2005 ANNUAL REPORT
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Filings Services
April 11,2006
SNL Financial, LC
1 - ~ n n - 9 ~ 9 - 4 1 2 1
Y
F&M Bank Corp.
ne Bank Holding Company For:
Farmers & Merchants Bank
TEB Life Insurance Company
The primary mission of Fdrmers & Mercbmts Bank
is to be a strong, i n ~ e p e ~ ~ e n t
community banking organization
tbdt provides d refionable return to our shareholders, quahy
service to OUT customers and communities and a rewarding and
challenging workplace for our employees.
Dear Stockholder,
The year 2005 was an excellent year for F & M Bank Corp. We again had record earnings
for the third straight year. Contributing significantly to the increase in earnings was an
1 1.4% increase in Loans Held for Investment and the rising interest rate environment.
Securities Gains fox 2005 were only $71,000 versus $532,000 in 2004, which makes the
record earnings in 2005 even more remarkable. As you review this report, I hope you will
share our enthusiasm for our accomplishments this past year. With three new branches,
which I will discuss in more detail later, opening in 2006 I am excited about the growth
potential for F & M in the future.
Net income for 2005 was $4.780 million or an increase of $430,000 (9.9%) over the prior
year 2004. Earnings per share increased from $1.80 to $1.99. The incrcase in both net
income and earnings per share can be attributed priniarily to an increase in net interest
income from our growth in loans held for investment of $20.805 million. We did see a reduction in our loan participarion
program that contributed significantly to earnings in 2004. In 2005 this program contributed approximately $135,000 to
net earnings, bur toward the end of the year we had very few loans in the program. This reduction was due to the rising
short term rate environment. The secondary market mortgage originarors have found cheaper funding options and,
therefore, are not using the program. If short term rates decline, I would anticipate this program generating income in the
future.
Credit quality remained good with charge offs dropping to .07% of Loans Held for Investment in 2005 from .09% in
2004. Averagc losses continue at less than one-half that of the Banks peer group average, which have ranged between .13%
and .26% over the last three years. Nonperforming assets decreased significantly to .200/0 of total assets which is well below
our five year average. Management has reviewed the nonperforming loans, and determined that they are primarily secured
by real estate with little potential for losses. The Allowance for Loan Losses remained steady at .60% of Loans Held for
Investment, which is below our bank peer group; however, we feel it is adequate based on our excellent history of loan
losses.
I
~
Dividends increased from $.74 to $.78 per share, an increase of 5.4%. In 2005 we paid out 38.70% of our earnings in
dividends.
As I mentioned earlier, we hope to open three new branches in 2006. The construction of our Crossroads branch is moving
along smoothly now after a few early delays. Our projected opening date is August 1st. At that time we will be closing
our current office located in the Food Lion shopping center in Elkton. The building housing this branch does not allow us
room for growth and expansion. Also on April 3rd, we will be opening a new branch in the Port Crossing shopping center
on Port Republic Road in Harrisonburg. This will be our first branch within the city limits of Harrisonburg and should
compliment the Crossroads branch. Both branches will be located on high traffic roads. We are also continuing with our
Courier Service in Harrisonburg to pick up business deposits. This service has becn well received by the Harrisonburg
business community.
By the time this annual report is distributed, we hope to also have regulatory approval for the third branch which will be in
Luray, Va. We feel that Luray and the surrounding Page County area fit our marketing plan and represent good areas for
future growth. This office will be in a leased facility in the East Luray Shopping Center. Oncc all of these branches are
operating, we will have nine full service branches, a mortgage department and an investment department.
As you review this annual report, I think you will agree with me that we had an excellent year in 2005. This is due to the
excellent staff we have and the support of the stockholders and the communities that we serve. We are committed to
continuing our efforts to provide quality customcr service which will result in a good return on your investment.
Thanks again for your support through the years.
Dean W. Withers
President/CEO
I
Five Year Summary of Selected Financial Data
(Dollars in thousands,
except per share data)
Income Statement Data:
2005
2004
2003
2002
200 1
Interest and Dividend Income
Interest Expense
$
19,878
6,998
$ 16,804
5,396
$ 16,683
6,010
$
17,846
7,390
$
17,681
9,494
Net Intcrest Income
Provision for Loan Losses
12,880
360
1 1,408
240
10,673
226
10,456
387
Net Interest Income after
Provision for Loan Losses
Noninterest Income
Sccurities Gains (Losses)
Noninterest Expenses
Income before Incomc Taxes
Income Tax Expense
12,520
2,643
71
8,608
6,626
1,846
11,168
2,254
532
7,74 1
6,213
1,863
10,447
2,308
179
7,256
5,678
1,666
10,069
1,380
(182)
6,448
4,819
1,315
8,187
204
7,983
1,158
1,252
5,728
4,665
1,435
Net Income
$
4,780
$
4,350
$
4,012
$
3,504
$
3,230
Per Share Data:
Net Income
Dividcnds Declared
Book Value
Balance Sheet Data:
$
$
1.99
.78
15.22
1.80
.74
14.2 1
$
$
1.66
.70
13.35
1.44
.66
12.19
$
1.33
.63
11.74
Assets
Loans Held for Investment
Loans Held for Sale
Sccuriries
Deposits
Short-Term Debt
Long-Term Dcbt
Shareholders' Equity
Average Shares Outstanding
$ 346,328
277,398
3,528
3492 1
267,3 10
14,345
22,808
36,567
2,404
$ 369,957
248,972
47,150
38,800
246,505
57,362
26,462
34,260
2,414
$ 309,126
211,231
$
303,149
201,980
$ 272,673
176,625
6 1,230
240,715
6,389
24,784
32,3 19
2,4 18
69,602
228,284
8,308
32,3 12
29,541
2,429
63,987
208,279
10,696
20,983
28,597
2,431
Financial Ratios:
Return on Average Assets'
Return on Average Equity'
Net Intcrest Margin
Efficiency Ratio2
Dividend Payout Ratio
1.34%
1 3.56%)
3.95%
53.07%
38.70%
Capital and Credit Quality Ratios:
Average Equity to Avcrage Assets'
Allowance for Loan Losses to Loans3
Nonperforming Assets to Total Assets
Net Charge-offs to Total Loans'
9.86%
.60%
.200/0
.07%
' Ratios are primarily based on daily average balances.
1.31%
1 3.1 1 Yo
3.82%
54.02%
4 1.06%
10.00%
.6 1 %
.63%
.09%
1.29%
13.13%
3.8 29'0
53.96%
42.17%
9.86%
.70%
.520/0
.lo%
1.21%
12.12Yo
4.03%
5 1.28%
45.72%
9.98%
.73%
.86Yo
.lo%
1.26 %
11.47 %
3.52 '3/0
56.93 %
47.45 %
1 1.02 Yo
.73 Yo
.40 9'0
.06 %
The EKciency Ratio cquals noninterest expenses dividcd 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.
Calculated based on Loans Held for Investment. excludes Loans Hcld for Sale.
Five Year Summary
of Selected Financial Charts
Balance Sheet: Total Assets
Balance Sheet:
Loans Held For Investment
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
2001
I
2002
I
2uu3
1
2004
I
2005
I
'" ~
~-
w Loans $176,625
2001
I
2002
2003
$201,980
$211,231
I
1
2005 4
$277,396
2004
$248,972
Dividends Per Share
Earnings Per Share
$2.00
$1 .eo
$1.60
$1.40
$1.20
$1 .oo
$0.80
$0.60
$0.40
$0.20
r n nn
*U'uu ~
[.Earnings
1
1
2003
$0.70
1
2004
~
2005
$0.74
$0.78
I
2002
$1.44
1
2001
$1.33
2003
~
2004
$1.66
$1.80
I
2005 4
$1.99
2001
~
2002
LDlvldendc
$0.63
$0.66
$400,000-
$350,000-'
$300,000
-'
5250,000-'
$200,000-'
$150,000-'
$100,000-'
$50,000
'
-,
$0
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
Financial Ratios:
Return on Average Assets
Financial Ratios:
Return on Average Equity
1.34%
1.32%
1.30%
1.2a%
1.26%
1.24%
1.22%
1.20%
1.18%
1.16%
1 l A %
2002
1.21%
I
1
2003 I
I
1.29%
1.31%
14.00% ('1
13.50%
13.00%
12.50%
12.00%
1 I .50%
11 .OO%
a n nnol
10.50%
I " . " " I O +:
WReturn
13.13%
12.12%
2o02
11.47%
1
1
2004
13.11%
1
I
13.56%
, 0 ° 5 i
Along with approximately 60 other Virginia community banks, our Bank has ownership in Bankers Insurance
and can offer a variety of insurance products to our area.
Bankers Insurance, LLC
Comprehensive insurance solutions for you, your business and your family
Lee Shuler
Hdrrison burg Agent
Representative Business Products
Property Coverage
Buildings, Business Personal Property,
Computer Equipment, Property of Others
Professional Liability
Health and Welfare
General Liability Coverage
Premises and Operations, Personal
Fire Damage
"jury,
Workers' Compensation
Major Medical, Disability, Group Life,
Dental, Retirement, Key Employee Life
Surety Bonds
Representative Personal Products
Property and Casualty
0
Personal Articles
Homeowners, Automobiles and Boats
Personal Umbrella
Life
Term, Whole, Universal
Health
Accident, Disability, Long-Term Care
Farmers & Merchants Financial Services
Henry Ha wkins
Mary Ellen Harrison
Helping our Customers Reach Their Financial Goals
Henry Hawkins and Mary Ellen Harrison, the investment consultants at Farmers & Merchants Financial Services,
bring a wealth of experience to Farmers & Merchants Bank customers. They can tailor an investment strategy to fit
comfortably with each customer's objectives. At Farmers & Merchants Bank, we want our customers to receive the
same level of care they expect when banking with us. That's why we continue to offer all the financial capabilities
found at other brokerage firms through our association with BI Investments, LLC.*
Annuity Representatives
With customers becoming more educated about their financial needs, the Bank chose to work with BI Investments
to license employees for fixed annuities. T h e employees pictured above successfully completed the licensing
requiremcnts needed to offer annuities to our customers. By licensing several employees in each branch, the Bank is
able to compete with insurance companies and other investment companies to meet the customers' investment needs.
*Securities and Insurancc Products: Not insured hy FDIC o r any Fcdcrd Government Agency, May lose value, Not a deposit of or guaranteed hy the Rank or any
Bank Affiliate
Srcuritics nnd insurtmr &red
Fintincia1 Seroiccs is nn @liine of'kiumers $. Merchants Bank.
through BI Inzicstnients. LLC, member NASD and SIPC, BI Inveslmmts is Usrociatcd with hrmers & Mrrcbants Bunk. Farmers &Modiann
O n July 21, 2005, Robert L. Halterman retired as a director and Vice
Chairman of Farmers & Merchants Bank and F & M Bank Corp. and
it was also his 70th birthday. Bob served on the board for 25 years and
contributed significantly to the success of the Bank over that time. A
dinner was held for Bob at Spotswood Country Club, where he was
awarded an engraved plaque and a framed resolution honoring his
service. H e is President of Virginia Classic Mustang, Inc. in Broadway
and Partner in H & H Properties.
Robert E. Halterman
Service Anniversaries
Carolyn J. Dove
30 years
Phyllis B. Dela wder
20 years
Farmers & Merchants Bank Offices Coming Soon
Crossroads Farm
80 Cross Keys Road
Harrisonburg, VA
Port Road
1085 Port Republic Road
Harrisonburg, VA
Lourier 3ervice
Farmers & Merchants Bank Courier Van Service to Harrisonburg and surrounding areas began operations on July 11,
2005, with daily pick up of commercial deposits, offering safety and convenience to commercial customers. This is the
first service of this type in the Harrisonhurg area and is proving to be a great source of new business and a jump start for
our new Crossroads branch. The custom van is equipped with a dual-control night deposit vault and security equipment.
FOR OUR CUSTOMERS’ CONVENIENCE, WE ALSO PROVIDE ACCESS TO
BANK SERVICES THROUGH:
ATM Locations
24-Hour Access
6 at Branch Locations
Internet Banking at www.farmersandmerchats.biz
T h e following off site are cash dispensing only:
4 in Food Lion Stores in Harrisonburg, VA
Food Lion Store in Mt. Jackson, VA
Bo’s Interstate Shell, Edinburg, VA
Telephone Banking 540-901-8733 or
Toll Free 877-901-8733
Directors
THOMAS L. CLINE
President, Truck t$ Lquipment Corp.
President, Mac Lease, Inc.
JOHN N. CRIST
Partner, Hoover Penrod, I’LC, Attorneys
RICHARD S. MYERS
President, Dick Myers Chevrolet-Pontiac
MICHAEL W. PUGH
President, Old Dominion Realty, Inc.
President, Colonial Appraisal Service, Inc.
JULLAN D. FISHER
RONALD E. WAMPLEK
Chairman ofthe Board,
Farmers &Merchants Bank
and F & M Bank Corp.
ELLEN R. FITZWATER
Partner, Financial Manager,
F t$ R Leasing, ILIA. C
DANIEL J. HARSIIMAN
Manager. Tnwn of Edinburg
Officers
Julian D. Fisher
Chairmun of the Board
Thomas L. Clinc
Vice Chairman of the Board
Dcan W. Withers
President and Chief Executive Oficer
Larry A. Caplinger
Sr. Kce President and Secretmy of the Board
Salesman, Dick Myers Chevrolet-Pontiac
Retired Farmer
Partner, Dove Ohio Farms, LLC.
and WWTD Ohio Farms. LLC
DEAN W. WIl’HERS
President, Farmers &Merchants Bank
and P B M Bank Corp.
Curtis M. Arey
Sylvia T. Bowman
Carolyn J. Dove
Sally H. Erickson
Ralph C. Foltz, Jr.
Henry E. Hawkins
Gary L. Knott
Jeffrey L. Lam
Susan K. Olson
Mary Sue l’rophcc
Kitty H. Purcell
Robert R. Reedy, Jr.
Carrie A. Comer
Ellcn M. Grataski
Kathy L. Grubhs
Joshua I? Hale
Mary Ellen Harrison
Teresa D. Helmick
Cathy M. Lindamood
Judith A. Mathias
Sheila E Owen
Cindy A. Sherman
Jacqueline M. ShiMcct
Darlene K. Sites
Dcborah D. Vance
Neil W. Hayslett
Kce Presidents
Sr. Vice President and Chief’Financial Oficer
Assistant Kce Presidents
Ellen C. Branner
Sr. Vice PresidendHuman Resources
Stephanic E. Shillingburg
Sr. Vice President/Retail Services
(caption f i r centerspread)
Farmers & Merchants Bank determined that it was important to be involved with the relief
rricane Katrina. One of the ways the bank chose to help was by allowing empla
repair efforts. The bank also made monetary contributions for the purchase
the American Ked Cross immediately after the hurricane. So far Farmers &
trips co Mississippi and at lew one additional trip is being planned. The Bank would like t
their time and efforts in the clean up and also those who remained here in Virginia to cover for those
f the jobs performed were:
floor and paneling in one roam of the home of a 70-year old woman and her 90-year old mo
r, replaced sheet rock,
insulation ctc. in homes, painted and installed plumbing and furtures in two homes, removed damaged roof and replaced with new
shingles, complctcly replaced r o o m destroyed by hurricane, removed debris from homes, anticipate similar jobs in coming rrip(s).