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FMBM > SEC Filings for FMBM > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for F&M BANK CORP

Form 10-Q for F&M BANK CORP


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

F & M Bank Corp. (Company) 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, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly-owned subsidiaries of the Bank. The Bank also holds a majority ownership in VBS Mortgage LLC (VBS).

The Bank is a full service commercial bank offering a wide range of banking and financial services through its nine branch offices as well as its loan production offices located in Penn Laird, VA (which specializes in providing automobile financing through a network of automobile dealers) and in Fishersville, VA. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides title insurance, brokerage services and property/casualty insurance to customers of the Bank. VBS originates conventional and government sponsored mortgages through their offices in Harrisonburg and Woodstock, VA.

The Company's primary trade area services customers in Rockingham County, Shenandoah County, Page County and Augusta County.

Management's discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q.

Forward-Looking Statements

Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Such forward-looking statements involve known and unknown risks including, but not limited to:

? Changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;

? The strength of the economy in our target market area, as well as general economic, market, or business conditions;

? An insufficient allowance for loan losses as a result of inaccurate assumptions;

? Our ability to maintain our "well-capitalized" regulatory status;

? Changes in the interest rates affecting our deposits and our loans;

? Changes in our competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets;

? Our ability to manage growth;

? Our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;

? Our exposure to operational risk;

? Our ability to raise capital as needed by our business;

? Changes in laws, regulations and the policies of federal or state regulators and agencies; and

? Other circumstances, many of which are beyond our control.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

Forward-Looking Statements (continued)

Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

Critical Accounting Policies


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. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 "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. For further discussion refer to page 30 in the Management Discussion and Analysis.

Goodwill and Intangibles

ASC 805 "Business Combinations" and ASC 350 "Intangibles" require 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 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 will be subject to at least 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.

Securities Impairment

For a complete discussion of securities impairment see Note 2 of the Notes to Consolidated Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Net income for the six months ended June 30, 2014 was $2,667,000 or $.91 per share, compared to $2,349,000 or $.94 in the same period in 2013, an increase of 13.54% in net income however earnings per share did not increase due to the shares issued in the first quarter. Net interest income increased 4.66% from $10,602,000 to $11,096,000 compared to the same period in 2013. During the six months ended June 30, 2014, noninterest income decreased 15.97% and noninterest expense increased 5.18%. The provision for loan losses decreased from $2,025,000 to $1,500,000 or 25.93%. Net income from Bank operations adjusted for income or loss from Parent activities is as follows:

In thousands                                   2014        2013

Net Income from Bank Operations               $ 2,586     $ 2,347
Income from Parent Company Activities              81           2
Net Income for the six months ended June 30   $ 2,667     $ 2,349

Results of Operations

As shown in Table I on page 34, the 2014 year to date tax equivalent net interest income increased $491,000 or 4.61% compared to the same period in 2013. Second quarter tax equivalent net interest income increased $476,000 or 8.97% compared to June 30, 2013. The tax equivalent adjustment to net interest income totaled $45,000 for the quarter. The year to date yield on earning assets decreased .01%, while the cost of funds decreased .23% compared to the same period in 2013. The cost of time deposits decreased by .31% due to continued low market rates and accounted for most of the change in the overall cost of funds.

Year to date, the combination of the decrease in both yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage has resulted in the net interest margin increasing to 4.26%, an increase of .23% when compared to the same period in 2013. Second quarter net interest margin increased to 4.35%, an increase of .31% when compared to June 30, 2013. Balance sheet leverage has changed due primarily to a $16 million increase in non-interest bearing deposits and a $20 million decrease in long-term debt. A schedule of the net interest margin for the six month and three month periods ended June 30, 2014 and 2013 can be found in Table I on page 34.

The Interest Sensitivity Analysis contained in Table II on page 35 indicates the Company is in an asset sensitive position in the one year time horizon. 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. Approximately 41.93% of rate sensitive assets and 41.16% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has continued to reduce deposit rates. Liquid assets have been used to pay off maturing long term FHLB borrowings, which when coupled with depositors reluctance to tie up funds at historically low rates has resulted in the decrease in the positive GAP position in the one year time period.

Noninterest income decreased $325,000 or 15.97% for the six month period ended June 30, 2014. The decrease is primarily due to a loss by VBS Mortgage. This loss resulted from a decline in mortgage refinancing as rates have rebounded and a particularly hard winter which depressed home sales throughout the region during the first quarter of 2014. VBS Mortgage returned to profitability in the second quarter of 2014 as home sales recovered.

Noninterest expense increased $371,000 for the six month period ended June 30, 2014 as compared to 2013. Other expenses, as shown on the income statement, increased in the areas of data processing, legal and professional, supplies, travel and ATM expenses. As stated in the most recently available (March 31, 2014) Bank Holding Company Performance Report, the Company's and peer's (Holding Companies with Consolidated Assets of $500 million to $1billion) noninterest expenses averaged 2.67% and 3.04% of average assets, respectively. The Company's operating costs have always compared favorably to the peer group due to an excellent asset to employee ratio and below average facilities costs.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Balance Sheet

Federal Funds Sold and Interest Bearing Bank Deposits

The Company's subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at 0% to .25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Combined balances in fed funds sold and interest bearing bank deposits have increased since year end due to the maturity of a short term investment held at year end.


The Company's securities portfolio serves several purposes. Portions of the portfolio are held to assist the Company with liquidity, asset liability management and as security for certain public funds and repurchase agreements.

The securities portfolio consists of investment securities commonly referred to as securities held to maturity and securities available for sale. Securities are classified as Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders' equity.

As of June 30, 2014, the cost of securities available for sale exceeded market value by $22,000. The portfolio is made up of primarily agency securities with an average portfolio life of just under three years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. There are no scheduled maturities in 2014. The Bank held a short term security at year end which matured resulting in the decreased balance at June 30, 2014.

In reviewing investments as of June 30, 2104, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.

Loan Portfolio

The Company operates in a predominately rural area that includes the counties of Rockingham, Page, Shenandoah and Augusta in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid size businesses and farms within its primary service area.

Lending is geographically diversified within the service area. The only concentration within the portfolio is in construction and development lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Loans Held for Investment of $495,306,000 increased $16.9 million at June 30, 2014 compared to December 31, 2013. The dealer finance portfolio increased $11.4 million, commercial real estate increased $7.5 million and real estate loans increased $2.7 million. These increases were offset by decreases in the construction and land development loans of $3.6 million and consumer loans totaling $.6 million.

Loans Held for Sale totaled $13,697,000 at June 30, 2014, an increase of $9,893,000 compared to December 31, 2013. While the portfolio has grown compared to December 31, 2013, the Company experienced a rapid decline in this portfolio during the first half of 2013 due to the decline in the real estate refinancing market which has not rebounded. Average balances and income from loans held for sale are detailed in the Table 1 on page 34.

Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $7,382,000 at June 30, 2014 compared to $12,582,000 at December 31, 2013. Although the potential exists for loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of June 30, 2014, the Company holds $4,059,000 of real estate which was acquired through foreclosure. This is an increase of $1,431,000 compared to December 31, 2013.

The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):

                                                                    June 30, 2014       31, 2013

Nonaccrual Loans
   Real Estate                                                     $         5,829     $     9,963
   Commercial                                                                1,368           1,890
   Home Equity                                                                  34             402
   Other                                                                        31               -
                                                                             7,262          12,255

Loans past due 90 days or more (excluding nonaccrual)
   Real Estate                                                                  77             246
   Commercial                                                                    -               4
   Home Equity                                                                   -              61
   Other                                                                        43              16
                                                                               120             327

Total Nonperforming loans                                          $         7,382     $    12,582

Nonperforming loans as a percentage of loans held for investment              1.49 %          2.63 %

Net Charge Offs to total loans held for investment                             .34 %           .78 %

Allowance for loan and lease losses to nonperforming loans                  108.30 %         65.05 %

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Allowance for Loan Losses

The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.

Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank's watch list or schedule of classified loans.

In evaluating the portfolio, loans are segregated into loans with identified potential losses and pools of loans by type and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as Troubled Debt Restructurings 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, the industry in which the borrower is involved and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.

Loans that are not impaired are categorized by call report code and an estimate is calculated based on actual loss experience over the last two years. Dealer finance loans utilize a five year loss history. The Company will monitor the net losses for this division and adjust based on how the portfolio performs since the department was established in 2012. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using eight environmental factors (loan growth, unemployment, past due/criticized loans, interest rates, changes in underwriting practices, local real estate industry conditions, and experience of lending staff) with a range for worst and best case. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans or in the homogeneous pools based on two year loss histories. 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 $7,995,000 at June 30, 2014 is equal to 1.61% of loans held for investment. This compares to an allowance of $8,184,000 (1.71%) at December 31, 2013. Based on the evaluation of the loan portfolio described above, as well as a significant decline in non-performing loans, management has funded the allowance a total of $1,500,000 in the first six months of 2014, versus $2,025,000 of allowance funding for the same period of 2013. Net charge-offs year to date totaled $1,689,000.

The overall level of the allowance has been increasing for several years and now approximates the national peer group average. Based on historical losses, delinquency rates, collateral values of delinquent loans and a thorough review of the loan portfolio, management is of the opinion that the allowance for loan losses fairly states the estimated losses in the current portfolio.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits have increased $8,101,000 since December 31, 2013. Time deposits decreased $2,270,000 during this period while demand deposits and savings deposits increased $10,371,000. The decrease in certificates of deposits is a result of a decrease in core time deposits. The increase in demand deposits and savings deposits is a result of new account growth during the year. The Bank also participates in the CDARS program. CDARS (Certificate of Deposit Account Registry Service) is a program that allows the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. The CDARS program also allows the Bank to purchase funds through its One-Way Buy program. At quarter end the Bank had a total of $15.9 million in CDARS funding, which is an increase of $4.6 million over December 31, 2013.

Short-term debt

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), short-term fixed rate FHLB borrowings and commercial repurchase agreements (repos). Commercial customers deposit operating funds into their checking account and by mutual agreement with the bank their excess funds are swept daily into the repurchase accounts. These accounts are not considered deposits and are not insured by the FDIC. The Bank pledges securities held in its investment portfolio as collateral for these short-term loans. Federal funds purchased are overnight borrowings obtained from the Bank's primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. As of June 30, 2014 there were no FHLB short-term borrowings and commercial repurchase agreements totaled $3,295,000 compared to $3,423,000 at December 31, 2013.

Long-term debt

Borrowings from the FHLB continue to be an important source of funding. The Company's subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes. There was a borrowing that matured during the second quarter that totaled $4 million and there were no additional borrowings through June 30, 2014, resulting in a balance of $7,500,000.

In August 2009, the Bank began issuing subordinated debt to local investors with 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 10 year note. As of June 30, 2014 and December 31, 2013 the balance outstanding was $10,191,000.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)


The Company successfully completed a private placement of common stock in March 2014. In the private placement the Company sold 774,231 shares of common stock for net proceeds of $12 million. The resulting increase in equity improved the Company's risked based capital and leverage ratios by 2.64% and 2.16%, respectively. The Company intends to use the proceeds for general corporate purposes, including organic growth, new market expansion and possible future acquisitions. The Company also has filed a registration statement with respect to a potential public offering of up to $10 million of mandatorily convertible preferred stock.

The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level. As of June 30, 2014, the Company's total risk based capital and leverage ratios were 17.55% and 11.57%, respectively, increasing over year end from 15.37% and 9.37%, respectively. For the same period, Bank-only total risk based capital and leverage ratios were 17.23% and 11.28%, respectively, increasing over year end from 15.43% and 9.41%, respectively. For both the Company and the Bank these ratios are in excess of regulatory minimums to be considered "well capitalized".


Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of . . .

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