F&M BANK CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2009
Commission file number: 0-13273
F & M BANK CORP.
(Exact name of registrant as specified in its charter)
| Virginia | 54-1280811 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer 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)
(Address of principal executive offices) (Zip Code)
(540) 896-8941
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock — $5 Par value per share
Common Stock — $5 Par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Sarbanes Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes
o
No
þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting Company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
o
No
þ
The registrant’s Common Stock is traded Over-the-Counter under the symbol FMBM. The aggregate
market value of the 2,193,453 shares of Common Stock of the registrant issued and outstanding held
by non-affiliates on June 30, 2009 was approximately $53,739,599 based on the closing sales price
of $24.50 per share on that date. For purposes of this calculation, the term “affiliate” refers to
all directors and executive officers of the registrant.
As of the close of business on March 1, 2010, there were 2,295,828 shares of the registrant’s
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2010 (the “Proxy
Statement”).
Table of Contents
Table of Contents
General
F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one-bank holding
company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and owns 100% of the
outstanding stock of its affiliate, Farmers & Merchants Bank (Bank). TEB Life Insurance Company
(TEB) and Farmers & Merchants Financial Services, Inc. (FMFS) are wholly owned subsidiaries of
Farmers & Merchants Bank. Farmers & Merchants Bank also holds a majority ownership in VBS Mortgage
LLC. (VBS).
Farmers & Merchants Bank was chartered on April 15, 1908, as a state chartered bank under the laws
of the Commonwealth of Virginia. TEB was incorporated on January 27, 1988, as a captive life
insurance company under the laws of the State of Arizona. FMFS is a Virginia chartered corporation
and was incorporated on February 25, 1993. VBS (formerly Valley Broker Services, Inc.) was
incorporated on May 11, 1999. The Bank purchased a majority interest in VBS on November 3, 2008.
The Bank offers all services normally offered by a full-service commercial bank, including
commercial and individual demand and time deposit accounts, repurchase agreements for commercial
customers, commercial and individual loans, and drive-in banking services. TEB was organized to
re-insure credit life and accident and health insurance currently being sold by the Bank in
connection with its lending activities. FMFS was organized to write title insurance but now
provides brokerage and other financial services to customers of Farmers & Merchants Bank. VBS
originates conventional and government sponsored mortgages through their office in Harrisonburg.
The Bank makes various types of commercial and consumer loans and has a heavy concentration of
residential and agricultural real estate loans. The local economy is relatively diverse with strong
employment in the agricultural, manufacturing, service and governmental sectors.
The Company’s and the Bank’s principal executive office is at 205 South Main Street, Timberville,
VA 22853, and its phone number is (540) 896-8941.
Filings with the SEC
The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934
with the Securities and Exchange Commission (“SEC”). These reports are posted and are available at
no cost on the Company’s website,
www
.
farmersandmerchants.biz
, as soon as reasonably practicable
after the Company files such documents with the SEC. The Company’s filings are also available
through the SEC’s website at
www.sec.gov
.
Employees
On December 31, 2009, the Bank had 138 full-time and part-time employees; including executive
officers, loan and other banking officers, branch personnel, operations personnel and other support
personnel. None of the Company’s employees is represented by a union or covered under a collective
bargaining agreement. Management of the Company considers their employee relations to be excellent.
No one employee devotes full-time services to F&M Bank Corp.
Competition
The Bank’s offices face strong competition from numerous other financial institutions. These other
institutions include large national and regional banks, other community banks, nationally chartered
savings banks, credit unions, consumer finance companies, mortgage companies, loan production
offices, mutual funds and life insurance companies. Competition for loans and deposits is affected
by a variety of factors including interest rates, types of products offered, the number and
location of branch offices, marketing strategies and the reputation of the Bank within the
communities served.
Regulation and Supervision
General.
The operations of F & M Bank Corp. and the Bank are subject to federal and state statutes,
which apply to state member banks of the Federal Reserve System.
2
Table of Contents
The stock of F & M Bank Corp. is subject to the registration requirements of the Securities Act of
1934. F & M Bank Corp. is subject to the periodic reporting requirements of the Securities Exchange
Act of 1934. These include, but are not limited to, the filing of annual, quarterly and other
current reports with the Securities and Exchange Commission. As an Exchange Act reporting company,
the Corporation is directly affected by the Sarbanes-Oxley Act of 2002, which is aimed at improving
corporate governance and reporting procedures. The Corporation is complying with SEC and other
rules and regulations implemented pursuant to Sarbanes-Oxley and intends to comply with any
applicable rules and regulations implemented in the future.
F & M Bank Corp., as a bank holding company, is subject to the provisions of the Bank Holding
Company Act of 1956, as amended (the “Act”). It is registered as such and is supervised by the
Federal Reserve Board. The Act requires F & M Bank Corp. to secure the prior approval of the
Federal Reserve Board before F & M Bank Corp. acquires ownership or control of more than 5% of the
voting shares or substantially all of the assets of any institution, including another bank.
As a bank holding company, F & M Bank Corp. is required to file with the Federal Reserve Board an
annual report and such additional information as it may require pursuant to the Act. The Federal
Reserve Board may also conduct examinations of F & M Bank Corp. and any or all of its subsidiaries.
Under Section 106 of the 1970 Amendments to the Act and the regulations of the Federal Reserve
Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with an extension of credit, provision of credit, sale or lease of
property or furnishing of services.
Federal Reserve Board regulations permit bank holding companies to engage in non-banking activities
closely related to banking or to managing or controlling banks. These activities include the
making or servicing of loans, performing certain data processing services, and certain leasing and
insurance agency activities. Since 1994, the Company has entered into agreements with the Virginia
Community Development Corporation to purchase equity positions in several Low Income Housing Funds;
these funds provide housing for low-income individuals throughout Virginia. Approval of the
Federal Reserve Board is necessary to engage in any of the activities described above or to acquire
interests engaging in these activities.
The Bank as a state member bank is supervised and regularly examined by the Virginia Bureau of
Financial Institutions and the Federal Reserve Board. Such supervision and examination by the
Virginia Bureau of Financial Institutions and the Federal Reserve Board is intended primarily for
the protection of depositors and not for the stockholders of F & M Bank Corp.
Payment of Dividends.
The Company is a legal entity, separate and distinct from its subsidiaries. A
significant portion of the revenues of the Company result from dividends paid to it by the Bank.
There are various legal limitations applicable to the payment of dividends by the Bank to the
Company. Under the current regulatory guidelines, prior approval from the Board of Governors of the
Federal Reserve System is required if cash dividends declared in any given year exceed net income
for that year, plus retained net profits of the two preceding years. The payment of dividends by
the Bank or the Company may also be limited by other factors, such as requirements to maintain
capital above regulatory guidelines.
Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an
unsafe or unsound practice in conducting their businesses. The payment of dividends, depending on
the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe
or unsound practice. Based on the Bank’s current financial condition, the Company does not expect
that any of these laws will have any impact on its ability to obtain dividends from the Bank.
Capital Requirements.
The Federal Reserve has issued risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, regulatory agencies may from time
to time require that a banking organization maintain capital above the minimum levels because of
its financial condition or actual or anticipated growth. Under the risk-based capital requirements,
the Company and Bank are required to maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%. At least half of the total capital is required to be “Tier 1 capital”, which
consists principally of common and certain qualifying preferred shareholders’ equity (including
Trust Preferred Securities), less certain intangibles and other adjustments. The remainder (“Tier 2
capital”) consists of a limited amount of subordinated and other qualifying debt (including certain
hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and
total capital to risk-weighted asset ratios of the Company as of December 31, 2009 were 9.01% and
10.65%, respectively, exceeding the minimum requirements.
3
Table of Contents
In addition, each of the federal regulatory agencies has established a minimum leverage capital
ratio (Tier 1 capital to average adjusted assets) (“Tier 1 leverage ratio”). These guidelines
provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet
certain specified criteria, including that they have the highest regulatory examination rating and
are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as
of December 31, 2009, was 7.08%, which is above the minimum requirements. The guidelines also
provide that banking organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
The Gramm-Leach-Bliley Act.
Effective on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB Act”)
allows a bank holding company or other company to certify status as a financial holding company,
which will allow such company to engage in activities that are financial in nature, that are
incidental to such activities, or are complementary to such activities. The GLB Act enumerates
certain activities that are deemed financial in nature, such as underwriting insurance or acting as
an insurance principal, agent or broker; underwriting; dealing in or making markets in securities;
and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve
to determine by regulation what other activities are financial in nature, or incidental or
complementary thereto.
USA Patriot Act of 2001.
In October, 2001, the USA Patriot Act of 2001 was enacted in response to
the terrorist attacks in New York, Pennsylvania and Northern Virginia which occurred on September
11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence
communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The
continuing and potential impact of the Patriot Act and related regulations and policies on
financial institutions of all kinds is significant and wide ranging. The Patriot Act contains
sweeping anti-money laundering and financial transparency laws, and imposes various regulations,
including standards for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Community Reinvestment
The requirements of the Community Reinvestment Act are also applicable to
the Bank. The act imposes on financial institutions an affirmative and ongoing obligation to meet
the credit needs of their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial institution’s
efforts in meeting community needs currently are evaluated as part of the examination process
pursuant to twelve assessment factors. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Forward-Looking Statements
F & M Bank Corp. makes forward-looking statements in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations and in other portions of this Annual Report on Form
10-K that are subject to risks and uncertainties. These forward-looking statements include:
estimates of risks and of future costs and benefits; assessments of probable loan losses and
statements of goals and expectations. These forward-looking statements are subject to significant
uncertainties because they are based upon management’s estimates and projections of future interest
rates and other economic conditions; future laws and regulations; and a variety of other matters.
As a result of these uncertainties, actual results may be materially different from the results
indicated by these forward-looking statements. In addition, the Company’s past results of
operations do not necessarily indicate its future results.
4
Table of Contents
General economic conditions, either national or within the Company’s local markets.
The Company is affected by general economic conditions in the United States and the local markets
within which it operates. An economic downturn within the Company’s markets, or the nation as a
whole; a significant decline in general economic conditions caused by inflation, recession,
unemployment or other factors beyond the Company’s control could negatively impact the growth rate
of loans and deposits, the quality of the loan portfolio, loan and deposit pricing and other key
factors of the Company’s business. Such negative developments could adversely impact the Company’s
financial condition and performance.
Changes in interest rates could affect the Company’s income and cash flows.
The direction and speed of interest rate changes affects our net interest margin and net interest
income. Typically, in a period of declining interest rates our net interest income is negatively
affected in the short term as our interest earning assets (primarily loans and investment
securities) reprice more quickly than our interest bearing liabilities (deposits and borrowings).
We attempt to mitigate this risk by maintaining a neutral position regarding the volume of assets
and liabilities that mature or reprice during any period; however, interest rate fluctuations, loan
prepayments, loan production and deposit flows constantly change and influence the ability to
maintain a neutral position. Generally speaking, the Company’s earnings will be more sensitive to
fluctuations in interest rates the greater the variance in volume of assets and liabilities that
mature and reprice in any period. Accordingly, the Company may not be successful in maintaining a
neutral position and, as a result, the Company’s net interest margin may be impacted.
The Company faces substantial competition that could adversely affect the Company’s growth and/or
operating results.
The Company operates in a competitive market for financial services and faces intense competition
from other financial institutions both in making loans and in attracting deposits. Many of these
financial institutions have been in business for many years, are significantly larger, have
established customer bases, and have greater financial resources and lending limits.
There could be an adverse effects on the way in which we do business if we do not maintain our
capital requirements and our status as a ‘well-capitalized” bank.
The Bank is subject to regulatory capital adequacy guidelines. If the Bank fails to meet the
capital adequacy guidelines for a “well-capitalized” bank, it could increase the regulatory
scrutiny for the Bank and the Company; increase our FDIC insurance premiums, and could lead to a
decline in the confidence that our customers have in us and a reduction in the demand for our
products and services.
The inability of the Company to successfully manage its growth or implement its growth strategy may
adversely affect the result of operations and financial conditions.
The Company may not be able to successfully implement its growth strategy if unable to identify
attractive markets, locations or opportunities to expand in the future. The ability to manage
growth successfully also depends on whether the Company can maintain capital levels adequate to
support its growth, maintain cost controls, asset quality and successfully integrate any businesses
acquired into the organization.
As the Company continues to implement its growth strategy by opening new branches it expects to
incur increased personnel, occupancy and other operating expenses. The Company must absorb those
higher expenses while it begins to generate new deposits, and there is a further time lag involved
in redeploying new deposits into attractively priced loans and other higher yielding earning
assets. Thus, the Company’s plans to branch could depress earnings in the short run, even if it
efficiently executes a branching strategy leading to long-term financial benefits.
5
Table of Contents
The Company’s exposure to operational risk may adversely affect the Company.
Similar to other financial institutions, the Company is exposed to many types of operational risk,
including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or
outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or
those resulting from faulty or disabled computer or telecommunications systems.
The Company’s concentration in loans secured by real estate may adversely impact earnings due to
changes in the real estate markets.
The Company offers a variety of secured loans, including commercial lines of credit, commercial
term loans, real estate, construction, home equity, consumer and other loans. Many of the Company’s
loans are secured by real estate (both residential and commercial) in the Company’s market area. A
major change in the real estate market, resulting in deterioration in the value of this collateral,
or in the local or national economy, could adversely affect the customers’ ability to pay these
loans, which in turn could impact the Company. Risk of loan defaults and foreclosures are
unavoidable in the banking industry, and the Company tries to limit its exposure to this risk by
monitoring extensions of credit carefully. The Company cannot fully eliminate credit risk, and as a
result credit losses may occur in the future.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact the
Company or the businesses in which the Company is engaged.
The Company is subject to extensive state and federal regulation, supervision and legislation that
govern almost all aspects of its operations. Laws and regulations may change from time to time and
are primarily intended for the protection of consumers, depositors and the deposit insurance funds.
The impact of any changes to laws and regulations or other actions by regulatory agencies may
negatively impact the Company or its ability to increase the value of its business. Additionally,
actions by regulatory agencies or significant litigation against the Company could cause it to
devote significant time and resources to defending itself and may lead to penalties that materially
affect the Company and its shareholders. Future changes in the laws or regulations or their
interpretations or enforcement could be materially adverse to the Company and its shareholders.
Changes in accounting standards could impact reported earnings.
The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically
change the financial accounting and reporting standards that govern the preparation of the
Company’s consolidated financial statements. These changes can be hard to predict and can
materially impact how it records and reports its financial condition and results of operations. In
some cases, the Company could be required to apply a new or revised standard retroactively,
resulting in the restatement of prior period financial statements.
The Company does not have any unresolved staff comments to report for the year ended December 31,
2009.
6
Table of Contents
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
| Timberville Main Office | Elkton Branch | |
| 205 South Main Street | 127 West Rockingham Street | |
| Timberville, VA 22853 | Elkton, VA 22827 | |
| Broadway Branch | Port Road Branch | |
| 126 Timberway | 1085 Port Republic Road | |
| Broadway, VA 22815 | Harrisonburg, VA 22801 | |
| Bridgewater Branch | Edinburg Branch | |
| 100 Plaza Drive | 120 South Main Street | |
| Bridgewater, VA 22812 | Edinburg, VA 22824 | |
| Woodstock Branch | Crossroads Branch | |
| 161 South Main Street | 80 Cross Keys Road | |
| Woodstock, VA 22664 | Harrisonburg, VA 22801 | |
| Luray Branch | ||
| 700 East Main Street | ||
| Luray, VA 22835 |
With the exception of the Edinburg Branch, Port Road Branch and the Luray Branch, all facilities
are owned by Farmers & Merchants Bank. ATMs are available at all locations.
Through an agreement with Nationwide Money ATM Services, the Bank also operates cash only ATMs at
five Food Lion grocery stores, one in Mt. Jackson, VA and four in Harrisonburg, VA.
VBS’ office is located at:
Harrisonburg Office
2040 Deyerle Avenue
Suite 102
Harrisonburg, VA 22801
2040 Deyerle Avenue
Suite 102
Harrisonburg, VA 22801
In the normal course of business, the Company may become involved in litigation arising from
banking, financial, or other activities of the Company. Management after consultation with legal
counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will
have a material effect on the Company’s financial condition, operating results or liquidity.
No matters were submitted to a vote of security holders of the Company during the fourth quarter of
the period covered by this report.
Item 5
.
Market for Registrant’s Common Equity and Related Stockholder Matters
Stock Listing
The Company’s Common Stock trades under the symbol “FMBM” on the OTC Bulletin Board. The bid and
asked price of the Company’s stock is not published in any newspaper. Although several firms in
both Harrisonburg and Richmond, Virginia occasionally take positions in the Company stock, they
typically only match buyers and sellers.
7
Table of Contents
Transfer Agent and Registrar
Farmers & Merchants Bank
205 South Main Street
P.O. Box 1111
Timberville, VA 22853
205 South Main Street
P.O. Box 1111
Timberville, VA 22853
Stock Performance
The following graph compares the cumulative total return to the shareholders of the Company for the
last five fiscal years with the total return of the Russell 2000 Index and the SNL Bank Index, as
reported by SNL Financial, LC, assuming an investment of $100 in the Company’s common stock on
December 31, 2003, and the reinvestment of dividends.
| Period Ending December 31, | ||||||||||||||||||||||||
| Index | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||
|
F & M Corp
|
100.00 | 102.85 | 114.67 | 129.94 | 130.24 | 102.25 | ||||||||||||||||||
|
Russell 2000
|
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 | ||||||||||||||||||
|
SNL Bank Index
|
100.00 | 101.36 | 118.57 | 92.14 | 52.57 | 52.03 | ||||||||||||||||||
Recent Stock Prices and Dividends
Dividends to shareholders totaled $1,743,000 and $2,083,000 in 2009 and 2008, respectively. Regular
quarterly dividends have been declared for fifty six consecutive quarters. In the third quarter of
2009 dividends per share were reduced from $.23 to $.15 per quarter. This decrease was the result
of reduced earnings and an effort to bring the dividend payout ratio within stated goals.
Dividends per share decreased 16% in 2009.
The ratio of dividends per share to net income per share was 89.18% in 2009, compared to 65.01% in
2008. The decision as to timing, amount and payment of dividends is at the discretion of the
Company’s Board of Directors. The payment of dividends depends on the earnings of the Company and
its subsidiaries, the financial condition of the Company and other factors including capital
adequacy, regulatory requirements, general economic conditions and shareholder returns.
8
Table of Contents
Stock Repurchases
As previously reported, on September 18, 2008, the Company’s Board of Directors approved an
increase in the number of shares of common stock that the Company can repurchase under the share
repurchase program from 150,000 to 200,000 shares. Shares repurchased through the end of 2009
totaled 164,132 shares; of this amount, 2,122 shares were repurchased in 2009, at an average cost
of $25.58 per share.
The number of common shareholders of record was approximately 1,725 as of March 1, 2010. This
amount includes all shareholders, whether titled individually or held by a brokerage firm or
custodian in street name.
Quarterly Stock Information
These quotes include the terms of trades transacted through a broker. The terms of exchanges
occurring between individual parties may not be known to the Company.
| 2009 | 2008 | |||||||||||||||||||||||
| Per Share Range | Per Share | Stock Price Range | Per Share | |||||||||||||||||||||
| Quarter | Low | High | Dividend | Low | High | Dividend | ||||||||||||||||||
|
1
st
|
20.00 | 30.75 | $ | .23 | 29.50 | 32.05 | $ | .22 | ||||||||||||||||
|
2
nd
|
22.00 | 28.15 | .23 | 31.75 | 32.50 | .22 | ||||||||||||||||||
|
3
rd
|
22.95 | 26.65 | .15 | 30.10 | 33.00 | .23 | ||||||||||||||||||
|
4
th
|
20.00 | 24.90 | .15 | 28.80 | 31.50 | .23 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | .76 | $ | .90 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
9
Table of Contents
Five Year Summary of Selected Financial Data
| (Dollars in thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Income Statement Data:
|
||||||||||||||||||||
|
Interest and Dividend Income
|
$ | 27,516 | $ | 25,544 | $ | 24,635 | $ | 22,526 | $ | 19,878 | ||||||||||
|
Interest Expense
|
10,182 | 10,498 | 11,043 | 9,091 | 6,998 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income
|
17,334 | 15,046 | 13,592 | 13,435 | 12,880 | |||||||||||||||
|
Provision for Loan Losses
|
4,210 | 815 | 270 | 240 | 360 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income after Provision for Loan Losses
|
13,124 | 14,231 | 13,322 | 13,195 | 12,520 | |||||||||||||||
|
Noninterest Income
|
3,111 | 3,169 | 3,215 | 2,754 | 2,643 | |||||||||||||||
|
Securities Gains (Losses)
|
(1,754 | ) | (1,680 | ) | 101 | 193 | 71 | |||||||||||||
|
Noninterest Expenses
|
12,188 | 11,097 | 10,532 | 9,688 | 8,608 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income before Income Taxes
|
2,293 | 4,623 | 6,106 | 6,454 | 6,626 | |||||||||||||||
|
Income Tax Expense
|
339 | 1,419 | 1,653 | 1,925 | 1,846 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
$ | 1,954 | $ | 3,204 | $ | 4,453 | $ | 4,529 | $ | 4,780 | ||||||||||
|
|
||||||||||||||||||||
|
|
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|
Per Share Data:
|
||||||||||||||||||||
|
Net Income
|
$ | .85 | $ | 1.38 | $ | 1.89 | $ | 1.90 | $ | 1.99 | ||||||||||
|
Dividends Declared
|
.76 | .90 | .86 | .82 | .78 | |||||||||||||||
|
Book Value
|
16.99 | 15.64 | 16.71 | 16.05 | 15.22 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Assets
|
$ | 539,223 | $ | 472,058 | $ | 386,727 | $ | 375,924 | $ | 346,328 | ||||||||||
|
Loans Held for Investment
|
434,403 | 399,233 | 317,180 | 309,461 | 277,398 | |||||||||||||||
|
Loans Held for Sale
|
31,168 | 3,780 | — | — | 3,528 | |||||||||||||||
|
Securities
|
26,230 | 30,785 | 36,614 | 37,373 | 34,921 | |||||||||||||||
|
Deposits
|
420,643 | 342,225 | 298,560 | 289,522 | 267,310 | |||||||||||||||
|
Short-Term Debt
|
9,085 | 20,510 | 12,743 | 11,717 | 14,345 | |||||||||||||||
|
Long-Term Debt
|
63,096 | 65,331 | 29,714 | 29,247 | 22,808 | |||||||||||||||
|
Shareholders’ Equity
|
39,002 | 36,305 | 39,165 | 38,105 | 36,567 | |||||||||||||||
|
Average Shares Outstanding
|
2,292 | 2,319 | 2,360 | 2,386 | 2,404 | |||||||||||||||
|
|
||||||||||||||||||||
|
Financial Ratios:
|
||||||||||||||||||||
|
Return on Average Assets
1
|
.38 | % | .75 | % | 1.17 | % | 1.26 | % | 1.34 | % | ||||||||||
|
Return on Average Equity
1
|
5.10 | % | 8.50 | % | 11.53 | % | 12.13 | % | 13.56 | % | ||||||||||
|
Net Interest Margin
|
3.70 | % | 3.89 | % | 3.94 | % | 4.17 | % | 4.01 | % | ||||||||||
|
Efficiency Ratio
2
|
57.74 | % | 58.60 | % | 60.31 | % | 57.45 | % | 53.07 | % | ||||||||||
|
Dividend Payout Ratio
|
89.18 | % | 65.01 | % | 45.60 | % | 43.12 | % | 38.70 | % | ||||||||||
|
|
||||||||||||||||||||
|
Capital and Credit Quality Ratios:
|
||||||||||||||||||||
|
Average Equity to Average Assets
1
|
7.37 | % | 8.85 | % | 10.05 | % | 10.36 | % | 9.86 | % | ||||||||||
|
Allowance for Loan Losses to Loans
3
|
.88 | % | .55 | % | .54 | % | .58 | % | .60 | % | ||||||||||
|
Nonperforming Assets to Total Assets
|
1.42 | % | 1.01 | % | 1.11 | % | .58 | % | .20 | % | ||||||||||
|
Net Charge-offs to Total Loans
3
|
.59 | % | .08 | % | .11 | % | .04 | % | .07 | % | ||||||||||
| 1 | Ratios are primarily based on daily average balances. | |
| 2 | The Efficiency Ratio equals noninterest expenses divided by the sum of tax equivalent net interest income and noninterest income. Noninterest expenses exclude intangible asset amortization. Noninterest income excludes gains (losses) on securities transactions. | |
| 3 | Calculated based on Loans Held for Investment, excludes Loans Held for Sale. |
10
Table of Contents
The following discussion provides information about the major components of the results of
operations and financial condition, liquidity and capital resources of F & M Bank Corp. and its
subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8,
Financial Statements and Supplementary Information, of this Form 10-K.
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”). The financial information contained within the statements
is, to a significant extent, financial information that is based on measures of the financial
effects of transactions and events that have already occurred. The Company’s financial position and
results of operations are affected by management’s application of accounting policies, including
estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities
and amounts reported for revenues, expenses and related disclosures. Different assumptions in the
application of these policies could result in material changes in the Company’s consolidated
financial position and/or results of operations.
In addition, GAAP itself may change from one previously acceptable method to another method.
Although the economics of these transactions would be the same, the timing of events that would
impact these transactions could change. Following is a summary of the Company’s significant
accounting policies that are highly dependent on estimates, assumptions and judgments.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan
portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 (formerly SFAS
No. 5) “Contingencies"
,
which requires that losses be accrued when they are probable of occurring
and estimable and (ii) ASC 310 (formerly SFAS No. 114), “Receivables"
,
which requires that losses
be accrued based on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan balance.
The Company’s allowance for loan losses is the accumulation of various components that are
calculated based on independent methodologies. All components of the allowance represent an
estimation performed pursuant to either ASC 450 or ASC 310. Management’s estimate of each ASC 450
component is based on certain observable data that management believes are most reflective of the
underlying credit losses being estimated. This evaluation includes credit quality trends;
collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the
loan portfolio; the findings of internal credit quality assessments and results from external bank
regulatory examinations. These factors, as well as historical losses and current economic and
business conditions, are used in developing estimated loss factors used in the calculations.
Allowances for commercial loans are determined by applying estimated loss factors to the portfolio
based on management’s evaluation and “risk grading” of the commercial loan portfolio. Allowances
are provided for noncommercial loan categories using estimated loss factors applied to the total
outstanding loan balance of each loan category. Specific allowances are typically provided on all
impaired commercial loans in excess of a defined threshold that are classified in the Special
Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a
loan-by-loan basis based on management’s evaluation the Company’s exposure for each credit, given
the current payment status of the loan and the value of any underlying collateral.
While management uses the best information available to establish the allowance for loan and lease
losses, future adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or, if required by regulators,
based upon information available to them at the time of their examinations. Such adjustments to
original estimates, as necessary, are made in the period in which these factors and other relevant
considerations indicate that loss levels may vary from previous estimates.
11
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued ASC 805 (formerly SFAS No. 141),
Business Combinations
and ASC 350 (formerly SFAS No. 142),
Intangibles
. ASC 850 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. ASC 350 was effective for fiscal years beginning after
December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and
intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment
review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires
that reporting units be identified for the purpose of assessing potential future impairments of
goodwill.
The Company adopted ASC 350 on January 1, 2002. Goodwill totaled $2,639,000 at January 1, 2002. As
of December 31, 2008, the Company recognized $30,000 in additional goodwill related to the purchase
of 70% ownership in VBS Mortgage. The goodwill is not amortized but is tested for impairment at
least annually. Based on this testing, there were no impairment charges for 2009 or 2008.
Application of the non-amortization provisions of the Statement resulted in additional net income
of $120,000 for each of the years ended December 31, 2009, 2008 and 2007.
Core deposit intangibles are amortized on a straight-line basis over a ten year life. Core deposit
intangible, net of amortization, amounted to $322,000 and $598,000 at December 31, 2009 and 2008,
respectively. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit
intangible will continue to be amortized over its estimated useful life.
Securities Impairment
The Company follows the guidance in ASC 320-10 and SAB Topic 5M,
Other Than Temporary
Impairment
in evaluating if these impairments are temporary or other than temporary in nature.
This determination is made on an investment by investment basis and includes all available evidence
at the time of the determination including the following:
| • | The length of time of impairment; | ||
| • | The extent of the impairment relative to the cost of the investment; | ||
| • | Recent volatility in the market value of the investment; | ||
| • | The financial condition and near-term prospects of the issuer, including any specific events which may impair the earnings potential of the issuer; or | ||
| • | The intent and ability of the Company to hold its investment for a period of time sufficient to allow for any anticipated recovery in market value. |
The following description provides our revised policies/procedures for the evaluation for Other
Than Temporary Impairment (OTTI) for the quarter ended September 30, 2009 and for subsequent
periods:
| • | We begin our evaluation using a default position that OTTI has occurred and then use all available evidence to determine whether prospects for the individual security are sufficient to support temporary impairment at the date of the SEC filing. This evaluation is conducted at each filing date. | ||
| • | For purposes of determining OTTI, the security value recovery period is projected for a maximum of a two year holding period. This is the maximum; a shorter period may be used when there are particular conditions related to the individual security which make recovery unlikely. | ||
| • | The primary focus in determining whether a security is OTTI, and projecting potential recovery, is the prospects for the individual security, rather than broad market indices. All available evidentiary material is considered, including the Company’s public filings with the SEC, press releases, analyst reports, etc. |
12
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Securities Impairment, continued
| • | Secondary consideration is given to historic returns, but only to the extent that this evidence is instructive in determining whether the individual security has shown a history of outperforming (or underperforming) the market (or industry) in prior economic cycles. This factor is only considered when the declines in value were not limited to the individual security, but were prevalent over the broader market. This measure is considered to aid in determining whether OTTI should be recognized earlier, rather than later (ie. a security which underperforms relative to the industry or market will result in early recognition of OTTI). In no event will OTTI recognition be delayed beyond the two year projection period. | ||
| • | OTTI may be recognized as early as quarter 1, regardless of holding period projections, when there are specific factors relative to the security which make recovery unlikely. These factors could include evidence contained in the aforementioned SEC filings, press releases, analyst reports, but may also be based on the severity of the impairment. | ||
| • | Situations where a security has declined in value more rapidly than the industry (or market), absent strong evidence supporting prospects for recover, will result in OTTI being recognized in quarter 1 or quarter 2 rather than continuing to evaluate the security over several quarters, based on holding period projections. |
Declines determined to be other than temporary are charged to operations and included in the gain
(loss) on security sales. Such charges were $1,751,000 for 2009, $1,759,000 for 2008 and $171,000
for 2007.
Overview
The Company’s net income for 2009 totaled $1,954,000 or $.85 per share, down 39% from $3,204,000 or
$1.38 a share in 2008. Return on average equity decreased in 2009 to 5.10% versus 8.50% in 2008,
while the return on average assets decreased from .75% to .38%. The Company’s operating earnings,
which are net earnings excluding gains (losses) on the sale of investments, non-recurring tax
entries and other non-recurring income was $3,095,000 in 2009 versus $4,293,000 in 2008, a decrease
of 27.9%. Core profitability decreased due to the increase in the provision for loan and lease
losses and increased FDIC deposit insurance assessment. These amounts were partially offset by
growth in net interest income, which was driven by the significant loan portfolio growth of the
Bank.
13
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
See page 10 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
| 2009 | 2008 | |||||||
| to 2008 | to 2007 | |||||||
|
Prior Year Net Income Per Share
|
$ | 1.38 | $ | 1.89 | ||||
|
Change from differences in:
|
||||||||
|
Net interest income
|
1.07 | .73 | ||||||
|
Provision for credit losses
|
(1.49 | ) | (.24 | ) | ||||
|
Noninterest income, excluding securities gains
|
(.01 | ) | (.01 | ) | ||||
|
Securities gains
|
(.05 | ) | (.76 | ) | ||||
|
Noninterest expenses
|
(.51 | ) | (.32 | ) | ||||
|
Income taxes
|
.46 | .09 | ||||||
|
|
||||||||
|
Total Change
|
(.53 | ) | (.51 | ) | ||||
|
|
||||||||
|
Net Income Per Share
|
$ | .85 | $ | 1.38 | ||||
|
|
||||||||
Net Interest Income
The largest source of operating revenue for the Company is net interest income, which is calculated
as the difference between the interest earned on earning assets and the interest expense paid on
interest bearing liabilities. The net interest margin is the net interest income expressed as a
percentage of interest earning assets. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, along with their yields and rates, have a significant impact on the
level of net interest income.
Net interest income for 2009 was $17,518,000 representing an increase of $2,221,000 or 14.52%. A
10.92% increase in 2008 versus 2007 resulted in total net interest income of $15,297,000. In this
discussion and in the tabular analysis of net interest income performance, entitled “Consolidated
Average Balances, Yields and Rates,” (found on page 15), the interest earned on tax exempt loans
and investment securities has been adjusted to reflect the amount that would have been earned had
these investments been subject to normal income taxation. This is referred to as tax equivalent net
interest income.
Loans held for investment, expressed as a percentage of total earning assets, decreased slightly in
2009 to 88.65% as compared to 90.44% in 2008. Tax equivalent income on earning assets increased
$1,905,000, supported by the increase in loan income of $2,677,000.
During 2009, yields on earning assets decreased 71 basis points (BP), primarily due to a .60BP
decrease in the yield on loans held for investment. This decrease is consistent with declining
market rates resulting from Federal Reserve interest rate cuts and a slowing economy.
The average cost of interest bearing liabilities decreased 69BP in 2009, following a decrease of
66BP in 2008. The decrease in average cost resulted from maturing liabilities repricing at lower
rates following action by the Federal Reserve’s Federal Open Market Committee (FOMC), which cut the
Federal Funds rate on seven occasions in 2008. These rate cuts were in response to the
aforementioned slowing in the national economy following the subprime mortgage crisis and resulting
capital markets crisis.
The analysis on the next page reveals a decrease in net interest margin to 3.70% in 2009 primarily
due to changes in balance sheet leverage as loan growth was funded primarily by increasing
long-term debt and through the higher rate Platinum Rewards Checking product which caused a 30BP
increase in the average cost of interest bearing demand accounts.
14
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Consolidated Average Balances, Yields and Rates
1
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Loans:
2
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 172,883 | 9,382 | 5.43 | % | $ | 128,815 | 7,976 | 6.19 | % | $ | 98,027 | 7,629 | 7.78 | % | |||||||||||||||||||||
|
Real estate
|
217,677 | 13,473 | 6.19 | % | 195,743 | 13,061 | 6.67 | % | 185,383 | 12,415 | 6.70 | % | ||||||||||||||||||||||||
|
Installment
|
28,945 | 2,663 | 9.20 | % | 31,239 | 2,735 | 8.76 | % | 29,516 | 2,606 | 8.83 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Loans held for
investment
|
419,505 | 25,518 | 6.08 | % | 355,797 | 23,772 | 6.68 | % | 312,926 | 22,650 | 7.24 | % | ||||||||||||||||||||||||
|
Loans held for sale
|
29,619 | 1,169 | 3.95 | % | 5,816 | 238 | 4.09 | % | 296 | 22 | 7.43 | % | ||||||||||||||||||||||||
|
Investment securities:
3
Fully taxable
|
15,602 | 720 | 4.61 | % | 19,813 | 1,101 | 5.56 | % | 23,743 | 1,341 | 5.65 | % | ||||||||||||||||||||||||
|
Partially taxable
|
3,542 | 267 | 7.54 | % | 6,583 | 509 | 7.73 | % | 7,116 | 488 | 6.86 | % | ||||||||||||||||||||||||
|
Tax exempt
|
38 | 3 | 7.89 | % | 169 | 8 | 4.73 | % | 287 | 14 | 4.88 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total investment
securities
|
19,182 | 990 | 5.16 | % | 26,565 | 1,618 | 6.09 | % | 31,146 | 1,843 | 5.92 | % | ||||||||||||||||||||||||
|
Interest bearing deposits
in banks
|
924 | 16 | 1.73 | % | 2,426 | 117 | 4.82 | % | 1,821 | 123 | 6.75 | % | ||||||||||||||||||||||||
|
Federal funds sold
|
3,964 | 7 | .18 | % | 2,821 | 50 | 1.77 | % | 3,960 | 196 | 4.95 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Earning Assets
|
473,194 | 27,700 | 5.85 | % | 393,425 | 25,795 | 6.56 | % | 350,149 | 24,834 | 7.09 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Allowance for loan
losses
|
(3,132 | ) | (1,946 | ) | (1,747 | ) | ||||||||||||||||||||||||||||||
|
Nonearning assets
|
37,962 | 34,748 | 32,972 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Assets
|
$ | 508,024 | $ | 426,227 | $ | 381,374 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||
|
Deposits:
|
|||||||||||||||||||||||||||||||||||||
|
Demand –interest
bearing
|
$ | 78,556 | $ | 1,306 | 1.66 | % | $ | 58,682 | $ | 798 | 1.36 | % | $ | 52,857 | $ | 1,172 | 2.22 | % | |||||||||||||||||||
|
Savings
|
32,650 | 202 | .62 | % | 30,073 | 293 | .97 | % | 30,457 | 331 | 1.09 | % | |||||||||||||||||||||||||
|
Time deposits
|
218,396 | 6,294 | 2.88 | % | 169,978 | 6,955 | 4.09 | % | 168,005 | 7,819 | 4.65 | % | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Total interest
bearing deposits
|
329,602 | 7,802 | 2.37 | % | 258,733 | 8,046 | 3.11 | % | 251,319 | 9,322 | 4.00 | % | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Short-term debt
|
14,700 | 78 | .53 | % | 23,622 | 456 | 1.93 | % | 11,040 | 502 | 4.55 | % | |||||||||||||||||||||||||
|
Long-term debt
|
67,320 | 2,302 | 3.42 | % | 50,135 | 1,996 | 3.98 | % | 26,940 | 1,219 | 4.52 | % | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Total interest bearing
liabilities
|
411,622 | 10,182 | 2.47 | % | 332,490 | 10,498 | 3.16 | % | 289,299 | 11,043 | 3.82 | % | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Noninterest bearing
deposits
|
51,124 | 49,557 | 46,465 | ||||||||||||||||||||||||||||||||||
|
Other liabilities
|
6,929 | 6,469 | 6,975 | ||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Total liabilities
|
469,675 | 388,516 | 342,739 | ||||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
38,349 | 37,711 | 38,635 | ||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Total liabilities
and stock-holders’ equity
|
$ | 508,024 | $ | 426,227 | $ | 381,374 | |||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Net interest earnings
|
$ | 17,518 | $ | 15,297 | $ | 13,791 | |||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Net yield on interest
earning assets (NIM)
|
3.70 | % | 3.89 | % | 3.94 | % | |||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
| 1 | Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate. | |
| 2 | Interest income on loans includes loan fees. | |
| 3 | Average balance information is reflective of historical cost and has not been adjusted for changes in market value. |
15
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
The following table illustrates the effect of changes in volumes and rates.
| 2009 Compared to 2008 | 2008 Compared to 2007 | |||||||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| Due to Change | Increase | Due to Change | Increase | |||||||||||||||||||||
| in Average: | or | in Average | or | |||||||||||||||||||||
| Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |||||||||||||||||||
|
Interest income
|
||||||||||||||||||||||||
|
Loans held for investment
|
$ | 4,256 | $ | (2,510 | ) | $ | 1,746 | $ | 3,104 | $ | (1,982 | ) | $ | 1,122 | ||||||||||
|
Loans held for sale
|
974 | (43 | ) | 931 | 410 | (194 | ) | 216 | ||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
(234 | ) | (147 | ) | (381 | ) | (222 | ) | (18 | ) | (240 | ) | ||||||||||||
|
Partially taxable
|
(235 | ) | (7 | ) | (242 | ) | (37 | ) | 58 | 21 | ||||||||||||||
|
Tax exempt
|
(6 | ) | 1 | (5 | ) | (6 | ) | (6 | ) | |||||||||||||||
|
Interest bearing deposits
in banks
|
(72 | ) | (29 | ) | (101 | ) | 41 | (47 | ) | (6 | ) | |||||||||||||
|
Federal funds sold
|
20 | (63 | ) | (43 | ) | (56 | ) | (90 | ) | (146 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total Interest Income
|
4,703 | (2,798 | ) | 1,905 | 3,234 | (2,273 | ) | 961 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand
|
270 | 238 | 508 | 129 | (503 | ) | (374 | ) | ||||||||||||||||
|
Savings
|
25 | (116 | ) | (91 | ) | (4 | ) | (34 | ) | (38 | ) | |||||||||||||
|
Time deposits
|
1,980 | (2,641 | ) | (661 | ) | 92 | (956 | ) | (864 | ) | ||||||||||||||
|
Short-term debt
|
(172 | ) | (206 | ) | (378 | ) | 572 | (618 | ) | (46 | ) | |||||||||||||
|
Long-term debt
|
684 | (378 | ) | 306 | 1,048 | (271 | ) | 777 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Interest Expense
|
2,787 | (3,103 | ) | (316 | ) | 1,837 | (2,382 | ) | (545 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net Interest Income
|
$ | 1,916 | $ | 305 | $ | 2,221 | $ | 1,397 | $ | 109 | $ | 1,506 | ||||||||||||
|
|
||||||||||||||||||||||||
| Note : Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change. | ||
Interest Income
Tax equivalent interest income increased $1,905,000 or 7.39% in 2009, after increasing 3.87% or
$961,000 in 2008. Overall, the yield on earning assets decreased .71%, from 6.56% to 5.85%. Average
loans outstanding grew at a record pace during 2009, with average loans outstanding increasing
$63,708,000 to $419,505,000. Real estate loans increased 11.21% and commercial loans increased
34.21%. Combined these categories accounted for the total increase in year ending loans. The
increase in both residential real estate and commercial loans is primarily the result of market
conditions. Market conditions contributed as other banks began to pull back on lending due to their
rising loan losses or exposure to subprime lending..
Average total securities, yielding 5.16%, decreased $7,383,000 during 2009. Proceeds from the sale
and maturity of investment securities were used to fund (in part) the growth in the loan portfolio.
Income on loans held for sale totaled $1,169,000, as compared to the $238,000 during 2008. The
bank entered into this participation arrangement as a higher yielding alternative to federal funds
sold. Due to the slowdown in secondary market lending, there was very little activity on this
participation commitment during 2008. However, as market rates began to fall in the early part of
2009 the originating bank had an increased need for participating banks to fund a portion of these
loans. The Bank purchases a 95% participation interest in these loans. These participations are
short-term, real estate loan participations that have an average life of approximately ten days.
The Bank holds its participation interest in these loans during the period of time between loan
closing and when the loan is paid off by the secondary market purchaser.
16
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Interest Expense
Interest expense decreased $316,000 or 3.01% during 2009, which followed a 4.94% decrease $545,000
in 2008. The average cost of funds of 2.47% decreased .69% compared to 2008. Average interest
bearing liabilities increased $79,132,000 in 2009 following an increase of $43,191,000 in 2008.
The increase in interest bearing liabilities was primarily the result of an increase in interest
bearing demand deposits, time deposits and long term debt. Interest bearing demand deposits
increased primarily due to the aforementioned Platinum Rewards Checking product. This product pays
an above market interest rate, but rewards the customer to adopt certain behaviors that either
drive down operating expenses or drive up non-interest income for the Bank. Interest expense of
demand deposits increased $508,000 (63.6%), while the average balance in interest bearing demand
deposits increased $19.9 million in 2009.
Time deposits increased primarily due to the Bank’s participation in the Certificate of Deposit
Account Registry Service (CDARS), which through reciprocal agreements among banks allows customers
to gain access to significantly higher levels of FDIC deposit insurance coverage. Due to declining
rates, both locally and nationally, the expense associated with time deposits decreased $661,000
(9.5%) in 2009, in spite of an increase in balances of $48.4 million.
Long term debt increased $17.2 million as the Bank supported its lending growth and converted some
of its short term debt to long term at favorable market rates. Expense of long-term debt increased
$306,000 in 2009 after an increase of $777,000 in 2008. The average cost of long term debt
declined from 3.98% in 2008 to 3.42% in 2009. The Company borrowed $30,115,000 in 2009 and
$39,747,000 in 2008. Changes in the cost of funds attributable to rate and volume variances can be
found in the table at the top of page 16.
Noninterest Income
Noninterest income continues to be an increasingly important factor in maintaining and growing
profitability. Management is conscious of the need to constantly review fee income and develop
additional sources of complementary revenue. The Bank continues to enjoy significant revenue from
its subsidiary Farmers & Merchants Financial Services (FMFS). However, gross revenue for FMFS
decreased $87,000 in 2009. This decrease resulted primarily from a reduction in brokerage income as
sales of investment products declined due to concerns over stock market volatility and the slowing
of the national economy.
Exclusive of losses, non-interest income decreased 1.83% ($58,000) in 2009 following an decrease of
1.43% in 2008. Investments in bank owned life insurance (BOLI) on officers of the Company resulted
in tax-free income of $331,000 and $336,000 in 2009 and 2008, respectively. Investments in low
income housing projects resulted in non-interest income of $193,000 in 2009 and $102,000 in 2008,
an increase of $91,000.
Securities transactions in 2009 resulted in losses of $1,754,000 after recognition of impairment
write-downs totaling $1,751,000 on several holdings within the equities portfolio. This followed a
loss of $1,681,000 in 2008. The losses within the securities portfolio were not the result of
securities actually sold, but due to the recognition of Other Than Temporary Impairment (OTTI)
losses on securities that declined significantly in value. Typically securities are considered
impaired when their value has been significantly below cost for over a year. Based on the losses
already recognized in 2008 and 2009, there is minimal risk of additional significant OTTI in 2010.
Noninterest Expense
Noninterest expenses increased from $11,097,000 in 2008 to $12,188,000 in 2009, a 9.83% increase.
Salary and benefits increased 1.60% to $6,728,000 in 2009 and 5.77% in 2008. The 2009 increase
resulted from additions to staff to support Bank growth and expansion, and increases in insurance
cost, offset by reduced bonus compensation. Occupancy and equipment expense increased 1.1%
($13,000) in 2009, following a 5.85% increase in 2008.
17
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Noninterest Expense, continued
The FDIC insurance assessment increased $791,000 in 2009 to $935,000. This increase was a result of
increases in the standard assessment rates and a special assessment enacted by the FDIC to cover
expenses to the fund resulting from failed institutions. Other operating expense increased $182,000
in 2009, following a $164,000 increase in 2008. Much of the increase was due to increases in data
processing and legal fees. During 2009, noninterest expenses dropped as a percentage of total
assets due to the rapid growth in total assets. Noninterest expenses continue to be substantially
lower than peer group averages. Total noninterest expense as a percentage of average assets totaled
2.41%, 2.60%, and 2.76%, in 2009, 2008 and 2007, respectively. Peer group averages have ranged
between 3.14% and 3.45% over the same time period.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic trends, changes in
the nature and volume of the portfolio and industry standards. Specific factors considered by
management in determining the adequacy of the level of the allowance for loan losses include
internally generated loan review reports, past due reports and historical loan loss experience.
This review also considers concentrations of loans in terms of geography, business type and level
of risk. Management evaluates nonperforming loans relative to their collateral value and makes the
appropriate adjustments to the allowance for loan losses when needed. Based on the factors outlined
above, the current year provision for loan losses increased from $815,000 in 2008 to $4,210,000 in
2009. The increase in the provision for loan losses and the current levels of the allowance for
loan losses reflect specific reserves related to nonperforming loans, changes in risk rating on
loans, net charge-off activity, loan growth, delinquency trends and other credit risk factors that
the Company considers in assessing the adequacy of the allowance for loan losses
Actual net loan charge-offs were $2,563,000 in 2009 and $329,000 in 2008. Loan losses as a
percentage of average loans held for investment totaled .61% and .09% in 2009 and 2008,
respectively. This loss rate is significantly better than peer group averages which were 1.12% in
2009 and .84% in 2008.
Total assets increased 14.22% during the year to $539,223,000, an increase of $67,165,000 from
$472,058,000 in 2008. Earning assets increased 14.93% or $65,001,000 to $500,502,000 at December
31, 2009. Virtually all of the increase in earning assets resulted from growth in the portfolio of
loans held for investment and loans held sale which increased $35,170,000 and $27,387,000,
respectively. Deposit growth for 2009 totaled $78,418,000 or 22.91%, much of the growth resulted
from the growth in interest bearing demand deposits and time deposits, due to the Bank’s
participation in the CDARS program. The Company continues to utilize its assets well with 92.80% of
year-end assets consisting of earning assets.
Investment Securities
Average balances in investment securities decreased 27.79% in 2008 to $19,182,000. Proceeds from
the sale or maturity of investments were used in part to support loan growth and for debt
repayment. At year end, 4.05% of earning assets of the Company were held as investment securities
to provide security for public deposits and to secure repurchase agreements. Management strives to
match the types and maturities of securities owned to balance projected liquidity needs, interest
rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio
yields averaged 5.16% for 2009, down from 6.09% in 2008. Average yields on the investment
portfolio exceed peer group averages primarily due to dividend yielding investments held by the
Company. Yields on these types of investments increased as balances decreased due to the decline in
market value of equity securities. It is anticipated that these yields will fall in 2010 as
maturing debt securities reprice at lower yields and as some of the issuers of equity securities
have recently cut dividends due to the weakening economy.
18
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Investment Securities, continued
The Company recognized losses totaling $1,754,000 on its equities portfolio. Of this amount,
$1,751,000 in losses resulted from Other Than Temporary Impairment (OTTI) write-downs on several of
its holdings. Management considers a number of factors in determining whether to recognize OTTI on
any of its securities, including current market conditions, historical trends in individual
securities, historical trends in the overall market and length of time that a security has been
below cost. Additional information on the securities impairment write-downs can be found on page 12
under the caption “Securities Impairment” and page 17 under the caption “Noninterest Income”.
The composition of securities at December 31 was:
| (Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Available for Sale:
1
|
||||||||||||
|
U.S. Treasury and Agency
|
$ | 6,012 | $ | 10,194 | $ | 16,459 | ||||||
|
Municipal
|
125 | 250 | ||||||||||
|
Mortgage-backed
2
|
6,170 | 8,574 | 5,411 | |||||||||
|
Corporate bonds
|
505 | 281 | 2,426 | |||||||||
|
Marketable equity securities
|
3,742 | 3,063 | 5,668 | |||||||||
|
|
||||||||||||
|
Total
|
16,429 | 22,237 | 30,214 | |||||||||
|
Held to Maturity:
|
||||||||||||
|
U.S. Treasury and Agency
|
110 | 110 | 109 | |||||||||
|
|
||||||||||||
|
Total
|
110 | 110 | 109 | |||||||||
|
Other Equity Investments
|
9,681 | 8,439 | 6,291 | |||||||||
|
|
||||||||||||
|
Total Securities
|
$ | 26,220 | $ | 30,786 | $ | 36,614 | ||||||
|
|
||||||||||||
| 1 | At estimated fair value. | |
| 2 | Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral. |
Maturities and weighted average yields of debt securities at December 31, 2009 are presented
in the table below. Amounts are shown by contractual maturity; expected maturities will differ as
issuers may have the right to call or prepay obligations.
| Years to Maturity | ||||||||||||||||||||||||||||||||
| Less | One to | Over | ||||||||||||||||||||||||||||||
| than one | Five | Five | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Total | Yield | ||||||||||||||||||||||||
| Debt Securities Available for Sale: | ||||||||||||||||||||||||||||||||
|
U.S. Treasury & Agency
|
$ | 2,000 | .23 | % | $ | 4,012 | 3.48 | % | $ | % | $ | 6,012 | 2.40 | % | ||||||||||||||||||
|
Municipal
|
% | % | % | % | ||||||||||||||||||||||||||||
|
Mortgage-backed
|
% | % | 6,170 | 5.08 | % | 6,170 | 5.08 | % | ||||||||||||||||||||||||
|
Corporate bonds
|
% | % | 505 | 8.86 | % | 505 | 8.86 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 2,000 | .23 | % | $ | 4,012 | 3.48 | % | $ | 6,675 | 5.37 | % | $ | 12,687 | 3.96 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| Debt Securities Held to Maturity: | ||||||||||||||||||||||||||||||||
|
U.S. Treasury & Agency
|
$ | 110 | 2.25 | % | 110 | 2.25 | % | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 110 | 2.25 | % | $ | 110 | 2.25 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
19
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Analysis of Loan Portfolio
The Company’s portfolio of loans held for investment totaled $434,403,000 at December 31, 2009
compared with $399,233,000 at the beginning of the year. The Company’s policy has been to make
conservative loans that are held for future interest income. Collateral required by the Company is
determined on an individual basis depending on the purpose of the loan and the financial condition
of the borrower. Commercial loans, including agricultural and multi family loans, increased 2.45%
during 2009 to $145,384,000. Real estate mortgages increased $19,766,000 (12.26%). Growth has
included a variety of loan and collateral types including residential real estate and real estate
development.
Construction loans increased $15,061,000 or 21.14%, this increase resulted primarily from several
large real estate development loans. The growth in construction loans within our portfolio was
broadly diversified with loans to a variety of developers, including large multi-unit single family
developments, single lot spec homes; and multifamily properties in various locations throughout our
market area. The Bank also has loan participation arrangements with several other banks within the
region to aid in diversification of the loan portfolio geographically, by collateral type and by
borrower.
Consumer installment loans decreased $3,545,000. This category includes personal loans, auto loans
and other loans to individuals. This category continues to suffer from strong competition by other
providers of automobile financing. Credit card balances increased $416,000 to $2,356,000 but are a
minor component of the loan portfolio. The following table presents the changes in the loan
portfolio over the previous five years.
| December 31 | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Real estate — mortgage
|
$ | 180,990 | $ | 161,224 | $ | 141,836 | $ | 137,595 | $ | 133,826 | ||||||||||
|
Real estate — construction
|
86,320 | 71,259 | 51,301 | 46,669 | 33,540 | |||||||||||||||
|
Consumer installment
|
19,247 | 22,792 | 18,772 | 15,990 | 16,435 | |||||||||||||||
|
Commercial
|
115,638 | 115,297 | 86,048 | 89,347 | 73,896 | |||||||||||||||
|
Agricultural
|
19,355 | 18,711 | 15,701 | 14,587 | 14,759 | |||||||||||||||
|
Multi-family residential
|
10,391 | 7,898 | 1,412 | 3,462 | 3,261 | |||||||||||||||
|
Credit cards
|
2,356 | 1,940 | 1,800 | 1,709 | 1,616 | |||||||||||||||
|
Other
|
106 | 112 | 310 | 102 | 65 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Loans
|
$ | 434,403 | $ | 399,233 | $ | 317,180 | $ | 309,461 | $ | 277,398 | ||||||||||
|
|
||||||||||||||||||||
20
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Analysis of Loan Portfolio, continued
The following table shows the Company’s loan maturity and interest rate sensitivity as of December
31, 2009:
| Less Than | 1-5 | Over | ||||||||||||||
| (Dollars in thousands) | 1 Year | Years | 5 Years | Total | ||||||||||||
|
Commercial and
agricultural loans
|
$ | 54,834 | $ | 73,169 | $ | 6,990 | $ | 134,993 | ||||||||
|
Multi-family residential
|
2,741 | 7,650 | 10,391 | |||||||||||||
|
Real Estate — mortgage
|
51,543 | 113,112 | 16,335 | 180,990 | ||||||||||||
|
Real Estate — construction
|
76,643 | 9,600 | 77 | 86,320 | ||||||||||||
|
Consumer — installment/other
|
13,296 | 8,358 | 55 | 21,709 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 199,057 | $ | 211,889 | $ | 23,457 | $ | 434,403 | ||||||||
|
|
||||||||||||||||
|
Loans with predetermined rates
|
$ | 15,312 | $ | 32,690 | $ | 22,848 | $ | 70,850 | ||||||||
|
Loans with variable or
adjustable rates
|
183,745 | 179,199 | 609 | 363,553 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 199,057 | $ | 211,889 | $ | 23,457 | $ | 434,403 | ||||||||
|
|
||||||||||||||||
Residential real estate loans are generally made for a period not to exceed 25 years and are
secured by a first deed of trust which normally does not exceed 90% of the appraised value. If the
loan to value ratio exceeds 90%, the Company requires additional collateral, guarantees or mortgage
insurance. On approximately 80% of the real estate loans, interest is adjustable after each three
or five year period. Fixed rate loans are generally made for a fifteen-year or a twenty-year period
with an interest rate adjustment after ten years.
Since 1992, fixed rate real estate loans have been funded with fixed rate borrowings from the
Federal Home Loan Bank, which allows the Company to control its interest rate risk. In addition,
the Company makes home equity loans secured by second deeds of trust with total indebtedness not to
exceed 90% of the appraised value. Home equity loans are made for three, five or ten year periods
at a fixed rate or as a revolving line of credit.
Construction loans may be made to individuals, who have arranged with a contractor for the
construction of a residence, or to contractors that are involved in building pre-sold, spec-homes
or subdivisions. The majority of commercial loans are made to small retail, manufacturing and
service businesses. Consumer loans are made for a variety of reasons; however, approximately 26% of
the loans are secured by automobiles and trucks.
The Company’s market area has a stable economy which tends to be less cyclical than the national
economy. Major industries in the market area include agricultural production and processing,
higher education, retail sales, services and light manufacturing. The agricultural production and
processing industry is a major contributor to the local economy and its performance and growth tend
to be cyclical in nature, however, this cyclical nature is offset by other stable industries in the
trade area. In addition to direct agricultural loans, a large percentage of residential real estate
loans and consumer installment loans are made to borrowers whose income is derived from the
agricultural sector of the economy. A large percentage of the agricultural loans are made to
poultry growers.
During recent years, real estate values in the Company’s market area for commercial, agricultural
and residential property increased, on the average, between 5% and 8% annually depending on the
location and type of property, however due to the slowing economy and declining real estate sales
it is estimated that values actually declined approximately 10%-15% in 2009. Approximately 89% of
the Company’s loans are secured by real estate; however, policies relating to appraisals and loan
to value ratios are adequate to control the related risk. Unemployment rates in the Company’s
market area continue to be below both the national and state averages.
The Bank has identified loan concentrations of greater than 25% of capital in the following
categories, poultry related, motel properties, multi-family properties, spec homes and
construction/development. While the Bank has not developed a formal policy limiting the
concentration level to any particular loan type or industry segment, it has established target
limits on both a nominal and percentage of capital basis. Concentrations are monitored and reported
to the board of directors quarterly. Concentration levels have been used by management to determine
how aggressively they may price or pursue new loan requests. At December 31, 2009,
there are no industry categories of loans that exceed 10% of total loans.
21
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Nonaccrual and Past Due Loans
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 $7,653,000 at December 31,
2009 compared to $4,766,000 at December 31, 2008. Approximately 93% of these past due loans are
secured by real estate. Although management expects that there will be some loan losses, the bank
is generally well secured and continues to actively work with its customers to effect payment. As
of December 31, 2009, the Company holds $526,000 of real estate which was acquired through
foreclosure.
The following is a summary of information pertaining to risk elements and impaired loans:
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| 2009 | 2009 | 2009 | 2009 | 2008 | ||||||||||||||||
|
Nonaccrual Loans:
|
||||||||||||||||||||
|
Real Estate
|
3,245 | 3,638 | 1,918 | 1,518 | 1,374 | |||||||||||||||
|
Commercial
|
261 | 1,364 | 31 | |||||||||||||||||
|
Other
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Loans past due 90 days or more:
|
||||||||||||||||||||
|
Real Estate
|
3,850 | 2,550 | 4,042 | 2,798 | 3,205 | |||||||||||||||
|
Commercial
|
57 | 312 | 432 | 497 | 26 | |||||||||||||||
|
Other
|
240 | 153 | 38 | 148 | 161 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Nonperforming loans
|
7,653 | 8,017 | 6,461 | 4,961 | 4,766 | |||||||||||||||
|
|
||||||||||||||||||||
|
Nonperforming loans as a
percentage of loans held for
investment
|
1.76 | % | 1.88 | % | 1.55 | % | 1.21 | % | 1.19 | % | ||||||||||
|
|
||||||||||||||||||||
|
Net Charge Offs to Total Loans
|
.59 | % | .19 | % | .04 | % | .004 | % | .08 | % | ||||||||||
|
|
||||||||||||||||||||
|
Allowance for loan and lease
losses to nonperforming loans
|
50.12 | % | 58.63 | % | 39.56 | % | 48.00 | % | 45.93 | % | ||||||||||
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not
represent or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources. Nor do they represent
material credits about which management is aware of any information which causes it to have serious
doubts as to the ability of such borrowers to comply with the loan repayment terms. As of December
31, 2009, management is not aware of any potential problem loans which are not already classified
for regulatory purposes or on the watch list as part of the Bank’s internal grading system.
22
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Loan Losses and the Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with identified potential losses, and
pools of loans by type (commercial, residential, consumer, credit cards). Loans with identified
potential losses include examiner and bank classified loans. Classified relationships in excess of
$100,000 are reviewed individually for impairment under ASC 310. 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
ASC 450.
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 to these past due loans reflect
the fact that these loans bear a significant risk of charge-off. Loss rates vary by loan type to
reflect the likelihood that collateral values will offset a portion of the anticipated losses.
The remainder of the portfolio falls into pools by type of homogenous loans that do not exhibit any
of the above described weaknesses. Loss rates are assigned based on historical rates over the prior
two year period. 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 allowance for environmental
factors (such as trends in past due/impaired loans, volume and terms of loans, changes in lending
policies/procedures, experience of lending staff/management, local/national economic trends and
credit concentrations) has been established to reflect other unidentified losses within the
portfolio. The environment factor allowance mitigates the increased risk of loss associated with
fluctuations in past due trends, changes in the local and national economies, and other unusual
events. The Board approves the loan loss provision for each quarter based on this evaluation. 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 $3,836,000 at December 31, 2009 is equal to .88% of total loans
held for investment. This compares to an allowance of $2,189,000 (.55%) at December 31, 2008. The
overall level of the allowance remains well below the peer group averages. Management feels this
is appropriate based on its loan loss history and the composition of its loan portfolio. Based on
historical losses, delinquency rates, collateral values of delinquent loans and a thorough review
of the loan portfolio, management is of the opinion that the allowance for loan losses fairly
states the estimated losses in the current portfolio.
Loan losses, net of recoveries, totaled $2,563,000 in 2009 which is equivalent to .59% of total
loans outstanding. Over the preceding five years, the Company has had an average loss rate of .18%
which is approximately one third the loss rate of its peer group.
23
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Loan Losses and the Allowance for Loan Losses, continued
A summary of the activity in the allowance for loan losses follows:
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Balance at beginning of period
|
$ | 2,189 | $ | 1,703 | $ | 1,791 | $ | 1,673 | $ | 1,511 | ||||||||||
|
Provision charged to expenses
|
4,210 | 815 | 270 | 240 | 360 | |||||||||||||||
|
Loan losses:
|
||||||||||||||||||||
|
Commercial
|
1,110 | 294 | 331 | 19 | 128 | |||||||||||||||
|
Installment
|
193 | 106 | 119 | 143 | 135 | |||||||||||||||
|
Real estate
|
1,336 | |||||||||||||||||||
|
|
||||||||||||||||||||
|
Total loan losses
|
2,639 | 400 | 450 | 162 | 263 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
10 | 7 | 9 | 4 | 19 | |||||||||||||||
|
Installment
|
63 | 63 | 83 | 36 | 46 | |||||||||||||||
|
Real estate
|
3 | 1 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
76 | 71 | 92 | 40 | 65 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net loan losses
|
(2,563 | ) | 329 | 358 | 122 | 198 | ||||||||||||||
|
|
||||||||||||||||||||
|
Balance at end of period
|
$ | 3,836 | $ | 2,189 | $ | 1,703 | $ | 1,791 | $ | 1,673 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for loan losses as a
percentage of loans
|
.88 | % | .55 | % | .54 | % | 58 | % | .60 | % | ||||||||||
|
|
||||||||||||||||||||
|
Net loan losses to loans outstanding
|
.59 | % | .08 | % | .11 | % | .04 | % | .07 | % | ||||||||||
The Company has allocated the allowance according to the amounts deemed to be reasonably necessary
to provide for the possibility of losses occurring within each of the loan categories as shown
below. The allocation of the allowance as shown below should not be interpreted as an indication
that loan losses in future years will occur in the same proportions or that the allocation
indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance is a general
allowance applicable to the entire portfolio.
The following table shows the allocation of the allowance by loan type and the related outstanding
loan balances to total loans.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 2,220 | 31 | % | $ | 1,200 | 36 | % | $ | 900 | 32 | % | $ | 666 | 34 | % | $ | 648 | 32 | % | ||||||||||||||||||||
|
Real estate
|
1,168 | 64 | % | 450 | 58 | % | 300 | 61 | % | 300 | 61 | % | 300 | 61 | % | |||||||||||||||||||||||||
|
Installment
|
448 | 5 | % | 539 | 6 | % | 428 | 7 | % | 750 | 5 | % | 650 | 7 | % | |||||||||||||||||||||||||
|
Unallocated
|
% | % | 75 | % | 75 | % | 75 | % | ||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 3,836 | 100 | % | $ | 2,189 | 100 | % | $ | 1,703 | 100 | % | $ | 1,791 | 100 | % | $ | 1,673 | 100 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
24
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2009 of 22.91%. Interest bearing demand
deposits have increased primarily as a result of the new Platinum Rewards interest bearing checking
account which the Bank began offering in March 2008. At year end there were balances of
approximately $48 million in this account category which is a $33 million increase over 2008.
Balances in certificates of deposit increased $31.7 million as a result of the Bank’s membership in
the CDARS program. CDARS (Certificate of Deposit Account Registry Service) is a program that allows
the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements
with other network participating banks offer FDIC insurance up to as much as $50 million in
deposits. The CDARS program also allows the Bank to purchase funds through its One-Way Buy program.
At year end the Bank had obtained a total of $44.6 million in CDARS funding.
The Bank has traditionally avoided brokered deposits believing that they were unstable and, thus
not desirable. However, some of the deposits raised through the online listing service are
considered brokered deposits. Also, under current banking regulations, CDARS deposits are
considered brokered deposits even though in the reciprocal program the original source of funds
came from local customers. Certificates of deposit over $100,000 totaled $99,330,000 at December
31, 2009. The maturity distribution of these certificates is as follows:
| (Dollars in thousands) | 2009 | 2008 | ||||||
|
Less than 3 months
|
$ | 31,381 | $ | 15,314 | ||||
|
3 to 12 months
|
36,631 | 29,553 | ||||||
|
1 year to 5 years
|
31,318 | 18,988 | ||||||
|
|
||||||||
|
Total
|
$ | 99,330 | $ | 63,855 | ||||
|
|
||||||||
Non-deposit borrowings include repurchase agreements, federal funds purchased, Federal Home Loan
Bank (FHLB) daily rate credit and long-term debt obtained through the FHLB. Repurchase agreements
continue to be an important source of funding and provide commercial customers the opportunity to
earn market rates of interest on funds that are secured by specific securities owned by the Bank.
Borrowings from the Federal Home Loan Bank are used to support the Bank’s lending program and allow
the Bank to mange interest rate risk by laddering maturities and matching funding terms to the
terms of various loan types in the loan portfolio. The Bank borrowed $22,250,000 in 2009 and
$34,747,000 in 2008 in long term loans. Repayment of amortizing and fixed maturity loans through
FHLB totaled $27,350,000 for the year. These loans carry an average rate of 3.23% at December 31,
2009.
Stockholder’s Equity
Total stockholders’ equity increased $2,698,000 or 7.43% in 2009. While net income totaled
$1,954,000, noncontrolling interest net income totaled $$76,000 and changes in other comprehensive
income increased $2,292,000, capital was reduced by dividends ($1.743 million) and shares
repurchased ($54 thousand). As of December 31, 2009, book value per share was $16.99 compared to
$15.64 as of December 31, 2008. Dividends are paid to stockholders on a quarterly basis in uniform
amounts unless unexpected fluctuations in net income indicate a change to this policy is needed.
Banking regulators have established a uniform system to address the adequacy of capital for
financial institutions. The rules require minimum capital levels based on risk-adjusted assets.
Simply stated, the riskier an entity’s investments, the more capital it is required to maintain.
The Bank, as well as the Company, is required to maintain these minimum capital levels. The two
types of capital guidelines are Tier I capital (referred to as core capital) and Tier II capital
(referred to as supplementary capital). At December 31, 2009, the Company had Tier I capital of
9.01% of risk weighted assets and combined Tier I and II capital of 10.65% of risk weighted assets.
Regulatory minimums at this date were 4% and 8%, respectively. The Bank has maintained capital
levels far above the minimum requirements throughout the year. In the unlikely event that such
capital levels are not met, regulatory agencies are empowered to require the Company to raise
additional capital and/or reallocate present capital.
25
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Stockholder’s Equity, continued
In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital
leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets.
The regulators have established a minimum of 3% for this ratio, but can increase the minimum
requirement based upon an institution’s overall financial condition. At December 31, 2009, the
Company reported a leverage ratio of 7.08%. The Bank’s leverage ratio was also substantially above
the minimum.
Market Risk Management
Most of the Company’s net income is dependent on the Bank’s net interest income. Rapid changes in
short-term interest rates may lead to volatility in net interest income resulting in additional
interest rate risk to the extent that imbalances exist between the maturities or repricing of
interest bearing liabilities and interest earning assets. The net interest margin decreased .19% in
2009 and decreased .05% in 2008. Due to a slowing of the national economy and market turbulence
related to the sub-prime mortgage lending crisis, the Federal Reserve began cutting short term
interest rates in September 2007. The Federal Reserve cut short term rates a total of 5.00% to a
target of 0 to .25%.
Net interest income is also affected by changes in the mix of funding that supports earning assets.
For example, higher levels of non-interest bearing demand deposits and leveraging earning assets by
funding with stockholder’s equity would result in greater levels of net interest income than if
most of the earning assets were funded with higher cost interest-bearing liabilities, such as
certificates of deposit.
Liquidity as of December 31, 2009 is acceptable; the Bank historically has had a stable core
deposit base and, therefore, does not have to rely on volatile funding sources. Because of the
stable core deposit base, changes in interest rates should not have a significant effect on
liquidity. The Bank’s membership in the Federal Home Loan Bank has historically provided liquidity
as the Bank borrows money that is repaid over a five to ten year period and uses the money to make
fixed rate loans. The matching of the long-term receivables and liabilities helps the Bank reduce
its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically
and makes adjustments as needed. There are no off balance sheet items that will impair future
liquidity.
The following table depicts the Company’s interest rate sensitivity, as measured by the repricing
of its interest sensitive assets and liabilities as of December 31, 2009. As the notes to the
table indicate, the data was based in part on assumptions as to when certain assets or liabilities
would mature or reprice. The analysis indicates a liability sensitive one-year cumulative GAP
position of 6.86% of total earning assets, compared to (3.58%) in 2008. Approximately 50.26% of
rate sensitive assets and 49.44% of rate sensitive liabilities are subject to repricing within one
year. Short term assets (less than one year) increased $58,718,000 during the year, while total
earning assets increased $65,001,000. Growth in the loan portfolio was concentrated in real estate
secured loans, including both amortizing residential and commercial loans which typically have an
initial rate adjustment period of three to five years and construction loans which typically have a
term of one year and a rate that floats with the prime rate. Short term liabilities increased
$8,820,000, while total interest bearing liabilities increased $61,069,000. Due to the relatively
flat yield curve, management has aggressively cut deposit rates and has lengthened the term on some
of its fixed rate borrowings with FHLB. These actions have resulted in the improvement in the
negative GAP position in the one year time period and have helped to mitigate the decline in the
net interest margin.
26
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Market Risk Management, continued
The following GAP analysis shows the time frames as of December 31, 2009, in which the Company’s
assets and liabilities are subject to repricing:
| 1-90 | 91-365 | 1-5 | Over 5 | Not | ||||||||||||||||||||
| (Dollars in thousands) | Days | Days | Years | Years | Classified | Total | ||||||||||||||||||
|
Rate Sensitive Assets:
|
||||||||||||||||||||||||
|
Loans held for investment
|
$ | 162,938 | $ | 34,277 | $ | 210,867 | $ | 23,965 | $ | $ | 432,047 | |||||||||||||
|
Loans held for sale
|
31,168 | 31,168 | ||||||||||||||||||||||
|
Federal Funds Sold
|
18,326 | 18,326 | ||||||||||||||||||||||
|
Investments securities
|
2,066 | 344 | 4,012 | 5,871 | 4,247 | 16,540 | ||||||||||||||||||
|
Credit Cards
|
2,356 | 2,356 | ||||||||||||||||||||||
|
Interest bearing bank deposits
|
65 | 65 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
216,919 | 34,621 | 214,879 | 29,836 | 4,247 | 500,502 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Rate Sensitive Liabilities:
|
||||||||||||||||||||||||
|
Interest bearing demand deposits
|
27,111 | 58,106 | 15,497 | 100,714 | ||||||||||||||||||||
|
Savings
|
6,846 | 20,537 | 6,846 | 34,229 | ||||||||||||||||||||
|
Certificates of deposit
$100,000 and over
|
31,380 | 36,631 | 31,319 | 99,330 | ||||||||||||||||||||
|
Other certificates of deposit
|
23,658 | 66,912 | 42,325 | 132,895 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Deposits
|
55,038 | 137,500 | 152,287 | 22,343 | 367,168 | |||||||||||||||||||
|
Short-term debt
|
9,085 | 9,085 | ||||||||||||||||||||||
|
Long-term debt
|
10,275 | 5,325 | 44,781 | 2,715 | 63,096 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
74,398 | 142,825 | 197,068 | 25,058 | 439,349 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Discrete Gap
|
142,521 | (108,204 | ) | 17,811 | 4,778 | 4,247 | 61,153 | |||||||||||||||||
|
Cumulative Gap
|
142,521 | 34,317 | 52,128 | 56,906 | 61,153 | |||||||||||||||||||
|
As a % of Earning Assets
|
28.48 | % | 6.86 | % | 10.42 | % | 11.37 | % | 12.22 | % | ||||||||||||||
| • | In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run off. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities on deposits which have no stated maturity dates were derived from guidance contained in FDICIA 305. |
27
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which restructured
generally accepted accounting principles (“GAAP”) and simplified access to all authoritative
literature by providing a single source of authoritative nongovernmental GAAP. The guidance is
presented in a topically organized structure referred to as the FASB Accounting Standards
Codification (“ASC”). The new structure is effective for interim or annual periods ending after
September 15, 2009. All existing accounting standards have been superseded and all other accounting
literature not included is considered nonauthoritative.
In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to
shareholders that allow the shareholder to elect to receive their entire distribution in cash or
shares but with a limit on the aggregate amount of cash to be paid. The amendment states that the
stock portion of a distribution to shareholders that allows them to elect to receive cash or shares
with a potential limitation on the total amount of cash that all shareholders can elect to receive
in the aggregate is considered a share issuance. The amendment is effective for interim and annual
periods ending on or after December 15, 2009 and had no impact on the Company’s financial
statements.
Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for
consolidation purposes. The amendment provides that the decrease in ownership guidance should
apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a
subsidiary that is a business or nonprofit activity that is transferred to an equity method
investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or
nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a
decrease in ownership in transactions related to sales of in substance real estate or conveyances
of oil and gas mineral rights. The update is effective for the interim or annual reporting periods
ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
28
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Quarterly Results
The table below lists the Company’s quarterly performance for the years ended December 31, 2009 and
2008:
| 2009 | ||||||||||||||||||||
| (Dollars in thousands) | Fourth | Third | Second | First | Total | |||||||||||||||
|
Interest and Dividend Income
|
$ | 7,035 | $ | 6,761 | $ | 7,019 | $ | 6,701 | $ | 27,516 | ||||||||||
|
Interest Expense
|
2,458 | 2,475 | 2,548 | 2,701 | 10,182 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income
|
4,577 | 4,286 | 4,471 | 4,000 | 17,334 | |||||||||||||||
|
Provision for Loan Losses
|
900 | 2,790 | 310 | 210 | 4,210 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income after Provision,
For Loan Losses
|
3,677 | 1,496 | 4,161 | 3,790 | 13,124 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-Interest Income
|
718 | (101 | ) | 420 | 320 | 1,357 | ||||||||||||||
|
Non-Interest Expense
|
3,057 | 3,249 | 3,088 | 2,794 | 12,188 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income before taxes
|
1,338 | (1,854 | ) | 1,493 | 1,316 | 2,293 | ||||||||||||||
|
Income Tax Expense
|
483 | (978 | ) | 402 | 432 | 339 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
$ | 855 | $ | (876 | ) | $ | 1,091 | $ | 884 | $ | 1,954 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income Per Share
|
$ | .36 | $ | (.38 | ) | $ | .48 | $ | .39 | $ | .85 | |||||||||
| 2008 | ||||||||||||||||||||
| (Dollars in thousands) | Fourth | Third | Second | First | Total | |||||||||||||||
|
Interest and Dividend Income
|
$ | 6,765 | $ | 6,617 | $ | 6,128 | $ | 6,034 | $ | 25,544 | ||||||||||
|
Interest Expense
|
2,776 | 2,665 | 2,453 | 2,604 | 10,498 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income
|
3,989 | 3,952 | 3,675 | 3,430 | 15,046 | |||||||||||||||
|
Provision for Loan Losses
|
430 | 120 | 175 | 90 | 815 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income after Provision
For Loan Losses
|
3,559 | 3,832 | 3,500 | 3,340 | 14,231 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-Interest Income
|
(563 | ) | 475 | 896 | 681 | 1,489 | ||||||||||||||
|
Non-Interest Expense
|
2,890 | 2,793 | 2,761 | 2,653 | 11,097 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income before taxes
|
106 | 1,514 | 1,635 | 1,368 | 4,623 | |||||||||||||||
|
Income Tax Expense
|
136 | 428 | 491 | 364 | 1,419 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
$ | (30 | ) | $ | 1,086 | $ | 1,144 | $ | 1,004 | $ | 3,204 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income Per Share
|
$ | (.01 | ) | $ | .47 | $ | .49 | $ | .43 | $ | 1.38 | |||||||||
29
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash and due from banks (notes 3 and 13)
|
$ | 5,314,285 | $ | 5,686,781 | ||||
|
Federal funds sold
|
18,326,000 | 8,979,000 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
23,640,285 | 14,665,781 | ||||||
|
|
||||||||
|
Interest bearing deposits (note 13)
|
64,971 | 1,162,265 | ||||||
|
Securities:
|
||||||||
|
Held to maturity — fair value of $110,000 in 2009
and 2008 (note 4)
|
109,813 | 109,634 | ||||||
|
Available for sale (note 4)
|
16,429,533 | 22,237,430 | ||||||
|
Other investments (note 4)
|
9,680,733 | 8,438,964 | ||||||
|
Loans held for sale
|
31,167,763 | 3,780,287 | ||||||
|
Loans held for investment (notes 5 and 13)
|
434,402,916 | 399,232,536 | ||||||
|
Less allowance for loan losses (note 6)
|
(3,835,698 | ) | (2,189,261 | ) | ||||
|
|
||||||||
|
Net Loans Held for Investment
|
430,567,218 | 397,043,275 | ||||||
|
|
||||||||
|
Other real estate owned
|
525,897 | |||||||
|
Bank premises and equipment, net (note 7)
|
7,079,504 | 7,457,128 | ||||||
|
Interest receivable
|
2,037,612 | 2,056,162 | ||||||
|
Core deposit intangible (note 21)
|
321,932 | 597,874 | ||||||
|
Goodwill (note 21)
|
2,669,517 | 2,669,517 | ||||||
|
Bank owned life insurance (note 22)
|
6,593,081 | 6,304,263 | ||||||
|
Other assets
|
8,334,778 | 5,535,207 | ||||||
|
|
||||||||
|
Total Assets
|
539,222,637 | 472,057,787 | ||||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest bearing
|
53,475,063 | 49,785,896 | ||||||
|
Interest bearing:
|
||||||||
|
Demand
|
77,483,164 | 39,772,929 | ||||||
|
Money market accounts
|
23,230,861 | 22,779,161 | ||||||
|
Savings
|
34,228,965 | 29,366,527 | ||||||
|
Time deposits over $100,000 (note 8)
|
99,329,716 | 63,855,260 | ||||||
|
All other time deposits (note 8)
|
132,895,542 | 136,665,430 | ||||||
|
|
||||||||
|
Total Deposits
|
420,643,311 | 342,225,203 | ||||||
|
|
||||||||
|
|
||||||||
|
Short-term debt (note 9)
|
9,084,909 | 20,510,287 | ||||||
|
Accrued liabilities
|
7,396,233 | 7,686,661 | ||||||
|
Subordinated debt
|
2,715,000 | |||||||
|
Long-term debt (note 10)
|
60,380,702 | 65,330,833 | ||||||
|
|
||||||||
|
Total Liabilities
|
500,220,155 | 435,752,984 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity (Note 20)
|
||||||||
|
Common stock $5 par value, 6,000,000
shares authorized, 2,295,053 and 2,289,497 shares
issued and outstanding for 2009 and 2008, respectively
|
11,475,265 | 11,447,485 | ||||||
|
Capital surplus
|
||||||||
|
Retained earnings (note 17)
|
27,989,144 | 27,686,745 | ||||||
|
Noncontrolling interest
|
122,709 | 46,829 | ||||||
|
Accumulated other comprehensive income (loss)
|
(584,636 | ) | (2,876,256 | ) | ||||
|
|
||||||||
|
Total Stockholders’ Equity
|
39,002,482 | 36,304,803 | ||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 539,222,637 | $ | 472,057,787 | ||||
|
|
||||||||
The accompanying notes are an integral part of this statement.
30
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
For the years ended 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Interest and Dividend Income
|
||||||||||||
|
Interest and fees on loans held for investment
|
$ | 25,393,347 | $ | 23,638,923 | $ | 22,560,401 | ||||||
|
Interest on loans held for sale
|
1,169,228 | 238,249 | 21,794 | |||||||||
|
Interest on deposits and federal funds sold
|
23,533 | 167,441 | 319,048 | |||||||||
|
Interest on debt securities
|
697,982 | 970,523 | 1,231,825 | |||||||||
|
Dividends on equity securities
|
231,838 | 529,268 | 502,080 | |||||||||
|
|
||||||||||||
|
Total Interest and Dividend Income
|
27,515,928 | 25,544,404 | 24,635,148 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest Expense
|
||||||||||||
|
Interest on demand deposits
|
1,306,439 | 798,137 | 1,171,782 | |||||||||
|
Interest on savings deposits
|
202,027 | 293,461 | 331,218 | |||||||||
|
Interest on time deposits over $100,000
|
1,551,360 | 1,906,538 | 2,304,597 | |||||||||
|
Interest on all other time deposits
|
4,742,443 | 5,047,994 | 5,513,883 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total interest on deposits
|
7,802,269 | 8,046,130 | 9,321,480 | |||||||||
|
Interest on short-term debt
|
77,818 | 456,398 | 501,932 | |||||||||
|
Interest on long-term debt
|
2,302,246 | 1,995,514 | 1,219,489 | |||||||||
|
|
||||||||||||
|
Total Interest Expense
|
10,182,333 | 10,498,042 | 11,042,901 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Interest Income
|
17,333,595 | 15,046,362 | 13,592,247 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Provision for Loan losses
(note 6)
|
4,210,000 | 815,000 | 270,000 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Interest Income After
Provision for Loan Losses
|
13,123,595 | 14,231,362 | 13,322,247 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest Income (Expenses)
|
||||||||||||
|
Service charges on deposit accounts
|
1,292,965 | 1,356,494 | 1,209,972 | |||||||||
|
Insurance and other commissions
|
476,734 | 271,078 | 368,990 | |||||||||
|
Other operating income
|
1,086,890 | 1,193,991 | 1,342,851 | |||||||||
|
Income on bank owned life insurance
|
330,756 | 336,459 | 293,271 | |||||||||
|
Other than temporary impairment losses
|
(1,751,169 | ) | (1,758,730 | ) | (171,000 | ) | ||||||
|
Gain (loss) on the sale of securities (note 4)
|
(2,424 | ) | 78,173 | 272,185 | ||||||||
|
|
||||||||||||
|
Total Noninterest Income
|
1,433,752 | 1,477,465 | 3,316,269 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest Expenses
|
||||||||||||
|
Salaries
|
5,037,699 | 5,131,045 | 4,737,325 | |||||||||
|
Employee benefits (note 12)
|
1,690,834 | 1,491,847 | 1,524,208 | |||||||||
|
Occupancy expense
|
563,923 | 578,735 | 598,598 | |||||||||
|
Equipment expense
|
592,075 | 564,410 | 615,083 | |||||||||
|
Amortization of intangibles (notes 2 and 21)
|
275,942 | 275,942 | 275,942 | |||||||||
|
FDIC insurance assessment
|
934,864 | 144,308 | 34,459 | |||||||||
|
Other operating expenses
|
3,092,799 | 2,911,190 | 2,746,691 | |||||||||
|
|
||||||||||||
|
Total Noninterest Expenses
|
12,188,136 | 11,097,477 | 10,532,306 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income before Income Taxes
|
2,369,211 | 4,611,350 | 6,106,210 | |||||||||
|
|
||||||||||||
|
Income Tax Expense
(note 11)
|
339,309 | 1,418,628 | 1,653,124 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Consolidated Net Income
|
2,029,902 | 3,192,722 | 4,453,086 | |||||||||
|
|
||||||||||||
|
Net Income — Noncontrolling interest
|
(75,880 | ) | 11,294 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income-F & M Bank Corp.
|
$ | 1,954,022 | $ | 3,204,016 | $ | 4,453,086 | ||||||
|
|
||||||||||||
|
Per Share Data Net Income
|
$ | .85 | $ | 1.38 | $ | 1.89 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Dividends
|
$ | .84 | $ | .90 | $ | .86 | ||||||
|
|
||||||||||||
|
Average Common Shares Outstanding
|
2,291,845 | 2,318,998 | 2,359,540 | |||||||||
|
|
||||||||||||
The accompanying notes are an integral part of this statement
31
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2009, 2008 and 2007
For the years ended December 31, 2009, 2008 and 2007
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Comprehensive | ||||||||||||||||||||||||
| Common | Capital | Retained | Noncontrolling | Income | ||||||||||||||||||||
| Stock | Surplus | Earnings | Interest | (Loss) | Total | |||||||||||||||||||
|
Balance December 31, 2006
|
11,870,965 | $ | $ | 26,794,238 | $ | $ | (560,359 | ) | $ | 38,104,844 | ||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||
|
Net income
|
4,453,086 | 4,453,086 | ||||||||||||||||||||||
|
Net change in other
comprehensive income (note 2)
|
(403,683 | ) | (403,683 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Comprehensive Income
|
4,049,403 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Tax benefit of ESOP dividends
Dividends on common stock
|
(2,030,564 | ) | (2,030,564 | ) | ||||||||||||||||||||
|
Stock issued (294 shares)
|
1,470 | 8,082 | 9,552 | |||||||||||||||||||||
|
Stock repurchased (30,597 shares)
|
(152,985 | ) | (815,569 | ) | (968,554 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance December 31, 2007
|
11,719,450 | 28,409,273 | (964,042 | ) | 39,164,681 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cumulative effect of initial adoption
of EITF 06-4
|
(428,112 | ) | (428,112 | ) | ||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||
|
Net income
|
3,204,016 | 46,829 | 3,250,845 | |||||||||||||||||||||
|
Net change in other
comprehensive income (note 2)
|
(1,912,214 | ) | (1,912,214 | ) | ||||||||||||||||||||
|
Total Comprehensive Income
|
1,338,631 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Dividends on common stock
|
(2,083,015 | ) | (2,083,015 | ) | ||||||||||||||||||||
|
Stock issued (3,951 shares)
|
19,755 | 98,380 | 118,135 | |||||||||||||||||||||
|
Stock repurchased (58,344 shares)
|
(291,720 | ) | (98,380 | ) | (1,415,417 | ) | (1,805,517 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance December 31, 2008
|
11,447,485 | — | 27,686,745 | 46,829 | (2,876,256 | ) | 36,304,803 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||
|
Net income
|
1,954,022 | 75,880 | 2,029,902 | |||||||||||||||||||||
|
Net change in other
comprehensive income (note 2)
|
2,291,620 | 2,291,620 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Comprehensive Income
|
4,321,522 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Dividends on common stock
|
(1,742,637 | ) | (1,742,637 | ) | ||||||||||||||||||||
|
Stock issued (8,478 shares)
|
38,390 | 134,680 | 173,070 | |||||||||||||||||||||
|
Stock repurchased (2,122 shares)
|
(10,610 | ) | (43,666 | ) | (54,276 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance December 31, 2009
|
11,475,265 | $ | $ | 27,989,144 | $ | 122,709 | $ | (584,636 | ) | $ | 39,002,482 | |||||||||||||
|
|
||||||||||||||||||||||||
The accompanying notes are an integral part of this statement.
32
Table of Contents
F & M Bank Corp. and Subsidiaries
For the years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 1,954,022 | $ | 3,204,016 | $ | 4,453,086 | ||||||
|
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
|
||||||||||||
|
(Gain) loss on securities transactions
|
2,424 | (78,173 | ) | (272,185 | ) | |||||||
|
Other than temporary impairment losses
|
1,751,169 | 1,758,730 | 171,000 | |||||||||
|
Depreciation
|
654,401 | 630,314 | 697,659 | |||||||||
|
Accretion of securities
|
27,383 | (29,717 | ) | (111,489 | ) | |||||||
|
Net decrease (increase) in loans held for sale
|
(27,387,476 | ) | (3,780,287 | ) | — | |||||||
|
Provision for loan losses
|
4,210,000 | 815,000 | 270,000 | |||||||||
|
Provision for deferred taxes
|
(694,041 | ) | (159,824 | ) | (346,191 | ) | ||||||
|
(Increase) decrease in interest receivable
|
18,550 | (124,187 | ) | (55,326 | ) | |||||||
|
(Increase) decrease in other assets
|
(3,187,314 | ) | (69,785 | ) | (831,946 | ) | ||||||
|
Increase (decrease) in accrued expenses
|
(15,740 | ) | 538,980 | (299,666 | ) | |||||||
|
Change in pension liability
|
852,683 | (1,835,082 | ) | 531,150 | ||||||||
|
Amortization of limited partnership
investments
|
370,808 | 431,584 | 722,041 | |||||||||
|
Amortization of intangibles
|
275,942 | 275,942 | 275,942 | |||||||||
|
Gain on sale of property and equipment
|
(1,902 | ) | (68,904 | ) | ||||||||
|
Income from life insurance investment
|
(288,818 | ) | (298,952 | ) | (293,271 | ) | ||||||
|
|
||||||||||||
|
Net Cash Provided by Operating Activities
|
(21,456,007 | ) | 1,276,657 | 4,841,900 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
(Increase) decrease in interest bearing bank deposits
|
1,097,294 | 1,969,600 | (1,127,083 | ) | ||||||||
|
Purchase of securities held to maturity
|
— | (108,166 | ) | |||||||||
|
Proceeds from maturities of securities held to maturity
|
— | 110,000 | ||||||||||
|
Proceeds from maturities of securities available for sale
|
17,618,208 | 23,843,841 | 22,499,667 | |||||||||
|
Proceeds from sales of securities available for sale
|
32,228 | 1,511,286 | 2,172,552 | |||||||||
|
Purchases of securities available for sale
|
(12,724,664 | ) | (22,654,078 | ) | (25,514,141 | ) | ||||||
|
Net increase in loans held for investment
|
(38,259,840 | ) | (82,381,163 | ) | (8,077,058 | ) | ||||||
|
Purchase of life insurance
|
— | — | ||||||||||
|
Purchase of property and equipment
|
(276,777 | ) | (864,047 | ) | (140,648 | ) | ||||||
|
Proceeds from life insurance policy
|
— | 246,332 | ||||||||||
|
|
||||||||||||
|
Net Cash Used in Investing Activities
|
(32,513,551 | ) | (78,574,561 | ) | (9,938,545 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities
|
(2,932,000 | ) | 370,000 | |||||||||
|
Net change in federal funds purchased
|
||||||||||||
|
Net change in demand and savings deposits
|
46,713,540 | 8,147,063 | 8,044,854 | |||||||||
|
Net change in time deposits
|
31,704,568 | 35,518,478 | 992,378 | |||||||||
|
Net change in short-term debt
|
(11,425,378 | ) | 10,699,236 | 656,122 | ||||||||
|
Dividends paid in cash
|
(1,932,332 | ) | (2,103,775 | ) | (2,016,246 | ) | ||||||
|
Proceeds from long-term debt
|
27,400,000 | 39,747,500 | 10,000,000 | |||||||||
|
Proceeds for issuance of subordinated debt
|
2,715,000 | |||||||||||
|
Payments to repurchase common stock
|
(54,276 | ) | (1,805,517 | ) | (968,554 | ) | ||||||
|
Proceeds from issuance of common stock
|
173,071 | 118,135 | 9,552 | |||||||||
|
Repayments of long-term debt
|
(32,350,131 | ) | (4,130,953 | ) | (9,532,966 | ) | ||||||
|
|
||||||||||||
|
Net Cash Provided by Financing Activities
|
62,944,062 | 83,258,167 | 7,555,140 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
8,974,504 | 5,960,263 | 2,458,495 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, Beginning of Year
|
14,665,781 | 8,705,518 | 6,247,023 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, End of Year
|
$ | 23,640,285 | $ | 14,665,781 | $ | 8,705,518 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Disclosure:
|
||||||||||||
|
Cash paid for:
|
||||||||||||
|
Interest expense
|
$ | 10,419,858 | $ | 10,646,216 | $ | 10,801,426 | ||||||
|
Income taxes
|
720,000 | 950,000 | 1,155,000 | |||||||||
The accompanying notes are an integral part of this statement.
33
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
December 31, 2009 and 2008
F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”),
operates under a charter issued by the Commonwealth of Virginia and provides commercial banking
services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of
Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers
located mainly in Rockingham, Shenandoah and Page Counties in Virginia, and the adjacent counties
of Augusta, Virginia and Hardy, West Virginia. Services are provided at nine branch offices. The
Company offers insurance, mortgage lending and financial services through its subsidiaries, TEB
Life Insurance, Inc. and Farmers & Merchants Financial Services, Inc, and VBS Mortgage, LLC.
The accounting and reporting policies of the Company and its subsidiaries conform to generally
accepted accounting principles and to accepted practice within the banking industry.
The following is a summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Farmers and Merchants Bank, TEB
Life Insurance Company, Farmers & Merchants Financial Services, Inc. and VBS Mortgage, LLC. (net of
minority interest). Significant inter-company accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to make estimates and assumptions
that affect the reported amounts in those statements; actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to significant changes
in the near term are the determination of the allowance for loan losses, which is sensitive to
changes in local and national economic conditions, and the other than temporary impairment of
investments in the investment portfolio.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits at other financial institutions whose
initial maturity is ninety days or less and Federal funds sold.
Investment Securities
Management reviews the securities portfolio and classifies all securities as either held to
maturity or available for sale at the date of acquisition. Securities that the Company has both
the positive intent and ability to hold to maturity (at time of purchase) are classified as held to
maturity securities. All other securities are classified as available for sale. Securities held
to maturity are carried at historical cost and adjusted for amortization of premiums and accretion
of discounts, using the effective interest method. Securities available for sale are carried at
fair value with any valuation adjustments reported, net of deferred taxes, as a part of other
accumulated comprehensive income. Also included in securities available for sale are marketable
equity securities.
Interest, amortization of premiums and accretion of discounts on securities are reported as
interest income using the effective interest method. Gains (losses) realized on sales and calls of
securities are determined on the specific identification method.
Accounting for Historic Rehabilitation and Low Income Housing Partnerships
The Company periodically invests in low income housing partnerships whose primary benefit is the
distribution of federal income tax credits to partners. The Company recognizes these benefits and
the cost of the investments over the life of the partnership (usually 15 years). In addition,
state and federal historic rehabilitation credits are generated from some of the partnerships.
Amortization of these investments are prorated based on the amount of benefits received in each
year to the total estimated benefits over the life of the projects. All benefits have been shown
as investment income since income tax benefits are the only anticipated benefits of ownership.
34
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans
Loans are carried on the balance sheet net of any unearned interest and the allowance for loan
losses. Interest income on loans is determined using the effective interest method on the daily
amount of principal outstanding except where serious doubt exists as to collectibility of the loan,
in which case the accrual of income is discontinued.
Allowance for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance
for loan losses to an estimated balance that management considers adequate to absorb potential
losses in the portfolio. Loans are charged against the allowance when management believes the
collectibility of the principal is unlikely. Recoveries of amounts previously charged-off are
credited to the allowance. Management’s determination of the adequacy of the allowance is based on
an evaluation of the composition of the loan portfolio, the value and adequacy of collateral,
current economic conditions, historical loan loss experience, and other risk factors. Management
believes that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may be necessary based
on changes in economic conditions, particularly those affecting real estate values. In addition,
regulatory agencies, as an integral part of their examination process, periodically review the
Company’s allowance for loan losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to them at the time of their
examination.
A loan is considered impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Nonaccrual Loans
Commercial loans are placed on nonaccrual status when they become ninety days or more past due,
unless there is an expectation that the loan will either be brought current or paid in full in a
reasonable period of time. Interest accruals are continued on past due, secured residential real
estate loans and consumer purpose loans until the principal and accrued interest equal the value of
the collateral and on unsecured loans until the financial condition of the borrower deteriorates to
the point that any further accrued interest would be determined to be uncollectible.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is
charged to income over the estimated useful lives of the assets on a combination of the
straight-line and accelerated methods. The ranges of the useful lives of the premises and
equipment are as follows:
|
Buildings and Improvements
|
10-40years | |||
|
Furniture and Fixtures
|
5-20years |
Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and
losses on dispositions are reflected in other income or expense.
35
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over ten years. Core deposit
intangibles, net of amortization totaled $321,932 and $597,874 at December 31, 2009 and 2008,
respectively. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit
intangible will continue to be amortized over the estimated useful life.
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ASC 850, Business Combinations and ASC 350, Intangibles. ASC 850 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. ASC 350 became effective for fiscal years beginning after
December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to
initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and
intangible assets with indefinite lives. Instead, these assets are subject to an impairment review
on an annual basis and more frequently if certain impairment indicators are in evidence. ASC 350
also requires that reporting units be identified for the purpose of assessing potential future
impairments of goodwill.
Goodwill totaled $2,669,517 at December 31, 2009 and 2008. The goodwill is no longer amortized, but
instead tested for impairment at least annually. Based on the testing, there were no impairment
charges for 2009, 2008 or 2007.
Pension Plans
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially
all of its employees. The benefits are primarily based on years of service and earnings. On
December 31, 2006 the Company adopted ASC 325-960 “Defined Benefit Pension Plans” (formerly SFAS
No. 158), which was issued in September of 2006 and amends SFAS 87 and SFAS 106 to require
recognition of the over-funded or under-funded status of pension and other postretirement benefit
plans on the balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits,
and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized
through net periodic benefit cost will be recognized in accumulated other comprehensive income, net
of tax effects, until they are amortized as a component of net periodic cost.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Total
advertising costs included in other operating expenses for 2009, 2008, and 2007 were $223,762,
$295,214 and $244,930, respectively.
36
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes
Amounts provided for income tax expense are based on income reported for financial statement
purposes rather than amounts currently payable under income tax laws. Deferred taxes, which arise
principally from temporary differences between the period in which certain income and expenses are
recognized for financial accounting purposes and the period in which they affect taxable income,
are included in the amounts provided for income taxes.
In 2006, the FASB issued ASC 740 (formerly Interpretation No. 48), “Income Taxes.” ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a
recognition threshold and measurement of a tax position taken or expected to be taken in an
enterprise’s tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006.
Accordingly, the Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not
have any impact on the Company’s consolidated financial position.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be
included in net income. Certain changes in assets and liabilities and changes in pension plan
funding status, such as unrealized gains and losses on available-for-sale securities and gains or
losses on certain derivative contracts, are reported as a separate component of the equity section
of the balance sheet. Such items, along with operating net income, are components of comprehensive
income.
The components of other comprehensive income and related tax effects are as follows:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Changes in:
|
||||||||||||
|
Net income
|
$ | 2,029,902 | $ | 3,250,845 | $ | 4,453,086 | ||||||
|
Adjustment for initial adoption of ASC 325-960
funded status adjustment
|
852,683 | (1,835,082 | ) | 531,150 | ||||||||
|
Tax effect
|
(289,912 | ) | 623,928 | (180,591 | ) | |||||||
|
|
||||||||||||
|
Pension plan adjustment, net of tax
|
562,771 | (1,211,154 | ) | 350,559 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Unrealized holding gains (losses)
on available-for-sale securities
|
865,875 | (2,742,769 | ) | (1,041,606 | ) | |||||||
|
Other than temporary impairment losses
|
1,751,169 | 1,758,730 | 171,000 | |||||||||
|
Reclassification adjustment for
(gains) losses realized in income
|
2,424 | (78,173 | ) | (272,185 | ) | |||||||
|
|
||||||||||||
|
Net unrealized gains (losses)
|
2,619,468 | (1,062,212 | ) | (1,142,791 | ) | |||||||
|
Tax effect
|
890,619 | 361,152 | 388,549 | |||||||||
|
|
||||||||||||
|
Unrealized holding gain (losses), net of tax
|
1,728,849 | (701,060 | ) | (754,242 | ) | |||||||
|
|
||||||||||||
|
Total other comprehensive income
|
$ | 4,321,522 | $ | 1,338,631 | $ | 4,049,403 | ||||||
|
|
||||||||||||
Earnings Per Share
Earnings per share are based on the weighted average number of shares outstanding. The Company had
no potentially dilutive instruments during the three-year period ended December 31, 2009.
37
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Derivative Financial Instruments and Change in Accounting Principle
On January 1, 2001, the Company adopted ASC 815 “Derivative and Hedging Investments” (formerly SFAS
No. 133). This statement requires that all derivatives be recognized as assets or liabilities in
the balance sheet and measured at fair value.
Under ASC 815, the gain or loss on a derivative designated and qualifying as a fair value hedging
instrument, as well as the offsetting gain or loss on the hedging item attributable to the risk
being hedged, is recognized currently in earnings in the same accounting period. The effective
portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging
instrument is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if
any, is recognized currently in earnings.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are
designated as a hedge and are expected to be, and are, effective in substantially reducing interest
rate risk arising from the assets and liabilities identified as exposing the Company to risk.
Those derivative financial instruments that do not meet the hedging criteria discussed below would
be classified as trading activities and would be recorded at fair value with changes in fair value
recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over
time the change in their fair values due to the designated hedge risk must be within 80 to 125
percent of the opposite change in the fair value of the hedged assets or liabilities). Changes in
fair value of the derivative financial instruments must be effective at offsetting changes in the
fair value of the hedging items due to the designated hedge risk during the term of the hedge.
Further, if the underlying financial instrument differs from the hedged asset or liability, there
must be a clear economic relationship between the prices of the two financial instruments. If
periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives
contracts would be closed out and settled or classified as a trading activity.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through March 18, 2010, the date the financial statements were
issued.
The Bank is required to maintain average reserve balances based on a percentage of deposits. The
average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $25,000 for
the years ended December 31, 2009 and 2008.
The amortized cost and fair value of securities held to maturity are as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
U. S. Treasuries
|
$ | 109,813 | $ | $ | $ | 109,813 | ||||||||||
|
|
||||||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
U. S. Treasuries
|
$ | 109,634 | $ | — | $ | — | $ | 109,634 | ||||||||
|
|
||||||||||||||||
38
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
The amortized cost and fair value of securities available for sale are as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Government sponsored enterprises
|
$ | 5,975,816 | $ | 35,878 | $ | $ | 6,011,694 | |||||||||
|
Mortgage-backed obligations of
federal agencies
|
5,895,747 | 277,032 | 2,439 | 6,170,340 | ||||||||||||
|
Marketable equities
|
3,768,175 | 263,700 | 288,906 | 3,742,969 | ||||||||||||
|
Municipals
|
||||||||||||||||
|
Corporate bonds
|
280,800 | 223,730 | 504,530 | |||||||||||||
|
|
||||||||||||||||
|
Total Securities Available for Sale
|
$ | 15,920,538 | $ | 800,340 | $ | 291,345 | $ | 16,429,533 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
Government sponsored enterprises
|
$ | 10,012,805 | $ | 202,895 | $ | 21,860 | $ | 10,193,840 | ||||||||
|
Mortgage-backed obligations of
federal agencies
|
8,391,182 | 193,059 | 10,475 | 8,573,766 | ||||||||||||
|
Marketable equities
|
5,430,255 | 22 | 2,366,026 | 3,064,251 | ||||||||||||
|
Municipals
|
125,000 | 227 | 124,773 | |||||||||||||
|
Corporate bonds
|
280,800 | 280,800 | ||||||||||||||
|
|
||||||||||||||||
|
Total Securities Available for Sale
|
$ | 24,240,042 | $ | 395,976 | $ | 2,398,588 | $ | 22,237,430 | ||||||||
|
|
||||||||||||||||
The amortized cost and fair value of securities at December 31, 2009, by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
| Securities Held to Maturity | Securities Available for Sale | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
|
Due in one year or less
|
$ | 109,813 | $ | 109,813 | $ | 2,301,928 | $ | 2,299,622 | ||||||||
|
Due after one year through five years
|
3,976,069 | 4,011,814 | ||||||||||||||
|
Due after five years
|
5,874,366 | 6,375,128 | ||||||||||||||
|
|
||||||||||||||||
|
|
109,813 | 109,813 | 12,152,363 | 12,686,564 | ||||||||||||
|
Marketable equities
|
3,768,175 | 3,742,969 | ||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 109,813 | $ | 109,813 | $ | 15,920,538 | $ | 16,429,533 | ||||||||
|
|
||||||||||||||||
There were no sales of debt securities during 2009, 2008, or 2007. Following is a table reflecting
gains and losses on equity securities:
| 2009 | 2008 | 2007 | ||||||||||
|
Gains
|
$ | 2,475 | $ | 244,181 | $ | 344,944 | ||||||
|
Losses
|
(4,899 | ) | (166,008 | ) | (72,759 | ) | ||||||
|
|
||||||||||||
|
Net Gains
|
$ | (2,424 | ) | $ | 78,173 | $ | 272,185 | |||||
|
|
||||||||||||
The carrying value (which approximates fair value) of securities pledged by the Bank to secure
deposits and for other purposes amounted to $15,229,000 at December 31, 2009 and $21,078,000 at
December 31, 2008.
39
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Other investments consist of investments in fourteen low-income housing and historic equity
partnerships (carrying basis of $4,204,000), stock in the Federal Home Loan Bank (carrying basis of
$4,543,000), and various other investments (carrying basis of $933,000). The interests in the
low-income housing and historic equity partnerships have limited transferability and the interests
in the other stocks are restricted as to sales. The market values of these securities are
estimated to approximate their carrying value as of December 31, 2009. At December 31, 2009, the
Company was committed to invest an additional $2,770,938 in five low-income housing limited
partnerships. These funds will be paid as requested by the general partner to complete the
projects. This additional investment has been reflected in the above carrying basis and in accrued
liabilities on the balance sheet.
The primary purpose of the investment portfolio is to generate income and meet liquidity needs of
the Company through readily saleable financial instruments. The portfolio includes fixed rate
bonds, whose prices move inversely with rates, variable rate bonds and equity securities. At the
end of any accounting period, the investment portfolio has unrealized gains and losses. The
Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit
risk changes, to see if adjustments are needed. The primary concern in a loss situation is the
credit quality of the business behind the instrument. Bonds deteriorate in value due to credit
quality of the individual issuer and changes in market conditions. These losses relate to market
conditions and the timing of purchases.
A summary of these losses (in thousands) is as follows:
| Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Government sponsored
enterprises
|
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Mortgage backed
obligations
|
300 | (2 | ) | 300 | (2 | ) | ||||||||||||||||||
|
Marketable equities
|
1,891 | (289 | ) | 1,891 | (289 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | $ | $ | 2,191 | $ | (291 | ) | $ | 2,191 | $ | (291 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Government sponsored
enterprises
|
$ | 2,002 | $ | (22 | ) | $ | $ | $ | 2,002 | $ | (22 | ) | ||||||||||||
|
Mortgage backed
obligations
|
373 | (11 | ) | 373 | (11 | ) | ||||||||||||||||||
|
Marketable equities
|
598 | (381 | ) | 1,853 | (1,985 | ) | 2,451 | (2,366 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 2,600 | $ | (403 | ) | $ | 2,226 | $ | (1,996 | ) | $ | 4,826 | $ | (2,399 | ) | |||||||||
|
|
||||||||||||||||||||||||
Management evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market conditions warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the fair value has been
less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery of fair value. The Company does not intend to
sell these securities and it is more likely than not that the Company will not be required to sell
these securities before recovery of their amortized cost.
The Company recognized other-than-temporary impairment losses of $1,751,000, $1,759,000, and
$171,000 in the carrying basis of its equity holdings in 2009, 2008, and 2007, respectively. These
write downs were a result of management’s evaluation and determination that these assets met the
definition of other than temporary impairment under ASC 320-10.
40
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Loans held for investment as of December 31
:
| 2009 | 2008 | |||||||
|
Real Estate
|
||||||||
|
Construction
|
$ | 86,319,632 | $ | 71,259,034 | ||||
|
Mortgage
|
191,381,547 | 169,121,443 | ||||||
|
Commercial and agricultural
|
134,992,512 | 134,008,258 | ||||||
|
Installment
|
19,247,550 | 22,791,468 | ||||||
|
Credit cards
|
2,355,510 | 1,940,301 | ||||||
|
Other
|
106,165 | 112,032 | ||||||
|
|
||||||||
|
Total
|
$ | 434,402,916 | $ | 399,232,536 | ||||
|
|
||||||||
The Company has pledged loans as collateral for borrowings with the Federal Home Loan Bank of
Atlanta totaling $155,632,000 and $167,246,000 as of December 31, 2009 and 2008, respectively.
During 2005, the Company switched to a blanket lien on its entire residential real estate portfolio
and also began pledging commercial and home equity loans.
The following is a summary of information pertaining to impaired loans (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Impaired loans without a valuation allowance
|
$ | 1,241 | $ | 1,743 | $ | — | ||||||
|
Impaired loans with a valuation allowance
|
7,694 | 1,676 | 2,748 | |||||||||
|
|
||||||||||||
|
Total impaired loans
|
$ | 8,935 | $ | 3,419 | $ | 2,748 | ||||||
|
|
||||||||||||
|
Valuation allowance related to impaired loans
|
$ | 986 | $ | 468 | $ | 682 | ||||||
|
|
||||||||||||
|
Average investment in impaired loans
|
$ | 5,666 | $ | 3,908 | $ | 3,408 | ||||||
|
|
||||||||||||
|
Interest income recognized on impaired loans
|
$ | 347 | $ | 162 | $ | 247 | ||||||
|
|
||||||||||||
Loans held for sale consists of the Bank’s commitment to purchase up to $35,000,000 in residential
mortgage loan participations. These loans are purchased as a 95% participation in loans that are
warehoused by a bank in California. Loans are originated by a network of mortgage loan originators
throughout the United States. A take out commitment is in place at the time the participation
interests are purchased. The Bank receives certain loan documents daily for review, makes its
purchase decision and wires funds to the bank in California. By contract terms, the Bank will hold
these loans up to 60 days. The actual holding period of individual loans has ranged from 1 day to
50 days, with an average of 10 days during 2008 and 2009.
The commitment to purchase these loan participations was entered into in 2003, as a $30,000,000
commitment, but actual purchases were immaterial until March 2004. This program was entered into as
an alternative to selling Federal Funds and other short-term investments. As demand within the
program increased, the Bank recognized an opportunity to earn a return based on the spread between
the participation interest received and the cost of borrowing daily rate credit from the FHLB. The
volume of loans purchased fluctuates due to a number of factors including changes in secondary
market rates, which affects demand for mortgage loans; the number of participating banks involved
in the program; the number of mortgage loan originators selling loans to the lead bank and the
funding capabilities of the lead bank.
Loans held for sale as of December 31
:
| 2009 | 2008 | |||||||
|
Real Estate
|
$ | 31,167,763 | 3,780,287 | |||||
41
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
A summary of changes in the allowance for loan losses is shown in the following schedule:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, beginning of year
|
$ | 2,189,261 | $ | 1,702,501 | $ | 1,791,248 | ||||||
|
Provision charged to operating expenses
|
4,210,000 | 815,000 | 270,000 | |||||||||
|
Loan recoveries
|
75,997 | 71,751 | 91,620 | |||||||||
|
Loans charged off
|
(2,639,560 | ) | (399,991 | ) | (450,367 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 3,835,698 | $ | 2,189,261 | $ | 1,702,501 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Percentage of loans held for investment
|
.88 | % | .55 | % | .54 | % | ||||||
Bank premises and equipment as of December 31 are summarized as follows:
| 2009 | 2008 | |||||||
|
Land
|
$ | 1,145,204 | $ | 1,063,320 | ||||
|
Buildings and improvements
|
6,883,232 | 6,844,160 | ||||||
|
Furniture and equipment
|
4,964,684 | 4,810,223 | ||||||
|
|
||||||||
|
|
12,993,120 | 12,717,703 | ||||||
|
Less — accumulated depreciation
|
(5,913,616 | ) | (5,260,575 | ) | ||||
|
|
||||||||
|
Net
|
$ | 7,079,504 | $ | 7,457,128 | ||||
|
|
||||||||
Provisions for depreciation of $654,401 in 2009, $630,314 in 2008, and $697,659 in 2007 were
charged to operations.
At December 31, 2009, the scheduled maturities of time deposits are as follows:
|
2010
|
$ | 157,529,288 | ||
|
2011
|
46,155,551 | |||
|
2012
|
8,547,164 | |||
|
2013
|
9,039,683 | |||
|
2014
|
10,953,572 | |||
|
|
||||
|
Total
|
$ | 232,225,258 | ||
|
|
||||
Short-term debt information is summarized as follows:
| Maximum | Weighted | |||||||||||||||||||
| Outstanding | Outstanding | Average | Average | Year End | ||||||||||||||||
| at any | at | Balance | Interest | Interest | ||||||||||||||||
| Month End | Year End | Outstanding | Rate | Rate | ||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Short term note
|
$ | 750,000 | $ | $ | 400,000 | 5.00 | % | % | ||||||||||||
|
Federal funds purchased
|
14,924,000 | 1,369,148 | .80 | % | % | |||||||||||||||
|
FHLB daily rate credit
|
21,002,500 | 2,800,000 | 6,890,041 | .49 | % | .36 | % | |||||||||||||
|
Securities sold under agreements
to repurchase
|
9,895,231 | 6,284,909 | 6,090,608 | .43 | % | .47 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Totals
|
$ | 9,084,909 | $ | 14,749,797 | .62 | % | .44 | % | ||||||||||||
|
|
||||||||||||||||||||
42
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| Maximum | Weighted | |||||||||||||||||||
| Outstanding | Outstanding | Average | Average | Year End | ||||||||||||||||
| at any | at | Balance | Interest | Interest | ||||||||||||||||
| Month End | Year End | Outstanding | Rate | Rate | ||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Short term note
|
$ | 1,000,000 | $ | 750,000 | $ | 437,500 | 5.00 | % | 5.00 | % | ||||||||||
|
Federal funds purchased
|
10,684,000 | 1,993,844 | 2.18 | % | — | |||||||||||||||
|
FHLB daily rate credit
|
35,000,000 | 12,252,500 | 12,366,810 | 2.15 | % | .70 | % | |||||||||||||
|
Securities sold under
agreements to repurchase
|
10,005,446 | 7,507,787 | 8,886,829 | 1.61 | % | .59 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Totals
|
$ | 20,510,287 | $ | 23,684,983 | 2.00 | % | .75 | % | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Federal funds purchased
|
$ | 2,932,000 | $ | 2,932,000 | $ | 494,066 | 5.26 | % | 4.36 | % | ||||||||||
|
FHLB daily rate credit
|
7,500,000 | — | 626,027 | 5.58 | % | 4.40 | % | |||||||||||||
|
Securities sold under
agreements to repurchase
|
10,957,095 | 9,811,051 | 9,920,289 | 4.40 | % | 3.83 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Totals
|
$ | 12,743,051 | $ | 11,040,382 | 4.51 | % | 3.95 | % | ||||||||||||
|
|
||||||||||||||||||||
Repurchase agreements are secured transactions with customers and generally mature the day
following the date sold. Federal funds purchased are unsecured overnight borrowings from other
financial institutions. FHLB daily rate credit, which is secured by the loan portfolio is a
variable rate loan that acts as a line of credit to meet financing needs. Margin borrowings which
carry a variable rate are secured by investment securities and are used to finance equity
acquisitions on a short term basis.
As of December 31, 2009, the Company had lines of credit with correspondent banks totaling
$20,000,000, which may be used in the management of short-term liquidity.
In September 2008 the Company entered into an agreement with Page Valley Bank to provide a $1
million term loan to be used for a capital contribution to the Bank. The loan is unsecured and
carried an interest rate of prime. Repayment terms include quarterly payments of $250,000 plus
interest beginning in December 2008. The loan was paid in full on October 2, 2009.
New borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $22,250,000 in 2009,
$34,747,000 in 2008, and $10,000,000 in 2007. The interest rates on the notes payable are fixed at
the time of the advance and range from 1.12% to 4.82%; the weighted average interest rate was 3.23%
and 3.74% at December 31, 2009 and 2008, respectively. The balance of these obligations at
December 31, 2009 was $55,381,000. The long-term debt is secured by qualifying mortgage loans owned
by the Company.
In March 2008, the Company entered into an agreement with a correspondent bank (Silverton Bank) to
provide a $5 million line of credit to be used for general corporate purposes, including capital
contributions to the Bank and for the current stock repurchase program. The loan is unsecured and
bears a rate of prime minus 1.25%. In November 2009, the Company entered into an agreement with
Page Valley Bank (and several sub-participants) to refinance the Silverton line of credit as a five
year, fixed rate, amortizing loan at 6%. The Company will make quarterly installments of $250,000
plus interest beginning in February 2010.
In August 2009, the Company began to issue Subordinated debt agreements with local investors
bearing terms of 7 to 10 years. Interest rates are fixed on the notes for the full term but vary
by maturity. Rates range from 7.0% on the 7 year note to 8.05% on the ten year note. As of
December 31, 2009 the balance outstanding was $2,715,000. Due to their terms (greater than five
years) and priority (subordinate to deposits and other borrowings) this debt is counted with
capital for purposes of calculating the Total Risk Based Capital Ratio.
43
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
The maturities of long-term debt, including Federal Home Loan Bank of Atlanta borrowings, the Page
Valley Bank Loan and Subordinated debt agreements, as of December 31, 2009 are as follows:
|
2010
|
$ | 11,345,238 | ||
|
2011
|
8,925,571 | |||
|
2012
|
17,982,857 | |||
|
2013
|
12,214,286 | |||
|
2014
|
9,912,750 | |||
|
Thereafter
|
2,715,000 | |||
|
|
||||
|
Total
|
$ | 63,095,702 | ||
|
|
||||
The components of the income tax expense are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Current expense
|
||||||||||||
|
Federal
|
$ | 1,033,350 | $ | 1,578,452 | $ | 1,999,315 | ||||||
|
Deferred benefit
|
||||||||||||
|
Federal
|
(678,041 | ) | (140,074 | ) | (61,390 | ) | ||||||
|
State
|
(16,000 | ) | (19,750 | ) | (284,801 | ) | ||||||
|
|
||||||||||||
|
Total Income Tax Expense
|
$ | 339,309 | $ | 1,418,628 | $ | 1,653,124 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Amounts in above arising from gains
(losses) on security transactions
|
$ | (550,660 | ) | $ | (402,807 | ) | $ | 21,232 | ||||
|
|
||||||||||||
The deferred tax effects of temporary differences are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
LIH Partnership Losses
|
$ | (21,505 | ) | $ | (32,850 | ) | $ | (95,210 | ) | |||
|
Securities impairment
|
(549,836 | ) | (378,759 | ) | (27,724 | ) | ||||||
|
Local & Historic State Credits Recognized
|
(16,000 | ) | (19,750 | ) | (284,801 | ) | ||||||
|
Provision for loan losses
|
(404,016 | ) | (165,498 | ) | 30,108 | |||||||
|
Non-qualified deferred compensation
|
30,072 | (4,460 | ) | (10,268 | ) | |||||||
|
Depreciation
|
48,163 | 143,858 | (44,906 | ) | ||||||||
|
Core deposit intangible amortization
|
(33,113 | ) | (33,113 | ) | (33,113 | ) | ||||||
|
Pension expense
|
190,722 | 269,154 | 57,509 | |||||||||
|
Goodwill tax amortization
|
61,424 | 61,424 | 61,424 | |||||||||
|
Other
|
48 | 170 | 790 | |||||||||
|
|
||||||||||||
|
Deferred Income Tax Expense (Benefit)
|
$ | (694,041 | ) | $ | (159,824 | ) | $ | (346,191 | ) | |||
|
|
||||||||||||
The components of the deferred taxes as of December 31 are as follows:
| 2009 | 2008 | |||||||
|
Deferred Tax Assets
|
||||||||
|
Allowance for loan losses
|
$ | 994,117 | $ | 590,101 | ||||
|
Split dollar life insurance
|
4,892 | 1,506 | ||||||
|
Nonqualified deferred compensation
|
345,483 | 374,498 | ||||||
|
Securities impairment
|
1,179,426 | 474,085 | ||||||
|
Core deposit amortization
|
264,906 | 231,793 | ||||||
|
State historic tax credits
|
292,184 | 276,184 | ||||||
|
Securities available for sale
|
(34,260 | ) | 715,944 | |||||
|
Bank owned life insurance
|
484,091 | |||||||
|
Other
|
977 | 1,644 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 3,531,816 | $ | 2,665,755 | ||||
|
|
||||||||
44
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Unearned low income housing credits
|
$ | 762,373 | $ | 782,608 | ||||
|
Depreciation
|
322,110 | 273,948 | ||||||
|
Pension
|
766,774 | 576,052 | ||||||
|
Goodwill tax amortization
|
542,578 | 481,154 | ||||||
|
Securities available for sale
|
105,560 | 123,552 | ||||||
|
Other
|
51,628 | |||||||
|
|
||||||||
|
Total Liabilities
|
2,551,023 | 2,237,314 | ||||||
|
|
||||||||
|
Deferred Tax Asset (Liability)
|
$ | 980,793 | $ | 428,441 | ||||
|
|
||||||||
The following table summarizes the differences between the actual income tax expense and the
amounts computed using the federal statutory tax rates:
| 2009 | 2008 | 2007 | ||||||||||
|
Tax expense at federal statutory rates
|
$ | 779,734 | $ | 1,571,699 | $ | 2,076,111 | ||||||
|
Increases (decreases) in taxes resulting from:
|
||||||||||||
|
State income taxes, net
|
3,514 | 4,497 | (55,130 | ) | ||||||||
|
Partially exempt income
|
(64,592 | ) | (19,524 | ) | (135,259 | ) | ||||||
|
Tax-exempt income
|
(157,454 | ) | (170,210 | ) | (159,916 | ) | ||||||
|
Prior year LIH credits
|
(27,521 | ) | (27,356 | ) | (51,735 | ) | ||||||
|
Other
|
(194,372 | ) | 59,522 | (20,947 | ) | |||||||
|
|
||||||||||||
|
Total Income Tax Expense
|
$ | 339,309 | $ | 1,418,628 | $ | 1,653,124 | ||||||
|
|
||||||||||||
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially
all of its employees. The benefits are primarily based on years of service and earnings. On
December 31, 2006 the Company adopted ASC 325-960 “Defined Benefit Pension Plans” (formerly “SFAS
158”), which was issued in September of 2006 and amends SFAS 87 and SFAS 106 to require recognition
of the over-funded or under-funded status of pension and other postretirement benefit plans on the
balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through
net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax
effects, until they are amortized as a component of net periodic cost.
The following table provides a reconciliation of the changes in the benefit obligations and fair
value of plan assets for 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Change in Benefit Obligation
|
||||||||||||
|
Benefit obligation, beginning
|
$ | 4,582,997 | $ | 4,111,188 | $ | 3,975,983 | ||||||
|
Service cost
|
358,799 | 402,976 | 316,786 | |||||||||
|
Interest cost
|
273,333 | 320,270 | 237,892 | |||||||||
|
Actuarial gain (loss)
|
110,390 | 46,725 | (333,377 | ) | ||||||||
|
Benefits paid
|
(13,668 | ) | (298,162 | ) | (86,096 | ) | ||||||
|
|
||||||||||||
|
Benefit obligation, ending
|
$ | 5,311,851 | $ | 4,582,997 | $ | 4,111,188 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Change in Plan Assets
|
||||||||||||
|
Fair value of plan assets, beginning
|
3,948,698 | 4,072,435 | 3,236,937 | |||||||||
|
Actual return on plan assets
|
1,157,880 | (1,325,575 | ) | 421,594 | ||||||||
|
Employer contribution
|
1,500,000 | 500,000 | ||||||||||
|
Benefits paid
|
(13,668 | ) | (298,162 | ) | (86,096 | ) | ||||||
|
|
||||||||||||
|
Fair value of plan assets, ending
|
$ | 5,092,910 | $ | 3,948,698 | $ | 4,072,435 | ||||||
|
|
||||||||||||
|
Funded status at the end of the year
|
$ | (218,941 | ) | $ | (634,299 | ) | $ | (38,753 | ) | |||
|
|
||||||||||||
45
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 12 EMPLOYEE BENEFITS (CONTINUED):
| 2009 | 2008 | 2007 | ||||||||||
|
Amount recognized in the Balance Sheet
|
||||||||||||
|
Accrued prepaid benefit cost
|
$ | 1,204,854 | $ | 1,642,179 | $ | 402,643 | ||||||
|
Unfunded pension benefit obligation under ASC 325-960
|
(1,423,795 | ) | (2,276,478 | ) | (441,396 | ) | ||||||
|
|
||||||||||||
|
Amount recognized in other liabilities
|
$ | (218,941 | ) | $ | (634,299 | ) | $ | (38,753 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
Amount recognized in accumulated other
comprehensive income
|
||||||||||||
|
Net Gain/(Loss)
|
$ | (1,570,180 | ) | $ | (2,428,163 | ) | $ | (599,706 | ) | |||
|
Prior service cost
|
146,385 | 151,685 | 158,310 | |||||||||
|
Net obligation at transition
|
— | |||||||||||
|
|
||||||||||||
|
Amount recognized
|
(1,423,795 | ) | (2,276,478 | ) | (441,396 | ) | ||||||
|
Deferred Taxes
|
484,091 | 774,003 | 150,075 | |||||||||
|
|
||||||||||||
|
Amount recognized in accumulated
comprehensive income
|
$ | (939,704 | ) | $ | (1,502,475 | ) | $ | (291,321 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
(Accrued) Prepaid benefit detail
|
||||||||||||
|
Benefit obligation
|
$ | (5,311,851 | ) | $ | (4,582,997 | ) | $ | (4,111,188 | ) | |||
|
Fair value of assets
|
5,092,910 | 3,948,698 | 4,072,435 | |||||||||
|
Unrecognized net actuarial loss
|
1,570,180 | 2,428,163 | 599,706 | |||||||||
|
Unrecognized transition obligation
|
— | — | ||||||||||
|
Unrecognized prior service cost
|
(146,385 | ) | (151,685 | ) | (158,310 | ) | ||||||
|
|
||||||||||||
|
Prepaid (accrued) benefits
|
$ | 1,204,854 | $ | 1,642,179 | $ | 402,643 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||
|
Service cost
|
$ | 358,799 | $ | 322,381 | $ | 316,786 | ||||||
|
Interest cost
|
273,333 | 256,216 | 237,892 | |||||||||
|
Expected return on plan assets
|
(313,710 | ) | (376,713 | ) | (274,201 | ) | ||||||
|
Amortization of prior service cost
|
(5,300 | ) | (5,300 | ) | (5,300 | ) | ||||||
|
Amortization of transition obligation
|
— | 10,155 | ||||||||||
|
Recognized net actuarial (gain) loss
|
124,203 | 11,787 | 45,525 | |||||||||
|
|
||||||||||||
|
Net periodic benefit cost
|
$ | 437,325 | $ | 208,371 | $ | 330,857 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Additional disclosure information
|
||||||||||||
|
Accumulated benefit obligation
|
$ | 3,538,352 | $ | 2,977,671 | $ | 2,575,783 | ||||||
|
Vested benefit obligation
|
$ | 3,398,034 | $ | 2,871,201 | $ | 2,497,484 | ||||||
|
Discount rate used for net pension cost
|
6.00 | % | 6.25 | % | 6.00 | % | ||||||
|
Discount rate used for disclosure
|
6.00 | % | 6.00 | % | 6.25 | % | ||||||
|
Expected return on plan assets
|
8.00 | % | 8.50 | % | 8.50 | % | ||||||
|
Rate of compensation increase
|
4.00 | % | 4.00 | % | 5.00 | % | ||||||
|
Average remaining service (years)
|
16 | 16 | 16 | |||||||||
Funding Policy
It is the Bank’s policy to normally contribute the maximum tax-deductible amount each year as
determined by the plan administrator. Based on current information, the 2010 contribution will be
$1,000,000 and pension cost for 2010 will be approximately $283,000.
46
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 12 EMPLOYEE BENEFITS (CONTINUED):
Long-Term Rate of Return
The plan sponsor selects the expected long-term rate of return on assets assumption in consultation
with their advisors and the plan actuary, and with concurrence from their auditor. This rate is
intended to reflect the average rate of earnings expected to be earned on the funds invested or to
be invested to provide plan benefits. Historical performance is reviewed, especially with respect
to real rates of return (net of inflation) for the major asset classes held or anticipated to be
held by the trust. Undue weight is not given to recent experience, which may not continue over the
measurement period, with higher significance placed on current forecasts of future long-term
economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes.
Further — solely for this purpose the plan is assumed to continue in force and not terminate
during the period during which the assets are invested. However, consideration is given to the
potential impact of current and future investment policy, cash flow into and out of the trust, and
expenses (both investment and non-investment) typically paid from plan assets (to the extent such
expenses are not explicitly estimated within periodic cost).
Asset Allocation
The following table provides the pension plan’s asset allocation as of December 31:
| 2009 | 2008 | |||||||
|
Mutual funds — equity
|
61 | % | 64 | % | ||||
|
Mutual funds —fixed income
|
38 | % | 31 | % | ||||
|
Cash and equivalents
|
1 | % | 5 | % | ||||
The trust fund is sufficiently diversified to maintain a reasonable level of risk without
imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60%
equity. The Investment Manager selects investment fund managers with demonstrated experience and
expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s
investment strategy. The Investment Manager will consider both actively and passively managed
investment strategies and will allocate funds across the asset classes to develop an efficient
investment structure.
Estimated Future Benefit Payments
|
2010
|
$ | 57,847 | ||
|
2011
|
58,503 | |||
|
2012
|
80,634 | |||
|
2013
|
100,492 | |||
|
2014
|
168,391 | |||
|
2015-2017
|
1,094,838 | |||
|
|
||||
|
|
$ | 1,560,705 | ||
|
|
||||
Employee Stock Ownership Plan (ESOP
)
The Company sponsors an ESOP which provides stock ownership to substantially all employees of the
Bank. The Plan provides total vesting upon the attainment of five years of service. Contributions
to the plan are made at the discretion of the Board of Directors and are allocated based on the
compensation of each employee relative to total compensation paid by the Bank. All shares issued
and held by the Plan are considered outstanding in the computation of earnings per share. Dividends
on Company stock are allocated and paid to participants at least annually. Shares of Company stock,
when distributed, have restrictions on transferability. The Company contributed $180,000 in 2009,
$275,000 in 2008, and $250,000 in 2007 to the Plan and charged this expense to operations. The
shares held by the ESOP totaled 123,908 and 114,991 at December 31, 2009 and 2008, respectively.
47
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
401K Plan
The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to
20 percent of their salary on a pretax basis, subject to certain IRS limits. Under the Safe Harbor
rules employees are automatically enrolled at 3% (in the third year this increases by 1% per year
up to 6%) of their salary unless elected otherwise. The Company matches a hundred percent of the
first 1% contributed by the employee and fifty percent of the next 2% to 6% of employee
contributions. Vesting in the contributions made by the bank is 100% after two years of service.
Contributions under the plan amounted to $142,853, $116,422 and $108,717 in 2009, 2008 and 2007,
respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for several of its key employee’s and
directors. The Company may make annual contributions to the plan, and the employee or director has
the option to defer a portion of their salary or bonus based on qualifying annual elections. Due to
the level of earnings, the Company did not contribute to the plan in 2009. Contributions to the
plan totaled $60,000 and $50,000 in 2008, 2007, respectively.
The Company had cash deposits in other commercial banks totaling $3,062,630 and $4,775,222 at
December 31, 2009 and 2008, respectively.
The Company grants commercial, residential real estate and consumer loans to customers located
primarily in the northwestern portion of the State of Virginia. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts
is dependent upon the agribusiness economic sector, specifically the poultry industry for which
loans outstanding total $16,120,000. Other identified loan concentration areas greater than 25% of
capital include motel properties, multi-family residential, spec homes and
construction/development. Collateral required by the Company is determined on an individual basis
depending on the purpose of the loan and the financial condition of the borrower. Approximately 89%
of the loan portfolio is secured by real estate.
The Company makes commitments to extend credit in the normal course of business and issues standby
letters of credit to meet the financing needs of its customers. The amount of the commitments
represents the Company’s exposure to credit loss that is not included in the balance sheet. As of
the balance sheet dates, the Company had the following commitments outstanding:
| 2009 | 2008 | |||||||
|
Commitments to loan money
|
$ | 83,081,156 | $ | 95,106,266 | ||||
|
Standby letters of credit
|
1,108,419 | 1,677,343 | ||||||
The Company uses the same credit policies in making commitments to lend money and issue standby
letters of credit as it does for the loans reflected in the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. Collateral required, if any, upon extension of credit is based on management’s
credit evaluation of the borrower’s ability to pay. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment.
48
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
The Bank leases three of its branch offices on long term lease arrangements of either five or ten
years. Lease expense for 2009, 2008 and 2007 were $71,760, $71,760 and $69,960, respectively. As
of December 31, 2009, the required lease payments for the next five years are as follows:
|
2010
|
$ | 64,260 | ||
|
2011
|
26,640 | |||
|
2012
|
21,600 | |||
|
2013
|
21,600 | |||
|
2014
|
21,600 |
Derivative Financial Instruments
The Company has stand alone derivative financial instruments in the form of forward option
contracts. These transactions involve both credit and market risk. The notional amounts are
amounts on which calculations, payments, and the value of the derivative are based. Notional
amounts do not represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if any. Such difference, which
represents the fair value of the derivative instruments, is reflected on the Company’s balance
sheet as derivative assets and derivative liabilities.
The Company is exposed to credit-related losses in the event of nonperformance by the
counterparties to these agreements. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures, and does not expect any
counterparties to fail their obligations. The Company deals only with primary dealers.
Derivative instruments are generally either negotiated OTC contracts or standardized contracts
executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into
between two counterparties that negotiate specific agreement terms, including the underlying
instrument, amount, exercise prices and maturity.
The Company issues to customers certificates of deposit with an interest rate that is derived from
the rate of return on the stock of the companies that comprise The Dow Jones Industrial Average.
In order to manage the interest rate risk associated with this deposit product, the Company has
purchased a series of forward option contracts. These contracts provide the Company with a rate of
return commensurate with the return of The Dow Jones Industrial Average from the time of the
contract until maturity of the related certificate of deposit. These contracts are accounted for
as fair value hedges. Because the certificates of deposit can be redeemed by the customer at
anytime and this related forward options contracts cannot be cancelled by the Company, the hedge is
not considered effective.
At December 31, the information pertaining to the forward option contracts, included in other
liabilities on the balance sheet, is as follows:
| 2009 | 2008 | |||||||
|
Notional amount
|
$ | 497,691 | $ | 551,250 | ||||
|
Fair market value of contracts
|
$ | 13,295 | $ | 15,471 | ||||
49
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
During the year, officers and directors (and companies controlled by them) were customers of and
had transactions with the Company in the normal course of business. These transactions were made on
substantially the same terms as those prevailing for other customers and did not involve any
abnormal risk.
Loan transactions with related parties are shown in the following schedule:
| 2009 | 2008 | |||||||
|
Total loans, beginning of year
|
$ | 7,246,384 | $ | 7,417,401 | ||||
|
New loans
|
1,271,666 | 2,046,744 | ||||||
|
Participation Sold
|
(986,845 | ) | ||||||
|
Repayments
|
(1,793,627 | ) | (1,230,916 | ) | ||||
|
|
||||||||
|
Total loans, end of year
|
$ | 6,724,423 | $ | 7,246,384 | ||||
|
|
||||||||
The principal source of funds of F & M Bank Corp. is dividends paid by the Farmers and Merchants
Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the
Board of Governors of the Federal Reserve System is required if the dividends declared by a state
member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net
of dividends for the preceding two years. As of January 1, 2008, approximately $1,926,000 was
available for dividend distribution without permission of the Board of Governors. Dividends paid
by the Bank to the Company totaled $2,428,000 in 2009, $2,559,000 in 2008 and $2,516,000 in 2007.
50
Table of Contents
ASC 825 “Financial Intruments” (formerly SFAS 107) defines the fair value of a financial instrument
as the amount at which a financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced liquidation or sale. As the majority of the Bank’s
financial instruments lack an available trading market, significant estimates, assumptions and
present value calculations are required to determine estimated fair value. Estimated fair value
and the carrying value of financial instruments at December 31, 2009 and 2008 are as follows (in
thousands):
| 2009 | 2008 | |||||||||||||||
| Estimated | Carrying | Estimated | Carrying | |||||||||||||
| Fair Value | Value | Fair Value | Value | |||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Cash
|
$ | 5,314 | $ | 5,314 | $ | 5,687 | $ | 5,687 | ||||||||
|
Interest bearing deposits
|
65 | 65 | 1,164 | 1,162 | ||||||||||||
|
Federal funds sold
|
18,326 | 18,326 | 8,979 | 8,979 | ||||||||||||
|
Securities available for sale
|
16,430 | 16,430 | 22,237 | 22,237 | ||||||||||||
|
Securities held to maturity
|
110 | 110 | 110 | 110 | ||||||||||||
|
Other investments
|
9,681 | 9,681 | 8,439 | 8,439 | ||||||||||||
|
Loans
|
481,967 | 434,403 | 418,630 | 399,233 | ||||||||||||
|
Loan held for sale
|
31,168 | 31,168 | 3,780 | 3,780 | ||||||||||||
|
Bank owned life insurance
|
6,593 | 6,593 | 6,304 | 6,304 | ||||||||||||
|
Accrued interest receivable
|
2,038 | 2,038 | 2,056 | 2,056 | ||||||||||||
|
|
||||||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Demand Deposits:
|
||||||||||||||||
|
Non-interest bearing
|
53,475 | 53,475 | 49,786 | 49,786 | ||||||||||||
|
Interest bearing
|
100,714 | 100,714 | 62,552 | 62,552 | ||||||||||||
|
Savings deposits
|
34,229 | 34,229 | 29,367 | 29,367 | ||||||||||||
|
Time deposits
|
234,032 | 232,225 | 202,082 | 200,521 | ||||||||||||
|
Accrued liabilities
|
7,534 | 7,396 | 7,687 | 7,687 | ||||||||||||
|
Short-term debt
|
9,085 | 9,085 | 20,569 | 20,510 | ||||||||||||
|
Subordinated debt
|
2,715 | 2,715 | ||||||||||||||
|
Long-term debt
|
61,216 | 60,381 | 68,846 | 65,331 | ||||||||||||
The carrying value of cash and cash equivalents, other investments, deposits with no stated
maturities, short-term borrowings, and accrued interest approximate fair value. The fair value of
securities was calculated using the most recent transaction price or a pricing model, which takes
into consideration maturity, yields and quality. The remaining financial instruments were valued
based on the present value of estimated future cash flows, discounted at various rates in effect
for similar instruments entered into during the month of December of each year.
51
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Accounting Standards Codification (ASC 820), “Fair Value Measurement Disclosures” (formerly “FAS
No. 157”), defines fair value, establishes a framework for measuring fair value, establishes a
three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy is based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date. The three levels are
defined as follows:
|
|
Level 1 | — | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |||
|
|
Level 2 | — | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |||
|
|
Level 3 | — | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The following sections provide a description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such instruments pursuant to the
valuation hierarchy:
Securities: Where quoted prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government
bonds, mortgage products and exchange traded equities. If quoted market prices are not available,
then fair values are estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political subdivisions and certain
corporate, asset backed and other securities. In certain cases where there is limited activity or
less transparency around inputs to the valuation, securities are classified within Level 3 of the
valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2
securities.
Impaired Loans: SFAS No. 157 applies to loans measured for impairment using the practical
expedients permitted by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” including
impaired loans measured at an observable market price (if available), or at the fair value of the
loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when
the loan is dependent on collateral, is determined by appraisals or independent valuation which is
then adjusted for the cost related to liquidation of the collateral.
Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at fair
value less cost to sell. We believe that the fair value component in its valuation follows the
provisions of SFAS No. 157.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a
recurring basis.
| December 31, 2009 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Investment securities available-for-sale
|
$ | 16,430 | $ | 4,247 | $ | 12,183 | $ | |||||||||
|
Loans held for sale
|
31,168 | 31,168 | ||||||||||||||
|
Impaired loans
|
6,708 | 6,708 | ||||||||||||||
|
Other real estate owned
|
526 | 526 | ||||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
$ | 54,832 | $ | 4,247 | $ | 50,585 | $ | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
$ | $ | $ | $ | ||||||||||||
|
|
||||||||||||||||
There were no assets or liabilities recorded at fair value on a non-recurring basis.
52
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
The Company and its subsidiary bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company
must meet specific capital guidelines that involve quantitative measures of the Company’s assets,
liabilities, and certain off balance-sheet items as calculated under regulatory accounting
practices. The Company’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation, to ensure capital adequacy, require the Company to
maintain minimum amounts and ratios. These ratios are defined in the regulations and the amounts
are set forth in the table below. Management believes, as of December 31, 2009, that the Company
and its subsidiary bank meet all capital adequacy requirements to which they are subject.
As of the most recent notification from the Federal Reserve Bank Report of Examination (which was
as of May 10, 2006), the subsidiary bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the Company must
maintain minimum total risk based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that management believes have
changed the institution’s category.
The Company’s actual capital ratios are presented in the following table:
| Actual | ||||||||||||||||||||||||
| December 31, | Regulatory Requirements | |||||||||||||||||||||||
| 2009 | 2008 | Adequately | Well | |||||||||||||||||||||
| $ | % | $ | % | Capitalized | Capitalized | |||||||||||||||||||
|
Total risk-based ratio
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 43,324 | 10.65 | % | $ | 36,441 | 10.04 | % | 8.00 | % | none | |||||||||||||
|
Bank only
|
44,488 | 11.07 | % | 35,895 | 10.07 | % | 8.00 | % | 10.00 | % | ||||||||||||||
|
Tier 1 risk-based ratio
|
||||||||||||||||||||||||
|
Consolidated
|
36,623 | 9.01 | % | 34,252 | 9.44 | % | 4.00 | % | none | |||||||||||||||
|
Bank only
|
37,853 | 9.42 | % | 33,727 | 9.46 | % | 4.00 | % | 6.00 | % | ||||||||||||||
|
Total assets leverage
ratio
|
||||||||||||||||||||||||
|
Consolidated
|
36,623 | 7.08 | % | 34,252 | 7.64 | % | 3.00 | % | none | |||||||||||||||
|
Bank only
|
37,853 | 7.32 | % | 33,727 | 7.53 | % | 3.00 | % | 5.00 | % | ||||||||||||||
Core deposit intangible costs recognized from the acquisition of the Woodstock and Edinburg
branches are being amortized using the straight-line method over a ten-year period. The core
deposit intangibles and goodwill totaled $2,833,476 and $2,638,677, respectively at the acquisition
date. Amortization expense for the years ending December 31, 2009, 2008 and 2007 was $276,000 in
each year.
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. To help offset escalating benefit costs and to attract and retain qualified
employees, the Bank purchased Bank Owned Life Insurance (BOLI) contracts that will provide benefits
to employees during their lifetime. Dividends received on these policies are tax-deferred and the
death benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are
very favorable when compared to other long-term investments which the Bank might make.
53
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Balance Sheets
December 31, 2009 and 2008
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 174,950 | $ | 194,266 | ||||
|
Investment in subsidiaries
|
40,109,958 | 38,871,291 | ||||||
|
Securities available for sale
|
3,347,452 | 2,682,791 | ||||||
|
Limited partnership investments
|
1,814,800 | 2,681,931 | ||||||
|
Deferred income taxes
|
592,604 | 683,605 | ||||||
|
Other Assets
|
61,839 | 292,232 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 46,101,603 | $ | 45,406,116 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Short term debt
|
$ | $ | 750,000 | |||||
|
Long term debt
|
6,389,650 | 6,360,000 | ||||||
|
Accrued interest payable
|
57,129 | 50,135 | ||||||
|
Other liabilities
|
44,882 | 78,567 | ||||||
|
Dividends payable
|
345,731 | 528,479 | ||||||
|
Due to subsidiaries
|
18,000 | 481,605 | ||||||
|
Demand obligations for low income
housing investment
|
366,438 | 899,356 | ||||||
|
|
||||||||
|
Total Liabilities
|
7,221,830 | 9,148,142 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Common stock par value $5 per share, 6,000,000
shares authorized, 2,295,053 and 2,289,497 shares issued
and outstanding for 2009 and 2008, respectively
|
11,475,265 | 11,447,485 | ||||||
|
Capital surplus
|
||||||||
|
Retained earnings
|
27,989,144 | 27,686,745 | ||||||
|
Accumulated other comprehensive income (loss)
|
(584,636 | ) | (2,876,256 | ) | ||||
|
|
||||||||
|
Total Stockholders’ Equity
|
38,879,773 | 36,257,974 | ||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 46,101,603 | $ | 45,406,116 | ||||
|
|
||||||||
54
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 23 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
For the years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Income
|
||||||||||||
|
Dividends from affiliate
|
$ | 2,428,000 | $ | 2,809,000 | $ | 2,516,000 | ||||||
|
Investment income
|
101 | 465 | 13,407 | |||||||||
|
Dividend income
|
169,966 | 324,219 | 310,919 | |||||||||
|
Interest Income
|
64,777 | 40,031 | ||||||||||
|
Other than temporary impairment losses
|
(1,617,165 | ) | (1,206,581 | ) | (171,000 | ) | ||||||
|
Security gains (losses)
|
(2,424 | ) | 21,855 | 233,446 | ||||||||
|
Net limited partnership income
|
192,597 | 101,518 | 226,889 | |||||||||
|
|
||||||||||||
|
Total Income
|
1,171,075 | 2,115,253 | 3,169,692 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Expenses
|
||||||||||||
|
Interest expense
|
233,627 | 219,492 | 80,476 | |||||||||
|
Administrative expenses
|
211,294 | 182,285 | 171,001 | |||||||||
|
|
||||||||||||
|
Total Expenses
|
444,921 | 401,777 | 251,477 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income before income tax expense (benefit)
and undistributed subsidiary net income
|
726,154 | 1,713,476 | 2,918,215 | |||||||||
|
|
||||||||||||
|
Income Tax Expense (Benefit)
|
(824,542 | ) | (430,706 | ) | (74,560 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income before undistributed subsidiary
net income
|
1,550,696 | 2,144,182 | 2,992,775 | |||||||||
|
|
||||||||||||
|
Undistributed subsidiary net income
|
403,326 | 1,059,834 | 1,460,311 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income
|
1,954,022 | 3,204,016 | 4,453,086 | |||||||||
|
|
||||||||||||
|
Retained earnings, beginning of year
|
27,686,745 | 28,409,273 | 26,794,238 | |||||||||
|
Adoption of FAS 106
|
(428,112 | ) | ||||||||||
|
Stock issuance
|
134,680 | — | — | |||||||||
|
Stock repurchase
|
(43,666 | ) | (1,415,417 | ) | (807,487 | ) | ||||||
|
Dividends on common stock
|
(1,742,637 | ) | (2,083,015 | ) | (2,030,564 | ) | ||||||
|
|
||||||||||||
|
Retained Earnings, End of Year
|
$ | 27,989,144 | $ | 27,686,745 | $ | 28,409,273 | ||||||
|
|
||||||||||||
|
|
||||||||||||
55
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Statements of Cash Flows
For the years ended December 31, 2009, 2008 and 2007
For the years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 1,954,022 | $ | 3,204,016 | $ | 4,453,086 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Undistributed subsidiary income
|
(403,326 | ) | (1,059,834 | ) | (1,460,311 | ) | ||||||
|
Gain (Loss) on sale of securities
|
2,424 | (21,855 | ) | (233,446 | ) | |||||||
|
Other than temporary impairment losses
|
1,617,165 | 1,206,581 | 171,000 | |||||||||
|
Deferred tax (benefit) expense
|
(276,118 | ) | (1,269 | ) | (389,105 | ) | ||||||
|
Increase (decrease) in other assets
|
(510,937 | ) | 144,130 | — | ||||||||
|
Increase (decrease) in other liabilities
|
261,568 | 97,407 | 39,396 | |||||||||
|
Net change in deferred tax credits
|
(20,235 | ) | 15,931 | 29,628 | ||||||||
|
Amortization of limited partnership investments
|
354,108 | 431,584 | 722,041 | |||||||||
|
|
||||||||||||
|
Net Cash Provided by Operating Activities
|
2,978,671 | 4,016,691 | 3,332,289 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Change in loans receivable
|
1,089,167 | (1,089,167 | ) | |||||||||
|
Proceeds from sales of securities available for sale
|
32,228 | 1,511,286 | 2,172,408 | |||||||||
|
Proceeds from maturities of securities available for sale
|
656,250 | |||||||||||
|
Purchase of securities available for sale
|
(253,222 | ) | (962,408 | ) | (2,763,932 | ) | ||||||
|
Capital contributed to subsidiary
|
(5,500,000 | ) | ||||||||||
|
|
||||||||||||
|
Net Cash Provided by (Used in) Investing Activities
|
435,256 | (3,861,955 | ) | (1,680,691 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Proceeds of long-term debt
|
5,150,000 | 5,650,000 | 2,826,500 | |||||||||
|
Payments on long-term debt
|
(6,019,706 | ) | (2,626,540 | ) | (2,080,210 | ) | ||||||
|
Change in short term debt
|
(750,000 | ) | 750,000 | |||||||||
|
Payments to repurchase common stock
|
(54,276 | ) | (1,805,517 | ) | (968,554 | ) | ||||||
|
Proceeds from issuance of common stock
|
173,071 | 118,135 | 9,552 | |||||||||
|
Dividends paid in cash
|
(1,932,332 | ) | (2,103,775 | ) | (2,016,246 | ) | ||||||
|
|
||||||||||||
|
Net Cash Used in Financing Activities
|
(3,433,243 | ) | (17,697 | ) | (2,228,958 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Increase in Cash and Cash Equivalents
|
(19,316 | ) | 137,039 | (577,360 | ) | |||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, Beginning of Year
|
194,266 | 57,227 | 634,587 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, End of Year
|
$ | 174,950 | $ | 194,266 | $ | 57,227 | ||||||
|
|
||||||||||||
56
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
On November 3, 2008, the Bank acquired a 70% ownership interest in VBS Mortgage, LLC (formerly
Valley Broker Services, DBA VBS Mortgage). VBS originates both conventional and government
sponsored mortgage for sale in the secondary market. As of December 31, 2009 and 2008, VBS’
summarized balance sheet and short period income statement were as follows:
Balance Sheets
December 31, 2009 and 2008
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 382,601 | $ | 29,397 | ||||
|
Interest bearing deposits with banks
|
159,678 | |||||||
|
Property and equipment, net
|
36,688 | 28,575 | ||||||
|
Other Assets
|
127,448 | 27,274 | ||||||
|
|
||||||||
|
Total Assets
|
546,737 | 244,924 | ||||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Line of credit
|
$ | $ | 19,943 | |||||
|
Other liabilities
|
137,707 | 68,884 | ||||||
|
|
||||||||
|
Total Liabilities
|
137,707 | 88,827 | ||||||
|
|
||||||||
|
|
||||||||
|
Equity
|
||||||||
|
Capital
|
219,634 | 219,634 | ||||||
|
Retained earnings
|
189,396 | (63,537 | ) | |||||
|
|
||||||||
|
Total Equity
|
409,030 | 156,097 | ||||||
|
|
||||||||
|
Total Liabilities and Equity
|
$ | 546,737 | $ | 244,924 | ||||
|
|
||||||||
Statements of Income
For the years ended December 31, 2009 and 2008
For the years ended December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Income
|
||||||||
|
Mortgage origination income
|
$ | 1,740,801 | $ | 115,543 | ||||
|
Other income
|
5,933 | 1,961 | ||||||
|
|
||||||||
|
Total Income
|
1,746,734 | 117,504 | ||||||
|
|
||||||||
|
|
||||||||
|
Expenses
|
||||||||
|
Interest expense
|
6 | 111 | ||||||
|
Salaries and employee benefits
|
775,521 | 93,057 | ||||||
|
Occupancy and equipment expense
|
111,583 | 21,584 | ||||||
|
Management and professional fees
|
382,076 | 2,966 | ||||||
|
Other
|
224,615 | 37,431 | ||||||
|
|
||||||||
|
Total Expenses
|
1,493,801 | 155,149 | ||||||
|
|
||||||||
|
|
||||||||
|
Net income (loss)
|
$ | 252,933 | $ | (37,645 | ) | |||
|
|
||||||||
57
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors
F & M Bank Corp. and Subsidiaries
Timberville, Virginia
F & M Bank Corp. and Subsidiaries
Timberville, Virginia
We have audited the accompanying consolidated balance sheets of F & M Bank Corp. and Subsidiaries
as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in
stockholders’ equity and cash flows each of the three years in the period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of F & M Bank Corp. and Subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for the three years in the
period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assertion about the effectiveness of F & M Bank Corp.’s
internal control over financial reporting as of December 31, 2009 included in the accompanying 2009
Form 10-K, item 8, and, accordingly, we do not express an opinion thereon.
Galax, Virginia
March 25, 2010
104
Cranberry Road, P.O Box 760, Galax, VA 24333 Phone: 276.238.1800 Fax:
276.238.1801 elliottdavis.com
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures.
The Company, under the supervision and with the participation
of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of its disclosure controls and procedures
as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were effective as of December 31, 2009 to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
Management’s report on internal control over financial reporting and the audit report of the
Registered Public Accounting Firm for the year ended December 31, 2009 are included in Item 8 of
the annual report on Form 10-K.
Management’s Report on Internal Control over Financial Reporting.
Management is also responsible
for establishing and maintaining adequate internal control over the Company’s financial reporting
(as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended).
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment
of the design and effectiveness of its internal controls over financial reporting based on criteria
established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on the assessment using these criteria,
management concluded that the internal control over financial reporting was effective as of
December 31, 2009.
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s
internal control over financial reporting during the Company’s quarter ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
| Item 9B. | Other Information |
None.
59
Table of Contents
| Item 10. | Directors and Executive Officers of the Registrant |
Information regarding directors, executive officers and the audit committee financial expert is
incorporated by reference from the Company’s definitive proxy statement for the Company’s 2010
Annual Meeting of Shareholders to be held May 8, 2010 (“Proxy Statement”), under the captions
“Election of Directors,” “Board of Directors and Committees,” and “Executive Officers.”
Information on Section 16(a) beneficial ownership reporting compliance for the directors and
executive officers of the Company is incorporated by reference from the Proxy Statement under the
caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
The Company has adopted a broad based code of ethics for all employees and directors. The Company
has also adopted a code of ethics tailored to senior officers who have financial responsibilities.
A copy of the codes may be obtained without charge by request from the corporate secretary.
| Item 11. | Executive Compensation |
This information is incorporated by reference from the Proxy Statement under the caption “Executive
Compensation.”
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
This information is incorporated by reference from the Proxy Statement under the caption “Ownership
of Company Common Stock” and “Executive Compensation” and from Item 5 of this 10-K.
| Item 13. | Certain Relationships and Related Transactions |
This information is incorporated by reference from the Proxy Statement under the caption “Interest
of Directors and Officers in Certain Transactions.”
| Item 14. | Principal Accounting Fees and Services |
This information is incorporated by reference from the Proxy Statement under the caption “Principal
Accounting Fees.”
| Item 15. | Exhibits and Financial Statement Schedules |
The following financial statements are filed as a part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent auditors of the Company
are in Part II, Item 8 on pages 30 thru 56:
| 30 | ||||
| 31 | ||||
| 32 | ||||
| 33 | ||||
| 34 | ||||
| 58 |
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(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required
information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as a part of this form 10-K and this list includes the Exhibit
index:
| Exhibit | No. | |
|
3.1
|
Restated Articles of Incorporation of F & M Bank Corp. as incorporated by reference to F & M Bank Corp.’s 10-Q filed August 13, 2007. | |
|
3.2
|
Amended and Restated Bylaws of F & M Bank Corp. as incorporated by reference to F & M Bank Corp.’s 10-K filed March 8, 2002. | |
|
21.0
|
Subsidiaries of the Registrant | |
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Shareholders may obtain, free of charge, a copy of the exhibits to this Report on Form 10-K by
writing Larry A. Caplinger, Corporate Secretary, at F & M Bank Corp., P.O. Box 1111, Timberville,
VA 22853 or our website at
www.farmersandmerchants.biz.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
F & M Bank Corp.
(Registrant) |
|
By:
|
/s/ Dean W. Withers
|
Date March 25, 2010
|
||
|
|
||||
|
|
Dean W. Withers
Director, President and Chief Executive Officer |
|||
|
|
||||
|
By:
|
/s/ Neil W. Hayslett
|
Date March 25, 2010
|
||
|
|
||||
|
|
Neil W. Hayslett
Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and as of the date indicated.
| Signature | Title | Date | ||
|
/s/ Thomas L. Cline
|
Director | March 25, 2010 | ||
|
|
||||
|
Thomas L. Cline
|
||||
|
|
||||
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/s/ John N. Crist
|
Director | March 25, 2010 | ||
|
|
||||
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John N. Crist
|
||||
|
|
||||
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/s/ Julian D. Fisher
|
Director, Chairman | March 25, 2010 | ||
|
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Julian D. Fisher
|
||||
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|
||||
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/s/ Ellen R. Fitzwater
|
Director | March 25, 2010 | ||
|
|
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|
Ellen R. Fitzwater
|
||||
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|
||||
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/s/ Daniel J. Harshman
|
Director | March 25, 2010 | ||
|
|
||||
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Daniel J. Harshman
|
||||
|
|
||||
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/s/ Richard S. Myers
|
Director | March 25, 2010 | ||
|
|
||||
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Richard S. Myers
|
||||
|
|
||||
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/s/ Michael W. Pugh
|
Director | March 25, 2010 | ||
|
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||||
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Michael W. Pugh
|
||||
|
|
||||
|
/s/ Ronald E. Wampler
|
Director | March 25, 2010 | ||
|
|
||||
|
Ronald E. Wampler
|
62
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. Description Of PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5 . Market For Registrant S Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 8. Financial Statements and Supplementary InformationNote 1 Nature Of Operations:Note 2 Summary Of Significant Accounting Policies:Note 2 Summary Of Significant Accounting Policies (continued):Note 3 Cash and Due From Banks:Note 4 Investment Securities:Note 4 Investment Securities (continued):Note 5 Loans:Note 6 Allowance For Loan Losses:Note 7 Bank Premises and EquipmentNote 8 Time Deposits:Note 9 Short-term Debt:Note 9 Short-term Debt (continued):Note 10 Long-term Debt:Note 10 Long-term Debt (continued):Note 11 Income Tax Expense:Note 11 Income Tax Expense (continued):Note 12 Employee Benefits:Note 12 Employee Benefits (continued):Note 13 Concentrations Of Credit:Note 14 Commitments:Note 14 Commitments (continued):Note 15 on Balance Sheet Derivative Instruments and Hedging Activities:Note 16 Transactions with Related Parties:Note 17 Dividend Limitations on Subsidiary Bank:Note 18 Disclosures About Fair Value Of Financial Instruments:Note 19 Fair Value MeasurementsNote 20 Regulatory Matters:Note 21 Intangibles:Note 22 Investment in Life Insurance ContractsNote 23 Parent Corporation Only Financial Statements:Note 23 Parent Corporation Only Financial Statements (continued):Note 24 Investment in Vbs Mortgage, LlcItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits and Financial Statement Schedules