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, 2010
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 | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
P. O. Box 1111, Timberville, Virginia 22853
(Address of principal executive offices) (Zip Code)
(540) 896-8941
(Registrant’s telephone number including area code)
(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 (§232.405 of this chapter) 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 2,061,156 shares of Common Stock of the registrant issued and outstanding held
by non-affiliates on June 30, 2010 was approximately $39,161,964 based on the closing sales price
of $19.00 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, 2011, there were 2,307,436 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 14, 2011 (the “Proxy
Statement”).
Table of Contents
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PART I
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PART II
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PART III
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PART IV
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| EX-21 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
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, internet banking, drive-in banking services, ATMs at
all branch locations and several off-site locations, as well as a courier service for its
commercial banking customers. 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 offices in Harrisonburg and Woodstock.
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, 2010, the Bank had 141 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.
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Table of Contents
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. 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 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 stockholders’ 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, 2010 were 9.77% and
13.51%, respectively, significantly above the minimum requirements.
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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, 2010, was 7.37%, which is significantly 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 Act.
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 effect 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,
2010.
6
Table of Contents
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
|
Timberville Main Office
205 South Main Street Timberville, VA 22853 |
Elkton Branch
127 West Rockingham Street Elkton, VA 22827 |
|
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Broadway Branch
126 Timberway Broadway, VA 22815 |
Port Road Branch
1085 Port Republic Road Harrisonburg, VA 22801 |
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Bridgewater Branch
100 Plaza Drive Bridgewater, VA 22812 |
Edinburg Branch
120 South Main Street Edinburg, VA 22824 |
|
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Woodstock Branch
161 South Main Street Woodstock, VA 22664 |
Crossroads Branch
80 Cross Keys Road Harrisonburg, VA 22801 |
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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’ offices are located at:
|
Harrisonburg Office
2040 Deyerle Avenue Suite 107 Harrisonburg, VA 22801 |
Woodstock Office
161 South Main Street Woodstock, VA 22664 |
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.
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
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016
10 Commerce Drive
Cranford, NJ 07016
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, 2006, and the reinvestment of dividends.
| Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
|
F & M Corp
|
100.00 | 111.49 | 126.34 | 126.63 | 99.42 | 65.15 | ||||||||||||||||||
|
Russell 2000
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100.00 | 118.37 | 116.51 | 77.15 | 98.11 | 124.46 | ||||||||||||||||||
|
SNL Bank Index
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100.00 | 116.98 | 90.90 | 51.87 | 51.33 | 57.52 | ||||||||||||||||||
Recent Stock Prices and Dividends
Dividends to shareholders totaled $1,034,000 and $1,743,000 in 2010 and 2009, 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. 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. The ratio of dividends per share to net income
per share was 36.81% in 2010, compared to 89.18% in 2009.
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 2010
totaled 164,132 shares; of this amount, none were repurchased in 2010.
The number of common shareholders of record was approximately 1,759 as of March 1, 2011. 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.
| 2010 | 2009 | |||||||||||||||||||||||
| Stock Price Range | Per Share | Stock Price Range | Per Share | |||||||||||||||||||||
| Quarter | Low | High | Dividends Declared (1) | Low | High | Dividends Declared | ||||||||||||||||||
|
1
st
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20.75 | 26.00 | $ | .15 | 20.00 | 30.75 | $ | .23 | ||||||||||||||||
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2
nd
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18.05 | 22.00 | .15 | 22.00 | 28.15 | .23 | ||||||||||||||||||
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3
rd
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15.15 | 20.00 | .15 | 22.95 | 26.65 | .15 | ||||||||||||||||||
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4
th
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13.25 | 16.24 | .15 | 20.00 | 24.90 | .15 | ||||||||||||||||||
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Total
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$ | .60 | $ | .76 | ||||||||||||||||||||
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| (1) | Beginning in the third quarter 2010, the dividend is now declared at the board meeting following quarter end. This is a result of a change in practice by our board of directors to declare dividends for a particular quarter following the completion of the quarter instead of prior to quarter end. The timing of actual dividend payments to shareholders remains unchanged. |
9
Table of Contents
Five Year Summary of Selected Financial Data
| (Dollars in thousands, | ||||||||||||||||||||
| except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Income Statement Data:
|
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Interest and Dividend Income
|
$ | 27,870 | $ | 27,516 | $ | 25,544 | $ | 24,635 | $ | 22,526 | ||||||||||
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Interest Expense
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9,005 | 10,182 | 10,498 | 11,043 | 9,091 | |||||||||||||||
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Net Interest Income
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18,865 | 17,334 | 15,046 | 13,592 | 13,435 | |||||||||||||||
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Provision for Loan Losses
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4,300 | 4,210 | 815 | 270 | 240 | |||||||||||||||
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Net Interest Income after
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Provision for Loan Losses
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14,565 | 13,124 | 14,231 | 13,322 | 13,195 | |||||||||||||||
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Noninterest Income
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3,249 | 3,111 | 3,169 | 3,215 | 2,754 | |||||||||||||||
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Securities Gains (Losses)
|
349 | (1,754 | ) | (1,680 | ) | 101 | 193 | |||||||||||||
|
Noninterest Expenses
|
12,741 | 12,188 | 11,097 | 10,532 | 9,688 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income before Income Taxes
|
5,422 | 2,293 | 4,623 | 6,106 | 6,454 | |||||||||||||||
|
Income Tax Expense
|
1,681 | 339 | 1,419 | 1,653 | 1,925 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
$ | 3,741 | $ | 1,954 | $ | 3,204 | $ | 4,453 | $ | 4,529 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
Net Income
|
$ | 1.63 | $ | .85 | $ | 1.38 | $ | 1.89 | $ | 1.90 | ||||||||||
|
Dividends Declared
|
.60 | .76 | .90 | .86 | .82 | |||||||||||||||
|
Book Value
|
18.31 | 16.99 | 15.64 | 16.71 | 16.05 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Assets
|
$ | 538,855 | $ | 539,223 | $ | 472,058 | $ | 386,727 | $ | 375,924 | ||||||||||
|
Loans Held for Investment
|
445,147 | 434,403 | 399,233 | 317,180 | 309,461 | |||||||||||||||
|
Loans Held for Sale
|
23,764 | 31,168 | 3,780 | — | — | |||||||||||||||
|
Securities
|
24,144 | 26,220 | 30,785 | 36,614 | 37,373 | |||||||||||||||
|
Deposits
|
425,051 | 420,643 | 342,225 | 298,560 | 289,522 | |||||||||||||||
|
Short-Term Debt
|
5,355 | 9,085 | 20,510 | 12,743 | 11,717 | |||||||||||||||
|
Long-Term Debt
|
58,979 | 63,096 | 65,331 | 29,714 | 29,247 | |||||||||||||||
|
Stockholders’ Equity
|
42,229 | 39,002 | 36,305 | 39,165 | 38,105 | |||||||||||||||
|
Average Shares Outstanding
|
2,299 | 2,292 | 2,319 | 2,360 | 2,386 | |||||||||||||||
|
|
||||||||||||||||||||
|
Financial Ratios:
|
||||||||||||||||||||
|
Return on Average Assets
1
|
.69 | % | .38 | % | .75 | % | 1.17 | % | 1.26 | % | ||||||||||
|
Return on Average Equity
1
|
9.22 | % | 5.10 | % | 8.50 | % | 11.53 | % | 12.13 | % | ||||||||||
|
Net Interest Margin
|
3.77 | % | 3.70 | % | 3.89 | % | 3.94 | % | 4.17 | % | ||||||||||
|
Efficiency Ratio
2
|
57.23 | % | 57.74 | % | 58.60 | % | 60.31 | % | 57.45 | % | ||||||||||
|
Dividend Payout Ratio
|
36.81 | % | 89.18 | % | 65.01 | % | 45.60 | % | 43.12 | % | ||||||||||
|
|
||||||||||||||||||||
|
Capital and Credit Quality Ratios:
|
||||||||||||||||||||
|
Average Equity to Average Assets
1
|
7.46 | % | 7.37 | % | 8.85 | % | 10.05 | % | 10.36 | % | ||||||||||
|
Allowance for Loan Losses to Loans
3
|
1.30 | % | .88 | % | .55 | % | .54 | % | .58 | % | ||||||||||
|
Nonperforming Assets to Total Assets
4
|
3.06 | % | 1.42 | % | 1.01 | % | 1.11 | % | .58 | % | ||||||||||
|
Net Charge-offs to Total Loans
3
|
.53 | % | .59 | % | .08 | % | .11 | % | .04 | % | ||||||||||
| 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. | |
| 4 | Calculated based on 90 day past due, non-accrual and restructured loans to Total Assets. |
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.
Lending Activities
Credit Policies
The principal risk associated with each of the categories of loans in our portfolio is the
creditworthiness of our borrowers. Within each category, such risk is increased or decreased,
depending on prevailing economic conditions. In an effort to manage the risk, our loan policy gives
loan amount approval limits to individual loan officers based on their position and level of
experience and to our loan committees based on the size of the lending relationship. The risk
associated with real estate and construction loans, commercial loans and consumer loans varies,
based on market employment levels, consumer confidence, fluctuations in the value of real estate
and other conditions that affect the ability of borrowers to repay indebtedness. The risk
associated with real estate construction loans varies, based on the supply and demand for the type
of real estate under construction.
We have written policies and procedures to help manage credit risk. We have a loan review policy
that includes regular portfolio reviews to establish loss exposure and to ascertain compliance with
our loan policy.
We use a management loan committee and a directors’ loan committee to approve loans. The management
loan committee is comprised of members of management, and the directors’ loan committee is composed
of any four directors, of which at least three are independent directors. Both committees approve
new, renewed and or modified loans that exceed officer loan authorities. The directors’ loan
committee also reviews any changes to our lending policies, which are then approved by our board of
directors.
Construction and Development Lending
We make construction loans, primarily residential, and land acquisition and development loans. The
construction loans are secured by residential houses under construction and the underlying land for
which the loan was obtained. The average life of a construction loan is approximately 12 months,
and it is typically re-priced as the prime rate of interest changes. The majority of the interest
rates charged on these loans floats with the market. Construction lending entails significant
additional risks, compared with residential mortgage lending. Construction loans often involve
larger loan balances concentrated with single borrowers or groups of related borrowers. Another
risk involved in construction lending is attributable to the fact that loan funds are advanced upon
the security of the land or home under construction, which value is estimated prior to the
completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds
required to complete a project and related loan-to-value ratios. To mitigate the risks associated
with construction lending, we generally limit loan amounts to 75% to 90% of appraised value, in
addition to analyzing the creditworthiness of our borrowers. We also obtain a first lien on the
property as security for our construction loans and typically require personal guarantees from the
borrower’s principal owners.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in our market
area, including multi-family residential buildings, commercial buildings and offices, shopping
centers and churches. Commercial real estate lending entails significant additional risks, compared
with residential mortgage lending. Commercial real estate loans typically involve larger loan
balances concentrated with single borrowers or groups of related borrowers. Additionally, the
payment experience on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be subject, to a greater
extent, to adverse conditions in the real estate market or in the economy in general. Our
commercial real estate loan underwriting criteria require an examination of debt service coverage
ratios and the borrower’s creditworthiness, prior credit history and reputation. We also evaluate
the location of the security property and typically require personal guarantees or endorsements of
the borrower’s principal owners.
11
Table of Contents
Business Lending
Business loans generally have a higher degree of risk than residential mortgage loans but have
higher yields. To manage these risks, we generally obtain appropriate collateral and personal
guarantees from the borrower’s principal owners and monitor the financial condition of our business
borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to
make repayment from his employment and other income and are secured by real estate whose value
tends to be readily ascertainable. In contrast, business loans typically are made on the basis of
the borrower’s ability to make repayment from cash flow from its business and are secured by
business assets, such as real estate, accounts receivable, equipment and inventory. As a result,
the availability of funds for the repayment of business loans is substantially dependent on the
success of the business itself. Furthermore, the collateral for business loans may depreciate over
time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
We offer various consumer loans, including personal loans and lines of credit, automobile loans,
deposit account loans, installment and demand loans, and home equity lines of credit and loans.
Such loans are generally made to clients with whom we have a pre-existing relationship. We
currently originate all of our consumer loans in our geographic market area.
The underwriting standards employed by us for consumer loans include a determination of the
applicant’s payment history on other debts and an assessment of their ability to meet existing
obligations and payments on the proposed loan. The stability of the applicant’s monthly income may
be determined by verification of gross monthly income from primary employment and additionally from
any verifiable secondary income. Although creditworthiness of the applicant is of primary
consideration, the underwriting process also includes an analysis of the value of the security in
relation to the proposed loan amount. For home equity lines of credit and loans, our primary
consumer loan category, we require title insurance, hazard insurance and, if required, flood
insurance.
Portfolio Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan
to value limits ranging between 80 and 90% depending on the age of the property, borrower’s income
and credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates
that can change every three to five years, based on amortization periods of twenty to thirty years.
All fixed rate loans for longer terms, typically fifteen or thirty years, are originated by VBS
Mortgage and are sold to investors in the secondary market.
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (“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.
12
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
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 loans are determined by applying estimated loss factors to the portfolio based on
management’s evaluation and “risk grading” of the loan portfolio. Specific allowances are
typically provided on all impaired loans in excess of a defined threshold that are classified in
the Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan
basis based on management’s evaluation of 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.
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 805 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 2010 or 2009.
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, 2010, 2009 and 2008.
Core deposit intangibles are amortized on a straight-line basis over a ten year life. Core deposit
intangible, net of amortization, amounted to $46,000 and $322,000 at December 31, 2010 and 2009,
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.
13
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
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. |
| • | 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 $65,000 for 2010, $1,751,000 for 2009 and $1,759,000
for 2008.
14
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Overview
The Company’s net income for 2010 totaled $3,741,000 or $1.63 per share, an increase of 91% over
$1,954,000 or $.85 a share in 2009. Return on average equity increased in 2010 to 9.22% versus
5.10% in 2009, while the return on average assets increased from .38% to .69%. 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 $3,539,000 in 2010 versus $3,095,000
in 2009, an increase of 14.3%. Core profitability increased due to the growth in the net interest
margin which was driven by growth in the loan portfolio.
See page 10 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
| 2010 | 2009 | |||||||
| to 2009 | to 2008 | |||||||
|
Prior Year Net Income Per Share
|
$ | .85 | $ | 1.38 | ||||
|
Change from differences in:
|
||||||||
|
Net interest income
|
.67 | 1.07 | ||||||
|
Provision for credit losses
|
(.04 | ) | (1.49 | ) | ||||
|
Noninterest income, excluding securities gains
|
.06 | (.01 | ) | |||||
|
Securities gains
|
.91 | (.05 | ) | |||||
|
Noninterest expenses
|
(.24 | ) | (.51 | ) | ||||
|
Income taxes
|
(.58 | ) | .46 | |||||
|
|
||||||||
|
Total Change
|
.78 | (.53 | ) | |||||
|
|
||||||||
|
Net Income Per Share
|
$ | 1.63 | $ | .85 | ||||
|
|
||||||||
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 2010 was $18,865,000 representing an increase
of $1,531,000 or 8.83% over the prior year. A 15.21% increase in 2009 versus 2008 resulted in
total net interest income of $17,334,000. In this discussion and in the tabular analysis of net
interest income performance, entitled “Consolidated Average Balances, Yields and Rates,” (found on
page 16), 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.
Tax equivalent income on earning assets increased $318,000, supported by the increase in loan
income of $675,000. Loans held for investment, expressed as a percentage of total earning assets,
decreased slightly in 2010 to 87.92% as compared to 88.65% in 2009. During 2010, yields on earning
assets decreased 29 basis points (BP), primarily due to a 20BP 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 42BP in 2010, following a decrease of 69BP in 2009. 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. To date the economy has
continued to struggle and the FOMC has conducted monetary policy designed to keep short-term rates
at historically low levels.
The analysis on the next page reveals an increase in net interest margin to 3.77% in 2010 primarily
due to changes in balance sheet leverage as the decline in yields on earning assets (29BP) is less
than the decline in the cost of funds on interest bearing liabilities (42BP).
15
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Consolidated Average Balances, Yields and Rates
1
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Loans
2
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 180,292 | $ | 9,474 | 5.25 | % | $ | 172,883 | $ | 9,382 | 5.43 | % | $ | 128,815 | $ | 7,976 | 6.19 | % | ||||||||||||||||||
|
Real estate
|
236,318 | 14,502 | 6.14 | % | 217,677 | 13,473 | 6.19 | % | 195,743 | 13,061 | 6.67 | % | ||||||||||||||||||||||||
|
Installment
|
26,831 | 2,086 | 7.77 | % | 28,945 | 2,663 | 9.20 | % | 31,239 | 2,735 | 8.76 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Loans held for investment
4
|
443,441 | 26,062 | 5.88 | % | 419,505 | 25,518 | 6.08 | % | 355,797 | 23,772 | 6.68 | % | ||||||||||||||||||||||||
|
Loans held for sale
|
32,503 | 1,300 | 4.00 | % | 29,619 | 1,169 | 3.95 | % | 5,816 | 238 | 4.09 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Investment securities
3
|
||||||||||||||||||||||||||||||||||||
|
Fully taxable
|
12,298 | 420 | 3.42 | % | 15,602 | 720 | 4.61 | % | 19,813 | 1,101 | 5.56 | % | ||||||||||||||||||||||||
|
Partially taxable
|
3,722 | 189 | 5.08 | % | 3,542 | 267 | 7.54 | % | 6,583 | 509 | 7.73 | % | ||||||||||||||||||||||||
|
Tax exempt
|
38 | 3 | 7.89 | % | 169 | 8 | 4.73 | % | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total investment securities
|
16,020 | 609 | 3.80 | % | 19,182 | 990 | 5.16 | % | 26,565 | 1,618 | 6.09 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest bearing deposits in banks
|
2,997 | 26 | .87 | % | 924 | 16 | 1.73 | % | 2,426 | 117 | 4.82 | % | ||||||||||||||||||||||||
|
Federal funds sold
|
9,390 | 21 | .22 | % | 3,964 | 7 | .18 | % | 2,821 | 50 | 1.77 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Earning Assets
|
504,351 | 28,018 | 5.56 | % | 473,194 | 27,700 | 5.85 | % | 393,425 | 25,795 | 6.56 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Allowance for loan losses
|
(4,990 | ) | (3,132 | ) | (1,946 | ) | ||||||||||||||||||||||||||||||
|
Nonearning assets
|
44,700 | 37,962 | 34,748 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Assets
|
$ | 544,061 | $ | 508,024 | $ | 426,227 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||||||||||||||
|
Demand —interest bearing
|
$ | 110,814 | $ | 1,939 | 1.75 | % | $ | 78,556 | $ | 1,306 | 1.66 | % | $ | 58,682 | $ | 798 | 1.36 | % | ||||||||||||||||||
|
Savings
|
35,666 | 191 | .54 | % | 32,650 | 202 | .62 | % | 30,073 | 293 | .97 | % | ||||||||||||||||||||||||
|
Time deposits
|
222,919 | 4,426 | 1.99 | % | 218,396 | 6,294 | 2.88 | % | 169,978 | 6,955 | 4.09 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest bearing deposits
|
369,399 | 6,556 | 1.77 | % | 329,602 | 7,802 | 2.37 | % | 258,733 | 8,046 | 3.11 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Short-term debt
|
6,035 | 29 | .48 | % | 14,700 | 78 | .53 | % | 23,622 | 456 | 1.93 | % | ||||||||||||||||||||||||
|
Long-term debt
|
63,565 | 2,421 | 3.81 | % | 67,320 | 2,302 | 3.42 | % | 50,135 | 1,996 | 3.98 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest bearing liabilities
|
438,999 | 9,006 | 2.05 | % | 411,622 | 10,182 | 2.47 | % | 332,490 | 10,498 | 3.16 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest bearing deposits
|
56,328 | 51,124 | 49,557 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
8,166 | 6,929 | 6,469 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities
|
503,493 | 469,675 | 388,516 | |||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
40,568 | 38,349 | 37,711 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 544,061 | $ | 508,024 | $ | 426,227 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest earnings
|
$ | 19,012 | $ | 17,518 | $ | 15,297 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net yield on interest earning assets (NIM)
|
3.77 | % | 3.70 | % | 3.89 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| 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. | |
| 4 | Includes nonaccrual loans. |
16
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.
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
| 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
|
$ | 1,455 | $ | (911 | ) | $ | 544 | $ | 4,256 | $ | (2,510 | ) | $ | 1,746 | ||||||||||
|
Loans held for sale
|
114 | 17 | 131 | 974 | (43 | ) | 931 | |||||||||||||||||
|
Investment securities
|
||||||||||||||||||||||||
|
Taxable
|
(152 | ) | (148 | ) | (300 | ) | (234 | ) | (147 | ) | (381 | ) | ||||||||||||
|
Partially taxable
|
14 | (92 | ) | (78 | ) | (235 | ) | (7 | ) | (242 | ) | |||||||||||||
|
Tax exempt
|
(3 | ) | (3 | ) | (6 | ) | 1 | (5 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest
bearing deposits in banks
|
36 | (26 | ) | 10 | (72 | ) | (29 | ) | (101 | ) | ||||||||||||||
|
Federal funds sold
|
10 | 4 | 14 | 20 | (63 | ) | (43 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Interest Income
|
1,474 | (1,156 | ) | 318 | 4,703 | (2,798 | ) | 1,905 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||
|
Demand
|
535 | 98 | 633 | 270 | 238 | 508 | ||||||||||||||||||
|
Savings
|
19 | (30 | ) | (11 | ) | 25 | (116 | ) | (91 | ) | ||||||||||||||
|
Time deposits
|
(3,348 | ) | 1,480 | (1,868 | ) | 1,980 | (2,641 | ) | (661 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Short-term debt
|
(46 | ) | (3 | ) | (49 | ) | (172 | ) | (206 | ) | (378 | ) | ||||||||||||
|
Long-term debt
|
(128 | ) | 247 | 119 | 684 | (378 | ) | 306 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Interest Expense
|
(2,968 | ) | 1,792 | (1,176 | ) | 2,787 | (3,103 | ) | (316 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net Interest Income
|
$ | 4,442 | $ | (2,948 | ) | $ | 1,494 | $ | 1,916 | $ | 305 | $ | 2,221 | |||||||||||
|
|
||||||||||||||||||||||||
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 $318,000 or 1.15% in 2010, after increasing 7.39% or
$1,905,000 in 2009. Overall, the yield on earning assets decreased .29%, from 5.85% to 5.56%.
Average loans outstanding grew during 2010, with average loans outstanding increasing $23,936,000
to $443,441,000. Real estate loans increased 8.56% and commercial loans increased 4.29%. Combined
these categories accounted for the total increase in year ending loans. Lending conditions within
the market were sluggish for the year as a result of the slow economy, approximately one half of
the growth in the loan portfolio came from repurchasing loans that had previously been sold to
other financial institutions. The remainder of the increase is attributed to the fact that many
banks within the market appear to have pulled back on lending due to rising loan losses, exposure
to subprime lending, or reduced capital positions.
Average total securities, yielding 3.80%, decreased $3,162,000 during 2010. 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 $1,300,000, as compared to the $1,169,000 during 2009. This
category is made up of loans originated by VBS Mortgage and loans that are purchased from a bank
that has a large secondary market lending presence (Gateway Bank, California). This arrangement has
been used for several years as a higher yielding alternative to federal funds sold. As market rates
began to fall in the early part of 2009 the volume of mortgage loan refinancing increased for both
VBS Mortgage and Gateway. This trend continued throughout 2010.These loans are short-term,
residential real estate loans that have an average life of approximately two weeks. The Bank holds
these loans during the period of time between loan closing and when the loan is paid off by the
ultimate secondary market purchaser.
17
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
| GAAP Financial Measurements: | ||||||||||||
| (dollars in thousands). | 2010 | 2009 | 2008 | |||||||||
|
Interest Income — Loans
|
$ | 27,256 | $ | 26,563 | $ | 23,877 | ||||||
|
Interest Income — Securities and Other Interest-Earnings Assets
|
615 | 953 | 1,667 | |||||||||
|
Interest Expense — Deposits
|
6,556 | 7,802 | 8,046 | |||||||||
|
Interest Expense — Other Borrowings
|
2,450 | 2,380 | 2,452 | |||||||||
|
|
||||||||||||
|
Total Net Interest Income
|
18,865 | 17,334 | 15,046 | |||||||||
|
|
||||||||||||
|
Non-GAAP Financial Measurements:
|
||||||||||||
|
Add: Tax Benefit on Tax-Exempt Interest Income — Loans
|
106 | 125 | 133 | |||||||||
|
Add: Tax Benefit on Tax-Exempt Interest Income — Securities and Other Interest-Earnings Assets
|
41 | 36 | 118 | |||||||||
|
|
||||||||||||
|
Total Tax Benefit on Tax-Exempt Interest Income
|
147 | 161 | 251 | |||||||||
|
|
||||||||||||
|
Tax-Equivalent Net Interest Income
|
$ | 19,012 | $ | 17,495 | $ | 15,297 | ||||||
|
|
||||||||||||
18
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Interest Expense
Interest expense decreased $1,176,000 or 11.55% during 2010, which followed a 3.01% decrease or
$316,000 in 2009. The average cost of funds of 2.05% decreased .42% compared to 2009. Average
interest bearing liabilities increased $27,377,000 in 2010 following an increase of $79,132,000 in
2009. The increase in interest bearing liabilities was primarily the result of an increase in
interest bearing demand deposits and time deposits. Interest bearing demand deposits increased
primarily due to the 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
$638,000 (48.7%), while the average balance in interest bearing demand deposits increased $32.2
million in 2010.
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 $1,868,000
(29.7%) in 2009, in spite of an increase in balances of
$4.5 million. Changes in the cost of funds attributable to rate and volume variances can be found in the table at
the top of page 17.
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.
Exclusive of securities transactions, non-interest income increased 4.77% ($152,000) in 2010
following a decrease of 1.83% in 2009. Service charges on deposit accounts decreased $100,000,
primarily due to a decrease in overdraft charges. All of the decrease occurred following the
implementation of Reg. E which required customers to Opt-In to allowing debit card transactions to
create account overdrafts. Other operating income increased $174,000. This category includes a
number of revenue items; however the largest category is debit card revenue. In 2010 debit card
revenue totaled $618,000 versus $439,000 in 2009 an increase of $178,000. The increase in revenue
can be traced to higher levels of card usage resulting from the increase in the number of checking
accounts, primarily the previously mentioned Platinum Rewards Checking product.
Securities transactions in 2010 resulted in net gains of $349,000 after recognition of impairment
write-downs totaling $65,000 on several holdings within the equities portfolio. This followed a
loss of $1,754,000 in 2009. In 2009, 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, 2009 and 2010, there is reduced risk of additional significant OTTI in
2011.
Noninterest Expense
Noninterest expenses increased from $12,188,000 in 2009 to $12,741,000 in 2010, a 4.54% increase.
Salary and benefits increased .19% to $6,742,000 in 2010, following a 1.60% increase in 2009. The
FDIC insurance assessment increased $272,000 in 2010 to $1,207,000. This increase was a result of
increases in the standard assessment rates. Other operating expense increased $281,000 in 2010,
following a $182,000 increase in 2009. Much of the increase was due to an increase in other loan
expense and Bank franchise tax. The increase in other loan expense resulted when the bank forfeited
an escrow deposit on a loan participation when it chose to not pursue the purchase of the
controlling interest in the loan. Noninterest expenses continue to be substantially lower than peer
group averages. Total noninterest expense as a percentage of average assets totaled 2.36%, 2.41%,
and 2.60%, in 2010, 2009 and 2008, respectively. Peer group averages have ranged between 3.09% and
3.45% over the same time period.
19
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
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 $4,210,000 in 2009 to $4,300,000
in 2010. 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 $2,350,000 in 2010 and $2,563,000 in 2009. Loan losses as a
percentage of average loans held for investment totaled .53% and .61% in 2010 and 2009,
respectively. This loss rate is significantly better than peer group averages which were 1.09% in
2010 and 1.18% in 2009.
Total assets decreased .07% during the year to $538,855,000, a decrease of $368,000 from
$539,223,000 in 2009. Earning assets increased .61% or $3,030,000 to $503,531,000 at December 31,
2010. Virtually all of the increase in earning assets resulted from growth in the loan portfolio,
loans held for investment increased $10,744,000 and loans held for sale decreased $7,404,000.
Deposit growth for 2010 totaled $4,408,000 or 1.05%, much of the growth resulted from the growth in
interest bearing demand deposits. The Company continues to utilize its assets well with 93.44% of
year-end assets consisting of earning assets.
Investment Securities
Average balances in investment securities decreased 16.48% in 2010 to $16,020,000. Proceeds from
the sale or maturity of investments were used in part to support loan growth and for debt
repayment. At year end, 3.05% 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 3.80% for 2010, down from 5.16% in 2009. The decline can be attributed to maturing
securities being reinvested at lower rates, due to market conditions.
The Company recognized gains totaling $349,000 on its equities portfolio. This was net of $65,000
in losses resulting 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 14 under the
caption “Securities Impairment” and page 19 under the caption “Noninterest Income”.
20
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Investment Securities, continued
The composition of securities at December 31 was:
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Available for Sale
1
|
||||||||||||
|
U.S. Treasury, Agency and Government
Sponsored Enterprises (GSE)
|
$ | 8,001 | $ | 6,012 | $ | 10,194 | ||||||
|
Municipal
|
125 | |||||||||||
|
Mortgage-backed
2
|
3,931 | 6,170 | 8,574 | |||||||||
|
Corporate bonds
|
505 | 281 | ||||||||||
|
Marketable equity securities
|
3,315 | 3,742 | 3,063 | |||||||||
|
|
||||||||||||
|
Total
|
15,247 | 16,429 | 22,237 | |||||||||
|
|
||||||||||||
|
Held to Maturity
|
||||||||||||
|
U.S. Treasury and Agency
|
109 | 110 | 110 | |||||||||
|
|
||||||||||||
|
Total
|
109 | 110 | 110 | |||||||||
|
|
||||||||||||
|
Other Equity Investments
|
8,789 | 9,681 | 8,439 | |||||||||
|
|
||||||||||||
|
Total Securities
|
$ | 24,145 | $ | 26,220 | $ | 30,786 | ||||||
|
|
||||||||||||
| 1 | At estimated fair value. See Note 4 for amortized cost. | |
| 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, 2010 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.
| 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 & GSE
|
$ | $ | 8,001 | 4.37 | % | $ | $ | 8,001 | 4.37 | % | ||||||||||||||||||||||
|
Municipal
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed
|
260 | 3.18 | % | 3,671 | 5.18 | % | 3,931 | 5.05 | % | |||||||||||||||||||||||
|
Corporate bonds
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 260 | 3.18 | % | $ | 8,001 | 4.37 | % | $ | 3,671 | 5.18 | % | $ | 11,932 | 4.59 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Debt Securities Held to Maturity
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
U.S. Treasury & Agency
|
$ | 109 | 2.25 | % | $ | 109 | 2.25 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 109 | 2.25 | % | $ | 109 | 2.25 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
21
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 $445,147,000 at December 31, 2010
compared with $434,403,000 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 5.59%
during 2010 to $153,512,000. Real estate mortgages increased $10,172,000 (5.62%). Growth has
included a variety of loan and collateral types including residential real estate and real estate
development.
Construction loans decreased $6,983,000 or 8.09%. The decline in construction loans resulted from
the slower economy which reduced construction within the Bank’s primary market area and efforts by
management to reduce its concentration levels in construction lending. 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 $206,000. 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 $415,000 to $2,771,000 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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Real estate — mortgage
|
$ | 190,162 | $ | 180,990 | $ | 161,224 | $ | 141,836 | $ | 137,595 | ||||||||||
|
Real estate — construction
|
79,337 | 86,320 | 71,259 | 51,301 | 46,669 | |||||||||||||||
|
Consumer installment
|
19,043 | 19,247 | 22,792 | 18,772 | 15,990 | |||||||||||||||
|
Commercial
|
121,490 | 115,638 | 115,297 | 86,048 | 89,347 | |||||||||||||||
|
Agricultural
|
19,761 | 19,355 | 18,711 | 15,701 | 14,587 | |||||||||||||||
|
Multi-family residential
|
12,259 | 10,391 | 7,898 | 1,412 | 3,462 | |||||||||||||||
|
Credit cards
|
2,771 | 2,356 | 1,940 | 1,800 | 1,709 | |||||||||||||||
|
Other
|
324 | 106 | 112 | 310 | 102 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Loans
|
$ | 445,147 | $ | 434,403 | $ | 399,233 | $ | 317,180 | $ | 309,461 | ||||||||||
|
|
||||||||||||||||||||
The following table shows the Company’s loan maturity and interest rate sensitivity as of December
31, 2010:
| Less Than | 1-5 | Over | ||||||||||||||
| (Dollars in thousands) | 1 Year | Years | 5 Years | Total | ||||||||||||
|
Commercial and
agricultural loans
|
$ | 55,057 | $ | 33,404 | $ | 52,790 | $ | 141,251 | ||||||||
|
Multi-family residential
|
7,383 | 2,233 | 2,643 | 12,259 | ||||||||||||
|
Real Estate — mortgage
|
56,264 | 56,216 | 77,682 | 190,162 | ||||||||||||
|
Real Estate — construction
|
75,047 | 1,632 | 2,658 | 79,337 | ||||||||||||
|
Consumer — installment/other
|
14,390 | 4,961 | 2,787 | 22,138 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 208,141 | $ | 98,446 | $ | 138,560 | $ | 445,147 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Loans with predetermined rates
|
19,481 | 9,611 | 34,699 | 63,791 | ||||||||||||
|
Loans with variable or
adjustable rates
|
188,660 | 88,835 | 103,861 | 381,356 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 208,141 | $ | 98,446 | $ | 138,560 | $ | 445,147 | ||||||||
|
|
||||||||||||||||
22
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Analysis of Loan Portfolio, continued
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 96% 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 22% 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.
Prior to the recent recession, 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 have declined during 2009 and 2010.
Depending on a number of factors, including property type, location and price point, the decline in
value ranges from relatively modest, perhaps 10%, to more severe, up to 30%. 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, multi-family properties 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, 2010, there are no industry categories of loans that exceed 10% of total loans.
23
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 $16,486,000 at December 31,
2010 compared to $7,653,000 at December 31, 2009. Approximately 90% 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, 2010, the Company holds $1,513,000 of real estate which was acquired through
foreclosure.
Although problem loans have increased approximately $8.2 million since December 31, 2009, most of
the increase is limited to two large commercial relationships totaling approximately $6.7 million.
One of these relationships is anticipated to be fully current by the end of March 2011. The other
may be brought current by the borrower bringing another partner into the business. However at this
point, that situation is questionable and we have begun the foreclosure process. No loss is
anticipated on either of these relationships due an evaluation of the values of the properties that
we hold as collateral.
The following is a summary of information pertaining to risk elements and impaired loans:
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| 2010 | 2010 | 2010 | 2010 | 2009 | ||||||||||||||||
|
Nonaccrual Loans:
|
||||||||||||||||||||
|
Real Estate
|
$ | 5,189 | $ | 4,456 | $ | 3,676 | $ | 4,814 | $ | 2,995 | ||||||||||
|
Commercial
|
1,656 | 2,490 | 1,394 | 951 | 261 | |||||||||||||||
|
Home Equity
|
715 | 983 | 356 | 381 | 250 | |||||||||||||||
|
Other
|
30 | 71 | 124 | 151 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Loans past due 90 days or more:
|
||||||||||||||||||||
|
Real Estate
|
3,021 | 1,112 | 1,146 | 1,010 | 3,475 | |||||||||||||||
|
Commercial
|
4,581 | 146 | 663 | 1,474 | 57 | |||||||||||||||
|
Home Equity
|
588 | 162 | 504 | 111 | 375 | |||||||||||||||
|
Other
|
54 | 75 | 69 | 84 | 240 | |||||||||||||||
|
|
||||||||||||||||||||
|
Restructured loans:
|
||||||||||||||||||||
|
Real Estate
|
267 | 267 | ||||||||||||||||||
|
Commercial
|
385 | 385 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total Nonperforming loans
|
$ | 16,486 | $ | 10,147 | $ | 7,932 | $ | 8,976 | $ | 7,653 | ||||||||||
|
|
||||||||||||||||||||
|
Nonperforming loans as a
percentage of loans held for
investment
|
3.70 | % | 2.27 | % | 1.78 | % | 2.04 | % | 1.76 | % | ||||||||||
|
|
||||||||||||||||||||
|
Net Charge Offs to Total Loans
|
.53 | % | .39 | % | .17 | % | .05 | % | .59 | % | ||||||||||
|
|
||||||||||||||||||||
|
Allowance for loan and lease
losses to nonperforming loans
|
36.54 | % | 54.77 | % | 61.65 | % | 50.25 | % | 50.12 | % | ||||||||||
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, 2010, 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.
24
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
$200,000 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. 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 $5,786,000 at December 31, 2010 is equal to 1.30% of total loans
held for investment. This compares to an allowance of $3,836,000
(.88%) at December 31, 2009 and .55% at December 31, 2008. Management and the Board of Directors have made a concentrated effort
at increasing the allowance during the recent recession to reflect the increased risks within the
portfolio. While the overall level of the allowance remains below peer group averages, management
feels the current reserve level is appropriate. Management has reached this conclusion based on
historical losses, delinquency rates, collateral values of delinquent loans and a thorough review
of the loan portfolio.
Loan losses, net of recoveries, totaled $2,350,000 in 2010 which is equivalent to .53% of total
loans outstanding. Over the preceding three years, the Company has
had an average loss rate of .40%, compared to a 1.05% loss rate for its peer group.
25
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) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Balance at beginning of period
|
$ | 3,836 | $ | 2,189 | $ | 1,703 | $ | 1,791 | $ | 1,673 | ||||||||||
|
Provision charged to expenses
|
4,300 | 4,210 | 815 | 270 | 240 | |||||||||||||||
|
Loan losses:
|
||||||||||||||||||||
|
Commercial
|
1,541 | 1,110 | 294 | 331 | 19 | |||||||||||||||
|
Installment
|
211 | 193 | 106 | 119 | 143 | |||||||||||||||
|
Real estate
|
731 | 1,336 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total loan losses
|
2,483 | 2,639 | 400 | 450 | 162 | |||||||||||||||
|
|
||||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
54 | 10 | 7 | 9 | 4 | |||||||||||||||
|
Installment
|
77 | 63 | 63 | 83 | 36 | |||||||||||||||
|
Real estate
|
2 | 3 | 1 | |||||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
133 | 76 | 71 | 92 | 40 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net loan losses
|
(2,350 | ) | (2,563 | ) | (329 | ) | (358 | ) | (122 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Balance at end of period
|
$ | 5,786 | $ | 3,836 | $ | 2,189 | $ | 1,703 | $ | 1,791 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for loan losses as a
|
||||||||||||||||||||
|
percentage of loans
|
1.30 | % | .88 | % | .55 | % | .54 | % | .58 | % | ||||||||||
|
|
||||||||||||||||||||
|
Net loan losses to loans outstanding
|
.53 | % | .59 | % | .08 | % | .11 | % | .04 | % | ||||||||||
Refer to Note 6 for the allocation of the allowance for loan losses.
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2010 of 1.05%. The average deposit
balances and average rates paid for 2010, 2009 and 2008 were as follows:
Average Deposits and Rates Paid
(dollars in thousands)
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
|
Noninterest-bearing
|
$ | 56,328 | $ | 51,124 | $ | 49,557 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-bearing:
|
||||||||||||||||||||||||
|
Interest Checking
|
$ | 110,814 | 1.75 | % | $ | 78,556 | 1.66 | % | $ | 58,682 | 1.36 | % | ||||||||||||
|
Savings Accounts
|
35,666 | .54 | % | 32,650 | .62 | % | 30,073 | .97 | % | |||||||||||||||
|
Time Deposits:
|
||||||||||||||||||||||||
|
CDARS
|
37,102 | 1.08 | % | 28,667 | 1.55 | % | 877 | 3.08 | % | |||||||||||||||
|
$100,000 or more
|
83,669 | 1.34 | % | 92,414 | 1.99 | % | 59,949 | 3.18 | % | |||||||||||||||
|
Less than $100,000
|
102,147 | 2.84 | % | 97,315 | 4.12 | % | 109,152 | 4.60 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Interest-bearing
|
369,398 | 1.77 | % | 329,602 | 2.37 | % | 258,733 | 3.11 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total deposits
|
$ | 425,726 | 1.54 | % | $ | 380,726 | 2.05 | % | $ | 308,290 | 2.61 | % | ||||||||||||
|
|
||||||||||||||||||||||||
26
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Deposits and Borrowings, continued
This Discussion relates to table of Average balances on the previous page. Noninterest-bearing
demand deposits, which are comprised of checking accounts, increased $5,204,000 or 10.2% from
$51,124,000 at December 31, 2009 to $56,328,000 at December 31, 2010. Interest-bearing deposits,
which include interest checking accounts, money market accounts, regular savings accounts and time
deposits, increased $39,796,000 or 12.07% from $329,602,000 at December 31, 2009 to $369,398,000 at
December 31, 2010. Total interest checking (including money market) account balances increased
$32,258,000 or 41.06% from $78,556,000 at December 31, 2009 to $110,814,000 at December 31, 2010.
Total savings account balances increased $3,016,000 or 9.24% from $32,650,000 at December 31, 2009
to $35,666,000 at December 31, 2010.
CDARS deposits increased $8,435,000 or 29.4% from $28,667,000 at December 31, 2009 to $37,102,000
at December 31, 2010. Time deposits increased $4,523,000 or 2.01% from $218,396,000 at December
31, 2009 to $222,919,000 at December 31, 2010. This is comprised of a decrease in certificates of
deposit of $100,000 and more of $8,745,000 or 9.5% from $92,414,000 at December 31, 2009 to
$83,669,000 at December 31, 2010, an increase in certificates of deposit of less than $100,000 of
$4,832,000 or 5.0% from $97,315,000 at December 31, 2009 to $102,147,000 at December 31, 2010 and
an increase in CDARs deposits of $8,435,000 or 29.42% from $28,667,000 at December 31, 2009 to
$37,102,000 at December 31, 2010. The Bank joined the CDARS network in 2008, which allows it to
offer over $50 million in FDIC insurance on a certificate of deposit.
The maturity distribution of certificates of deposit of $100,000 or more is as follows:
| (Actual Dollars in thousands) | 2010 | 2009 | ||||||
|
Less than 3 months
|
$ | 6,426 | $ | 31,381 | ||||
|
3 to 12 months
|
41,712 | 36,631 | ||||||
|
1 year to 5 years
|
31,922 | 31,318 | ||||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 80,060 | $ | 99,330 | ||||
|
|
||||||||
Non-deposit borrowings include repurchase agreements, federal funds purchased, Federal Home Loan
Bank (FHLB) borrowings and the issue of Subordinated Debt. 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. See Note 10 Short
Term Debt for short term borrowing disclosures.
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 $11,250,000 in 2010 and
$22,250,000 in 2009 in long term loans. Repayment of amortizing and fixed maturity loans through
FHLB totaled $21,596,000 for the year. These loans carry an average rate of 3.12% at December 31,
2010.
Contractual Obligations and Scheduled Payments (dollars in thousands)
| December 31, 2010 | ||||||||||||||||||||
| One Year | Three Years | |||||||||||||||||||
| Less than | Through | Through | More than | |||||||||||||||||
| One Year | Three Years | Five Years | Five Years | Total | ||||||||||||||||
|
FHLB Notes
|
$ | 4,773 | $ | 2,155 | $ | 33,107 | $ | 5,000 | $ | 45,035 | ||||||||||
|
PVB Note
|
1,000 | 2,000 | 1,000 | 4,000 | ||||||||||||||||
|
Securities
sold under agreements to
repurchase
|
5,355 | 5,355 | ||||||||||||||||||
|
Subordinated Debt
|
9,944 | 9,944 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 11,128 | $ | 4,155 | $ | 34,107 | $ | 14,944 | $ | 64,334 | ||||||||||
|
|
||||||||||||||||||||
The $45,035,000 in outstanding FHLB advances is comprised of thirteen advances. Note 11 to the
Consolidated Financial Statements discusses the rates, terms, and conversion features on these
advances
27
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Stockholder’s Equity
Total stockholders’ equity increased $3,227,000 or 8.27% in 2010. While net income totaled
$3,741,000, noncontrolling interest net income totaled $63,000, sales of common stock totaled
$196,000 and changes in other comprehensive income increased $260,000, capital was reduced by
dividends ($1.033 million). As of December 31, 2010, book value per share was $18.31 compared to
$16.99 as of December 31, 2009. 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, 2010, the Company had Tier I capital of
9.77% of risk weighted assets and combined Tier I and II capital of 13.51% 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.
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, 2010, the
Company reported a leverage ratio of 7.37%. 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 increased .07% in
2010 following a decrease of .19% in 2009. 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 has 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, 2010 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.
28
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Market Risk Management, continued
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, 2010. 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 an asset sensitive one-year cumulative GAP position
of 17.87% of total earning assets, compared to 6.86% in 2009. Approximately 51.08% of rate
sensitive assets and 38.80% of rate sensitive liabilities are subject to repricing within one year.
Short term assets (less than one year) increased $5,639,000 during the year, while total earning
assets increased $3,030,000. 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 decreased $50,050,000,
while total interest bearing liabilities decreased $8,460,000. 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 the FHLB. These actions and the increase in interest bearing deposits
(which are allocated based on FDICIA 305) have resulted in the increase in the positive GAP
position in the one year time period.
29
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, 2010, 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
|
$ | 161,566 | $ | 43,804 | $ | 213,484 | $ | 23,522 | $ | $ | 442,376 | |||||||||||||
|
Loans held for sale
|
23,764 | 23,764 | ||||||||||||||||||||||
|
Federal Funds Sold
|
16,338 | 16,338 | ||||||||||||||||||||||
|
Investments securities
|
55 | 6,202 | 2,112 | 3,671 | 3,315 | 15,355 | ||||||||||||||||||
|
Credit Cards
|
2,771 | 2,771 | ||||||||||||||||||||||
|
Interest bearing bank deposits
|
936 | 1,743 | 248 | 2,927 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
205,430 | 51,749 | 215,844 | 27,193 | 3,315 | 503,531 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Rate Sensitive Liabilities:
|
||||||||||||||||||||||||
|
Interest bearing demand deposits
|
30,217 | 67,855 | 18,818 | 116,890 | ||||||||||||||||||||
|
Savings
|
7,152 | 21,456 | 7,152 | 35,760 | ||||||||||||||||||||
|
Certificates of deposit
$100,000 and over
|
6,426 | 41,712 | 31,922 | 80,060 | ||||||||||||||||||||
|
Other certificates of deposit
|
17,356 | 51,027 | 65,462 | 133,845 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Deposits
|
23,782 | 130,108 | 186,695 | 25,970 | 366,555 | |||||||||||||||||||
|
Short-term debt
|
5,355 | 5,355 | ||||||||||||||||||||||
|
Long-term debt
|
5,023 | 2,905 | 36,107 | 14,944 | 58,979 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
34,160 | 133,013 | 222,802 | 40,914 | 430,889 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Discrete Gap
|
171,270 | (81,264 | ) | (6,958 | ) | (13,721 | ) | 3,315 | 72,642 | |||||||||||||||
|
Cumulative Gap
|
171,270 | 90,006 | 83,048 | 69,327 | 72,642 | |||||||||||||||||||
|
As a % of Earning Assets
|
34.01 | % | 17.87 | % | 16.49 | % | 13.77 | % | 14.43 | % | ||||||||||||||
| • | 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. |
30
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
continued
Recent Accounting Pronouncements
In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related
to a company’s allowance for credit losses and the credit quality of its financing receivables. The
amendments will require the allowance disclosures to be provided on a disaggregated basis. The
Company is required to begin to comply with the disclosures in its financial statements for the
year ended December 31, 2010. Disclosures about Troubled Debt Restructurings (TDRs) required by
the Update have been deferred by FASB in an update issued in early 2011. The TDR disclosures are
anticipated to be effective for periods ending after June 15, 2011.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial
institutions and the financial services industry. The Dodd-Frank Act includes several provisions
that will affect how community banks, thrifts, and small bank and thrift holding companies will be
regulated in the future. Among other things, these provisions abolish the Office of Thrift
Supervision and transfer its functions to the other federal banking agencies, relax rules regarding
interstate branching, allow financial institutions to pay interest on business checking accounts,
change the scope of federal deposit insurance coverage, and impose new capital requirements on bank
and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial
Protection as an independent entity within the Federal Reserve, which will be given the authority
to promulgate consumer protection regulations applicable to all entities offering consumer
financial services or products, including banks. Additionally, the Dodd-Frank Act includes a
series of provisions covering mortgage loan origination standards affecting originator
compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the
provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial
condition, and results of operations.
In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to
Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial
Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments
related primarily to business combinations and removed references to “minority interest” and added
references to “controlling” and “noncontrolling interests(s)”. The updates were effective upon
issuance but had no impact on the Company’s financial statements.
In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill
impairment test for reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as
a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring
subsequent to adoption should be included in earnings. The amendment is effective for the Company
beginning January 1, 2011. Early adoption is not permitted.
31
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Quarterly Results (unaudited)
The table below lists the Company’s quarterly performance for the years ended December 31, 2010 and
2009:
| 2010 | ||||||||||||||||||||
| (Dollars in thousands) | Fourth | Third | Second | First | Total | |||||||||||||||
|
Interest and Dividend Income
|
$ | 7,086 | $ | 7,075 | $ | 6,902 | $ | 6,807 | $ | 27,870 | ||||||||||
|
Interest Expense
|
2,136 | 2,213 | 2,252 | 2,404 | 9,005 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income
|
4,950 | 4,862 | 4,650 | 4,403 | 18,865 | |||||||||||||||
|
Provision for Loan Losses
|
1,200 | 1,300 | 900 | 900 | 4,300 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Interest Income after Provision,
For Loan Losses
|
3,750 | 3,562 | 3,750 | 3,503 | 14,565 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-Interest Income
|
853 | 1,094 | 895 | 756 | 3,598 | |||||||||||||||
|
Non-Interest Expense
|
3,095 | 3,257 | 3,243 | 3,146 | 12,741 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income before taxes
|
1,508 | 1,399 | 1,402 | 1,113 | 5,422 | |||||||||||||||
|
Income Tax Expense
|
394 | 508 | 422 | 357 | 1,681 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
$ | 1,114 | $ | 891 | $ | 980 | $ | 756 | $ | 3,741 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net Income Per Share
|
$ | .48 | $ | .39 | $ | .43 | $ | .33 | $ | 1.63 | ||||||||||
| 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 | |||||||||
32
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2010 and 2009
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Cash and due from banks (notes 3 and 14)
|
$ | 4,585,693 | $ | 5,314,285 | ||||
|
Federal funds sold
|
16,338,229 | 18,326,000 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
20,923,922 | 23,640,285 | ||||||
|
|
||||||||
|
Interest bearing deposits (note 14)
|
2,926,978 | 64,971 | ||||||
|
Securities:
|
||||||||
|
Held to maturity — fair value of $108,974 and $109,813 in 2010 and
2009, respectively (note 4)
|
108,974 | 109,813 | ||||||
|
Available for sale (note 4)
|
15,246,524 | 16,429,533 | ||||||
|
Other investments (note 4)
|
8,788,997 | 9,680,733 | ||||||
|
Loans held for sale
|
23,764,237 | 31,167,763 | ||||||
|
Loans held for investment (notes 5 and 14)
|
445,147,227 | 434,402,916 | ||||||
|
Less allowance for loan losses (note 6)
|
(5,785,633 | ) | (3,835,698 | ) | ||||
|
|
||||||||
|
Net Loans Held for Investment
|
439,361,594 | 430,567,218 | ||||||
|
|
||||||||
|
Other real estate owned (note 8)
|
1,513,199 | 525,897 | ||||||
|
Bank premises and equipment, net (note 7)
|
6,792,494 | 7,079,504 | ||||||
|
Interest receivable
|
2,001,226 | 2,037,612 | ||||||
|
Core deposit intangible (note 22)
|
45,771 | 321,932 | ||||||
|
Goodwill (note 22)
|
2,669,517 | 2,669,517 | ||||||
|
Bank owned life insurance (note 23)
|
6,883,248 | 6,593,081 | ||||||
|
Other assets
|
7,827,883 | 8,334,778 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 538,854,564 | $ | 539,222,637 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits: (note 9)
|
||||||||
|
Noninterest bearing
|
$ | 58,497,146 | $ | 53,475,063 | ||||
|
Interest bearing:
|
||||||||
|
Demand
|
94,090,825 | 77,483,164 | ||||||
|
Money market accounts
|
22,798,543 | 23,230,861 | ||||||
|
Savings
|
35,759,634 | 34,228,965 | ||||||
|
Time deposits over $100,000
|
80,060,033 | 99,329,716 | ||||||
|
All other time deposits
|
133,844,576 | 132,895,542 | ||||||
|
|
||||||||
|
Total Deposits
|
425,050,757 | 420,643,311 | ||||||
|
|
||||||||
|
|
||||||||
|
Short-term debt (note 10)
|
5,354,992 | 9,084,909 | ||||||
|
Accrued liabilities
|
7,240,003 | 7,396,233 | ||||||
|
Subordinated debt
|
9,944,000 | 2,715,000 | ||||||
|
Long-term debt (note 11)
|
49,035,464 | 60,380,702 | ||||||
|
|
||||||||
|
Total Liabilities
|
496,625,216 | 500,220,155 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and Contingencies (note 15)
|
||||||||
|
|
||||||||
|
Stockholders’ Equity (Note 21)
|
||||||||
|
Common stock $5 par value, 6,000,000 shares authorized, 2,306,086 and
2,295,053 shares issued and outstanding for 2010 and 2009, respectively
|
11,530,430 | 11,475,265 | ||||||
|
Capital surplus
|
||||||||
|
Retained earnings (note 18)
|
30,837,090 | 27,989,144 | ||||||
|
Noncontrolling interest
|
186,133 | 122,709 | ||||||
|
Accumulated other comprehensive income (loss)
|
(324,305 | ) | (584,636 | ) | ||||
|
|
||||||||
|
Total Stockholders’ Equity
|
42,229,348 | 39,002,482 | ||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 538,854,564 | $ | 539,222,637 | ||||
|
|
||||||||
The accompanying notes are an integral part of this statement.
33
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
For the years ended 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Interest and Dividend Income
|
||||||||||||
|
Interest and fees on loans held for investment
|
$ | 25,955,716 | $ | 25,393,347 | $ | 23,638,923 | ||||||
|
Interest on loans held for sale
|
1,300,373 | 1,169,228 | 238,249 | |||||||||
|
Interest on deposits and federal funds sold
|
46,715 | 23,533 | 167,441 | |||||||||
|
Interest on debt securities
|
369,932 | 697,982 | 970,523 | |||||||||
|
Dividends on equity securities
|
197,737 | 231,838 | 529,268 | |||||||||
|
|
||||||||||||
|
Total Interest and Dividend Income
|
27,870,473 | 27,515,928 | 25,544,404 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest Expense
|
||||||||||||
|
Interest on demand deposits
|
1,939,352 | 1,306,439 | 798,137 | |||||||||
|
Interest on savings deposits
|
190,838 | 202,027 | 293,461 | |||||||||
|
Interest on time deposits over $100,000
|
1,120,415 | 1,551,360 | 1,906,538 | |||||||||
|
Interest on all other time deposits
|
3,305,294 | 4,742,443 | 5,047,994 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total interest on deposits
|
6,555,899 | 7,802,269 | 8,046,130 | |||||||||
|
Interest on short-term debt
|
28,485 | 77,818 | 456,398 | |||||||||
|
Interest on long-term debt
|
2,421,159 | 2,302,246 | 1,995,514 | |||||||||
|
|
||||||||||||
|
Total Interest Expense
|
9,005,543 | 10,182,333 | 10,498,042 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Interest Income
|
18,864,930 | 17,333,595 | 15,046,362 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Provision for Loan losses
(note 6)
|
4,300,000 | 4,210,000 | 815,000 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Interest Income After
|
||||||||||||
|
Provision for Loan Losses
|
14,564,930 | 13,123,595 | 14,231,362 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest Income (Expenses)
|
||||||||||||
|
Service charges on deposit accounts
|
1,193,081 | 1,292,965 | 1,356,494 | |||||||||
|
Insurance and other commissions
|
548,828 | 476,734 | 271,078 | |||||||||
|
Other operating income
|
1,260,900 | 1,086,890 | 1,193,991 | |||||||||
|
Income on bank owned life insurance
|
336,727 | 330,756 | 336,459 | |||||||||
|
Other than temporary impairment losses
|
(65,158 | ) | (1,751,169 | ) | (1,758,730 | ) | ||||||
|
Gain (loss) on the sale of securities (note 4)
|
413,970 | (2,424 | ) | 78,173 | ||||||||
|
|
||||||||||||
|
Total Noninterest Income
|
3,688,348 | 1,433,752 | 1,477,465 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest Expenses
|
||||||||||||
|
Salaries
|
5,126,414 | 5,037,699 | 5,131,045 | |||||||||
|
Employee benefits (note 13)
|
1,615,222 | 1,690,834 | 1,491,847 | |||||||||
|
Occupancy expense
|
551,334 | 563,923 | 578,735 | |||||||||
|
Equipment expense
|
590,822 | 592,075 | 564,410 | |||||||||
|
Amortization of intangibles (notes 2 and 22)
|
275,942 | 275,942 | 275,942 | |||||||||
|
FDIC insurance assessment
|
1,207,333 | 934,864 | 144,308 | |||||||||
|
Other operating expenses
|
3,374,177 | 3,092,799 | 2,911,190 | |||||||||
|
|
||||||||||||
|
Total Noninterest Expenses
|
12,741,244 | 12,188,136 | 11,097,477 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income before Income Taxes
|
5,512,034 | 2,369,211 | 4,611,350 | |||||||||
|
|
||||||||||||
|
Income Tax Expense
(note 12)
|
1,681,392 | 339,309 | 1,418,628 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Consolidated Net Income
|
3,830,642 | 2,029,902 | 3,192,722 | |||||||||
|
|
||||||||||||
|
Net Income — Noncontrolling interest
|
(89,982 | ) | (75,880 | ) | 11,294 | |||||||
|
|
||||||||||||
|
Net Income-F & M Bank Corp.
|
$ | 3,740,660 | $ | 1,954,022 | $ | 3,204,016 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Per Share Data
|
||||||||||||
|
Net Income
|
1.63 | .85 | 1.38 | |||||||||
|
|
||||||||||||
|
Cash Dividends
|
.60 | .84 | .90 | |||||||||
|
|
||||||||||||
|
Average Common Shares Outstanding
|
2,299,294 | 2,291,845 | 2,318,998 | |||||||||
|
|
||||||||||||
The accompanying notes are an integral part of this statement.
34
Table of Contents
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
For the years ended December 31, 2010, 2009 and 2008
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Comprehensive | ||||||||||||||||||||||||
| Common | Capital | Retained | Noncontrolling | Income | ||||||||||||||||||||
| Stock | Surplus | Earnings | Interest | (Loss) | Total | |||||||||||||||||||
|
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 | (11,294 | ) | 3,192,722 | ||||||||||||||||||||
|
Minority Interest Contributed
Capital (Distributions)
|
58,123 | 58,123 | ||||||||||||||||||||||
|
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 | |||||||||||||||||||||
|
Minority Interest Contributed
Capital (Distributions)
|
||||||||||||||||||||||||
|
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 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||
|
Net income
|
3,740,660 | 89,982 | 3,830,642 | |||||||||||||||||||||
|
Minority Interest Contributed
Capital (Distributions)
|
(26,558 | ) | (26,558 | ) | ||||||||||||||||||||
|
Net change in other comprehensive
income (note 2)
|
260,331 | 260,331 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Comprehensive Income
|
4,064,415 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Dividends on common stock
|
(1,033,632 | ) | (1,033,632 | ) | ||||||||||||||||||||
|
Stock issued (11,033 shares)
|
55,165 | 140,918 | 196,083 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance December 31, 2010
|
$ | 11,530,430 | $ | 30,837,090 | $ | 186,133 | $ | (324,305 | ) | $ | 42,229,348 | |||||||||||||
|
|
||||||||||||||||||||||||
The accompanying notes are an integral part of this statement.
35
Table of Contents
F & M Bank Corp. and Subsidiaries
For the years ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 3,740,660 | $ | 1,954,022 | $ | 3,204,016 | ||||||
|
Adjustments to reconcile net income to net cash
|
||||||||||||
|
provided by (used in) operating activities:
|
||||||||||||
|
(Gain) loss on the sale of securities
|
(413,970 | ) | 2,424 | (78,173 | ) | |||||||
|
Other than temporary impairment losses
|
65,158 | 1,751,169 | 1,758,730 | |||||||||
|
Depreciation
|
635,706 | 654,401 | 630,314 | |||||||||
|
Amortization (Accretion) of securities
|
50,031 | 27,383 | (29,717 | ) | ||||||||
|
Net decrease (increase) in loans held for sale
|
7,403,526 | (27,387,476 | ) | (3,780,287 | ) | |||||||
|
Provision for loan losses
|
4,300,000 | 4,210,000 | 815,000 | |||||||||
|
Benefit for deferred taxes
|
(350,392 | ) | (694,041 | ) | (159,824 | ) | ||||||
|
(Increase) decrease in interest receivable
|
36,386 | 18,550 | (124,187 | ) | ||||||||
|
(Increase) decrease in other assets
|
710,961 | (3,187,314 | ) | (69,785 | ) | |||||||
|
Increase (decrease) in accrued expenses
|
233,194 | (15,740 | ) | 538,980 | ||||||||
|
Change in pension liability
|
38,002 | 852,683 | (1,835,082 | ) | ||||||||
|
Amortization of limited partnership investments
|
407,537 | 370,808 | 431,584 | |||||||||
|
Gain on sale of other real estate owned
|
(49,828 | ) | ||||||||||
|
Amortization of intangibles
|
275,942 | 275,942 | 275,942 | |||||||||
|
Gain on sale of property and equipment
|
(1,902 | ) | ||||||||||
|
Income from life insurance investment
|
(290,167 | ) | (288,818 | ) | (298,952 | ) | ||||||
|
|
||||||||||||
|
Net Cash Provided by (Used in) Operating
Activities
|
16,792,746 | (21,456,007 | ) | 1,276,657 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
(Increase) decrease in interest bearing bank deposits
|
(2,862,007 | ) | 1,097,294 | 1,969,600 | ||||||||
|
Purchase of securities held to maturity
|
(110,000 | ) | — | |||||||||
|
Proceeds from maturities of securities held to maturity
|
110,062 | — | ||||||||||
|
Proceeds from maturities of securities available for sale
|
1,859,712 | 17,618,208 | 23,843,841 | |||||||||
|
Proceeds from sales of securities available for sale
|
23,630,342 | 32,228 | 1,511,286 | |||||||||
|
Purchases of securities available for sale
|
(23,149,597 | ) | (12,724,664 | ) | (22,654,078 | ) | ||||||
|
Net increase in loans held for investment
|
(15,912,135 | ) | (38,259,840 | ) | (82,381,163 | ) | ||||||
|
Purchase of property and equipment
|
(348,696 | ) | (276,777 | ) | (864,047 | ) | ||||||
|
Proceeds from sale of other real estate owned
|
1,880,285 | |||||||||||
|
|
||||||||||||
|
Net Cash Used in Investing Activities
|
(14,902,034 | ) | (32,513,551 | ) | (78,574,561 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Net change in federal funds purchased
|
(2,932,000 | ) | ||||||||||
|
Net change in demand and savings deposits
|
22,728,095 | 46,713,540 | 8,147,063 | |||||||||
|
Net change in time deposits
|
(18,320,649 | ) | 31,704,568 | 35,518,478 | ||||||||
|
Net change in short-term debt
|
(3,729,917 | ) | (11,425,378 | ) | 10,699,236 | |||||||
|
Dividends paid in cash
|
(1,364,449 | ) | (1,932,332 | ) | (2,103,775 | ) | ||||||
|
Proceeds from long-term debt
|
11,250,000 | 27,400,000 | 39,747,500 | |||||||||
|
Proceeds for issuance of subordinated debt
|
7,229,000 | 2,715,000 | ||||||||||
|
Payments to repurchase common stock
|
(54,276 | ) | (1,805,517 | ) | ||||||||
|
Proceeds from issuance of common stock
|
196,083 | 173,071 | 118,135 | |||||||||
|
Repayments of long-term debt
|
(22,595,238 | ) | (32,350,131 | ) | (4,130,953 | ) | ||||||
|
|
||||||||||||
|
Net Cash Provided by (Used in) Financing Activities
|
(4,607,075 | ) | 62,944,062 | 83,258,167 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
(2,716,363 | ) | 8,974,504 | 5,960,263 | ||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, Beginning of Year
|
23,640,285 | 14,665,781 | 8,705,518 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, End of Year
|
$ | 20,923,922 | $ | 23,640,285 | $ | 14,665,781 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Disclosure:
|
||||||||||||
|
Cash paid for:
|
||||||||||||
|
|
||||||||||||
|
Interest expense
|
$ | 10,394,986 | $ | 10,419,858 | $ | 10,646,216 | ||||||
|
Income taxes
|
720,000 | 720,000 | 950,000 | |||||||||
|
Transfers from loans to other real estate owned
|
2,944,033 | 525,897 | ||||||||||
|
Transfers from other real estate owned to fixed
assets
|
126,294 | |||||||||||
The
accompanying notes are an integral part of this statement.
36
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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.
37
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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.
Other Real Estate Owned (OREO)
As of December 31, 2010, we had $1.5 million classified as OREO on the balance sheet, compared to
$.5 million as of December 31, 2009. The table in Note 7 reflects the OREO activity in 2010.
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.
38
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is
charged to income over the estimated useful lives of the assets on a combination of the
straight-line and accelerated methods. The ranges of the useful lives of the premises and
equipment are as follows:
|
Buildings and Improvements
|
10-40 years | |
|
Furniture and Fixtures
|
5-20 years |
Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and
losses on dispositions are reflected in other income or expense.
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over ten years. Core deposit
intangibles, net of amortization totaled $45,771 and $321,932 at December 31, 2010 and 2009,
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 805, Business Combinations and ASC 350, Intangibles. ASC 805 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, 2010 and 2009. The goodwill is no longer amortized, but
instead tested for impairment at least annually. Based on the testing, there were no impairment
charges for 2010, 2009 or 2008.
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 2010, 2009, and 2008 were $191,449,
$223,762, and $295,214, respectively.
39
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Changes in:
|
||||||||||||
|
Net income
|
$ | 3,830,642 | $ | 2,029,902 | $ | 3,192,722 | ||||||
|
Minority Interest Contributed Capital (Distributions)
|
(26,558 | ) | 58,123 | |||||||||
|
Adjustment for initial adoption of ASC 325-960
funded status adjustment
|
(38,002 | ) | 852,683 | (1,835,082 | ) | |||||||
|
Tax effect
|
12,921 | (289,912 | ) | 623,928 | ||||||||
|
|
||||||||||||
|
Pension plan adjustment, net of tax
|
(25,081 | ) | 562,771 | (1,211,154 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Unrealized holding gains (losses)
on available-for-sale securities
|
781,254 | 865,875 | (2,742,769 | ) | ||||||||
|
Other than temporary impairment losses
|
65,158 | 1,751,169 | 1,758,730 | |||||||||
|
Reclassification adjustment for (gains) losses
realized in income
|
(413,970 | ) | 2,424 | (78,173 | ) | |||||||
|
|
||||||||||||
|
Net unrealized gains (losses)
|
432,442 | 2,619,468 | (1,062,212 | ) | ||||||||
|
Tax effect
|
147,030 | 890,619 | (361,152 | ) | ||||||||
|
|
||||||||||||
|
Unrealized holding gain (losses), net of tax
|
285,412 | 1,728,849 | (701,060 | ) | ||||||||
|
|
||||||||||||
|
Total other comprehensive income
|
$ | 4,064,415 | $ | 4,321,522 | $ | 1,338,631 | ||||||
|
|
||||||||||||
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, 2010.
40
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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.
Recent Accounting Pronouncements
Standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s financial position, results of operations or
cash flows.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through 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, 2010 and 2009.
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, 2010
|
||||||||||||||||
|
U. S. Treasuries
|
$ | 108,974 | $ | $ | $ | 108,974 | ||||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
U. S. Treasuries
|
$ | 109,813 | $ | — | $ | — | $ | 109,813 | ||||||||
|
|
||||||||||||||||
41
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010
|
||||||||||||||||
|
Government sponsored enterprises
|
$ | 7,997,077 | $ | 7,020 | $ | 3,415 | $ | 8,000,682 | ||||||||
|
Mortgage-backed obligations of
federal agencies
|
3,723,928 | 209,386 | 2,353 | 3,930,961 | ||||||||||||
|
Marketable equities
|
2,642,833 | 710,857 | 38,809 | 3,314,881 | ||||||||||||
|
Corporate bonds
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Securities Available for Sale
|
$ | 14,363,838 | $ | 927,263 | $ | 44,577 | $ | 15,246,524 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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 | ||||||||||||
|
Corporate bonds
|
280,800 | 223,730 | 504,530 | |||||||||||||
|
|
||||||||||||||||
|
Total Securities Available for Sale
|
$ | 15,920,538 | $ | 800,340 | $ | 291,345 | $ | 16,429,533 | ||||||||
|
|
||||||||||||||||
The amortized cost and fair value of securities at December 31, 2010, 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
|
$ | 108,974 | $ | 108,974 | $ | $ | ||||||||||
|
Due after one year through five years
|
7,997,077 | 8,000,682 | ||||||||||||||
|
Due after five years
|
3,723,928 | 3,930,961 | ||||||||||||||
|
|
||||||||||||||||
|
|
108,974 | 108,974 | 11,721,005 | 11,931,643 | ||||||||||||
|
Marketable equities
|
2,642,833 | 3,314,881 | ||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 108,974 | $ | 108,974 | $ | 14,363,838 | $ | 15,246,524 | ||||||||
|
|
||||||||||||||||
There were no sales of debt securities during 2010, 2009, or 2008. Following is a table reflecting
gains and losses on equity securities:
| 2010 | 2009 | 2008 | ||||||||||
|
Gains
|
$ | 506,379 | $ | 2,475 | $ | 244,181 | ||||||
|
Losses
|
(92,409 | ) | (4,899 | ) | (166,008 | ) | ||||||
|
|
||||||||||||
|
Net Gains
|
$ | 413,970 | $ | (2,424 | ) | $ | 78,173 | |||||
|
|
||||||||||||
The carrying value (which approximates fair value) of securities pledged by the Bank to secure
deposits and for other purposes amounted to $8,019,000 at December 31, 2010 and $15,229,000 at
December 31, 2009.
42
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Other investments consist of investments in fourteen low-income housing and historic equity
partnerships (carrying basis of $3,797,000), stock in the Federal Home Loan Bank (carrying basis of
$4,059,000), 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, 2010. At December 31, 2010, the
Company was committed to invest an additional $2,043,299 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 | |||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
Government sponsored
enterprises
|
$ | 2,004 | $ | (4 | ) | $ | $ | $ | 2,004 | $ | (4 | ) | ||||||||||||
|
Mortgage backed
obligations
|
260 | (2 | ) | 260 | (2 | ) | ||||||||||||||||||
|
Marketable equities
|
575 | (39 | ) | 575 | (39 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 2,004 | $ | (4 | ) | $ | 835 | $ | (41 | ) | $ | 2,839 | $ | (45 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
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 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
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 $65,000, $1,751,000, and
$1,759,000 in the carrying basis of its equity holdings in 2010, 2009, and 2008, 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.
43
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Loans held for investment as of December 31
:
| 2010 | 2009 | |||||||
|
Real Estate
|
||||||||
|
Construction
|
$ | 79,336,716 | $ | 86,319,632 | ||||
|
Mortgage
|
202,420,540 | 191,381,547 | ||||||
|
Commercial and agricultural
|
141,252,566 | 134,992,512 | ||||||
|
Installment
|
19,042,600 | 19,247,550 | ||||||
|
Credit cards
|
2,770,826 | 2,355,510 | ||||||
|
Other
|
323,979 | 106,165 | ||||||
|
|
||||||||
|
Total
|
$ | 445,147,227 | $ | 434,402,916 | ||||
|
|
||||||||
The Company has pledged loans as collateral for borrowings with the Federal Home Loan Bank of
Atlanta totaling $150,813,000 and $155,632,000 as of December 31, 2010 and 2009, 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):
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| December 31, 2010 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
|
Impaired loans without a valuation allowance:
|
||||||||||||||||||||
|
Real Estate
|
$ | 5,680 | $ | 5,680 | $ | 2,015 | $ | 84 | ||||||||||||
|
Commerical
|
888 | 888 | 606 | 19 | ||||||||||||||||
|
Home Equity
|
673 | 673 | 260 | 5 | ||||||||||||||||
|
Other
|
247 | 247 | 292 | |||||||||||||||||
|
|
||||||||||||||||||||
|
Impaired loans with a valuation allowance
|
||||||||||||||||||||
|
Real Estate
|
6,942 | 6,942 | 1,003 | 2,881 | 211 | |||||||||||||||
|
Commerical
|
1,149 | 1,149 | 161 | 5,013 | 17 | |||||||||||||||
|
Home Equity
|
439 | 439 | 118 | 333 | 11 | |||||||||||||||
|
Other
|
7 | 7 | 1 | 5 | 12 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total impaired loans
|
$ | 16,025 | $ | 16,025 | $ | 1,283 | $ | 11,405 | $ | 359 | ||||||||||
|
|
||||||||||||||||||||
The Recorded Investment is defined as the principal balance, net of deferred fees, less principal
payments and charge-offs.
As of December 31, 2009 there were $8,935,000 in impaired loans, of which $1,241,000 were impaired
without a valuation allowance and $7,694,000 were impaired with a valuation allowance. The related
allowance for impaired loans for 2009 was $986,000.
44
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Loans held for sale consists of loans originated by VBS Mortgage and the Bank’s commitment to
purchase up to $35,000,000 in residential mortgage loan participations from Gateway Bank. The loans
purchased from Gateway are originated by a network of mortgage loan originators throughout the
United States. A take out commitment is in place at the time the loans are purchased. The Bank
receives certain loan documents daily for review, makes its purchase decision and wires funds to
Gateway Bank. Typically loans for both VBS Mortgage and Gateway Bank are held on our books for
approximately two weeks until purchased by the ultimate holder in the secondary market.
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
:
| 2010 | 2009 | |||||||
|
Real Estate
|
$ | 23,764,237 | $ | 31,167,763 | ||||
A summary of changes in the allowance for loan losses is shown in the following schedule:
| 2010 | 2009 | 2008 | ||||||||||
|
Balance, beginning of year
|
$ | 3,835,698 | $ | 2,189,261 | $ | 1,702,501 | ||||||
|
Provision charged to operating expenses
|
4,300,000 | 4,210,000 | 815,000 | |||||||||
|
Loan recoveries
|
133,206 | 75,997 | 71,751 | |||||||||
|
Loans charged off
|
(2,483,271 | ) | (2,639,560 | ) | (399,991 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 5,785,633 | $ | 3,835,698 | $ | 2,189,261 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Percentage of loans held for investment
|
1.30 | % | .88 | % | .55 | % | ||||||
45
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Allowance for Loan Losses and Recorded Investment in Loan Receivables (in thousands)
| December 31, 2010 | Commercial | Real Estate | Home Equity | Credit Cards | Consumer | Unallocated | Total | |||||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||||||
|
Ending Balance
|
$ | 1,724 | $ | 1,814 | $ | 407 | $ | 59 | $ | 111 | $ | 1,671 | $ | 5,786 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending Balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated
for impairment (specific
reserve)
|
161 | 1,003 | 118 | 1 | 1,283 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending Balance:
|
||||||||||||||||||||||||||||
|
Collectively evaluated
for impairment
|
1,563 | 811 | 289 | 59 | 110 | 1,671 | 4,503 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Loans Receivable:
|
||||||||||||||||||||||||||||
|
Ending balance
|
$ | 153,511 | $ | 214,906 | $ | 54,593 | $ | 2,771 | $ | 19,366 | $ | 445,147 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated
for impairment
|
$ | 12,406 | $ | 16,806 | $ | 1,538 | $ | 1,099 | $ | 31,849 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending Balance:
|
||||||||||||||||||||||||||||
|
Collectively evaluated
for impairment
|
$ | 141,105 | $ | 198,100 | $ | 53,055 | $ | 2,771 | $ | 18,267 | $ | 413,298 | ||||||||||||||||
Aging of Past Due Loans Receivable (in thousands)
| Greater than 90 | Recorded Investment | |||||||||||||||||||||||||||||||
| Days (excluding | Total Loan | > 90 Days & | ||||||||||||||||||||||||||||||
| 30-59 Days Past due | 60-89 Days Past Due | non-accrual) | Total Past Due | Non-Accrual Loans | Current | Receivable | Accruing | |||||||||||||||||||||||||
|
Commercial
|
$ | 756 | $ | 382 | $ | 4,581 | $ | 5,719 | $ | 1,656 | $ | 146,137 | $ | 153,512 | $ | 4,581 | ||||||||||||||||
|
Real Estate
|
6,303 | 1,395 | 3,021 | 10,719 | 5,189 | 198,998 | 214,906 | 3,021 | ||||||||||||||||||||||||
|
Home Equity
|
1,302 | 595 | 588 | 2,485 | 715 | 51,392 | 54,592 | 588 | ||||||||||||||||||||||||
|
Credit Cards
|
19 | 6 | 25 | 2,746 | 2,771 | |||||||||||||||||||||||||||
|
Consumer
|
1,240 | 67 | 54 | 1,361 | 30 | 17,975 | 19,366 | 54 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 9,620 | $ | 2,445 | $ | 8,244 | $ | 20,309 | $ | 7,590 | $ | 417,248 | $ | 445,147 | $ | 8,244 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
46
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
CREDIT QUALITY INDICATORS
AS OF DECEMBER 31, 2010
AS OF DECEMBER 31, 2010
Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
Credit Risk Profile by Creditworthiness Category
| Real Estate | Commercial | Home Equity | ||||||||||
|
Grade 1 — Minimal Risk
|
$ | 69,231 | $ | 174,582 | ||||||||
|
Grade 2 — Modest Risk
|
817,827 | 1,678,841 | 574,374 | |||||||||
|
Grade 3 — Average Risk
|
30,041,586 | 16,254,057 | 7,942,935 | |||||||||
|
Grade 4 — Acceptable Risk
|
107,027,580 | 77,472,242 | 37,848,295 | |||||||||
|
Grade 5 — Marginally Acceptable
|
40,163,358 | 40,908,350 | 5,473,349 | |||||||||
|
Grade 6 — Watch
|
16,785,371 | 7,781,021 | 904,542 | |||||||||
|
Grade 7 — Substandard
|
19,718,886 | 8,639,726 | 1,849,301 | |||||||||
|
Grade 8 — Doubtful
|
281,678 | 602,691 | ||||||||||
|
Total
|
$ | 214,905,517 | $ | 153,511,510 | $ | 54,592,796 | ||||||
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Credit Risk Profile Based on Payment Activity
| Credit Cards | Consumer | |||||||||||
|
Performing
|
$ | 2,770,826 | $ | 19,311,799 | ||||||||
|
Non performing
|
54,779 | |||||||||||
|
Total
|
$ | 2,770,826 | $ | 19,366,578 | ||||||||
Bank premises and equipment as of December 31 are summarized as follows:
| 2010 | 2009 | |||||||
|
Land
|
$ | 1,488,270 | $ | 1,145,204 | ||||
|
Buildings and improvements
|
6,696,666 | 6,883,232 | ||||||
|
Furniture and equipment
|
5,064,375 | 4,964,684 | ||||||
|
|
||||||||
|
|
13,249,311 | 12,993,120 | ||||||
|
Less — accumulated depreciation
|
(6,456,817 | ) | (5,913,616 | ) | ||||
|
|
||||||||
|
Net
|
$ | 6,792,494 | $ | 7,079,504 | ||||
|
|
||||||||
Provisions for depreciation of $635,706 in 2010, $654,401 in 2009, and $630,314 in 2008 were
charged to operations.
47
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The table below reflects OREO activity for 2010:
Other Real Estate Owned
(dollars in thousands)
(dollars in thousands)
|
Balance as of January 1, 2010
|
$ | 525,897 | ||
|
Property acquired at foreclosure
|
2,961,064 | |||
|
Capital improvements on foreclosed property
|
32,817 | |||
|
Transfers to fixed assets
|
(126,294 | ) | ||
|
Sales of foreclosed properties
|
(1,880,285 | ) | ||
|
Valuation adjustments
|
||||
|
Balance as of December 31, 2010
|
$ | 1,513,199 | ||
|
|
||||
The composition of deposits at December 31, 2010 and 2009 was as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Noninterest bearing demand deposits
|
$ | 58,497,146 | $ | 53,475,063 | ||||
|
|
||||||||
|
Savings and interest bearing demand deposits:
|
||||||||
|
Interest checking accounts
|
116,889,368 | 100,714,025 | ||||||
|
Savings accounts
|
35,759,634 | 34,228,965 | ||||||
|
|
||||||||
|
Time Deposits:
|
||||||||
|
Balances of less than $100,000
|
133,844,576 | 132,895,542 | ||||||
|
Balances of $100,000 and more
|
80,060,033 | 99,329,716 | ||||||
|
|
||||||||
|
Total Deposits
|
$ | 425,050,757 | $ | 420,643,311 | ||||
|
|
||||||||
At December 31, 2010, the scheduled maturities of time deposits are as follows:
|
2011
|
$ | 115,660,783 | ||
|
2012
|
55,966,363 | |||
|
2013
|
14,233,557 | |||
|
2014
|
14,636,158 | |||
|
2015
|
13,407,748 | |||
|
|
||||
|
Total
|
$ | 213,904,609 | ||
|
|
||||
48
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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 | ||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Short term note
|
||||||||||||||||||||
|
Federal funds purchased
|
4,095,000 | 470,493 | .55 | % | ||||||||||||||||
|
FHLB daily rate credit
|
||||||||||||||||||||
|
Securities sold under
agreements
to repurchase
|
7,094,873 | 5,354,992 | 5,501,560 | .48 | % | .48 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Totals
|
$ | 5,354,992 | $ | 5,972,053 | .52 | % | .48 | % | ||||||||||||
|
|
||||||||||||||||||||
|
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 | % | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 | % | ||||||||||||
|
|
||||||||||||||||||||
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.
As of December 31, 2010, the Company had lines of credit with correspondent banks totaling
$15,000,000, which may be used in the management of short-term liquidity.
49
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
New borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $11,250,000 in 2010,
$22,250,000 in 2009, and $34,747,000 in 2008. The interest rates on the notes payable are fixed at
the time of the advance and range from 2.07% to 4.82%; the weighted average interest rate was 3.12%
and 3.23% at December 31, 2010 and 2009, respectively. The balance of these obligations at
December 31, 2010 was $45,035,000. The long-term debt is secured by qualifying mortgage loans owned
by the Company.
In November 2009, the Company entered into an agreement with Page Valley Bank (and several
sub-participants) to refinance the Silverton Bank line of credit which was used for general
corporate purposes, as a five year, fixed rate, amortizing loan at 6%. The repayment terms include
quarterly payments of $250,000 plus interest beginning in February 2010. The balance of this line
of credit at December 31, 2010 was $4,000,000.
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, 2010 the balance outstanding was $9,944,000. 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.
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, 2010 are as follows:
|
2011
|
$ | 3,928,571 | ||
|
2012
|
17,892,857 | |||
|
2013
|
17,214,286 | |||
|
2014
|
9,999,750 | |||
|
Thereafter
|
9,944,000 | |||
|
|
||||
|
Total
|
$ | 58,979,464 | ||
|
|
||||
50
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The components of the income tax expense are as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Current expense
|
||||||||||||
|
Federal
|
$ | 2,031,784 | $ | 1,033,350 | $ | 1,578,452 | ||||||
|
Deferred benefit
|
||||||||||||
|
Federal
|
(415,964 | ) | (678,041 | ) | (140,074 | ) | ||||||
|
State
|
65,572 | (16,000 | ) | (19,750 | ) | |||||||
|
|
||||||||||||
|
Total Income Tax Expense
|
$ | 1,681,392 | $ | 339,309 | $ | 1,418,628 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Amounts in above arising from gains
|
||||||||||||
|
(losses) on security transactions
|
$ | 56,094 | $ | (550,660 | ) | $ | (402,807 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
The deferred tax effects of temporary differences are as follows:
|
||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
LIH Partnership Losses
|
(15,658 | ) | (21,505 | ) | (32,850 | ) | ||||||
|
Securities impairment
|
50,239 | (549,836 | ) | (378,759 | ) | |||||||
|
Local & Historic State Credits Recognized
|
65,572 | (16,000 | ) | (19,750 | ) | |||||||
|
Provision for loan losses
|
(529,905 | ) | (404,016 | ) | (165,498 | ) | ||||||
|
Non-qualified deferred compensation
|
(32,669 | ) | 30,072 | (4,460 | ) | |||||||
|
Depreciation
|
(53,330 | ) | 48,163 | 143,858 | ||||||||
|
Core deposit intangible amortization
|
(33,113 | ) | (33,113 | ) | (33,113 | ) | ||||||
|
Pension expense
|
243,639 | 190,722 | 269,154 | |||||||||
|
Goodwill tax amortization
|
61,424 | 61,424 | 61,424 | |||||||||
|
Secondary accrual on nonaccrual loans
|
(106,695 | ) | ||||||||||
|
Other
|
104 | 48 | 170 | |||||||||
|
|
||||||||||||
|
Deferred Income Tax Expense (Benefit)
|
$ | (350,392 | ) | $ | (694,041 | ) | $ | (159,824 | ) | |||
|
|
||||||||||||
The components of the deferred taxes as of December 31 are as follows:
| Deferred Tax Assets: | 2010 | 2009 | ||||||
|
Allowance for loan losses
|
$ | 1,524,022 | $ | 994,117 | ||||
|
Split Dollar Life Insurance
|
4,892 | 4,892 | ||||||
|
Nonqualified deferred compensation
|
378,152 | 345,483 | ||||||
|
Secondary accrual on nonaccrual loans
|
106,693 | |||||||
|
Securities impairment
|
1,118,078 | 1,179,426 | ||||||
|
Core deposit amortization
|
298,019 | 264,906 | ||||||
|
State historic tax credits
|
116,332 | 292,184 | ||||||
|
Securities available for sale
|
(129,337 | ) | (34,260 | ) | ||||
|
Bank owned life insurance
|
497,012 | 484,091 | ||||||
|
Other
|
906 | 977 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 3,914,769 | $ | 3,531,816 | ||||
|
|
||||||||
| Deferred Tax Liabilities: | 2010 | 2009 | ||||||
|
Unearned low income housing credits
|
$ | 723,315 | $ | 762,373 | ||||
|
Depreciation
|
268,780 | 322,110 | ||||||
|
Pension
|
1,010,413 | 766,774 | ||||||
|
Goodwill tax amortization
|
604,003 | 542,578 | ||||||
|
Securities available for sale
|
71,617 | 105,560 | ||||||
|
Other
|
52,002 | 51,628 | ||||||
|
|
||||||||
|
Total Liabilities
|
2,730,130 | 2,551,023 | ||||||
|
|
||||||||
|
Deferred Tax Asset (Liability)
|
$ | 1,184,639 | $ | 980,793 | ||||
|
|
||||||||
51
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The following table summarizes the differences between the actual income tax expense and the
amounts computed using the federal statutory tax rates:
| 2010 | 2009 | 2008 | ||||||||||
|
Tax expense at federal statutory rates
|
$ | 1,843,498 | $ | 779,734 | $ | 1,571,699 | ||||||
|
Increases (decreases) in taxes resulting from:
|
||||||||||||
|
State income taxes, net
|
3,372 | 3,514 | 4,497 | |||||||||
|
Partially exempt income
|
(74,495 | ) | (64,592 | ) | (19,524 | ) | ||||||
|
Tax-exempt income
|
(154,571 | ) | (157,454 | ) | (170,210 | ) | ||||||
|
Prior year LIH credits
|
121,569 | (27,521 | ) | (27,356 | ) | |||||||
|
Other
|
(57,981 | ) | (194,372 | ) | 59,522 | |||||||
|
|
||||||||||||
|
Total Income Tax Expense
|
$ | 1,681,392 | $ | 339,309 | $ | 1,418,628 | ||||||
|
|
||||||||||||
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 2010, 2009 and 2008:
| 2010 | 2009 | 2008 | ||||||||||
|
Change in Benefit Obligation
|
||||||||||||
|
Benefit obligation, beginning
|
$ | 5,311,851 | $ | 4,582,997 | $ | 4,111,188 | ||||||
|
Service cost
|
387,915 | 358,799 | 402,976 | |||||||||
|
Interest cost
|
317,001 | 273,333 | 320,270 | |||||||||
|
Actuarial gain (loss)
|
326,634 | 110,390 | 46,725 | |||||||||
|
Benefits paid
|
(485,118 | ) | (13,668 | ) | (298,162 | ) | ||||||
|
|
||||||||||||
|
Benefit obligation, ending
|
$ | 5,858,283 | $ | 5,311,851 | $ | 4,582,997 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Change in Plan Assets
|
||||||||||||
|
Fair value of plan assets, beginning
|
$ | 5,092,910 | $ | 3,948,698 | $ | 4,072,435 | ||||||
|
Actual return on plan assets
|
710,128 | 1,157,880 | (1,325,575 | ) | ||||||||
|
Employer contribution
|
1,000,000 | 1,500,000 | ||||||||||
|
Benefits paid
|
(485,118 | ) | (13,668 | ) | (298,162 | ) | ||||||
|
|
||||||||||||
|
Fair value of plan assets, ending
|
6,317,920 | 5,092,910 | 3,948,698 | |||||||||
|
|
||||||||||||
|
Funded status at the end of the year
|
$ | 459,637 | $ | (218,941 | ) | $ | (634,299 | ) | ||||
|
|
||||||||||||
The fair value of plan assets is measured based on the fair value hierarchy as discussed in
Note 20, “Fair Value Measurements” to the Consolidated Financial Statements. The valuations are
based on third party data received as of the balance sheet date. All plan assets are considered
Level 1 assets, as quoted prices exist in active markets for identical assets.
52
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 13 EMPLOYEE BENEFITS (CONTINUED):
| 2010 | 2009 | 2008 | ||||||||||
|
Amount recognized in the Balance Sheet
|
||||||||||||
|
Accrued prepaid benefit cost
|
$ | 1,921,434 | $ | 1,204,854 | $ | 1,642,179 | ||||||
|
Unfunded pension benefit obligation under ASC 325-960
|
(1,461,797 | ) | (1,423,795 | ) | (2,276,478 | ) | ||||||
|
|
||||||||||||
|
Amount recognized in accumulated other
|
||||||||||||
|
comprehensive income
|
||||||||||||
|
Net Gain/(Loss)
|
$ | (1,602,882 | ) | $ | (1,570,180 | ) | $ | (2,428,163 | ) | |||
|
Prior service cost
|
141,085 | 146,385 | 151,685 | |||||||||
|
Net obligation at transition
|
||||||||||||
|
Amount recognized
|
(1,461,797 | ) | (1,423,795 | ) | (2,276,478 | ) | ||||||
|
Deferred Taxes
|
497,012 | 484,091 | 774,003 | |||||||||
|
|
||||||||||||
|
Amount recognized in accumulated
|
||||||||||||
|
comprehensive income
|
$ | (964,785 | ) | $ | (939,704 | ) | $ | (1,502,475 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
(Accrued) Prepaid benefit detail
|
||||||||||||
|
Benefit obligation
|
$ | (5,858,283 | ) | $ | (5,311,851 | ) | $ | (4,582,997 | ) | |||
|
Fair value of assets
|
6,317,920 | 5,092,910 | 3,948,698 | |||||||||
|
Unrecognized net actuarial loss
|
1,602,882 | 1,570,180 | 2,428,163 | |||||||||
|
Unrecognized transition obligation
|
— | |||||||||||
|
Unrecognized prior service cost
|
(141,085 | ) | (146,385 | ) | (151,685 | ) | ||||||
|
|
||||||||||||
|
Prepaid (accrued) benefits
|
$ | 1,921,434 | $ | 1,204,854 | $ | 1,642,179 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||
|
Service cost
|
$ | 387,915 | $ | 358,799 | $ | 322,381 | ||||||
|
Interest cost
|
317,001 | 273,333 | 256,216 | |||||||||
|
Expected return on plan assets
|
(481,706 | ) | (313,710 | ) | (376,713 | ) | ||||||
|
Amortization of prior service cost
|
(5,300 | ) | (5,300 | ) | (5,300 | ) | ||||||
|
Amortization of transition obligation
|
— | |||||||||||
|
Recognized net actuarial (gain) loss
|
65,510 | 124,203 | 11,787 | |||||||||
|
|
||||||||||||
|
Net periodic benefit cost
|
$ | 283,420 | $ | 437,325 | $ | 208,371 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Additional disclosure information
|
||||||||||||
|
Accumulated benefit obligation
|
$ | 4,025,608 | $ | 3,538,352 | $ | 2,977,671 | ||||||
|
Vested benefit obligation
|
$ | 3,809,484 | $ | 3,398,034 | $ | 2,871,201 | ||||||
|
Discount rate used for net pension cost
|
5.50 | % | 6.00 | % | 6.25 | % | ||||||
|
Discount rate used for disclosure
|
5.50 | % | 6.00 | % | 6.00 | % | ||||||
|
Expected return on plan assets
|
8.00 | % | 8.00 | % | 8.50 | % | ||||||
|
Rate of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Average remaining service (years)
|
15 | 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 2011 contribution will be
$1,000,000 and pension cost for 2011 will be approximately $319,000.
53
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 13 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:
| 2010 | 2009 | |||||||
|
Mutual funds — equity
|
62 | % | 61 | % | ||||
|
Mutual funds —fixed income
|
38 | % | 38 | % | ||||
|
Cash and equivalents
|
0 | % | 1 | % | ||||
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
|
2011
|
$ | 25,441 | ||
|
2012
|
49,177 | |||
|
2013
|
75,158 | |||
|
2014
|
153,724 | |||
|
2015
|
175,299 | |||
|
2016-2020
|
1,332,976 | |||
|
|
||||
|
|
$ | 1,811,775 | ||
|
|
||||
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 $270,000 in 2010,
$180,000 in 2009, and $275,000 in 2008 to the Plan and charged this expense to operations. The
shares held by the ESOP totaled 132,845 and 123,908 at December 31, 2010 and 2009, respectively.
54
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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 from 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 $145,882, $142,853 and $116,422 in 2010, 2009 and 2008, respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for several of its key employees 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.
Contributions to the plan totaled $60,000 in 2010 and 2008. Due to the level of earnings, the
Company did not contribute to the plan in 2009.
The Company had cash deposits in other commercial banks totaling $2,374,947 and $3,062,630 at
December 31, 2010 and 2009, 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 $15,190,000. Other identified loan concentration areas greater than 25% of
capital include multi-family 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:
| 2010 | 2009 | |||||||
|
Commitments to loan money
|
$ | 91,198,417 | $ | 83,081,156 | ||||
|
Standby letters of credit
|
1,650,272 | 1,108,419 | ||||||
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.
55
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The Bank leases three of its branch offices on long term lease arrangements of either five or ten
years. Lease expense for 2010, 2009 and 2008 were $71,760, respectively. As of December 31, 2010,
the required lease payments for the next five years are as follows:
|
2011
|
$ | 77,760 | ||
|
2012
|
77,760 | |||
|
2013
|
77,760 | |||
|
2014
|
62,640 | |||
|
2015
|
48,600 |
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
assets and other liabilities on the balance sheet, is as follows:
| 2010 | 2009 | |||||||
|
Notional amount
|
$ | 125,787 | $ | 497,691 | ||||
|
Fair market value of contracts
|
10,831 | 13,295 | ||||||
56
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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:
| 2010 | 2009 | |||||||
|
Total loans, beginning of year
|
$ | 6,724,423 | $ | 7,246,384 | ||||
|
New loans
|
2,606,355 | 1,271,666 | ||||||
|
Relationship Change
|
1,548,727 | |||||||
|
Repayments
|
(3,283,636 | ) | (1,793,627 | ) | ||||
|
|
||||||||
|
Total loans, end of year
|
$ | 7,595,869 | $ | 6,724,423 | ||||
|
|
||||||||
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, 2011, approximately $3,422,000 was
available for dividend distribution without permission of the Board of Governors. Dividends paid
by the Bank to the Company totaled $920,000 in 2010, $2,428,000 in 2009 and $2,559,000 in 2008.
57
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010 and 2009 are as follows (in
thousands):
| 2010 | 2009 | |||||||||||||||
| Estimated | Carrying | Estimated | Carrying | |||||||||||||
| Fair Value | Value | Fair Value | Value | |||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Cash
|
$ | 4,586 | $ | 4,586 | $ | 5,314 | $ | 5,314 | ||||||||
|
Interest bearing deposits
|
2,927 | 2,927 | 65 | 65 | ||||||||||||
|
Federal funds sold
|
16,338 | 16,338 | 18,326 | 18,326 | ||||||||||||
|
Securities available for sale
|
15,247 | 15,247 | 16,430 | 16,430 | ||||||||||||
|
Securities held to maturity
|
109 | 109 | 110 | 110 | ||||||||||||
|
Other investments
|
8,789 | 8,789 | 9,681 | 9,681 | ||||||||||||
|
Loans
|
475,166 | 445,147 | 481,967 | 434,403 | ||||||||||||
|
Loan held for sale
|
23,764 | 23,764 | 31,168 | 31,168 | ||||||||||||
|
Bank owned life insurance
|
6,883 | 6,883 | 6,593 | 6,593 | ||||||||||||
|
Accrued interest receivable
|
2,001 | 2,001 | 2,038 | 2,038 | ||||||||||||
|
|
||||||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Demand Deposits:
|
||||||||||||||||
|
Non-interest bearing
|
58,497 | 58,497 | 53,475 | 53,475 | ||||||||||||
|
Interest bearing
|
116,889 | 116,889 | 100,714 | 100,714 | ||||||||||||
|
Savings deposits
|
35,760 | 35,760 | 34,229 | 34,229 | ||||||||||||
|
Time deposits
|
216,199 | 213,905 | 234,032 | 232,225 | ||||||||||||
|
Short-term debt
|
5,355 | 5,355 | 9,085 | 9,085 | ||||||||||||
|
Subordinated debt
|
9,944 | 9,944 | 2,715 | 2,715 | ||||||||||||
|
Long-term debt
|
51,566 | 49,035 | 61,216 | 60,381 | ||||||||||||
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.
58
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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.
Loans Held for Sale: Loans held for sale are short-term loans purchased at par for resale to
investors at the par value of the loan. These loans are generally repurchased within 15 days.
Because of the short-term nature and fixed repurchased price, the book value of these loans
approximates fair value.
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 (in thousands)
The table below presents the recorded amount of assets and liabilities measured at fair value on a
recurring basis.
| December 31, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Government sponsored enterprises
|
$ | 8,001 | $ | 8,001 | ||||||||||||
|
Mortgage-backed obligations of federal agencies
|
3,931 | 3,931 | ||||||||||||||
|
Marketable Equities
|
3,315 | 3,315 | ||||||||||||||
|
Investment securities available for sale
|
15,247 | 3,315 | 11,932 | |||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
$ | 15,247 | $ | 3,315 | $ | 11,932 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
||||||||||||||||
59
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
| December 31, 2009 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Government sponsored enterprises
|
$ | 6,012 | $ | 6,012 | ||||||||||||
|
Mortgage-backed obligations of federal agencies
|
6,170 | 6,170 | ||||||||||||||
|
Marketable Equities
|
3,743 | 3,743 | ||||||||||||||
|
Corporate Bonds
|
505 | 505 | — | |||||||||||||
|
|
||||||||||||||||
|
Investment securities available for sale
|
16,430 | 4,248 | 12,182 | |||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
$ | 16,430 | 4,248 | $ | 12,182 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
||||||||||||||||
Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis (in thousands)
The table below presents the recorded amount of assets and liabilities measured at fair value on a
non-recurring basis.
| December 31, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Loans Held for Sale
|
$ | 23,764 | $ | 23,764 | ||||||||||||
|
Other Real Estate Owned
|
1,513 | 1,513 | ||||||||||||||
|
|
||||||||||||||||
|
Real Estate
|
5,938 | 5,938 | ||||||||||||||
|
Commercial
|
988 | 988 | ||||||||||||||
|
Consumer
|
7 | 7 | ||||||||||||||
|
Home Equity
|
321 | 321 | ||||||||||||||
|
|
||||||||||||||||
|
Impaired loans
|
7,254 | 7,254 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
$ | 32,531 | $ | 32,531 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
||||||||||||||||
| December 31, 2009 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Loans Held for Sale
|
$ | 31,168 | $ | 31,168 | ||||||||||||
|
Other Real Estate Owned
|
526 | 526 | ||||||||||||||
|
|
||||||||||||||||
|
Real Estate
|
1,123 | 1,123 | ||||||||||||||
|
Commercial
|
5,585 | 5,585 | ||||||||||||||
|
Consumer
|
||||||||||||||||
|
Impaired loans
|
6,708 | 6,708 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
$ | 38,402 | $ | 38,402 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
||||||||||||||||
There were no significant transfers between levels 1 and 2.
60
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010, 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 January 12, 2009), 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 consolidated capital ratios are presented in the following table (dollars in
thousands):
| Analysis of Capital | Regulatory Requirements | |||||||||||||||||||
| At December 31, | Adequately | Well | ||||||||||||||||||
| 2010 | 2009 | 2008 | Capitalized | Capitalized | ||||||||||||||||
|
Tier1 capital:
|
||||||||||||||||||||
|
Common stock
|
$ | 11,530 | $ | 11,476 | $ | 11,447 | ||||||||||||||
|
Capital surplus
|
||||||||||||||||||||
|
Retained earnings
|
30,837 | 27,989 | 27,687 | |||||||||||||||||
|
Intangible assets
|
(2,716 | ) | (2,992 | ) | (3,268 | ) | ||||||||||||||
|
Accumulated other comprehensive income
|
502 | 150 | (1,614 | ) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total Tier 1 Capital
|
$ | 40,153 | $ | 36,623 | $ | 34,252 | ||||||||||||||
|
Tier 2 capital:
|
||||||||||||||||||||
|
Qualifying subordinated debt
|
$ | 9,944 | $ | 2,715 | ||||||||||||||||
|
Allowance for loan losses
|
5,146 | 3,836 | 2,189 | |||||||||||||||||
|
Unrealized gains on AFS equity securities
|
302 | 150 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total risked based capital
|
$ | 55,545 | $ | 43,324 | $ | 36,441 | ||||||||||||||
|
|
||||||||||||||||||||
|
Risk-weighted assets
|
$ | 411,065 | $ | 420,379 | $ | 362,851 | ||||||||||||||
|
Capital ratios:
|
||||||||||||||||||||
|
Total risk-based ratio
|
13.51 | % | 10.65 | % | 10.00 | % | 8.00 | % | 10.00 | % | ||||||||||
|
Tier 1 risk-based ratio
|
9.77 | % | 9.01 | % | 9.44 | % | 4.00 | % | 6.00 | % | ||||||||||
|
Total assets leverage ratio
|
7.37 | % | 7.08 | % | 7.64 | % | 3.00 | % | 5.00 | % | ||||||||||
61
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The actual capital ratios for the subsidiary bank are presented in the following table (dollars in
thousands):
| Analysis of Capital | Regulatory Requirements | |||||||||||||||||||
| At December 31, | Adequately | Well | ||||||||||||||||||
| 2010 | 2009 | 2008 | Capitalized | Capitalized | ||||||||||||||||
|
Tier1 capital:
|
||||||||||||||||||||
|
Common stock
|
$ | 500 | $ | 500 | $ | 500 | ||||||||||||||
|
Capital surplus
|
18,971 | 18,971 | 15,550 | |||||||||||||||||
|
Retained earnings
|
24,336 | 21,290 | 20,915 | |||||||||||||||||
|
Intangible assets
|
(2,716 | ) | (2,992 | ) | (3,237 | ) | ||||||||||||||
|
Accumulated other comprehensive income
|
251 | 84 | (1 | ) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total Tier 1 Capital
|
$ | 41,342 | $ | 37,853 | $ | 33,727 | ||||||||||||||
|
Tier 2 capital:
|
||||||||||||||||||||
|
Qualifying subordinated debt
|
$ | 9,944 | $ | 2,715 | ||||||||||||||||
|
Allowance for loan losses
|
5,107 | 3,836 | 2,168 | |||||||||||||||||
|
Unrealized gains on AFS securities
|
131 | 84 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Total risked based capital
|
$ | 56,524 | $ | 44,488 | $ | 35,895 | ||||||||||||||
|
|
||||||||||||||||||||
|
Risk-weighted assets
|
$ | 407,902 | $ | 415,802 | $ | 356,375 | ||||||||||||||
|
Capital ratios:
|
||||||||||||||||||||
|
Total risk-based ratio
|
13.86 | % | 10.70 | % | 10.07 | % | 8.00 | % | 10.00 | % | ||||||||||
|
Tier 1 risk-based ratio
|
10.14 | % | 9.10 | % | 9.46 | % | 4.00 | % | 6.00 | % | ||||||||||
|
Total assets leverage ratio
|
7.64 | % | 7.32 | % | 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, 2010, 2009 and 2008 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.
62
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Balance Sheets
December 31, 2010 and 2009
December 31, 2010 and 2009
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 279,671 | $ | 174,950 | ||||
|
Investment in subsidiaries
|
43,231,596 | 40,109,958 | ||||||
|
Securities available for sale
|
2,340,897 | 3,347,452 | ||||||
|
Limited partnership investments
|
228,826 | 1,814,800 | ||||||
|
Deferred income taxes
|
326,527 | 592,604 | ||||||
|
Other assets
|
211,442 | 61,839 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 46,618,959 | $ | 46,101,603 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Long term debt
|
$ | 3,999,750 | $ | 6,389,650 | ||||
|
Accrued interest payable
|
19,808 | 57,129 | ||||||
|
Other liabilities
|
264,748 | 44,882 | ||||||
|
Dividends payable
|
345,731 | |||||||
|
Due to subsidiaries
|
18,000 | 18,000 | ||||||
|
Demand obligations for low income
|
||||||||
|
housing investment
|
273,438 | 366,438 | ||||||
|
|
||||||||
|
Total Liabilities
|
4,575,744 | 7,221,830 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Common stock par value $5 per share, 6,000,000 shares
authorized, 2,306,086 and 2,295,053 shares issued and outstanding for 2010 and 2009, respectively
|
$ | 11,530,430 | $ | 11,475,265 | ||||
|
Capital surplus
|
||||||||
|
Retained earnings
|
30,837,090 | 27,989,144 | ||||||
|
Accumulated other comprehensive income (loss)
|
(324,305 | ) | (584,636 | ) | ||||
|
|
||||||||
|
Total Stockholders’ Equity
|
42,043,215 | 38,879,773 | ||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 46,618,959 | $ | 46,101,603 | ||||
|
|
||||||||
63
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 24 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
For the years ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Income
|
||||||||||||
|
Dividends from affiliate
|
$ | 920,000 | $ | 2,428,000 | $ | 2,809,000 | ||||||
|
Investment income
|
101 | 465 | ||||||||||
|
Dividend income
|
126,838 | 169,966 | 324,219 | |||||||||
|
Interest Income
|
64,777 | |||||||||||
|
Other than temporary impairment losses
|
(65,158 | ) | (1,617,165 | ) | (1,206,581 | ) | ||||||
|
Security gains (losses)
|
230,140 | (2,424 | ) | 21,855 | ||||||||
|
Net limited partnership income
|
11,941 | 192,597 | 101,518 | |||||||||
|
|
||||||||||||
|
Total Income
|
1,223,761 | 1,171,075 | 2,115,253 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Expenses
|
||||||||||||
|
Interest expense
|
265,581 | 233,627 | 219,492 | |||||||||
|
Administrative expenses
|
216,854 | 211,294 | 182,285 | |||||||||
|
|
||||||||||||
|
Total Expenses
|
482,435 | 444,921 | 401,777 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income
before income tax expense (benefit) and undistributed subsidiary net income
|
741,326 | 726,154 | 1,713,476 | |||||||||
|
|
||||||||||||
|
Income Tax Expense (Benefit)
|
46,532 | (824,542 | ) | (430,706 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income
before undistributed subsidiary net income
|
694,794 | 1,550,696 | 2,144,182 | |||||||||
|
|
||||||||||||
|
Undistributed subsidiary net income
|
3,045,866 | 403,326 | 1,059,834 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income
|
$ | 3,740,660 | $ | 1,954,022 | $ | 3,204,016 | ||||||
|
|
||||||||||||
|
Retained earnings, beginning of year
|
$ | 27,989,144 | $ | 27,686,745 | $ | 28,409,273 | ||||||
|
Adoption of FAS 106
|
(428,112 | ) | ||||||||||
|
Stock issuance
|
140,918 | 134,680 | — | |||||||||
|
Stock repurchase
|
(43,666 | ) | (1,415,417 | ) | ||||||||
|
Dividends on common stock
|
(1,033,632 | ) | (1,742,637 | ) | (2,083,015 | ) | ||||||
|
|
||||||||||||
|
Retained Earnings, End of Year
|
$ | 30,837,090 | $ | 27,989,144 | $ | 27,686,745 | ||||||
|
|
||||||||||||
64
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Statements of Cash Flows
For the years ended December 31, 2010, 2009 and 2008
For the years ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 3,740,660 | $ | 1,954,022 | $ | 3,204,016 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Undistributed subsidiary income
|
(3,045,866 | ) | (403,326 | ) | (1,059,834 | ) | ||||||
|
Gain (Loss) on sale of securities
|
(230,140 | ) | 2,424 | (21,855 | ) | |||||||
|
Other than temporary impairment losses
|
65,158 | 1,617,165 | 1,206,581 | |||||||||
|
Deferred tax (benefit) expense
|
(106,056 | ) | (276,118 | ) | (1,269 | ) | ||||||
|
Increase (decrease) in other assets
|
155,532 | (510,937 | ) | 144,130 | ||||||||
|
Increase (decrease) in other liabilities
|
74,631 | 261,568 | 97,407 | |||||||||
|
Net change in deferred tax credits
|
(28,080 | ) | (20,235 | ) | 15,931 | |||||||
|
Amortization of limited partnership investments
|
98,497 | 354,108 | 431,584 | |||||||||
|
|
||||||||||||
|
Net Cash Provided by Operating Activities
|
$ | 724,336 | $ | 2,978,671 | $ | 4,016,691 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Proceeds from sales of securities available for sale
|
$ | 1,543,261 | $ | 32,228 | $ | 1,511,286 | ||||||
|
Proceeds from maturities of securities available for sale
|
1,487,477 | 656,250 | ||||||||||
|
Change in loans receivable
|
1,089,167 | |||||||||||
|
Purchase of securities available for sale
|
(92,087 | ) | (253,222 | ) | (962,408 | ) | ||||||
|
Capital contributed to subsidiary
|
(5,500,000 | ) | ||||||||||
|
|
||||||||||||
|
Net Cash Provided by (Used in) Investing Activities
|
$ | 2,938,651 | $ | 435,256 | $ | (3,861,955 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Proceeds of long-term debt
|
$ | 7,229,000 | $ | 5,150,000 | $ | 5,650,000 | ||||||
|
Payments on long-term debt
|
(9,618,900 | ) | (6,019,706 | ) | (2,626,540 | ) | ||||||
|
Change in short term debt
|
(750,000 | ) | 750,000 | |||||||||
|
Payments to repurchase common stock
|
(54,276 | ) | (1,805,517 | ) | ||||||||
|
Proceeds from issuance of common stock
|
196,083 | 173,071 | 118,135 | |||||||||
|
Dividends paid in cash
|
(1,364,449 | ) | (1,932,332 | ) | (2,103,775 | ) | ||||||
|
|
||||||||||||
|
Net Cash Used in Financing Activities
|
(3,558,266 | ) | $ | (3,433,243 | ) | $ | (17,697 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Increase (decreases) in Cash and Cash Equivalents
|
104,721 | (19,316 | ) | 137,039 | ||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, Beginning of Year
|
$ | 174,950 | $ | 194,266 | $ | 57,227 | ||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, End of Year
|
$ | 279,671 | $ | 174,950 | $ | 194,266 | ||||||
|
|
||||||||||||
65
Table of Contents
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
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 mortgages for sale in the secondary market. As of December 31, 2010 and 2009, VBS’
summarized balance sheet and income statement were as follows:
Balance Sheets
December 31, 2010 and 2009
December 31, 2010 and 2009
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 392,707 | $ | 382,601 | ||||
|
Interest bearing deposits with banks
|
150,549 | |||||||
|
Property and equipment, net
|
41,867 | 36,688 | ||||||
|
Other Assets
|
222,330 | 127,448 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 807,453 | $ | 546,737 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Other liabilities
|
187,008 | 137,707 | ||||||
|
|
||||||||
|
Total Liabilities
|
187,008 | 137,707 | ||||||
|
|
||||||||
|
|
||||||||
|
Equity
|
||||||||
|
Capital
|
131,108 | 219,634 | ||||||
|
Retained earnings
|
489,337 | 189,396 | ||||||
|
|
||||||||
|
Total Equity
|
620,445 | 409,030 | ||||||
|
|
||||||||
|
Total Liabilities and Equity
|
$ | 807,453 | $ | 546,737 | ||||
|
|
||||||||
Statements of Income
For the years ended December 31, 2010 and 2009
For the years ended December 31, 2010 and 2009
| 2010 | 2009 | |||||||
|
Income
|
||||||||
|
Mortgage origination income
|
$ | 1,839,289 | $ | 1,740,801 | ||||
|
Other income
|
147 | 5,933 | ||||||
|
|
||||||||
|
Total Income
|
1,839,436 | 1,746,734 | ||||||
|
|
||||||||
|
|
||||||||
|
Expenses
|
||||||||
|
Interest expense
|
6 | |||||||
|
Salaries and employee benefits
|
937,007 | 775,521 | ||||||
|
Occupancy and equipment expense
|
120,503 | 111,583 | ||||||
|
Management and professional fees
|
330,224 | 382,076 | ||||||
|
Other
|
151,761 | 224,615 | ||||||
|
|
||||||||
|
Total Expenses
|
1,539,495 | 1,493,801 | ||||||
|
|
||||||||
|
|
||||||||
|
Net income (loss)
|
$ | 299,941 | $ | 252,933 | ||||
|
|
||||||||
66
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, 2010 and 2009, and the related consolidated statements of income, changes in
stockholders’ equity and comprehensive income and cash flows each of the three years in the period
ended December 31, 2010. 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. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements,
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,
2010 and 2009, and the results of their operations and their cash flows for the three years in the
period ended December 31, 2010 in conformity with U.S. generally accepted accounting principles.
Galax, Virginia
March 24, 2011
March 24, 2011
Table of Contents
None.
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, 2010 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.
Management is responsible
for establishing and maintaining adequate internal control over financial reporting (as such term
is defined in Rule 13a-15(f) and Rule 15d — 15(f) under the Exchange Act). Our internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on the financial statements.
Because of the inherent limitations in any internal control, no matter how well designed,
misstatements may occur and not be prevented or detected. Accordingly, even effective internal
control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Further, the evaluation of the effectiveness of internal control over
financial reporting was made as of a specific date, and continued effectiveness in future periods
is subject to the risks that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies and procedures may decline.
Management conducted an evaluation of the effectiveness of our system of internal control over
financial reporting as of December 31, 2010 based on the framework set forth in “Internal Control -
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on its evaluation, management concluded that, as of December 31, 2010, F&M’s
internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to provide only management’s report in
this annual report
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, 2010 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
None.
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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 2011
Annual Meeting of Shareholders to be held May 14, 2011 (“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.
This information is incorporated by reference from the Proxy Statement under the caption “Executive
Compensation.”
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.
This information is incorporated by reference from the Proxy Statement under the caption “Interest
of Directors and Officers in Certain Transactions.”
This information is incorporated by reference from the Proxy Statement under the caption “Principal
Accounting Fees.”
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 33 thru 67:
| 33 | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 67 |
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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)
(Registrant)
|
By:
|
/s/ Dean W. Withers | March 24, 2011 | ||
|
|
||||
|
|
Dean W. Withers | Date | ||
|
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Director, President and Chief Executive Officer | |||
|
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||||
|
By:
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/s/ Neil W. Hayslett | March 24, 2011 | ||
|
|
||||
|
|
Neil W. Hayslett | Date | ||
|
|
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, Chairman | March 24, 2011 | ||
|
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Thomas L. Cline
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Director | March 24, 2011 | ||
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John N. Crist
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/s/ Ellen R. Fitzwater
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Director | March 24, 2011 | ||
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Ellen R. Fitzwater
|
||||
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/s/ Daniel J. Harshman
|
Director | March 24, 2011 | ||
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Daniel J. Harshman
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||||
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Director | March 25, 2011 | ||
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Richard S. Myers
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Director | March 24, 2011 | ||
|
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||||
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Michael W. Pugh
|
||||
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||||
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/s/ Christopher S. Runion
|
Director | March 24, 2011 | ||
|
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||||
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Christopher S. Runion
|
||||
|
|
||||
|
|
Director | March 24, 2011 | ||
|
|
||||
|
Ronald E. Wampler
|
71
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. Description Of PropertiesItem 3. Legal ProceedingsItem 4. Removed and ReservedPart IIItem 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 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations, ContinuedItem 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 5 Loans (continued):Note 6 Allowance For Loan Losses:Note 6 Allowance For Loan Losses (continued):Note 6 Allowance For Loan Losses (continued)Note 7 Bank Premises and EquipmentNote 8 Other Real Estate OwnedNote 9 Deposits:Note 10 Short-term Debt:Note 11 Long-term Debt:Note 12 Income Tax Expense:Note 12 Income Tax Expense (continued):Note 13 Employee Benefits:Note 13 Employee Benefits (continued):Note 14 Concentrations Of Credit:Note 15 Commitments:Note 15 Commitments (continued):Note 16 on Balance Sheet Derivative Instruments and Hedging Activities:Note 17 Transactions with Related Parties:Note 18 Dividend Limitations on Subsidiary Bank:Note 19 Disclosures About Fair Value Of Financial Instruments:Note 20 Fair Value MeasurementsNote 20 Fair Value Measurements, ContinuedNote 21 Regulatory Matters:Note 21 Regulatory Matters Continued:Note 22 Intangibles:Note 23 Investment in Life Insurance ContractsNote 24 Parent Corporation Only Financial Statements:Note 24 Parent Corporation Only Financial Statements (continued):Note 25 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 ServicesPart IVItem 15. Exhibits and Financial Statement Schedules