liquidity in
either federal funds sold or interest bearing bank deposits. Federal funds sold
offer daily liquidity and pay market rates of interest that is currently
benchmarked at 1.00% by the Federal Reserve. Actual rates received vary slightly
based upon money supply and demand among banks. Interest bearing bank deposits
are held either in money market accounts or as short-term certificates of
deposits. Balances in both federal funds sold and interest bearing bank deposits
have increased due to continued deposit growth, maturing securities and flat
loan demand.
Securities
The Company's securities portfolio 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, 2003, the amortized cost of all
securities available for sale exceeded their market value by $217,000 ($143,000
after the consideration of income taxes). Unrealized losses on equity securities
are partially offset by unrealized gains on the Bank's bond portfolio.
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.
Investments in debt securities have declined approximately five million
dollars during 2003. Proceeds from maturing bonds have been held as
short-term investments in either federal funds sold or interest bearing bank
deposits. Opportunities for investments in the bond portfolio at favorable rates
have been limited due to falling rates and economic uncertainties. Shortly after
the end of the second quarter, management invested ten million dollars in
treasury and agency securities as yields on two to three year bonds increased
approximately 30 basis points over rates available at quarter end. The
philosophy of retaining liquidity and purchasing relatively short maturities
allows for greater flexibility in an environment of rapidly changing rates and
has served the Company well over the years.
Of the investments in securities available for sale, 13.2% 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,
2003, did not reveal any additional impairment to be recognized in excess of
that which was recognized in the fourth quarter of 2002.
Loan Portfolio
The Company operates in an agriculturally dominated area, 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.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Loan Portfolio (Continued)
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 March 2002, a mild strain of Avian Influenza (AI) was discovered in
the Shenandoah Valley. Several of the Bank's customers were affected by the
contamination. Their flocks were destroyed; poultry houses cleaned and allowed
to set idle for several weeks. All have since been returned to production.
Although the Bank does not anticipate any losses as a result of this outbreak of
AI, it was necessary, in some cases to extend additional operating funds and/or
modify payment terms in the short-term. 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.
The first six months of 2003 resulted in a decrease of $1,243,000 in loans
outstanding. Although the Bank has experienced a decline year to date in the
portfolio, the second quarter did result in a modest increase of $1,647,000. A
number of factors contributed to the change in the portfolio, including payoff
by the lead bank of participation loans totaling in excess of three million
dollars, referrals of loans to the secondary market origination office, a
generally sluggish economy and management's unwillingness to aggressively reduce
long-term interest rates to stimulate loan growth.
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 $2,866,000 at June 30, 2003
compared to $2,594,000 at December 31, 2002. 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, 2003, the Company held $119,000 of real estate that was
acquired through foreclosure. The property is currently under contract for sale
with closing scheduled during August 2003. No additional losses are anticipated
at this time.
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.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 June 30, 2003 is equal to
..78% of total loans. This compares to an allowance of $1,477,000 (.73%) at
December 31, 2002. Based on the previously mentioned evaluation of the loan
portfolio, coupled with slow loan growth, management anticipates that funding of
the allowance will be significantly less for the remainder of the year than for
the full year of 2002.
Although the allowance has increased as a percentage of loans
outstanding, it remains well below the peer group average of 1.38%. Management
feels this is appropriate based on its loan loss history and the composition of
its loan portfolio; the current allowance for loan losses is equal to
approximately nine years of average loan losses. Based on historical
losses, delinquency rates, collateral values of delinquent loans and a thorough
review of the loan portfolio, management is of the opinion that the allowance
for loan losses fairly states the estimated losses in the current portfolio.
Net charge offs during the first six months of 2003 were $44,000, compared
to $38,000 during the same period in 2002. In recent years the company has had
an average loss rate of .09% which is approximately one-third the loss rate of
its peer group.
Deposits and Long-Term Debt
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
$8,835,000 during the first half of 2003. Certificates of deposit decreased
$3,096,000 during this period. Demand deposits, interest and noninterest
bearing, increased a total of $5,739,000, compared to December 31, 2002.
Management believes this increase resulted from frequent advertising of its free
checking account and accounts gained from BB&T following its takeover of the
local F&M Bank Winchester branches.
Short-term debt consists entirely of 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. Balances have decreased
$1,526,000 since December 31, 2002. Although some of this decrease is a result
of declining rates and customers moving their funds to higher yielding account
types, much of the decrease is seasonal in nature and consistent with patterns
seen in prior years.
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 $3,097,000 in the first half of the year. Additional borrowings were not
necessary due to the overall liquidity position and lower loan demand.
As part of the approval process for the acquisition of new branches in
2001, F & M Bank Corp. was required to contribute $6 million into Farmers &
Merchants Bank as additional equity capital. The Company funded this
contribution in part by borrowing $4 million from SunTrust Bank. The loan is
amortized over a three year period with quarterly payments of $333,333, plus
interest. The loan is collateralized by marketable equity securities and carries
an interest rate of LIBOR + 1.10%. In September 2001, the Company entered into a
rate swap agreement with SunTrust Robinson Humphrey, which fixed the rate at
4.60% for the remaining term of the obligation. In September 2002, the Company
borrowed an additional $3 million from SunTrust Bank. This loan also carries an
interest rate of LIBOR + 1.10% and is variable. Payments of interest only will
be due quarterly for seven calendar quarters, followed by payments of $230,769
plus interest for a period of thirteen quarters. Proceeds of this loan were used
to provide an additional capital contribution to the Bank and to pay off an
intercompany loan.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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, 2003, the Company's total risk based capital
and tier 1 risk based capital ratios were 14.47% and 13.94%, 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 2003 over those in 2002.
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 have
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 liquidity position as of June 30, 2003 remains very strong. The
Bank historically has had a stable core deposit base and, therefore, does not
have to rely on volatile funding sources. Because of the stable core deposit
base, changes in interest rates should not have a significant effect on
liquidity. 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.
The Company monitors its interest rate sensitivity periodically and makes
adjustments as needed. There are no off balance sheet items that will impair
future liquidity. A summary of asset and liability repricing
opportunities is shown on page 18 as Table II.
As of June 30, 2003, the Company had a cumulative Gap Rate Sensitivity
Ratio of 4.14% for the one-year repricing period. This generally indicates that
net interest income would improve in an increasing or stable interest rate
environment as assets reprice more quickly than liabilities. In actual practice,
this may not be the case, as deposits customers may move funds into longer term,
higher rate time deposits as rates rise rather than maintaining the same general
maturity schedules as that which currently exists. Management constantly
monitors the Company's interest rate risk and has decided its current position
is acceptable for a well-capitalized community bank operating in a rural
environment.
16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Stock Repurchase
On April 20, 2000, the Company announced that the Board of Directors had
authorized the repurchase of up to 50,000 shares of the Company's outstanding
common stock. On June 12, 2003, the Board of Directors authorized the
repurchase of an additional 50,000 shares of the Company's outstanding common
stock Repurchases are authorized to be made by the Company from time to time in
the open market or through privately negotiated transactions as, in the opinion
of management, market conditions warrant. The repurchased shares are held as
unissued stock and are accounted for as retired stock. Through the end of the
second quarter of 2003, a total of 46,284 shares have been repurchased. Of this
amount, 5,000 shares have been repurchased in 2003.
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
(Dollar Amounts in Thousands)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $200,693 $ 7,154 7.19% $188,510 $7,255 7.76%
Federal funds sold 16,996 98 1.16% 5,707 47 1.66%
Bank deposits 7,633 90 2.38% 15,214 280 3.71%
Investments
Taxable 3 47,725 984 4.12% 40,919 1,029 5.07%
Partially taxable 2,3 8,981 273 6.08% 10,517 279 5.35%
------ ------ ------ ------ ----- -----
Total Earning Assets 282,028 8,599 6.15% 260,867 8,890 6.87%
-------- ----- ------ ------- ----- ------
Interest Expense
Demand deposits 34,246 114 .67% 31,177 156 1.01%
Savings 43,080 273 1.28% 38,167 367 1.94%
Time deposits 127,185 2,116 3.36% 115,825 2,628 4.58%
Short-term debt 7,628 27 .71% 8,802 56 1.28%
Long-term debt 30,372 664 4.41% 26,929 624 4.67%
------ ----- ---- ------ ----- ----
Total Interest Bearing
Liabilities 242,511 3,194 2.66% 220,900 3,831 3.50%
------- ------ ------ ------- ----- ------
Net Interest Income 1 $ 5,405 $ 5,059
======== =====
Net Yield on Interest
Earning Assets 1 3.86% 3.91%
===== ====
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.
17 (CONTINUED)
Table 1 (Continued)
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
Average Income/ Rates Average Income/ Rates
Balance Expense Balance Expense
Rate Related Income
Loans 1 $200,554 $ 3,550 7.08% $195,547 $ 3,722 7.63%
Federal funds sold 22,855 66 1.16% 3,609 15 1.67%
Bank deposits 8,392 42 2.00% 12,393 115 3.72%
Investments
Taxable 3 43,018 462 4.30% 44,311 530 4.80%
Partially
taxable 2,3 8,972 137 6.10% 10,286 149 5.81%
------ ------ ----- ------- ----- ------
Total Earning Assets 283,791 4,257 6.01% 266,146 4,531 6.83%
--------- ----- ------ ------ ----- -----
Interest Expense
Demand deposits 34,886 56 .64% 32,041 82 1.03%
Savings 43,772 131 1.20% 39,445 186 1.89%
Time deposits 127,246 1,042 3.28% 115,208 1,261 4.39%
Short-term debt 7,724 14 .73% 8,469 27 1.28%
Long-term debt 29,384 321 4.38% 28,913 337 4.67%
------ ----- ---- ------ ----- -----
Total Interest Bearing
Liabilities 243,012 1,564 2.58% 224,076 1,893 3.39%
------- ------- ------- ------ ----- ------
Net Interest Income 1 $ 2,693 $ 2,638
======== =====
Net Yield on Interest
Earning Assets 1 3.81% 3.98%
==== ====
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, 2003
(In Thousands of Dollars)
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
Uses of Funds
Loans:
Commercial $27,308 $ 4,067 $15,608 $ 1,328 $ $48,311
Installment 327 1,043 19,444 2,325 23,139
Real estate 10,956 16,753 67,032 33,149 127,890
Credit cards 1,397 1,397
Interest bearing 5,755 3,268 991 10,014
bank deposits
Federal Funds Sold 11,155 11,155
Investment securities 21,033 14,588 14,402 492 7,534 58,049
------ ------ ------ ------ ----- ------
Total 77,931 39,719 117,477 37,294 7,534 279,955
------ ------ ------- ------ ----- -------
Sources of Funds
Demand deposits 10,349 19,066 4,359 33,774
Savings deposits 8,896 26,687 8,895 44,478
Certificates of
deposit
$100,000 and over 3,363 8,314 11,113 22,790
Other certificates
of deposit 16,220 43,622 43,507 103,349
Short-term borrowings 6,782 6,782
Long-term debt 1,775 6,753 19,199 821 28,548
------ ------ ------ ------ ----- ------
Total 28,140 77,934 119,572 14,075 239,721
------ ------ ------- ------ ----- -------
Discrete Gap 49,791 (38,215) (2,095) 23,219 7,534
Cumulative Gap 49,791 11,576 9,481 32,700 40,234
Ratio of Cumulative Gap 17.79% 4.14% 3.35% 11.68% 14.37%
to Total Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 2003. 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
Not Applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as F & M Bank Corp. that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are required to include in those reports
certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws. These
disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports it files or submits under the Act, is communicated to
the issuer's management, including its principal executive officer or officers
and principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
We have established disclosure controls and procedures to ensure that
material information related to F & M Bank Corp. 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. 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 10, 2003,
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 "Against"
"For" by by
Proxy Proxy Abstain
Ellen R. Fitzwater 1,753,145 12,822 100
Lawrence H.
Hoover, Jr. 1,753,145 12,822 100
Richard S. Myers 1,853,145 12,822 100
Ronald E. Wampler 1,753,145 12,822 100
2) Appointment of S.B. Hoover & Co. LLP.
as independent accountants as
proposed in the proxy materials;
1,757,791 votes for, 100 votes
against, 8,176 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.
99.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (filed herewith).
99.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
99.3 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 filed Form 8-K on June 12, 2003, in reporting Item 5,
Other Events and required FD Disclosure.
21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
/s/ JULIAN D. FISHER
--------------------------------
Julian D. Fisher
President and Chief Executive Officer
/s/ NEIL W. HAYSLETT
--------------------------------
Neil W. Hayslett
Vice President and Chief Financial Officer
August 13, 2003