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F&M BANK CORP - Quarter Report: 2014 September (Form 10-Q)

fmbm_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

x         Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014.

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:    000-13273
 
F & M BANK CORP.
 
Virginia 54-1280811
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
 
(540) 896-8941
(Registrant's Telephone Number, Including Area Code)
 
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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes x No o

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 (Do not check if a smaller reporting company)   Smaller reporting Company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class Outstanding at November 12, 2014
Common Stock, par value - $5 3,290,273 shares
 


 
 
 
 
 
F & M BANK CORP.
 
 
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Certifications
   

 
2

 
 
Part I Financial Information
Item 1 Financial Statements

F & M BANK CORP.
Consolidated Statements of Income
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
 
   
Three Months Ended
 
   
September 30,
 
Interest income
 
2014
   
2013
 
Interest and fees on loans held for investment
  $ 6,665     $ 6,320  
Interest and fees on loans held for sale
    164       80  
Interest on federal funds sold
    7       17  
Interest on interest bearing deposits
    -       2  
Interest on debt securities
    37       39  
Total interest income
    6,873       6,458  
                 
Interest expense
               
Interest on demand deposits
    165       198  
Interest on savings accounts
    31       29  
Interest on time deposits over $100,000
    145       197  
Interest on other time deposits
    273       378  
Total interest on deposits
    614       802  
Interest on short-term debt
    2       3  
Interest on long-term debt
    292       389  
Total interest expense
    908       1,194  
                 
Net interest income
    5,965       5,264  
                 
Provision for loan losses
    750       1,000  
Net interest income after provision for loan losses
    5,215       4,264  
                 
Noninterest income
               
Service charges
    275       307  
Insurance and other commissions
    202       235  
Other
    400       387  
Income on bank owned life insurance
    118       128  
Total noninterest income
    995       1,057  
                 
Noninterest expense
               
Salaries
    1,767       1,670  
Employee benefits
    514       521  
Occupancy expense
    150       148  
Equipment expense
    160       134  
FDIC insurance assessment
    180       180  
Other
    1,152       1,009  
Total noninterest expense
    3,923       3,662  
                 
Income before income taxes
    2,287       1,659  
Income tax expense
    726       445  
Consolidated net income
    1,561       1,214  
Net income - Noncontrolling interest (income) loss
    8       (31 )
Net Income – F & M Bank Corp
  $ 1,569     $ 1,183  
                 
Per share data
               
Net income (basic and dilutive)
  $ .48     $ .47  
Cash dividends
  $ .17     $ .17  
Weighted average shares outstanding
    3,289,743       2,503,509  
 
See notes to unaudited consolidated financial statements
 
3

 
 
F & M BANK CORP.
Consolidated Statements of Income
(In Thousands of Dollars except per Share Amounts)
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
Interest income
 
2014
   
2013
 
Interest and fees on loans held for investment
  $ 19,443     $ 18,763  
Interest and fees on loans held for sale
    228       623  
Interest on federal funds sold
    31       36  
Interest on interest bearing deposits
    -       4  
Interest on debt securities
    136       140  
Total interest income
    19,838       19,566  
                 
Interest expense
               
Interest on demand deposits
    501       608  
Interest on savings accounts
    88       91  
Interest on time deposits over $100,000
    453       601  
Interest on other time deposits
    857       1,203  
Total interest on deposits
    1,899       2,503  
Interest on short-term debt
    6       22  
Interest on long-term debt
    872       1,175  
Total interest expense
    2,777       3,700  
                 
Net interest income
    17,061       15,866  
                 
Provision for loan losses
    2,250       3,025  
Net interest income after provision for loan losses
    14,811       12,841  
                 
Noninterest income
               
Service charges
    786       845  
Insurance and other commissions
    378       704  
Other
    1,192       1,163  
Income on bank owned life insurance
    349       380  
Total noninterest income
    2,705       3,092  
                 
Noninterest expense
               
Salaries
    5,114       4,858  
Employee benefits
    1,491       1,631  
Occupancy expense
    465       468  
Equipment expense
    442       404  
FDIC insurance assessment
    540       546  
Other
    3,410       2,923  
Total noninterest expense
    11,462       10,830  
                 
Income before income taxes
    6,054       5,103  
Income tax expense
    1,844       1,465  
Consolidated net income
    4,210       3,638  
Net income - Noncontrolling interest (income) loss
    26       (106 )
Net Income – F & M Bank Corp
  $ 4,236     $ 3,532  
                 
Per share data
               
Net income (basic and dilutive)
  $ 1.38     $ 1.41  
Cash dividends
  $ .51     $ .51  
Weighted average shares outstanding
    3,061,432       2,501,990  
 
See notes to unaudited consolidated financial statements
 
4

 
 
F & M BANK CORP.
Consolidated Statements of Comprehensive Income
(In Thousands of Dollars)
(Unaudited)


   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net Income:
                       
    Net Income – F & M Bank Corp
  $ 4,236     $ 3,532     $ 1,569     $ 1,183  
    Net Income (loss) attributable to noncontrolling interest
    (26 )     106       (8     31  
      4,210       3,638       1,561       1,214  
                                 
Other comprehensive income (loss):
                               
                                 
Unrealized holding gains (losses) on available-for-sale securities
    20       (60 )     25       52  
    Tax effect
    7       (20 )     9       18  
    Unrealized holding gain (loss), net of tax
    13       (40 )     16       34  
Total other comprehensive income (loss)
    13       (40 )     16       34  
                                 
Comprehensive income
  $ 4,223     $ 3,598     $ 1,577     $ 1,248  
 
See notes to unaudited consolidated financial statements
 
5

 
 
F & M BANK CORP.
Consolidated Balance Sheets
(In Thousands of Dollars Except per Share Amounts)

   
September 30,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Cash and due from banks
  $ 6,156     $ 5,835  
Money market funds
    1,039       708  
Federal funds sold
    16,165       2  
Cash and cash equivalents
    23,360       6,545  
Securities:
               
Held to maturity – fair value of $125 in 2014 and $106 in 2013
    125       106  
Available for sale
    11,275       30,266  
Other investments
    7,898       8,114  
Loans held for sale
    16,131       3,804  
Loans held for investment
    506,846       478,453  
Less allowance for loan losses
    (8,601 )     (8,184 )
Net loans held for investment
    498,245       470,269  
                 
Other real estate owned
    3,956       2,628  
Bank premises and equipment, net
    6,468       6,525  
Interest receivable
    1,536       1,498  
Goodwill
    2,670       2,670  
Bank owned life insurance
    12,465       12,122  
Other assets
    10,444       8,241  
Total assets
  $ 594,573     $ 552,788  
                 
Liabilities
               
Deposits:
               
Noninterest bearing
  $ 110,700     $ 92,397  
Interest bearing:
               
Demand
    91,669       92,562  
Money market accounts
    25,222       24,894  
Savings
    63,401       58,292  
Time deposits over $100,000
    78,311       69,674  
All other time deposits
    118,338       126,330  
Total deposits
    487,641       464,149  
                 
Short-term debt
    3,784       3,423  
Accrued liabilities
    9,043       9,384  
Subordinated debt
    10,191       10,191  
Long-term debt
    15,000       11,500  
Total liabilities
    525,659       498,647  
                 
Stockholders’ Equity
               
Common stock, $5 par value, 6,000,000 shares authorized,
               
     3,290,381 and 2,511,735 shares issued and outstanding
               
     in 2014 and 2013, respectively
    16,452       12,559  
Retained earnings
    52,967       42,089  
Noncontrolling interest
    407       418  
Accumulated other comprehensive loss
    (912 )     (925 )
Total stockholders’ equity
    68,914       54,141  
Total liabilities and stockholders’ equity
  $ 594,573     $ 552,788  

See notes to unaudited consolidated financial statements
 
6

 
 
F & M BANK CORP.
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2014
   
2013
 
Cash flows from operating activities
           
Net income
  $ 4,236     $ 3,532  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    449       433  
Amortization of security premiums, net
    61       28  
Loans held for sale originated
    (41,385 )     (68,116
Sale of loans held for sale originated
    39,799       77,541  
Provision for loan losses
    2,250       3,025  
(Increase) Decrease in interest receivable
    (38 )     188  
(Increase) Decrease in other assets
    (2,492 )     702  
Increase (decrease) in accrued expenses
    (65 )     888  
Amortization of limited partnership investments
    456       438  
Income from life insurance investment
    (348 )     (380 )
Gain on Other Real Estate Owned
    43       (4 )
Net adjustments
    (1,270 )     14,743  
Net cash provided by operating activities
    2,966       18,275  
                 
Cash flows from investing activities
               
Purchase of investments available for sale
    (8,614 )     (7,067 )
Proceeds from maturity of investments available for sale
    27,323       8,446  
        Purchase of investments held to maturity
    (125 )     -  
        Proceeds from maturity of investments held to maturity
    106       -  
Net (increase) decrease in loans held for investment
    (10,740 )     (16,239 )
Net (increase) decrease in loans held for sale participations
    (32,376 )     65,005  
Proceeds from the sale of other real estate owned
    779       525  
Purchase of property and equipment
    (391 )     (365 )
Net cash (used in) investing activities
    (24,038 )     50,305  
                 
Cash flows from financing activities
               
Net change in demand and savings deposits
    22,845       12,700  
Net change in time deposits
    646       (4,728 )
Net change in short-term debt
    361       (31,117 )
Cash dividends paid
    (1,545 )     (1,277 )
Proceeds from issuance of common stock
    12,080       82  
Proceeds from long-term debt
    10,000          
Repayment of long-term debt
    (6,500 )     (21,036 )
Net cash provided by (used in) financing activities
    37,887       (45,376 )
                 
Net Increase in Cash and Cash Equivalents
    16,815       23,204  
Cash and cash equivalents, beginning of period
    6,545       8,997  
Cash and cash equivalents, end of period
  $ 23,360     $ 32,201  
Supplemental disclosure
               
Cash paid for:
               
Interest expense
  $ 2,745     $ 2,600  
Income taxes
    1,300       800  
Transfers from loans to Other Real Estate Owned
    2,930       416  
Noncash exchange of other real estate owned
    (780 )     409  
 
See notes to unaudited consolidated financial statements
 
7

 
 
F & M BANK CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands of Dollars)
(Unaudited)

   
Nine Months Ended
 
   
September 30,
 
   
2014
   
2013
 
             
Balance, beginning of period
  $ 54,141     $ 49,384  
                 
Comprehensive income
               
Net income – F & M Bank Corp
    4,236       3,532  
Net income attributable to noncontrolling interest
    (26     106  
Net change in unrealized appreciation on securities available for sale, net of taxes
    13       (40 )
Total comprehensive income
    4,223       3,598  
                 
Minority Interest Capital Distributions
    15       (51 )
Issuance of common stock
    12,080       82  
Dividends declared
    (1,545 )     (1,277 )
Balance, end of period
  $ 68,914     $ 51,736  
 
See notes to unaudited consolidated financial statements
 
8

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 1.                   Accounting Principles

The consolidated financial statements include the accounts of F & M Bank Corp. and its subsidiaries (the “Company”).  Significant intercompany accounts and transactions have been eliminated in consolidation.
 
The consolidated financial statements conform to accounting principles generally accepted in the United States of America and to general industry practices.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2014 and the results of operations for the quarters and nine month periods ended September 30, 2014 and 2013.  The notes included herein should be read in conjunction with the notes to financial statements included in the 2013 annual report to shareholders of F & M Bank Corp.

The Company does not expect the anticipated adoption of any newly issued accounting standards to have a material impact on future operations or financial position.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, 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.

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.  

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 collectability 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 collectability 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.
 
 
9

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 1.                  Accounting Principles, continued

Allowance for Loan Losses, continued

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Nonaccrual Loans

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.

Note 2.                  Investment Securities
 
Investment securities available for sale are carried in the consolidated balance sheets at their approximate market value, amortized cost and unrealized gains and losses at September 30, 2014 and December 31, 2013 are reflected in the table below.  The amortized costs of investment securities held to maturity are carried in the consolidated balance sheets and their approximate market values at September 30, 2014 and December 31, 2013 are as follows (in thousands):
 
   
2014
   
2013
 
         
Market
         
Market
 
   
Cost
   
Value
   
Cost
   
Value
 
                         
Securities held to maturity
                       
U. S. Treasury and agency obligations
  $ 125     $ 125     $  106     $ 106  
Total
  $ 125     $ 125     $  106     $ 106  
                                 
   
September 30, 2014
 
           
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities available for sale
                               
U. S. Treasury
  $ 4,029     $ -     $ 8     $ 4,021  
Government sponsored enterprises
    6,050       11       7       6,054  
Mortgage-backed securities
    1,060       5       -       1,065  
Corporate equities
    135       -       -       135  
Total
  $ 11,274     $ 16     $ 15     $ 11,275  
                                 
   
December 31, 2013
 
           
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities available for sale
                               
Government sponsored enterprises
  $ 29,076     $ 11     $ 22     $ 29,065  
Mortgage-backed securities
    1,209       -       8       1,201  
Total
  $ 30,285     $ 11     $ 30     $ 30,266  
 
 
10

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 2.                  Investment Securities, continued

The amortized cost and fair value of securities at September 30, 2014, by contractual maturity are shown below (in thousands).  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
  $ 125     $ 125     $ -     $ -  
Due after one year through five years
    -       -       10,079       10,075  
Due after five years
    -       -       1,195       1,200  
Total
  $ 125     $ 125     $ 11,274     $ 11,275  

There were no gains and losses on sales of securities in the third quarter or nine month period ended September 30 of 2014 or 2013.  There were also no securities with an other than temporary impairment.
 
The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
                                     
September 30, 2014
                                   
U. S. Treasury
  $ 4,021     $ (8 )   $ -     $ -     $ 4,021     $ (8 )
Government sponsored Enterprises
     1,996       (4 )      2,008       (3 )      4,004       (7 )
Total
  $ 6,017     $ (12 )   $ 2,008     $ (3 )   $ 8,025     $ (15 )
                                                 
December 31, 2013
                                               
Government sponsored Enterprises
  $ 4,984     $ (22 )   $ -     $ -     $ 4,984     $ (22 )
Mortgage backed obligations
    1,191       (8 )     -       -       1,191       (8 )
Total
  $ 6,175     $ (30 )   $ -     $ -     $ 6,175     $ (30 )

Other investments, which consist of stock of correspondent banks and investments in low income housing projects, decreased since December 31, 2013.  This decrease is due to FHLB stock repurchases which were partially offset with an increase in the Federal Reserve Bank Stock holding requirement.

   
2014
   
2013
 
Construction/Land Development
  $ 69,654     $ 68,512  
Farmland
    11,955       13,197  
Real Estate
    155,302       154,628  
Multi-Family
    11,461       11,797  
Commercial Real Estate
    120,939       113,415  
Home Equity – closed end
    9,519       10,228  
Home Equity – open end
    51,446       47,358  
Commercial & Industrial – Non-Real Estate
    26,454       25,903  
Consumer
    9,980       10,163  
Dealer Finance
    37,610       20,572  
Credit Cards
    2,526       2,680  
Total
  $ 506,846     $ 478,453  
 
Note 3.                 Loans Held for Investment

Loans outstanding at September 30, 2014 and December 31, 2013 are summarized as follows (in thousands):

 
11

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 3.                 Loans Held for Investment, continued

The following is a summary of information pertaining to impaired loans (in thousands):
 
         
Unpaid
         
Average
   
Interest
 
  September 30, 2014
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
Impaired loans without a valuation allowance:
                             
     Construction/Land Development
  $ 4,547     $ 5,130     $ -     $ 5,726     $ 110  
     Farmland
    1,444       1,445       -       1,457       42  
     Real Estate
    142       142       -       286       4  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    1,448       1,747       -       1,283       60  
     Home Equity – closed end
    -       -       -       221       -  
     Home Equity – open end
    -       -       -       20       -  
     Commercial & Industrial – Non-Real Estate
    194       194       -       205       8  
     Consumer
    -       -       -       -       -  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    -       -       -       -       -  
      7,775       8,658               9,198       224  
                                         
Impaired loans with a valuation allowance
                                       
     Construction/Land Development
    11,293       12,484       1,440       10,789       241  
     Farmland
    -       -       -       -       -  
     Real Estate
    914       914       118       900       46  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    1,015       1,015       68       1,050       7  
     Home Equity – closed end
    -       -       -       142       -  
     Home Equity – open end
    -       -       -       40       -  
     Commercial & Industrial – Non-Real Estate
    -       -       -       -       -  
     Consumer
    -       -       -       -       -  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    -       -       -       -       -  
      13,222       14,413       1,626       12,921       294  
                                         
Total impaired loans
  $ 20,997     $ 23,071     $ 1,626     $ 22,119     $ 518  

The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
 
 
12

 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 3.                 Loans Held for Investment, continued

         
Unpaid
         
Average
   
Interest
 
  December 31, 2013
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
Impaired loans without a valuation allowance:
                             
     Construction/Land Development
  $ 4,543     $ 5,125     $ -     $ 5,750     $ 153  
     Farmland
    1,459       1,459       -       1,475       67  
     Real Estate
    49       49       -       529       3  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    851       851       -       616       56  
     Home Equity – closed end
    308       308       -       284       25  
     Home Equity – open end
    -       -       -       20       -  
     Commercial & Industrial – Non-Real Estate
    242       242       -       64       12  
     Consumer
    -       -       -       -       -  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    -       -       -       -       -  
      7,452       8,034               8,738       316  
                                         
Impaired loans with a valuation allowance
                                       
     Construction/Land Development
    9,716       11,141       1,560       10,855       175  
     Farmland
    -       -       -       -       -  
     Real Estate
    1,145       1,145       154       966       48  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    1,118       1,418       282       1,171       4  
     Home Equity – closed end
    180       180       17       409       3  
     Home Equity – open end
    100       100       9       93       5  
     Commercial & Industrial – Non-Real Estate
    -       -       -       141       -  
     Consumer
    2       2       -       1       1  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    -       -       -       -       -  
      12,261       13,986       2,022       13,636       236  
                                         
Total impaired loans
  $ 19,713     $ 22,020     $ 2,022     $ 22,374     $ 552  
 
 
13

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 4.                 Allowance for Loan Losses

 
A summary of the allowance for loan losses follows (in thousands):
 
September 30, 2014
 
Beginning Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending Balance
   
Percentage of loans in each category to total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
 
Allowance for loan losses:
                                               
Construction/Land Development
  $ 4,007     $ 1,191     $ 14     $ 1,128     $ 3,958       46.03 %   $ 1,440     $ 2,518  
Farmland
    (2 )     -       -       -       (2 )     (.02 %)     -       (2 )
Real Estate
    400       205       -       158       353       4.10 %     118       235  
Multi-Family
    -       -       -       -       -               -       -  
Commercial Real Estate
    777       -       32       (194 )     615       7.14 %     68       547  
Home Equity – closed end
    157       -       -       (15 )     142       1.65 %     -       142  
Home Equity – open end
    476       79       -       130       527       6.13 %     -       527  
 Commercial & Industrial – Non-Real Estate
    1,464       385       49       403       1,531       17.80 %     -       1,531  
 Consumer
    156       32       23       23       170       1.98 %     -       170  
Dealer Finance
    628       60       5       616       1,189       13.82 %     -       1,189  
Credit Cards
    121       35       31       1       118       1.37 %     -       118  
Total
  $ 8,184     $ 1,987     $ 154     $ 2,250     $ 8,601       100.00 %   $ 1,626     $ 6,975  
 
December 31, 2013
 
Beginning Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending Balance
   
Percentage of loans in each category to total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
 
Allowance for loan losses:
                                               
Construction/Land Development
  $ 2,771     $ 2,127     $ 40     $ 3,323     $ 4,007       48.96 %   $ 1,560     $ 2,447  
Farmland
    (2 )     -       -       -       (2 )     (.03 %)     -       (2 )
Real Estate
    924       173       -       (351 )     400       4.89 %     154       246  
Multi-Family
    (37 )     -       -       37       -       -       -       -  
Commercial Real Estate
    1,113       201       42       (177 )     777       9.49 %     282       495  
Home Equity – closed end
    360       159       -       (44 )     157       1.92 %     17       140  
Home Equity – open end
    659       68       29       (144 )     476       5.82 %     9       467  
 Commercial & Industrial – Non-Real Estate
    2,113       986       127       210       1,464       17.89 %     -       1,464  
 Consumer
    51       173       14       264       156       1.90 %     -       156  
Dealer Finance
    72       17       -       573       628       7.68 %     -       628  
Credit Cards
    130       121       28       84       121       1.48 %     -       121  
   Unallocated
    -       -       -       -       -       -       -       -  
Total
  $ 8,154     $ 4,025     $ 280     $ 3,775     $ 8,184       100.00 %   $ 2,022     $ 6,162  
 
 
14

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 4.                   Allowance for Loan Losses, continued
 
September 30, 2014
 
Loan Receivable
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
 
Construction/Land Development
  $ 69,654     $ 15,840     $ 53,814  
Farmland
    11,955       1,444       10,511  
Real Estate
    155,302       1,056       154,246  
Multi-Family
    11,461       -       11,461  
Commercial Real Estate
    120,939       2,463       118,476  
Home Equity – closed end
    9,519       -       9,519  
Home Equity –open end
    51,446       -       51,446  
Commercial & Industrial – Non-Real Estate
    26,454       194       26,260  
Consumer
    9,980       -       9,980  
Dealer Finance
    37,610       -       37,610  
Credit Cards
    2,526       -       2,526  
Total   $ 506,846     $ 20,997     $ 485,849  
 
Recorded Investment in Loan Receivables (in thousands)
 
December 31, 2013
 
Loan Receivable
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
 
Construction/Land Development
  $ 68,512     $ 14,259     $ 54,253  
Farmland
    13,197       1,459       11,738  
Real Estate
    154,628       1,194       153,434  
Multi-Family
    11,797       -       11,797  
Commercial Real Estate
    113,415       1,969       111,446  
Home Equity – closed end
    10,228       488       9,740  
Home Equity –open end
    47,358       100       47,258  
Commercial & Industrial – Non-Real Estate
    25,903       242       25,661  
Consumer
    10,163       2       10,161  
Dealer Finance
    20,572               20,572  
Credit Cards
    2,680       -       2,680  
Total   $ 478,453     $ 19,713     $ 458,740  
 
Aging of Past Due Loans Receivable (in thousands) as of September 30, 2014
 
 
September 30, 2014
 
30-59 Days Past due
   
60-89 Days Past Due
   
Greater than 90 Days (excluding non-accrual)
   
Non-Accrual Loans
   
Total Past Due
   
Current
   
Total Loan Receivable
 
Construction/Land Development
  $ 1,217     $ 200     $ -     $ 4,928     $ 6,345     $ 63,309     $ 69,654  
Farmland
    97       -       -       -       97       11,858       11,955  
Real Estate
    2,329       536       -       657       3,522       151,780       155,302  
Multi-Family
    -       -       -       -       -       11,461       11,461  
Commercial Real Estate
    74       -       -       1,319       1,393       119,546       120,939  
Home Equity – closed end
    95       15       10       -       120       9,399       9,519  
Home Equity – open end
    532       10       -       23       565       50,881       51,446  
Commercial & Industrial – Non- Real Estate
    39       5       -       15       59       26,395       26,454  
Consumer
    89       106       11       3       209       9,771       9,980  
Dealer Finance
    301       98       75       12       486       37,124       37,610  
Credit Cards
    15       1       -       -       16       2,510       2,526  
Total
  $ 4,788     $ 971     $ 96     $ 6,957     $ 12,812     $ 494,034     $ 506,846  
 
 
15

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 4.                   Allowance for Loan Losses, continued

Aging of Past Due Loans Receivable (in thousands) as of December 31, 2013
 
   
30-59 Days Past due
   
60-89 Days Past Due
   
Greater than 90 Days (excluding non-accrual)
   
Non-Accrual Loans
   
Total Past Due
   
Current
   
Total Loan Receivable
 
December 31, 2013
                                         
Construction/Land Development
  $ 167     $ 735     $ -     $ 8,556     $ 9,458     $ 59,054     $ 68,512  
Farmland
    -       -       -       -       -       13,197       13,197  
Real Estate
    4,659       920       246       1,407       7,232       147,396       154,628  
Multi-Family
    107       -       -       -       107       11,690       11,797  
Commercial Real Estate
    858       -       -       1,474       2,332       111,083       113,415  
Home Equity – closed end
    122       79       10       180       391       9,837       10,228  
Home Equity – open end
    549       39       51       222       861       46,497       47,358  
Commercial & Industrial – Non- Real Estate
    148       20       4       416       588       25,315       25,903  
Consumer
    169       71       5       -       245       9,918       10,163  
Dealer Finance
    335       72       11       -       418       20,154       20,572  
Credit Cards
    21       3       -       -       24       2,656       2,680  
Total
  $ 7,135     $ 1,939     $ 327     $ 12,255     $ 21,656     $ 456,797     $ 478,453  

CREDIT QUALITY INDICATORS (in thousands)
AS OF SEPTEMBER 30, 2014
Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
 
   
Grade 1 Minimal Risk
   
Grade 2 Modest Risk
   
Grade 3 Average Risk
   
Grade 4 Acceptable Risk
   
Grade 5 Marginally Acceptable
   
Grade 6 Watch
   
Grade 7 Substandard
   
Grade 8 Doubtful
   
Total
 
Construction/Land Development
  $ -     $ 167     $ 8,228     $ 25,851     $ 8,394     $ 4,134     $ 22,880     $ -     $ 69,654  
Farmland
    68       -       1,582       3,257       4,913       -       2,135       -       11,955  
Real Estate
    -       635       59,484       62,139       23,260       7,311       2,473       -       155,302  
Multi-Family
    -       487       4,189       2,207       4,578               -       -       11,461  
Commercial Real Estate
    -       1,449       22,315       64,766       18,890       10,820       2,699       -       120,939  
Home Equity – closed end
    -       -       4,473       3,039       1,832       163       12       -       9,519  
Home Equity – open end
    -       1,535       13,153       28,219       4,123       1,859       2,557       -        51,446  
Commercial & Industrial (Non-Real Estate)
    684       76       4,129       16,226       4,597       725       17       -         26,454  
Total
  $ 752     $ 4,349     $ 117,553     $ 205,704     $ 70,587     $ 25,012     $ 32,773     $ -     $ 456,730  
 
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
   
Credit Cards
   
Consumer
 
Performing
  $ 2,526     $ 47,489  
Non performing
    -       101  
Total
  $ 2,526     $ 47,590  
 
 
16

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 4.                 Allowance for Loan Losses, continued

CREDIT QUALITY INDICATORS (in thousands)
AS OF DECEMBER 31, 2013
Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
 
   
Grade 1 Minimal Risk
   
Grade 2 Modest Risk
   
Grade 3 Average Risk
   
Grade 4 Acceptable Risk
   
Grade 5 Marginally Acceptable
   
Grade 6 Watch
   
Grade 7 Substandard
   
Grade 8 Doubtful
   
Total
 
Construction/Land Development
  $ -     $ -     $ 3,166     $ 25,657     $ 11,116     $ 2,946     $ 25,627     $ -     $ 68,512  
Farmland
    69       -       1,406       5,206       4,816       143       1,557       -       13,197  
Real Estate
    -       562       68,241       52,190       19,037       7,821       6,777       -       154,628  
Multi-Family
    -       668       4,442       2,275       4,412       -       -       -       11,797  
Commercial Real Estate
    -       1,897       18,062       55,350       21,677       13,406       3,023       -       113,415  
Home Equity – closed end
    -       -       4,574       3,117       1,870       281       386       -       10,228  
Home Equity – open end
    -       1,482       13,308       26,734       4,840       327       667       -       47,358  
Commercial & Industrial (Non-Real Estate)
    815       92       3,631       16,265       3,108       1,516       476       -       25,903  
Total
  $ 884     $ 4,701     $ 116,830     $ 186,794     $ 70,876     $ 26,440     $ 38,513     $ -     $ 445,038  
 
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
   
Credit Cards
   
Consumer
 
Performing
  $ 2,680     $ 30,719  
Non performing
    -       16  
Total
  $ 2,680     $ 30,735  
 
Description of loan grades:

Grade 1 – Minimal Risk:   Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk:  Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk:  Borrower generates sufficient cash flow to fund debt service.  Employment (or business) is stable with good future trends.  Credit is very good.

Grade 4 – Acceptable Risk:  Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt.  Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.
 
 
17

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 4.                   Allowance for Loan Losses, continued

Grade 5 – Marginally acceptable:  Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable.  Employment or business stability may be weak or deteriorating.  May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects.  Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch:  Loans are currently protected, but are weak due to negative balance sheet or income statement trends.  There may be a lack of effective control over collateral or the existence of documentation deficiencies.  These loans have potential weaknesses that deserve management’s close attention.  Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness.  Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable.  Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt.  Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful:  The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety.  Cash flow is insufficient to service the debt.  It may be difficult to project the exact amount of loss, but the probability of some loss is great.  Loans are to be placed on non-accrual status when any portion is classified doubtful.

 
18

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 5.                 Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees.  The benefits are primarily based on years of service and earnings.  The Bank contributed $1,500,000 to the plan in the first quarter of 2014 and does not anticipate additional contributions for the 2014 plan year.  The following is a summary of net periodic pension costs for the nine month and three month periods ended September 30, 2014 and 2013.

   
Nine Months Ended
   
Three Months Ended
 
   
September 30
 2014
   
September 30,
2013
   
September 30,
2014
   
September 30,
2013
 
                         
Service cost
  $ 375,771     $ 449,949     $ 125,257     $ 149,983  
Interest cost
    283,281       262,734       94,427       87,578  
Expected return on plan assets
    (523,689 )     (477,060 )     (174,563 )     (159,020 )
Amortization of net obligation at transition
    -       -       -       -  
Amortization of prior service cost
    (11,427 )     (11,427 )     (3,809 )     (3,809 )
Amortization of net (gain) or loss
    27,084       152,388        9,028        50,796  
Net periodic pension cost
  $ 151,020     $ 376,584     $ 50,340     $ 125,528  
 
Note 6.                 Fair Value
 
Accounting Standards Codification (ASC) 820, 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. Treasury, 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.

 
19

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 6.                   Fair Value, continued

Impaired Loans: ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 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 the lower of carrying amount or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

Derivative Financial Instruments: The equity derivative contracts are purchased as part of our Indexed Certificate of Deposit (ICD) program and are an offset of an asset and liability.  ICD values are measured on the S&P 500 Index.

For level 3 assets and liabilities measured at fair value on a recurring basis or non-recurring basis as of September 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

   
Fair Value at
September 30,
2014
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range
Impaired Loans
  $ 11,596  
Discounted appraised value
 
Discount for selling costs and age of appraisals
  15%-55%
                   
Other Real Estate Owned
  $ 3,956  
Discounted appraised value
 
Discount for selling costs and age of appraisals
  15%-55%
 
   
Fair Value at
December 31,
2013
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range
Impaired Loans
  $
10,239
 
Discounted appraised value
 
Discount for selling costs and age of appraisals
 
15%-55%
                   
Other Real Estate Owned
  $
2,628
 
Discounted appraised value
 
Discount for selling costs and age of appraisals
 
15%-55%

 
 
20

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 6.                   Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands).

September 30, 2014
 
Total
   
Level 1
   
Level 2
   
Level 3
 
U.S. Treasury Securities
  $ 4,021     $ -     $ 4,021        
Government sponsored enterprises
    6,054       -       6,054       -  
Mortgage-backed obligations of federal agencies
    1,065       -       1,065       -  
Corporate equities
    135       -       135       -  
Investment securities available for sale
  $ 11,275     $ -     $ 11,275     $ -  
                                 
Total assets at fair value
  $ 11,275     $ -     $ 11,275     $ -  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
                                 
Derivative financial instruments at fair value
  $ 33     $ -     $ 33     $ -  
 
December 31, 2013
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Government sponsored enterprises
  $ 29,065     $ -     $ 29,065     $ -  
Mortgage-backed obligations of federal agencies
    1,201       -       1,201       -  
Investment securities available for sale
    30,266       -       30,266       -  
                                 
Total assets at fair value
  $ 30,266     $ -     $ 30,266     $ -  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
                                 
Derivative financial instruments at fair value
  $ 31     $ -     $ 31     $ -  

 
21

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 6.                 Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis

September 30, 2014
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Other Real Estate Owned
  $ 3,956       -       -     $ 3,956  
              -       -          
     Construction/Land Development
    9,854       -       -       9,854  
     Farmland
    -       -       -       -  
     Real Estate
    796       -       -       796  
     Multi-Family
    -       -       -       -  
     Commercial Real Estate
    946       -       -       946  
     Home Equity – closed end
    -       -       -       -  
     Home Equity – open end
    -       -       -       -  
     Commercial & Industrial – Non-Real Estate
    -       -       -       -  
     Consumer
    -       -       -       -  
     Credit cards
    -       -       -       -  
     Dealer Finance
    -       -       -       -  
Total Impaired loans
    11,596       -       -       11,596  
                                 
Total assets at fair value
  $ 15,552     $ -     $ -     $ 15,552  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
 
The table below presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis (in thousands).  The Company has determined that Other Real Estate Owned and Impaired Loans are Level 3.
 
December 31, 2013
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Other Real Estate Owned
  $ 2,628       -       -     $ 2,628  
              -       -          
     Construction/Land Development
    8,156       -       -       8,156  
     Farmland
    -       -       -       -  
     Real Estate
    991       -       -       991  
     Multi-Family
    -       -       -       -  
     Commercial Real Estate
    836       -       -       836  
     Home Equity – closed end
    163       -       -       163  
     Home Equity – open end
    91       -       -       91  
     Commercial & Industrial – Non-Real Estate
    -       -       -       -  
     Consumer
    2       -       -       2  
     Credit cards
    -       -       -       -  
     Dealer Finance
    -       -       -       -  
Total Impaired loans
    10,239       -       -       10,239  
                                 
Total assets at fair value
  $ 12,867       -     $ -       12,867  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
 
 
22

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 7.                  Disclosures About Fair Value of Financial Instruments

ASC 825 “Financial Instruments” 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.  The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2014 and December 31, 2013.  This table excludes financial instruments for which the carrying amount approximates the fair value, which would be Level 1; inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. All financial instruments above and below are considered Level 2 with the exception of impaired loans of $11,596,000 and $10,239,000 at September 30, 2014 and December 31, 2013, respectively, which are considered level 3.  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 (in thousands).

   
September 30, 2014
   
December 31, 2013
 
   
Estimated
   
Carrying
   
Estimated
   
Carrying
 
   
Fair Value
   
Value
   
Fair Value
   
Value
 
Financial Assets
                       
Loans, gross
  $ 537,765     $ 506,846     $ 512,250     $ 478,453  
                                 
Financial Liabilities
                               
Time deposits
  $ 198,070     $ 196,649     $ 197,729     $ 196,004  
Long-term debt
  $ 27,651     $ 25,191     $ 23,791     $ 21,691  

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 as of the end of each respective period shown above.

Note 8.   Troubled Debt Restructuring

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually.
 
In the nine months ended September 30, 2014, there were three (one loan during quarter ended September 30, 2014) loan modifications that were considered to be troubled debt restructurings.  Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

There were no troubled debt restructurings from the previous twelve months that went into default in 2014.  A restructured loan is considered in default when it becomes 90 days past due.

 
23

 
 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 8.   Troubled Debt Restructuring, continued
 
   
Nine months ended September 30, 2014
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of Contracts
   
Recorded Investment
   
Recorded Investment
 
Troubled Debt Restructurings
                 
Commercial
        $ -     $ -  
Real Estate
  2       181       181  
Home Equity
          -       -  
Credit Cards
          -       -  
Consumer
  1       23       23  
Total
        $ 204     $ 204  
 
During the nine months and quarter ended, September 30, 2013, there was one real estate loan modification that was considered to be troubled debt restructuring.
 
There were also no troubled debt restructurings from the previous twelve months that went into default in the nine months and quarter ended September 30, 2013.  A restructured loan is considered in default when it becomes 90 days past due.
 
   
Nine months ended September 30, 2013
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of Contracts
   
Recorded Investment
   
Recorded Investment
 
Troubled Debt Restructurings
                 
Commercial
        $ -     $ -  
Real Estate
  1       50       50  
Home Equity
          -       -  
Credit Cards
          -       -  
Consumer
          -       -  
Total
        $ 50     $ 50  
 
 
24

 
F & M BANK CORP.


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.

 
25

 
F & M BANK CORP.
 
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

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. 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 31 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.

 
26

 
F & M BANK CORP.

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

Overview

Net income for the nine months ended September 30, 2014 was $4,236,000 or $1.38 per share, compared to $3,532,000 or $1.41 in the same period in 2013, an increase of 19.93% in net income however earnings per share decreased due to the shares of common stock issued by the Company in its private placement capital raise in the first quarter of 2014. Net interest income increased 7.53% from $15,866,000 to $17,061,000 compared to the same period in 2013.  During the nine months ended September 30, 2014, noninterest income decreased 12.52% and noninterest expense increased 5.84%.  The provision for loan losses decreased from $3,025,000 to $2,250,000 or 25.62%.  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
  $ 4,141     $ 3,442  
Income from Parent Company Activities
    95       90  
Net Income for the nine months ended September 30
  $ 4,236     $ 3,532  

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

Results of Operations

As shown in Table I on page 35, the 2014 year to date tax equivalent net interest income increased $1,198,000 or 7.52% compared to the same period in 2013.  Third quarter tax equivalent net interest income increased $707,000 or 13.37% compared to September 30, 2013.  The tax equivalent adjustment to net interest income totaled $74,000 for the quarter.  The year to date yield on earning assets increased .05%, while the cost of funds decreased .26% compared to the same period in 2013.  The cost of time deposits decreased by .32% 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 increase in 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 4.29%, an increase of .26% when compared to the same period in 2013. Third quarter net interest margin increased to 4.36%, an increase of .38% when compared to September 30, 2013. The $18 million increase in non-interest bearing deposits has allowed the Company to fund loan growth while reducing our cost of funds. The Company has developed a rewards deposit product to encourage deposit growth, this along with continued low rates have resulted in the growth in non-interest bearing deposits. A schedule of the net interest margin for the nine month and three month periods ended September 30, 2014 and 2013 can be found in Table I on page 35.

The Interest Sensitivity Analysis contained in Table II on page 36 indicates the Company is in an asset sensitive position in the one year time horizon. This would indicate that in a rising rate environment net interest income and net interest margin would increase as a result of assets repricing faster than liabilities. 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  42.65% of rate sensitive assets and 40.58% of rate sensitive liabilities are subject to repricing within one year. 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 $387,000 or 12.52% for the nine month period ended September 30, 2014.  The decrease is primarily due to a decrease in VBS Mortgage income. 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 $632,000 for the nine month period ended September 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 (June 30, 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 3.03% 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.
 
 
27

 
F & M BANK CORP.
 
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 as well as growth in the loan portfolio.

Securities

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 September 30, 2014, the market value of securities available for sale exceeded the cost by $1,000. The portfolio is made up of primarily agency securities with an average portfolio life of just under four 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 additional scheduled maturities in 2014.  The Bank held a short term security at year end which matured resulting in the decreased balance at September 30, 2014.

In reviewing investments as of September 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.

 
28

 
F & M BANK CORP.

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

Loans Held for Investment of $506,846,000 increased $28.4 million at September 30, 2014 compared to December 31, 2013.  The dealer finance portfolio increased $17.0 million, commercial real estate increased $7.5 million and open ended home equities increased $4.1 million.  These increases were offset by decreases in farmland loans of $1.2 million and closed end home equities totaling $.7 million.

Loans Held for Sale totaled $16,131,000 at September 30, 2014, an increase of $12,327,000 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 35.

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.  Nonperforming loans totaled $7,257,000 at September 30, 2014 compared to $14,082,000 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 September 30, 2014, the Company holds $3,956,000 of real estate which was acquired through foreclosure. This is an increase of $1,328,000 compared to December 31, 2013.

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

   
September 30,
2014
   
December 31,
2013
 
             
Nonaccrual Loans
           
     Real Estate
  $ 5,585     $ 9,963  
     Commercial
    1,334       1,890  
     Home Equity
    23       402  
     Other
    15       -  
      6.957       12,255  
                 
Loans past due 90 days or more (excluding nonaccrual)
               
     Real Estate
    -       246  
     Commercial
    -       4  
     Home Equity
    10       61  
     Other
    86       16  
      96       327  
                 
Restructured Loans
               
     Real Estate
    204       50  
     Commercial
    -       1,450  
      204       1,500  
                 
Total Nonperforming loans
  $ 7,257     $ 14,082  
                 
Nonperforming loans as a percentage of loans held for investment
    1.43 %     2.94 %
                 
Net loan losses  to average loans outstanding (held for investment)
    .37 %     .79 %
                 
Allowance for loan and lease losses to nonperforming loans
    118.52 %     58.12 %
                 
Restructured Nonaccrual
    -       -  
 
 
29

 
F & M BANK CORP.

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 $8,601,000 at September 30, 2014 is equal to 1.70% 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 $2,250,000 in the first nine months of 2014, versus $3,025,000 of allowance funding for the same period of 2013. Net charge-offs year to date totaled $1,833,000.

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.

 
30

 
F & M BANK CORP.
 
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 $23,492,000 since December 31, 2013.  Time deposits increased $645,000 during this period while demand deposits and savings deposits increased $22,847,000.  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 $25.5 million in CDARS funding, which is an increase of $14.2 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 September 30, 2014 there were no FHLB short-term borrowings and commercial repurchase agreements totaled $3,784,000 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.  In addition to the $4.0 million maturity in the second quarter, there was a borrowing that matured during the third quarter that totaled $2.5 million and a new borrowing of $10.0 million, resulting in a balance of $15,000,000 at September 30, 2014.

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 September 30, 2014 and December 31, 2013 the balance outstanding was $10,191,000.

 
31

 
F & M BANK CORP.

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

Capital

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 as of March 31, 2014.  The Company also has filed a registration statement with respect to a public offering of up to $10 million of mandatorily convertible preferred stock that is expected to close on November 14, 2014.

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 September 30, 2014, the Company's total risk based capital and leverage ratios were 17.04% and 11.49%, 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 16.78% and 11.25%, 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

Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year.  The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure.  As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs.

Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds.  To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution.  The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.

Interest Rate Sensitivity

In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet.  Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.

As of September 30, 2014, the Company had a cumulative Gap Rate Sensitivity Ratio of 12.79% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly.  Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.

A summary of asset and liability repricing opportunities is shown in Table II, on page 36.
 
 
32

 
F & M BANK CORP.

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

Effect of Newly Issued Accounting Standards

In January 2014, the FASB amended the Equity Method and Joint Ventures topic of the Accounting Standards Codification. The amendments provide criteria that must be met in order to apply a proportional amortization method to Low-Income Housing Tax Credit investments and provide guidance on the method used to amortize the investment, the impairment approach, and the eligibility criteria for entities that have other arrangements (e.g., loans) with the limited liability entity. The amendments will be effective for the Company for new investments in qualified affordable housing projects for interim and annual periods beginning after December 15, 2014.  The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016.  The Companydoes not expect this guidance to have a material effect on its financial statements.

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

Existence of Securities and Exchange Commission Web Site

The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov).

 
33

 
 
TABLE I
 
F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)
(Dollar Amounts in Thousands)

   
Nine Months Ended
   
Nine Months Ended
   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2014
   
September 30, 2013
   
September 30, 2014
   
September 30, 2013
 
Average
       
Income/
   
Average
         
Income/
   
Average
         
Income/
   
Average
         
Income/
   
Average
 
   
Balance2,4
   
Expense
   
Rates
   
Balance2,4
   
Expense
   
Rates5
   
Balance2,4
   
Expense
   
Rates
   
Balance2,4
   
Expense
   
Rates5
 
Interest income
                                                                       
     Loans held for investment1,2
  $ 490,970     $ 19,516       5.31 %   $ 468,664     $ 18,835       5.37 %   $ 500,623     $ 6,692       5.30 %   $ 474,131     $ 6,344       5.31 %
     Loans held for sale
    8,684       228       3.51 %     27,581       623       3.02 %     18,718       164       3.48 %     10,222       79       3.07 %
     Federal funds sold
    19,392       31       .21 %     22,079       36       .22 %     11,743       7       .24 %     30,424       17       .22 %
     Interest bearing deposits
    891       -       -       1,140       4       .47 %     1,139       -       -       748       2       1.06 %
     Investments
                                                                                               
Taxable 3
    13,347       137       1.37 %     11,856       140       1.58 %     13,644       38       1.11 %     11,157       39       1.39 %
Partially taxable
    116       -       -       107       -       -       113       -       -       107       -       -  
     Total earning assets
  $ 533,400     $ 19,912       4.99 %   $ 531,427     $ 19,638       4.94 %   $ 545,980     $ 6,901       5.01 %   $ 526,789     $ 6,481       4.88 %
Interest Expense
                                                                                               
     Demand deposits
    117,542       501       .57 %     120,747       608       .67 %     114,996       165       .57 %     117,017       198       .67 %
     Savings
    58,940       88       .20 %     51,993       91       .23 %     61,910       31       .20 %     53,899       29       .21 %
     Time deposits
    195,282       1,309       .90 %     199,598       1,804       1.21 %     193,883       416       .85 %     197,137       575       1.16 %
     Short-term debt
    3,556       7       .26 %     7,098       22       .41 %     3,808       3       .31 %     3,378       3       .35 %
     Long-term debt
    22,277       872       5.23 %     39,506       1,175       3.98 %     23,995       292       4.83 %     35,474       389       4.35 %
     Total interest bearing liabilities
  $ 397,597     $ 2,777       .93 %   $ 418,942     $ 3,700       1.19 %   $ 398,592     $ 907       .90 %   $ 406,905     $ 1,194       1.16 %
                                                                                                 
Tax equivalent net interest income 1
          $ 17,135                     $ 15,938                     $ 5,994                     $ 5,287          
                                                                                                 
Net interest margin
                    4.29 %                     4.01 %                     4.36 %                     3.98 %
 
1      Interest income on loans includes loan fees.
2      Loans held for investment include nonaccrual loans.
 
3
An incremental income tax rate of 34% was used to calculate the tax equivalent income (see page 27) on nontaxable and partially taxable investments and loans.
4      Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

 
34

 
 
TABLE II

F & M BANK CORP.
Interest Sensitivity Analysis
 
September 30, 2014
(In Thousands of Dollars)

The following table presents the Company’s interest sensitivity.

    0 – 3     4 – 12     1 – 5    
Over 5
   
Not
       
   
Months
   
Months
   
Years
   
Years
   
Classified
   
Total
 
                                           
Uses of funds
                                         
Loans
                                         
Commercial
  $ 28,400     $ 24,713     $ 110,346     $ 7,349     $ -     $ 170,808  
Installment
    4,486       855       31,220       11,030       -       47,591  
Real estate loans for investments
    94,934       45,876       138,451       6,660       -       285,921  
Loans held for sale
    16,131       -       -       -       -       16,131  
Credit cards
    2,526       -       -       -       -       2,526  
Federal funds sold
    16,165       -       -       -       -       16,165  
Interest bearing bank deposits
    1,039       -       -       -       -       1,039  
Investment securities
    -       125       10,076       1,064       135       11,400  
Total
  $ 163,681     $ 71,569     $ 290,093     $ 26,103     $ 135     $ 551,581  
                                                 
Sources of funds
                                               
Interest bearing demand deposits
  $ -     $ 30,944     $ 67,612     $ 18,335     $ -     $ 116,891  
Savings deposits
    -       12,680       38,041       12,680       -       63,401  
Certificates of deposit $100,000 and over
    28,178       17,989       32,144       -       -       78,311  
Other certificates of deposit
    19,372       46,258       52,708       -       -       118,338  
Short-term borrowings
    3,784       -       -       -       -       3,784  
Long-term borrowings
    5,125       375       8,785       10,906       -       25,191  
Total
  $ 56,459     $ 108,246     $ 199,290     $ 41,920     $ -     $ 405,915  
                                                 
Discrete Gap
  $ 107,222     $ (36,677 )   $ 90,803     $ (15,817 )   $ 135     $ 145,666  
                                                 
Cumulative Gap
  $ 107,222     $ 70,545     $ 161,348     $ 145,531     $ 145,666          
                                                 
Ratio of Cumulative Gap to Total Earning Assets
    19.44 %     12.79 %     29.25 %     26.38 %     26.41 %        
 
Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2014.  In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice.  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 of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.
 
 
35

 
F & M BANK CORP.
 

Not Applicable


Evaluation of Disclosure Controls and Procedures

As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.
 
The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) of the Act), have concluded that the Company’s disclosure controls and procedures are effective for purposes of Rule 13(a)-15(b).
 
Changes in Internal Controls

The findings of the internal auditor are presented to management of the Bank and to the Audit Committee of the Company.  During the period covered by this report, there were no changes to the internal controls over financial reporting of the Company that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 
36

 
F & M BANK CORP.
 

 
There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.

 
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 
None

 
None


 
None


(a)           Exhibits
 
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
   
32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
101 The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

 
 
37

 
F & M BANK CORP.


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
F & M BANK CORP.
 
       
 
By:
/s/ Dean W. Withers    
   
Dean W. Withers
 
   
President and Chief Executive Officer
 
       
       
 
By:
/s/ Carrie A. Comer
 
   
Carrie A. Comer
 
   
Senior Vice President and Chief Financial Officer
 
       
 
November 14, 2014


 
38

 
F & M BANK CORP.

Exhibit Index:

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
   
32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
101 The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

 
39