FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2003 Commission file number: 0-13273
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
P. O. Box 1111, Timberville, Virginia 22853
(Address of principal executive offices) (Zip Code)
(540) 896-8941
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements 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). Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The registrant's Common Stock is traded Over-the-Counter under the symbol
FMBM. The aggregate market value of the 2,144,857 shares of Common Stock of the
registrant issued and outstanding held by non-affiliates on June 30, 2003 was
approximately $41,610,226 based on the closing sales price of $19.40 per share
on that date. For purposes of this calculation, the term "affiliate" refers to
all directors and executive officers of the registrant.
As of the close of business on March 1, 2004, there were 2,418,678 shares of
the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held on May 8,
2004 (the "Proxy Statement").
2
F & M Bank Corp.
Index
Forward-Looking Statements 2
Form 10-K Cross Reference Sheet 3
F & M Bank Corp. 4
Report Format 4
Market for Registrant's Common Equity and Related Stockholder Matters 5
Selected Financial Data 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-23
Consolidated Financial Statements 24-27
Notes to Consolidated Financial Statements 28-45
Report of Independent Auditors 46
Other Material Required by Form 10-K 47-51
Description of Business
Properties
Exhibits, Financial Statements, and Reports on Form 8-K
Signatures
Forward-Looking Statements
F & M Bank Corp. makes forward-looking statements in the Management's Discussion
and Analysis of Financial Condition and Results of Operations and in other
portions of this Annual Report on Form 10-K that are subject to risks and
uncertainties. These forward-looking statements include: estimates of risks and
of future costs and benefits; assessments of probable loan losses and statements
of goals and expectations. These forward-looking statements are subject to
significant uncertainties because they are based upon management's estimates and
projections of future interest rates and other economic conditions; future laws
and regulations; and a variety of other matters. As a result of these
uncertainties, actual results may be materially different from the results
indicated by these forward-looking statements. In addition, the Company's past
results of operations do not necessarily indicate its future results.
3
F & M Bank Corp.
Form 10-K Cross Reference Sheet Material Incorporated by Reference
The following table shows the location in this Annual Report on Form 10-K or in
the Proxy Statement of the information, which requires disclosure in SEC Form
10-K. As indicated below, information has been incorporated by reference in the
Report from the Proxy Statement. Other portions of the Proxy Statement are not
included in this Report. This Report is not part of the Proxy Statement. Page
references are in this report unless indicated otherwise.
Item of Form 10-K Location
PART I
Item 1 Business "Forward-Looking Statements" on page 2,
"F&M Bank Corp." and "Report Format" on
page 4 and "Business on pages 47 to 48.
Item 2 Properties "Properties" on page 49.
Item 3 Legal Proceedings Note 17 "Litigation" on page 40.
Item 4 Submission of Matters to a No matters have been submitted to a vote
Vote of Security Holders of security holders during the fourth
quarter of 2003
PART II
Item 5 Market for Registrant's "Market for Registrant's Common Equity
Common Equity and Related and Related Stockholder Matters" on
Stockholder Matters Page 5
Item 6 Selected Financial Data "Selected Financial Data" on page 6.
Item 7 Management's Discussion and "Management's Discussion and Analysis of
Analysis of Financial Financial Condition and Results of
Condition and Results of Operations" on pages 7-23.
Operations
Item 7A Quantitative and "Forward-Looking Statements" on page 2
Qualitative Disclosures and "Market Risk Management" on page
about Market Risk 20-21.
Item 8 Financial Statements and Pages 24 to 45.
Supplementary Information
Item 9 Changes in and Disagreements There were no changes in or disagreements
with Accountants on Accounting with accountants on accounting and
and Financial Disclosure financial disclosure during the last two
fiscal years.
Item 9A Controls and Procedures "Other Material Required in Form 10-K"
on page 47 to 48.
4
PART I (CONTINUED)
Item of Form 10-K Location
PART III
Item 10 Directors and Executive The material labeled "Section 16(a)
Officers of the Registrant Beneficial Ownership Reporting
Compliance" and "Information
Concerning Directors and Nominees" in the
Proxy Statement is Incorporated in this
Report by reference.
Item 11 Executive Compensation The material labeled "Summary
Compensation" and "Salary Committee
Report on Executive Compensation" in
the Proxy Statement is incorporated in
this Report by reference.
Item 12 Security Ownership of The material labeled "Stock Ownership of
Certain Beneficial Owners Directors and Executive Officers" in the
and Management Proxy Statement is incorporated in this
Report by reference.
Item 13 Certain Relationships and The material labeled "Indebtedness and
Related Transactions Other Transactions" in the Proxy Statement
is incorporated in this Report by
reference.
Item 14 Principal Accounting Fees The information regarding fees and
and Services services of F & M Bank Corp.'s principal
independent accountant, S. B. Hoover &
Company, under the caption "Audit
Committee Disclosure - Fees Paid to
Auditors" and "Audit Committee Pre-Approval
Policy" contained in the 2004 Proxy
Statement is incorporated by reference
herein.
PART IV
Item 15 Exhibits, Financial "Exhibits, Financial Statements, and
Statement Schedules and Reports on Form 8-K" on page 50.
Reports on Form 8-K
Signatures "Signatures" on page 51.
F & M Bank Corp.
F & M Bank Corp. is the holding company for Farmers & Merchants Bank, the oldest
banking business native to Rockingham County, Virginia. Operating as an
independent community bank, Farmers & Merchants Bank was originally organized as
Farmers & Merchants Bank of Timberville in 1908. The bank provides a wide range
of financial services to individuals and businesses through eight offices
located in Rockingham and Shenandoah Counties.
Report Format
The format of this report was changed in 2001 in order to increase information
distributed to shareholders and to reduce expenses related to preparing and
distributing annual financial information. Prior to that time, F & M Bank Corp.
provided an annual report to shareholders along with the annual proxy materials,
and also prepared and filed a separate Annual Report on Form 10-K under the
rules of the United States Securities and Exchange Commission ("SEC"). Beginning
in 2001 and for subsequent years, we are distributing the Form 10-K report to
shareholders with the annual proxy materials for the annual meeting. This report
includes the entire Form 10-K, other than exhibits, as filed with the SEC.
Please see page 50 for information regarding how to obtain copies of exhibits
and additional copies of the Form 10-K.
The SEC has not approved or disapproved this Report or passed upon its accuracy
or adequacy.
5
Item 5
Market for Registrant's Common Equity and Related Stockholder Matters
Stock Listing
The Company's Common Stock trades under the symbol "FMBM" on the OTC Bulletin
Board. The bid and asked price of the Company's stock is not published in any
newspaper. Although several firms in both Harrisonburg and Richmond, Virginia
occasionally take positions in the Company stock, they typically only match
buyers and sellers.
Transfer Agent and Registrar
Farmers & Merchants Bank
205 South Main Street
P.O. Box 1111
Timberville, VA 22853
Recent Stock Prices and Dividends
Dividends to shareholders totaled $1,693,215 and $1,601,823 in 2003 and 2002,
respectively. Regular quarterly dividends have been declared for forty
consecutive quarters. Dividends per share increased 6.06% in 2003.
The ratio of dividends per share to net income per share was 42.17% in 2003,
compared to 45.72% in 2002. The decision as to timing, amount and payment of
dividends is at the discretion of the Company's Board of Directors. The payment
of dividends depends on the earnings of the Company and its subsidiaries, the
financial condition of the Company and other factors including capital adequacy,
regulatory requirements, general economic conditions and shareholder returns.
In April 2000, the Board of Directors approved a stock repurchase plan, which
allows the repurchase of up to 50,000 shares of its outstanding common stock. On
June 12, 2003, the Board authorized the repurchase of an additional 50,000
shares of the Company's outstanding common stock. Shares are repurchased either
through broker-arranged transactions or directly from the shareholder at the
discretion of management. The decision to purchase shares is based on factors
including market conditions for the stock and the availability of cash. Shares
repurchased through the end of 2003 total 54,484; of this amount, 13,200 shares
were repurchased in 2003.
The number of common shareholders of record was approximately 1,609 as of March
1, 2004. This amount includes all shareholders, whether titled individually or
held by a brokerage firm or custodian in street name.
Quarterly Stock Information
These quotes were obtained from Davenport & Company and include the terms of
trades transacted through a broker. The terms of exchanges occurring between
individual parties may not be known to the Company.
2003 2002
---- ----
Per Share Range Per Share Stock Price Range Per Share
Quarter Low High Dividend Low High Dividend
1st 18.65 19.50 .17 18.50 22.00 .16
2nd 19.20 19.60 .17 18.00 20.25 .16
3rd 19.00 22.30 .18 15.70 19.20 .17
4th 21.25 22.90 .18 17.20 19.20 .17
--- --
Total .70 .66
--- --
6
Item 6
Five Year Summary of Selected Financial Data
(Dollars in thousands, 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
except per share data)
Income Statement Data:
Interest and Dividend
Income $ 16,683 $ 17,846 $ 17,681 $ 15,509 $ 14,321
Interest Expense 6,010 7,390 9,494 7,411 6,475
--------- -------- -------- -------- --------
Net Interest Income 10,673 10,456 8,187 8,098 7,846
Provision for Loan
Losses 226 387 204 123 140
--------- -------- -------- -------- --------
Net Interest Income after
Provision for Loan
Losses 10,447 10,069 7,983 7,975 7,706
Noninterest Income 2,308 1,380 1,158 1,038 916
Securities Gains
(Losses) 179 (182) 1,252 770 1,179
Noninterest Expenses 7,256 6,448 5,728 4,653 4,313
--------- -------- -------- -------- --------
Income before
Income Taxes 5,678 4,819 4,665 5,130 5,488
Income Tax Expense 1,666 1,315 1,435 1,486 1,682
--------- -------- -------- -------- --------
Net Income $ 4,012 $ 3,504 $ 3,230 $ 3,644 $ 3,806
======== ======== ======== ======== ========
Per Share Data:
Net Income $ 1.66 $ 1.44 $ 1.33 $ 1.49 $ 1.55
Dividends Declared .70 .66 .63 .59 .52
Book Value 13.35 12.19 11.74 11.18 10.30
Balance Sheet Data:
Assets $ 309,126 $ 303,149 $ 272,673 $ 208,818 $ 195,338
Loans 211,231 201,980 176,625 152,035 140,318
Securities 61,230 69,602 63,987 45,323 44,422
Deposits 240,715 228,284 208,279 152,354 139,507
Long-Term Debt 24,784 32,312 20,983 16,386 18,548
Shareholders' Equity 32,319 29,541 28,597 27,198 25,286
Average Shares
Outstanding 2,418 2,429 2,431 2,446 2,454
Financial Ratios:
Return on Average Assets1 1.29% 1.21% 1.26% 1.76% 1.96%
Return on Average Equity1 13.13% 12.12% 11.47% 13.88% 15.47%
Net Interest Margin 3.82% 4.03% 3.52% 4.32% 4.52%
Efficiency Ratio 2 53.96% 51.28% 56.93% 50.93% 49.23%
Dividend Payout Ratio 42.17% 45.72% 47.45% 39.53% 33.55%
Capital and Credit Quality Ratios:
Average Equity to
Average Assets1 9.86% 9.98% 11.02% 12.70% 12.65%
Allowance for Loan
Losses to Loans .70% .73% .73% .73% .78%
Nonperforming Assets to
Total Assets .52% .86% .40% .52% .98%
Net Charge-offs to
Total Loans .10% .10% .06% .07% .16%
1 Ratios are primarily based on daily average balances.
2 The Efficiency Ratio equals noninterest expenses divided by the sum of tax
equivalent net interest income and noninterest income. Noninterest expenses
exclude intangible asset amortization. Noninterest income excludes gains
(losses) on securities transactions.
7
Item 7
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 8, Financial Statements
and Supplementary Information, of this Form 10-K.
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. The Company's financial
position and results of operations are affected by management's application of
accounting policies, including estimates, assumptions and judgments made to
arrive at the carrying value of assets and liabilities and amounts reported for
revenues, expenses and related disclosures. Different assumptions in the
application of these policies could result in material changes in the Company's
consolidated financial position and/or results of operations.
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.
Following is a summary of the Company's significant accounting policies that are
highly dependent on estimates, assumptions and judgments.
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.
The Company's allowance for loan losses is the accumulation of various
components that are calculated based on independent methodologies. All
components of the allowance represent an estimation performed pursuant to either
SFAS No. 5 or SFAS No. 114. Management's estimate of each SFAS No. 5 component
is based on certain observable data that management believes are most reflective
of the underlying credit losses being estimated. This evaluation includes credit
quality trends; collateral values; loan volumes; geographic, borrower and
industry concentrations; seasoning of the loan portfolio; the findings of
internal credit quality assessments and results from external bank regulatory
examinations. These factors, as well as historical losses and current economic
and business conditions, are used in developing estimated loss factors used in
the calculations.
Reserves for commercial loans are determined by applying estimated loss factors
to the portfolio based on management's evaluation and "risk grading" of the
commercial loan portfolio. Reserves are provided for noncommercial loan
categories using estimated loss factors applied to the total outstanding loan
balance of each loan category. Specific reserves are typically provided on all
impaired commercial loans in excess of a defined threshold that are classified
in the Special Mention, Substandard or Doubtful risk grades. The specific
reserves are determined on a loan-by-loan basis based on management's evaluation
the Company's exposure for each credit, given the current payment status of the
loan and the value of any underlying collateral.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Allowance for Loan Losses (Continued)
While management uses the best information available to establish the allowance
for loan and lease losses, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the valuations or, if required by regulators, based upon information available
to them at the time of their examinations. Such adjustments to original
estimates, as necessary, are made in the period in which these factors and other
relevant considerations indicate that loss levels may vary from previous
estimates.
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 was 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
are subject to 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.
The Company adopted SFAS No. 142 on January 1, 2002. Goodwill totaled $2,639,000
at January 1, 2002. The goodwill is not amortized but is tested for impairment
at least annually. Based on this testing, there were no impairment charges for
2003 or 2002. Application of the non-amortization provisions of the Statement
resulted in additional net income of $190,000 for the year ended December 31,
2003 and 2002.
Core deposit intangibles are amortized on a straight-line basis over a ten year
life. Core deposits, net of amortization, amounted to $1,978,000 and $2,254,000
at December 31, 2003 and 2002, respectively. The Company adopted SFAS 147 on
January 1, 2002 and determined that the core deposit intangible will continue to
be amortized over its 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
overall markets. Expectations are developed regarding potential returns from
dividend reinvestment and price appreciation over a reasonable holding period
(five years) and current carrying values are compared to these expected values.
Declines determined to be other than temporary are charged to operations and
included in the gain (loss) on security sales. Such charges were zero for 2003
and $503,000 for 2002.
Overview
The Company's net income for 2003 totaled $4,012,000 or $1.66 per share, up
15.3% or from $3,504,000 or $1.44 a share in 2002. Return on average equity
increased in 2003 to 13.13% from 12.12% in 2002, while the return on average
assets increased from 1.21% to 1.29%. The Company's operating earnings, which
are net earnings excluding gains (losses) on the sale of investments, redemption
of insurance contracts, and the non-cash amortization of acquisition
intangibles, were $3,973,000 in 2003 versus $3,785,000 in 2002, an increase of
4.97%. Core profitability improved as net interest income increased by 2.08% and
non-interest income, exclusive of securities transactions, was up 72.72%.
See page 6 for a five-year summary of selected financial data.
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Changes in Net Income per Common Share
2003 to 2002 2002 to 2001
------------ ------------
Prior Year Net Income Per Share $ 1.44 $ 1.33
Change from differences in:
Net interest income .09 .93
Provision for credit losses .07 (.08)
Noninterest income, excluding
securities gains .41 .09
Securities gains .15 (.59)
Noninterest expenses, excluding
intangibles amortization (.36) (.31)
Amortization of intangibles .00 .01
Income taxes (.15) .05
Other .01 .01
-------- --------
Total Change .22 .11
-------- --------
Net Income Per Share $ 1.66 $ 1.44
======== ========
Net Interest Income
The largest source of operating revenue for the Company is net interest income,
which is calculated as the difference between the interest earned on earning
assets and the interest expense paid on interest bearing liabilities. The net
interest margin is the net interest income expressed as a percentage of interest
earning assets. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, along with their yields and rates, have a
significant impact on the level of net interest income.
Net interest income for 2003 was $10,673,000 representing an increase of
$217,000 or 2.08% from 2002. A 27.71% increase in 2002 versus 2001 resulted in
total net interest income of $10,456,000. In this discussion and in the tabular
analysis of net interest income performance, entitled "Consolidated Average
Balances, Yields and Rates," (found on page 10), the interest earned on tax
exempt loans and investment securities has been adjusted to reflect the amount
that would have been earned had these investments been subject to normal income
taxation. This is referred to as tax equivalent net interest income.
The analysis on the next page reveals a significantly increasing net interest
margin in 2002 followed by a decline of the margin in 2003. The Federal Reserve
has continued its accommodative monetary stance throughout 2003. Factors
contributing to the declining margin in 2003 included a slow down in the rate of
growth in the loan portfolio, lower rates received on adjustable rate mortgages
that reached a rate adjustment date, securities maturing with proceeds being
reinvested at lower rates and an increase in low yielding, short-term federal
funds sold.
Although interest bearing liabilities continued to reprice at lower levels, the
rate of decline moderated during 2003, with the cost of funds dropping .76%
compared to a decline in the rate received on earning assets of .87%. Also
contributing to the decrease in the net interest margin is a shift in balance
sheet leverage as the percentage of longer-term, higher yielding assets (loans
and securities) declined in 2003 to 91.41% of total earning assets as compared
to 93.52% in 2002.
During 2002 the net interest margin increased as large amounts of time deposits
matured and repriced at much lower market rates. Also, management was able to
react to the changing market conditions and rapidly reduced rates paid on
non-maturing deposits (checking and savings). Loans also grew rapidly during the
first half of 2002, resulting in a reduction in lower yielding short-term
investments. Longer-term, higher yielding assets (loans and securities)
increased from 87.64% in 2001 to 93.52% of earning assets in 2002. In 2001, the
margin suffered as rate sensitive assets (adjustable rate loans and fed funds)
repriced more quickly than rate sensitive liabilities. Although assets have
continued to reprice at somewhat lower levels (down .72%), repricing
opportunities on deposits was much greater, resulting in a decline in the cost
of funds of 1.32%.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Average Balances, Yields and Rates1
2003 2002 2001
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Loans:2
Commercial $ 48,848 $ 3,020 6.18% $ 46,917 $ 3,201 6.82% $ 40,093 $ 3,297 8.22%
Real estate 129,083 8,943 6.93 121,999 9,248 7.58 101,858 8,486 8.33
Installment 24,663 2,218 8.99 27,114 2,465 9.09 24,487 2,426 10.09
-------- -------- ---- --------- ------ ----- -------- ------- -----
Total Loans 202,594 14,181 7.00 196,030 14,914 7.61 166,438 14,209 8.54
Investment securities:3
Fully taxable 47,908 1,765 3.68 43,347 2,083 4.84 31,264 1,910 6.11
Partially taxable 9,194 567 6.17 10,260 610 5.95 10,415 581 5.58
Tax exempt 160 7 4.38
--------- ------- ----- ------- ------ ----- -------- ------- -----
Total Investment
Securities 57,262 2,339 4.08 53,607 2,693 5.02 41,679 2,491 5.98
Interest bearing
deposits
in banks 8,378 178 2.12 10,319 438 4.24 9,140 405 4.43
Federal funds sold 16,043 169 1.05 6,992 109 1.56 20,212 759 3.75
-------- ------ ----- ------- ----- ----- --------- ------- -----
Total Earning
Assets 284,277 16,867 5.93 266,948 18,154 6.80 237,469 17,864 7.52
-------- --------- ------- ------- ------- ----- --------- ------- -----
Allowance for loan
losses (1,511) (1,400) (1,229)
Nonearning assets 27,055 24,147 19,427
------- -------- --------
Total Assets $ 309,821 $ 289,695 $ 255,667
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Interest
bearing $ 35,611 $ 214 .60 $ 32,094 $ 307 .96 $ 27,299 $ 436 1.60
Savings 44,547 488 1.10 39,624 710 1.79 32,063 873 2.72
Time deposits 125,430 4,018 3.20 116,699 4,898 4.20 113,035 6,385 5.65
-------- -------- ------- -------- ------ ----- -------- ------- -----
Total Deposits 205,588 4,720 2.30 188,417 5,915 3.14 172,397 7,694 4.46
Short-term debt 7,179 44 .61 8,497 104 1.22 9,127 312 3.42
Long-term debt 28,645 1,246 4.35 30,645 1,372 4.48 20,632 1,488 7.21
--------- ------- ------- -------- ------- ----- -------- ------- -----
Total Interest Bearing
Liabilities 241,412 6,010 2.49 227,559 7,391 3.25 202,156 9,494 4.69
-------- ----- ------- ----- ------- -----
Noninterest bearing
deposits 31,442 28,300 22,567
Other liabilities 6,408 4,932 2,779
-------- --------- -------
Total Liabilities 279,262 260,791 227,502
Stockholders' equity 30,559 28,904 28,165
-------- -------- --------
Total Liabilities
and Stockholders'
Equity $ 309,821 $ 289,695 $ 255,667
========= ======== ========
Net Interest Earnings $ 10,857 $ 10,763 $ 8,370
======= ======== ======
Net Yield on Interest
Earning Assets (NIM) 3.82% 4.03% 3.52%
====== ===== =====
1 Income and yields are presented on a tax-equivalent basis using the
applicable federal income tax rate.
2 Interest income on loans includes loan fees.
3 Average balance information is reflective of historical cost and has not been
adjusted for changes in market value.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table illustrates the effect of changes in volumes and rates.
2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Due to Change Increase Due to Change Increase
in Average: or in Average: or
Volume Rate (Decrease) Volume Rate (Decrease)
Interest income:
Loans $ 499 $ (1,232) $ (733) $ 2,527 $(1,822) $ 705
Investment securities:
Taxable 221 (539) (318) 738 (565) 173
Partially taxable (63) 20 (43) (9) 38 29
Tax exempt 7 7
Interest bearing
Deposits in banks (82) (178) (260) 52 (19) 33
Federal funds sold 141 (81) 60 (496) (154) (650)
------- --------- ------- -------- ------- --------
Total Interest Income 723 (2,010) (1,287) 2,812 (2,522) 290
------ ------- ------ ------- ------ -------
Interest expense:
Deposits:
Demand 34 (127) (93) 77 (206) (129)
Savings 88 (310) (222) 206 (369) (163)
Time deposits 367 (1,247) (880) 207 (1,694) (1,487)
Short-term debt (16) (44) (60) (22) (186) (208)
Long-term debt (90) (36) (126) 722 (838) (116)
-------- --------- -------- ------- ------- --------
Total Interest
Expense 383 (1,764) (1,381) 1,190 (3,293) (2,103)
------ -------- ------- ------- ------- --------
Net Interest
Income $ 340 $ (246) $ 94 $ 1,622 $ 771 $ 2,393
====== ======== ====== ======= ====== =======
Note: Volume changes have been determined by multiplying the prior years'
average rate by the change in average balances outstanding. The rate change is
the difference between the total change and the volume change.
Interest Income
Tax equivalent interest income decreased 7.09% or $1,287,000 in 2003, after
increasing 1.62% or $290,000 in 2002. Although 2003 earning assets increased
$17,329,000, the distribution of the increase and overall decline in portfolio
rates resulted in the decline in interest income. Approximately half of the
increase in earning assets for the year was in federal funds sold, which only
yielded 1.05% for the year. Overall, the yield on earning assets declined .87%,
from 6.80% to 5.83%. The combined two year decrease in yields on earning assets
now totals 1.59%.
Loan growth slowed during 2003, with average outstandings increasing only
$6,564,000 to $202,594,000. Factors contributing to the slowdown of loan growth
include an increase in long term mortgage loans going to the secondary market
due to rates at historically low levels and a greater competition for loans, at
much lower rates, as most banks within the region remained highly liquid
throughout much of 2003. During 2002, average loans outstanding had increased
$29,592,000 to $196,030,000 as all three major loan categories showed increases
with the greatest percentage increase shown in real estate loans which increased
19.77%.
Average total securities, yielding 4.08%, increased $3,655,000 during 2003.
Funding for this increase came from deposit growth and conversion of short-term
investments (interest bearing deposits in other banks). With rates at
historically low levels, the Bank continued to look for favorable yields on
investment securities primarily in the eighteen to thirty month maturity range.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Interest Expense
Interest expense decreased $1,381,000 or 18.68% during 2003, which followed a
22.15% decrease ($2,103,000) in 2002. The average cost of funds of 2.49%
declined .76% compared to 2002. Average interest bearing liabilities increased
$17,171,000 and $16,020,000 in 2003 and 2002, respectively. This increase may be
reflective of customers seeking safety during stock market volatility and
economic uncertainty. The Bank also enjoyed growth as a result of continued
consolidation among larger banks within its markets. Expense of time deposits
decreased $880,000 or 17.97% in 2003 due to market conditions. This followed a
decline of 23.29% or $1,487,000 in 2002. These decreases resulted as customer
accounts renewed at rates that were often 3.00% to 3.50% lower than rates paid
as recently as early 2001. Expense of long-term debt decreased $126,000 and
$116,000, respectively in 2003 and 2002. The 2003 decline was a function of
lower levels of debt as the rate declined only 13 basis points. The 2002 decline
was due to early prepayment penalties recognized in 2001 that were not repeated
in 2002. The Company did not obtain any additional long-term debt during 2003.
Noninterest Income
As a result of the current low interest rate environment placing downward
pressure on the net interest margin, noninterest income has become an
increasingly important factor in maintaining and growing profitability.
Management is conscious of the need to constantly review fee income and develop
additional sources of complementary revenue. The Bank continues to enjoy
increased revenue from its subsidiary Farmers & Merchants Financial Services
(FMFS). Gross revenue for FMFS increased $137,000 in 2003. This increase was a
combination of greater levels of commissions from its partnerships in Bankers
Title Shenandoah, LLC, Bankers Insurance, LLC and from sales of investment
products through UVEST Financial Services and BI Investments, LLC.
Exclusive of securities gains and losses, overall noninterest income increased
67.30% in 2003 and 19.21% in 2002. Investments in bank owned life insurance
(BOLI) on officers of the Company resulted in tax-free income of $238,000 in
2003, an increase of $107,000 over 2002. During 2003, the Bank invested an
additional $2,291,000 in BOLI, through a combination of cash purchases and a
tax-free exchange of existing split-dollar life insurance policies. The
conversion of the split-dollar policies resulted in non-recurring gains of
$164,000 which is included in other operating income.
In an effort to generate more fee income, the Bank opened a mortgage and
investments office in Harrisonburg, Virginia during December 2002. The office
employs three people, all of whom have previous experience in mortgage lending
or investments at other institutions in the Harrisonburg area. Mortgage
origination fees totaled $209,000, an increase of $184,000 over 2002. Income
from investment sales totaled $51,000 and is included in gross revenue of FMFS
as discussed above. In April 2003, the Bank began offering an overdraft
privilege program called "Bounce Protection." Total overdraft revenue, net of
refunds and demand deposit account chargeoffs, increased $222,000 for the year.
Securities transactions in 2003 resulted in gains of $179,000 after recognizing
a $100,000 write down on the Company's investment in BI Investments, LLC.
Although this investment is a minority interest, accounted for at cost,
management determined that the losses generated during 2003 were unlikely to be
recouped in the near future and recognized an impairment in the investment under
SFAS 115.
In 2002, the Company suffered its first year of net securities losses since
1991. Losses in 2002 totaled $182,430, and were the result of the Company
recognizing an impairment of several of its equity holdings. Based on current
market conditions, historical trends of the individual securities and trends
during previous increasing and declining markets, management determined that
several holdings met the definition of impairment. The impairments were based on
management's expectations of potential total returns from dividend reinvestment
and price appreciation over a reasonable holding period (five years). This
analysis resulted in a total write down of $503,000 affecting five equities held
by the Company. The Company reevaluated these investments during 2003 and
determined that there was no additional impairment.
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Noninterest Expense
Noninterest expenses increased from $6,448,000 in 2002 to $7,255,000 in 2003.
Salary and benefits increased 14.67% to $4,129,000 in 2003 and 13.67% in 2002
compared to 2001. The increase in salaries and benefits in 2003 included a full
year of salaries and benefits for the Harrisonburg mortgage and investment
office, increased staff in several branch offices, normal salary adjustments and
increases in insurance and pension expenses.
Occupancy and equipment expense increased $127,000 (18.45%) in 2003. This
includes a full year of expenses for the Harrisonburg office, additional
depreciation on the remodeled Elkton Office and depreciation on upgrades to
computer hardware and software.
Other operating expense increased $153,000 in 2003, following a $269,000
increase in 2002. Much of the increase was due to increases in audit and
examination fees and the bank franchise tax (which is a tax based on capital of
the Bank). Also increasing were data processing fees paid for computer software
and licensing and maintenance of new and existing programs. Increases in data
processing costs include expenses for website hosting, Bounce Protection, online
teller software, and internet banking.
Although noninterest expenses have increased substantially in both 2003 and
2002, they continue to be substantially less than peer group averages. Total
noninterest expense as a percentage of average assets totaled 2.34%, 2.22%, and
2.24% 2003, 2002, and 2001, respectively. Peer group averages are approximately
3.10% over the same time period.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic
trends, changes in the nature and value of the portfolio and industry standards.
Specific factors considered by management in determining the adequacy of the
level of the allowance for loan losses include internally generated loan review
reports, past due reports and historical loan loss experience. This review also
considers concentrations of loans in terms of geography, business type and level
of risk. Management evaluates nonperforming loans relative to their collateral
value and makes the appropriate adjustments to the allowance for loan losses
when needed. Based on the factors outlined above, the current year provision for
loan losses decreased from $387,000 in 2002 to $226,000 in 2003. Actual loan
charge-offs were $219,000 in 2003 and $199,000 in 2002. Loan losses as a
percentage of average loans totaled .10% in both 2003 and 2002, respectively.
Losses continue at less than one-half that of the Bank's peer group average,
which have ranged between .26% and .29% over the last three years.
Balance Sheet
Total assets increased 1.97% during the year to $309,126,000, an increase of
$5,977,000 from $303,149,000 in 2002. Earning assets increased 1.62% or
$4,555,000 to $286,499,000 at December 31, 2003. Interest bearing liabilities
declined $694,000 or .29%. The Company continues to utilize its assets well with
92.23% of year-end assets consisting of earning assets.
Investment Securities
Average balances in investment securities increased 6.82% in 2003 to
$57,262,000. This increase came from funds received through continued deposit
growth. The Company maintains a high level of earning assets as investment
securities to provide liquidity, as security for public deposits and to secure
repurchase agreements. Management strives to match the types and maturities of
securities owned to balance projected liquidity needs, interest rate sensitivity
and to maximize earnings through a portfolio bearing low credit risk.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Analysis of Securities
The composition of securities at December 31 was:
(Dollars in thousands) 2003 2002 2001
---- ---- ----
Available for Sale:1
U.S. Treasury and Agency $25,443 $38,475 $29,428
Municipal 373
Mortgage-backed2 8,989 5,069 7,922
Corporate bonds 10,845 11,338 10,402
Marketable equity securities 9,245 8,026 10,500
------ ------ ------
Total 54,895 62,908 58,252
Held to Maturity:
U.S. Treasury and Agency 110 110 111
Corporate bonds 763 1,767 1,772
------ ------ ------
Total 873 1,877 1,883
Other Equity Investments 5,461 4,817 3,852
------ ------ ------
Total Securities $61,229 $69,602 $63,987
====== ====== ======
1 At estimated fair value.
2 Issued by a U.S. Government Agency or secured by U.S. Government Agency
collateral.
Maturities and weighted average yields of debt securities at December 31, 2003
are presented in the table below. Amounts are shown by contractual maturity;
expected maturities will differ as issuers may have the right to call or prepay
obligations.
Years to Maturity
Less One to Over
(Dollars in thousands) than one Five Five
Amount Yield Amount Yield Amount Yield Total Yield
Debt Securities Available
for Sale:
U.S. Treasury,
Agency $ 7,040 4.47% $18,403 2.29% $ % $25,443 .89%
Municipal 249 2.90 124 3.40 373 3.07
Mortgage-backed 6,060 3.57 2,929 2.67 8,989 3.28
Corporate
bonds 3,054 7.13 7,278 3.77 513 7.18 10,845 4.88
------ ------ ------ ------
Total $10,094 5.27% $31,990 2.88% $ 3,566 3.34% $45,650 3.44%
------- ------- ------- -------
Debt Securities
Held to Maturity:
U.S. Treasury &
Agency $ 110 1.66% $ 110 1.66%
Corporate
bonds 763 6.15 763 6.15
------ ------
Total $ 873 5.88% $ n/a $ n/a $ 873 5.88%
------ ------ ------ ======
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Analysis of Loan Portfolio
The Company's loan portfolio totaled $211,231,000 at December 31, 2003 compared
with $201,980,000 at the beginning of the year. The Company's policy has been to
make conservative loans that are held for future interest income. Collateral
required by the Company is determined on an individual basis depending on the
purpose of the loan and the financial condition of the borrower. Commercial
loans, including agricultural and multi family loans, increased 17.59% during
2003 to $55,523,000. Real estate mortgages were virtually flat for the year,
increasing only $224,000, while construction loans increased $3,270,000 or
27.12%. Consumer installment loans were down significantly at $19,630,000, a
decrease of $3,074,000 that management believes to be attributable to aggressive
auto financing packages offered by the major auto manufacturers and installment
debt refinanced into mortgage loans as a result of increasing property values
and historically low mortgage rates. Credit card balances were decreased $14,000
to $1,463,000 but are a minor component of the loan portfolio.
The following table presents the changes in the loan portfolio over the previous
five years.
December 31
(Dollars in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Real estate -
mortgage $ 118,677 $ 118,453 $ 105,305 $ 92,464 $ 84,019
Real estate -
construction 15,329 12,059 5,521 4,372 5,481
Consumer installment 19,630 22,704 23,106 20,927 18,082
Commercial 45,011 35,769 28,552 25,628 22,880
Agricultural 10,512 10,966 11,835 6,656 8,392
Multi-family residential 477 484 869 703 414
Credit cards 1,463 1,477 1,348 1,249 1,016
Other 132 68 89 36 34
-------- -------- -------- -------- --------
Total Loans $ 211,231 $ 201,980 $ 176,625 $ 152,035 $ 140,318
-------- ======== ======== ======== ========
The following table shows the Company's loan maturity and interest rate
sensitivity as of December 31, 2003:
Less Than 1-5 Over
(Dollars in thousands) 1 Year Years 5 Years Total
------ ----- ------- -----
Commercial and
agricultural loans $33,611 $ 20,171 $ 2,218 $ 56,000
Real Estate - mortgage 18,294 71,187 29,196 118,677
Real Estate - construction 15,329 15,329
Consumer - installment/other 2,860 17,958 407 21,225
------ ------ ------ ------
Total $70,094 $109,316 $31,821 $211,231
====== ======= ====== =======
Loans with predetermined rates $ 4,358 $24,029 $20,277 $ 48,664
Loans with variable or
adjustable rates 65,736 85,287 11,544 162,567
------ ------ ------ -------
Total $70,094 $109,316 $31,821 $211,231
====== ======= ====== =======
Residential real estate loans are generally made for a period not to exceed 25
years and are secured by a first deed of trust which normally does not exceed
90% of the appraised value. If the loan to value ratio exceeds 90%, the Company
requires additional collateral, guarantees or mortgage insurance. On
approximately 80% of the real estate loans, interest is adjustable after each
three or five year period. Fixed rate loans are generally made for a
fifteen-year or a twenty-year period with an interest rate adjustment after ten
years.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Since 1992, fixed rate real estate loans have been funded with fixed rate
borrowings from the Federal Home Loan Bank, which allows the Company to control
its interest rate risk. In addition, the Company makes home equity loans secured
by second deeds of trust with total indebtedness not to exceed 90% of the
appraised value. Home equity loans are made for three, five or seven year
periods at a fixed rate or as a revolving line of credit.
The majority of commercial loans are made to small retail, manufacturing and
service businesses. Consumer loans are made for a variety of reasons, however,
approximately 60% of the loans are secured by automobiles and trucks.
The Company's market area has a stable economy which tends to be less cyclical
than the national economy. Major industries in the market area include
agricultural production and processing, higher education, retail sales, services
and light manufacturing. The agricultural production and processing industry is
a major contributor to the local economy and its performance and growth tend to
be cyclical in nature, however, this cyclical nature is offset by other stable
industries in the trade area. In addition to direct agricultural loans, a large
percentage of residential real estate loans and consumer installment loans are
made to borrowers whose income is derived from the agricultural sector of the
economy. A large percentage of the agricultural loans are made to poultry
growers.
During recent years, real estate values in the Company's market area for
commercial, agricultural and residential property increased, on the average,
between 5% and 8% annually depending on the location and type of property.
Approximately 80% of the Company's loans are secured by real estate, however,
policies relating to appraisals and loan to value ratios are adequate to control
the related risk. Unemployment rates in the Company's market area continue to be
below both the national and state averages.
Nonaccrual and Past Due Loans
The following table shows loans placed in a nonaccrual status and loans
contractually past due 90 days or more as to principal or interest payments.
December 31,
(Dollars in thousands) 2003 2002 2001 2000 1999
Nonaccruing loans None None None $ 664 None
Loans past due 90
Days or more $1,614 $2,594 $1,096 $ 421 $1,917
Percentage of total
loans .76% 1.28% .62% .71% 1.37%
Interest accruals are continued on past due, secured loans until the principal
and accrued interest equal the value of the collateral and on unsecured loans
until the financial condition of the borrower deteriorates to the point that any
further accrued interest would be determined to be uncollectible. At December
31, 2003, 2002, and 2001, there were no restructured loans on which interest was
accruing at a reduced rate or on which payments had been extended.
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources. Nor do they represent material credits about
which management is aware of any information which causes it to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. As of December 31, 2003, management is not aware of any potential problem
loans which are not already classified for regulatory purposes or on the watch
list as part of the Bank's internal grading system.
Loan Concentrations
At December 31, 2003, no industry category exceeded ten percent of total loans.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Loan Losses and the 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 SFAS No. 5.
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 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
allowance has been established to reflect other unidentified losses within the
portfolio. The unallocated allowance mitigates the increased risk of loss
associated with fluctuations in past due trends, changes in the local and
national economies, and other unusual events. The Board approves the loan loss
provision for the following quarter based on this evaluation and an effort is
made to keep the actual allowance at or above the midpoint of the range
established by the evaluation process.
The allowance for loan losses of $1,484,000 at December 30, 2003 is equal to
..70% of total loans. This compares to an allowance of $1,477,000 (.73%) at
December 31, 2002. The overall level of the allowance remains well below the
peer group average of 1.35%. Management feels this is appropriate based on its
loan loss history and the composition of its loan portfolio; the current
allowance for loan losses is equal to approximately seven years of average loan
losses. Based on historical losses, delinquency rates, collateral values of
delinquent loans and a thorough review of the loan portfolio, management is of
the opinion that the allowance for loan losses fairly states the estimated
losses in the current portfolio.
Loan losses, net of recoveries, totaled $219,000 in 2003 which is equivalent to
..10% of total loans outstanding. Over the preceding five years, the Company has
had an average loss rate of .10% which is approximately forty percent of the
loss rate of its peer group.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
A summary of the activity in the allowance for loan losses follows:
(Dollars in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance at beginning of period $1,477 $1,289 $1,108 $1,090 $1,162
Provision charged to expenses 226 387 204 123 140
Other adjustments 84
Loan losses:
Commercial 76 20 22 21 107
Installment 219 249 138 125 150
Real estate 31 2 2
----- ----- ----- ----- -----
Total loan losses 295 300 160 148 259
----- ----- ----- ----- -----
Recoveries:
Commercial 11 28 3 3 5
Installment 65 73 49 39 40
Real estate 1 1 2
----- ----- ----- ----- -----
Total recoveries 76 101 53 43 47
----- ----- ----- ----- -----
Net loan losses 219 199 107 105 212
----- ----- ----- ----- -----
Balance at end of period $1,484 $1,477 $1,289 $1,108 $1,090
===== ===== ===== ===== =====
Allowance for loan losses as a
percentage of loans .70% .73% .73% .73% .78%
Net loan losses to loans
outstanding .10% .10% .06% .07% .16%
The Company has allocated the allowance according to the amounts deemed to be
reasonably necessary to provide for the possibility of losses occurring within
each of the above categories of loans. The allocation of the allowance as shown
below should not be interpreted as an indication that loan losses in future
years will occur in the same proportions or that the allocation indicates future
loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
The following table shows the allocation of the allowance by loan type and the
related outstanding loan balances to total loans.
(Dollars in thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial $ 475 26% $ 443 23% $ 451 23% $ 332 25% $ 327 26%
Real estate 297 64% 369 65% 323 63% 277 61% 327 60%
Installment 638 10% 591 12% 451 14% 333 14% 273 14%
Unallocated 74 74 64 166 163
----- --- ----- --- ----- --- ----- --- ----- ---
Total $1,484 100% $1,477 100% $1,289 100% $1,108 100% $1,090 100%
===== === ===== === ===== === ===== === ===== ===
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2003 of 5.45%. The Bank
experienced an increase in all account types with the exception of certificates
of deposit. Rates of interest declined throughout all of 2003 and, with the
exception of advertising a free checking account, the Bank did not have any
special promotions to generate deposit growth. Management believes that economic
uncertainty, the volatility of the stock market and continued consolidation of
larger banks contributed to the growth in deposits in 2003.
The Bank has traditionally avoided brokered and large deposits believing that
they were unstable and, thus not desirable. This has proven to be a good
strategy as the local deposit base is very stable and small increases in rates
above the competition have usually resulted in deposit gains in past years.
Beginning in 2001 the Bank has, on occasion, accepted certificates of deposit
from other financial institutions at below market rates of interest. Typically
this has been done to meet loan demand or if liquidity was sufficient, the Bank
has reinvested these deposits in certificates of deposit at other institutions
which were offering above market rates. Certificates of deposit over $100,000
totaled $21,138,000 at December 31, 2003. The maturity distribution of these
certificates is as follows:
(Dollars in thousands) 2003 2002
---------------------- ---- ----
Less than 3 months $ 3,206 $ 2,427
3 to 12 months 7,250 8,573
1 year to 5 years 10,682 7,955
-------- -------
Total $ 21,138 $ 18,955
======== ========
Non-deposit borrowings include repurchase agreements, federal funds purchased
and long-term debt obtained through the Federal Home Loan Bank and SunTrust
Bank. Repurchase agreements continue to be an important source of funding and
provide commercial customers the opportunity to earn market rates of interest on
funds that are secured by specific securities owned by the Bank.
Borrowings from the Federal Home Loan Bank are used to support the Bank's
mortgage lending program and allow the Bank to offer longer-term mortgages. The
Bank did not borrow any additional funds from the FHLB during 2003. Quarterly
installment payments on FHLB debt totaled $6,194,000 for the year. These loans
carry an average rate of 4.68% at December 31, 2003.
Stockholder's Equity
Total stockholders' equity increased $2,778,000 or 9.40% in 2003. Earnings
retained from operations were the primary source of the increase. As of December
31, 2003, book value per share was $13.35 compared to $12.19 as of December 31,
2002. Dividends are paid to stockholders on a quarterly basis in uniform amounts
unless unexpected fluctuations in net income indicate a change to this policy is
needed.
Banking regulators have established a uniform system to address the adequacy of
capital for financial institutions. The rules require minimum capital levels
based on risk-adjusted assets. Simply stated, the riskier an entity's
investments, the more capital it is required to maintain. The Bank, as well as
the Company, is required to maintain these minimum capital levels. The two types
of capital guidelines are Tier I capital (referred to as core capital) and Tier
II capital (referred to as supplementary capital). At December 31, 2003, the
Company had Tier I capital of 13.97% of risk weighted assets and combined Tier I
and II capital of 14.72% of risk weighted assets. Regulatory minimums at this
date were 4% and 8%, respectively. The Bank has maintained capital levels far
above the minimum requirements throughout the year. In the unlikely event that
such capital levels are not met, regulatory agencies are empowered to require
the Company to raise additional capital and/or reallocate present capital.
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Stockholder's Equity (Continued)
In addition, the regulatory agencies have issued guidelines requiring the
maintenance of a capital leverage ratio. The leverage ratio is computed by
dividing Tier I capital by actual total assets. The regulators have established
a minimum of 3% for this ratio, but can increase the minimum requirement based
upon an institution's overall financial condition. At December 31, 2003, the
Company reported a leverage ratio of 9.00%. The Bank's leverage ratio was also
substantially above the minimum.
ITEM 7A
Quantitative and Qualitative Disclosures about Market Risk
Most of the Company's net income is dependent on the Bank's net interest income.
As the rapid change in short-term interest rates demonstrated in 2001, net
interest income is subject to interest rate risk to the extent that imbalances
exist between the maturities or repricing of interest bearing liabilities and
interest earning assets. In 2001 for example, interest-earning assets repriced
much more quickly than interest bearing liabilities; this resulted in a decrease
in the net interest margin compared to 2000. During 2002, the net interest
margin increased as the interest bearing liabilities matured and repriced at
significantly lower levels. During 2003 this trend again reversed, as longer
term assets (principally mortgage loans and securities) matured or repriced at
rates that were substantially lower, while most interest bearing liabilities had
already repriced at lower rates in either 2001 or 2002. Net interest income is
also affected by changes in the mix of funding that supports earning assets. For
example, higher levels of non-interest bearing demand deposits and leveraging
earning assets by funding with stockholder's equity would result in greater
levels of net interest income than if most of the earning assets were funded
with higher cost interest-bearing liabilities, such as certificates of deposit.
Liquidity as of December 31, 2003 is 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. During 2003, the Bank
used, maturing investments, and deposit growth to meet its liquidity needs. The
Bank's membership in the Federal Home Loan Bank has historically provided
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 the
long-term receivables and liabilities helps the Bank reduce its sensitivity to
interest rate changes. The Company reviews its interest rate gap periodically
and makes adjustments as needed. There are no off balance sheet items that will
impair future liquidity.
The following table depicts the Company's interest rate sensitivity, as measured
by the repricing of its interest sensitive assets and liabilities as of December
31, 2003. As the notes to the table indicate, the data was based in part on
assumptions as to when certain assets or liabilities would mature or reprice.
The analysis indicates a liability sensitive one-year cumulative GAP position of
1.61% of total earning assets. Approximately 35% of rate sensitive assets and
43% of rate sensitive liabilities are subject to repricing within one year. The
one-year cumulative GAP narrowed during 2003, as the Bank held more short-term
liquid assets. With rates remaining at historically low rates throughout 2003,
the Investment Committee and management choose to not reinvest bond maturities,
loan repayments and cash in longer-term investments. Management believes that
remaining liquid and keeping investments short-term in nature will allow it to
achieve greater earnings in the future when rates rise to higher levels.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following GAP analysis shows the time frames from December 31, 2003, in
which the Company's assets and liabilities are subject to repricing:
1-90 91-365 1-5 Over 5 Not Total
(Dollars in thousands) Days Days Years Years Classified
Rate Sensitive Assets:
Loans $44,065 $ 26,029 $109,316 $ 31,821 $ $211,231
Investments
securities 8,665 7,208 30,012 125 9,758 55,768
Federal Funds Sold 5,035 5,035
Interest bearing
bank deposits 3,655 4,457 891 9,003
------ ------- ------ ------- ------ -------
Total 61,420 37,694 140,219 31,946 9,758 281,037
Rate Sensitive Liabilities:
Interest bearing
demand deposits 11,501 21,416 4,958 37,875
Savings 9,509 28,527 9,509 47,545
Certificates of
deposit $100,000
and over 3,206 7,250 10,682 21,138
Other certificates
of deposit 20,343 37,114 43,576 101,033
------ ------- ------ ------- ------ -------
Total Deposits 23,549 65,374 104,201 14,467 207,591
Short-term debt 6,389 6,389
Long-term debt 2,774 5,548 16,085 377 24,784
------ ------- ------ ------- ------ -------
Total 32,712 70,922 120,286 14,844 238,764
Discrete Gap 28,708 (33,228) 19,933 17,102 9,758 42,273
Cumulative Gap 28,708 (4,520) 15,413 32,515 42,273
As a % of Earning
Assets 10.22% (1.61%) 5.48% 11.56% 15.04%
* In preparing the above table, no assumptions are made with respect to loan
prepayments or deposit run off. 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 on deposits which have no stated maturity dates were derived from
guidance contained in FDICIA 305.
Recent Accounting Pronouncements
In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 amends previous interpretive guidance on the
application of the purchase method of accounting to acquisitions of
financial institutions, and requires the application of SFAS No. 141, Business
Combinations, and SFAS No. 142 to branch acquisitions if such transactions
meet the definition of a business combination. The provisions of SFAS No. 147
do not apply to transactions between two or more mutual enterprises. In
addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets, to include in its scope core deposit intangibles of
financial institutions. Accordingly, such intangibles are subject to a
recoverability test based on undiscounted cash flows, and to the impairment
recognition and measurement provisions required for other long-lived assets
held and used.
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). The Interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The recognition
requirements of the Interpretation were effective beginning January 1, 2003. The
initial adoption of the Interpretation did not have an affect on the Company,
and management has determined that the recognition requirements of this
Interpretation have had little impact on either the Company's consolidated
financial position or consolidated results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation provides guidance
with respect to the identification of variable interest entities and when the
assets, liabilities, noncontrolling interests, and results of operations of a
variable interest entity need to be included in a company's consolidated
financial statements. The Interpretation requires consolidation by business
enterprises of variable interest entities in cases where (a) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
which is provided through other interests that will absorb some or all of the
expected losses of the entity, or (b) in cases where the equity investors lack
one or more of the essential characteristics of a controlling financial
interest, which include the ability to make decisions about the entity's
activities through voting rights, the obligations to absorb the expected losses
of the entity if they occur, or the right to receive the expected residual
returns of the entity if they occur. Management has evaluated the Company's
investments in variable interest entities and potential variable interest
entities or transactions, particularly in limited liability partnerships
involved in low-income housing development. The implementation of FIN 46 did not
have a significant impact on either the Company's consolidated financial
position or consolidated results of operations. Interpretive guidance relating
to FIN 46 is continuing to evolve and the Company's management will continue to
assess various aspects of consolidations and variable interest entity accounting
as additional guidance becomes available.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Statement is effective for contracts entered into or
modified after June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003. It is not expected to have an
impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and was effective at
the beginning of the first interim period beginning after June 15, 2003.
Adoption of the Statement did not result in an impact on the Company's
consolidated financial statements.
In November 2003, the FASB's Emerging Issues Task Force reached a consensus on a
new disclosure requirement related to unrealized losses on investment
securities. The new disclosure requires a table of securities which have
unrealized losses as of the reporting date. The table must distinguish between
those securities which have been in a continuous unrealized loss position for
twelve months or more and those securities which have been in a continuous
unrealized loss position for less than twelve months. The table is to include
the aggregate unrealized losses of securities whose fair values are below book
values as of the reporting date, and the aggregate fair value of securities
whose fair values are below book values as of the reporting date. In addition to
the quantitative disclosure, FASB requires a narrative discussion that provides
sufficient information to allow financial statement users to understand the
quantitative disclosures and the information that was considered in determining
whether impairment was not other-than-temporary. The new disclosure requirements
apply to fiscal years ending after December 15, 2003. The Company has included
the required disclosures in their consolidated financial statements.
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quarterly Results
The table below lists the Company's quarterly performance for the years ended
December 31, 2003 and 2002:
2003
Dollars in thousands Fourth Third Second First Total
------ ----- ------ ----- -----
Interest Income $4,078 $4,103 $4,202 $4,300 $16,683
Interest Expense 1,361 1,455 1,564 1,630 6,010
----- ----- ----- ----- -----
Net Interest Income 2,717 2,648 2,638 2,670 10,673
Provision for Loan Losses 62 31 61 72 226
----- ----- ----- ----- -----
Net Interest Income
after Provision
For Loan Losses 2,655 2,617 2,577 2,598 10,447
Non-Interest Income 509 643 993 341 2,486
Non-Interest Expense 1,855 1,846 1,822 1,732 7,255
----- ----- ----- ----- -----
Income before taxes 1,309 1,414 1,748 1,207 5,678
Income Tax Expense 418 369 525 354 1,666
----- ----- ----- ----- -----
Net Income $ 891 $1,045 $1,223 $ 853 $4,012
===== ===== ===== ===== =====
Net Income Per Share $ .37 $ .43 $ .50 $ .36 $ 1.66
2002
Fourth Third Second First Total
Interest Income $4,538 $4,499 $4,490 $4,319 $17,846
Interest Expense 1,756 1,803 1,893 1,938 7,390
----- ----- ----- ----- -----
Net Interest Income 2,782 2,696 2,597 2,381 10,456
Provision for Loan Losses 106 107 107 67 387
----- ----- ----- ----- -----
Net Interest Income
after Provision
For Loan Losses 2,676 2,589 2,490 2,314 10,069
Non-Interest Income (341) 386 755 398 1,198
Non-Interest Expense 1,729 1,564 1,573 1,582 6,448
----- ----- ----- ----- -----
Income Before Taxes 606 1,411 1,672 1,130 4,819
Income Tax Expense 60 403 511 341 1,315
----- ----- ----- ----- -----
Net Income $ 546 $1,008 $1,161 $ 789 $3,504
===== ===== ===== ===== =====
Net Income Per Share $ .22 $ .42 $ .48 $ .32 $ 1.44
The fourth quarter results in 2003 include a $100,000 pre-tax charge on the
Company's investment in BI Investments, LLC, while the fourth quarter results in
2002 include a $503,000 pre-tax loss on securities that management determined
were impaired.
24
Item 8
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS 2003 2002
---- ----
Cash and due from banks (notes 3 and 13) $ 5,665,110 $ 6,017,446
Interest bearing deposits (note 13) 9,002,742 5,886,439
Federal funds sold 5,035,000 4,476,000
Securities -
Held to maturity - fair value of $897,865
in 2003 and $1,905,012 in 2002 (note 4) 872,978 1,877,258
Available for sale (note 4) 54,895,520 62,908,016
Other investments (note 4) 5,461,316 4,816,386
Loans (notes 5, 10 and 13) 211,231,092 201,979,842
Less allowance for loan losses (note 6) (1,483,667) (1,477,007)
------------ ------------
Net Loans 209,747,425 200,502,835
Bank premises and equipment, net (note 7) 5,001,293 4,485,813
Other real estate 719,268
Interest receivable 1,496,232 1,655,122
Core deposit intangible (note 20) 1,977,583 2,253,525
Goodwill (note 20) 2,638,677 2,638,677
Bank owned life insurance (note 21) 4,831,667 2,302,655
Other assets 2,500,917 2,609,469
------------ -----------
Total Assets 309,126,460 $303,148,909
============ ===========
LIABILITIES
Deposits:
Noninterest bearing 33,123,978 $ 29,445,922
Interest bearing:
Demand 24,788,355 22,464,540
Money market accounts 13,086,303 11,669,676
Savings 47,545,499 41,661,219
Time deposits over $100,000 (note 8) 21,138,463 18,955,379
All other time deposits (note 8) 101,032,742 104,087,160
------------ -----------
Total Deposits 240,715,340 228,283,896
------------ ------------
Short-term debt (note 9) 6,388,958 8,308,382
Accrued liabilities 4,918,788 4,703,427
Long-term debt (note 10) 24,784,207 32,312,024
------------ -----------
Total Liabilities 276,807,293 273,607,729
------------ -----------
STOCKHOLDERS' EQUITY (NOTE 19)
Common stock $5 par value, 3,000,000
shares authorized, 2,420,478 and 2,423,678
shares issued and outstanding, for 2003
and 2002, respectively 12,102,390 12,118,390
Capital surplus 286,330 302,795
Retained earnings (note 16) 19,709,562 17,390,478
Accumulated other comprehensive income (loss) 220,885 (270,483)
------------ ------------
Total Stockholders' Equity 32,319,167 29,541,180
------------ -----------
Total Liabilities and Stockholders' Equity $309,126,460 $303,148,909
=========== ===========
The accompanying notes are an integral part of this statement.
25
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2003 2002 2001
------------------------- --------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans 14,121,937 $14,846,527 $14,162,330
Interest on deposits and federal
funds sold 346,951 438,330 1,163,750
Interest on debt securities 1,715,328 2,004,119 1,837,897
Dividends on equity securities 498,546 557,470 517,435
---------- --------- ---------
Total Interest and Dividend Income 16,682,762 17,846,446 17,681,412
---------- ---------- ----------
INTEREST EXPENSE:
Interest on demand deposits 213,803 306,730 435,919
Interest on savings deposits 488,347 710,489 873,462
Interest on time deposits over $100,000 757,204 657,069 723,697
Interest on all other time deposits 3,260,349 4,240,390 5,661,394
---------- --------- ---------
Total interest on deposits 4,719,703 5,914,678 7,694,472
Interest on short-term debt 44,377 103,951 311,240
Interest on long-term debt 1,245,531 1,371,774 1,488,569
---------- --------- ---------
Total Interest Expense 6,009,611 7,390,403 9,494,281
---------- --------- ---------
NET INTEREST INCOME 10,673,151 10,456,043 8,187,131
---------- ---------- ---------
PROVISION FOR LOAN LOSSES (note 6) 226,000 387,000 204,000
---------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,447,151 10,069,043 7,983,131
---------- ---------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 904,946 716,590 674,366
Insurance and other commissions 280,156 209,579 141,116
Other operating income 884,806 323,056 341,969
Income on bank owned life insurance 238,369 130,531
Gain (loss) on security transactions
(note 4) 178,618 (182,430) 1,252,500
---------- ---------- ---------
Total Noninterest Income 2,486,895 1,197,326 2,409,951
---------- --------- ---------
NONINTEREST EXPENSES:
Salaries 3,075,762 2,853,483 2,473,605
Employee benefits (note 12) 1,053,032 747,074 693,933
Occupancy expense 406,816 337,038 324,092
Equipment expense 407,636 350,701 317,597
Amortization of intangibles
(notes 2 and 20) 275,942 275,942 304,008
Other operating expenses 2,036,235 1,883,657 1,614,519
---------- --------- ---------
Total Noninterest Expenses 7,255,423 6,447,895 5,727,754
---------- --------- ---------
Income before Income Taxes 5,678,623 4,818,474 4,665,328
INCOME TAX EXPENSE (note 11) 1,666,324 1,314,579 1,434,798
---------- --------- ---------
NET INCOME $4,012,299 $3,503,895 $3,230,530
========== ========== ==========
PER SHARE DATA
NET INCOME $ 1.66 $ 1.44 $ 1.33
========== ========= =========
CASH DIVIDENDS .70 $ .66 $ .63
========== ========= =========
AVERAGE COMMON SHARES OUTSTANDING 2,417,807 2,428,722 2,430,993
========== ========= =========
The accompanying notes are an integral part of this statement.
26
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
BALANCE - December 31,
2000 $12,166,865 $ 479,468 $13,790,628 $ 761,269 $27,198,230
Comprehensive Income:
Net income 3,230,530 3,230,530
Net change in other
comprehensive income
(note 2) (370,306) (370,306)
----------
Comprehensive Income 2,860,224
Dividends on common stock (1,532,752) (1,532,752)
Stock sold to ESOP
(9,000 shares) 45,000 110,250 155,250
Stock repurchased
(3,810 shares) (19,050) (64,703) (83,753)
----------- --------- ---------- --------- -----------
BALANCE - December 31,
2001 12,192,815 525,015 15,488,406 390,963 28,597,199
Comprehensive Income:
Net income 3,503,895 3,503,895
Net change in other
comprehensive income
(note 2) (661,446) (661,446)
----------
Comprehensive Income 2,842,449
Dividends on common stock (1,601,823) (1,601,823)
Stock repurchased
(14,885 shares) (74,425) (222,220) (296,645)
------------ ---------- ---------- -------- ----------
BALANCE - December 31,
2002 $ 12,118,390 $ 302,795 $ 17,390,478 $(270,483) $29,541,180
Comprehensive Income:
Net income 4,012,299 4,012,299
Net change in other
comprehensive income
(Note 2) 491,368 491,368
-----------
Comprehensive Income 4,503,667
Tax benefit of ESOP
dividends 23,969 23,969
Dividends on common
stock (1,693,215) (1,693,215)
Stock sold to ESOP
(10,000 shares) 50,000 158,000 208,000
Stock repurchased
(13,200 shares) (66,000) (198,434) (264,434)
----------- --------- ---------- -------- -----------
BALANCE - December 31,
2003 $ 12,102,390 $ 286,330 $19,709,562 $ 220,885 $32,319,167
=========== ========= ========== ========= =========
The accompanying notes are an integral part of this statement.
27
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2003 2002 2001
--------------------------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,012,299 $ 3,503,895 $ 3,230,530
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Gain) loss on sale of
securities (178,618) 182,430 (1,252,500)
Depreciation 429,717 347,867 308,152
Amortization of security premiums 312,301 125,412 40,266
Provision for loan losses 226,000 387,000 204,000
Provision for deferred taxes 210,305 (240,106) (43,982)
(Increase) decrease in interest
receivable 158,890 (113,581) (60,509)
(Increase) decrease in other assets (610,505) (178,301) 51,166
Increase in accrued expenses 69,197 757,679 84,173
Amortization of limited partnership
investments 262,227 255,850 218,804
Amortization of intangibles 275,942 275,942 304,008
Income from life insurance
investment (238,369) (130,531)
(Gain) loss on sale of other
real estate (94,754) 22,161 (21,484)
----------- --------- ---------
Net Cash Provided by Operating
Activities 4,834,632 5,195,717 3,062,624
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in interest
bearing bank deposits (3,116,303) 8,312,403 (13,886,318)
Net (increase) decrease in federal
funds sold (559,000) (4,476,000) 909,000
Proceeds from maturities of securities
held to maturity 1,000,000 20,100,747
Proceeds from maturities of securities
Available or sale 54,755,131 25,794,446 40,828,490
Proceeds from sales of securities
Available for sale 2,480,338 5,062,045 3,051,910
Purchases of securities held to
maturity (19,990,333)
Purchases of securities available
for sale (49,557,386) (37,983,540) (62,216,028)
Net increase in loans (9,470,590) (25,748,188) (24,955,943)
Purchase of life insurance (1,870,528) (2,172,124)
Purchase of property and equipment (729,048) (330,302) (1,072,265)
Purchase of other real estate (243,204)
Construction in progress payments (91,850)
Purchase of intangible assets (5,472,152)
Sale of other real estate 597,873 263,970 138,774
----------- ----------- -----------
Net Cash Used in Investing Activities (6,469,513) (31,612,344) (62,564,118)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand and savings
deposits 13,315,434 14,978,546 24,893,136
Net increase (decrease) in time
deposits (871,334) 5,026,575 31,031,240
Net change in short-term debt (1,932,080) (2,387,313) 1,997,660
Dividends paid in cash (1,645,224) (1,580,138) (1,532,752)
Proceeds from long-term debt 18,000,000 13,000,000
Payments to repurchase common stock (264,434) (296,645) (83,753)
Proceeds from issuance of common stock 208,000 155,250
Repayments of long-term debt (7,527,817) (6,670,674) (8,403,140)
----------- ----------- -----------
Net Cash Provided by Financing
Activities 1,282,545 27,070,351 61,057,641
----------- ---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents (352,336) 653,724 1,556,147
Cash and Cash Equivalents,
Beginning of Year 6,017,446 5,363,722 3,807,575
=========== ========== ===========
Cash and Cash Equivalents, End of Year 5,665,110 $ 6,017,446 $ 5,363,722
=========== ========== ===========
Supplemental Disclosure:
Cash paid for:
Interest expense $6,148,756 $ 7,538,614 $ 9,458,909
Income taxes 750,000 1,100,000 1,050,000
The accompanying notes are an integral part of this statement
28
Notes to the Consolidated Financial Statements
NOTE 1 NATURE OF OPERATIONS:
F & M Bank Corp. ("Company"), through its subsidiary Farmers & Merchants Bank
("Bank"), operates under a charter issued by the Commonwealth of Virginia and
provides commercial banking services. As a state chartered bank, the Bank is
subject to regulation by the Virginia Bureau of Financial Institutions and the
Federal Reserve Bank. The Bank provides services to customers located mainly in
Rockingham and Shenandoah counties in Virginia, and the adjacent counties of
Page, and Augusta. Services are provided at eight branch offices. In addition,
the Company offers insurance and financial services through its subsidiaries,
TEB Life Insurance, Inc. and Farmers & Merchants Financial Services, Inc.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to accepted practice
within the banking industry.
The following is a summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Farmers and Merchants Bank, the TEB Life Insurance Company and Farmers &
Merchants Financial Services, Inc. Significant intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts in those statements; actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term are the
determination of the allowance for loan losses, which is sensitive to changes in
local and national economic conditions, and the other than temporary impairment
of investments in the investment portfolio.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and deposits at other financial
institutions whose initial maturity is ninety days or less.
Investment Securities
Management reviews the securities portfolio and classifies all securities as
either held to maturity or available for sale at the date of acquisition.
Securities that the Company has both the positive intent and ability to hold to
maturity (at time of purchase) are classified as held to maturity securities.
All other securities are classified as available for sale. Securities held to
maturity are carried at historical cost and adjusted for amortization of
premiums and accretion of discounts, using the effective interest method.
Securities available for sale are carried at fair value with any valuation
adjustments reported, net of deferred taxes, as a part of other accumulated
comprehensive income. Also included in securities available for sale are
marketable equity securities.
Interest, amortization of premiums and accretion of discounts on securities are
reported as interest income using the effective interest method. Gains (losses)
realized on sales and calls of securities are determined on the specific
identification method.
Accounting for Historic Rehabilitation and Low Income Housing Partnerships
The Company periodically invests in low income housing partnerships whose
primary benefit is the distribution of federal tax credits to partners. The
Company recognizes these benefits and the cost of the investments over the life
of the partnership (usually 15 years). In addition, state and federal historic
rehabilitation credits are generated from an investment in one of the
partnerships. Amortization of this investment is prorated based on the amount of
benefits received in each year to the total estimated benefits over the life of
the project. All benefits have been shown as investment income since income tax
benefits are the only anticipated benefits of ownership.
29
Notes to the Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans
Loans are carried on the balance sheet net of any unearned interest and the
allowance for loan losses. Interest income on loans is determined using the
effective interest method on the daily amount of principal outstanding except
where serious doubt exists as to collectibility of the loan, in which case the
accrual of income is discontinued.
Allowance for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to
bring the allowance for loan losses to an estimated balance that management
considers adequate to absorb potential losses in the portfolio. Loans are
charged against the allowance when management believes the collectibility of the
principal is unlikely. Recoveries of amounts previously charged-off are credited
to the allowance. Management's determination of the adequacy of the allowance is
based on an evaluation of the composition of the loan portfolio, the value and
adequacy of collateral, current economic conditions, historical loan loss
experience, and other risk factors. Management believes that the allowance for
loan losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions, particularly those affecting real
estate values. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Nonaccrual Loans
Interest accruals are continued on past due, secured loans until the principal
and accrued interest equal the value of the collateral and on unsecured loans
until the financial condition of the borrower deteriorates to the point that any
further accrued interest would be determined to be uncollectible.
30
Notes to the Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to income over the estimated useful lives of the assets
on a combination of the straight-line and accelerated methods. The ranges of the
useful lives of the premises and equipment are as follows:
Buildings and Improvements 10 - 40 years
Furniture and Fixtures 5 - 20 years
Maintenance, repairs, and minor improvements are charged to operations as
incurred. Gains and losses on dispositions are reflected in other income or
expense.
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over ten years.
Core deposit intangibles, net of amortization amounted to $1,978,000 and
$2,254,000 at December 31, 2003 and 2002, respectively. 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.
Goodwill
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 became 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.
The Company adopted SFAS No. 142 on January 1, 2002. Goodwill totaled $2,639,000
at December 31, 2003 and 2002. The goodwill is no longer amortized, but instead
tested for impairment at least annually. Based on the testing, there were no
impairment charges for 2003 or 2002. Application of the nonamortization
provisions of the Statement resulted in additional net income of $192,000 and
$190,000 for the years ended December 31, 2003 and 2002, respectively.
Pension Plans
Substantially all employees are covered by a pension plan. The net periodic
pension expense includes a service cost component, estimated normal return on
plan assets, and the effect of deferring and amortizing certain actuarial gains
and losses.
31
Notes to the Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as
incurred. Total advertising costs included in other operating expenses for 2003,
2002 and 2001 were $139,749, $141,461 and $139,527 respectively.
Income Taxes
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under income
tax laws. Deferred taxes, which arise principally from temporary differences
between the period in which certain income and expenses are recognized for
financial accounting purposes and the period in which they affect taxable
income, are included in the amounts provided for income taxes.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities and gains
or losses on certain derivative contracts, are reported as a separate component
of the equity section of the balance sheet. Such items, along with operating net
income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
Changes in: 2003 2002 2001
Unrealized holding gain
(loss) on interest
rate swap $ $ 4,137 $ (30,106)
Unrealized holding gains
(losses) on available-
for-sale securities 880,766 (1,141,553) 698,279
Reclassification adjustment
for (gains) losses
realized in income (178,618) 182,430 (1,252,500)
----------- ---------- ----------
Net Unrealized (Gains)
Losses 702,148 (954,986) (584,327)
Tax effect (210,780) 293,540 214,021
----------- --------- ----------
Net Change $ 491,368 $ (661,446) $ (370,306)
=========== ========= ==========
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding.
NOTE 3 CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a percentage
of deposits. The average balance of cash, which the Federal Reserve Bank
requires to be on reserve, was $ 1,962,000 and $1,475,000 for the years ended
December 31, 2003 and 2002, respectively.
32
Notes to the Consolidated Financial Statements
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair value of securities held to maturity are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2003
U. S. Treasuries
and Agencies $ 110,035 $ 515 $ $ 110,550
Corporate bonds $ 762,943 $ 24,372 $ $ 787,315
------------ ------------ ------------ -------------
Total Securities
Held to Maturity$ 872,978 $ 24,887 $ $ 897,865
=========== =========== =========== ============
December 31, 2002
U. S. Treasuries
and Agencies $ 110,000 $ $ $ 110,000
Corporate bonds 1,767,258 27,754 1,795,012
----------- ----------- ------------ ------------
Total Securities
Held to Maturity $ 1,877,258 $ 27,754 $ $ 1,905,012
=========== =========== =========== ============
The amortized cost and fair value of securities available for sale are as follows:
December 31, 2003
U.S. Agencies $ 25,386,992 $ 65,617 $ 8,888 $ 25,443,721
Mortgage-backed
obligations of
federal agencies 9,004,266 7,010 21,901 8,989,375
Marketable equities 9,109,546 652,193 516,573 9,245,166
Municipals 375,000 2,427 372,573
Corporate bonds 10,660,326 207,447 23,088 10,844,685
----------- ---------- ----------- ------------
Total Securities
Available for
Sale $ 54,536,130 $ 932,267 $ 572,877 $ 54,895,520
=========== ========== =========== ============
December 31, 2002
U.S. Treasuries and $ 38,023,227 $ 453,565 $ 1,834 $ 38,474,958
Agencies
Mortgage-backed
obligations of
federal agencies 5,033,202 36,371 708 5,068,865
Marketable equities 9,103,662 488,951 1,566,930 8,025,683
Corporate bonds 11,088,828 263,682 14,000 11,338,510
----------- ---------- ----------- ------------
Total Securities
Available for
Sale $ 63,248,919 $ 1,242,569 $ 1,583,472 $ 62,908,016
=========== =========== =========== ============
33
Notes to the Consolidated Financial Statements
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
The amortized cost and fair value of securities at December 31, 2003, by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities Held to Maturity Securities Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or
less $ 872,978 $ 897,865 $ 9,992,979 $10,093,471
Due after one year
through five years 31,878,467 31,990,280
Due after five years 3,555,138 3,566,603
-------- -------- ---------- ----------
Total 872,978 897,865 45,426,584 45,650,354
Marketable equities 9,109,546 9,245,166
-------- -------- ---------- ----------
$ 872,978 $ 897,865 $54,536,130 $54,895,520
======== ======== ========== ==========
Realized gains and losses and the gross proceeds from the sale of debt
securities were not material in 2003, 2002 or 2001. Gains and losses on
marketable equity transactions are summarized below:
2003 2002 2001
---- ---- ----
Gains 440,340 $ 318,354 $1,283,189
Losses 261,722 500,784 30,689
--------- -------- ---------
Net Gains $ 178,618 $(182,430) $1,252,500
======== ========= =========
Based on a review of its equities portfolio, the Company recognized an
impairment of $503,000 in the carrying basis of five of its equity holdings as
of December 31, 2002. This write down was a result of management's evaluation
and determination that these assets met the definition for impairment under SFAS
115.
The carrying value (which approximates fair value) of securities pledged by the
Bank to secure deposits and for other purposes amounted to $16,550,000 at
December 31, 2003 and $23,487,000 at December 31, 2002. The Company has pledged
$4,314,000 of equity securities to secure the $3,667,000 in loans it has
outstanding with SunTrust Bank (see note 10).
Other investments consist of investments in nine low-income housing and historic
equity partnerships (carrying basis of $3,532,487) and stock in the Federal Home
Loan Bank, Community Bankers Bank, Federal Reserve Bank, Shenandoah Title, LLC,
BI Investments, LLC and Virginia Bankers' Insurance Center, LLC (carrying basis
of $1,928,829). The interests in the low-income housing and historic equity
partnerships have limited transferability and the interests in the other stocks
are restricted as to sales. The market values of these securities are estimated
to approximate their carrying value as of December 31, 2003. During 2003, the
Company recognized a loss in its investment in BI Investments of $100,000. This
write down was the result of substantial losses incurred by BI Investments
during its start up phase. At December 31, 2003, the Company was committed to
invest an additional $2,555,974 in four low-income housing limited partnerships.
These funds will be paid as requested by the general partner to complete the
projects. This additional investment has been reflected in the above carrying
basis and in accrued liabilities on the balance sheet.
34
Notes to the Consolidated Financial Statements
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
The primary purpose of the investment portfolio is to generate income and meet
liquidity needs of the Company through readily saleable financial instruments.
The portfolio includes fixed rate bonds, whose prices move inversely with rates,
variable rate bonds and equity securities. At the end of any accounting period,
the investment portfolio has unrealized gains and losses. The Company monitors
the portfolio, which is subject to liquidity needs, market rate changes and
credit risk changes, to see if adjustments are needed. The primary concern in a
loss situation is the credit quality of the business behind the instrument. In
2002, the Company wrote down several equity investments because of price
deterioration that was not expected to improve in the near term. Bonds
deteriorate in value due to credit quality of the individual issuer and declines
in the price of the bonds as market rates rise. There are approximately 28
holdings in the consolidated portfolio that have losses. These losses are
relative to the market rates and the timing of purchases and are not a material
concern since they have moved up and down with the market.
A summary of these losses is as follows:
Less than 12 Months More than 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
U.S. Treasury
& Agency $9,257,000 $ (32,000) $ $ $ 9,257,000 $ (32,000)
Municipals 373,000 (2,000) 373,000 (2,000)
Mortgage
backed
obligations 5,302,000 (22,000) 5,302,000 (22,000)
Marketable
Equities 1,093,000 (21,000) 2,924,000 (414,000) 4,017,000 (435,000)
---------- -------- ----------- -------- --------- --------
Total $16,025,000 $ (77,000) $ 2,924,000 $(414,000) $18,949,000 $(491,000)
========== ======== =========== ======== ========== ========
NOTE 5 LOANS:
Loans outstanding as of December 31 are summarized as follows:
2003 2002
Real Estate
Construction $ 15,328,810 $ 12,059,185
Mortgage 118,677,266 118,453,009
Commercial and agricultural 55,999,652 47,218,287
Installment 19,630,461 22,703,677
Credit cards 1,463,329 1,477,436
Other 131,574 68,248
----------- -----------
Total $211,231,092 $201,979,842
=========== ===========
35
Notes to the Consolidated Financial Statements
NOTE 5 LOANS (CONTINUED):
At December 31, 2003 and 2002, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114), totaled $3,407,000 and $2,719,000, respectively. The valuation
allowance related to impaired loans on December 31, 2003 and 2002 is $395,000
and $387,000, respectively, At December 31, 2003, 2002 and 2001, the average
investment in impaired loans was $3,075,000, $4,004,000 and $5,225,000,
respectively. The amount of interest income recorded by the Company during 2003,
2002 and 2001 on impaired loans was approximately $215,000, $305,000 and
$449,000, respectively. There were no nonaccrual loans excluded from impaired
loan disclosure at December 31, 2003 or December 31, 2002
The Company has pledged mortgage loans as collateral for borrowings with the
Federal Home Loan Bank of Atlanta totaling $25,004,804 and $32,914,047 as of
December 31, 2003 and 2002, respectively.
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses is shown in the following
schedule:
2003 2002 2001
Balance, beginning of year $1,477,007 $1,288,506 $1,107,917
Other adjustments 84,000
Provision charged to operating
expenses 226,000 387,000 204,000
Loan recoveries 75,955 100,985 52,848
Loans charged off (295,295) (299,484) (160,259)
---------- ---------- ---------
Balance, end of year $1,483,667 $1,477,007 $1,288,506
========= ========= =========
Percentage of gross loans .70% .73% .73%
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as follows:
2003 2002
Land $ 644,440 $ 549,723
Buildings and improvements 4,569,581 4,090,723
Furniture and equipment 3,259,321 2,973,131
---------- ----------
8,473,342 7,613,577
Less - accumulated depreciation (3,472,049) (3,127,764)
----------- ----------
Net $ 5,001,293 $ 4,485,813
========== ==========
Provisions for depreciation of $429,717 in 2003, $347,687 in 2002, and $ 308,152
in 2001 were charged to operations.
36
Notes to the Consolidated Financial Statements
NOTE 8 TIME DEPOSITS:
At December 31, 2003, the scheduled maturities of time deposits are as follows:
2004 $ 67,913,958
2005 19,141,511
2006 12,195,917
2007 11,948,702
Thereafter 10,971,117
-----------
Total $122,171,205
NOTE 9 SHORT-TERM DEBT:
Short-term borrowings consist of the following at December 31, 2003 and 2002
(dollars in thousands):
2003 2002
Securities sold under agreements
to repurchase $6,037,124 $8,286,715
Other short-term borrowings 351,834 21,667
--------- ---------
Total $6,388,958 $8,308,382
========= =========
Weighted interest rate .64% .72%
Average for the year ended December 31:
Outstanding $7,236,999 $8,496,601
Interest rate .64% 1.23%
Maximum month-end outstanding $9,039,633 $1,375,268
Short-term borrowings consist of securities sold under agreements to repurchase,
which are secured transactions with customers and generally mature the day
following the date sold. Short-term borrowings may also include Federal funds
purchased, which are unsecured overnight borrowings from other financial
institutions and margin borrowings secured by investment securities.
As of December 31, 2003, the Company had lines of credit with correspondent
banks totaling $18,864,000, which are used in the management of short-term
liquidity.
NOTE 10 LONG-TERM DEBT:
New borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were zero in
2003 and $15,000,000 in 2002 and $13,000,000 in 2001. The interest rates on the
notes payable are fixed at the time of the advance and range from 4.02% to
5.33%; the weighted average interest rate is 4.61% at December 31, 2003. The
balance of this obligation at December 31, 2003 was $21,117,540. During 2001,
the Company paid $358,955 in prepayment penalties to refinance portions of this
debt. These penalties were expensed in 2001 when paid. The long-term debt is
secured by qualifying mortgage loans owned by the Company.
The Company borrowed $4,000,000 of long-term debt in March 2001 and an
additional $3,000,000 of long-term debt in September 2002. Both loans were made
by SunTrust Bank. Of these borrowings, $6,000,000 was used as contributed
capital to the Bank, $900,000 was used to payoff a loan from the Bank for
securities purchases and the balance was used for working capital needs. The
combined outstanding balance at December 31, 2003 was $3,666,667 with quarterly
principal payments of $333,333 for two quarters, followed by principal payments
of $230,769 over the next thirteen quarters. The interest rate is a floating
rate of LIBOR plus 1.10%, adjustable monthly.
37
Notes to the Consolidated Financial Statements
NOTE 10 LONG-TERM DEBT (CONTINUED):
Repayments of long-term debt are due either quarterly or semi-annually and
interest is due monthly. Interest expense of $1,245,531, $1,371,774, and
$1,488,569, was incurred on these debts in 2003, 2002, and 2001, respectively.
The maturities of long-term debt as of December 31, 2003 are as follows:
2004 $ 8,553,462
2005 7,117,560
2006 5,615,933
2007 2,104,395
2008 1,035,714
Thereafter 357,143
-----------
Total $ 24,784,207
===========
NOTE 11 INCOME TAX EXPENSE:
The components of the income tax expense are as follows:
2003 2002 2001
------------------------ -------
Current expense
Federal $1,456,019 $1,554,685 $1,448,500
State 30,280
Deferred benefit
Federal 210,305 (240,106) (43,982)
-------- --------- ---------
Total Income Tax Expense $1,666,324 $1,314,579 $1,434,798
========= ========= =========
Amounts in above arising from
gains (losses) on security
transactions $ 60,730 $ (96,711) $ 455,188
========= ======== ========
The deferred tax effects of temporary differences are as follows:
2003 2002 2001
------------------------ -------
Tax Effects of Temporary Differences:
LIH Partnership Losses $15,223 $ 7,944 $ 19,107
Securities impairment 55,334 (171,032)
Provision for loan losses (225) $ (62,050) (30,800)
Split dollar life insurance 60,576 30,780 (10,629)
Non-qualified deferred
compensation (43,810) (41,612) (52,147)
Depreciation 43,405 44,271 39,177
Core deposit amortization (33,113) (33,113)
Pension expense 117,133 (13,611) (1,736)
Other (4,218) (1,683) (6,954)
------- --------- ---------
Deferred Income Tax
Expense ( Benefit) $210,305 $ (240,106) $(43,982)
======= ============ =======
38
Notes to the Consolidated Financial Statements
NOTE 11 INCOME TAX EXPENSE (CONTINUED):
The components of the deferred taxes as of December 31 are as follows:
2003 2002
Deferred Tax Assets:
Allowance for loan losses $ 350,133 $ 349,908
Split dollar life insurance 13,647 74,224
Nonqualified deferred compensation 271,632 226,261
Securities impairment 115,696 171,032
Core deposit amortization 66,227 33,113
State historic tax credits 66,766 99,591
Securities available for sale 90,372
Other 8,844 21,917
---------- ---------
Total Assets $ 892,945 $1,066,418
--------- -----------
Deferred Tax Liabilities:
Securities available for sale $ 137,550 $
Unearned low income housing credits 553,478 450,157
Depreciation 238,029 185,856
Pension 227,385 110,252
Other 27,971 21,210
---------- ---------
Total Liabilities 1,184,413 767,475
---------- ---------
Deferred Tax Asset (Liability) $ (291,468) $ 298,943
=========== =========
The following table summarizes the differences between the actual income tax
expense and the amounts computed using the federal statutory tax rates:
2003 2002 2001
Tax expense at federal
statutory rates $1,930,732 $1,638,281 $1,586,212
Increases (decreases) in taxes
resulting from:
State income taxes, net 9,042 (16,421) 31,613
Partially exempt income (155,416) (141,923) (134,909)
Tax-exempt income (116,043) (68,507) (79,739)
Other (1,991) (96,851) 31,621
-------- --------- --------
Total Income Tax Expense $1,666,324 $1,314,579 $1,434,798
========= ========= =========
39
Notes to the Consolidated Financial Statements
NOTE 12 EMPLOYEE BENEFITS:
The Bank participates in the Virginia Bankers' Association Master Defined
Benefit Pension Plan and Trust. Substantially all bank employees are covered by
the plan. Benefits are based upon the participant's length of service and annual
earnings with vesting of benefits after five years of service. Plan assets
consist primarily of investments in stocks and bonds. Pension expense totaled
$290,970, $189,215, and $140,622 for 2003, 2002, and 2001, respectively and
reflects the lower returns on investments in the last three years.
The Company sponsors an employee stock ownership plan which provides stock
ownership to substantially all employees of the Bank. The Plan provides total
vesting upon the attainment of five years of service. Contributions to the plan
are made at the discretion of the Board of Directors and are allocated based on
the compensation of each employee relative to total compensation paid by the
Bank. All shares issued and held by the Plan are considered outstanding in the
computation of earnings per share. Dividends on Company stock are allocated and
paid to participants at least annually. Shares of Company stock, when
distributed, have restrictions on transferability. The Company contributed
$208,000 in 2003, $190,000 in 2002, and $155,250 in 2001 to the Plan and charged
this expense to operations.
NOTE 13 CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks totaling $11,758,833 and
$10,165,063 at December 31, 2003 and 2002, respectively.
The Company grants commercial, residential real estate and consumer loans to
customers located primarily in the northwestern portion of the State of
Virginia. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
agribusiness economic sector, specifically the poultry industry for which loans
outstanding total $8,737,000. Collateral required by the Company is determined
on an individual basis depending on the purpose of the loan and the financial
condition of the borrower. Approximately 70% of the loan portfolio is secured by
real estate.
NOTE 14 COMMITMENTS:
The Company makes commitments to extend credit in the normal course of business
and issues standby letters of credit to meet the financing needs of its
customers. The amount of the commitments represents the Company's exposure to
credit loss that is not included in the balance sheet. As of the balance sheet
dates, the Company had the following commitments outstanding:
2003 2002
------------ --------
Commitments to loan money $41,616,194 $51,315,690
Standby letters of credit 1,901,520 594,840
The Company uses the same credit policies in making commitments to lend money
and issue standby letters of credit as it does for the loans reflected in the
balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case by case basis. Collateral required, if any, upon
extension of credit is based on management's credit evaluation of the borrower's
ability to pay. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment.
40
Notes to the Consolidated Financial Statements
NOTE 15 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by them) were
customers of and had transactions with the Company in the normal course of
business. These transactions were made on substantially the same terms as those
prevailing for other customers and did not involve any abnormal risk.
Loan transactions with related parties are shown in the following schedule:
2003 2002
Total loans, beginning of year $ 2,882,127 $ 1,783,345
Designation of new executive officers 216,384
New loans 2,423,879 2,226,099
Repayments (1,362,566) (1,343,701)
---------- -----------
Total loans, end of year $ 3,943,440 $ 2,882,127
========== ==========
NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
The principal source of funds of F & M Bank Corp. is dividends paid by the
Farmers and Merchants Bank. The Federal Reserve Act restricts the amount of
dividends the Bank may pay. Approval by the Board of Governors of the Federal
Reserve System is required if the dividends declared by a state member bank, in
any year, exceed the sum of (1) net income of the current year and (2) income
net of dividends for the preceding two years. As of January 1, 2004,
approximately $1,965,000 was available for dividend distribution without
permission of the Board of Governors. Dividends paid by the Bank to the Company
totaled $2,930,000 in 2003, $1,760,000 in 2002 and $954,000 in 2001.
NOTE 17 LITIGATION
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, or other activities of the Company. Management
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures
about the Fair Value of Financial Statements" defines the fair value of a
financial instrument as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced liquidation or sale. As the majority of the Bank's financial instruments
lack an available trading market, significant estimates, assumptions and present
value calculations are required to determine estimated fair value.
41
Notes to the Consolidated Financial Statements
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED:
Estimated fair value and the carrying value of financial instruments at December
31, 2003 and 2002 are as follows (in thousands):
2003 2002
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
Financial Assets
Cash $ 5,665 $ 5,665 $ 6,017 $ 6,017
Interest bearing deposits 9,019 9,003 5,873 5,886
Federal funds sold 5,035 5,035 4,476 4,476
Securities available for
sale 54,896 54,896 62,908 62,908
Securities held to
maturity 898 873 1,905 1,877
Other investments 5,461 5,461 4,816 4,816
Loans 217,842 211,231 208,022 201,980
Bank owned life
insurance 4,832 4,832 2,303 2,303
Accrued interest
receivable 1,496 1,496 1,655 1,655
Financial Liabilities
Demand Deposits:
Non-interest bearing 33,124 33,124 29,446 29,446
Interest bearing 37,875 37,875 34,134 34,134
Savings deposits 47,545 47,545 41,661 41,661
Time deposits 124,750 122,171 125,186 123,042
Accrued liabilities 4,919 4,919 4,703 4,703
Short-term debt 6,389 6,389 8,308 8,308
Long-term debt 25,427 24,784 33,181 32,312
The carrying value of cash and cash equivalents, other investments, deposits
with no stated maturities, short-term borrowings, and accrued interest
approximate fair value. The fair value of securities was calculated using the
most recent transaction price or a pricing model, which takes into consideration
maturity, yields and quality. The remaining financial instruments were valued
based on the present value of estimated future cash flows, discounted at various
rates in effect for similar instruments during the month of December 2003.
NOTE 19 REGULATORY MATTERS:
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off balance-sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
42
Notes to the Consolidated Financial Statements
NOTE 19 REGULATORY MATTERS (CONTINUED):
Quantitative measures established by regulation, to ensure capital adequacy,
require the Company to maintain minimum amounts and ratios. These ratios are
defined in the regulations and the amounts are set forth in the table below.
Management believes, as of December 31, 2003, that the Company and its
subsidiary bank meet all capital adequacy requirements to which they are
subject.
As of the most recent notification from the Bureau of Financial Institutions
(which was April 3, 2003), the subsidiary bank was categorized as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company must maintain minimum total risk
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Company's actual capital ratios are presented in the following table:
Actual Regulatory Requirements
December 31, Adequately Well
2003 2002 Capitalized Capitalized
Total risk-based ratio 14.72% 14.48% 8.00% 10.00%
Tier 1 risk-based ratio 13.97% 13.67% 4.00% 6.00%
Total assets leverage
ratio 9.00% 8.76% 3.00% 5.00%
NOTE 20 BRANCH ACQUISITIONS:
On February 23, 2001, the Company closed on its purchase of the Edinburg and
Woodstock branches from First Union. The acquisition included deposits totaling
$37,244,000, and loans totaling $9,800,000. The Woodstock facility was also
purchased at a cost of $625,000, while the Edinburg facility is leased.
Equipment and fixtures acquired as part of the transaction totaled $54,893. The
core deposit intangibles and goodwill totaled $5,472,153. These core deposit
intangible costs are being amortized using the straight-line method over a
ten-year period.
NOTE 21 INVESTMENT IN LIFE INSURANCE CONTRACTS
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
investments which the Bank might make.
43
Notes to the Consolidated Financial Statements
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31,
ASSETS 2003 2002
------------- --------
Cash and cash equivalents $ 617,457 $ 292,501
Investment in subsidiaries 26,859,841 26,476,470
Securities available for sale 8,877,366 7,470,322
Limited partnership investments 3,532,487 2,794,715
Due from subsidiaries 190,354
Income tax receivable 215,109
Other real estate 307,891
Interest receivable 3,073
Deferred income taxes 139,306
--------- -----------
Total Assets $39,890,224 $37,886,668
========== ==========
LIABILITIES
Notes payable $ 3,666,667 $ 5,000,000
Margin payable 317,511
Accrued interest payable 25,086 46,091
Due to subsidiaries 83,455
Other liabilities 10,449 33,450
Dividends payable 436,046 412,025
Demand obligations for low income
housing investment 2,555,974 2,853,922
Deferred income taxes 475,869
---------- ----------
Total Liabilities 7,571,057 8,345,488
---------- ----------
STOCKHOLDERS' EQUITY
Common stock par value $5 per share, 3,000,000
shares authorized, 2,420,478 and 2,423,678
shares issued and outstanding for 2003 and 2002,
respectively
12,102,390 12,118,390
Capital surplus 286,330 302,795
Retained earnings 19,709,562 17,390,478
Accumulated other comprehensive income (loss) 220,885 (270,483)
---------- ----------
Total Stockholders' Equity 32,319,167 29,541,180
---------- ----------
Total Liabilities and Stockholders' Equity $39,890,224 $37,886,668
========== ==========
44
Notes to the Consolidated Financial Statements
Statements of Net Income and Retained Earnings
Years Ended December 31,
2003 2002 2001
---------------------------- ---------
INCOME
Dividends from affiliate $2,930,000 $ 1,760,000 $ 954,000
Interest on loans 8,489
Investment income 180 100 11,621
Dividend income 366,892 408,817 382,108
Security gains (losses) 275,943 (307,480) 1,160,235
Net limited partnership income 62,351 20,915 81,361
Other 78,326 2,960 20,537
--------- ---------- ---------
Total Income 3,713,692 1,885,312 2,618,351
--------- ---------- ---------
EXPENSES
Interest expense 127,087 189,915 194,488
Administrative expenses 137,081 132,787 119,167
--------- ---------- ---------
Total Expenses 264,168 322,702 313,655
--------- ---------- ---------
Net income before income tax expense
(benefit) and undistributed
subsidiary net income 3,449,524 1,562,610 2,304,696
INCOME TAX EXPENSE (BENEFIT) 120,229 (208,706) 384,990
--------- ----------- ---------
Income before undistributed subsidiary
net income 3,329,295 1,771,316 1,919,706
Undistributed subsidiary net income 683,004 1,732,579 1,310,824
--------- ---------- ---------
NET INCOME 4,012,299 3,503,895 3,230,530
Retained earnings, beginning of year 17,390,478 15,488,406 13,790,628
Dividends on common stock (1,693,215) (1,601,823) (1,532,752)
----------- ----------- ----------
Retained Earnings, End of Year $19,709,562 $17,390,478 $15,488,406
========== ========== ==========
45
Notes to the Consolidated Financial Statements
Statements of Cash Flows
Years Ended December 31,
203 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,012,299 $ 3,503,895 $3,230,530
Adjustments to reconcile net income
to net cash provided by
operating activities:
Undistributed subsidiary income (683,004) (1,732,579) (1,310,824)
Gain (Loss) on sale of securities (275,943) 307,480 (1,160,235)
Deferred tax (benefit) expense 71,515 (148,606) 49,387
Decrease (increase) in interest
receivable (3,073) 736
Decrease (increase) in due from
subsidiary 190,353 (174,356) 52,764
Decrease in other receivables 215,109 3,182 29,795
Increase in due to subsidiary 116,280
Increase (decrease) in other
liabilities (18,089) 14,039 39,530
Increase in deferred tax credits 103,321 96,179 65,537
Amortization of limited partnership
investments 262,227 255,850 218,804
Securities amortization 17,109
Gain on sale of land (95,434) (20,537)
---------- ---------- ---------
Net Cash Provided by Operating
Activities 3,912,670 2,125,084 1,195,487
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributed to subsidiary (2,000,000) 6,000,000)
Proceeds from sales of securities
available for sale 1,849,509 4,377,753 2,695,063
Proceeds from maturity of securities
available for sale 298
Purchase of securities available for
sale (1,825,119) (2,977,153) (1,273,759)
Investments in low income housing
partnerships (1,297,948) (14,152) (33,692)
Proceeds from sale of real estate 403,325 138,775
Decrease in loans receivable 194,902
----------- --------- ---------
Net Cash Used in Investing Activities (870,233) (613,552) (4,278,413)
------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt 3,000,000 5,000,000
Payments on long-term debt (1,333,333) (2,333,333) (666,667)
Increase (decrease) in short-term debt 317,511 (198,260) 198,260
Payments to repurchase common stock (264,434) (296,645) (83,753)
Proceeds from issuance of common stock 208,000 155,250
Dividends paid in cash (1,645,225) (1,580,138) (1,507,418)
----------- ---------- ----------
Net Cash Provided by (Used in)
Financing Activities (2,717,481) (1,408,376) 3,095,672
---------- ----------- ----------
Net Increase in Cash and Cash Equivalents 324,956 103,156 12,746
Cash and Cash Equivalents, Beginning
of Year 292,501 189,345 176,599
---------- ---------- ----------
Cash and Cash Equivalents, End of Year $ 617,457 $ 292,501 $ 189,345
========= ========== =========
46
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
F & M Bank Corp.
Timberville, Virginia
We have audited the accompanying consolidated balance sheets of F & M Bank Corp.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three years ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of F & M Bank Corp. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the three years ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
S. B. Hoover & Company, L.L.P.
February 24, 2004
Harrisonburg, Virginia
47
Item 1
Other Material Required by Form 10-K
BUSINESS
General
F & M Bank Corp., incorporated in Virginia in 1983, is a one-bank holding
company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and
owns 100% of the outstanding stock of its two affiliates, Farmers & Merchants
Bank (Bank) and TEB Life Insurance Company (TEB). Farmers & Merchants Financial
Services, Inc. (FMFS) is a wholly owned subsidiary of Farmers & Merchants Bank.
Farmers & Merchants Bank was chartered on April 15, 1908, as a state
chartered bank under the laws of the Commonwealth of Virginia. TEB was
incorporated on January 27, 1988, as a captive life insurance company under the
laws of the State of Arizona. FMFS is a Virginia chartered corporation and was
incorporated on February 25, 1993.
The Bank offers all services normally offered by a full-service commercial
bank, including commercial and individual demand and time deposit accounts,
repurchase agreements for commercial customers, commercial and individual loans,
and drive-in banking services. TEB was organized to re-insure credit life and
accident and health insurance currently being sold by the Bank in connection
with its lending activities. FMFS was organized to write title insurance but now
provides other financial services to customers of Farmers & Merchants Bank.
The Bank makes various types of commercial and consumer loans and has a
heavy concentration of residential and agricultural real estate loans. The Bank
experienced moderate loan demand in 2003 but at a lesser pace than in prior
years. The local economy is relatively diverse with strong employment in the
agricultural, manufacturing, service and governmental sectors.
On December 31, 2003, F & M Bank Corp., the Bank, TEB and FMFS had 97 full-time
and part-time employees. No one employee devotes full-time services to F&M Bank
Corp.
The Company's and the Bank's principal executive office is at 205 South Main
Street, Timberville, VA 22853, and its phone number is (540) 896-8941.
Competition
The Bank's offices compete with approximately sixteen financial institutions.
These other institutions include state and nationally chartered banks,
nationally chartered savings banks and several credit unions. The main office
and the Broadway branch serve the northern portion of Rockingham County,
Virginia and the southwestern portion of Shenandoah County. The Elkton branches
serve the town of Elkton, the eastern portion of Rockingham County, and the
southern portion of Page County. The Bridgewater office serves the town of
Bridgewater, the southern portion of Rockingham County and the northwestern
portion of Augusta County. The offices in Shenandoah County serve the towns of
Edinburg and Woodstock and the surrounding areas. Bank competition in the area
of all offices is very strong.
48
Other Material Required by Form 10-K
Regulation and Supervision
The operations of F & M Bank Corp. and the Bank are subject to federal and state
statutes, which apply to state member banks of the Federal Reserve System.
The stock of F & M Bank Corp. is subject to the registration requirements of the
Securities Act of 1934. F & M Bank Corp. is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934. These include, but are not
limited to, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission. As an Exchange Act reporting company, the
Corporation is directly affected by the Sarbanes-Oxley Act of 2002, which is
aimed at improving corporate governance and reporting procedures. The
Corporation is complying with new SEC and other rules and regulations
implemented pursuant to Sarbanes-Oxley and intends to comply with any applicable
rules and regulations implemented in the future.
F & M Bank Corp., as a bank holding company, is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Act"). It is registered as
such and is supervised by the Federal Reserve Board. The Act requires F & M Bank
Corp. to secure the prior approval of the Federal Reserve Board before F & M
Bank Corp. acquires ownership or control of more than 5% of the voting shares or
substantially all of the assets of any institution, including another bank.
As a bank holding company, F & M Bank Corp. is required to file with the Federal
Reserve Board an annual report and such additional information as it may require
pursuant to the Act. The Federal Reserve Board may also conduct examinations of
F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the
1970 Amendments to the Act and the regulations of the Federal Reserve Board, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with an extension of credit, provision
of credit, sale, or lease of property or furnishing of services.
Federal Reserve Board regulations permit bank holding companies to engage in
non-banking activities closely related to banking or to managing or controlling
banks. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency
activities. TEB Life acts as the primary re-insurer for credit life insurance
sold through the Bank. F & M Bank Corp. owns an interest in the Johnson Williams
Project in Berryville, Virginia which provides housing for the elderly and lower
income tenants. Since 1994, the Company has entered into agreements with the
Virginia Community Development Corporation to purchase equity positions in the
Housing Equity Fund of Virginia II, III, IV, V, VII, VIII, IX and Historic
Equity Fund I. These funds provide housing for low-income individuals throughout
Virginia. Approval of the Federal Reserve Board is necessary to engage in any of
the activities described above or to acquire interests engaging in these
activities.
The Bank as a state member bank is supervised and regularly examined by the
Virginia Bureau of Financial Institutions and the Federal Reserve Board. Such
supervision and examination by the Virginia Bureau of Financial Institutions and
the Federal Reserve Board is intended primarily for the protection of depositors
and not for the stockholders of F & M Bank Corp.
The information required by Guide 3 has been included under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
49
Item 2
Description of Properties
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
Timberville Main Office Elkton Branch
205 South Main Street 127 West Rockingham Street
Timberville, VA 22853 Elkton, VA 22827
Broadway Branch Elkton Plaza Branch
126 Timberway Rt. 33 West
Broadway, VA 22815 Elkton, VA 22827
Bridgewater Branch Edinburg Branch
100 Plaza Drive 120 South Main Street
Bridgewater, VA 22812 Edinburg, VA 22824
Woodstock Branch Harrisonburg Office
161 South Main Street (Mortgage Origination & Investment
Woodstock, VA 22664 Sales)
207 University Blvd, Suite 100
Harrisonburg, VA 22801
With the exception of the Edinburg Branch and the Harrisonburg Office, all
facilities are owned by Farmers & Merchants Bank. ATMs are available at all
branch locations, with the exception of the Edinburg Branch.
Through an agreement with Nationwide Money ATM Services, the Bank also operates
cash only ATMs at eight Food Lion grocery stores, one in Mt. Jackson, VA, four
in Harrisonburg, VA, three in Charlottesville, VA and one ATM at a convenience
store in Edinburg, VA.
Item 9A
Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the chief executive officer and chief financial officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on that evaluation, the chief executive officer and
chief financial officer have concluded that these controls and procedures are
effective. There were no significant changes in the internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are the controls and other procedures that
are designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to management of the Company, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
50
Item 15 - Exhibits, Financial Statements, and Reports on Form 8-K
The following financial statements are filed as a part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent
auditors of the Company are in Part II, Item 8 on pages 24 thru 45:
Consolidated Balance Sheets - December 31, 2003 and 2002 24
Consolidated Statements of Income - Years ended December 31,
2003, 2002 and 2001 25
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2003, 2002 and 2001 26
Consolidated Statements of Cash Flows - Years ended December 31, 2003,
2002 and 2001 27
Notes to the Consolidated Financial Statements 28
Report of the Independent Auditors 46
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.
(a)(3) Exhibits
The following exhibits are filed as a part of this form 10-K and this list
includes the Exhibit index:
Exhibit No.
3.1 Restated Articles of Incorporation of F & M Bank Corp. as incorporated
by reference to F & M Bank Corp.'s 10-K filed March 8, 2002.
3.2 Amended and Restated Bylaws of F & M Bank Corp. as incorporated by
reference to F & M Bank Corp.'s 10-K filed March 8, 2002.
21.0 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8K
The Corporation did not file any reports on Form 8-K for the quarter ending
December 31, 2003.
Shareholders may obtain, free of charge, a copy of the exhibits to this Report
on Form 10-K by writing Larry A. Caplinger, Corporate Secretary, at F & M Bank
Corp., P.O. Box 1111, Timberville, VA 22853 or our website at
www.farmersandmerchants.biz.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: /s/ Julian D. Fisher March 25, 2004
--------------------------- -------------------------
Julian D. Fisher Date
Director, President and
Chief Executive Officer
By: /s/ Neil W. Hayslett March 25, 2004
--------------------------- -------------------------
Neil W. Hayslett Date
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
/s/ Thomas L. Cline Director March 25, 2004
- ----------------------------- ----------------
Thomas L. Cline
Director
- ----------------------------- ----------------
John N. Crist
/s/ Ellen R. Fitzwater Director March 25, 2004
- ----------------------------- ----------------
Ellen R. Fitzwater
/s/ Robert L. Halterman Director March 25, 2004
- ----------------------------- ----------------
Robert L. Halterman
/s/ Daniel J. Harshman Director March 25, 2004
- ----------------------------- ---------------
Daniel J. Harshman
Director, Chairman
- ----------------------------- ----------------
Lawrence H. Hoover, Jr
Director
- ----------------------------- ----------------
Richard S. Myers
Director
- ------------------------------ ----------------
Michael W. Pugh
/s/ Ronald E. Wampler Director March 25, 2004
- ------------------------------ ---------------
Ronald E. Wampler