-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdteqxgNasPAzgpcSI85v3c9GLbyqv1r0idtOWuzHOwqYHXbrTWpluQ5LHc8yApl BhSNgxjD4yO5UNJnWKw09Q== 0000930609-04-000069.txt : 20040517 0000930609-04-000069.hdr.sgml : 20040517 20040517125045 ACCESSION NUMBER: 0000930609-04-000069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: F&M BANK CORP CENTRAL INDEX KEY: 0000740806 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541280811 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13273 FILM NUMBER: 04810899 BUSINESS ADDRESS: STREET 1: P.O. BOX 1111 CITY: TIMBERVILLE STATE: VA ZIP: 22853 BUSINESS PHONE: 540-896-8941 MAIL ADDRESS: STREET 1: P. O. BOX 1111 CITY: TIMBERVILLE STATE: VA ZIP: 22853 10-Q 1 fm10qfor304.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 Commission File No. 0-13273 F & M BANK CORP. (Exact name of registrant as specified in its charter) Virginia 54-1280811 - ------------------------------ -------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Drawer 1111 Timberville, Virginia 22853 (Address of Principal Executive Offices, Including Zip Code) (540) 896-8941 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ----- ------- Indicate by check mark whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ----- ------ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of April 15, 2004, 2,418,148 shares of Common Stock, $5 Par Value 1 F & M BANK CORP. INDEX Page PART I FINANCIAL INFORMATION 2 Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended March 31, 2004 and 2003 2 Consolidated Balance Sheets - March 31, 2004 and December 31, 2003 3 Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended March 31, 2004 and 2003 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003 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 18 Item 4. Controls and Procedures 18 PART II OTHER INFORMATION 19 Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibit and Reports on Form 8-K 19 SIGNATURES 20 2 Part I Financial Information Item 1 Financial Statements F & M BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars) Three Months Ended March 31, 2004 2003 Interest Income Interest and fees on loans $ 3,460 $ 3,588 Interest on federal funds sold 10 32 Interest on interest bearing deposits 51 48 Interest and dividends on investment securities 450 632 ------- ------ Total Interest Income 3,971 4,300 ------- ------ Interest Expense Interest on demand accounts 51 58 Interest on savings deposits 108 142 Interest on time deposits 838 1,074 ------- ------ Total interest on deposits 997 1,274 Interest on short-term debt 8 14 Interest on long-term debt 255 342 ------- ------ Total Interest Expense 1,260 1,630 ------- ------ Net Interest Income 2,711 2,670 Provision for Loan Losses 60 72 ------- ------ Net Interest Income after Provision for Loan Losses 2,651 2,598 ------- ------ Noninterest Income Service charges 224 173 Other 247 231 Income on Bank owned life insurance 63 47 Security gains (losses) 175 (110) ------- ------- Total Noninterest Income 709 341 ------- ------ Noninterest Expense Salaries 807 753 Employee benefits 297 260 Occupancy expense 95 95 Equipment expense 105 89 Intangibles amortization 69 69 Other 515 466 ------- ------ Total Noninterest Expense 1,888 1,732 ------- ------ Income before Income Taxes 1,472 1,207 Income Taxes 439 354 ------- ------ Net Income $ 1,033 $ 853 ======= ====== Per Share Data Net Income $ .43 $ .35 ======= ====== Cash Dividends $ .18 $ .17 ======= ====== Equivalent Shares Outstanding 2,419,172 2,423,678 ========= ========= 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 2004 2003 ---------- ------------ Cash and due from banks $ 5,952 $ 5,665 Interest bearing deposits in banks 9,801 9,003 Federal funds sold 5,639 5,035 Securities held to maturity (note 2) 872 873 Securities available for sale (note 2) 48,158 54,896 Other investments 5,422 5,461 Loans, net of unearned discount (note 3) 217,924 211,231 Less allowance for loan losses (note 4) (1,517) (1,484) -------- -------- Net Loans 216,407 209,747 Bank premises and equipment 5,007 5,001 Interest receivable 1,275 1,496 Goodwill 2,639 2,639 Deposit intangibles 1,909 1,978 Bank owned life insurance (note 5) 4,895 4,832 Other assets 2,311 2,500 ------- ------- Total Assets $310,287 $309,126 ======= ======= LIABILITIES Deposits Noninterest bearing demand $ 34,698 $ 33,124 Interest bearing Demand 38,882 37,875 Savings deposits 49,321 47,545 Time deposits 118,933 122,171 ------- ------- Total Deposits 241,834 240,715 Short-term debt 7,339 6,389 Long-term debt 22,676 24,784 Accrued expenses 5,448 4,919 ------- ------- Total Liabilities 277,297 276,807 ------- ------- STOCKHOLDERS' EQUITY Common stock $5 par value, 2,418,148 and 2,420,478 shares issued and outstanding, respectively 12,091 12,102 Surplus 242 286 Retained earnings 20,308 19,710 Accumulated other comprehensive income 349 221 ------- ------- Total Stockholders' Equity 32,990 32,319 ------- ------- Total Liabilities and Stockholders' Equity $310,287 $309,126 ======= ======= The accompanying notes are an integral part of these statements. 4 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands of Dollars) Three Months Ended March 31, 2004 2003 Balance, beginning of period $ 32,319 $ 29,541 Comprehensive Income: Net income for period 1,033 853 Net change in unrealized appreciation (depreciation) on investment securities available for sale, net of taxes 130 (205) ------- -------- Total comprehensive income 1,163 648 Repurchase of common stock (2,330 shares) (56) Dividends declared (436) (412) -------- -------- Balance, end of period $ 32,990 $ 29,777 ======= ======= The accompanying notes are an integral part of these statements. 5 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) Three Months Ended March 31, 2004 2003 Cash Flows from Operating Activities: Net income $ 1,033 $ 853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 116 93 Amortization of security premiums 114 41 Provision for loan losses 60 72 Intangibles amortization 69 69 (Increase)decrease in interest receivable 221 183 Decrease in other assets 400 260 Increase(decrease) in accrued expenses 264 (356) (Gain)Loss on security transactions (175) 110 Amortization of limited partnership investments 61 64 Income from life insurance investment (63) (47) --------- --------- Net adjustments 1,067 489 ------- ------- Net Cash Provided by Operating Activities 2,100 1,342 ------- ------- Cash Flows from Investing Activities: Purchase of investments available for sale (614) (9,474) Proceeds from sales of investments available for sale 830 277 Proceeds from maturity of investments available for sale 6,746 15,002 Net increase in loans (6720) 2,886 Purchase of property and equipment (122) (101) Change in federal funds sold (604) (9,027) Net increase in interest bearing bank deposits (798) (2,884) Purchase of life insurance (1,870) Construction in progress payments (99) ------- ------- Net Cash Used in Investing Activities (1,282) (5,290) -------- -------- Cash Flows from Financing Activities: Net increase in demand and savings deposits 4,323 1,564 Net increase (decrease) in time deposits (3,238) 4,327 Net increase (decrease) in short-term debt 984 (359) Cash dividends paid (436) (412) Repurchases of common stock (56) Repayment of long-term debt (2,108) (1,775) -------- ------- Net Cash Provided by Financing Activities (531) 3,345 -------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 287 (603) Cash and Cash Equivalents, Beginning of Period 5,665 6,017 ------- ------- Cash and Cash Equivalents, End of Period $ 5,952 $ 5,414 ======= ======= Supplemental Disclosure Cash paid for: Interest expense $ 1,301 $ 1,647 The accompanying notes are an integral part of these statements. 6 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING PRINCIPLES: The consolidated financial statements include the accounts of F & M Bank Corp. and its subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements conform to generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2004 and the results of operations for the three-month periods ended March 31, 2004 and March 31, 2003. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2003. 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, 2004 and December 31, 2003 follows: 2004 2003 ---------------------- -------------------- Carrying Market Carrying Market Value Value Value Value Securities Held to Maturity U. S. Treasury and Agency obligations $ 110 $ 110 $ 110 $ 111 Other securities 762 776 763 787 ------- ------- ------- -------- Total $ 872 $ 886 $ 873 $ 898 ======= ======= ======= ======= 2004 2003 --------------------- -------------------- Market Market Value Cost Value Cost Securities Available for Sale U. S. Treasury and Agency obligations $ 20,459 $ 20,333 $ 25,444 $ 25,387 Equity securities 9,334 9,044 9,245 9,110 Mortgage-backed securities 8,208 8,236 8,989 9,004 Other securities 10,157 10,003 11,218 11,035 ------- ------- ------- -------- Total $ 48,158 $ 47,616 $54,896 $54,536 ======= ======== ======== ======== 7 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 LOANS: Loans outstanding at March 31, 2004 and December 31, 2003 are summarized as follows: 2004 2003 Real Estate Construction $16,061 $ 15,329 Mortgage 121,244 118,677 Commercial and agricultural 60,238 56,000 Consumer 18,954 19,630 Credit cards 1,355 1,463 Other 72 132 ----- ------- Total $217,924 $211,231 ======= ======== NOTE 4 ALLOWANCE FOR LOAN LOSSES: A summary of transactions in the allowance for loan losses for the three months ended March 31, 2004 and 2003 follows: 2004 2003 Balance, beginning of period $ 1,484 $ 1,477 Provisions charged to operating expenses 60 72 Net (charge offs) recoveries Loan recoveries 40 19 Loan charge-offs (67) (23) ------- --------- Total Net (Charge-offs) Recoveries (27) (4) ------- --------- Balance, End of Period $ 1,517 1,545 ====== ======== Components of net (charge-offs) recoveries: Real Estate $ Commercial (48) 1 Consumer 21 (5) ------ --------- $ (27) (4) ======= ========= 8 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 BANK OWNED LIFE INSURANCE (BOLI) The Bank currently offers a variety of benefit plans to all full time employees. While the costs of these plans are generally tax deductible to the Bank, the cost has been escalating greatly in recent years. In order to attract and retain good employees, the Bank has determined that additional benefits are necessary. To help offset the growth in these costs, the Bank decided to enter into the BOLI contracts. Dividends received on these policies are tax-deferred and the death benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are very favorable when compared to other long-term assets which the Bank could obtain. The Bank is both owner and beneficiary of the policies. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview F & M Bank Corp. (Company) is a one-bank holding company organized under Virginia law which provides financial services through its wholly-owned subsidiaries Farmers & Merchants Bank (Bank) and TEB Life Insurance Company (TEB). Farmers & Merchants Financial Services (FMFS) is a wholly-owned subsidiary of the Bank. The Bank is a full service commercial bank offering a wide range of banking and financial services through its seven branch offices. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides title insurance, brokerage services and property/casualty insurance to customers of the Bank. The Company's primary trade area services customers in Rockingham County, Shenandoah County, the southern part of Page County and the northern part of Augusta County. Management's discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q. Forward-Looking Statements Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standard ("SFAS") No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. 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). Results of Operations Net income year to date increased $180,000 compared to 2003. Yields on earning assets declined 55 basis points compared to 2003 while rates paid on interest bearing liabilities fell 60 basis points for the same period. Much of the decrease in the cost of funds resulted from maturing time deposits which repriced at much lower rates. Overall the cost of time deposits has decreased from 3.43% in 2003 to 2.78% in 2004. Total average earning assets are virtually unchanged at $281 million versus $280 million in 2003, however balance sheet leverage has improved. Loans, the highest yielding earning asset, as a percentage of earning assets have increased from 71.7% in 2003 to 76.1% in 2004. A schedule of the net interest margin for 2004 and 2003 can be found in Table I on page 16. Noninterest income increased $368,000 in the first three months of 2004. Exclusive of securities transactions, other noninterest income increased $83,000 or 18.4%. The growth in noninterest income came from overdraft fees, commissions on sales of investments and insurance products and increases in the value of bank owned life insurance. Noninterest expense increased $156,000 (9.0%). Salaries and benefits accounted for $91,000, (also a 9.0% increase) of this total. This increase was caused by a combination of normal salary increases and increases in the cost of group health insurance and pension expense. The remaining increase is made up of increases in a number of areas, including: data processing fees, equipment maintenance, and professional fees. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Federal Funds Sold and Interest Bearing Bank Deposits The Company's subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay a market rate of interest that is currently benchmarked at 1.00% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Balances in both federal funds sold and interest bearing bank deposits have increased slightly due to continued deposit growth, and maturing securities. Securities The Company's securities portfolio is held to assist the Company in liquidity and asset liability management. The securities portfolio consists of securities held to maturity and securities available for sale. Securities are classified as held to maturity when management has the intent and ability to hold the securities to maturity. These securities are carried at their amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, general liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders' equity. As of March 31, 2004, the market value of all securities available for sale exceeded their cost by $542,000. This includes increases in value in both the equity securities held by the Company and in the value of government obligations held by the Bank. 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 securities decreased $6,739,000 in the first quarter of 2004 with proceeds of maturing securities funding the growth of the loan portfolio. The Company generally invests in relatively short-term maturities due to the uncertainty in the direction of interest rates. Recent purchases of debt securities have been primarily U.S. Agency obligations with contractual maturities of two to three years. Of the investments in securities available for sale, 19.4% are invested in equity securities, most of which are dividend producing and subject to the corporate dividend exclusion for income taxation purposes. The Company believes these investments offer adequate returns and have the potential for significant increases in value. A review of these investments as of March 31, 2004, did not reveal any additional impairment to be recognized in excess of that which was recognized in the fourth quarter of 2002. Loan Portfolio The Company operates in an agriculturally dominated area in the western portion of Virginia which includes the counties of Rockingham, Page and Shenandoah. The Company does not make a significant number of loans to borrowers outside its primary service area. The Company is very active in local residential construction mortgages. Commercial lending includes loans to small and medium sized businesses within its service area. The allowance for loan losses (see subsequent section) provides for the risk that borrowers will be unable to repay their obligations and is reviewed quarterly for adequacy. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is primarily based on the strength of the local economy. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations While lending is geographically diversified within the service area, the Company has a concentration in agricultural loans (primarily poultry farming). Subsequent to the date of this report, Pilgrim's Pride announced the planned sale or closure of its turkey processing plant in Hinton, Virginia. Bank management has evaluated the loan portfolio to determine its potential exposure with growers that are associated with Pilgrim's Pride. Management has determined that its exposure is limited due to a combination of strong collateral positions on most of the loans, the potential for some of these borrowers to contract these poultry houses with other processors, the potential to convert the houses to other uses and other sources of income for some of the borrowers. The risks within the portfolio related to this plant sale or closure are not limited only to growers, but also include those individuals employed at this location and businesses that provide services to the plant, growers or employees. The complete impact on the portfolio of the decision by Pilgrim's Pride will not be known until the plant's disposition has been settled. The Company will continue to monitor its past due loans closely throughout this process and will take appropriate actions to mitigate its risks, as well as to work with its customers to facilitate timely payment on their loans. The first three months of 2004 resulted in a $6,693,000 increase in the loan portfolio. This increase compares to a $2,890,000 decrease in the loan portfolio in 2003. The increase in the loan portfolio is reflective of the strengthening local economy. Subsequent to the end of the first quarter, the Bank began purchasing a significant volume of short-term loan participations. These loans are single family mortgage loans that have been pre-sold into the secondary market. The Bank will hold these loans for an average of ten days to two weeks, until all documentation requirements of the secondary market purchaser have been met and the purchaser takes final delivery on the loan(s). While the potential exists that this participation arrangement may add significantly to loan income, the volume and timing of loans purchased is highly dependent on fluctuations in market rates of interest for qualifying secondary market loans and the corresponding impact on demand for these products. Nonperforming loans include nonaccrual loans, loans 90 days or more past due and restructured loans. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans, on which the original interest rate or repayment terms have been changed due to financial hardship. Nonperforming loans totaled $1,010,000 at March 31, 2004 compared to $1,614,000 of loans at December 31, 2003. Approximately 86% of these past due loans are secured by real estate. Although the potential exists for some loan losses, management believes the bank is generally well secured and continues to actively work with these customers to effect payment. As of March 31, 2004 the Company did not hold any real estate that was acquired through foreclosure. Allowance for Loan Losses In evaluating the portfolio, loans are segregated into loans with identified potential losses, and pools of loans by type (commercial, residential, consumer, credit cards). Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $100,000 are reviewed individually for impairment under FAS 114. A variety of factors are taken into account when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under FAS 5. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Loan pools are further segmented into watch list, past due over 90 days and all other. Watch list loans include loans that are 60 days past due, and may include restructured loans, borrowers that are highly leveraged, loans that have been upgraded from classified or loans that contain policy exceptions (term, collateral coverage, etc.). Loss estimates on these loans reflect the increased risk associated with these assets due to any of the above factors. The past due pools contain loans that are currently 90 days or more past due. Loss rates assigned reflect the fact that these loans bear a significant risk of charge-off. Loss rates vary by loan type to reflect the likelihood that collateral values will offset a portion of the anticipated losses. The remainder of the portfolio falls into pools by type of homogenous loans that do not exhibit any of the above described weaknesses. Loss rates are assigned based on historical loss rates over the prior five years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates. All potential losses are evaluated within a range of low to high. An unallocated reserve has been established to reflect other unidentified losses within the portfolio. It helps to offset the increased risk of loss associated with fluctuations in past due trends, changes in the local and national economies, and other unusual events (ie. Avian influenza). The Board approves the loan loss provision for the following quarter based on this evaluation and an effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process. The allowance for loan losses of $1,517,000 at March 31, 2004 is equal to ..70% of total loans. This compares to an allowance of $1,484,000 (.70%) at December 31, 2003. Although management has decreased its funding of the allowance compared to the first quarter of 2003, funding for the quarter of $60,000 exceeded net charge-offs by $33,000. The allowance of .70% of loans outstanding 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. Deposits and Long-Term Debt The Company's main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Company realized annualized deposit growth of 1.9% in the first quarter of 2004. Certificates of deposit decreased $3,238,000, while all other deposit types increased a total of $4,357,000 during the quarter. Management believes that much of the decrease in certificates of deposits funded a portion of the increase in other deposit types, as customers moved monies to liquid interest bearing accounts rather than tying up funds for longer terms at current market rates. It is anticipated that as rates rise these funds may once again migrate into certificates of deposits. The Bank has advertised a free checking account product, but has not offered any other deposit promotions during the first quarter. The remaining growth in non-interest bearing liabilities appears to be a result of accounts gained from larger institutions and customer funds being held in short-term accounts due to low rates of interest and stock market volatility. 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. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 $1,441,000 in the first quarter of the year. Additional borrowings were not necessary due to the overall liquidity position. As part of the approval process for the acquisition of the new branches, the Company was required to contribute $6 million into the Bank as additional equity capital. The Company funded this contribution in part by borrowing $4 million from SunTrust Bank. The loan was amortized over a three year period with quarterly payments of $333,333, plus interest. The loan was collateralized by marketable securities and carried an interest rate of LIBOR + 1.10%. In September 2001, the Company entered into a rate swap agreement with SunTrust Robinson Humphrey, which fixed the rate at 4.60% for the remaining term of the obligation. The final payment on this loan was made in March 2004. In September 2002, the Company borrowed an additional $3 million from SunTrust Bank. This loan carries an interest rate of LIBOR + 1.10% and is variable. Payments of $230,769, plus interest, will begin in the second quarter of 2004 for a period of thirteen quarters. Proceeds of this loan were used to provide an additional capital contribution to the Bank and to pay off an intercompany loan. Capital The Company maintains a strong capital base to expand facilities, promote public confidence, support operations and grow at a manageable level. As of March 31, 2004, the Company's total risk based capital and total capital to total average assets ratios were 14.78% and 10.70%, respectively. Both ratios are in excess of regulatory minimums and exceed the ratios of the Company's peers. Earnings have been sufficient to allow an increase in dividends in 2004 and management has no reason to believe this increased level of dividends will not continue. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. As of January 1, 2004, approximately $1,965,000 was available for dividend distribution without permission of the Board of Governors. Liquidity Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, deposits obtained through the adjustment of interest rates and purchases of federal funds. To further meet its liquidity needs, the Company also maintains lines of credit with correspondent financial institutions. The Company's subsidiary bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. In the past, growth in deposits and proceeds from the maturity of investment securities has been sufficient to fund most of the net increase in loans and investment securities. Interest Rate Sensitivity As a result of the continued growth in deposits, and through maturities of investments, the liquidity position at March 31, 2004 remains very strong. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Bank's membership in the Federal Home Loan Bank System also provides liquidity, as the Bank borrows money that is repaid over a five to ten year periods 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. Table II (page 17) contains an analysis which shows the repricing opportunities of earning assets and interest bearing liabilities as of March 31, 2004. Interest Rate Sensitivity (continued) As of March 31, 2004, the Company had a cumulative Gap Rate Sensitivity Ratio of .67% for the one year repricing period. This generally indicates that earnings would improve in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as deposit customers may move funds into longer term higher rate time deposits as rates rise rather than maintaining the same general maturity schedules as that which currently exists. Management constantly monitors the Company's interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment. Stock Repurchase On June 12, 2003, the Company announced that the Board of Directors had authorized the repurchase of up to 50,000 shares of the Company's outstanding common stock. Repurchases were authorized to be made by the Company from time to time in the open market or privately negotiated transactions during the year as, in the opinion of management, market conditions warrant. The repurchased shares are accounted for as retired stock. Shares repurchased through March 31, 2004 total 6,904. Shares repurchased during the first quarter of 2004 totaled 2,330 shares at an average cost of $23.83 per share. Securities and Exchange Commission Web Site The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp., and the address is (http://www.sec.gov). 16 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, 2004 March 31, 2003 -------------------- -------------------- Average Income/ Average Income/ Balance 2 Expense Rates Balance 2 Expense Rates ------- ------- ----- ------- ------- ----- Interest Income Loans1 $213,808 $3,474 6.50% $200,832 $3,604 7.28% Federal funds sold 4,264 10 .94 11,137 32 1.17 Interest bearing deposits 9,411 51 2.17 6,875 48 2.83 Investments Taxable 3 43,475 347 3.19 52,431 522 3.98 Partially taxable 9,687 132 5.45 8,990 136 6.05 Tax exempt 2,3 375 4 4.27 ------ ----- ---- ------ ----- --- Total Earning Assets 281,020 4,018 5.72 280,265 4,342 6.27 -------- ----- ---- ---------- ----- ---- Interest Expense Demand deposits 37,915 51 .54 33,605 58 .70 Savings 47,916 108 .90 42,387 142 1.36 Time deposits 120,434 838 2.78 127,125 1,074 3.43 Short-term debt 6,744 8 .53 7,533 14 .75 Long-term debt 23,762 255 4.28 31,360 342 4.42 ------ --- ----- ------ ----- ---- Total Interest Bearing Liabilities $236,771 1,260 2.13 $242,010 1,630 2.73 ========== ----- ----- ========== ----- ---- Net Interest Margin 1 2,758 $2,712 ===== ===== Net Yield on Interest Earning Assets 3.93% 3.91% ===== ===== 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. 3 Average balance information is reflective of historical cost and has not been adjusted for changes in market value. 17 TABLE II F & M BANK CORP. INTEREST SENSITIVITY ANALYSIS MARCH 31, 2004 (In Thousands of Dollars) 0 - 3 4 - 12 1 - 5 Over 5 Not Months Months Years Years Classified Total Uses of Funds Loans 49,205 25,233 113,789 29,697 217,924 Interest bearing bank deposits 2,786 6,421 594 9,801 Investment securities 3,795 9,178 26,389 625 14,465 54,452 Federal funds sold 5,639 5,639 ------ ------ ------ ------ ----- ------ Total 61,425 40,832 140,772 30,322 14,465 287,816 ------ ------ --------- ------ ------ ------- Sources of Funds Interest bearing demand deposits 11,685 22,026 5,171 38,882 Savings deposits 9,864 29,593 9,864 49,321 Time deposits $100,000 and over 2,996 7,204 10,882 21,082 Other time deposits 16,767 36,409 44,675 97,851 Short-term borrowings 7,339 7,339 Long-term debt 1,886 6,229 13,454 1,107 22,676 ----- ------- ------- ------- ------- ------ Total 28,988 71,391 120,630 16,142 237,151 ------ ------- ------- ------ ------- ---------- Discrete Gap 32,437 (30,559) 20,142 14,180 14,465 50,665 Cumulative Gap 32,437 1,878 22,020 36,200 50,665 Ratio of Cumulative Gap to Total Earning Assets 11.27% .65% 7.65% 12.58% 17.60% Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities at March 31, 2004. In preparing the above table no assumptions are made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments 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. 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the information provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company's 2003 Form 10-K. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are now required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws. Under rules adopted by the Securities and Exchange Commission effective August 29, 2002, these disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We have established our disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer, and the other executive officers of the Company and its subsidiaries to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company's operations. As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company's disclosure controls and procedures (as defined in Rule 13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the Company's disclosure controls and procedures are adequate and effective for purposes of Rule 13(a)-14(e) and timely, alerting them to financial information relating to the Company required to be included in the Company's filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Changes in Internal Controls During the period reported upon, there were no significant changes in the internal controls of F & M Bank Corp. pertaining to its financial reporting and control of its assets or in other factors that could significantly affect these controls. Due to the nature of the Company's business as stewards of assets of customers, internal controls are of the utmost importance. The Company has established procedures undertaken during the normal course of business to reasonably ensure that fraudulent activity of either an amount material to these results or in any amount is not occurring. In addition to these controls and review by executive officers, the Company retains the services of Yount, Hyde & Barbour, P.C., 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 Yount, Hyde & Barbour are presented to management of the Bank and to the Audit Committee of the Company. 19 Part II Other Information Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities - Not Applicable Item 3. Defaults Upon Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders - Not applicable Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on 8-K (a) Exhibits 3 i Restated Articles of Incorporation of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.'s Form 10K filed March 1, 2002. 3 ii Amended and Restated Bylaws of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.'s Form 10K filed March 1, 2002. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 USC Section 1350(A) and (B)) 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 USC Section 1350(A) and (B)) 32.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Title 18 USC Section 1350). (b) Reports on Form 8-K The Company did not file any reports on Form 8-K for the quarter ending March 31, 2004. 20 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. F & M BANK CORP. /s/ Julian D. Fisher --------------------------------------- Julian D. Fisher President and Chief Executive Officer /s/ Neil W. Hayslett --------------------------------------- Neil W. Hayslett Senior Vice President and Chief Financial Officer May 13, 2004 EX-31 2 exhibit311for10qfor304.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 USC Section 1350 (A) and (B)) I, Julian D. Fisher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 13, 2004 /s/ JULIAN D. FISHER ------------------------- Julian D. Fisher President and Chief Executive Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 3 exhibit312for10q304.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 USC Section 1350 (A) and (B)) I, Neil W. Hayslett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 13, 2004 /s/ NEIL W. HAYSLETT ------------------------- Neil W. Hayslett Senior Vice President & Chief Financial Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 4 exhibit32for10q304.txt EXHIBIT 32.1 Exhibit 32.1 Statement of Chief Executive Officer and Financial Officer Pursuant to 18 U.S.C.ss. 1350 In connection with the Quarterly Report of F & M Bank Corp. (the "Company") on Form 10-Q for the period ending March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as the chief executive officer and chief financial officer, respectively, of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2003, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JULIAN D. FISHER ----------------------------------- Julian D. Fisher President and Chief Executive Officer /s/ NEIL W. HAYSLETT ----------------------------------- Neil W. Hayslett Senior Vice President & Chief Financial Officer Date: May 13, 2004 -----END PRIVACY-ENHANCED MESSAGE-----