F&M BANK CORP - Annual Report: 2015 (Form 10-K)

fmbm_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended December 31, 2015

Commission file number: 0-13273

F & M BANK CORP.

(Exact name of registrant as specified in its charter)

Virginia		54-1280811
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

P. O. Box 1111, Timberville, Virginia 22853

(Address of principal executive offices) (Zip Code)

(540) 896-8941

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock - $5 Par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Sarbanes Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Non-accelerated filer o (Do not check if a smaller reporting company)

Accelerated filer o

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

The registrant’s Common Stock is traded Over-the-Counter under the symbol FMBM. The aggregate market value of the 2,949,418 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2015 was approximately $66,066,952 based on the closing sales price of $22.40 per share on that date. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant.

As of the close of business on March 21, 2016, there were 3,298,983 shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III: Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 2016 (the “Proxy Statement”).

Table of Contents

		Page

PART I

Item 1	Business	2

Item 1A	Risk Factors	7

Item 1B	Unresolved Staff Comments	11

Item 2	Properties	12

Item 3	Legal Proceedings	12

Item 4	Mine Safety Disclosures	12


PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13

Item 6	Selected Financial Data	15

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 8	Financial Statements and Supplementary Data	38

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81

Item 9A	Controls and Procedures	81

Item 9B	Other Information	81

PART III

Item 10	Directors, Executive Officers and Corporate Governance	82

Item 11	Executive Compensation	82

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	81

Item 13	Certain Relationships and Related Transactions and Director Independence	82

Item 14	Principal Accounting Fees and Services	82

PART IV

Item 15	Exhibits and Financial Statement Schedules	83

Signatures		84

PART I

Item 1. Business

General

F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and owns 100% of the outstanding stock of its affiliate, Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services, Inc. (FMFS) are wholly owned subsidiaries of Farmers & Merchants Bank. Farmers & Merchants Bank also holds a majority ownership in VBS Mortgage LLC, (VBS).

Farmers & Merchants Bank was chartered on April 15, 1908, as a state chartered bank under the laws of the Commonwealth of Virginia. TEB was incorporated on January 27, 1988, as a captive life insurance company under the laws of the State of Arizona. FMFS is a Virginia chartered corporation and was incorporated on February 25, 1993. VBS (formerly Valley Broker Services, Inc.) was incorporated on May 11, 1999. The Bank purchased a majority interest in VBS on November 3, 2008.

As a commercial bank, the Bank offers a wide range of banking services including commercial and individual demand and time deposit accounts, repurchase agreements for commercial customers, commercial and individual loans, internet and mobile banking, drive-in banking services, ATMs at all branch locations and several off-site locations, as well as a courier service for its commercial banking customers. TEB was organized to re-insure credit life and accident and health insurance currently being sold by the Bank in connection with its lending activities. FMFS was organized to write title insurance but now provides brokerage services, commercial and personal lines of insurance to customers of the Bank. VBS originates conventional and government sponsored mortgages through their offices in Harrisonburg, Woodstock and Fishersville.

The Bank makes various types of commercial and consumer loans and has a large portfolio of residential mortgages and a concentration in development lending. The local economy is relatively diverse with strong employment in the agricultural, manufacturing, service and governmental sectors.

The Company’s and the Bank’s principal executive office is at 205 South Main Street, Timberville, VA 22853, and its phone number is (540) 896-8941.

Filings with the SEC

The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”). These reports are posted and are available at no cost on the Company’s website, www.FMBankVA.com, as soon as reasonably practicable after the Company files such documents with the SEC. The Company’s filings are also available through the SEC’s website at www.sec.gov.

Employees

On December 31, 2015, the Bank had 168 full-time and part-time employees; including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers their employee relations to be excellent. No one employee devotes full-time services to F & M Bank Corp.

Competition

The Bank's offices face strong competition from numerous other financial institutions. These other institutions include large national and regional banks, other community banks, nationally chartered savings banks, credit unions, consumer finance companies, mortgage companies, loan production offices, mutual funds and life insurance companies. Competition for loans and deposits is affected by a variety of factors including interest rates, types of products offered, the number and location of branch offices, marketing strategies and the reputation of the Bank within the communities served.

PART I, continued

Item 1. Business, continued

Regulation and Supervision

General. The operations of F & M Bank Corp. and the Bank are subject to federal and state statutes, which apply to bank holding companies and state member banks of the Federal Reserve System. The common stock of F & M Bank Corp. is registered pursuant to and subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). These include, but are not limited to, the filing of annual, quarterly and other current reports with the Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Company is directly affected by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which is aimed at improving corporate governance and reporting procedures. The Company believes it is in compliance with SEC and other rules and regulations implemented pursuant to Sarbanes-Oxley and intends to comply with any applicable rules and regulations implemented in the future.

F & M Bank Corp., as a bank holding company, is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Act") and is supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Act requires F & M Bank Corp. to secure the prior approval of the Federal Reserve Board before F & M Bank Corp. acquires ownership or control of more than 5% of the voting shares or substantially all of the assets of any institution, including another bank.

As a bank holding company, F & M Bank Corp. is required to file with the Federal Reserve Board an annual report and such additional information as it may require pursuant to the Act. The Federal Reserve Board may also conduct examinations of F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the 1970 Amendments to the Act and the regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, provision of credit, sale or lease of property or furnishing of services.

Federal Reserve Board regulations limit activities of bank holding companies to managing or controlling banks or non-banking activities closely related to banking. These activities include the making or servicing of loans, performing certain data processing services, and certain leasing and insurance agency activities. Since 1994, the Company has entered into agreements with the Virginia Community Development Corporation to purchase equity positions in several Low Income Housing Funds; these funds provide housing for low-income individuals throughout Virginia. Approval of the Federal Reserve Board is necessary to engage in any of the activities described above or to acquire interests engaging in these activities.

The Bank as a state member bank is supervised and regularly examined by the Virginia Bureau of Financial Institutions and the Federal Reserve Board. Such supervision and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Board is intended primarily for the protection of depositors and not the stockholders of F & M Bank Corp.

Payment of Dividends. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company. Under the current regulatory guidelines, prior approval from the Federal Reserve Board is required if cash dividends declared in any given year exceed net income for that year, plus retained net profits of the two preceding years. A bank also may not declare a dividend out of or in excess of its net undivided profits without regulatory approval. The payment of dividends by the Bank or the Company may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines.

Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting their businesses. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice. Based on the Bank’s current financial condition, the Company does not expect that any of these laws will have any impact on its ability to obtain dividends from the Bank.

The Company also is subject to regulatory restrictions on dividends to its shareholders. Regulators have indicated that bank holding companies should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Further, a bank holding company should inform and consult with the Federal Reserve Board prior to declaring a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure.

PART I, continued

Item 1. Business, continued

Regulation and Supervision, continued

Capital Requirements. In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that substantially amends the regulatory risk-based capital rules applicable to us. The final rule implements the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act (see definition below). The final rule includes new minimum risk-based capital and leverage ratios which was effective for us on January 1, 2015, and refines the definition of what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 ("CET1") capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the previous rules; and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a "capital conservation buffer" of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities.

The CETI and Tier 1 leverage ratio of the Company as of December 31, 2015, were 12.46% and 12.18%, respectively, which are significantly above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

The Gramm-Leach-Bliley Act. Effective on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB Act”) allows a bank holding company or other company to certify status as a financial holding company, which will allow such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker; dealing in or making markets in securities; and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.

USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Northern Virginia which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Community Reinvestment Act. The requirements of the Community Reinvestment Act are also applicable to the Bank. The act imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

PART I, continued

Item 1. Business, continued

Regulation and Supervision, continued

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impact the Company is the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to implement, examine and enforce complaints with federal consumer protection laws, which govern all financial institutions. For smaller financial institutions such as the Company and the Bank, their primary regulators will continue to conduct its examination activities.

The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. In addition, the Federal Reserve has issued new rules that have the effect of limiting the fees charged to merchants for debit card transactions. The result of these rules will be to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

Although the Dodd-Frank Act provisions themselves are extensive, the ultimate impact on the Company of this massive legislation is unknown. The Act provides that several federal agencies, including the Federal Reserve and the Securities and Exchange Commission, shall issue regulations implementing major portions of the legislation, and this process is ongoing.

Mortgage Lending. In 2013, the CFPB adopted a rule, effective in January 2014, to implement certain sections of the Dodd-Frank Act requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay any closed-end consumer credit transaction secured by a 1-4 family dwelling. The rule also establishes certain protections from liability under this requirement to ensure a borrower’s ability to repay for loans that meet the definition of “qualified mortgage.” Loans that satisfy this “qualified mortgage” safe harbor will be presumed to have complied with the new ability-to-repay standard.

Forward-Looking Statements

Certain information contained in this report may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. 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;

●	Aninsufficient allowance for loan losses as a result of inaccurate assumptions;

●	Ourability to maintain our “well-capitalized” regulatory status;

●	Changesin 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;

●	Ourability 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;

●	Ourexposure to operational risk;

●	Ourability to raise capital as needed by our business;

●	Changesin laws, regulations and the policies of federal or state regulators and agencies; and

●	Othercircumstances, many of which are beyond our control.

PART I, continued

Item 1. Business, continued

Forward looking statements, continued

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

Item 1A. Risk Factors

General economic conditions in our market area could adversely affect us.

We are affected by the general economic conditions in the local markets in which we operate. Since the recession began in 2008, our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. Although economic conditions have improved, many businesses and individuals are still experiencing difficulty as a result of the economic downturn and protracted recovery. If economic conditions in our market deteriorate from current conditions, we could experience further adverse consequences, including a decline in demand for our products and services and an increase in problem assets, forecloses and loan losses. Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation, any of which could negatively affect our performance and financial condition.

Our allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.

Like all financial institutions, we maintain an allowance for loan losses to provide for loans that our borrowers may not repay in their entirety. We believe that we maintain an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. At December 31, 2015, our non-performing loans were $6.5 million, compared to $6.9 million at December 31, 2014. Our provision for loan losses was $.3 million for the year ended December 31, 2015, and our loan loss allowance was $8.8 million, or 1.61% of total loans held for investment at December 31, 2015.

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot fully predict such losses or that the loss allowance will be adequate in the future. While the risk of nonpayment is inherent in banking, we could experience greater nonpayment levels than we anticipate. In addition, we have loan participation arrangements with several other banks within the region and may not be able to exercise control of negotiations with borrowers in the event these loans do not perform. Additional problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase further, which could adversely affect our results of operations and financial condition.

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the amount of the provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

PART I, continued

Item 1A. Risk Factors, continued

Our loan concentrations could, as a result of adverse market conditions, increase credit losses which could adversely impact earnings.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area, which could result in adverse consequences to us in the event of a prolonged economic downturn in our market. As of December 31, 2015, approximately 83% of our loans had real estate as a primary or secondary component of collateral. A significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished. In addition, our consumer loans (such as automobile loans) are collateralized, if at all, with assets that may not provide an adequate source of repayment of the loan due to depreciation, damage or loss.

In addition, we have a large portfolio of residential mortgages and a concentration in development lending, both of which could be adversely affected by a decline in the real estate markets. Construction and development lending entails significant additional risks, because these loans, which often involve larger loan balances concentrated with single borrowers or groups of related borrowers, are dependent on the successful completion of real estate projects. Loan funds for construction and development loans often are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. The deterioration of one or a few of these loans could cause a significant increase in the percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition.

Our small-to-medium sized business target market may have fewer financial resources to weather continued downturn in the economy.

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

Our inability to maintain adequate sources of funding and liquidity may negatively impact our current financial condition or our ability to grow.

Our access to funding and liquidity sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. In managing our balance sheet, a primary source of funding asset growth and liquidity historically has been deposits, including both local customer deposits and brokered deposits. If the level of deposits were to materially decrease, we would have to raise additional funds by increasing the interest that we pay on certificates of deposit or other depository accounts, seek other debt or equity financing, or draw upon our available lines of credit. Our access to these funding and liquidity sources could be detrimentally impacted by a number of factors, including operating losses, rising levels of non-performing assets, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or regulatory restrictions. In addition, our ability to continue to attract deposits and other funding or liquidity sources is subject to variability based upon additional factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. We do not maintain significant additional sources of liquidity through potential sales in our investment portfolio or liquid assets at the holding company level. Our potential inability to maintain adequate sources of funding or liquidity may, among other things, inhibit our ability to fund asset growth or negatively impact our financial condition, including our ability to pay dividends or satisfy our obligations.

PART I, continued

Item 1A. Risk Factors, continued

If we do not maintain our capital requirements and our status as a “well-capitalized” bank, there could an adverse effect on our liquidity and our ability to fund our loan portfolio.

We are subject to regulatory capital adequacy guidelines. If we fail to meet the capital adequacy guidelines for a “well-capitalized” bank, it could increase the regulatory scrutiny for the Bank and the Company. In addition, if we failed to be “well capitalized” for regulatory capital purposes, we would not be able to renew or accept brokered deposits without prior regulatory approval and we would not be able to offer interest rates on our deposit accounts that are significantly higher than the average rates in our market area. As a result, it would be more difficult for us to attract new deposits as our existing brokered deposits mature and do not roll over and to retain or increase existing, non-brokered deposits. If we are prohibited from renewing or accepting brokered deposits and are unable to attract new deposits, our liquidity and our ability to fund our loan portfolio may be adversely affected. In addition, we would be required to pay higher insurance premiums to the FDIC, which would reduce our earnings.

We are subject to more stringent capital requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act which could adversely affect our results of operations and future growth.

In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that substantially amends the regulatory risk-based capital rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios which was effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the previous rules; and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. In addition, the final rule provides for a number of new deductions from and adjustments to capital and prescribes a revised approach for risk weightings that could result in higher risk weights for a variety of asset categories.

The application of these more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, adversely affect our future growth opportunities, and result in regulatory actions such as a prohibition on the payment of dividends or on the repurchase shares if we are unable to comply with such requirements.

New regulations could adversely impact our earnings due to, among other things, increased compliance costs or costs due to noncompliance.

The Consumer Financial Protection Bureau has issued a rule, effective as of January 14, 2014, designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including but not limited to:

·	excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

·	interest-only payments;

·	negative-amortization; and

·	terms longer than 30 years.

PART I, continued

Item 1A. Risk Factors, continued

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our growth or profitability.

Additionally, on December 10, 2013, five financial regulatory agencies, including our primary federal regulator, the Federal Reserve, adopted final rules implementing a provision of the Dodd-Frank Act, commonly referred to as the Volcker Rule. The Final Rules prohibit banking entities from, among other things, engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; or owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” On January 14, 2014, the five financial regulatory agencies, approved an adjustment to the final rule by allowing banks to keep certain collateralized debt obligations (“CDOs”) acquired the bank before the Volcker Rule was finalized, if the CDO was established before May 2010 and is backed primarily by trust preferred securities issued by banks with less than $15 billion in assets established. The rules were effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. This will not have an impact on the Company.

Our future success is dependent on our ability to effectively compete in the face of substantial competition from other financial institutions in our primary markets.

We encounter significant competition for deposits, loans and other financial services from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions in our market area. A number of these banks and other financial institutions are significantly larger than us and have substantially greater access to capital and other resources, larger lending limits, more extensive branch systems, and may offer a wider array of banking services. To a limited extent, we compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations any of which may offer more favorable financing rates and terms than us. Many of these non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors may have advantages in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

Our exposure to operational risk may adversely affect us.

Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

PART I, continued

Item 1A. Risk Factors, continued

Changes in market interest rates could affect our cash flows and our ability to successfully manage our interest rate risk.

Our profitability and financial condition depend to a great extent on our ability to manage the net interest margin, which is the difference between the interest income earned on loans and investments and the interest expense paid for deposits and borrowings. The amounts of interest income and interest expense are principally driven by two factors; the market levels of interest rates, and the volumes of earning assets or interest bearing liabilities. The management of the net interest margin is accomplished by our Asset Liability Management Committee. Short term interest rates are highly sensitive to factors beyond our control and are effectively set and managed by the Federal Reserve, while longer term rates are generally determined by the market based on investors’ inflationary expectations. Thus, changes in monetary and or fiscal policy will affect both short term and long term interest rates which in turn will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if we do not effectively manage the relative sensitivity of our earning assets and interest bearing liabilities to changes in market interest rates. We generally attempt to maintain a neutral position in terms of the volume of earning assets and interest bearing liabilities that mature or can re-price within a one year period in order that we may maintain the maximum net interest margin; however, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and greatly influence this ability to maintain a neutral position.

Generally, our earnings will be more sensitive to fluctuations in interest rates the greater the difference between the volume of earning assets and interest bearing liabilities that mature or are subject to re-pricing in any period. The extent and duration of this sensitivity will depend on the cumulative difference over time, the velocity and direction of interest rate changes, and whether we are more asset sensitive or liability sensitive. Additionally, the Asset Liability Management Committee may desire to move our position to more asset sensitive or more liability sensitive depending upon their expectation of the direction and velocity of future changes in interest rates in an effort to maximize the net interest margin. Should we not be successful in maintaining the desired position, or should interest rates not move as anticipated, our net interest margin may be negatively impacted.

In December of 2015 the Federal Open Market Committee (FOMC) voted to raise the fed funds rate from .00-.25% to .25-.50% in a unanimous decision, with indication rates would increase again in 2016. As indicated above the Company analyzes their risk and is prepared for future changes in interest rates.

Our inability to successfully manage growth or implement our growth strategy may adversely affect our results of operations and financial condition.

We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future. Our ability to manage growth successfully also depends on whether we can maintain capital levels adequate to support our growth, maintain cost controls, asset quality and successfully integrate any businesses acquired into the organization.

As we continue to implement our growth strategy, we may incur increased personnel, occupancy and other operating expenses. We must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, our plans to branch could depress earnings in the short run, even if we efficiently execute a branching strategy leading to long-term financial benefits.

PART I, continued

Item 1A. Risk Factors, continued

Our operations rely on certain external vendors.

We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service agreements. Although we maintain a system of comprehensive policies and a control framework designed to monitor vendor risks, the failure of an external vendor to perform in accordance with the contracted arrangements under service agreements could be disruptive to our operations, which could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

Our operations may be adversely affected by cyber security risks.

In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and our business strategy. We have invested in accepted technologies and review processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to our reputation, which could adversely affect our business.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.

We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Additionally, actions by regulatory agencies or significant litigation against us could cause us to devote significant time and resources to defending ourselves and may lead to penalties that materially affect us. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse us and our shareholders.

Changes in accounting standards could impact reported earnings.

The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Item 1B. Unresolved Staff Comments

The Company does not have any unresolved staff comments to report for the year ended December 31, 2015.

PART I, continued

Item 2. Properties

The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.

Timberville Branch and Administrative Offices	Elkton Branch
205 South Main Street	127 West Rockingham Street
Timberville, VA 22853	Elkton, VA 22827

Broadway Branch	Port Road Branch
126 Timberway	1085 Port Republic Road
Broadway, VA 22815	Harrisonburg, VA 22801

Bridgewater Branch	Edinburg Branch
100 Plaza Drive	120 South Main Street
Bridgewater, VA 22812	Edinburg, VA 22824

Woodstock Branch	Crossroads Branch
161 South Main Street	80 Cross Keys Road
Woodstock, VA 22664	Harrisonburg, VA 22801

Luray Branch	Dealer Finance Division
700 East Main Street	4759 Spotswood Trail
Luray, VA 22835	Penn Laird, VA 22846

Fishersville Loan Production Office	North Augusta Branch
1842 Jefferson Hwy	2813 North Augusta Street
Fishersville, VA 22939	Staunton, VA 22401

Craigsville Branch
125 W. Craig Street
Craigsville, VA 24430

With the exception of the Edinburg Branch, Port Road Branch, Luray Branch, Dealer Finance Division, the Fishersville Loan Production Office and the North Augusta Branch the remaining facilities are owned by Farmers & Merchants Bank. ATMs are available at all branch locations.

Through an agreement with FCTI, Inc., the Bank also operates cash only ATMs at five Food Lion grocery stores, one in Mt. Jackson, VA and four in Harrisonburg, VA. The Bank also has an agreement with CardTronics ATM to operate twleve cash only ATMs in various Rite Aid Pharmacies, CVS Pharmacies and Target Stores in Rockingham and Augusta Counties of VA.

VBS’ offices are located at:

Harrisonburg Office	Woodstock Office	Fishersville Loan Production Office
2040 Deyerle Avenue	161 South Main Street	1842 Jefferson Hwy 161
Suite 107	Woodstock, VA 22664	Fishersville, VA 22939
Harrisonburg, VA 22801

Item 3. Legal Proceedings

In the normal course of business, the Company may become involved in litigation arising from banking, financial, or other activities of the Company. Management after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

Item 4. Mine Safety Disclosures

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Listing

The Company’s Common Stock is quoted under the symbol “FMBM” on the OTCQX Market. The bid and ask price is quoted at www.OTCMARKETS.com/Stock/FMBM/quote. With its inclusion on the OTCQX Markets, there are now several active market makers for FMBM stock.

Transfer Agent and Registrar

Broadridge Financial Solutions

2 Journal Plaza Square, 7th Floor

Jersey City, NJ 07306

Stock Performance

The following graph compares the cumulative total return to the shareholders of the Company for the last five fiscal years with the total return of the Russell 2000 Index and the SNL Bank Index, as reported by SNL Financial, LC, assuming an investment of $100 in the Company’s common stock on December 31, 2010, and the reinvestment of dividends.

			Period Ending

Index	12/31/10		12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
F & M Bank Corp.		100.00		98.06		113.68		143.51		156.93		189.07
Russell 2000		100.00		95.82		111.49		154.78		162.35		155.18
SNL Bank		100.00		77.44		104.51		143.49		160.40		163.14

PART II, continued

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, continued

Recent Stock Prices and Dividends

Dividends to common shareholders totaled $2,405,000 and $2,104,000 in 2015 and 2014, respectively. Preferred stock dividends were $510,000 and $128,000 in 2015 and 2014, respectively. Regular quarterly dividends have been declared for at least 23 years. The payment of dividends depends on the earnings of the Company and its subsidiaries, the financial condition of the Company and other factors including capital adequacy, regulatory requirements, general economic conditions and shareholder returns. The ratio of dividends per common share to net income per common share was 30.42% in 2015, compared to 37.36% in 2014.

Refer to Payment of Dividends in Item 1. Business, Regulation and Supervision section above for restrictions on dividends.

Stock Repurchases

As previously reported, on September 18, 2008, the Company’s Board of Directors approved an increase in the number of shares of common stock that the Company can repurchase under the share repurchase program from 150,000 to 200,000 shares. Shares repurchased through the end of 2015 totaled 177,409 shares; of this amount, 13,277 were repurchased in 2015.

The number of common shareholders of record was approximately 1,859 as of March 21, 2016. This amount includes all shareholders, whether titled individually or held by a brokerage firm or custodian in street name.

Quarterly Stock Information

These quotes include the terms of trades transacted through a broker. The terms of exchanges occurring between individual parties may not be known to the Company.

	2015						2014
	Stock Price Range				Per Share		Stock Price Range				Per Share
Quarter	Low		High		Dividends Declared		Low		High		Dividends Declared

1st		19.30		20.95	$	.18		17.21		18.00	$	.17
2nd		20.00		24.50		.18		17.27		19.90		.17
3rd		20.98		22.45		.18		17.70		19.08		.17
4th		21.10		24.47		.19		17.83		19.73		.17
Total					$	.73					$	.68

PART II, continued

Item 6. Selected Financial Data

Five Year Summary of Selected Financial Data

(Dollars in thousands, except per share data)	2015			2014			2013			2012			2011
Income Statement Data:
Interest and Dividend Income	$	29,353		$	26,772		$	25,966		$	27,225		$	27,680
Interest Expense		2,876			3,648			4,773			6,294			7,719

Net Interest Income		26,477			23,124			21,193			20,931			19,961
Provision for Loan Losses		300			2,250			3,775			4,200			4,000

Net Interest Income after Provision for Loan Losses		26,177			20,874			17,418			16,731			15,961
Noninterest Income		3,732			3,485			3,925			3,627			3,118
Low Income Housing Partnership Losses		(620	)		(608	)		(856	)		(621	)		(467	)
Securities Gains (Losses)		-			-			-			-			1,024
Noninterest Expenses		17,986			15,656			14,720			13,362			12,892

Income before Income Taxes		11,303			8,095			5,767			6,375			6,744
Income Tax Expense		2,886			2,293			1,051			1,474			2,056
Net Income	$	8,417		$	5,802		$	4,716		$	4,901		$	4,688
Per Share Data:
Net Income – basic	$	2.40		$	1.82		$	1.88		$	1.96		$	1.91
Net Income - diluted	$	2.25		$	1.80		$	-		$	-		$	-
Dividends Declared		.73			.68			.68			.64			.60
Book Value per Common Share		22.38			20.77			21.56			19.76			18.53
Balance Sheet Data:
Assets	$	665,357		$	605,308		$	552,788		$	596,904		$	566,734
Loans Held for Investment		544,053			518,202			478,453			465,819			451,570
Loans Held for Sale		57,806			13,382			3,804			77,207			60,543
Securities		25,329			22,305			38,486			18,807			22,108
Deposits		494,670			491,505			464,149			453,796			435,947
Short-Term Debt		24,954			14,358			3,423			34,597			18,539
Long-Term Debt		48,161			9,875			21,691			47,905			57,298
Stockholders’ Equity		82,950			77,798			54,141			49,384			46,180
Average Common Shares Outstanding – basic		3,291			3,119			2,504			2,496			2,450
Average Common Shares Outstanding – diluted		3,735			3,230			-			-			-
Financial Ratios:
Return on Average Assets1		1.31	%		1.00	%		.82	%		.86	%		.84	%
Return on Average Equity1		10.46	%		8.65	%		9.11	%		10.26	%		10.41	%
Net Interest Margin		4.43	%		4.30	%		4.02	%		3.95	%		3.87	%
Efficiency Ratio 2		58.96	%		58.51	%		58.15	%		54.03	%		55.43	%
Dividend Payout Ratio - Common		30.42	%		37.36	%		36.17	%		32.65	%		31.41	%
Capital and Credit Quality Ratios:
Average Equity to Average Assets1		12.49	%		11.59	%		9.00	%		8.35	%		8.14	%
Allowance for Loan Losses to Loans3		1.61	%		1.68	%		1.71	%		1.75	%		1.54	%
Nonperforming Loans to Total Assets4		.98	%		1.15	%		2.28	%		2.24	%		2.61	%
Nonperforming Assets to Total Assets5		1.34	%		1.73	%		2.75	%		2.73	%		3.15	%
Net Charge-offs to Total Loans3		.04	%		.33	%		.78	%		.64	%		.63	%

1	Ratios are primarily based on daily average balances.

2	The Efficiency Ratio equals noninterest expenses divided by the sum of tax equivalent net interest income and noninterest income. Noninterest expenses exclude intangible asset amortization. Noninterest income excludes gains (losses) on securities transactions and LIH Partnership losses.

3	Calculated based on Loans Held for Investment, excludes Loans Held for Sale.

4	Calculated based on 90 day past due and non-accrual to Total Assets.

5	Calculated based on 90 day past due, non-accrual and OREO to Total Assets

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of F & M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.

Capital Activities

The Company raised $12 million through the sale of common stock in a private placement offering in March of 2014. In addition the Company raised $9.4 million through the sale of Series A preferred stock in a public offering in December 2014. Both amounts are net of fees related to the offering.

Lending Activities

Credit Policies

The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions. In an effort to manage the risk, our loan policy gives loan amount approval limits to individual loan officers based on their position and level of experience and to our loan committees based on the size of the lending relationship. The risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.

We have written policies and procedures to help manage credit risk. We have a loan review policy that includes regular portfolio reviews to establish loss exposure and to ascertain compliance with our loan policy.

We use a management loan committee and a directors’ loan committee to approve loans. The management loan committee is comprised of members of senior management, and the directors’ loan committee is composed of any six directors. Both committees approve new, renewed and or modified loans that exceed officer loan authorities. The directors’ loan committee also reviews any changes to our lending policies, which are then approved by our board of directors.

Construction and Development Lending

We make construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest changes. The majority of the interest rates charged on these loans float with the market. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, we generally limit loan amounts to 75% to 90% of appraised value, in addition to analyzing the creditworthiness of our borrowers. We also obtain a first lien on the property as security for our construction loans and typically require personal guarantees from the borrower’s principal owners.

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate in our market area, including multi-family residential buildings, commercial buildings and offices, shopping centers and churches. Commercial real estate lending entails significant additional risks, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy in general. Our commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and reputation. We also evaluate the location of the security property and typically require personal guarantees or endorsements of the borrower’s principal owners.

Business Lending

Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of our business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from his employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.

Consumer Lending

We offer various consumer loans, including personal loans and lines of credit, automobile loans, deposit account loans, installment and demand loans, and home equity lines of credit and loans. Such loans are generally made to clients with whom we have a pre-existing relationship. We currently originate all of our consumer loans in our geographic market area.

The underwriting standards employed by us for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount. For home equity lines of credit and loans, our primary consumer loan category, we require title insurance, hazard insurance and, if required, flood insurance.

Residential Mortgage Lending

The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan to value limits ranging between 80 and 90% depending on the age of the property, borrower’s income and credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates that can change every three to five years, based on amortization periods of twenty to thirty years.

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Loans Held for Sale

The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary VBS Mortgage. These loans are typically on the Bank’s books for two to three weeks prior to being sold to investors in the secondary market. Similarly, the Bank also has a relationship with Gateway Savings Bank in Oakland, CA and Northpointe Bank in Grand Rapids, MI whereby it purchases fixed rate conforming 1-4 family mortgage loans for short periods of time pending those loans being sold to investors in the secondary market. These loans have an average duration of ten days to two weeks, but occasionally remain on the Bank’s books for up to 60 days. The Bank has maintained a relationship with Gateway Bank since 2003 and began its relationship with Northpointe Bank in 2014. This relationship allows the Bank to achieve a higher rate of return than is available on other short term investment opportunities.

Dealer Finance Division

On September 25, 2012, the Bank began a loan production office in Penn Laird, VA which specializes in providing automobile financing through a network of automobile dealers. The Dealer Finance Division was staffed with three officers that have extensive experience in Dealer Finance. This office is serving the automobile finance needs for customers of dealers throughout the existing geographic footprint of the Bank. Approximately forty dealers have signed contracts to originate loans on behalf of the Bank.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 (formerly SFAS No. 5) “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 (formerly SFAS No. 114), “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company’s allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management’s estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Allowance for Loan Losses, continued

Allowances for loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the loan portfolio. Specific allowances are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Goodwill and Intangibles

In June 2001, the Financial Accounting Standards Board issued ASC 805 (formerly SFAS No. 141), Business Combinations and ASC 350 (formerly SFAS No. 142), Intangibles. ASC 805 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 was effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

The Company adopted ASC 350 on January 1, 2002. Goodwill totaled $2,639,000 at January 1, 2002. As of December 31, 2008, the Company recognized $30,000 in additional goodwill related to the purchase of 70% ownership in VBS Mortgage. The goodwill is not amortized but is tested for impairment at least annually. Based on this testing, there were no impairment charges for 2015, 2014 or 2013. Application of the non-amortization provisions of the Statement resulted in additional net income of $120,000 for each of the years ended December 31, 2015, 2014 and 2013.

Core deposit intangibles are amortized on a straight-line basis over a ten year life. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over its estimated useful life. The core deposit intangible was fully amortized during 2011.

Income Tax

The determination of income taxes represents results in income and expense being recognized in different periods for financial reporting purposes versus for the purpose of computing income taxes currently payable. Deferred taxes are provided on such temporary differences and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Further, the Company seeks strategies that minimize the tax effect of implementing its business strategies. Management makes judgements regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. As a result, it is considered a significant estimate.

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Fair Value

The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management’s judgment is necessary to estimate fair value possibly including estimates that incorporate estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.

Pension Plan Accounting

The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated obligation include discount rates, expected return on assets, mortality rates, health care cost trend rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company’s financial condition and results of operations. As a result, accounting for the Company’s pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.

PART II, continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Overview

The Company’s net income for 2015 totaled $8,417,000 or $2.40 per common share, an increase of 45.07% from $5,802,000 or $1.82 a share in 2014. Return on average equity increased in 2015 to 10.46% versus 8.65% in 2014, and the return on average assets increased from 1.00% to 1.31%.

See page 16 for a five-year summary of selected financial data.

Changes in Net Income per Common Share

	2015			2014
	to 2014			to 2013
Prior Year Net Income Per Common Share	$	1.82		$	1.88
Change from differences in:
Net interest income		1.02			.77
Provision for credit losses		.59			.61
Noninterest income, excluding securities gains		.08			(.18	)
Noninterest expenses		(.71	)		(.37	)
Income taxes		(.18	)		(.40	)
Effect of common stock raise		-			(.49	)
Effect of preferred stock dividend		(.12	)		-
Effect of increase in average shares outstanding		(.10	)		-
Total Change		.58			(.06	)
Net Income Per Common Share	$	2.40		$	1.82

Net Interest Income

The largest source of operating revenue for the Company is net interest income, which is calculated as the difference between the interest earned on earning assets and the interest expense paid on interest bearing liabilities. The net interest margin is the net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and interest bearing liabilities, along with their yields and rates, have a significant impact on the level of net interest income. Net interest income for 2015 was $26,477,000 representing an increase of $3,353,000 or 14.50% over the prior year. A 9.11% increase in 2014 versus 2013 resulted in total net interest income of $23,124,000.

In this discussion and in the tabular analysis of net interest income performance, entitled “Consolidated Average Balances, Yields and Rates,” (found on page 23), the interest earned on tax exempt loans and investment securities has been adjusted to reflect the amount that would have been earned had these investments been subject to normal income taxation. This is referred to as tax equivalent net interest income. For a reconciliation of tax equivalent net interest income to GAAP measures, see the table on page 25.

Tax equivalent income on earning assets increased $2,610,000. Loans held for investment, expressed as a percentage of total earning assets, decreased in 2015 to 88.60% as compared to 91.84% in 2014. During 2015, yields on earning assets decreased 6 basis points (BP), primarily due to a 72BP decrease in the yield on loans held for sale. This decrease is due to the growth in the short term participation program with Northpointe Bank. The average cost of interest bearing liabilities decreased 23BP in 2015, following a decrease of 24BP in 2014. The decrease is due to the redemption of subordinated debt agreements at the end of 2014 and the continued low rate environment.

The analysis on the next page reveals an increase in the net interest margin to 4.43% in 2015 primarily due to changes in balance sheet leverage as higher rate borrowings decreased, the increase in noninterest bearing deposit accounts and the growth in the Dealer Finance division produced higher yields.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Consolidated Average Balances, Yields and Rates1

	2015								2014								2013
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Loans2
Commercial	$	170,272		$	8,103		4.76	%	$	164,666		$	7,810		4.74	%	$	169,431		$	7,896		4.66	%
Real estate		295,892			14,976		5.06	%		281,052			14,542		5.17	%		268,902			14,796		5.50	%
Installment		65,870			4,981		7.56	%		50,695			3,960		7.81	%		33,625			2,467		7.34	%

Loans held for investment4		532,034			28,060		5.27	%		496,413			26,312		5.30	%		471,958			25,159		5.33	%
Loans held for sale		40,450			1,099		2.72	%		9,072			312		3.44	%		21,298			648		3.04	%

Investment securities3
Fully taxable		17,372			303		1.74	%		13,392			205		1.53	%		11,718			194		1.66	%
Partially taxable		125			-		.-			116			-		.-			107			-		.-
Tax exempt		-			-		-			-			-		-			-			-		-

Total investment securities		17,497			303		1.74	%		13,508			205		1.53	%		11,825			194		1.66	%

Interest bearing deposits in banks		1,223			-		-			896			-		-			1,084			4		.37	%
Federal funds sold		9,310			21		.23	%		20,602			44		.21	%		23,094			50		.22	%
Total Earning Assets		600,514			29,483		4.91	%		540,491			26,873		4.97	%		529,259			26,055		4.92	%

Allowance for loan losses		(8,933	)							(8,476	)							(8,384	)
Nonearning assets		52,378								47,036								48,565
Total Assets	$	643,959							$	579,051							$	569,440

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand –interest bearing	$	112,334		$	539		.48	%	$	117,396		$	664		.57	%	$	120,482		$	792		.66	%
Savings		76,491			212		.28	%		60,460			122		.20	%		52,714			119		.23	%
Time deposits		171,829			1,402		.82	%		195,933			1,704		.87	%		198,786			2,331		1.17	%

Total interest bearing deposits		360,654			2,153		.60	%		373,789			2,490		.67	%		371,982			3,242		.87	%

Short-term debt		32,017			69		.22	%		3,872			9		.23	%		6,171			24		.39	%
Long-term debt		31,856			654		2.05	%		21,501			1,149		5.34	%		36,280			1,507		4.15	%

Total interest bearing liabilities		424,527			2,876		.68	%		399,162			3,648		.91	%		414,433			4,773		1.15	%

Noninterest bearing deposits		125,665								107,647								90,170
Other liabilities		13,318								5,134								13,074

Total liabilities		563,510								511,943								517,677
Stockholders’ equity		80,449								67,108								51,763

Total liabilities and stockholders’ equity	$	643,959							$	579,051							$	569,440

Net interest earnings				$	26,607							$	23,225							$	21,282

Net yield on interest earning assets (NIM)							4.43	%							4.30	%							4.02	%

Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate.

Interest income on loans includes loan fees.

Average balance information is reflective of historical cost and has not been adjusted for changes in market value.

Includes nonaccrual loans.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

The following table illustrates the effect of changes in volumes and rates.

	2015 Compared to 2014									2014 Compared to 2013
	Increase (Decrease)									Increase (Decrease)
	Due to Change						Increase			Due to Change						Increase
	in Average:						Or			in Average:						or
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)

Interest income
Loans held for investment	$	1,888		$	(140	)	$	1,748		$	1,303		$	(150	)	$	1,153
Loans held for sale		1,079			(292	)		787			(372	)		36			(336	)
Investment securities
Taxable		61			37			98			28			(17	)		11
Partially taxable		-			-			-			-			-			-
Tax exempt		-			-			-			-			-			-

Interest bearing deposits in banks		-			-			-			(1	)		(3	)		(4	)
Federal funds sold		(24	)		1			(23	)		(5	)		(1	)		(6	)
Total Interest Income		3,004			(394	)		2,610			953			(135	)		818

Interest expense
Deposits
Demand		(29	)		(96	)		(125	)		(20	)		(108	)		(128	)
Savings		32			58			90			18			(15	)		3
Time deposits		(210	)		(92	)		(302	)		(33	)		(594	)		(627	)

Short-term debt		65			(5	)		60			(9	)		(6	)		(15	)
Long-term debt		553			(1,048	)		(495	)		(613	)		255			(358	)
Total Interest Expense		411			(1,183	)		(772	)		(657	)		(468	)		(1,125	)
Net Interest Income	$	2,593		$	789		$	3,382		$	1 ,610		$	333		$	1,943

Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change.

Interest Income

Tax equivalent interest income increased $2,610,000 or 9.71% in 2015, after increasing 3.14% or $818,000 in 2014. Overall, the yield on earning assets decreased .06%, from 4.97% to 4.91%. Average loans held for investment grew during 2015, with average loans outstanding increasing $35,621,000 to $532,034,000. Real estate loans increased 5.28%, commercial loans increased 3.40% and consumer loans increased 29.93%. The increase in consumer loans is result of the growth in our Dealer Finance division which opened at the end of 2012. The increase in tax equivalent interest income is primarily due to the growth in the Dealer Finance division as well as the volume in the short term loan participation program with Northpointe Bank. .

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

The following table provides detail on the components of tax equivalent net interest income:

GAAP Financial Measurements: (Dollars in thousands).	2015		2014		2013
Interest Income – Loans	$	29,029	$	26,522	$	25,718
Interest Income - Securities and Other Interest-Earnings Assets		324		249		248
Interest Expense – Deposits		2,153		2,490		3,242
Interest Expense - Other Borrowings		723		1,158		1,531
Total Net Interest Income		26,477		23,123		21,193

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans		130		102		89
Add: Tax Benefit on Tax-Exempt Interest Income - Securities and Other Interest-Earnings Assets		-		-		-
Total Tax Benefit on Tax-Exempt Interest Income		130		102		89
Tax-Equivalent Net Interest Income	$	26,607	$	23,225	$	21,282

Interest Expense

Interest expense decreased $772,000 or 21.16% during 2015, which followed a 23.57% decrease or $1,125,000 in 2014. The average cost of funds of .68% decreased .23% compared to 2014. Average interest bearing liabilities increased $25,365,000 in 2015 following decrease of $15,271,000 in 2014. The increase in interest bearing liabilities was the result of an increase in FHLB borrowings to support loan growth. Due to declining rates and the migration into noninterest bearing accounts the expense associated with time deposits decreased $302,000 (17.72%) in 2015. Changes in the cost of funds attributable to rate and volume variances can be found in the table at the top of page 24.

Noninterest Income

Noninterest income continues to be an increasingly important factor in maintaining and growing profitability. Management is conscious of the need to constantly review fee income and develop additional sources of complementary revenue.

Non-interest income increased 8.17% ($235,000) in 2015 following a decrease of 6.26% in 2014. The majority of the increase is from record earnings at VBS mortgage ($384,000), due to increased volume in our low interest rate environment and slight economic improvement. Areas of decrease were service charges on deposit accounts ($71,000), which has experience a steady decline over the past few years with regulatory changes.

There were no security transactions in 2015, 2014 or 2013 which resulted in a gain or loss.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Noninterest Expense

Noninterest expenses increased from $15,656,000 in 2014 to $17,986,000 in 2015, a 14.88% increase. Salary and benefits increased 14.14% to $10,055,000 in 2015, following a 1.60% increase in 2014. This increase was the result of normal salary increases, additions to staff for new branches and administrative positions as well as increasing benefit costs (including health care cost, pension expense and profit sharing expenses). This year the pension expense increased by $185,000 over 2014. Other real estate owned expenses increased $159,000 or 3.90% due to costs associated with maintaining the properties and losses from sales or write-downs of property. Other operating expenses increased $910,000 in 2015, following a $562,000 increase in 2014. Increases were in advertising and employee appreciation ($114,000), technology expense ($148,000), Franchise tax expense ($203,000) and checking account program expenses ($103,000). Noninterest expenses continue to be substantially lower than peer group averages. Total noninterest expense as a percentage of average assets totaled 2.79%, 2.70%, and 2.58%, in 2015, 2014 and 2013, respectively. Peer group averages (as reported in the most recent Uniform Bank Performance Report) have ranged between 2.86%, 2.89% and 2.93% over the same time period.

Provision for Loan Losses

Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and volume of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance for loan losses include internally generated loan review reports, past due reports and historical loan loss experience. This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates nonperforming loans relative to their collateral value and makes the appropriate adjustments to the allowance for loan losses when needed. Based on the factors outlined above, the current year provision for loan losses decreased from $2,250,000 in 2014 to $300,000 in 2015. The decrease in the provision for loan losses and the current levels of the allowance for loan losses reflect specific reserves related to nonperforming loans, changes in risk rating on loans, net charge-off activity, loan growth, delinquency trends and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses.

Actual net loan charge-offs were $244,000 in 2015 and $1,709,000 in 2014. Loan losses as a percentage of loans held for investment totaled .04% and .33% in 2015 and 2014, respectively. As stated in the most recently available Bank Holding Company Performance Report (BHCPR), peer group loss averages were .12% in 2015 and .18% in 2014.

Balance Sheet

Total assets increased 9.92% during the year to $665,357,000, an increase of $60,049,000 from $605,308,000 in 2014. Average earning assets increased 11.10% or $60,023,000 to $600,514,000 at December 31, 2015. The increase in earning assets is due largely to the growth in the short term loan participation program with Northpointe Bank and in the Dealer Finance division in installment loans. Average interest bearing deposits decreased $13,135,000 for 2015 or 3.51%, with all decreases in both time deposits and interest bearing demand accounts, there was $16,031,000 in growth in the savings category. The Company continues to utilize its assets well with 93.25% of average assets consisting of earning assets.

Investment Securities

Average balances in investment securities increased 29.53% in 2015 to $17,497,000. At year end, 2.91% of average earning assets of the Company were held as investment securities to provide security for public deposits and to secure repurchase agreements. Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 1.74% for 2015, up from 1.53% in 2014.

There were no security gains or losses and no Other Than Temporary Impairment (OTTI) write-downs in 2015, 2014 or 2013.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Investment Securities, continued

The composition of securities at December 31 was:

(Dollars in thousands)	2015		2014		2013

Available for Sale1
U.S. Treasury, Agency and Government Sponsored Enterprises (GSE)	$	12,095	$	12,058	$	29,065
Mortgage-backed2		817		1,022		1,201
Marketable equity securities		135		135		-
Total		13,047		13,215		30,266

Held to Maturity
U.S. Treasury and Agency		125		125		106
Total		125		125		106

Other Equity Investments		12,157		8,965		8,114
Total Securities	$	25,329	$	22,305	$	c38,486

1 At estimated fair value. See Note 4 to the Consolidated Financial Statements for amortized cost.

2 Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral.

Maturities and weighted average yields of debt securities at December 31, 2015 are presented in the table below. Amounts are shown by contractual maturity; expected maturities will differ as issuers may have the right to call or prepay obligations. Maturities of Other Investments are not readily determinable due to the nature of the investment; see Note 4 to the Consolidated Financial Statements for a description of these investments.

	Less					One to					Five to			Over
	Than one Year					Five Years					Ten Years			Ten Years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield	Amount		Yield			Total		Yield

Debt Securities Available for Sale

U.S. Treasury, Agency & GSE	$	4,075		.99	%	$	8,020		.78	%	$	-		$	-				$	12,095		.85	%
Mortgage-backed															817		2.35	%		817		2.35	%
Marketable equities		-					-					-			135					135
Total	$	4,075		.99	%	$	8,020		.78	%	$	-		$	952		2.29	%	$	13,047		.94	%

Debt Securities Held to Maturity

U.S. Treasury & Agency	$	125		.28	%														$	125		.28	%
Total	$	125		.28	%														$	125		.28	%

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Analysis of Loan Portfolio

The Company’s market area has a relatively stable economy which tends to be less cyclical than the national economy. Major industries in the market area include agricultural production and processing, higher education, retail sales, services and light manufacturing.

The Company’s portfolio of loans held for investment totaled $544,053,000 at December 31, 2015 compared with $518,202,000 at the beginning of the year. The Company’s policy has been to make conservative loans that are held for future interest income. Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Commercial loans, including agricultural and multifamily loans, increased 1.24% during 2015 to $176,922,000. Real estate mortgages increased $8,407,000 (3.76%). Growth has included a variety of loan and collateral types including owner occupied residential real estate and residential rental properties.

Construction loans increased $2,579,000 or 3.84%. The increase in construction lending is a result of improvement in the economy in the Bank’s primary market area. The Bank also has loan participation arrangements with several other banks within the region to aid in diversification of the loan portfolio geographically, by collateral type and by borrower.

Consumer installment loans increased $12,624,000 or 25.44%. This category includes personal loans, auto loans and other loans to individuals. This category began increasing during the fourth quarter of 2012 due to the opening of the Dealer Finance Division in Penn Laird, Virginia; at year end this Division had a loan portfolio of $54,086,000. Credit card balances increased $40,000 to $2,745,000 but are a minor component of the loan portfolio. The following table presents the changes in the loan portfolio over the previous five years.

	December 31
(Dollars in thousands)	2015		2014		2013		2012		2011

Real estate – mortgage	$	232,321	$	223,824	$	212,630	$	204,812	$	193,280
Real estate – construction		69,759		67,180		68,512		71,251		72,224
Consumer installment		62,239		49,615		30,643		15,753		13,015
Commercial		153,691		147,599		135,835		147,089		141,014
Agricultural		15,672		15,374		16,265		14,099		15,985
Multi-family residential		7,559		11,775		11,797		9,357		13,157
Credit cards		2,745		2,705		2,680		2,788		2,812
Other		67		130		91		670		83
Total Loans	$	544,053	$	518,202	$	478,453	$	465,819	$	451,570

The following table shows the Company’s loan maturity and interest rate sensitivity as of December 31, 2015:

	Less Than		1-5		Over
(Dollars in thousands)	1 Year		Years		5 Years		Total

Commercial and
agricultural loans	$	42,132	$	113,729	$	13,503	$	169,364
Multi-family residential		2,078		4,883		597		7,558
Real Estate – mortgage		84,888		147,124		309		232,321
Real Estate – construction		53,860		15,479		420		69,759
Consumer – installment/other		7,519		45,811		11,721		65,051
Total	$	190,477	$	327,026	$	26,550	$	544,053

Loans with predetermined rates	$	28,667	$	60,484	$	15,062	$	104,213
Loans with variable or
adjustable rates		161,810		266,542		11,488		439,840
Total	$	190,477	$	327,026	$	26,550	$	544,053

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Analysis of Loan Portfolio, continued

Residential real estate loans are generally made for a period not to exceed 25 years and are secured by a first deed of trust which normally does not exceed 90% of the appraised value. If the loan to value ratio exceeds 90%, the Company requires additional collateral, guarantees or mortgage insurance. On approximately 94% of the real estate loans, interest is adjustable after each one, three or five year period. The remainder of the portfolio is comprised of fixed rate loans that are generally made for a fifteen-year or a twenty-year period with an interest rate adjustment after ten years.

Since 1992, fixed rate real estate loans have been funded with fixed rate borrowings from the Federal Home Loan Bank, which allows the Company to control its interest rate risk. In addition, the Company makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 90% of the appraised value. Home equity loans are made for three, five or ten year periods at a fixed rate or as a revolving line of credit.

Construction loans may be made to individuals, who have arranged with a contractor for the construction of a residence, or to contractors that are involved in building pre-sold, spec-homes or subdivisions. The majority of commercial loans are made to small retail, manufacturing and service businesses. Consumer loans are made for a variety of reasons; however, approximately 81% of the loans are secured by automobiles and trucks.

Prior to the recession, real estate values in the Company’s market area for commercial, agricultural and residential property increased, on the average, between 5% and 8% annually depending on the location and type of property. However, due to the slowing economy and declining real estate sales it is estimated that values peaked in 2007 or 2008. Depending on a number of factors, including property type, location and price point, the decline in value ranges from relatively modest, perhaps 10%, to more severe, up to 30%. Values appear to have bottomed out in 2011, with modest increases in both 2014 and 2015. Approximately 83% of the Company’s loans are secured by real estate; however, policies relating to appraisals and loan to value ratios are adequate to control the related risk. Unemployment rates in the Company’s market area continue to be below both the national and state averages.

The Bank has identified loan concentrations of greater than 25% of capital in the real estate development category. While the Bank has not developed a formal policy limiting the concentration level to any particular loan type or industry segment, it has established target limits on both a nominal and percentage of capital basis. Concentrations are monitored and reported to the board of directors quarterly. Concentration levels have been used by management to determine how aggressively they may price or pursue new loan requests. At December 31, 2015, there are no industry categories of loans that exceed 10% of total loans.

Nonaccrual and Past Due Loans

Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. The Company would have earned approximately $267,000 in additional interest income had the loans on nonaccrual status been current and performing. Nonperforming loans totaled $6,526,000 at December 31, 2015 compared to $6,975,000 at December 31, 2014. At December 31, 2015 $570,000 of loans 90 days or more past due were not on nonaccrual status. Approximately 91% of these nonperforming loans are secured by real estate. Although management expects that there may be additional loan losses, the bank is generally well secured and continues to actively work with its customers to effect payment. As of December 31, 2015, the Company holds $2,128,000 of real estate which was acquired through foreclosure, of which $125,000 was under contract pending sale in the first quarter of 2016.

Nonperforming loans have decreased approximately $449,000 since December 31, 2014.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Nonaccrual and Past Due Loans, continued

The following is a summary of information pertaining to risk elements and impaired loans:

(Dollars in thousands)	2015			2014			2013			2012			2011
Nonaccrual Loans:
Real Estate - 2011 includes $1,040 of restructured loans	$	5,698		$	5,481		$	9,963		$	9,611		$	7,671
Commercial - 2011 includes $309 of restructured loans		109			1,179			1,890			2,914			5,888
Home Equity		40			153			402			740			266
Other		108			161			-			121			39

Loans past due 90 days or more:
Real Estate		272			0			246			-			646
Commercial		25			0			4			-			-
Home Equity		107			0			61			-			260
Other		167			1			16			-			6

Total Nonperforming loans	$	6,526		$	6,975		$	12,582		$	13,386		$	14,776

Restructured Loans current and performing:
Real Estate		8,713			3,913			7,484			6,572			4,335
Commercial		1,463			518			3,989			3,753			1,292
Home Equity		1,414			290			727			450			451
Other		91			22			-			-			-

Nonperforming loans as a percentage of loans held for investment		1.20	%		1.35	%		2.63	%		2.87	%		3.27	%

Net Charge Offs to Total Loans Held for Investment(1)		0.04	%		0.33	%		0.78	%		0.64	%		0.63	%

Allowance for loan and lease losses to nonperforming loans		134.55	%		125.09	%		65.04	%		60.91	%		46.95	%

Potential Problem Loans

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Nor do they represent material credits about which management is aware of any information which causes it to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of December 31, 2015, management is not aware of any potential problem loans which are not already classified for regulatory purposes or on the watch list as part of the Bank’s internal grading system.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Loan Losses and the Allowance for Loan Losses

In evaluating the portfolio, loans are segregated into loans with identified potential losses, pools of loans by type, with separate weighting for past dues 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 Restructuring are reviewed individually for impairment under ASC 310. A variety of factors are taken into account when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.

Loans that are not impaired are categorized by call report code and an estimate is calculated based on actual loss experience over the last five years. Due to the amount of loan losses in the past two years, the Company felt the two year lost history utilized in 2014 and prior would not be indicative of the amount of losses that could occur in our current economic cycle, therefore for 2015 the loss history was expanded to five years to capture a more representative loss history. Dealer finance loans utilize the highest year within the 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 six (past dues are now segregated as their own pool) environmental factors (loan growth, unemployment, interest rates, changes in underwriting practices, local real estate industry conditions, and experience of lending staff). The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, past dues or in the homogeneous pools based on five 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 $8,781,000 at December 31, 2015 is equal to 1.61% of total loans held for investment. This compares to an allowance of $8,725,000 (1.68%) at December 31, 2014 and 1.71% at December 31, 2013. Management and the Board of Directors made a concentrated effort at increasing the allowance during the recent recession to reflect the increased risks within the portfolio. The overall level of the allowance is above peer group averages and management feels the current reserve level is appropriate. Management has reached this conclusion based on historical losses, delinquency rates, collateral values of delinquent loans and a thorough review of the loan portfolio.

Loan losses, net of recoveries, totaled $244,000 in 2015 which is equivalent to .04% of total loans outstanding. Over the preceding three years, the Company has had an average loss rate of .38%, compared to a .20% loss rate for its peer group.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Loan Losses and the Allowance for Loan Losses, continued

A summary of the activity in the allowance for loan losses follows:

(Dollars in thousands)	2015			2014			2013			2012			2011

Balance at beginning of period	$	8,725		$	8,184		$	8,154		$	6,937		$	5,786
Provision charged to expenses		300			2,250			3,775			4,200			4,000
Loan losses:
Construction/land development		156			1,611			2,127			1,480			1,263
Farmland		-			-			-			-			-
Real Estate		25			208			173			482			474
Multi-family		-			-			-			-			-
Commercial Real Estate		-			-			201			424			381
Home Equity – closed end		26			-			159			69			222
Home Equity – open end		51			80			68			-			83
Commercial & Industrial – Non Real Estate		-			385			986			776			423
Consumer		32			33			173			45			90
Dealer Finance		251			107			17			-			-
Credit Cards		60			46			121			71			106
Total loan losses		601			2,470			4,025			3,347			3,042
Recoveries:
Construction/land development		85			223			40			192			-
Farmland		-			-			-			3			-
Real Estate		37			-			-			-			8
Multi-family		-			-			-			-			48
Commercial Real Estate		65			108			42			48			16
Home Equity – closed end		6			-			-			-			3
Home Equity – open end		-			-			29			-			27
Commercial & Industrial – Non Real Estate		62			356			127			62			24
Consumer		32			33			14			27			42
Dealer Finance		24			6			-			-			-
Credit Cards		46			35			28			32			25
Total recoveries		357			761			280			364			193
Net loan losses		(244	)		(1,709	)		(3,745	)		(2,983	)		(2,849	)
Balance at end of period	$	8,781		$	8,725		$	8,184		$	8,154		$	6,937

Allowance for loan losses as a
percentage of loans		1.61	%		1.68	%		1.71	%		1.75	%		1.54	%


Net loan losses to loans held for investment		.04	%		.33	%		.78	%		.64	%		.63	%

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Loan Losses and the Allowance for Loan Losses, continued

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
	2015					2014					2013					2012*					2011*
Allowance for loan losses: (in thousands)	Balance		Percentage of Loans in Each Category			Balance		Percentage of Loans in Each Category			Balance		Percentage of Loans in Each Category			Balance		Percentage of Loans in Each Category			Balance		Percentage of Loans in Each Category
Construction/Land Development	$	4,442		50.59	%	$	4,738		54.30	%	$	4,007		45.93	%	$	2,771		33.86	%	$	-		-
Real Estate		806		9.18	%		623		7.14	%		400		4.58	%		924		11.29	%		-		-
Commercial, Financial and Agricultural		1,666		18.97	%		1,337		15.33	%		2,239		25.66	%		3,187		38.94	%		2,984		36.60	%
Consumer		1,059		12.06	%		1,685		19.31	%		905		10.37	%		253		3.09	%		298		3.65	%
Home Equity		808		9.20	%		342		3.92	%		633		7.26	%		1,019		12.45	%		920		11.28	%
Total	$	8,781		100.00	%	$	8,725		100.00	%	$	8,184		93.80	%	$	8,154		99.63	%	$	6,937		85.07	%
* Allocation detail for Construction/Land Development verses Real Estate is not readily available.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Deposits and Borrowings

The average deposit balances and average rates paid for 2015, 2014 and 2013 were as follows:

Average Deposits and Rates Paid (Dollars in thousands)

	December 31,
	2015					2014					2013
	Amount		Rate			Amount		Rate			Amount		Rate
Noninterest-bearing	$	125,665				$	107,647				$	90,170

Interest-bearing:
Interest Checking	$	112,334		.48	%	$	117,396		.57	%	$	120,482		.66	%
Savings Accounts		76,491		.28	%		60,460		.20	%		52,714		.23	%
Time Deposits:
CDARS		11,247		.18	%		19,771		.21	%		8,581		.53	%
$100,000 or more		66,719		.55	%		74,743		.61	%		69,130		.87	%
Less than $100,000		93,863		1.08	%		101,419		1.19	%		121,075		1.39	%
Total Interest-bearing		360,654		.60	%		373,789		.67	%		371,982		.87	%
Total deposits	$	486,319		.44	%	$	481,436		.52	%	$	462,152		.70	%

Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $18,018,000 or 16.74% from $107,647,000 at December 31, 2014 to $125,665,000 at December 31, 2015. Interest-bearing deposits, which include interest checking accounts, money market accounts, regular savings accounts and time deposits, decreased $13,135,000 or 3.51% from $373,789,000 at December 31, 2014 to $360,654,000 at December 31, 2015. Total interest checking (including money market) account balances decreased $5,062,000 or 4.31% from $117,396,000 at December 31, 2014 to $112,334,000 at December 31, 2015. Total savings account balances increased $16,031,000 or 26.52% from $60,460,000 at December 31, 2014 to $76,491,000 at December 31, 2015.

Time deposits decreased $24,104,000 or 12.30% from $195,933,000 at December 31, 2014 to $171,829,000 at December 31, 2015. This is comprised of decrease in certificates of deposit of $100,000 and more of $8,024,000 or 10.74% from $74,743,000 at December 31, 2014 to $66,719,000 at December 31, 2015, a decrease in certificates of deposit of less than $100,000 of $7,556,000 or 7.45% from $101,419,000 at December 31, 2014 to $93,863,000 at December 31, 2015 and decrease in CDARs deposits of $8,524,000 or 43.11% from $19,771,000 at December 31, 2014 to $11,247,000 at December 31, 2015 The Bank joined the CDARS network in 2008, which allows it to offer over $50 million in FDIC insurance on a certificate of deposit.

The maturity distribution of certificates of deposit of $100,000 or more is as follows:

(Actual Dollars in thousands)	2015		2014

Less than 3 months	$	5,238	$	32,378
3 to 6 months		12,478		6,915
6 to 12 months		8,008		7,439
1 year to 5 years		27,901		33,080

Total	$	53,625	$	79,812

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Deposits and Borrowings, continued

Non-deposit borrowings include repurchase agreements, federal funds purchased, and Federal Home Loan Bank (FHLB) borrowings, (both short term and long term). Non-deposit borrowings are an important source of funding for the Bank. These sources assist in managing short and long term funding needs, often at rates that are more favorable than raising additional funds within the deposit portfolio.

Borrowings from the Federal Home Loan Bank are used to support the Bank’s lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various loan types in 4the loan portfolio. The Company borrowed $40,000,000 during 2015, with maturities ranging from 5 to 10 years, to replace maturities and lock in lower rates. The Company borrowed $10,000,000 in 2014 and there were no new long term borrowings in 2013. Repayment of amortizing and fixed maturity loans through FHLB totaled $1,714,000 for the year. These loans carry an average rate of 1.86% at December 31, 2015.

Contractual Obligations and Scheduled Payments (dollars in thousands)

	December 31, 2015
	Less than		One Year Through		Three Years Through		More than
	One Year		Three Years		Five Years		Five Years		Total
Securities sold under agreements to repurchase	$	3,995	$	-	$	-	$	-	$	3,995
FHLB Short term advances		20,000		-		-		-		20,000
Federal Funds Purchased		959		-		-		-		959
FHLB long term advances		3,929		12,857		20,357		11,018		48,161
Subordinated Debt		-		-		-		-		-
Total	$	28,883	$	12,857	$	20,357	$	11,018	$	73,115

See Note 11 (Short Term Debt) and Note 12 (Long Term Debt) to the Consolidated Financial Statements for a discussion of the rates, terms, and conversion features on these advances.

Stockholders’ Equity

Total stockholders' equity increased $5,152,000 or 6.62% in 2015. Net income totaled $8,417,009, noncontrolling interest net income totaled $164,575, other sales of common stock totaled $146,418, changes in other comprehensive income decreased $353,484, and capital was reduced by dividends ($2.915 million), repurchases of common stock of $289,119 and minority interest distributions of $18,260. As of December 31, 2015, book value per common share was $22.38 compared to $20.77 as of December 31, 2014. Dividends are paid to stockholders on a quarterly basis in uniform amounts unless unexpected fluctuations in net income indicate a change to this policy is needed.

Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity's investments, the more capital it is required to maintain. The Bank, as well as the Company, is required to maintain these minimum capital levels. In March 2015 the Company implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At December 31, 2015, the Company had Common Equity Tier I capital of 12.46%, Tier I capital of 14.13% of risk weighted assets and combined Tier I and II capital of 15.38% of risk weighted assets. Regulatory minimums at this date were 6% and 10%, respectively. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Company to raise additional capital and/or reallocate present capital.

In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 5% for this ratio, but can increase the minimum requirement based upon an institution's overall financial condition. At December 31, 2015, the Company reported a leverage ratio of 12.18%. The Bank's leverage ratio was also substantially above the minimum.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Market Risk Management

Most of the Company’s net income is dependent on the Bank’s net interest income. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest bearing liabilities and interest earning assets. Fortunately the Company’s net interest margin increased .13% in 2015 following an increase of .28% in 2014. This increase can be attributed to the growth in the Dealer finance division and continued reduction in cost of funds, in addition to the matching of maturities of interest bearing liabilities to interest earning assets. In December 2015, the Federal Open Market Committee elected to raise the short term rates target .25% to .25 to .50% due to expanding economic activity.

Net interest income is also affected by changes in the mix of funding that supports earning assets. For example, higher levels of non-interest bearing demand deposits and leveraging earning assets by funding with stockholder’s equity would result in greater levels of net interest income than if most of the earning assets were funded with higher cost interest-bearing liabilities, such as certificates of deposit.

Liquid assets, which include cash and cash equivalents, federal funds sold, interest bearing deposits and short term investments averaged $17,022,000 for 2015. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Bank's membership in the Federal Home Loan Bank has historically provided liquidity as the Bank borrows money that is repaid over a five to ten year period and uses the money to make fixed rate loans. The matching of the long-term receivables and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.

The following table depicts the Company’s interest rate sensitivity, as measured by the repricing of its interest sensitive assets and liabilities as of December 31, 2015. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. The analysis indicates an asset sensitive one-year cumulative GAP position of 15.59% of total earning assets, compared to 13.98% in 2014. Approximately 41.20% of rate sensitive assets and 36.48% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less than one year) increased $10,446,000 during the year, while total earning assets increased $54,741,000. The increase is attributed to growth in Loans Held for Investment of $25,811,000 as well as Loans Held for Sale of $44,424,000. Growth in the loan held for investment portfolio was concentrated in real estate secured loans, commercial and the Dealer Finance division. Short term liabilities increased $10,596,000, while total interest bearing liabilities increased $29,459,000. The increase in short term liabilities is due to an increase in short term debt of $20,000,000 to fund Loans Held for Sale. Due to the relatively flat yield curve, management has kept deposit rates low. These actions and the increase in total earning assets have resulted in a slightly lower one year cumulative gap than prior year.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Market Risk Management, continued

The following GAP analysis shows the time frames as of December 31, 2015, in which the Company’s assets and liabilities are subject to repricing:

	1-90			91-365			1-5			Over 5			Not
(Dollars in thousands)	Days			Days			Years			Years			Classified			Total
Rate Sensitive Assets:
Loans held for investment	$	122,425		$	65,307		$	327,026		$	26,550		$	-		$	541,308
Loans held for sale		57,806			-			-			-			-			57,806
Federal funds sold		-			-			-			-			-			-
Investment securities		125			4,075			8,020			817			135			13,172
Credit Cards		2,745			-			-			-			-			2,745
Interest bearing bank deposits		1,596			-			-			-			-			1,596

Total		184,697			69,382			335,046			27,367			135			616,627

Rate Sensitive Liabilities:
Interest bearing demand deposits		-			29,783			62,379			16,298			-			108,460
Savings deposits		-			18,076			54,230			18,077			-			90,383
Certificates of deposit $100,000 and over		5,239			20,486			27,900			-			-			53,625
Other certificates of deposit		14,683			40,827			51,905			-			-			107,415

Total Deposits		19,922			109,172			196,414			34,375			-			359,883
Short-term debt		24,954			-			-			-			-			24,954
Long-term debt		982			2,947			33,214			11,018			-			48,161
Total		45,858			112,119			229,628			45,393			-			432,998
Discrete Gap		138,839			(42,737	)		105,418			(18,026	)		135			183,629
Cumulative Gap		138,839			96,102			201,520			183,494			183,629
As a % of Earning Assets		22.52	%		15.59	%		32.68	%		29.76	%		29.78	%

In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run off. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities on deposits which have no stated maturity dates were derived from guidance contained in FDICIA 305.

PART II, Continued

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Quarterly Results (unaudited)

The table below lists the Company’s quarterly performance for the years ended December 31, 2015 and 2014:

	2015
(Dollars in thousands)	Fourth		Third		Second		First		Total

Interest and Dividend Income	$	7,518	$	7,451	$	7,373	$	7,011	$	29,353
Interest Expense		771		722		698		685		2,876

Net Interest Income		6,747		6,729		6,675		6,326		26,477
Provision for Loan Losses		-		-		-		300		300

Net Interest Income after Provision, For Loan Losses		6,747		6,729		6,675		6,026		26,177

Non-Interest Income		813		797		783		719		112
Non-Interest Expense		4,614		4,494		4,496		4,382		17,986

Income before taxes		2,946		3,032		2,962		2,363		11,303
Income Tax Expense		766		842		786		492		2,886

Net Income	$	2,180	$	2,190	$	2,176	$	1,871	$	8,417

Net Income Per Average Common Share	$	.62	$	.63	$	.62	$	.53	$	2.40

	2014
(Dollars in thousands)	Fourth		Third		Second		First		Total

Interest and Dividend Income	$	6,934	$	6,873	$	6,674	$	6,291	$	26,772
Interest Expense		871		908		919		950		3,648

Net Interest Income		6,063		5,965		5,755		5,341		23,124
Provision for Loan Losses		-		750		750		750		2,250

Net Interest Income after Provision, For Loan Losses		6,063		5,215		5,005		4,591		20,874

Non-Interest Income		780		789		738		570		2,877
Non-Interest Expense		4,194		3,923		3,801		3,738		15,656

Income before taxes		2,649		2,081		1,942		1,423		8,095
Income Tax Expense		1,057		520		446		270		2,293

Net Income	$	1,592	$	1,561	$	1,496	$	1,153	$	5,802

Net Income Per Average Common Share	$	.43	$	.48	$	.45	$	.46	$	1.82

Item 8. Financial Statements and Supplementary Data

F & M Bank Corp. and Subsidiaries

Consolidated Balance Sheets

As of December 31, 2015 and 2014

	2015			2014
Assets
Cash and due from banks (notes 3 and 15)	$	6,923,065		$	6,241,016
Money market funds		1,596,382			910,527
Federal funds sold		-			16,051,000
Cash and cash equivalents		8,519,447			23,202,543

Securities:
Held to maturity - fair value of $125,043 and $125,150 in 2015 and 2014, respectively (note 4)		125,043			125,150
Available for sale (note 4)		13,046,945			13,215,112
Other investments (note 4)		12,157,115			8,964,640
Loans held for sale		57,805,529			13,381,941
Loans held for investment (notes 5)		544,053,477			518,201,574
Less: allowance for loan losses (note 6)		(8,781,453	)		(8,724,731	)
Net loans held for investment		535,272,024			509,476,843

Other real estate owned (note 9)		2,127,685			3,507,153
Bank premises and equipment, net (note 8)		7,542,078			6,458,254
Interest receivable		1,708,617			1,674,846
Goodwill (note 23)		2,669,517			2,669,517
Bank owned life insurance (note 24)		13,046,111			12,581,210
Other assets		11,336,735			10,050,893
Total Assets	$	665,356,846		$	605,308,102

Liabilities
Deposits: (note 10)
Noninterest bearing	$	134,786,875		$	112,197,722
Interest bearing:
Demand		81,491,760			93,693,468
Money market accounts		26,967,837			25,900,061
Savings		90,383,486			64,249,199
Time deposits over $100,000		53,624,554			79,812,757
All other time deposits		107,415,244			115,651,329
Total deposits		494,669,756			491,504,536

Short-term debt (note 11)		24,954,051			14,358,492
Accrued liabilities		14,621,913			11,771,671
Federal Home Loan Bank debt (note 12)		48,160,714			9,875,000
Total Liabilities		582,406,434			527,509,699

Commitments and contingencies (notes 4 and 16)

Stockholders’ Equity (Note 22)
Preferred Stock $5 par value, 400,000 shares authorized, issued and outstanding for 2015		9,425,123			9,425,123
Common stock $5 par value, 6,000,000 shares authorized, 3,285,404 and 3,291,766
shares issued and outstanding at December 31, 2015 and 2014, respectively		16,427,020			16,458,830
Additional paid in capital – common stock		11,149,104			11,259,995
Retained earnings (note 19)		48,056,300			42,554,421
Noncontrolling interest		572,680			426,365
Accumulated other comprehensive loss		(2,679,815	)		(2,326,331	)
Total Stockholders' Equity		82,950,412			77,798,403
Total Liabilities and Stockholders' Equity	$	665,356,846		$	605,308,102

See accompanying Notes to the Consolidated Financial Statements.

F & M Bank Corp. and Subsidiaries

Consolidated Statements of Income

For the years ended 2015, 2014 and 2013

	2015			2014			2013
Interest and Dividend Income
Interest and fees on loans held for investment	$	27,930,151		$	26,210,609		$	25,070,039
Interest from loans held for sale		1,099,419			312,364			647,622
Interest from deposits and federal funds sold		20,990			44,435			54,679
Interest from debt securities		302,117			204,649			193,244
Total interest and dividend Income		29,352,677			26,772,057			25,965,584

Interest Expense
Interest from demand deposits		539,469			663,618			791,245
Interest from savings deposits		212,186			121,808			119,020
Interest from time deposits over $100,000		485,285			589,673			781,950
Interest from all other time deposits		916,219			1,114,470			1,549,273

Total interest on deposits		2,153,159			2,489,569			3,241,488
Interest from short-term debt		69,179			9,437			23,956
Interest from long-term debt		653,271			1,148,716			1,507,299
Total interest expense		2,875,609			3,647,722			4,772,743

Net Interest Income		26,477,068			23,124,335			21,192,841

Provision for Loan and Lease losses (note 6)		300,000			2,250,000			3,775,000

Net Interest Income After Provision for Loan Losses		26,177,068			20,874,335			17,417,841

Noninterest Income
Service charges on deposit accounts		963,459			1,033,959			1,117,910
Insurance and other commissions		1,058,281			635,543			868,464
Other operating income		1,401,162			1,393,897			1,537,397
Income from bank owned life insurance		473,098			466,936			508,658
Low income housing partnership losses		(619,534	)		(608,360	)		(855,527	)
Total noninterest income		3,276,466			2,921,975			3,176,902

Noninterest Expenses
Salaries		7,816,214			6,898,400			6,524,515
Employee benefits (note 14)		2,239,258			1,911,250			2,146,871
Occupancy expense		678,799			621,855			606,935
Equipment expense		651,113			589,919			547,948
FDIC insurance assessment		587,000			690,000			704,103
Other real estate owned expenses		566,147			407,219			214,832
Other operating expenses		5,447,347			4,537,269			3,974,791
Total noninterest expenses		17,985,878			15,655,912			14,719,995

Income before income taxes		11,467,656			8,140,398			5,874,748

Income Tax Expense (note 13)		2,886,072			2,293,136			1,051,770

Consolidated Net Income – F & M Bank Corp.		8,581,584			5,847,262			4,822,978

Net Income attributed to Noncontrolling interest		(164,575	)		(45,653	)		(107,185	)
Net Income-F & M Bank Corp.	$	8,417,009		$	5,801,609		$	4,715,793

Dividends paid/accumulated on preferred stock		510,000			127,500			-
Net income available to common stockholders	$	7,907,009		$	5,674,109		$	4,715,793

Per Common Share Data
Net income - basic		2.40			1.82			1.88
Net income - diluted		2.25			1.80			1.88
Cash dividends on common stock		.73			.68			.68
Weighted average common shares outstanding – basic		3,290,812			3,119,333			2,504,015
Weighted average common shares outstanding – diluted		3,735,212			3,229,942			2,504,015

See accompanying Notes to the Consolidated Financial Statements.

F & M BANK CORP.

Consolidated Statements of Comprehensive Income

For the years ended 2015, 2014 and 2013

	Years Ended December 31,
	2015			2014			2013
Net Income:
Net income – F & M Bank Corp	$	8,417,009		$	5,801,609		$	4,715,793
Net income attributable to noncontrolling interest		164,575			45,653			107,185
Total net income		8,581,584			5,847,262			4,822,978


Other comprehensive income (loss):
Pension plan adjustment		(537,005	)		(2,145,868	)		2,314,274
Tax effect		182,582			729,595			(786,853	)
Pension plan adjustment, net of tax		(354,423	)		(1,416,273	)		1,527,421

Unrealized holding gains (losses)
on available-for-sale securities		1,423			22,386			(75,127	)
Tax effect		(484	)		(7,611	)		25,543
Unrealized holding gain (losses), net of tax		939			14,775			(49,584	)
Other comprehensive income		(353,484	)		(1,401,498	)		1,477,837
Total comprehensive income	$	8,228,100		$	4,445,764		$	6,300,815

See accompanying Notes to the Consolidated Financial Statements.

F & M Bank Corp. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended December 31, 2015, 2014 and 2013

															Accumulated
															Other
															Comprehensive
	Preferred		Common			Additional Paid in			Retained			Noncontrolling			Income
	Stock		Stock			Capital			Earnings			Interest			(Loss)			Total

Balance December 31, 2012	$	-	$	12,497,720		$	2,951,967		$	35,974,812		$	362,131		$	(2,402,670	)	$	49,383,960

Net income consolidated										4,715,793			107,185						4,822,978
Other comprehensive income (loss)																1,477,837			1,477,837

Minority Interest Contributed Capital (Distributions)													(51,088	)					(51,088	)
Dividends on common stock										(1,705,881	)								(1,705,881	)
Common stock issued (12,141 shares)				60,955			152,474			-			-			-			213,429

Balance December 31, 2013	$	-	$	12,558,675		$	3,104,441		$	38,984,724		$	418,228		$	(924,833	)	$	54,141,235

Net income consolidated										5,801,609			45,653						5,847,262
Other comprehensive income (loss)																(1,401,498	)		(1,401,498	)

Minority Interest Contributed Capital (Distributions)													(37,516	)					(37,516	)
Dividends on preferred stock										(127,500	)								(127,500	)
Dividends on common stock										(2,104,412	)								(2,104,412	)
Preferred stock issued (400,000 shares)		9,425,123																	9,425,123
Common Stock issued (780,031 shares)		-		3,900,155			8,155,554			-			-			-			12,055,709

Balance December 31, 2014	$	9,425,123	$	16,458,830		$	11,259,995		$	42,554,421		$	426,365		$	(2,326,331	)	$	77,798,403
Net income consolidated										8,417,009			164,575						8,581,584
Other comprehensive income (loss)																(353,484	)		(353,484	)


Minority Interest Distribution													(18,260	)					(18,260	)
Dividends on preferred stock										(510,000	)								(510,000	)
Dividends on common stock										(2,405,130	)								(2,405,130	)
Common stock repurchased (13,277 shares)				(66,390	)		(222,729	)											(289,119	)
Common Stock issued (6,916 shares)				34,580			111,838			-			-			-			146,418

Balance December 31, 2015	$	9,425,123	$	16,427,020		$	11,149,104		$	48,056,300		$	572,680		$	(2,679,815	)	$	82,950,412

See accompanying Notes to the Consolidated Financial Statements.

F & M Bank Corp. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2015, 2014 and 2013

	2015			2014			2013
Cash Flows from Operating Activities
Net income	$	8,417,009		$	5,801,609		$	4,715,793
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation		709,237			612,116			581,625
Amortization of securities		147,407			76,057			45,416
Sale of loans held for sale originated		75,364,878			56,210,640			79,778,381
Loans held for sale originated		(77,151,936	)		(56,044,669	)		(71,169,362	)
Provision for loan losses		300,000			2,250,000			3,775,000
Benefit (expense) for deferred taxes		340,941			(515,538	)		(568,858	)
(Increase) decrease in interest receivable		(33,771	)		(176,734	)		204,735
Increase in other assets		(457,010	)		(1,473,634	)		(967,516	)
Increase in accrued expenses		1,480,074			1,159,913			1,731,973
Amortization of limited partnership investments		627,326			608,360			581,737
Loss on sale and valuation adjustments of other real estate owned		488,583			318,714			97,155
Income from life insurance investment		(473,098	)		(466,936	)		(508,658	)
Net Cash Provided by Operating Activities		9,759,640			8,359,898			18,297,421

Cash Flows from Investing Activities
Decrease in interest bearing bank deposits		-			-			248,000
Proceeds from maturities of securities available for sale		8,242,751			27,495,319			10,712,508
Proceeds from maturities of securities held to maturity		-			106,000
Purchases of securities available for sale		(12,040,262	)		(11,957,235	)		(31,093,384	)
Purchases of securities held to maturity		-			(125,250	)
Net increase in loans held for investment		(25,892,052	)		(43,642,033	)		(17,149,156	)
Net (increase) decrease in loans held for sale participations		(42,636,530	)		(9,743,487	)		64,793,073
Net purchase of property and equipment		(1,793,061	)		(545,313	)		(661,621	)
Proceeds from sale of other real estate owned		687,756			986,373			928,897
Net Cash Provided by (Used in) Investing Activities		(73,431,398	)		(37,425,626	)		27,778,317

Cash Flows from Financing Activities
Net change in demand and savings deposits		37,589,508			27,894,981			15,867,944
Net change in time deposits		(34,424,288	)		(539,689	)		(5,514,239	)
Net change in short-term debt		10,595,559			10,935,414			(31,174,274	)
Dividends paid in cash		(2,915,130	)		(2,231,912	)		(1,705,881	)
Proceeds from long-term debt		40,000,000			10,000,000			-
Proceeds from issuance of preferred stock		-			6,831,123			-
Proceeds from issuance of common stock		146,418			12,055,709			213,429
Repurchase of common stock		(289,119	)
Repayments of long-term debt		(1,714,286	)		(19,222,000	)		(26,214,286	)
Net Cash Provided by (Used in) Financing Activities		48,988,662			45,723,626			(48,527,307	)

Net Increase (Decrease) in Cash and Cash Equivalents		(14,683,096	)		16,657,898			(2,451,569	)

Cash and Cash Equivalents, Beginning of Year		23,202,543			6,544,645			8,996,214
Cash and Cash Equivalents, End of Year	$	8,519,447		$	23,202,543		$	6,544,645

Supplemental Disclosure:
Cash paid for:
Interest expense	$	2,854,119		$	3,703,190		$	6,500,592
Income taxes		1,500,000			1,607,000			800,000
Transfers from loans to other real estate owned		125,000			2,914,958			1,337,890
Loans originated for the sale of other real estate owned		(328,129	)		(780,097	)		(569,245	)
Conversion of subordinated debt to preferred stock		-			2,594,000

See accompanying Notes to the Consolidated Financial Statements.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 1 NATURE OF OPERATIONS:

F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers located mainly in Rockingham, Shenandoah, Page and Augusta Counties in Virginia, and the adjacent county of Hardy, West Virginia. Services are provided at eleven branch offices, a Dealer Finance Division and a loan production office. The Company offers insurance, mortgage lending and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc, and VBS Mortgage, LLC.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and to accepted practice within the banking industry.

The following is a summary of the more significant policies:

Principles of Consolidation

The consolidated financial statements include the accounts of Farmers and Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc. and VBS Mortgage, LLC, (net of minority interest). Significant inter-company accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in those statements; actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, which is sensitive to changes in local and national economic conditions, and the other than temporary impairment of investments in the investment portfolio.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits at other financial institutions whose initial maturity is ninety days or less and Federal funds sold.

Investment Securities

Management reviews the securities portfolio and classifies all securities as either held to maturity or available for sale at the date of acquisition. Securities that the Company has both the positive intent and ability to hold to maturity (at time of purchase) are classified as held to maturity securities. All other securities are classified as available for sale. Securities held to maturity are carried at historical cost and adjusted for amortization of premiums and accretion of discounts, using the effective interest method. Securities available for sale are carried at fair value with any valuation adjustments reported, net of deferred taxes, as a part of other accumulated comprehensive income.

Interest, amortization of premiums and accretion of discounts on securities are reported as interest income using the effective interest method. Gains (losses) realized on sales and calls of securities are determined on the specific identification method.

Accounting for Historic Rehabilitation and Low Income Housing Partnerships

The Company periodically invests in low income housing partnerships whose primary benefit is the distribution of federal income tax credits to partners. The Company recognizes these benefits and the cost of the investments over the life of the partnership (usually 15 years). In addition, state and federal historic rehabilitation credits are generated from some of the partnerships. Amortization of these investments is prorated based on the amount of benefits received in each year to the total estimated benefits over the life of the projects. The effective yield method is used to record the income statement effects of these investments.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Income Taxes

Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes.

Loans Held for Investment

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.

Loans Held for Sale

These loans consists of fixed rate loans made through its subsidiary, VBS Mortgage and loans purchased from Gateway Savings Bank, Oakland, CA and Northpointe Bank, Grand Rapids, MI.

VBS Mortgage originates conforming mortgage loans for sale in the secondary market. The bank (VBS) gives the customer a rate commitment at the time the rate is locked. The bank then immediately gets a rate lock-in from the investor that will be buying the loan upon closing. Both the rate lock and the purchase commitments (which is a blanket agreement) are best effort agreements, subject to final approval and underwriting. Because either party can walk away from these agreements prior to closing, neither the rate lock commitment nor the purchase commitment is considered a derivative contract. The bank provides a warehouse line for the Mortgage subsidiary after closing, until the loan is purchased by the investor. The average time on the line is two or three weeks. Although VBS does have a line, loans are actually assigned to the bank at closing and then reassigned prior to purchase from investor. There were $3.6 million of these mortgage loans held for resale at the end of the year. All of these loans are under contract to deliver to an investor as a specified price. Because of this and the short holding period, these loans are carried at par and a gain is recorded at transfer to the investor. The effect of not marking these loans to market is not material to the current year financial statements.

Gateway Savings Bank (“Gateway”) loans are originated by a network of mortgage loan originators throughout the United States. A takeout commitment is in place at the time the loans are purchased. The Gateway arrangement has been used since 2003 as a higher yielding alternative to federal funds sold or investment securities. These loans are short-term, residential real estate loans that have an average life in our portfolio of approximately two weeks. The Bank holds these loans during the period of time between loan closing and when the loan is paid off by the ultimate secondary market purchaser. Gateway Savings Bank discontinued the loan participation program in December of 2014 and the Company became a participant with Northpointe Bank which obtained the Gateway Savings Bank program and incorporated it into their existing program. The Northpointe Bank program and procedures are the same as described above for Gateway.

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.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Allowance for Loan and Lease 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.

Other Real Estate Owned (OREO)

As of December 31, 2015, the Bank had $2.1 million classified as OREO on the balance sheet, compared to $3.5 million as of December 31, 2014. The table in Note 9 reflects the OREO activity in 2015. The Company’s policy is to carry OREO on its balance sheet at the lower of cost or market. Values are reviewed periodically and additional losses are recognized if warranted based on market conditions.

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. Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over the estimated useful lives of the assets on a combination of the straight-line and accelerated methods. The ranges of the useful lives of the premises and equipment are as follows:

Buildings and Improvements	10 - 40 years
Furniture and Fixtures	5 - 20 years

Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and losses on dispositions are reflected in other income or expense.

Goodwill

The Company accounts for goodwill and intangible assets under ASC 805, “Business Combination” and ASC 350 “Intangibles”, respectively.

Goodwill totaled $2,669,517 at December 31, 2015 and 2014. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2015, 2014 or 2013.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Pension Plans

The Bank has a qualified noncontributory defined benefit pension plan which covers all full time employees hired prior to April 1, 2012. The benefits are primarily based on years of service and earnings. The Company complies with ASC 325-960 “Defined Benefit Pension Plans” which requires recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.

Advertising Costs

The Company follows the policy of charging the cost of advertising to expense as incurred. Total advertising costs included in other operating expenses for 2015, 2014, and 2013 were $401,138, $317,780, and $278,555, respectively.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities and changes in pension plan funding status, such as unrealized gains and losses on available-for-sale securities and gains or losses on certain derivative contracts, are reported as a separate component of the equity section of the balance sheet. Such items, along with operating net income, are components of comprehensive income.

Derivative Financial Instruments and Change in Accounting Principle

On January 1, 2001, the Company adopted ASC 815 “Derivative and Hedging Investments” (formerly SFAS No. 133). This statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value.

Under ASC 815, the gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedging item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.

Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in their fair values due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair value of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at offsetting changes in the fair value of the hedging items due to the designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed out and settled or classified as a trading activity.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per common share calculation.

Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.

The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:

	For the year ended
	December 31, 2015		December 31, 2014
Earnings Available to Common Stockholders:
Net Income	$	8,581,584	$	5,847,262
Minority interest	$	164,575	$	45,653
Preferred Stock Dividends		510,000		127,500
Net Income Available to Common Stockholders	$	7,907,009	$	5,674,109

The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated:

	Year ended
	12/31/2015							12/31/2014
	Income		Shares		Per Share Amounts			Income		Shares		Per Share Amounts
Basic EPS	$	7,907,009		3,735,212	$	2.40		$	5,674,109		3,229,942	$	1.82
Effect of Dilutive Securities:
Convertible Preferred Stock		510,000		444,400		(0.15	)		127,500		110,631		(0.02	)
Diluted EPS	$	8,417,009		3,290,812	$	2.25		$	5,801,609		3,119,311	$	1.80

There were no dilutive securities for the years ended December 31, 2013.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“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, 2017. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2015, the FASB issued guidance which provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (“ASC”), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements. The Company does not expect these amendments to have a material effect on its financial statements.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Recent Accounting Pronouncements, continued

In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB issued new guidance to change accounting for leases and that will generally require most leases to be recognized on the balance sheet. The new lease standard only contains targeted changes to accounting by lessors, however, lessees will be required to recognize most leases in their balance sheets as lease liabilities for lease payments and right-of-use assets representing the lessee’s rights to use the underlying assets for the lease terms for lease arrangements longer than 12 months. Under this approach, a lessee will account for most existing capital/finance leases as Type A leases and most existing operating leases as Type B leases. Type A and Type B leases have unique accounting and disclosure requirements. Existing sale-leaseback guidance, including guidance for real estate, will be replaced with a new model applicable to both lessees and lessors. The new guidance will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting.

Standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 3 CASH AND DUE FROM BANKS:

The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $25,000 for the years ended December 31, 2015 and 2014.

NOTE 4 INVESTMENT SECURITIES:

The amortized cost and fair value of securities held to maturity are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2015
U. S. Treasuries	$	125,043	$	-	$	-	$	125,043
December 31, 2014
U. S. Treasuries	$	125,150	$	-	$	-	$	125,150

The amortized cost and fair value of securities available for sale are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2015
U. S. Treasuries	$	4,015,440	$	5,840	$	-	$	4,021,280
Government sponsored enterprises		8,080,540		3,780		10,600		8,073,720
Mortgage-backed obligations of federal agencies		810,802		6,143		-		816,945
Marketable equities		135,000		-		-		135,000
Total Securities Available for Sale	$	13,041,782	$	15,763	$	10,600	$	13,046,945

December 31, 2014
U. S. Treasuries	$	4,025,740	$	-	$	6,100	$	4,019,640
Government sponsored enterprises		8,039,540		8,940		9,880		8,038,600
Mortgage-backed obligations of federal agencies		1,011,092		10,780		-		1,021,872
Marketable equities		135,000		-		-		135,000
Total Securities Available for Sale	$	13,211,372	$	19,720	$	15,980	$	13,215,112

The amortized cost and fair value of securities at December 31, 2015, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Securities Held to Maturity				Securities Available for Sale
		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	125,043	$	125,043	$	4,015,440	$	4,021,280
Due after one year through five years		-		-		8,080,540		8,073,720
Due after five years		-		-		945,802		951,945
Total	$	125,043	$	125,043	$	13,041,782	$	13,046,945

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 4 INVESTMENT SECURITIES (CONTINUED):

There were no sales of debt or equity securities during 2015, 2014 or 2013.

The carrying value (which approximates fair value) of securities pledged by the Bank to secure deposits and for other purposes amounted to $12,912,000 at December 31, 2015 and $13,080,000 at December 31, 2014.

Other investments consist of investments in nineteen low-income housing and historic equity partnerships (carrying basis of $7,213,000), stock in the Federal Home Loan Bank (carrying basis of $3,441,000), and various other investments (carrying basis of $1,503,000). The interests in the low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The market values of these securities are estimated to approximate their carrying value as of December 31, 2015. At December 31, 2015, the Company was committed to invest an additional $4,358,041 in eight low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in accrued liabilities on the balance sheet.

The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio includes fixed rate bonds, whose prices move inversely with rates and variable rate bonds. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business behind the instrument. Bonds deteriorate in value due to credit quality of the individual issuer and changes in market conditions. These losses relate to market conditions and the timing of purchases.

A summary of these losses (in thousands) is as follows:

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
2015
U. S. Treasuries	$	-	$	-		$	-	$	-		$	-	$	-
Government sponsored enterprises		6,056		(11	)		-		-			6,056		(11	)
Mortgage-backed obligations		-		-			-		-			-		-
Total	$	6,056	$	(11	)	$	-	$	-		$	6,056	$	(11	)

2014
U. S. Treasuries	$	4,020	$	(6	)	$	-	$	-		$	4,020	$	(6	)
Government sponsored enterprises		2,004		(2	)		1,991		(8	)		3,995		(10	)
Mortgage-backed obligations		-		-			-		-			-		-
Total	$	6,024	$	(8	)	$	1,991	$	(8	)	$	8,015	$	(16	)

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 4 INVESTMENT SECURITIES (CONTINUED):

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company did not recognize any other-than-temporary impairment losses in 2015, 2014 or 2013.

NOTE 5 LOANS:

Loans held for investment as of December 31:

	2015		2014
Construction/Land Development	$	69,759,401	$	67,180,467
Farmland		13,377,740		12,507,446
Real Estate		166,586,877		162,248,606
Multi-Family		7,558,460		11,775,205
Commercial Real Estate		128,031,686		122,305,417
Home Equity – closed end		9,135,433		9,393,805
Home Equity – open end		56,599,337		52,181,679
Commercial & Industrial – Non-Real Estate		27,954,171		28,160,584
Consumer		8,219,391		9,109,994
Dealer Finance		54,085,791		40,633,086
Credit Cards		2,745,190		2,745,190
Total	$	544,053,477	$	518,201,574

The Company has pledged loans as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $182,312,000 and $183,483,000 as of December 31, 2015 and 2014, respectively. The Company maintains a blanket lien on its entire residential real estate portfolio and also began pledges commercial and home equity loans.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 5 LOANS (CONTINUED):

The following is a summary of information pertaining to impaired loans (in thousands):

			Unpaid				Average		Interest
December 31, 2015	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Construction/Land Development	$	1,361	$	1,499	$	-	$	3,622	$	73
Farmland		-		-		-		-		-
Real Estate		1,097		1,097		-		734		58
Multi-Family		-		-		-		-		-
Commercial Real Estate		307		307		-		874		17
Home Equity – closed end		-		-		-		-		-
Home Equity – open end		1,159		1,159		-		1,513		82
Commercial & Industrial – Non-Real Estate		181		181		-		186		10
Consumer		18		18		-		7		-
Credit Cards		-		-		-		-		-
Dealer Finance		4		4		-		1		4
		4,127		4,265		-		6,937		244

Impaired loans with a valuation allowance
Construction/Land Development		11,534		11,534		2,373		12,884		299
Farmland		-		-		-		-		-
Real Estate		324		324		238		699		46
Multi-Family		-		-		-		-		-
Commercial Real Estate		890		890		18		900		15
Home Equity – closed end		-		-		-		-		-
Home Equity – open end		1,414		1,414		269		613		75
Commercial & Industrial – Non-Real Estate		-		-		-		-		-
Consumer		-		-		-		-		-
Credit cards		-		-		-		-		-
Dealer Finance		68		68		17		38		5
		14,230		14,230		2,915		15,134		440

Total impaired loans	$	18,357	$	18,495	$	2,915	$	22,071	$	684

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 5 LOANS (CONTINUED):

The following is a summary of information pertaining to impaired loans (in thousands):

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

			Unpaid				Average		Interest
December 31, 2014	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Construction/Land Development	$	4,982	$	5,402	$	-	$	5,412	$	251
Farmland		-		-		-		1,163		-
Real Estate		141		141		-		85		5
Multi-Family		-		-		-		-		-
Commercial Real Estate		1,159		1,459		-		1,450		66
Home Equity – closed end		-		-		-		123		-
Home Equity – open end		1,649		1,649		-		330		57
Commercial & Industrial – Non-Real Estate		191		191		-		237		11
Consumer		-		-		-		-		-
Credit cards		-		-		-		-		-
Dealer Finance		-		-		-		-		-
		8,122		8,842		-		8,800		390

Impaired loans with a valuation allowance
Construction/Land Development		12,976		14,749		1,469		12,056		326
Farmland		-		-		-		-		-
Real Estate		926		926		101		988		105
Multi-Family		-		-		-		-		-
Commercial Real Estate		938		938		47		1,030		4
Home Equity – closed end		-		-		-		72		-
Home Equity – open end		-		-		-		40		-
Commercial & Industrial – Non-Real Estate		-		-		-		-		-
Consumer		-		-		-		-		-
Credit cards		-		-		-		-		-
Dealer Finance		-		-		-		-		-
		14,840		16,613		1,617		14,186		435

Total impaired loans	$	22,962	$	25,455	$	1,617	$	22,986	$	825

Loans held for sale consists of loans originated by VBS Mortgage and the Bank’s commitment to purchase residential mortgage loan participations from Gateway Bank and Northpointe Bank. The volume of loans purchased fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of December 31, 2015 and 2014 were $57,805,529 and $13,381,941, respectively.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 6 ALLOWANCE FOR LOAN LOSSES:

A summary of changes in the allowance for loan losses is shown in the following schedule:

December 31, 2015 (in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	4,738	$	156	$	85	$	(225	)	$	4,442	$	2,373	$	2,069
Farmland		-		-		-		95			95		-		95
Real Estate		623		25		37		171			806		238		568
Multi-Family		-		-		-		71			71		-		71
Commercial Real Estate		126		-		65		254			445		18		427
Home Equity – closed end		188		26		6		6			174		-		174
Home Equity – open end		154		51		-		531			634		269		365
Commercial & Industrial – Non-Real Estate		1,211		-		62		(218	)		1,055		-		1,055
Consumer		214		32		32		(106	)		108		-		108
Dealer Finance		1,336		251		24		(273	)		836		17		819
Credit Cards		135		60		46		(6	)		115		-		115
Total	$	8,725	$	601	$	357	$	300		$	8,781	$	2,915	$	5,866

A summary of changes in the allowance for loan losses is shown in the following schedule:

December 31, 2014 (in thousands)	Beginning Balance			Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	4,007		$	1,611	$	223	$	2,119		$	4,738	$	1,469	$	3,269
Farmland		(2	)		-		-		2			-		-		-
Real Estate		400			208		-		431			623		101		522
Multi-Family		-			-		-		-			-		-		-
Commercial Real Estate		777			-		108		(759	)		126		47		79
Home Equity – closed end		157			-		-		31			188		-		188
Home Equity – open end		476			80		-		(242	)		154		-		154
Commercial & Industrial – Non-Real Estate		1,464			385		356		(224	)		1,211		-		1,211
Consumer		156			33		33		58			214		-		214
Dealer Finance		628			107		6		809			1,336		-		1,336
Credit Cards		121			46		35		25			135		-		135
Total	$	8,184		$	2,470	$	761	$	2,250		$	8,725	$	1,617	$	7,108

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):

Recorded Investment in Loan Receivables (in thousands):

December 31, 2015	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment

Construction/Land Development	$	69,759	$	12,895	$	56,864
Farmland		13,378		-		13,378
Real Estate		166,587		1,421		165,167
Multi-Family		7,559		-		7,559
Commercial Real Estate		128,032		1,197		126,835
Home Equity – closed end		9,135		-		9,135
Home Equity –open end		56,599		2,573		54,026
Commercial & Industrial – Non-Real Estate		27,954		181		27,773
Consumer		8,219		18		8,201
Dealer Finance		54,086		72		54,013
Credit Cards		2,745		-		2,745
	$	544,053	$	18,357	$	525,696
Total

December 31, 2014	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment

Construction/Land Development	$	67,181	$	17,958	$	49,223
Farmland		12,507		-		12,507
Real Estate		162,249		1,067		161,182
Multi-Family		11,775		-		11,775
Commercial Real Estate		122,305		2,097		120,208
Home Equity – closed end		9,394		-		9,394
Home Equity –open end		52,182		1,649		50,533
Commercial & Industrial – Non-Real Estate		28,161		191		27,970
Consumer		9,110		-		9,110
Dealer Finance		40,633				40,633
Credit Cards		2,705		-		2,705
	$	518,202	$	22,962	$	495,240
Total

Aging of Past Due Loans Receivable (in thousands)

	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, 2015
Construction/Land Development	$	104	$	-	$	-	$	4,688	$	4,792	$	64,967	$	69,759
Farmland		-		-		-		-		-		13,378		13,378
Real Estate		2,684		1,332		272		1,010		5,298		161,289		166,587
Multi-Family		-		-		-		-		-		7,559		7,559
Commercial Real Estate		340		241		-		-		581		127,451		128,032
Home Equity – closed end		41		7		-		-		48		9,087		9,135
Home Equity – open end		918		46		107		40		1,111		55,488		56,599
Commercial & Industrial – Non- Real Estate		114		3		25		109		251		27,703		27,954
Consumer		120		10		-		-		130		8,089		8,219
Dealer Finance		905		183		152		108		1,348		52,738		54,086
Credit Cards		10		13		15		-		38		2,707		2,745
Total	$	5,236	$	1,835	$	571	$	5,955	$	13,597	$	530,456	$	544,053

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):

	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, 2014
Construction/Land Development	$	205	$	166	$	-	$	4,508	$	4,879	$	62,302	$	67,181
Farmland		-		-		-		-		-		12,507		12,507
Real Estate		5,085		635		-		973		6,693		155,556		162,249
Multi-Family		-		-		-		-		-		11,775		11,775
Commercial Real Estate		747		-		-		1,165		1,912		120,393		122,305
Home Equity – closed end		162		15		-		10		187		9,207		9,394
Home Equity – open end		730		25		-		143		898		51,284		52,182
Commercial & Industrial – Non- Real Estate		-		-		-		14		14		28,147		28,161
Consumer		290		9		-		-		299		8,811		9,110
Dealer Finance		696		189		-		161		1,046		39,587		40,633
Credit Cards		36		-		1		-		37		2,668		2,705
Total	$	7,951	$	1,039	$	1	$	6,974	$	15,965	$	502,237	$	518,202

CREDIT QUALITY INDICATORS (in thousands)
AS OF DECEMBER 31, 2015
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	$	-	$	485	$	8,410	$	31,783	$	14,260	$	3,216	$	11,605	$	-	$	69,759
Farmland		66		-		2,615		3,768		4,952		1,977		-		-		13,378
Real Estate		-		955		54,400		76,545		23,695		8,334		2,658		-		166,587
Multi-Family		-		391		3,925		3,046		197		-		-		-		7,559
Commercial Real Estate		-		2,087		25,889		74,337		20,271		4,149		1,299		-		128,032
Home Equity – closed end		-		-		3,549		3,792		1,661		114		19		-		9,135
Home Equity – open end		-		1,657		15,043		31,455		4,827		398		3,219		-		56,599
Commercial & Industrial (Non-Real Estate)		896		646		6,423		17,053		2,281		517		138		-		27,954
Total	$	962	$	6,221	$	120,254	$	241,779	$	72,144	$	18,705	$	18,938	$	-	$	479,003

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
	Credit Cards		Consumer
Performing	$	2,730	$	62,046
Non performing		15		259
Total	$	2,745	$	62,305

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):

CREDIT QUALITY INDICATORS (in thousands)
AS OF DECEMBER 31, 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	$	-	$	165	$	8,460	$	24,227	$	9,605	$	3,815	$	20,909	$	-	$	67,181
Farmland		68		-		1,640		3,451		5,228		-		2,120		-		12,507
Real Estate		-		629		60,290		66,464		23,934		7,083		3,849		-		162,249
Multi-Family		-		468		4,145		2,183		4,979		-		-		-		11,775
Commercial Real Estate		-		1,687		22,800		65,653		19,058		10,571		2,536		-		122,305
Home Equity – closed end		-		-		4,327		3,090		1,812		154		11		-		9,394
Home Equity – open end		-		1,555		13,433		28,425		4,309		1,936		2,524		-		52,182
Commercial & Industrial (Non-Real Estate)		643		74		4,692		18,039		3,948		735		30		-		28,161
Total	$	711	$	4,578	$	119,787	$	211,532	$	72,873	$	24,294	$	31,979	$	-	$	465.754

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
	Credit Cards		Consumer
Performing	$	2,704	$	49,582
Non performing		1		161
Total	$	2,705	$	49,743

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.

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.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):

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.

NOTE 7

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.

During the twelve months ended December 31, 2015, the Bank modified 16 loans that were considered to be troubled debt restructurings. These modifications include 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.

	December 31, 2015
			Pre-Modification		Post-Modification
(in thousands)			Outstanding		Outstanding
Troubled Debt Restructurings	Number of Contracts		Recorded Investment		Recorded Investment
Commercial		1	$	974	$	974
Real Estate		5		1,408		1,408
Home Equity		4		1,414		1,414
Consumer		6		73		73
Total		16	$	3,869	$	3,869

As of December 31, 2015, there were no loans restructured in the previous twelve months, in default. A restructured loan is considered in default when it becomes 90 days past due.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 7

TROUBLED DEBT RESTRUCTURING (CONTINUED):

During the twelve months ended December 31, 2014, the Bank modified 3 loans that were considered to be troubled debt restructurings. These modifications include 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.

	December 31, 2014
			Pre-Modification		Post-Modification
(in thousands)			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Real Estate		2	$	179	$	179
Consumer		1		22		22

		3	$	201	$	201

As of December 31, 2014, there was one loan restructured in the previous twelve months, in default. This was a real estate loan totaling $97,000. A restructured loan is considered in default when it becomes 90 days past due.

NOTE 8

BANK PREMISES AND EQUIPMENT

Bank premises and equipment as of December 31 are summarized as follows:

	2015			2014

Land	$	1,868,709		$	1,418,003
Buildings and improvements		7,209,427			6,793,644
Furniture and equipment		7,397,173			6,479,815
		16,475,309			14,691,462
Less - accumulated depreciation		(8,933,231	)		(8,233,208	)
Net	$	7,542,078		$	6,458,254

Provisions for depreciation of $709,237 in 2015, $612,116 in 2014, and $581,625 in 2013 were charged to operations.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 9 OTHER REAL ESTATE OWNED

The tables below reflect OREO activity for 2015 and 2014:

Other Real Estate Owned
	2015			2014
Balance as of January 1	$	3,507,153		$	2,628,418
Property acquired at foreclosure		125,000			2,914,958
Capital improvements on foreclosed property		98,929			48,961
Sale of other real estate owned financed by Bank		(328,129	)		(780,097	)
Sales of foreclosed properties		(737,663	)		(1,029,452	)
Write down of OREO		(537,605	)		(275,635	)
Balance as of December 31	$	2,127,685		$	3,507,153

NOTE 10 DEPOSITS:

The composition of deposits at December 31, 2015 and 2014 was as follows:

	December 31,
	2015		2014

Noninterest bearing demand deposits	$	134,786,875	$	112,197,722

Savings and interest bearing demand deposits:
Interest checking accounts		108,459,597		119,593,529
Savings accounts		90,383,486		64,249,199

Time Deposits:
Balances of less than $100,000		107,415,244		115,651,329
Balances of $100,000 and more		53,624,554		79,812,757

Total Deposits	$	494,669,756	$	491,504,536

The Company’s deposits over $250,000 were not readily available from their data processing system.

At December 31, 2015, the scheduled maturities of time deposits are as follows:

2016	$	68,800,143
2017		38,529,664
2018		27,310,066
2019		12,595,076
2020 and after		13,804,849
Total	$	161,039,798

F& M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 11 SHORT-TERM DEBT:

Short-term debt, all maturing within 12 months, information is summarized as follows:

	Maximum						Weighted
	Outstanding		Outstanding		Average		Average			Year End
	at any		at		Balance		Interest			Interest
	Month End		Year End		Outstanding		Rate			Rate

2015
Federal funds purchased	$	8,843,000	$	959,217	$	833,907		.02	%		.78	%
FHLB short term		45,000 ,000		20,000,000		26,739,726		.16	%		.19	%
Securities sold under agreements to repurchase		4,697,341		3,994,834		4,443,753		.04	%		.25	%
Totals			$	24,954,051	$	32,017,386		.21	%		.22	%
2014
Federal funds purchased	$	491,000	$	-	$	7,704		.001	%		.61	%
FHLB short term		10,000 ,000		10,000,000		27,397		.001	%		.17	%
Securities sold under agreements to repurchase		5,066,238		4,358,492		3,837,612		.23	%		.24	%
Totals			$	14,358,492	$	3,872,713		.23	%		.23	%

Repurchase agreements are secured transactions with customers and generally mature the day following the date sold. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB daily rate credit, which is secured by the loan portfolio, is a variable rate loan that acts as a line of credit to meet financing needs.

As of December 31, 2015, the Company had unsecured lines of credit with correspondent banks totaling $26,000,000, which may be used in the management of short-term liquidity.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 12 LONG-TERM DEBT:

The Company borrowed $40,000,000 from the Federal Home Loan Bank of Atlanta (FHLB) in 2015 to fund loan growth and extend maturities of long term debt at lower rates. They borrowed $10,000,000 in 2014 and there were no new borrowings from FHLB in 2013. The interest rates on the notes payable are fixed at the time of the advance and range from 1.16% to 2.56%; the weighted average interest rate was 1.86% and 2.33% at December 31, 2015 and 2014, respectively. The balance of these obligations at December 31, 2015 and December 31, 2014 were $48,161,000 and $9,875,000, respectively. The long-term debt is secured by qualifying mortgage loans owned by the Company.

The maturities of long-term Federal Home Loan Bank borrowings as of December 31, 2015 are as follows:

2016	$	3,929,000
2017		3,929,000
2018		8,929,000
2019		6,429,000
2020		13,929,000
Thereafter		11,016,000
Total	$	48,161,000

NOTE 13 INCOME TAX EXPENSE:

The components of the income tax expense are as follows:


	2015			2014		2013
Current expense
Federal	$	3,227,013		$	1,777,598	$	482,912
Deferred (benefit) expense
Federal		(340,941	)		505,684		636,452
State		-			9,854		(67,594	)
Total Deferred (benefit) expense		(340,941	)		515,538		568,858
Total Income Tax Expense	$	2,886,072		$	2,293,136	$	1,051,770

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 13 INCOME TAX EXPENSE (CONTINUED):

The components of the deferred taxes as of December 31 are as follows:

Deferred Tax Assets:	2015		2014
Allowance for loan losses	$	2,564,214	$	2,201,291
Split Dollar Life Insurance		4,440		4,440
Nonqualified deferred compensation		702,440		594,132
Low income housing partnerships losses		210,107		308,539
Core deposit amortization		176,605		72,188
Other real estate owned		269,610		3,746
Pension plan		1,382,268		1,199,686
Total Assets	$	5,309,684	$	4,384,022

Deferred Tax Liabilities:	2015		2014
Unearned low income housing credits	$	418,416	$	523,769
Depreciation		359,406		320,743
Pension		1,988,736		1,864,964
Goodwill tax amortization		901,340		853,880
Securities available for sale		1,757		1,272
Total Liabilities		3,669,655		3,564,628
Net Deferred Tax Asset (included in Other Assets on Balance Sheet)	$	1,640,029	$	819,394

The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rates:

	2015			2014			2013
Tax expense at federal statutory rates	$	3,843,048		$	2,959,056		$	2,251,851
Increases (decreases) in taxes resulting from:
State income taxes, net of federal benefit		8,087			8,659			9,229
Partially tax-exempt income		(46,348	)		(54,529	)		(44,676	)
Tax-exempt income		(222,672	)		(190,192	)		(197,482	)
Prior year LIH credits		(132,028	)		(21,787	)		(61,768	)
LIH and historic credits		(568,854	)		(484,955	)		(611,795	)
Deferred Tax Asset Valuation Allowance - reversal		-			396,440			-
Other		4,840			(112,714	)		(2,710	)
Total Income Tax Expense	$	2,886,072		$	2,293,136		$	1,051,770

Management evaluated the likelihood of recognizing the Company’s deferred tax asset. Based on the evidence supporting this asset, it was decided to record a partial valuation allowance against the asset on the Company’s books in the amount of $582,778 for the years ended 2015 and 2014. A deferred tax asset is created from the difference between book income using Generally Accepted Accounting Principles and taxable income.

The Corporation has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with accounting guidance related to income taxes.

The Corporation and its subsidiaries file federal income tax returns and state income tax returns. With few exceptions, the Corporation is no longer subject to federal or state income tax examinations by tax authorities for years before 2012.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 14 EMPLOYEE BENEFITS:

Defined Benefit Pension Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings.

The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets for 2015, 2014 and 2013:

	2015			2014			2013
Change in Benefit Obligation
Benefit obligation, beginning	$	10,777,415		$	7,933,568		$	8,931,940
Service cost		648,334			501,032			599,933
Interest cost		410,944			377,706			350,314
Actuarial gain (loss)		(137,048	)		2,030,583			(1,300,094	)
Benefits paid		(754,987	)		(65,474	)		(648,525	)
Benefit obligation, ending	$	10,944,658		$	10,777,415		$	7,933,568

Change in Plan Assets
Fair value of plan assets, beginning	$	11,683,845		$	9,687,226		$	8,123,437
Actual return on plan assets		(640	)		562,093			1,462,314
Employer contribution		750,000			1,500,000			750,000
Benefits paid		(754,987	)		(65,474	)		(648,525	)
Fair value of plan assets, ending		11,678,218			11,683,845			9,687,226
Funded status at the end of the year	$	733,560		$	906,430		$	1,753,658

The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 21, “Fair Value Measurements” to the Consolidated Financial Statements. The valuations are based on third party data received as of the balance sheet date. All plan assets are considered Level 1 assets, as quoted prices exist in active markets for identical assets.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 14 EMPLOYEE BENEFITS (CONTINUED):

Defined Benefit Pension Plan, continued

	2015			2014			2013

Amount recognized in the Balance Sheet
Accrued prepaid benefit cost	$	4,799,051		$	4,434,917		$	3,136,277
Unfunded pension benefit obligation under ASC 325-960		(4,065,491	)		(3,528,487	)		(1,382,619	)

Amount recognized in accumulated other
comprehensive income
Net Gain/(Loss)	$	(4,137,855	)	$	(3,616,087	)	$	(1,485,455	)
Prior service cost		72,364			87,600			102,836
Amount recognized		(4,065,491	)		(3,528,487	)		(1,382,619	)
Deferred Taxes		1,382,267			1,199,686			470,090
Amount recognized in accumulated
comprehensive income	$	(2,683,224	)	$	(2,328,801	)	$	(912,529	)

(Accrued) Prepaid benefit detail
Benefit obligation	$	(10,944,658	)	$	(10,777,415	)	$	(7,933,568	)
Fair value of assets		11,678,218			11,683,845			9,687,226
Unrecognized net actuarial loss		4,137,855			3,616,087			1,485,455
Unrecognized prior service cost		(72,364	)		(87,600	)		(102,836	)
Prepaid (accrued) benefits	$	4,799,051		$	4,434,917		$	3,136,277

Components of net periodic benefit cost
Service cost	$	648,334		$	501,032		$	599,933
Interest cost		410,944			377,706			350,314
Expected return on plan assets		(838,818	)		(698,252	)		(636,081	)
Amortization of prior service cost		(15,236	)		(15,236	)		(15,236	)
Recognized net actuarial (gain) loss		180,642			36,110			203,183
Net periodic benefit cost	$	385,866		$	201,360		$	502,113

Additional disclosure information
Accumulated benefit obligation	$	7,601,249		$	7,543,340		$	5,474,048
Vested benefit obligation	$	7,539,365		$	7,408,014		$	5,388,808
Discount rate used for net pension cost		4.00	%		5.00	%		4.00	%
Discount rate used for disclosure		4.25	%		4.00	%		5.00	%
Expected return on plan assets		7.50	%		7.50	%		8.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%
Average remaining service (years)		13			14			14

Funding Policy

The Company’s contributions for 2015, 2014 and 2013 were $750,000, $1,500,000, and $750,000, respectively. Due to the current funding status of the plan, the Company will not make a contribution in 2016. The net periodic pension cost of the plan for 2016 will be approximately $438,000.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 14 EMPLOYEE BENEFITS (CONTINUED):

Defined Benefit Pension Plan, continued

Long-Term Rate of Return

The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with their advisors and the plan actuary, and with concurrence from their auditor. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the trust. Undue weight is not given to recent experience, which may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further – solely for this purpose the plan is assumed to continue in force and not terminate during the period during which the assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

Asset Allocation

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equity. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure. The pension plan’s allocations as of December 31, 2015 and 2014 were 60% equity and 40% fixed and 61% equity and 39% fixed, respectively.

Estimated Future Benefit Payments

2016	$	582,606
2017		48,333
2018		1,249,321
2019		662,704
2020		543,814
2021-2025		4,568,645
	$	7,655,423

Employee Stock Ownership Plan (ESOP)

The Company sponsors an ESOP which provides stock ownership to substantially all employees of the Bank. The Plan provides total vesting upon the attainment of five years of service. Contributions to the plan are made at the discretion of the Board of Directors and are allocated based on the compensation of each employee relative to total compensation paid by the Bank. All shares issued and held by the Plan are considered outstanding in the computation of earnings per share. Dividends on Company stock are allocated and paid to participants at least annually. Shares of Company stock, when distributed, have restrictions on transferability. The Company contributed $420,000 in 2015, $360,000 in 2014, and $360,000 in 2013 to the Plan and charged this expense to operations. The shares held by the ESOP totaled 188,596 and 188,396 at December 31, 2015 and 2014, respectively.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 14 EMPLOYEE BENEFITS (CONTINUED):

401(K) Plan

The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 20 percent of their salary on a pretax basis, subject to certain IRS limits. Under the Federal Safe Harbor rules employees are automatically enrolled at 3% (in the third year this increases by 1% per year up to 6%) of their salary unless elected otherwise. The Company matches a hundred percent of the first 1% contributed by the employee and fifty percent from 2% to 6% of employee contributions. Vesting in the contributions made by the Company is 100% after two years of service. Contributions under the plan amounted to $211,987, $190,057 and $183,468 in 2015, 2014 and 2013, respectively.

Deferred Compensation Plan

The Company has a nonqualified deferred compensation plan for several of its key employees and directors. The Company may make annual contributions to the plan, and the employee or director has the option to defer a portion of their salary or bonus based on qualifying annual elections. Contributions to the plan totaled $110,000 in 2015, $100,000 in 2014 and $90,000 in 2013.

NOTE 15 CONCENTRATIONS OF CREDIT:

The Company had cash deposits in other commercial banks totaling $2,156,006 and $1,731,223 at December 31, 2015 and 2014, respectively.

The Company grants commercial, residential real estate and consumer loans to customers located primarily in the northwestern portion of the State of Virginia. Loan concentration areas greater than 25% of capital include land development. Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Approximately 83% of the loan portfolio is secured by real estate.

NOTE 16 COMMITMENTS:

The Company makes commitments to extend credit in the normal course of business and issues standby letters of credit to meet the financing needs of its customers. The amount of the commitments represents the Company's exposure to credit loss that is not included in the balance sheet. As of the balance sheet dates, the Company had the following commitments outstanding:

	2015		2014
Commitments to loan money	$	135,138,834	$	120,922,771
Standby letters of credit		1,344,191		2,077,870

The Company uses the same credit policies in making commitments to lend money and issue standby letters of credit as it does for the loans reflected in the balance sheet.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Collateral required, if any, upon extension of credit is based on management's credit evaluation of the borrower’s ability to pay. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 16 COMMITMENTS (CONTINUED):

The Bank leases four of its branch offices and both of its loan production offices under long term lease arrangements which had initial terms of either three, five or ten years. Lease expense was $164,294, $120,728 and $121,025 for 2015, 2014 and 2013, respectively. As of December 31, 2015, the required lease payments for the next five years are as follows:

2016	$	160,882
2017		116,899
2018		73,226
2019		74,349
2020		75,500

NOTE 17

ON BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

Derivative Financial Instruments

The Company has stand alone derivative financial instruments in the form of forward option contracts. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s balance sheet as derivative assets and derivative liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

Derivative instruments are generally either negotiated OTC contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.

The Company issues to customers certificates of deposit with an interest rate that is derived from the rate of return on the stock of the companies that comprise The Dow Jones Industrial Average. In order to manage the interest rate risk associated with this deposit product, the Company has purchased a series of forward option contracts. These contracts provide the Company with a rate of return commensurate with the return of The Dow Jones Industrial Average from the time of the contract until maturity of the related certificate of deposit. These contracts are accounted for as fair value hedges. Because the certificates of deposit can be redeemed by the customer at any time and the related forward options contracts cannot be cancelled by the Company, the hedge is not considered effective. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.

At December 31, the information pertaining to the forward option contracts, included in other assets and other liabilities on the balance sheet, is as follows:

	2015		2014

Notional amount	$	189,629	$	87,782
Fair market value of contracts		15,162		32,795

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 18 TRANSACTIONS WITH RELATED PARTIES:

During the year, officers and directors (and companies controlled by them) were customers of and had transactions with the Company in the normal course of business. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.

Loan transactions with related parties are shown in the following schedule:

	2015			2014

Total loans, beginning of year	$	7,449,140		$	7,786,058
New loans		5,226,432			5,249,565
Relationship change		(44,948	)		-
Repayments		(5,450,520	)		(5,586,483	)
Total loans, end of year	$	7,180,104		$	7,449,140

Deposit of executive officers and directors and their affiliates were $4,529,503 and $3,430,336 on December 31, 2015 and 2014 respectively. These deposits were made under the same terms available to other customers of the bank

NOTE 19 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:

The principal source of funds of F & M Bank Corp. is dividends paid by the Farmers and Merchants Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. As of January 1, 2015, approximately $10,494,000 was available for dividend distribution without permission of the Board of Governors. Dividends paid by the Bank to the Company totaled $2,500,000 in 2015, $1,300,000 in 2014 and $1,550,000 in 2013.

NOTE 20 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

ASC 825 “Financial Instruments” (formerly SFAS 107) defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale. As the majority of the Bank's financial instruments lack an available trading market, significant estimates, assumptions and present value calculations are required to determine estimated fair value. The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2015 and December 31, 2014. 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 below are considered Level 2 (except for impaired loans which are 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.

	2015				2014
	Estimated		Carrying		Estimated		Carrying
	Fair Value		Value		Fair Value		Value
Financial Assets (in thousands)
Loans	$	555,762	$	544,053	$	551,338	$	518,202
Financial Liabilities
Time deposits		162,524		161,040		196,826		195,464
Long-term debt		48,565		48,161		9,862		9,875

The carrying value of cash and cash equivalents, other investments, deposits with no stated maturities, short-term borrowings, and accrued interest approximate fair value. The fair value of securities was calculated using the most recent transaction price or a pricing model, which takes into consideration maturity, yields and quality. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments entered into during the month of December of each year.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 21 FAIR VALUE MEASUREMENTS

Accounting Standards Codification (ASC 820), “Fair Value Measurement Disclosures” (formerly “FAS No. 157”), defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 -

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 -

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 -

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans Held for Sale: Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan. These loans are generally repurchased within 15 days. Because of the short-term nature and fixed repurchased price, the book value of these loans approximates fair value.

Impaired Loans: ASC 310 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are initially measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 310.

For level 3 assets and liabilities measured at fair value on a recurring basis or non-recurring basis as of December 31, 2015 and 2014 significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value at December 31, 2015		Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	11,315	Discounted appraised value	Discount for selling costs and age of appraisals		15%-55	%
Other Real Estate Owned	$	2,128	Discounted appraised value	Discount for selling costs and age of appraisals		15%-55	%

	Fair Value at December 31, 2014		Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	13,223	Discounted appraised value	Discount for selling costs and age of appraisals		15%-55	%
Other Real Estate Owned	$	3,507	Discounted appraised value	Discount for selling costs and age of appraisals		15%-55	%

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 21 FAIR VALUE MEASUREMENTS (CONTINUED):

Assets and Liabilities Recorded at Fair Value on a Recurring Basis (in thousands)

December 31, 2015	Total		Level 1		Level 2		Level 3
U. S. Treasuries	$	4,021	$	-	$	4,021	$	-
Government sponsored enterprises		8,074		-		8,074		-
Mortgage-backed obligations of federal agencies		817		-		817		-
Marketable equities		135		-		135		-
Investment securities available for sale		13,047		-		13,047		-

Total assets at fair value	$	13,047	$	-	$	13,047	$	-

Total liabilities at fair value	$	-	$	-	$	-	$	-

Derivative financial instruments at fair value	$	15	$	-	$	15	$	-

December 31, 2014	Total		Level 1		Level 2		Level 3
U. S. Treasuries	$	4,020	$	-	$	4,020	$	-
Government sponsored enterprises		8,038		-		8,038		-
Mortgage-backed obligations of federal agencies		1,022		-		1,022		-
Marketable equities		135		-		135		-
Investment securities available for sale		13,215		-		13,215		-

Total assets at fair value	$	13,215	$	-	$	13,215	$	-

Total liabilities at fair value	$	-	$	-	$	-	$	-

Derivative financial instruments at fair value	$	33	$	-	$	33	$	-

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis (in thousands)

December 31, 2015	Total		Level 1		Level 2		Level 3
Other Real Estate Owned	$	2,128		-		-	$	2,128
				-		-
Construction/Land Development		9,161		-		-		9,161
Farmland		-		-		-		-
Real Estate		85		-		-		85
Multi-Family		-		-		-		-
Commercial Real Estate		872		-		-		872
Home Equity – closed end		-		-		-		-
Home Equity – open end		1,145		-		-		1,145
Commercial & Industrial – Non-Real Estate		-		-		-		-
Consumer		-		-		-		-
Credit cards		-		-		-		-
Dealer Finance		52		-		-		52
Impaired loans		11,315		-		-		11,315

Total assets at fair value	$	13,443		-	$	-	$	13,443

Total liabilities at fair value	$	-	$	-	$	-	$	-

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 21 FAIR VALUE MEASUREMENTS, CONTINUED

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis (in thousands)

The table below presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.

December 31, 2014	Total		Level 1		Level 2		Level 3
Other Real Estate Owned	$	3,507		-		-	$	3,507
				-		-
Construction/Land Development		11,507		-		-		11,507
Farmland		-		-		-		-
Real Estate		825		-		-		825
Multi-Family		-		-		-		-
Commercial Real Estate		891		-		-		891
Home Equity – closed end		-		-		-		-
Home Equity – open end		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-
Consumer		-		-		-		-
Credit cards		-		-		-		-
Dealer Finance		-		-		-		-
Impaired loans		13,223		-		-		13,223

Total assets at fair value	$	16,730		-	$	-	$	16,730

Total liabilities at fair value	$	-	$	-	$	-	$	-

There were no significant transfers between levels 1 and 2. Level 3 assets consist of Other Real Estate Owned and Impaired loans. These assets have been valued based on Managements’ estimate. These estimates were derived from a review of appraisals, tax assessments and discussions with appraisers and realtors.

NOTE 22 REGULATORY MATTERS

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation, to ensure capital adequacy, require the Company to maintain minimum amounts and ratios. These ratios are defined in the regulations and the amounts are set forth in the table below. Management believes, as of December 31, 2015, that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.

As of the most recent notification from the Federal Reserve Bank Report of Examination (which was as of February 23, 2015), the subsidiary bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 22 REGULATORY MATTERS (CONTINUED):

The Company’s actual consolidated capital ratios are presented in the following table (dollars in thousands):

	Analysis of Capital									Regulatory Requirements
	At December 31,									Adequately		Well
	2015			2014			2013			Capitalized		Capitalized
Tier1 capital:
Preferred stock	$	9,425		$	9,425		$	-
Common stock		16,427			16,459			12,559
Retained earnings		59,205			53,815			42,089
Intangible assets		(2,670	)		(2,670	)		(2,670	)
Accumulated other comprehensive income		(2,680	)		-			-
Total Tier 1 Capital	$	79,707		$	77,029		$	51,978
Tier 2 capital:
Qualifying subordinated debt	$	-		$	-		$	8,487
Allowance for loan losses		7,073			6,018			5,389
Unrealized gains on AFS equity securities		-			-			-
Total risked based capital	$	86,780		$	83,047		$	65,854
Common Equity Tier 1 Capital (Tier 1 less preferred stock)	$	70,282		$	-		$	-
Risk-weighted assets	$	564,106		$	478,725		$	428,349
Capital ratios:
Total risk-based ratio		15.38	%		17.35	%		15.37	%	8.00	%	10.00	%
Tier 1 risk-based ratio		14.13	%		16.09	%		12.13	%	4.00	%	6.00	%
Common equity tier 1		12.46	%							4.5	%	6.5	%
Total assets leverage ratio		12.18	%		12.88	%		9.37	%	3.00	%	5.00	%

The actual capital ratios for the subsidiary bank are presented in the following table (dollars in thousands):

	Analysis of Capital									Regulatory Requirements
	At December 31,									Adequately			Well
	2015			2014			2013			Capitalized			Capitalized
Common Equity Tier 1 capital:
Common stock	$	500		$	500		$	500
Capital surplus		37,971			37,971			18,971
Retained earnings		45,855			40,114			35,361
Intangible assets		(2,670	)		(2,670	)		(2,670	)
Accumulated other comprehensive income		(2,680	)		-			-
Total Common Equity Tier 1 Capital	$	78,976		$	75,915		$	52,162
Tier 2 capital:
Qualifying subordinated debt	$	-		$	-		$	8,487
Allowance for loan losses		7,077			6,006			5,384
Unrealized gains on AFS securities		-			-			-
Total risked based capital	$	86,053		$	81,921		$	66,033
Risk-weighted assets	$	564,469		$	478,512		$	427,957
Capital ratios:
Total risk-based ratio		15.24	%		17.12	%		15.43	%		8.00	%		10.00	%
Tier 1 risk-based ratio		13.99	%		15.86	%		12.19	%		4.00	%		6.00	%
Common equity tier 1		13.99	%								4.5	%		6.5	%
Total assets leverage ratio		12.06	%		12.70	%		9.41	%		3.00	%		5.00	%

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 23 INTANGIBLES:

Goodwill associated with the purchase of the Edinburg and Woodstock branches and VBS Mortgage totaled $2,638,677 and $30,840, respectively, at the acquisition date.

NOTE 24 INVESTMENTS IN LIFE INSURANCE CONTRACTS

The Bank currently offers a variety of benefit plans to all full time employees. While the costs of these plans are generally tax deductible to the Bank, the cost has been escalating greatly in recent years. To help offset escalating benefit costs and to attract and retain qualified employees, the Bank purchased Bank Owned Life Insurance (BOLI) contracts that will provide benefits to employees during their lifetime. Dividends received on these policies are tax-deferred and the death benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are very favorable when compared to other long-term investments which the Bank might make.

NOTE 25 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

Balance Sheets

December 31, 2015 and 2014

	2015			2014

Assets
Cash and cash equivalents	$	1,907,581		$	1,214,140
Investment in subsidiaries		81,646,312			76,684,121
Securities available for sale		135,000			135,000
Income tax receivable (including due from subsidiary)		-			453,585
Total Assets	$	83,688,893		$	78,486,846

Liabilities
Other liabilities	$	-		$	137,977
Income tax payable (including due form subsidiary)		847,001			-
Deferred income taxes		301,870			383,125
Demand obligations for low income housing investment		162,290			167,341
Total Liabilities	$	1,311,161		$	688,443

Stockholders’ Equity
Preferred stock par value $5 per share, 400,000 shares authorized, issued and outstanding	$	9,425,123		$	9,425,123
Common stock par value $5 per share, 6,000,000 shares authorized, 3,285,404 and 3,291,766 shares issued and outstanding for 2015 and 2014, respectively		16,427,020			16,458,830
Retained earnings		59,205,404			53,814,416
Noncontrolling interest		-			426,365
Accumulated other comprehensive income (loss)		(2,679,815	)		(2,326,331	)
Total Stockholders' Equity		82,377,732			77,798,403
Total Liabilities and Stockholders' Equity	$	83,688,893		$	78,486,846

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

Statements of Net Income

For the years ended December 31, 2015, 2014 and 2013

	2015			2014		2013
Income
Dividends from affiliate	$	2,500,000		$	1,300,000	$	1,550,000
Interest Income		-			-		5
Net limited partnership income (loss)		4,792			-		(65,165	)
Total Income		2,504,792			1,300,000		1,484,840

Expenses
Other expense		21,316			7,100		-
Administrative expenses		-			-		60,209
Total Expenses		21,316			7,100		60,209

Net income before income tax expense (benefit)
and undistributed subsidiary net income		2,483,476			1,292,900		1,424,631

Income Tax Expense (Benefit)		(191,494	)		243,492		(239,908	)

Income before undistributed subsidiary
net income		2,674,970			1,049,408		1,664,539

Undistributed subsidiary net income		5,742,039			4,752,201		3,051,254

Net Income F&M Bank Corp.	$	8,417,009		$	5,801,609	$	4,715,793

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 25 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):

Statements of Cash Flows

For the years ended December 31, 2015, 2014 and 2013

	2015			2014			2013

Cash Flows from Operating Activities
Net income	$	8,417,009		$	5,801,609		$	4,715,793
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed subsidiary income		(5,742,039	)		(4,752,201	)		(3,051,254	)
Deferred tax (benefit) expense		(81,256	)		279,928			8,577
Decrease (increase) in other assets		1,300,586			(444,885	)		(174,367	)
Increase (decrease) in other liabilities		(143,028	)		137,817			(1,109,728	)
Net change in deferred tax credits		-			-			(27,918	)
Amortization of limited partnership investments		-			-			65,165
Net Cash Provided by Operating Activities		3,751,272			1,022,268			426,268

Cash Flows from Investing Activities
Change in loans receivable		-			-			1,000,000
Purchase of securities available for sale		-			(135,000	)		-
Net Cash Provided by (Used in) Investing Activities		-			(135,000	)		1,000,000

Cash Flows from Financing Activities
Capital contributed to subsidiary		-			(19,000,000	)		-
Proceeds from issuance of preferred stock		-			9,425,123			-
Repurchase of common stock		(289,119	)		-			-
Proceeds from issuance of common stock		146,418			12,055,709			213,429
Dividends paid in cash		(2,915,130	)		(2,231,912	)		(1,705,881	)
Net Provided by (Cash Used) in Financing Activities		(3,057,831	)		248,920			(1,492,452	)

Net Increase (decreases) in Cash and Cash Equivalents		693,441			1,136,188			(66,184	)

Cash and Cash Equivalents, Beginning of Year		1,214,140			77,952			144,136
Cash and Cash Equivalents, End of Year	$	1,907,581		$	1,214,140		$	77,952

F & M Bank Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2015 and 2014

NOTE 26 INVESTMENT IN VBS MORTGAGE, LLC

On November 3, 2008, the Bank acquired a 70% ownership interest in VBS Mortgage, LLC (formerly Valley Broker Services, DBA VBS Mortgage). VBS originates both conventional and government sponsored mortgages for sale in the secondary market. As of December 31, 2015 and 2014, VBS’ summarized balance sheet and income statement were as follows:

Balance Sheets

December 31, 2015 and 2014

	2015		2014
Assets
Cash and cash equivalents	$	1,071,293	$	610,973
Loans Receivable		763,534		818,054
Property and equipment, net		79,038		45,600
Other Assets		266,073		162,304
Total Assets	$	2,179,938	$	1,636,931

Liabilities
Other liabilities		271,004		215,713
Total Liabilities	$	271,004	$	215,713

Equity
Capital		219,634		219,634
Retained earnings		1,689,300		1,201,584
Total Equity	$	1,908,934	$	1,421,218
Total Liabilities and Equity	$	2,179,938	$	1,636,931

Statements of Income

For the years ended December 31, 2015, 2014 and 2013

	2015		2014		2013
Income
Mortgage origination income	$	2,645,235	$	1,907,804	$	2,528,108
Other Income		51,175		53,528		42,092
Total Income		2,696,410		1,961,332		2,570,200

Expenses

Salaries and employee benefits		1,413,107		1,105,902		1,461,797
Occupancy and equipment expense		212,858		177,014		164,717
Management and professional fees		290,102		321,053		301,558
Other		231,757		205,188		284,845
Total Expenses		2,147,824		1,809,157		2,212,917

Net income(loss)	$	548,586	$	152,175	$	357,283

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

F&M Bank Corp. and Subsidiaries

Timberville, Virginia

We have audited the accompanying consolidated balance sheets of F&M Bank Corp. and subsidiaries (“the Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of F&M Bank Corp. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ Elliott Davis Decosimo, LLC

Richmond, Virginia

March 29, 2016

Elliott Davis Decosimo | www.elliottdavis.com

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures. The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) and Rule 15d – 15(f) under the Exchange Act). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.

Management conducted an evaluation of the effectiveness of our system of internal control over financial reporting as of December 31, 2015 based on the framework set forth in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on its evaluation, management concluded that, as of December 31, 2015, F&M’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information regarding directors, executive officers and the audit committee financial expert is incorporated by reference from the Company’s definitive proxy statement for the Company’s 2016 Annual Meeting of Shareholders to be held May 14, 2016 (“Proxy Statement”), under the captions “Election of Directors,” “Board of Directors and Committees,” and “Executive Officers.”

Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the Company is incorporated by reference from the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

The Company has adopted a broad based code of ethics for all employees and directors. The Company has also adopted a code of ethics tailored to senior officers who have financial responsibilities. A copy of the codes may be obtained without charge by request from the corporate secretary.

Item 11. Executive Compensation

This information is incorporated by reference from the Proxy Statement under the caption “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

This information is incorporated by reference from the Proxy Statement under the caption “Ownership of Company Common Stock” and “Executive Compensation” and from Item 5 of this 10-K.

Item 13. Certain Relationships and Related Transactions, and Directors Independence

This information is incorporated by reference from the Proxy Statement under the caption “Interest of Directors and Officers in Certain Transactions.”

Item 14. Principal Accounting Fees and Services

This information is incorporated by reference from the Proxy Statement under the caption “Principal Accounting Fees.”

PART IV

Item 15. Exhibits and Financial Statement Schedules

The following financial statements are filed as a part of this report:

(a)(1) Financial Statements

The following consolidated financial statements and reports of independent auditors of the Company are in Part II, Item 8 on pages 38 thru 79:

Consolidated Balance Sheets - December 31, 2015 and 2014	38
Consolidated Statements of Income - Years ended December 31, 2015, 2014 and 2013	39
Consolidated Statements of Comprehensive Income - Years ended December 31, 2015, 2014 and 2013	40
Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2015, 2014 and 2013	41
Consolidated Statements of Cash Flows - Years ended December 31, 2015, 2014 and 2013	42
Notes to the Consolidated Financial Statements	43
Report of Independent Registered Public Accounting Firm	80

(a)(2) Financial Statement Schedules

All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(a)(3) Exhibits

The following exhibits are filed as a part of this form 10-K:

Exhibit No.

3.1	Restated Articles of Incorporation of F & M Bank Corp., incorporated herein by reference from F & M Bank Corp.’s, Quarterly Report on Form 10-Q, filed November 14, 2013.

3.2	Articles of Amendment to the Articles of Incorporation of F&M Bank Corp. designating the Series A Preferred Stock incorporated herein by reference from F&M Bank Corp,’s current report on Form 8-K filed December 4, 2014.

3.3	Amended and Restated Bylaws of F & M Bank Corp., incorporated herein by reference from F & M Bank Corp.’s, Annual Report on Form 10-K, filed March 8, 2002.

10.1	Change in Control Severance Plan, incorporated herein by reference from Exhibit 10.1 to F&M Bank Corp.’s Registration Statement on Form S-1, filed December 22, 2010.

10.2	VBA Executives Deferred Compensation Plan for Farmers & Merchants Bank, incorporated herein by reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.

10.3	VBA Directors Non-Qualified Deferred Compensation Plan for Farmers & Merchants Bank, incorporated herein by reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.

21.0	Subsidiaries of the Registrant

23.1	Consent of Elliott Davis Decosimo, LLC

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials from F&M Bank Corp.’s Annual Report on Form 10-K for the year ended December 31, 2015, 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 (furnished herewith).

Shareholders may obtain, free of charge, a copy of the exhibits to this Report on Form 10-K by writing Larry A. Caplinger, Corporate Secretary, at F & M Bank Corp., P.O. Box 1111, Timberville, VA 22853 or our website at www.fmbankva.com.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		F & M Bank Corp (Registrant)

By:	/s/ Dean W. Withers		March 29, 2016
	Dean W. Withers		Date
	Director, President and Chief Executive Officer


By:	/s/ Carrie A. Comer		March 29, 2016
	Carrie A. Comer		Date
	Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated.

Signature	Title	Date


/s/ Larry A. Caplinger	Director	March 29, 2016
Larry A. Caplinger


/s/ Thomas L. Cline	Director, Chairman	March 29, 2016
Thomas L. Cline


/s/ John N. Crist	Director	March 29, 2016
John N. Crist


/s/ Ellen R. Fitzwater	Director	March 29, 2016
Ellen R. Fitzwater


/s/ Daniel J. Harshman	Director	March 29, 2016
Daniel J. Harshman


/s/ Richard S. Myers	Director	March 29, 2016
Richard S. Myers


/s/ Michael W. Pugh	Director	March 29, 2016
Michael W. Pugh


/s/ Christopher S. Runion	Director	March 29, 2016
Christopher S. Runion


/s/ Ronald E. Wampler	Director	March 29, 2016
Ronald E. Wampler


/s/ E. Ray Burkholder	Director	March 29, 2016
E. Ray Burkholder

Exhibit No.

3.1	Restated Articles of Incorporation of F & M Bank Corp., incorporated herein by reference from F & M Bank Corp.’s, Quarterly Report on Form 10-Q, filed November 14, 2013.

3.2

Articles

3.3	Amended and Restated Bylaws of F & M Bank Corp., incorporated herein by reference from F & M Bank Corp.’s, Annual Report on Form 10-K, filed March 8, 2002.

10.1	Change in Control Severance Plan, incorporated herein by reference from Exhibit 10.1 to F&M Bank Corp.’s Registration Statement on Form S-1, filed December 22, 2010.

10.2	VBA Executives Deferred Compensation Plan for Farmers & Merchants Bank, incorporated herein by reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.

10.3	VBA Directors Non-Qualified Deferred Compensation Plan for Farmers & Merchants Bank, incorporated herein by reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.

21.0	Subsidiaries of the Registrant

23.1	Consent of Elliott Davis Decosimo, LLC

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Exhibit 21 List of Subsidiaries of the Registrant

Farmers & Merchants Bank (incorporated in Virginia)

TEB Life Insurance Company (incorporated in Arizona), a subsidiary of Farmers & Merchants Bank

Farmers & Merchants Financial Services (incorporated in Virginia), a subsidiary of Farmers & Merchants Bank

VBS Mortgage, LLC (a Virginia Limited Liability Company), a subsidiary of Farmers & Merchants Bank