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F&M BANK CORP - Quarter Report: 2015 September (Form 10-Q)

fmbm_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

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

For the quarterly period ended September 30, 2015.

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

Commission File Number: 000-13273

F & M BANK CORP.
 
Virginia
 
54-1280811
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
 
 
(540) 896-8941
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting Company þ
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
 
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding at November 12, 2015
Common Stock, par value - $5
 
3,284,654 shares
 


 
 
 
 
 
F & M BANK CORP.

Index
 
Page
   
Part I
Financial Information
3
     
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
 
10
     
26
     
37
     
37
     
Part II
Other Information
38
     
38
     
38
     
38
     
38
     
38
     
38
     
38
   
39
   
Certifications
 
 
 
2

 
 
Part I Financial Information

F & M BANK CORP.
(Unaudited)
(In Thousands of Dollars Except per Share Amounts)
 
   
Three Months Ended
 
   
September 30,
 
Interest income
 
2015
   
2014
 
Interest and fees from loans held for investment
  $ 7,086     $ 6,665  
Interest and fees from loans held for sale
    295       164  
Interest from federal funds sold
    4       7  
Interest from investment securities
    66       37  
Total interest income
    7,451       6,873  
                 
Interest expense
               
Interest from demand deposits
    112       165  
Interest from savings accounts
    64       31  
Interest from time deposits over $100,000
    122       145  
Interest from other time deposits
    228       273  
Total interest from deposits
    526       614  
Interest from short-term debt
    24       2  
Interest from long-term debt
    172       292  
Total interest expense
    722       908  
                 
Net interest income
    6,729       5,965  
Provision for loan losses
    -       750  
Net interest income after provision for loan losses
    6,729       5,215  
                 
Noninterest income
               
Service charges
    257       275  
Insurance and other commissions
    260       202  
Other
    352       400  
Income from bank owned life insurance
    119       118  
Total noninterest income
    988       995  
                 
Noninterest expense
               
Salaries
    1,974       1,767  
Employee benefits
    555       514  
Occupancy expense
    164       150  
Equipment expense
    166       160  
FDIC insurance assessment
    132       180  
Other
    1,503       1,152  
Total noninterest expense
    4,494       3,923  
                 
Income before income taxes
    3,223       2,287  
Income tax expense
    994       726  
Consolidated net income – F&M Bank Corp.
    2,229       1,561  
Net income - Noncontrolling interest (income) loss
    (39 )     8  
Net Income – F & M Bank Corp
  $ 2,190     $ 1,569  
        Dividends paid on preferred stock
    128       -  
Net income available to common stockholders
  $ 2,062     $ 1,569  
                 
Per share data
               
Net income available to common stockholders- basic
  $ .63     $ .48  
       Net income available to common stockholders– diluted
  $ .59       .48  
Cash dividends
  $ .18     $ .17  
Weighted average common shares outstanding – basic
    3,291,133       3,289,743  
       Weighted average common shares outstanding - diluted
    3,735,533       3,289,743  
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
3

 
 
F & M BANK CORP.
(In Thousands of Dollars except per Share Amounts)
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
Interest income
 
2015
   
2014
 
Interest and fees from loans held for investment
  $ 20,813     $ 19,443  
Interest and fees from loans held for sale
    808       228  
Interest from federal funds sold
    12       31  
Interest from investment securities
    202       136  
Total interest income
    21,835       19,838  
                 
Interest expense
               
Interest from demand deposits
    426       501  
Interest from savings accounts
    134       88  
Interest from time deposits over $100,000
    367       453  
Interest from other time deposits
    700       857  
Total interest from deposits
    1,627       1,899  
Interest from short-term debt
    54       6  
Interest from long-term debt
    424       872  
Total interest expense
    2,105       2,777  
                 
Net interest income
    19,730       17,061  
                 
Provision for loan losses
    300       2,250  
Net interest income after provision for loan losses
    19,430       14,811  
                 
Noninterest income
               
Service charges
    719       786  
Insurance and other commissions
    770       378  
Other
    1,037       1,192  
Income from bank owned life insurance
    354       349  
Total noninterest income
    2,880       2,705  
                 
Noninterest expense
               
Salaries
    5,667       5,114  
Employee benefits
    1,718       1,491  
Occupancy expense
    504       465  
Equipment expense
    480       442  
FDIC insurance assessment
    522       540  
        OREO expenses/losses
    516       -  
Other
    3,965       3,410  
Total noninterest expense
    13,372       11,462  
                 
Income before income taxes
    8,938       6,054  
Income tax expense
    2,586       1,844  
Consolidated net income – F&M Bank Corp.
    6,352       4,210  
Net income - Noncontrolling interest (income) loss
    (115 )     26  
Net Income – F & M Bank Corp
  $ 6,237     $ 4,236  
        Dividend paid/accumulated on preferred stock
    383       -  
Net income available to common stockholders
  $ 5,854     $ 4.236  
                 
Per share data
               
Net income available to common stockholders- basic
  $ 1.78     $ 1.38  
        Net income available to common stockholders– diluted
  $ 1.67       1.38  
Cash dividends
  $ .54     $ .51  
Weighted average common shares outstanding - basic
    3,292,709       3,061,432  
        Weighted average common shares outstanding – diluted
    3,737,109       3,061,432  
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
 
4

 
 
F & M BANK CORP.
(In Thousands of Dollars)
(Unaudited)
 
   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net Income:
                       
    Net Income – F & M Bank Corp
  $ 6,237     $ 4,236     $ 2,190     $ 1,569  
    Net Income (loss) attributable to noncontrolling interest
    115       (26 )     39       (8 )
Consolidated net income
    6,352       4,210       2,229       1,561  
                                 
Other comprehensive income:
                               
                                 
Unrealized holding gains on available-for-sale securities
    44       20       21       25  
    Tax effect
    (15 )     (7 )     (7 )     (9 )
    Unrealized holding gain, net of tax
    29       13       14       16  
Total other comprehensive income
    29       13       14       16  
                                 
Comprehensive income
  $ 6,381     $ 4,223     $ 2,243     $ 1,577  
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
 
5

 
 
F & M BANK CORP.
(In Thousands of Dollars Except per Share Amounts)
 
   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Cash and due from banks
  $ 6,420     $ 6,241  
Money market funds
    490       911  
Federal funds sold
    -       16,051  
Cash and cash equivalents
    6,910       23,203  
Securities:
               
Held to maturity – fair value of $125 in 2015 and $125 in 2014
    125       125  
Available for sale
    13,173       13,215  
Other investments
    10,845       8,964  
Loans held for sale
    55,482       13,382  
Loans held for investment
    540,415       518,202  
Less: allowance for loan losses
    (8,870 )     (8,725 )
Net loans held for investment
    531,545       509,477  
                 
Other real estate owned
    2,462       3,507  
Bank premises and equipment, net
    7,369       6,458  
Interest receivable
    1,655       1,675  
Goodwill
    2,670       2,670  
Bank owned life insurance
    12,928       12,581  
Other assets
    10,937       10,051  
Total assets
  $ 656,101     $ 605,308  
                 
Liabilities
               
Deposits:
               
Noninterest bearing
  $ 126,299     $ 112,198  
Interest bearing:
               
Demand
    75,316       93,694  
Money market accounts
    26,581       25,900  
Savings
    86,093       64,249  
Time deposits over $100,000
    61,089       79,813  
All other time deposits
    108,439       115,651  
Total deposits
    483,817       491,505  
                 
Short-term debt
    38,239       14,358  
Accrued liabilities
    13,314       11,772  
Long-term debt
    38,893       9,875  
Total liabilities
    574,263       527,510  
                 
Stockholders’ Equity
               
Preferred Stock $5 par value, 400,000 shares authorized, issued and outstanding
    9,425       9,425  
Common stock, $5 par value, 6,000,000 shares authorized, 3,284,513 and
               
    3,287,470 shares issued and outstanding
    16,423       16,459  
Additional paid in capital – common stock
    11,135       11,260  
Retained earnings
    46,629       42,554  
Noncontrolling interest
    524       426  
Accumulated other comprehensive loss
    (2,298 )     (2,326 )
Total stockholders’ equity
    81,838       77,798  
Total liabilities and stockholders’ equity
  $ 656,101     $ 605,308  
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
 
6

 
 
F & M BANK CORP.
(In Thousands of Dollars)
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2015
   
2014
 
Cash flows from operating activities
           
Net income
  $ 6,237     $ 4,236  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    525       449  
Amortization of security premiums, net
    109       61  
Origination of loans held for sale
    (56,301 )     (41,385 )
Sale of loans originated and held for sale
    55,298       39,799  
Provision for loan losses
    300       2,250  
(Increase) Decrease in interest receivable
    20       (38 )
Increase in other assets
    (916 )     (2,492 )
Increase (decrease) in accrued expenses
    1,660       (65 )
Amortization of limited partnership investments
    470       456  
Income from bank owned life insurance
    (354 )     (348 )
Loss on Other Real Estate Owned
    511       43  
Net adjustments
    1,322       (1,270 )
Net cash provided by operating activities
    7,559       2,966  
                 
Cash flows from investing activities
               
Purchase of investments available for sale
    (10,540 )     (8,614 )
Proceeds from maturity of investments available for sale
    8,167       27,323  
        Purchase of investments held to maturity
    -       (125 )
        Proceeds from maturity of investments held to maturity
    -       106  
Net increase in loans held for investment
    (22,195 )     (10,740 )
Net increase in participation loans held for sale
    (41,098 )     (32,376 )
Proceeds from the sale of other real estate owned
    361       779  
Purchase of property and equipment
    (1,435 )     (391 )
Net cash used in investing activities
    (66,740 )     (24,038 )
                 
Cash flows from financing activities
               
Increase in demand and savings deposits
    18,248       22,845  
Decrease in time deposits
    (25,936 )     646  
Increase  in short-term debt
    23,881       361  
Cash dividends paid
    (2,161 )     (1,545 )
Proceeds from issuance of common stock
    99       12,080  
Repurchase of common stock
    (261 )     -  
Proceeds from long-term debt
    30,000       10,000  
Repayment of long-term debt
    (982 )     (6,500 )
Net cash provided by financing activities
    42,888       37,887  
                 
Net (Decrease) Increase in Cash and Cash Equivalents
    (16,293 )     16,815  
Cash and cash equivalents, beginning of period
    23,203       6,545  
Cash and cash equivalents, end of period
  $ 6,910     $ 23,360  
Supplemental disclosure
               
Cash paid for:
               
Interest expense
  $ 2,126     $ 2,745  
Income taxes
    1,500       1,300  
Transfers from loans to Other Real Estate Owned
    155       2,930  
Noncash exchange of other real estate owned
    (328 )     (780 )
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
 
7

 
 
F & M BANK CORP.
(In Thousands of Dollars)
(Unaudited)

   
Nine Months Ended
 
   
September 30,
 
   
2015
   
2014
 
             
Balance, beginning of period
  $ 77,798     $ 54,141  
                 
Comprehensive income
               
Net income – F & M Bank Corp
    6,237       4,236  
Net income attributable to noncontrolling interest
    115       (26 )
Net change in unrealized appreciation on securities available for sale, net of taxes
    29       13  
Total comprehensive income
    6,381       4,223  
                 
Minority interest capital distributions
    (18 )     15  
Issuance of common stock
    99       12,080  
Repurchase of common stock
    (261 )     -  
Dividends paid
    (2,161 )     (1,545 )
Balance, end of period
  $ 81,838     $ 68,914  
 
See accompanying notes to Unaudited Consolidated Financial Statements
 
 
8

 
 
Notes to (unaudited) Consolidated Financial Statements
 
Note 1. Summary of significant accounting policies

The consolidated financial statements include the accounts of F & M Bank Corp. and its subsidiaries (the “Company”).  Significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements conform to accounting principles generally accepted in the United States of America and to general industry practices.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2015 and the results of operations for the quarters and nine month periods ended September 30, 2015 and 2014.  The notes included herein should be read in conjunction with the notes to financial statements included in the 2014 annual report to shareholders of F & M Bank Corp.

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

Comprehensive Income

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

Subsequent Events

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

Loans 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 consist of fixed rate loans made through its subsidiary, VBS Mortgage and loans purchased from NorthPointe Bank, Grand Rapids, MI.
 
Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio.  Loans are charged against the allowance when management believes the collectability of the principal is unlikely.  Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
 
 
9

 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
Note 1. Summary of significant accounting policies, continued

Allowance for Loan Losses, continued

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

Nonaccrual Loans

Loans are placed on nonaccrual status when they become ninety days or more past due, unless there is an expectation that the loan will either be brought current or paid in full in a reasonable period of time.

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per common share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements. Basic common EPS is computed by dividing net income by the weighted average number of common shares outstanding.  Diluted common 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 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 Nine months ended
   
For the Quarter ended
   
For the Nine months ended
   
For the Quarter ended
 
   
September 30,
2015
   
September 30,
2015
   
September 30,
2014
   
September 30,
2014
 
Earnings available to common stockholders:
                       
Net income
  $ 6,351,521     $ 2,229,213     $ 4,210,028     $ 1,561,179  
Minority interest
    115,397       39,273       26,300       8,208  
Preferred stock dividends
    382,500       127,500       -       -  
Net income available to common stockholders
  $ 5,853,624     $ 2,062,440     $ 4,236,328     $ 1,569,387  

 
10

 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Note 1. Summary of significant accounting policies, continued

Earnings per Share, continued

The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated.   Preferred stock was not issued at September 30, 2014 therefore there is no prior year data presented.
 
   
Nine months ended September 30, 2015
   
Quarter ended September 30, 2015
 
   
Income
   
Shares
   
Per Share
   
Income
   
Shares
   
Per Share
 
Basic common EPS
  $ 5,853,624       3,292,709     $ 1.78     $ 2,062,440       3,291,133     $ 0.63  
Effect of dilutive securities:
                                               
Convertible preferred stock
    382,500       444,400       (0.08 )     127,500       444,400       (0.04 )
Diluted common EPS
  $ 6,236,124       3,737,109     $ 1.67     $ 2,189,940       3,735,533     $ 0.59  

Note 2. Investment Securities
 
Investment securities available for sale are carried in the consolidated balance sheets at their approximate market value, amortized cost and unrealized gains and losses at September 30, 2015 and December 31, 2014 are reflected in the table below.  The amortized costs of investment securities held to maturity are carried in the consolidated balance sheets and their approximate market values at September 30, 2015 and December 31, 2014 are as follows (in thousands):
 
   
2015
   
2014
 
         
Market
         
Market
 
   
Cost
   
Value
   
Cost
   
Value
 
Securities held to maturity
                       
U. S. Treasury and agency obligations
  $ 125     $ 125     $  125     $ 125  
Total
  $ 125     $ 125     $  125     $ 125  
 
           
September 30, 2015
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities available for sale
                               
               U. S. Treasury
  $ 4,018     $ 29     $ -     $ 4,047  
Government sponsored enterprises
    8,115       10       6       8,119  
Mortgage-backed securities
    858       14       -       872  
               Corporate equities
    135       -       -       135  
Total
  $ 13,126     $ 53     $ 6     $ 13,173  
 
           
December 31, 2014
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities available for sale
                               
U. S. Treasury
  $ 4,026     $ -     $ 6     $ 4,020  
Government sponsored enterprises
    8,039       9       10       8,038  
Mortgage-backed securities
    1,011       11       -       1,022  
                Corporate equities
    135       -       -       135  
Total
  $ 13,211     $ 20     $ 16     $ 13,215  

 
11

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

The amortized cost and fair value of securities at September 30, 2015, by contractual maturity are shown below (in thousands).  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Securities Held to Maturity
   
Securities Available for Sale
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
Due in one year or less
  $ 125     $ 125     $ -     $ -  
Due after one year through five years
    -       -       12,133       12,166  
Due after five years
    -       -       993       1,007  
Total
  $ 125     $ 125     $ 13,126     $ 13,173  

There were no gains and losses on sales of securities in the third quarter or nine month period ended September 30 of 2015 or 2014.  There were also no securities with an other than temporary impairment.
 
The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2015 and December 31, 2014 were as follows (dollars in thousands):

   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
September 30, 2015
                                   
U. S. Treasury
  $ -     $ -     $ -     $ -     $ -     $ -  
Government sponsored Enterprises
     4,013       (6 )      -        -        4,013       (6 )
Total
  $ 4,013     $ (6 )   $ -     $ -     $ 4,013     $ (6 )
                                                 
December 31, 2014
                                               
U. S. Treasury
  $ 4,020     $ (6 )   $ -     $ -     $ 4,020     $ (6 )
Government sponsored Enterprises
    2,004       (2 )     1,991       (8 )     3,995       (10 )
Total
  $ 6,024     $ (8 )   $ 1,991     $ (8 )   $ 8,015     $ (16 )

Other investments, which consist of stock of correspondent banks and investments in low income housing projects, increased since December 31, 2014.  This increase is due to FHLB stock repurchases which were partially offset with an increase in the Federal Reserve Bank Stock holding requirement.
 
Note 3. Loans Held for Investment

Loans outstanding at September 30, 2015 and December 31, 2014 are summarized as follows
   
2015
   
2014
 
Construction/Land Development
  $ 68,597     $ 67,181  
Farmland
    12,739       12,507  
Real Estate
    165,324       162,249  
Multi-Family
    11,949       11,775  
Commercial Real Estate
    127,197       122,305  
Home Equity – closed end
    9,270       9,394  
Home Equity – open end
    55,202       52,182  
Commercial & Industrial – Non-Real Estate
    27,545       28,161  
Consumer
    7,979       9,110  
Dealer Finance
    52,032       40,633  
Credit Cards
    2,581       2,705  
Total
  $ 540,415     $ 518,202  
 
 
12

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

The following is a summary of information pertaining to impaired loans (in thousands):
 
         
Unpaid
         
Average
   
Interest
 
  September 30, 2015
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
Impaired loans without a valuation allowance:
                             
     Construction/Land Development
  $ 3,307     $ 3,445     $ -     $ 4,349     $ 110  
     Farmland
    -       -       -       -       -  
     Real Estate
    1,051       1,051       -       543       43  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    322       322       -       1,162       13  
     Home Equity – closed end
    -       -       -       -       -  
     Home Equity – open end
    1,559       1,559       -       1,281       82  
     Commercial & Industrial – Non-Real Estate
    183       183       -       189       9  
     Consumer
    19       19       -       4       -  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    -       -       -       -       2  
      6,441       6,579               7,528       259  
                                         
Impaired loans with a valuation allowance
                                       
     Construction/Land Development
    12,258       12,258       2,063       13,074       220  
     Farmland
    -       -       -       -       -  
     Real Estate
    753       753       52       817       43  
     Multi-Family
    -       -       -       -       -  
     Commercial Real Estate
    895       895       24       925       3  
     Home Equity – closed end
    -       -       -       -       -  
     Home Equity – open end
    1,649       1,649       47       330       58  
     Commercial & Industrial – Non-Real Estate
    -       -       -       -       -  
     Consumer
    -       -       -       -       -  
     Credit cards
    -       -       -       -       -  
     Dealer Finance
    40       40       11       32       3  
      15,595       15,595       2,197       15,178       327  
                                         
Total impaired loans
  $ 22,036     $ 22,174     $ 2,197     $ 22,706     $ 586  
 
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
 
 
13

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

         
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  

 
14

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

A summary of the allowance for loan losses follows (in thousands):
 
For the nine months ended September 30, 2015
 
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     $ 138     $ 83     $ 471     $ 5,154     $ 2,063     $ 3,091  
Farmland
    102       -       -       (15 )     87       -       87  
Real Estate
    623       25       -       (112 )     486       51       435  
Multi-Family
    95       -       -       (13 )     82       -       82  
Commercial Real Estate
    126       -       47       (78 )     95       24       71  
Home Equity – closed end
    188       26       6       (8 )     160       -       160  
Home Equity – open end
    154       51       -       82       185       48       137  
 Commercial & Industrial – Non-Real Estate
    1,014       -       60       (246 )     828       -       828  
 Consumer
    214       23       23       (9 )     205       -       205  
Dealer Finance
    1,336       111       20       232       1,477       11       1,466  
Credit Cards
    135       56       36       (4 )     111       -       111  
Total
  $ 8,725     $ 430     $ 275     $ 300     $ 8,870     $ 2,197     $ 6,673  
 
For the year ended December 31, 2014
 
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 )     -       -       104       102       -       102  
Real Estate
    400       208       -       431       623       101       522  
Multi-Family
    -       -       -       95       95       -       95  
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       (421 )     1,014       -       1,014  
 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  
 
 
15

 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
Note 4. Allowance for Loan Losses, continued
 
September 30, 2015
 
Loan Receivable
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
 
Construction/Land Development
  $ 68,597     $ 15,565     $ 53,032  
Farmland
    12,739       -       12,739  
Real Estate
    165,324       1,804       163,520  
Multi-Family
    11,949       -       11,949  
Commercial Real Estate
    127,197       1,217       125,980  
Home Equity – closed end
    9,270       -       9,270  
Home Equity –open end
    55,202       3,208       51,994  
Commercial & Industrial – Non-Real Estate
    27,545       183       27,362  
Consumer
    7,979       19       7,960  
Dealer Finance
    52,032       40       51,992  
Credit Cards
    2,581       -       2,581  
    $ 540,415     $ 22,036     $ 518,379  
Total
                       
 
Recorded Investment in Loan Receivables (in thousands)
 
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) as of September 30, 2015
 
   
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
 
September 30, 2015
                                         
Construction/Land Development
  $ 254     $ 2,030     $ -     $ 4,761     $ 7,045     $ 61,552     $ 68,597  
Farmland
    -       -       -       -       -       12,739       12,739  
Real Estate
    2,954       1,118       62       1,066       5,200       160,124       165,324  
Multi-Family
    -       -       -       -       -       11,949       11,949  
Commercial Real Estate
    315       -       -       -       315       126,882       127,197  
Home Equity – closed end
    42       4       -       -       46       9,224       9,270  
Home Equity – open end
    520       224       30       41       815       54,387       55,202  
Commercial & Industrial – Non- Real Estate
    33       59       -       75       167       27,378       27,545  
Consumer
    44       15       -       -       59       7,920       7,979  
Dealer Finance
    706       286       -       349       1,341       50,691       52,032  
Credit Cards
    36       8       2       -       46       2,535       2,581  
Total
  $ 4,904     $ 3,744     $ 94     $ 6,292     $ 15,034     $ 525,381     $ 540,415  
 
 
16

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

Aging of Past Due Loans Receivable (in thousands) as of December 31, 2014
 
   
30-59 Days Past due
   
60-89 Days Past Due
   
Greater than 90 Days (excluding non-accrual)
   
Non-Accrual Loans
   
Total Past Due
   
Current
   
Total Loan Receivable
 
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 SEPTEMBER 30, 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
  $ -     $ 342     $ 8,053     $ 31,514     $ 8,538     $ 5,757     $ 14,393     $ -     $ 68,597  
Farmland
    66       -       1,936       3,688       4,968       2,081       -       -       12,739  
Real Estate
    -       1,028       56,568       72,890       23,131       8,297       3,410       -       165,324  
Multi-Family
    -       410       3,974       3,078       4,487       -       -       -       11,949  
Commercial Real Estate
    -       1,721       27,312       69,002       20,126       7,733       1,303       -       127,197  
Home Equity – closed end
    -       -       3,675       3,772       1,682       123       18       -       9,270  
Home Equity – open end
    -       1,713       14,955       29,700       4,400       399       4,035       -        55,202  
Commercial & Industrial (Non-Real Estate)
    523       75       6,941       17,304       2,130       461       111       -         27,545  
Total
  $ 589     $ 5,289     $ 123,414     $ 230,948     $ 69,462     $ 24,851     $ 23,270     $ -     $ 477,823  
 
 
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
   
Credit Cards
   
Consumer
 
Performing
  $ 2,579     $ 59,662  
Non performing
    2       349  
Total
  $ 2,581     $ 60,011  
 
 
17

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

CREDIT QUALITY INDICATORS (in thousands)
AS OF DECEMBER 31, 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.
 
 
18

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

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

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

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

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

 
19

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

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees.  The benefits are primarily based on years of service and earnings.  The Bank contributed $750,000 to the plan in the first quarter of 2015 and does not anticipate additional contributions for the 2015 plan year.  The following is a summary of net periodic pension costs for the nine month and three month periods ended September 30, 2015 and 2014.

   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
2015
   
September 30,
2014
   
September 30,
2015
   
September 30,
2014
 
                         
Service cost
  $ 486,251     $ 375,771     $ 162,084     $ 125,257  
Interest cost
    308,208       283,281       102,736       94,427  
Expected return on plan assets
    (629,114 )     (523,689 )     (209,705 )     (174,563 )
Amortization of net obligation at transition
    -       -       -       -  
Amortization of prior service cost
    (11,427 )     (11,427 )     (3,809 )     (3,809 )
Amortization of net (gain) or loss
    135,482       27,084       45,161        9,028  
Net periodic pension cost
  $ 289,400     $ 151,020     $ 96,467     $ 50,340  
 
Note 6. Fair Value
 
Accounting Standards Codification (ASC) 820, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement
 
The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. Treasury, U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
 
 
20

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

Impaired Loans: ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the lower of carrying amount or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

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

For level 3 assets and liabilities measured at fair value on a recurring basis or non-recurring basis as of September 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:
 
   
Fair Value at September 30, 2015
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range
 
Impaired Loans
  $ 13,398  
Discounted appraised value
 
Discount for selling costs and age of appraisals
    15%-55 %
Other Real Estate Owned
  $ 2,462  
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 %

 
 
21

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

September 30, 2015
 
Total
   
Level 1
   
Level 2
   
Level 3
 
U.S. Treasury Securities
  $ 4,047     $ -     $ 4,047        
Government sponsored enterprises
    8,119       -       8,119       -  
Mortgage-backed securities
    872       -       872       -  
Marketable equities
    135       -       135       -  
Investment securities available for sale
  $ 13,173     $ -     $ 13,173     $ -  
                                 
Total assets at fair value
  $ 13,173     $ -     $ 13,173     $ -  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
                                 
Derivative financial instruments at fair value
  $ 34     $ -     $ 34     $ -  


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 securities
    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     $ -  

 
22

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

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

September 30, 2015
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Other Real Estate Owned
  $ 2,462       -       -     $ 2,462  
              -       -          
     Construction/Land Development
    10,195       -       -       10,195  
     Farmland
    -       -       -       -  
     Real Estate
    702       -       -       702  
     Multi-Family
    -       -       -       -  
     Commercial Real Estate
    871       -       -       871  
     Home Equity – closed end
    -       -       -       -  
     Home Equity – open end
    1,601       -       -       1,601  
     Commercial & Industrial – Non-Real Estate
    -       -       -       -  
     Consumer
    -       -       -       -  
     Credit cards
    -       -       -       -  
     Dealer Finance
    29       -       -       29  
Total Impaired loans
    13,398       -       -       13,398  
                                 
Total assets at fair value
  $ 15,860     $ -     $ -     $ 15,860  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
 
The table below presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis (in thousands).  The Company has determined that Other Real Estate Owned and Impaired Loans are Level 3.
 
December 31, 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
    -       -       -       -  
Total Impaired loans
    13,223       -       -       13,223  
                                 
Total assets at fair value
  $ 16,730       -     $ -     $ 16,730  
                                 
Total liabilities at fair value
  $ -     $ -     $ -     $ -  
 
 
23

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

ASC 825 “Financial Instruments” defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale.  As the majority of the Bank’s financial instruments lack an available trading market, significant estimates, assumptions and present value calculations are required to determine estimated fair value.  The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 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 above and below are considered Level 2 with the exception of impaired loans of $13,398,000 and $13,223,000 at September 30, 2015 and December 31, 2014, respectively, which are considered level 3.  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument (in thousands).

   
September 30, 2015
   
December 31, 2014
 
   
Estimated
   
Carrying
   
Estimated
   
Carrying
 
   
Fair Value
   
Value
   
Fair Value
   
Value
 
Financial Assets
                       
Loans, gross
  $ 568,774     $ 540,415     $ 551,338     $ 518,202  
                                 
Financial Liabilities
                               
Time deposits
  $ 170,548     $ 169,528       196,826       195,464  
Long-term debt
  $ 39,610     $ 38,893       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 as of the end of each respective period shown above.

Note 8. Troubled Debt Restructuring

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually.

In the nine months ended September 30, 2015, there were fifteen loan modifications that were considered to be troubled debt restructurings.  Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

   
Nine months ended September 30, 2015
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
Troubled Debt Restructurings
 
Number of Contracts
   
Recorded Investment
   
Recorded Investment
 
Commercial
    1     $ 978     $ 978  
Real Estate
    5       3,342       3,342  
Home Equity
    5       1,648       1,648  
Consumer
    4       40       40  
Total
    15     $ 6,008     $ 6,008  
 
 
 
24

 
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
Note 8. Troubled Debt Restructuring, continued

During the quarter ended September 30, 2015, there were seven loan modifications that were considered to be troubled debt restructurings.

   
Three Months ended September 30, 2015
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of Contracts
   
Recorded Investment
   
Recorded Investment
 
Troubled Debt Restructurings
                 
Commercial
    1     $ 978     $ 978  
Real Estate
    1       612     $ 612  
Home Equity
    5       1,648       1,648  
Total
    7     $ 3,238     $ 3,238  

There were no troubled debt restructurings from the previous twelve months that went into default in 2015.  A restructured loan is considered in default when it becomes 90 days past due.

In the nine months ended September 30, 2014, there were three (one loan during quarter ended September 30, 2014) loan modifications that were considered to be troubled debt restructurings.  Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.
 
   
Nine months ended September 30, 2014
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of Contracts
   
Recorded Investment
   
Recorded Investment
 
Troubled Debt Restructurings
                 
Commercial
        $ -     $ -  
Real Estate
    2       181       181  
Home Equity
            -       -  
Credit Cards
            -       -  
Consumer
    1       23       23  
Total
          $ 204     $ 204  
 
 There were no troubled debt restructurings from the previous twelve months that went into default in 2014.  A restructured loan is considered in default when it becomes 90 days past due.

 
25

 
 

F & M Bank Corp. (Company)  incorporated in Virginia in 1983, is a one-bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly-owned subsidiaries of the Bank. The Bank also holds a majority ownership in VBS Mortgage LLC (VBS).

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

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

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

Forward-Looking Statements

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

Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits.

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

 
26

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

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.  For further discussion refer to page 31 in the Management Discussion and Analysis.

Goodwill and Intangibles

ASC 805 “Business Combinations” and ASC 350 “Intangibles” require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

Securities Impairment

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

Overview

Net income for the nine months ended September 30, 2015 was $6,237,000 or $1.78 per share, compared to $4,236,000 or $1.38 in the same period in 2014, an increase of 47.24%. Noninterest income increased 6.47% and noninterest expense increased 16.66% during the same period.  Net income from Bank operations adjusted for income or loss from Parent activities is as follows:
 
In thousands
 
2015
   
2014
 
             
Net Income from Bank Operations
  $ 6,090     $ 4,141  
Income from Parent Company Activities
    147       95  
Net Income for the nine months ended September 30
  $ 6,237     $ 4,236  
 
 
27

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

Results of Operations

As shown in Table I on page 35, the 2015 year to date tax equivalent net interest income increased $2,660,000 or 15.52% compared to the same period in 2014.  Third quarter tax equivalent net interest income increased $735,000 or 12.26% compared to September 30, 2014.  The tax equivalent adjustment to net interest income totaled $65,000 for the quarter.  The year to date yield on earning assets decreased .02%, while the cost of funds decreased .27% compared to the same period in 2014.  The cost of long term debt decreased due to the redemption of the subordinated debt agreements and reduced cost of FHLB advances, this was the primary driver of the reduction of cost of funds.

Year to date, the combination of the increase in yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage has resulted in the net interest margin increasing to 4.45%, an increase of .16% when compared to the same period in 2014.  Third quarter net interest margin increased to 4.41%, an increase of .05% when compared to September 30, 2014. A schedule of the net interest margin for the nine month and three month periods ended September 30, 2015 and 2014 can be found in Table I on page 35.

The Interest Sensitivity Analysis contained in Table II on page 36 indicates the Company is in an asset sensitive position in the one year time horizon.  This would indicate that in a rising rate environment net interest income and net interest margin would increase as a result of assets repricing faster than liabilities. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 39.88% of rate sensitive assets and 40.22% of rate sensitive liabilities are subject to repricing within one year. Liquid assets have been used to pay off maturing long term FHLB borrowings, which when coupled with depositors reluctance to tie up funds at historically low rates has resulted in the decrease in the positive GAP position in the one year time period.

Noninterest income increased $175,000 or 6.47% for the nine month period ended September 30, 2015.  The increase is primarily due to an increase in insurance and other commissions from the bank subsidiaries.  The noninterest income for the quarter ended September 30, 2015 decreased $7,000 or .70% over the same period in 2014.

Noninterest expense increased $1,910,000 for the nine month period ended September 30, 2015 as compared to 2014. Areas of expense increase were salary and benefits and losses related to other real estate owned.  The Company’s operating costs have always compared favorably to the peer group (Holding Companies with Consolidated Assets of $500 million to $1 billion) due to an excellent asset to employee ratio and below average facilities costs.
 
 
28

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

Balance Sheet

Federal Funds Sold and Interest Bearing Bank Deposits

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

Securities

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

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

As of September 30, 2015, the market value of securities available for sale exceeded the cost by $47,000. The portfolio is made up of primarily agency securities with an average portfolio life of just under three years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. There are no additional scheduled maturities in 2015.

In reviewing investments as of September 30, 2105, there were no securities which met the definition for other than temporary impairment.  Management continues to re-evaluate the portfolio for impairment on a quarterly basis.

Loan Portfolio

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

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

 
29

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

Loans Held for Investment of $540,415,000 increased $22.2 million at September 30, 2015 compared to December 31, 2014.  The dealer finance portfolio increased $11.4 million, commercial real estate increased $4.9 million, real estate increased $3.1 million and open ended home equities increased $3.0 million.  These increases were offset by decreases in consumer loans of $1.1 million.

Loans Held for Sale totaled 55,482,000 at September 30, 2015, an increase of $42,100,000 compared to December 31, 2014.  The secondary market loan originations have remained strong throughout 2015.  Average balances and income from loans held for sale are detailed in the Table 1 on page 36.

Nonperforming loans include nonaccrual loans, loans 90 days or more past due and restructured loans.   Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently.  Nonperforming loans totaled $6,386,000 at September 30, 2015 compared to $6,975,000 at December 31, 2014.  Although the potential exists for loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment.  As of September 30, 2015, the Company holds $2,462,000 of real estate which was acquired through foreclosure. This is a decrease of $1,045,000 compared to December 31, 2013.

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

   
September 30,
2015
   
December 31,
2014
 
Nonaccrual Loans
           
     Real Estate
  $ 5,828     $ 5,481  
     Commercial
    75       1,179  
     Home Equity
    41       153  
     Other
    348       161  
      6.292       6,974  
                 
Loans past due 90 days or more (excluding nonaccrual)
               
     Real Estate
    62       -  
     Commercial
    -       -  
     Home Equity
    30       -  
     Other
    2       1  
      94       1  
                 
Total Nonperforming loans
  $ 6,386     $ 6,975  
                 
Restructured Loans current and performing:
               
      Real Estate
    10,766       3,913  
      Commercial
    1,482       518  
      Home Equity
    1,649       290  
       Other
    34       22  
                 
Nonperforming loans as a percentage of loans held for investment
    1.18 %     1.35 %
                 
Net loan losses  to average loans outstanding (held for investment)
    .03 %     .33 %
                 
Allowance for loan and lease losses to nonperforming loans
    138.90 %     125.09 %
 
 
30

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

Allowance for Loan Losses

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

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

In evaluating the portfolio, loans are segregated into loans with identified potential losses and pools of loans by type and a general allowance based on a variety of criteria.   Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as Troubled Debt Restructurings are reviewed individually for impairment under ASC 310. A variety of factors are taken into account when reviewing these credits including borrower cash flow, payment history, fair value of collateral, company management, the industry in which the borrower is involved and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.

Loans that are not impaired are categorized by call report code and an estimate is calculated based on actual loss experience over the last two years.  Dealer finance loans utilize a five year loss history.  The Company will monitor the net losses for this division and adjust based on how the portfolio performs since the department was established in 2012. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using eight environmental factors (loan growth, unemployment, past due/criticized loans, interest rates, changes in underwriting practices, local real estate industry conditions, and experience of lending staff) with a range for worst and best case.  The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans or in the homogeneous pools based on two year loss histories. The Board approves the loan loss provision for each quarter based on this evaluation. An effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.

The allowance for loan losses of $8,870,000 at September 30, 2015 is equal to 1.64% of loans held for investment. This compares to an allowance of $8,725,000 (1.68%) at December 31, 2014.  Based on the evaluation of the loan portfolio described above, management has funded the allowance a total of $300,000 in the first nine months of 2015.  Net charge-offs year to date totaled $155,000.

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

 
31

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

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area.  Deposit accounts include demand deposits, savings, money market and certificates of deposit.  Total deposits have decreased $7,688,000 since December 31, 2014.  Time deposits decreased $25,936,000 during this period while demand deposits and savings deposits increased $18,248,000.  The increase in demand deposits and savings deposits is a result of new account growth during the year.  The Bank also participates in the CDARS program.  CDARS (Certificate of Deposit Account Registry Service) is a program that allows the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. The CDARS program also allows the Bank to purchase funds through its One-Way Buy program. At quarter end the Bank had a total of $12.1 million in CDARS funding, which is a decrease of $18.0 million over December 31, 2014.

Short-term debt

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), short-term fixed rate FHLB borrowings and commercial repurchase agreements (repos). Commercial customers deposit operating funds into their checking account and by mutual agreement with the bank their excess funds are swept daily into the repurchase accounts.  These accounts are not considered deposits and are not insured by the FDIC.  The Bank pledges securities held in its investment portfolio as collateral for these short-term loans.  Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans.  As of September 30, 2015 there were $30,000,000 in FHLB short-term borrowings, federal funds purchased totaled $3,542,000 and commercial repurchase agreements totaled $4,697,000.  This compared to FHLB short term borrowings of $10,000,000 and commercial repurchase agreements of $3,423,000 at December 31, 2014.

Long-term debt

Borrowings from the FHLB continue to be an important source of funding.  The Company’s subsidiary bank borrows funds on a fixed rate basis.  These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes.  There were $982,000 of scheduled repayments and $30,000,000 in additional borrowings during the nine months ended September 30, 2015.

 
32

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

Capital

The Company successfully completed a private placement of common stock ($12 million) in March 2014 and a public offering of mandatorily convertible preferred stock in December 2014 ($10 million).  The Company intends to use the proceeds from the common stock for general corporate purposes, including organic growth, new market expansion and possible future acquisitions.  The Company used the proceeds from the preferred stock offering to redeem subordinated debt agreements.

The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.

March 31, 2015 the Company implemented the Basel III capital requirements.  As ofSeptember 30, 2015 total risk based capital and leverage ratios of 15.80% and 12.57%, respectively, as compared to year end of 17.35% and 12.88%, respectively. For the same period, Bank-only total risk based capital and leverage ratios were 15.71% and 12.50%, respectively, as compared to year end of 17.12% and 12.70%, respectively. Both the Company and the Bank also began reporting common equity tier 1 capital ratios of 12.95% and 14.46%, respectively.  For both the Company and the Bank these ratios are in excess of regulatory minimums to be considered “well capitalized”.
 
Liquidity

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

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

Interest Rate Sensitivity

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

As of September 30, 2015, the Company had a cumulative Gap Rate Sensitivity Ratio of 11.21% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly.  Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.

A summary of asset and liability repricing opportunities is shown in Table II, on page 37.

 
33

 


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

Effect of Newly Issued Accounting Standards

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. The Company does not expect these amendments to have a material effect on its financial statements.

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

Existence of Securities and Exchange Commission Web Site

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



 
34

 

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

   
Nine Months Ended
   
Nine Months Ended
   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2015
   
September 30, 2014
   
September 30, 2015
   
September 30, 2014
 
Average
       
Income/
   
Average
         
Income/
   
Average
         
Income/
   
Average
         
Income/
   
Average
 
   
Balance2,4
   
Expense
   
Rates
   
Balance2,4
   
Expense
   
Rates5
   
Balance2,4
   
Expense
   
Rates
   
Balance2,4
   
Expense
   
Rates5
 
Interest income
                                                                       
     Loans held for investment1,2
  $ 529,007     $ 20,878       5.28 %   $ 490,970     $ 19,516       5.31 %   $ 536,507     $ 7,086       5.24 %   $ 500,623     $ 6,692       5.30 %
     Loans held for sale
    39,813       808       2.71 %     8,684       228       3.51 %     42,335       295       2.76 %     18,718       164       3.48 %
     Federal funds sold
    7,394       12       .22 %     19,392       31       .21 %     7,643       4       .21 %     11,743       7       .24 %
     Interest bearing deposits
    1,388       -       -       891       -       -       1,506       -       -       1,139       -       -  
     Investments
                                                                                               
Taxable 3
    17,416       202       1.55 %     13,347       137       1.37 %     17,895       66       1.44 %     13,644       38       1.11 %
Partially taxable
    125       -       -       116       -       -       125       -       -       113       -       -  
     Total earning assets
  $ 595,143     $ 21,900       4.92 %   $ 533,400     $ 19,912       4.99 %   $ 606,011     $ 7,451       4.88 %   $ 545,980     $ 6,901       5.01 %
Interest Expense
                                                                                               
     Demand deposits
    115,081       426       .49 %     117,542       501       .57 %     103,357       112       .43 %     114,996       165       .57 %
     Savings
    72,611       134       .25 %     58,940       88       .20 %     81,579       64       .31 %     61,910       31       .20 %
     Time deposits
    174,696       1,067       .82 %     195,282       1,309       .90 %     170,834       350       .81 %     193,883       416       .85 %
     Short-term debt
    34,198       54       .21 %     3,556       7       .26 %     37,404       24       .25 %     3,808       3       .31 %
     Long-term debt
    26,741       424       2.12 %     22,277       872       5.23 %     33,443       172       2.04 %     23,995       292       4.83 %
     Total interest bearing liabilities
  $ 423,327     $ 2,105       .66 %   $ 397,597     $ 2,777       .93 %   $ 426,617     $ 722       .67 %   $ 398,592     $ 907       .90 %
                                                                                                 
Tax equivalent net interest income 1
          $ 19,795                     $ 17,135                     $ 6,729                     $ 5,994          
                                                                                                 
Net interest margin
                    4.45 %                     4.29 %                     4.41 %                     4.36 %

1
Interest income on loans includes loan fees.
2
Loans held for investment include nonaccrual loans.
3
An incremental income tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.
4
Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.
 
 
35

 
 
TABLE II

F & M BANK CORP.
Interest Sensitivity Analysis
 
September 30, 2015
(In Thousands of Dollars)

The following table presents the Company’s interest sensitivity.

    0 – 3     4 – 12     1 – 5    
Over 5
   
Not
       
   
Months
   
Months
   
Years
   
Years
   
Classified
   
Total
 
                                           
Uses of funds
                                         
Loans
                                         
Commercial
  $ 26,732     $ 13,510     $ 125,786     $ 13,402     $ -     $ 179,430  
Installment
    3,560       826       43,285       12,340       -       60,011  
Real estate loans for investments
    93,922       45,922       155,369       3,180       -       298,393  
Loans held for sale
    55,481       -       -       -       -       55,481  
Credit cards
    2,581       -       -       -       -       2,581  
Federal funds sold
    -       -       -       -       -       -  
Interest bearing bank deposits
    490       -       -       -       -       490  
Investment securities
    125       -       12,166       872       135       13,298  
Total
  $ 182,891     $ 60,258     $ 336,606     $ 29,794     $ 135     $ 609,684  
                                                 
Sources of funds
                                               
Interest bearing demand deposits
  $ -     $ 28,353     $ 58,480     $ 15,063     $ -     $ 101,896  
Savings deposits
    -       17,218       51,656       17,219       -       86,093  
Certificates of deposit $100,000 and over
    15,115       18,183       27,791       -       -       61,089  
Other certificates of deposit
    12,926       41,838       53,675       -       -       108,439  
Short-term borrowings
    38,239       -       -       -       -       38,239  
Long-term borrowings
    733       2,196       24,214       11,750       -       38,893  
Total
  $ 67,013     $ 107,788     $ 215,816     $ 44,032     $ -     $ 434,649  
                                                 
Discrete Gap
  $ 115,878     $ (47,530 )   $ 120,790     $ (14,238 )   $ 135     $ 175,035  
                                                 
Cumulative Gap
  $ 115,878     $ 68,348     $ 189,138     $ 174,900     $ 175,035          
                                                 
Ratio of Cumulative Gap to Total Earning Assets
    19.01 %     11.21 %     31.02 %     28.69 %     28.71 %        

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2015.  In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice.  Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity.  Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.
 
 
36

 
 
 
 

Not Applicable


Evaluation of Disclosure Controls and Procedures

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

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

 
37

 
 
 
Part II                 Other Information
 
Item 1. Legal Proceedings
  There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.
   
Item 1a. Risk Factors –
  There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds –None
   
Item 3. Defaults Upon Senior Securities – None
   
Item 4. Mine Safety Disclosures None
   
Item 5. Other Information – None
   
Exhibits
   
 
(a)           Exhibits
 
   
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
       
   
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
       
   
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
       
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
 
 
38

 
 

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

 
F & M BANK CORP.
 
     
 
/s/ Dean W. Withers  
  Dean W. Withers  
  President and Chief Executive Officer  
     
     
  /s/ Carrie A. Comer  
  Carrie A. Comer  
  Senior Vice President and Chief Financial Officer  

November 12, 2015


 
39

 
 
 
   
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
       
   
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
       
   
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
       
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
 
40