UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2006.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-13273
F & M BANK CORP.
Virginia 54-1280811
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
(540) 896-8941
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes No X
---- ---
State the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 1, 2006
Common Stock, par value - $5 2,398,402 shares
1
F & M BANK CORP.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2006 and 2005 2
Consolidated Balance Sheets - March 31, 2006
and December 31, 2005 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2006 and 2005 4
Consolidated Statements of Changes in Stockholders'
Equity - Three Months March 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
2
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
2006 2005
---------- ---------
Interest Income
Interest and fees on loans held for investment $ 4,809 $ 4,067
Interest and fees on loans held for sale 132
Interest on federal funds sold 12 16
Interest on interest bearing deposits 26 27
Dividends on equity securities 104 101
Interest on debt securities 184 183
-------- ------
Total Interest Income 5,135 4,526
-------- ------
Interest Expense
Interest on demand deposits 75 44
Interest on savings accounts 131 110
Interest on time deposits over $100,000 370 208
Interest on time deposits 879 681
-------- ------
Total interest on deposits 1,455 1,043
Interest on short-term debt 160 130
Interest on long-term debt 250 314
-------- ------
Total Interest Expense 1,865 1,487
-------- ------
Net Interest Income 3,270 3,039
Provision for Loan Losses 60 90
-------- ------
Net Interest Income after Provision for Loan Losses 3,210 2,949
-------- ------
Noninterest Income
Service charges 272 205
Insurance and other commissions 54 55
Other 184 320
Income on bank owned life insurance 66 62
Security gains (losses) -------- ------
Total Noninterest Income 576 642
-------- ------
Noninterest Expense
Salaries 997 830
Employee benefits 346 304
Occupancy expense 104 102
Equipment expense 122 106
Intangible amortization 69 69
Other 596 630
-------- ------
Total Noninterest Expense 2,234 2,041
-------- ------
Income before Income Taxes 1,552 1,550
Income Taxes 467 383
-------- ------
Net Income $ 1,085 $ 1,167
======== ======
Per Share Data
Net Income $ .45 $ .48
======= ======
Cash Dividends $ .20 $ .19
======= ======
Weighted Average Shares Outstanding 2,401,644 2,410,697
========= =========
The accompanying notes are an integral part of these statements.
3
F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
March 31, December 31,
ASSETS 2006 2005
--------- ---------
(Unaudited) (Audited)
Cash and due from banks $ 6,750 $ 7,904
Interest bearing deposits in banks 2,383 2,228
Fed funds sold 125 2,487
Securities held to maturity (note 2) 110 110
Securities available for sale (note 2) 29,952 28,507
Other investments 6,491 6,304
Loans held for sale 3,528
Loans held for investment (note 3) 292,510 277,398
Less allowance for loan losses (note 4) (1,718) (1,673)
--------- --------
Net Loans Held for Investment 290,792 275,725
Bank premises and equipment 6,372 5,757
Interest receivable 1,500 1,367
Deposit intangible 1,357 1,426
Goodwill 2,639 2,639
Bank owned life insurance (note 5) 5,400 5,333
Other assets 2,779 3,013
--------- --------
Total Assets $ 356,650 $ 346,328
========= ========
LIABILITIES
Deposits
Noninterest bearing demand $ 47,519 $ 46,325
Interest bearing
Demand 38,240 38,970
Savings deposits 42,534 43,855
Time deposits over $100,000 37,313 35,462
Time deposits 103,689 102,697
--------- --------
Total Deposits 269,295 267,309
Short-term debt 17,987 14,345
Long-term debt 25,913 22,808
Accrued expenses 6,166 5,299
--------- --------
Total Liabilities 319,361 309,761
--------- --------
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 2,400,002 and
2,402,037 issued and outstanding, in
2006 and 2005, respectively 12,000 12,010
Surplus
Retained earnings 25,695 25,136
Accumulated other comprehensive income (loss) (406) (579)
-------- --------
Total Stockholders' Equity 37,289 36,567
--------- --------
Total Liabilities and Stockholders' Equity $ 356,650 $ 346,328
========= ========
The accompanying notes are an integral part of these statements.
4
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
2006 2005
------- ------
Cash Flows from Operating Activities:
Net income $ 1,085 $ 1,167
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 135 116
Amortization of security premiums 27 36
Net (increase) decrease in loans held for sale 3,528 34,306
Provision for loan losses 60 90
Intangible amortization 69 69
(Increase) decrease in interest receivable (133) (30)
Decrease in other assets 15 87
Increase in accrued expenses 1,010 19
Gain on security transactions
Amortization of limited partnership investments 92 64
Income from life insurance investment (66) (62)
-------- ------
Net Adjustments 4,737 34,695
-------- ------
Net Cash Provided by Operating Activities 5,822 35,862
-------- ------
Cash Flows from Investing Activities:
Purchase of investments available for sale (2,281) (10,044)
Proceeds from sales of investments available for sale 500
Proceeds from maturity of investments available for sale 282 1,630
Net increase in loans held for investment (15,127) (17,546)
Purchase of property and equipment (751) (28)
Change in federal funds sold 2,362 1,017
Net (increase) decrease in interest bearing bank
deposits (155) 5,472
-------- ------
Net Cash Used in Investing Activities (15,170) (19,499)
-------- ------
Cash Flows from Financing Activities:
Net change in demand and savings deposits (857) 2,041
Net change in time deposits 2,842 7,018
Net change in short-term debt 3,642 (31,695)
Cash dividends paid (482) (457)
Repurchase of common stock (56) (61)
Change in federal funds purchased 2,020
Proceeds of long-term debt 5,000 5,000
Repayment of long-term debt (1,895) (1,922)
-------- ------
Net Cash Provided (Used) by Financing Activities 8,194 (18,056)
-------- ------
Net Decrease (Increase) in Cash and Cash Equivalents (1,154) (1,693)
Cash and Cash Equivalents, Beginning of Period 7,904 7,938
-------- ------
Cash and Cash Equivalents, End of Period $ 6,750 $ 6,245
======== ======
Supplemental Disclosure
Cash paid for:
Interest expense $ 1,826 $ 1,445
Income taxes 220
The accompanying notes are an integral part of these statements.
5
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
2006 2005
---------- ----------
Balance, beginning of period $ 36,567 $ 34,260
Comprehensive Income
Net income 1,085 1,167
Net change in unrealized appreciation on securities
available for sale, net of taxes 173 (225)
--------- --------
Total comprehensive income 1,258 942
Repurchase of common stock (56) (61)
Dividends declared (480) (457)
--------- --------
Balance, end of period $ 37,289 $ 34,684
========= ========
The accompanying notes are an integral part of these statements.
6
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements include the accounts of F & M
Bank Corp. and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements conform to accounting
principles generally accepted in the United States and to general
industry practices. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2006 and the results of
operations for the three month periods ended March 31, 2006 and March
31, 2005. The notes included herein should be read in conjunction with
the notes to financial statements included in the 2005 annual report
to stockholders of the F & M Bank Corp.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the
consolidated balance sheets and their approximate market values at
March 31, 2006 and December 31, 2005 are as follows:
2006 2005
------------------- -----------------
Market Market
Cost Value Cost Value
------ ------- -------- ---------
Securities Held to Maturity
U. S. Treasury and
Agency obligations $ 110 $ 110 $ 110 $ 110
------ ------- ------- ------
Total $ 110 $ 110 $ 110 $ 110
====== ======= ======= ======
2006 2005
----------------- ----------------
Market Market
Value Cost Value Cost
------ ------ -------- -------
Securities Available for Sale
U. S. Treasury and
Agency obligations $17,860 $ 17,993 $ 15,820 $16,007
Equity securities 6,121 6,372 6,458 6,875
Mortgage-backed
securities 3,236 3,314 3,510 3,604
Corporate Bonds 2,370 2,500 2,354 2,500
Municipals 365 375 365 375
------ ------- ------- ------
Total $29,952 $ 30,554 $ 28,507 $29,361
====== ======= ======= ======
7
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 3 LOANS HELD FOR INVESTMENT:
Loans outstanding at March 31, 2006 and December 31, 2005 are
summarized as follows:
2006 2005
----- ----
Real Estate
Construction $ 38,451 $ 33,540
Residential 139,394 137,087
Commercial and agricultural 96,167 88,656
Installment loans to individuals 16,889 16,434
Credit cards 1,506 1,616
Other 103 65
------ -------
Total $292,510 $277,398
======= =======
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
Three Months Ended
March 31,
2006 2005
---- ----
Balance, beginning of period $1,673 $1,511
Provisions charged to
operating expenses 60 90
Net (charge-offs) recoveries:
Loan recoveries 11 19
Loan charge-offs (26) (54)
------- -----
Total Net Charge-Offs * (15) (35)
------ -----
Balance, End of Period $1,718 $1,566
===== =====
*Components of Net Charge-Offs
Real Estate
Commercial 1 1
Installment (16) (36)
------ -----
Total $ (15) $ (35)
====== =====
8
F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 BANK OWNED LIFE INSURANCE (BOLI):
The Bank currently offers a variety of benefit plans to all full
time employees. While the costs of these plans are generally tax
deductible to the Bank, the cost has been escalating greatly in recent
years. The Bank has determined that the benefits offered are necessary
in order to attract and retain good employees.
To help offset the growth in these costs, the Bank decided to enter
into BOLI contracts. Dividends received on these policies are
tax-deferred and are anticipated to be tax exempt as the death
benefits under the policies are exempt from income taxation. Rates of
return on a tax-equivalent basis are very favorable when compared to
other long-term assets which the Bank could obtain.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
F & M Bank Corp. (Company) is a one-bank holding company organized under
Virginia law which provides financial services through its wholly-owned
subsidiaries Farmers & Merchants Bank (Bank) and TEB Life Insurance Company
(TEB). Farmers & Merchants Financial Services (FMFS) is a wholly-owned
subsidiary of the Bank.
The Bank is a full service commercial bank offering a wide range of banking
and financial services through its eight branch offices. Two new branches have
been approved by the regulatory authorities. One office is approximately two
miles east of the Harrisonburg city limits on Route 33. This office will be
owned by the Bank and is currently under construction. The opening date for this
branch is anticipated to be during the late summer of 2006. The second office
will be located at 700 East Main Street, Luray, Virginia. This is a leased
facility and was recently vacated by another bank; remodeling of this facility
is expected to take approximately two months. The targeted opening date for this
branch is late June 2006. The Bank also operates a courier service which picks
up commercial deposits on a daily basis in the Harrisonburg area. TEB reinsures
credit life and accident and health insurance sold by the Bank in connection
with its lending activities. FMFS provides title insurance, brokerage services
and property/casualty insurance to customers of the Bank.
The Company's primary trade area services customers in Rockingham County,
Shenandoah County, the southern part of Page County and the northern part of
Augusta County. The addition of the Luray branch will increase the Company's
service area to include eastern and northern Page County.
Management's discussion and analysis is presented to assist the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial statements,
footnotes, and other financial data presented. The discussion highlights
material changes from prior reporting periods and any identifiable trends which
may affect the Company. Amounts have been rounded for presentation purposes.
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements
presented in Item 1, Part 1 or this Form 10Q.
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are statements that include projections,
predictions, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often characterized
by the use of qualified words (and their derivatives) such as "expect,"
"believe," "estimate," "plan," "project," or other statements concerning
opinions or judgment of the Company and its management about future events.
Although the Company believes that its expectations with respect to certain
forward-looking statements are based upon reasonable assumptions within the
bounds of its existing knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual future results
and trends may differ materially from historical results or those anticipated
depending on a variety of factors, including, but not limited to, the effects of
and changes in: general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new products and
delivery systems, inflation, changes in the stock and bond markets, technology,
and consumer spending and savings habits.
We do not update any forward-looking statements that may be made from time
to time by or on behalf of the Company.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
financial information contained within the statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. The
Company uses historical loss factors as one factor in determining the inherent
loss that may be present in its loan portfolio. Actual losses could differ
significantly from the historical factors that are used. The fair value of the
investment portfolio is based on period end valuations but changes daily with
the market. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of these transactions would be
the same, the timing of events that would impact these transactions could
change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles
of accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Additionally, it further clarifies the criteria for the
initial recognition and measurement of intangible assets separate from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of SFAS No. 142 discontinue the amortization
of goodwill and intangible assets with indefinite lives. Instead, these assets
will be subject to at least an annual impairment review and more frequently if
certain impairment indicators are in evidence. SFAS No. 142 also requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
Core deposit intangibles are amortized on a straight-line basis over ten
years. The Company adopted SFAS 147 on January 1, 2002 and determined that the
core deposit intangible will continue to be amortized over the estimated useful
life.
Securities Impairment
The Company evaluates each of its investments in securities, debt and equity,
under guidelines contained in SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities. These guidelines require the Company to determine
whether a decline in value below original cost is other than temporary. In
making its determination, management considers current market conditions,
historical trends in the individual securities, and historical trends in the
total market. Expectations are developed regarding potential returns from
dividend reinvestment and price appreciation over a reasonable holding period
(five years).
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview
Net income for the first quarter of 2006 was $1,085,000 or $.45 per share,
compared to $1,167,000 or $.48 in the first quarter of 2005, a decrease of
7.03%. Core operating earnings, (exclusive of non-recurring items) totaled
$1,085,000 in 2006 and $1,023,000 in 2005, an increase of 6.06%. During the
first quarter, noninterest income, exclusive of securities transactions,
decreased 10.28% and noninterest expense increased 9.46% during the same period.
Results of Operations
The 2006 year to date tax equivalent net interest margin increased
$244,000 or 7.93% compared to the same period 2005. The yield on earning assets
increased .73%, while the cost of funds increased .59% compared to the same
period in 2005. These increases resulted as maturing assets and liabilities
began repricing at higher rates.
Beginning in June 2004, the Federal Reserve's Federal Open Market
Committee (FOMC) reversed its accommodative monetary policy and has since raised
short term interest rates, in .25% increments by a total of 3.75% through March
2006. Although the Interest Sensitivity Analysis on page 20 indicates the
Company is in a liability sensitive position in the one year time horizon, the
recent increase in rates has proven beneficial to the net interest margin. This
has resulted due to the fact that a large portion of rate sensitive liabilities
(checking and savings) do not reprice immediately with changes in market rates,
but are adjusted at the discretion of management based on funding needs and
competitive factors.
A schedule of the net interest margin for 2006 and 2005 can be found in
Table I on page 18.
Noninterest income, exclusive of securities transactions, decreased
$66,000 or 10.28% through March 31, 2006. Items contributing to the decrease
include a $32,000 decrease in secondary market loan origination fees and a
$104,000 decrease in returns on low income housing investments. The returns on
these investments are principally in the form of tax credits and in 2005
included $93,000 related to the recognition of deferred state tax credits. These
credits have been classified as a return on investment rather than as a
reduction of income tax expense. This has been done to reflect the fact that the
Company entered into these investments with the expectation that tax credits
would be the primary source of investment return and to avoid a distortion of
income tax expense for the period.
Noninterest expense increased $193,000 in 2006. The increase is the result
of a $209,000 increase in salaries and benefits expense (18.43%). The increase
in salaries and benefits includes normal salary increases, growth in staff, and
an increase in the cost of group insurance of 16.21% Exclusive of personnel
expenses, other noninterest expenses decreased at an annualized rate of 1.76% in
2006 compared to 2005. Areas that decreased include a $19,000 decrease in FDIC
insurance assessment, and $22,000 in legal and professional fees. Noninterest
expense as an annualized percentage of average assets equals 2.58% which
compares to 2.38% in the prior year. Operating costs continue to compare very
favorably to the peer group. As stated in the most recently available Bank
Holding Company Performance Report, peer group noninterest expenses averaged
3.00% of average assets. The Company's operating costs have always compared
favorably to the peer group due to an excellent asset to employee ratio and
below average facilities costs.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Financial Condition
Federal Funds Sold and Interest Bearing Bank Deposits
The Company's subsidiary bank invests a portion of its excess liquidity in
either federal funds sold or interest bearing bank deposits. Federal funds sold
offer daily liquidity and pay market rates of interest that at quarter end was
benchmarked at 4.75% by the Federal Reserve. Actual rates received vary slightly
based upon money supply and demand among banks. Interest bearing bank deposits
are held either in money market accounts or as short-term certificates of
deposits. Combined balances in fed funds sold and interest bearing bank deposits
have decreased due to growth in the loan portfolio.
Securities
The Company's securities portfolio serves several purposes. Portions of
the portfolio are held to assist the Company with liquidity, asset liability
management, as security for certain public funds and repurchase agreements and
for long-term growth potential.
The securities portfolio consists of investment securities (commonly
referred to as "securities held to maturity") and securities available for sale.
Securities are classified as investment securities when management has the
intent and ability to hold the securities to maturity. Investment securities are
carried at amortized cost. Securities available for sale include securities that
may be sold in response to general market fluctuations, liquidity needs and
other similar factors. Securities available for sale are recorded at market
value. Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported (net of deferred income taxes) as a separate
component of shareholders' equity.
As of March 31, 2006, the cost of all securities available for sale
exceeded their market value by $602,000. This includes declines in value in both
the equity securities held by the Company and in the value of government
obligations held by the Bank. Declines in the value of the bond portfolio are
the result of recent changes in short term rates within the market for fixed
income securities. Management has traditionally held debt securities (regardless
of classification) until maturity and thus it does not expect the fluctuations
in value of these securities to have a direct impact on earnings.
Investments in debt securities increased $1,782,000 in the first quarter
of 2006. The portfolio is made up of primarily agency and mortgage-backed
securities with an average portfolio life of approximately one and quarter
years. This short average life results in less portfolio volatility and
positions the Bank to redeploy assets in response to rising rates. Scheduled
maturities in 2006 total $10,000,000 and these bonds have an average yield of
approximately 3.50%. Based on current market rates, as these bonds mature, the
funds will be reinvested at rates that are approximately 200 BP higher.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Company's equity securities portfolio was $251,000 below cost at March
31, 2006. The decline in the value of the equities portfolio is spread over a
number of asset sectors including dividend producing mutual funds that hold
primarily preferred stocks. These funds have declined in value as their yields
have become less favorable relative to alternative investment categories. To
minimize risk the Company holds a diversified portfolio of equity investments in
a number of large, regional financial institutions, a diversified portfolio of
REITs and a variety of other predominantly blue-chip securities. Management
continues to believe that these investments offer adequate current returns
(dividends) and have the potential for future increases in value.
A review of these investments as of March 31, 2006, revealed no securities
that were impaired as of quarter end and management continues to re-evaluate the
portfolio for impairment on a quarterly basis.
Loan Portfolio
The Company operates in a predominately rural area that includes the
counties of Rockingham, Page and Shenandoah in the western portion of Virginia.
The local economy benefits from a variety of businesses including agri-business,
manufacturing, service businesses and several universities and colleges. The
Bank is an active residential mortgage and residential construction lender and
generally makes commercial loans to small and mid size businesses and farms
within its primary service area.
The allowance for loan losses (see subsequent section) provides for the
risk that borrowers will be unable to repay their obligations and is reviewed
quarterly for adequacy. The risk associated with real estate and installment
notes to individuals is based upon employment, the local and national economies
and consumer confidence. All of these affect the ability of borrowers to repay
indebtedness. The risk associated with commercial lending is substantially based
on the strength of the local and national economies.
While lending is geographically diversified within the service area, the
Company does have loan concentrations in agricultural (primarily poultry
farming), construction, hotels, churches, assisted living facilities and the
aforementioned mortgage participations. Management and the Board of Directors
review these concentrations quarterly.
Management has entered into an agreement with Gateway Bank (of California)
to purchase short-term real estate loan participations. These loans have been
purchased by Gateway from mortgage brokers and will be held until sold to the
ultimate holder in the secondary market. All loans have firm take-out
commitments and are held for periods ranging from two to sixty days, but
averaging approximately fifteen days. These loans originate in several states
throughout the country, however, a significant portion are from the state of
California. These loans have been included with mortgage loans that the Bank has
originated within its own market and designated on the balance sheet as "Loans
Held for Sale".
Management has funded its loans for sale through the use of short-term
borrowings from the FHLB. The yield on these loans is based on a discount to the
prime rate, but offers a premium over other comparable short-term investments.
During the first quarter, these loan participations have averaged $557,000, with
a maximum balance of $3,528,000 and $0 at quarter end. The Bank has made a
commitment to purchase up to a maximum of $45,000,000 of these loans.
The first three months of 2006 resulted in an increase of $15,112,000 in
the Bank's core loan portfolio. The increase in the loan portfolio is reflective
of the strong local economy. The growth has been concentrated within the real
estate portfolio, both residential and commercial properties. Within the last
year and a half, the bank hired two commercial lenders that brought experience
from larger regional banks. Both these lenders have been successful in bringing
loan customers from their former banks which has added to the recent growth in
the portfolio.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Nonperforming loans include nonaccrual loans, loans 90 days or more past
due and restructured loans. Nonaccrual loans are loans on which interest
accruals have been suspended or discontinued permanently. Restructured loans are
loans which have had the original interest rate or repayment terms changed due
to financial hardship. Nonperforming loans totaled $235,000 at March 31, 2006
compared to $695,000 at December 31, 2005. Approximately 90% of these past due
loans are secured by real estate. Although the potential exists for some loan
losses, management believes the bank is generally well secured and continues to
actively work with its customers to effect payment. As of March 31, 2006, the
Company does not hold any real estate which was acquired through foreclosure.
The following is a summary of information pertaining to risk elements and
impaired loans:
March 31, December 31,
2006 2005
--------- ---------
Nonaccrual loans $ $ 63,000
Loans past due 90 days or more
and still accruing interest 235,000 632,000
Restructured loans 0 0
--------- ---------
$ 235,000 $ 695,000
Percent of loans held for investment .08% .25%
Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature and volume of
the loan portfolio and the trend of past due and criticized loans. Specific
factors evaluated include internally generated loan review reports, past due
reports, historical loan loss experience and changes in the financial strength
of individual borrowers that have been included on the Banks watch list or
schedule of classified loans.
In evaluating the portfolio, loans are segregated into loans with
identified potential losses and pools of loans by type (commercial, residential,
consumer, credit cards). Loans with identified potential losses include examiner
and bank classified loans. Classified relationships in excess of $100,000 are
reviewed individually for impairment under FAS 114. A variety of factors are
taken into account when reviewing these credits including borrower cash flow,
payment history, fair value of collateral, company management, the industry in
which the borrower is involved and economic factors. Loan relationships that are
determined to have no impairment are placed back into the appropriate loan pool
and reviewed under FAS 5.
Loan pools are further segmented into watch list, past due over 90 days and
all other loans by type. Watch list loans include loans that are 60 days past
due, and may include restructured loans, borrowers that are highly leveraged,
loans that have been upgraded from classified or loans that contain policy
exceptions (term, collateral coverage, etc.). Loss estimates on these loans
reflect the increased risk associated with these assets due to any of the above
factors. The past due pools contain loans that are currently 90 days or more
past due. Loss rates assigned reflect the fact that these loans bear a
significant risk of charge-off. Loss rates vary by loan type to reflect the
likelihood that collateral values will offset a portion of the anticipated
losses.
The remainder of the portfolio falls into pools by type of homogenous loans
that do not exhibit any of the above described weaknesses. Loss rates are
assigned based on historical loss rates over the prior five years. A multiplier
has been applied to these loss rates to reflect the time for loans to season
within the portfolio and the inherent imprecision of these estimates.
All potential losses are evaluated within a range of low to high. An
unallocated reserve has been established to reflect other unidentified losses
within the portfolio. This helps to offset the increased risk of loss associated
with fluctuations in past due trends, changes in the local and national
economies, and other unusual events. The Board approves the loan loss provision
for the following quarter based on this evaluation and an effort is made to keep
the actual allowance at or above the midpoint of the range established by the
evaluation process.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The allowance for loan losses of $1,718,000 at March 31, 2006 is equal to
..59% of loans held for investment. This compares to an allowance of $1,673,000
(.60%) at December 31, 2005. Management has funded the allowance at a rate of
$20,000 per month throughout the year of 2006, for a total of $60,000. Total
charge-offs, net of recoveries, equal $15,000 year to date. This is equivalent
to an annualized loss rate of .02% of total loans. In recent years, the company
has had an average loss rate of .08% which is approximately one half the loss
rate of its peer group.
The overall level of the allowance is well below its peer group average.
Management feels this is appropriate based on its loan loss history and the
composition of its loan portfolio; the current allowance for loan losses is
equal to approximately seven years of average loan losses. Based on historical
losses, delinquency rates, collateral values of delinquent loans and a thorough
review of the loan portfolio, management is of the opinion that the allowance
for loan losses fairly states the estimated losses in the current portfolio.
Deposits and Other Borrowings
The Company's main source of funding is comprised of deposits received
from individuals, governmental entities and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit. Total deposits have increased $1,986,000
since December 31, 2005. Time deposits increased $2,843,000 during this period
while demand deposits and savings deposits decreased $857,000. Due to the growth
in its loan portfolio and competition for deposits within its market, the Bank
has advertised two short term certificate of deposit rate specials to attract
new funds. The Bank also continues to advertise a free checking account product.
The growth in deposits appears to be a result of advertising of these accounts.
Short-term debt
Short-term debt consists of federal funds purchased, commercial repurchase
agreements (repos.) and daily rate credit from the Federal Home Loan Bank
(FHLB). Commercial customers deposit operating funds into their checking account
and by mutual agreement with the bank their excess funds are swept daily into
the repurchase accounts. These accounts are not considered deposits and are not
insured by the FDIC. The Bank pledges securities held in its investment
portfolio as collateral for these short-term loans. Federal funds purchased are
overnight borrowings obtained from the Bank's primary correspondent bank to
manage short-term liquidity needs. Daily rate credit from the FHLB has been used
to finance loans held for sale and also to finance the increase in short-term
residential and commercial construction loans.
Long-term debt
Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to
be an important source of funding real estate loan growth. The Company's
subsidiary bank borrows funds on a fixed rate basis. These borrowings are used
to fund either a fifteen-year fixed rate loan or a twenty-year loan, of which
the first ten years have a fixed rate. This program allows the Bank to match the
maturity of its fixed rate real estate portfolio with the maturity of its debt
and thus reduce its exposure to interest rate changes. Scheduled repayments
totaled $1,895,000 through March 31, 2006. Additional borrowings of $5,000,000
were obtained to assist in funding the growth in the loans held for investment.
16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
In September 2002, the Company borrowed $3 million from SunTrust Bank.
This loan carries an interest rate of LIBOR + 1.10% and is variable. Payments of
$230,769 plus interest began in the second quarter of 2004 and will continue for
a period of thirteen quarters. Proceeds of this loan were used primarily to
provide a capital contribution to the Bank.
Capital
The Company seeks to maintain a strong capital base to expand facilities,
promote public confidence, support current operations and grow at a manageable
level. As of March 31, 2006, the Company's total risk based capital and total
capital to total assets ratios were 13.87% and 9.70%, respectively. Both ratios
are in excess of regulatory minimums and exceed the ratios of the Company's
peers. Earnings have been satisfactory to allow an increase in the first quarter
dividend in 2006 of 5.26%.
Liquidity
Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liquidity exposure. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial institutions. The Company's subsidiary bank also has a
line of credit with the Federal Home Loan Bank of Atlanta that allows for
secured borrowings.
Interest Rate Sensitivity
In conjunction with maintaining a satisfactory level of liquidity, management
must also control the degree of interest rate risk assumed on the balance sheet.
Managing this risk involves regular monitoring of interest sensitive assets
relative to interest sensitive liabilities over specific time intervals. The
Company monitors its interest rate sensitivity periodically and makes
adjustments as needed. There are no off balance sheet items that will impair
future liquidity.
As of March 31, 2006, the Company had a cumulative Gap Rate Sensitivity Ratio
of (5.38%) for the one year repricing period. This generally indicates that
earnings would decrease in an increasing interest rate environment as
liabilities reprice more quickly than assets. However, in actual practice, this
may not be the case as loans tied to the prime rate of interest will reprice
immediately with an increase in short term market rates, while deposit rates
will remain stable until competitive market conditions dictate the necessity for
an increase in rates. Management constantly monitors the Company's interest rate
risk and has decided the current position is acceptable for a well-capitalized
community bank.
A summary of asset and liability repricing opportunities is shown in Table
II.
Stock Repurchase
On June 12, 2003, the Board authorized the repurchase of 50,000 shares of
the Company's outstanding common stock. Management has been authorized to
repurchase shares from time to time in the open market or through privately
negotiated transactions when market conditions warrant. The repurchased shares
are accounted for as retired stock. During the first quarter of 2006 2,035
shares were repurchased, at an average cost of $27.64 per share.
17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Effect of Newly Issued Accounting Standards
The Company does not believe that any newly issued but as yet unapplied
accounting standards will have a material impact on the Company's financial
position or operations.
Existence of Securities and Exchange Commission Web Site
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including F & M Bank
Corp. and the address is (http: //www.sec.gov).
18
TABLE 1
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)
(Dollar Amounts in Thousands)
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
------------------------- -----------------------
Average Income/ Average Income/
Balance(2) Expense Rates Balance(2) Expense Rates
------- ------- ----- ------- ------- -----
Interest Income
Loans held for investment(1,2) $281,824 $4,830 6.86% $259,055 $4,082 6.39%
Loans held for sale 569 13,904 132 3.85
Federal funds sold 1,156 12 4.15 2,530 16 2.56
Interest bearing
deposits 2,094 26 4.97 6,495 27 1.69
Investments
Taxable (3) 19,675 200 4.07 23,693 199 3.36
Partially taxable 6,686 113 6.76 6,974 104 5.97
Tax exempt (2,3) 375 4 4.27 375 4 4.27
------ ----- ---- ------- ----- ----
Total Earning Assets 312,379 5,185 6.64 313,026 4,564 5.91
------- ----- ---- ------- ----- ----
Interest Expense
Demand deposits 37,889 75 .79 38,155 44 .47
Savings 42,998 131 1.22 49,034 110 .91
Time deposits 139,943 1,249 3.57 123,128 890 2.93
Short-term debt 15,258 160 4.19 21,749 130 2.42
Long-term debt 23,074 250 4.33 31,442 314 4.05
------- ----- ----- ------- ----- ----
Total Interest
Bearing Liabilities $259,162 1,865 2.88 $263,508 1,488 2.29
======= ----- ----- ======= ----- ----
Net Interest Margin (1) 3,320 $3,076
===== =====
Net Yield on Interest
Earning Assets 4.25% 3.98%
===== =====
(1) Interest income on loans includes loan fees.
(2) An incremental income tax rate of 34% was used to calculate the tax
equivalent income on nontaxable and partially taxable investments and
loans.
(3) Average balance information is reflective of historical cost and has not
been adjusted for changes in market value.
19
TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
March 31, 2006
(In Thousands of Dollars)
The following table presents the Company's interest sensitivity.
0 - 3 4 - 12 1 - 5 Over 5 Not
Months Months Years Years Classified Total
-------- ------- ------ ------ ---------- -----
Uses of Funds
Loans
Commercial $ 46,141 $ 7,276 $ 75,873 $ 5,328 $ $134,618
Installment 4,614 989 10,066 1,323 16,992
Real estate for
investments 22,557 6,163 92,099 18,575 139,394
Real estate for sale
Credit cards 1,506 1,506
Federal funs sold 125 125
Interest bearing
bank deposits 799 1,188 397 2,384
Investment securities 4,982 7,116 11,445 6,519 30,062
------ ------ ------- ------ ----- -------
Total 80,724 22,732 189,880 25,226 6,519 325,081
------ ------ ------- ------ ----- -------
Sources of Funds
Interest bearing
demand deposits 11,767 21,572 4,902 38,241
Savings deposits 8,507 25,520 8,507 42,534
Certificates of
deposit
$100,000 and over 4,525 16,317 16,471 37,313
Other certificates
of deposit 13,680 41,034 48,975 103,689
Short-term borrowings 17,987 17,987
Long-term borrowings 3,395 3,741 16,184 2,593 25,913
------ ------ ------- ------ ------ -------
Total 39,587 81,366 128,722 16,002 265,677
------ ------ ------- ------ ------ -------
Discrete Gap 41,137 (58,634) 61,158 9,224 6,519 59,404
Cumulative Gap 41,137 (17,497) 43,661 52,885 59,404
Ratio of Cumulative
Gap to Total 12.65% (5.38)% 13.43% 16.27% 18.27%
Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 2005. In preparing the above table,
no assumptions were made with respect to loan prepayments. Loan principal
payments are included in the earliest period in which the loan matures or can
reprice. Principal payments on installment loans scheduled prior to maturity are
included in the period of maturity or repricing. Proceeds from the redemption of
investments and deposits are included in the period of maturity. Estimated
maturities of deposits, which have no stated maturity dates, were derived from
guidance contained in FDICIA 305.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as F & M Bank Corp. that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are required to include in those reports
certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws. These
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports it files or submits under the Act, is communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to the Company is made known to our principal
executive officers and principal financial officer on a regular basis, in
particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the Chief Executive Officer and the Chief
Financial Officer, and the other executive officers of the Company and its
subsidiaries to identify any new transactions, events, trends, contingencies or
other matters that may be material to the Company's operations. As required, we
will evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and most recently did so as of the end of the period covered by
this report.
The Company's Chief Executive Officer and Chief Financial Officer, based on
their evaluation as of the end of the period covered by this quarterly report of
the Company's disclosure controls and procedures (as defined in Rule 13(a)-14(e)
of the Securities Exchange Act of 1934), have concluded that the Company's
disclosure controls and procedures are adequate and effective for purposes of
Rule 13(a)-14(e) and timely, alerting them to financial information relating to
the Company required to be included in the Company's filings with the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Controls
During the period reported upon, the only significant change in F & M Bank
Corp.'s internal controls was an increase in the lending limit of the management
loan committee from $800,000 to $1,500,000. No other changes were made
pertaining to its financial reporting and control of its assets or in other
factors that could significantly affect these controls since the date of their
evaluation.
Due to the nature of the Company's business as stewards of assets of
customers; internal controls are of the utmost importance. The Company has
established procedures during the normal course of business to reasonably ensure
that fraudulent activity of either a material amount to these results or in any
amount is not occurring. In addition to these controls and review by executive
officers, the Company retains the services of S. B. Hoover, LLP, a public
accounting firm, to complete regular internal audits, which examine the
processes and procedures of the Company and the Bank to ensure that these
processes are reasonably effective to prevent internal or external fraud and
that the processes comply with relevant regulatory guidelines of all relevant
banking authorities. The findings of S. B. Hoover are presented to management of
the Bank and to the Audit Committee of the Company.
21
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 1a. Risk Factors - There have been no material changes from the risk
factors previously disclosed in Item 1a of the Corporation's Form 10k filed on
March 24, 2006.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds- Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of
Security Holders- Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits
(a)Exhibits
3 i Restated Articles of Incorporation of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank
Corp.'s 2001 Form 10K filed March 1, 2002.
3 ii Amended and Restated Bylaws of F & M Bank Corp. are
incorporated by reference to Exhibits to F & M Bank Corp.'s
Form 10K filed March 1, 2002.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
32 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sabanes-Oxley Act of 2002
(filed herewith).
22
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANK CORP.
/s/ DEAN W. WITHERS
----------------------------
Dean W. Withers
President and Chief Executive Officer
/s/ NEIL W. HAYSLETT
----------------------------
Neil W. Hayslett
Senior Vice President and Chief
Financial Officer
May 12, 2006