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EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - F&M BANK CORPfmbm_ex32.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - F&M BANK CORPfmbm_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - F&M BANK CORPfmbm_ex311.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
[X]          Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934                                                                            
 
For the quarterly period ended September 30, 2016.
 
[ ]           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
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
 
 
(540) 896-8941
(Registrant's Telephone Number, Including Area Code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [X] No [ ]
 
 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 [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
 
Accelerated filer [ ]
Smaller reporting Company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at November 14, 2016
Common Stock, par value - $5   
 
3,268,641 shares
 

 
 
F & M BANK CORP.
 
Index
 
 
 
Page
 
 
 
Part I
Financial Information
4
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Statements of Income – Three Months Ended September 30, 2016 and 2015
4
 
 
 
 
Consolidated Statements of Income – Nine Months Ended September 30, 2016 and 2015
5
 
 
 
 
Consolidated Statements of Comprehensive Income – Nine Months Ended September 30, 2016 and 2015
6
 
 
 
 
Consolidated Balance Sheets – September 30, 2016 and December 31, 2015
7
 
 
 
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2016 and 2015
8
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2016 and 2015
9
 
 
 
 
Notes to Consolidated Financial Statements
10
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
 
 
 
Item 4.
Controls and Procedures
41
 
 
 
Part II
Other Information
42
 
 
 
Item 1.
Legal Proceedings
42
 
 
 
Item 1a.
Risk Factors 
42
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
 
 
 
Item 3.
Defaults Upon Senior Securities
42
 
 
 
Item 4.
Mine Safety Disclosures
42
 
 
 
Item 5.
Other Information
42
 
 
 
Item 6.
Exhibits
42
 
 
 
Signatures
 
43
 
 
 
Certifications
 
44
 

 
 
Part I Financial Information
Item 1 Financial Statements
 
F & M BANK CORP.
Consolidated Statements of Income
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
September 30,
 
Interest income
 
2016
 
 
2015
 
Interest and fees on loans held for investment
 $7,542 
 $7,086 
Interest and fees on loans held for sale
  540 
  295 
Interest on federal funds sold and bank deposits
  11 
  4 
Interest on debt securities
  105 
  66 
Total interest income
  8,198 
  7,451 
 
    
    
Interest expense
    
    
Interest on demand deposits
  126 
  112 
Interest on savings accounts
  114 
  64 
Interest on time deposits over $100,000
  131 
  122 
Interest on other time deposits
  237 
  228 
Total interest on deposits
  608 
  526 
Interest on borrowed funds
  361 
  196 
Total interest expense
  969 
  722 
 
    
    
Net interest income
  7,229 
  6,729 
 
    
    
Provision for loan losses
  - 
  - 
Net interest income after provision for loan losses
  7,229 
  6,729 
 
    
    
Noninterest income
    
    
Service charges on deposit accounts
  335 
  257 
Insurance and other commissions
  326 
  260 
Other operating income
  457 
  357 
Income on bank owned life insurance
  119 
  119 
        Low income housing partnership losses
  (183)
  (156)
Total noninterest income
  1,054 
  837 
 
    
    
Noninterest expense
    
    
Salaries
  2,176 
  1,974 
Employee benefits
  628 
  555 
Occupancy expense
  184 
  164 
Equipment expense
  182 
  166 
FDIC insurance assessment
  113 
  132 
Other
  1,679 
  1,503 
Total noninterest expense
  4,962 
  4,494 
 
    
    
Income before income taxes
  3,321 
  3,072 
Income tax expense
  655 
  843 
Consolidated net income – F & M Bank Corp.
  2,666 
  2,229 
        Net income - Noncontrolling interest income
  64 
  39 
Net Income – F & M Bank Corp
 $2,602 
 $2,190 
        Dividends paid on preferred stock
  128 
  128 
Net income available to common stockholders
 $2,474 
 $2,062 
 
    
    
Per share data
    
    
Net income – basic
 $.75 
 $.63 
Net income – diluted
  .70 
  .59 
Cash dividends
 $.20 
 $.18 
Weighted average common shares outstanding – basic
  3,286,756 
  3,291,133 
Weighted average common shares outstanding – diluted
  3,731,156 
  3,735,533 
 
See notes to unaudited consolidated financial statements
 
 
 
4
 
 
Part I Financial Information
Item 1 Financial Statements
 
F & M BANK CORP.
Consolidated Statements of Income
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
 
 
Nine Months Ended
 
 
 
September 30,
 
Interest income
 
2016
 
 
2015
 
Interest and fees on loans held for investment
 $22,064 
 $20,813 
Interest and fees on loans held for sale
  1,430 
  808 
Interest on federal funds sold and bank deposits
  25 
  12 
Interest on debt securities
  244 
  202 
Total interest income
  23,763 
  21,835 
 
    
    
Interest expense
    
    
Interest on demand deposits
  371 
  426 
Interest on savings accounts
  322 
  134 
Interest on time deposits over $100,000
  377 
  367 
Interest on other time deposits
  687 
  700 
Total interest on deposits
  1,757 
  1,627 
Interest on borrowed funds
  888 
  478 
Total interest expense
  2,645 
  2,105 
 
    
    
Net interest income
  21,118 
  19,730 
Provision for loan losses
  - 
  300 
Net interest income after provision for loan losses
  21,118 
  19,430 
 
    
    
Noninterest income
    
    
Service charges on deposit accounts
  841 
  719 
Insurance and other commissions
  831 
  770 
Other operating income
  1,259 
  1,042 
Income on bank owned life insurance
  356 
  354 
       Low income housing partnership losses
  (548)
  (470)
Total noninterest income
  2,739 
  2,415 
 
    
    
Noninterest expense
    
    
Salaries
  6,339 
  5,667 
Employee benefits
  1,927 
  1,718 
Occupancy expense
  552 
  504 
Equipment expense
  536 
  480 
FDIC insurance assessment
  338 
  522 
       Other
  4,774 
  4,481 
Total noninterest expense
  14,466 
  13,372 
 
    
    
Income before income taxes
  9,391 
  8,473 
Income tax expense
  2,187 
  2,121 
Consolidated net income – F & M Bank Corp.
  7,204 
  6,352 
Net income - Noncontrolling interest income
  154 
  115 
Net Income – F & M Bank Corp
 $7,050 
 $6,237 
        Dividends paid/accumulated on preferred stock
  383 
  383 
Net income available to common stockholders
 $6,667 
 $5,854 
 
    
    
Per share data
    
    
Net income – basic
 $2.03 
 $1.78 
Net income – diluted
  1.89 
  1.67 
Cash dividends
 $.58 
 $.54 
Weighted average shares outstanding – basic
  3,286,165 
  3,292,709 
Weighted average shares outstanding – diluted
  3,730,565 
  3,737,109 
 
See notes to unaudited consolidated financial statements
 
 
 
5
 
F & M BANK CORP.
Consolidated Statements of Comprehensive Income
(In Thousands of Dollars)
(Unaudited)
 
 
 
Nine Months Ended
 
 
Three Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Net Income:
 
 
 
 
 
 
 
 
 
 
 
 
    Net Income – F & M Bank Corp
 $7,050 
 $6,237 
 $2,602 
 $2,190 
    Net Income attributable to noncontrolling interest
  154 
  115 
  64 
  39 
Consolidated net income
  7,204 
  6,352 
  2,666 
  2,229 
 
    
    
    
    
Other comprehensive income (loss):
    
    
    
    
 
    
    
    
    
Change in unrealized holding gains (losses) on available-for-sale securities
  32 
  44 
  (6)
  21 
    Tax effect
  (11)
  (15)
  2 
  (7)
    Change in unrealized holding gain (loss), net of tax
  21 
  29 
  (4)
  14 
Total other comprehensive income (loss)
  21 
  29 
  (4)
  14 
 
    
    
    
    
Comprehensive income
 $7,225 
 $6,381 
 $2,662 
 $2,243 
 
See notes to unaudited consolidated financial statements
 
6
 
 
F & M BANK CORP.
Consolidated Balance Sheets
(In Thousands of Dollars Except per Share Amounts)
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
(Unaudited)
 
 
(Audited)
 
Assets
 
 
 
 
 
 
Cash and due from banks
 $7,719 
 $6,923 
Money market funds
  286 
  1,596 
Federal funds sold
  4,151 
  - 
Cash and cash equivalents
  12,156 
  8,519 
Securities:
    
    
Held to maturity – fair value of $125 in 2016 and 2015
  125 
  125 
Available for sale
  24,859 
  13,047 
Other investments
  13,658 
  12,157 
Loans held for sale
  83,164 
  57,806 
Loans held for investment
  578,089 
  544,053 
Less: allowance for loan losses
  (7,571)
  (8,781)
Net loans held for investment
  570,518 
  535,272 
 
    
    
Other real estate owned
  2,076 
  2,128 
Bank premises and equipment, net
  9,343 
  7,542 
Interest receivable
  1,680 
  1,709 
Goodwill
  2,670 
  2,670 
Bank owned life insurance
  13,395 
  13,046 
Deferred tax asset
  1,539 
  1,640 
Other assets
  10,109 
  9,696 
Total assets
 $745,292 
 $665,357 
 
    
    
Liabilities
    
    
Deposits:
    
    
Noninterest bearing
 $145,832 
 $134,787 
Interest bearing:
    
    
Demand
  88,946 
  81,492 
Money market accounts
  29,125 
  26,968 
Savings
  105,805 
  90,383 
Time deposits over $100,000
  51,058 
  53,625 
All other time deposits
  107,058 
  107,415 
Total deposits
  527,824 
  494,670 
 
    
    
Short-term borrowings
  51,229 
  24,954 
Accrued liabilities
  13,625 
  14,622 
Long-term borrowings
  65,089 
  48,161 
Total liabilities
  657,767 
  582,407 
 
    
    
Stockholders’ Equity
    
    
Preferred Stock $5 par value, 400,000 shares authorized, issued and outstanding for September 30, 2016 and December 31, 2015, respectively
  9,425 
  9,425 
Common stock, $5 par value, 6,000,000 shares authorized, 3,274,512 and 3,293,909 shares issued and outstanding for September 30, 2016 and December 31, 2015, respectively
  16,373 
  16,427 
Retained earnings
  52,819 
  48,056 
Noncontrolling interest
  653 
  573 
Accumulated other comprehensive loss
  (2,659)
  (2,680)
Total stockholders’ equity
  87,525 
  82,950 
Total liabilities and stockholders’ equity
 $745,292 
 $665,357 
 
See notes to unaudited consolidated financial statements
 
 
 
7
 
F & M BANK CORP.
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
 
2016
 
 
2015
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 $7,050 
 $6,237 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
    
    
Depreciation
  602 
  525 
Amortization of security premiums, net
  105 
  109 
Origination of loans held for sale originated
  (66,706)
  (56,301)
Sale of loans held for sale
  63,478 
  55,298 
Provision for loan losses
  - 
  300 
Decrease in interest receivable
  29 
  20 
Increase in other assets
  (67)
  (916)
Increase (decrease) in accrued expenses
  (1,167)
  1,660 
Amortization of limited partnership investments
  548 
  470 
Income from life insurance investment
  (356)
  (354)
Loss on Other Real Estate Owned
  20 
  511 
Net adjustments
  (3,514)
  1,322 
Net cash provided by operating activities
  3,536 
  7,559 
 
    
    
Cash flows from investing activities
    
    
Purchase of investments available for sale
  (26,109)
  (10,540)
Proceeds from maturity of investments available for sale
  12,175 
  8,167 
Net increase in loans held for investment
  (35,837)
  (22,195)
Net increase in loans held for sale participations
  (22,131)
  (41,098)
Proceeds from the sale of other real estate owned
  623 
  361 
Purchase of property and equipment
  (2,403)
  (1,435)
  Net cash used in investing activities
  (73,682)
  (66,740)
 
    
    
Cash flows from financing activities
    
    
Net change in demand and savings deposits
  36,078 
  18,248 
Net change in time deposits
  (2,924)
  (25,936)
Net change in short-term debt
  26,275 
  23,881 
Cash dividends paid
  (2,287)
  (2,161)
Proceeds from issuance of common stock
  132 
  99 
Proceeds from issuance of long-term debt
  20,000 
  30,000 
        Repurchase of common stock
  (421)
  (261)
Repayment of long-term debt
  (3,070)
  (982)
Net cash provided by financing activities
  73,783 
  42,888 
 
    
    
Net increase (decrease) in Cash and Cash Equivalents
  3,637 
  (16,293)
Cash and cash equivalents, beginning of period
  8,519 
  23,203 
Cash and cash equivalents, end of period
 $12,156 
 $6,910 
Supplemental disclosure
    
    
Cash paid for:
    
    
Interest expense
 $2,633 
 $2,126 
    Income taxes
  2,300 
  1,500 
Transfer from loans to other real estate owned
  592 
  155 
Noncash exchange of other real estate owned
  - 
  (328)
See notes to unaudited consolidated financial statements
 
 
8
 
F & M BANK CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands of Dollars)
(Unaudited)
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Balance, beginning of period
 $82,950 
 $77,798 
 
    
    
Comprehensive income
    
    
Net income – F & M Bank Corp
  7,050 
  6,237 
Net income attributable to noncontrolling interest
  154 
  115 
Other comprehensive income
  21 
  29 
Total comprehensive income
  7,225 
  6,381 
 
    
    
Minority interest capital distributions
  (74)
  (18)
Issuance of common stock
  132 
  99 
Repurchase of common stock
  (421)
  (261)
Dividends paid
  (2,287)
  (2,161)
Balance, end of period
 $87,525 
 $81,838 
 
 
See notes to unaudited consolidated financial statements
 
 
 
9
 
 F & M BANK CORP.
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, 2016 and the results of operations for the three and nine months ended September 30, 2016 and 2015. The notes included herein should be read in conjunction with the notes to financial statements included in the 2015 annual report to shareholders of F & M Bank Corp.
 
Note 1 to the 2015 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.
 
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017.
 
In August 2015, the FASB deferred the effective date of Accounting Standards Update (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
 
In January 2015, the FASB issued guidance to eliminate from U.S. Generally Acceptable Accounting Principles (GAAP) the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments were effective for the Company on January 1, 2016, and did not have a material effect on its financial statements.
 
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. The amendments were expected to result in the deconsolidation of many entities. The amendments were effective for the Company on January 1, 2016. The adoption of these amendments did not have a material effect on the Company’s financial statements. 
 
In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments were effective for the Company on January 1, 2016. The Company’s adoption of these amendments did not have a material effect on its financial statements.
 
In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. These amendments did not a material effect on the Company’s financial statements
 
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
 
10
 
  F & M BANK CORP.
 
Note 1.   
Accounting Principles, continued
 
In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position. The provisions of this guidance are effective for reporting periods beginning after December 15, 2018 including interim periods within those fiscal periods; early adoption is permitted. These provisions are to be applied using a modified retrospective approach. The Company is evaluating the effect that this new guidance will have on our consolidated financial statements.
  
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments 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.
 
In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments 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.
 
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments 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.
 
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
 
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
Subsequent Events
 
On November 3, 2016, the Board of Directors of the Company approved a stock repurchase program for up to 150,000 shares of its common stock. There is no assurance that the Company will repurchase any shares under this program, but repurchased shares will become authorized but unissued shares of common stock.
 
11
 
F & M BANK CORP.
Note 1. 
Accounting Principles, continued
 
Earnings per Share
 
Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding.  Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per 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 (in thousands):  
 
 
 
For the Nine
months ended
 
 
For the Quarter
ended
 
 
For the Nine
months ended
 
 
For the Quarter
ended
 
 In thousands of dollars
 
September 30, 2016
 
 
September 30, 2016
 
 
September 30, 2015
 
 
September 30, 2015
 
Earnings available to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 $7,204 
 $2,666 
 $6,352 
 $2,229 
Minority interest
  154 
  64 
  115 
  39 
Preferred stock dividends
  383 
  128 
  383 
  128 
Net income available to common stockholders
 $6,667 
 $2,474 
 $5,854 
 $2,062 
 
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated:
 
 
 
Nine months ended September 30, 2016
 
 
Nine months ended September 30, 2015
 
 
 
Income
 
 
Shares
 
 
Per Share Amounts
 
 
Income
 
 
Shares
 
 
Per Share Amounts
 
Basic EPS
 $6,666,742 
  3,286,165 
 $2.03 
 $5,853,624 
  3,292,709 
 $1.78 
Effect of Dilutive Securities:
    
    
    
    
    
    
     Convertible Preferred Stock
  382,500 
  444,400 
  (0.14)
  382,500 
  444,400 
  (0.08)
Diluted EPS
 $7,049,242 
  3,730,565 
 $1.89 
 $6,236,124 
  3,737,109 
 $1.67 
 
 
12
 
  F & M BANK CORP.
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, 2016 and December 31, 2015 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, 2016 and December 31, 2015 are as follows:
 
 
 
September 30, 2016
 
 
December 31, 2015
 
 
 
 
 
 
Market
 
 
 
 
 
Market
 
(in thousands)
 
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, 2016
 
 
 
 
 
 
Unrealized
 
 
Market
 
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $24,008 
 $19 
 $- 
 $24,027 
Mortgage-backed securities
  679 
  18 
  - 
  697 
Marketable equities
  135 
  - 
  - 
  135 
Total
 $24,822 
 $37 
 $- 
 $24,859 
 
    
    
    
    
 
 
 
December 31, 2015
 
 
 
 
 
 
Unrealized
 
 
Market
 
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $4,015 
 $6 
 $- 
 $4,021 
Government sponsored enterprises
  8,081 
  4 
  11 
  8,074 
Mortgage-backed securities
  811 
  6 
  - 
  817 
Marketable equities
  135 
  - 
  - 
  135 
Total
 $13,042 
 $16 
 $11 
 $13,047 
 
The amortized cost and fair value of securities at September 30, 2016, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
Securities Held to Maturity
 
 
Securities Available for Sale
 
 
 
Amortized
 
 
Fair
 
 
Amortized
 
 
Fair
 
(in thousands)
 
Cost
 
 
Value
 
 
Cost
 
 
Value
 
Due in one year or less
 $- 
 $- 
 $24,008 
 $24,027 
Due after one year through five years
  125 
  125 
  - 
  - 
Due after five years
  - 
  - 
  814 
  832 
Total
 $125 
 $125 
 $24,822 
 $24,859 
 
 
13
 
F & M BANK CORP.
Note 2. 
Investment Securities, continued
 
There were no gains and losses on sales of securities in the third quarter of 2016 or 2015. 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 December 31, 2015 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
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored Enterprises
 $6,056 
 $(11)
 $- 
 $- 
 $6,056 
 $(11)
Total
 $6,056 
 $(11)
 $- 
 $- 
 $6,056 
 $(11)
 
There were no unrealized losses for securities at September 30, 2016.
 
Other investments, which consist of stock of correspondent banks and investments in low income housing projects, increased since December 31, 2015. This increase is due to FHLB stock purchases during the nine months of 2016.
 
Note 3.
Loans Held for Investment
 
 Loans outstanding at September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
 
 
2016
 
 
2015
 
Construction/Land Development
 $77,478 
 $69,759 
Farmland
  12,697 
  13,378 
Real Estate
  168,911 
  166,587 
Multi-Family
  6,929 
  7,559 
Commercial Real Estate
  143,376 
  128,032 
Home Equity – closed end
  10,775 
  9,135 
Home Equity – open end
  55,852 
  56,599 
Commercial & Industrial – Non-Real Estate
  28,760 
  27,954 
Consumer
  7,218 
  8,219 
Dealer Finance
  63,406 
  54,086 
Credit Cards
  2,687 
  2,745 
Total
 $578,089 
 $544,053 
 
 
14
 
 
F & M BANK CORP.

Note 3.  
Loans Held for Investment, continued
 
The following is a summary of information pertaining to impaired loans (in thousands):
 
 
 
September 30, 2016
 
 
December 31, 2015
 
 
 
 
 
 
Unpaid
 
 
 
 
 
 
 
 
Unpaid
 
 
 
 
 
 
Recorded
 
 
Principal
 
 
Related
 
 
Recorded
 
 
Principal
 
 
Related
 
 
 
Investment
 
 
Balance
 
 
Allowance
 
 
Investment
 
 
Balance
 
 
Allowance
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $3,913 
 $4,207 
 $- 
 $1,361 
 $1,499 
 $- 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  774 
  774 
  - 
  1,097 
  1,097 
  - 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  1,985 
  1,985 
  - 
  307 
  307 
  - 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  347 
  - 
  1,159 
  1,159 
  - 
     Commercial & Industrial – Non-Real Estate
  173 
  173 
  - 
  181 
  181 
  - 
     Consumer
  15 
  15 
  - 
  18 
  18 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  24 
  24 
  - 
  4 
  4 
  - 
 
  6,884 
  7,525 
    
  4,127 
  4,265 
    
 
    
    
    
    
    
    
Impaired loans with a valuation allowance
    
    
    
    
    
    
     Construction/Land Development
  6,836 
  6,836 
  1,601 
  11,534 
  11,534 
  2,373 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  1,210 
  1,210 
  219 
  324 
  324 
  238 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  955 
  955 
  53 
  890 
  890 
  18 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  1,061 
  1,061 
  241 
  1,414 
  1,414 
  269 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  - 
  - 
  - 
     Consumer
  - 
  - 
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  57 
  57 
  18 
  68 
  68 
  17 
 
  10,119 
  10,119 
  2,132 
  14,230 
  14,230 
  2,915 
 
    
    
    
    
    
    
Total impaired loans
 $17,003 
 $17,644 
 $2,132 
 $18,357 
 $18,495 
 $2,915 
 
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
 
 
15
 
 F & M BANK CORP.
Note 3. 
Loans Held for Investment, continued
 
The following is a summary of the average investment and interest income recognized for impaired loans (in thousands):
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $2,649 
 $15 
 $3,423 
 $18 
 $2,009 
 $32 
 $4,153 
 $110 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  778 
  8 
  1,146 
  7 
  860 
  28 
  643 
  43 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  993 
  77 
  728 
  (17)
  674 
  79 
  1,016 
  13 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  964 
  (35)
  1,553 
  10 
  1,167 
  8 
  1,601 
  82 
     Commercial & Industrial – Non-Real Estate
  174 
  2 
  185 
  3 
  177 
  2 
  187 
  9 
     Consumer and credit cards
  7 
  2 
  10 
  - 
  12 
  - 
  5 
  - 
     Dealer Finance
  24 
  (1)
  - 
  2 
  15 
  1 
  - 
  2 
 
  5,589 
  68 
  7,045 
  23 
  4,914 
  150 
  7,605 
  259 
Impaired loans with a valuation allowance:
    
    
    
    
    
    
    
    
     Construction/Land Development
  8,429 
  112 
  12,590 
  29 
 $9,761 
 $212 
  13,222 
 $220 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  1,214 
  14 
  663 
  25 
  994 
  40 
  793 
  43 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  958 
  14 
  887 
  1 
  944 
  42 
  902 
  3 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  1,234 
  (5)
  824 
  58 
  1,322 
  14 
  412 
  58 
     Commercial & Industrial – Non-Real Estate
  14 
  (1)
  - 
  - 
  14 
  0 
  - 
  - 
     Consumer and credit card
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  72 
  - 
  51 
  - 
  72 
  3 
  41 
  3 
 
  11,921 
  134 
  15,015 
  113 
  13,107 
  311 
  15,370 
  327 
Total Impaired Loans
 $17,510 
 $202 
 $22,060 
 $136 
 $18,021 
 $461 
 $22,975 
 $586 
 
 
16
 
  F & M BANK CORP.
Note 4.  
Allowance for Loan Losses
 
A summary of changes in the allowance for loan losses follows for the nine months and twelve months ended September 30, 2016 and December 31, 2015:
 
Nine months ended September 30, 2016
 
(in thousands)
 
12/31/15
Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
9/30/16 Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $4,442 
 $294 
 $4 
 $(869)
 $3,283 
 $1,601 
 $1,682 
Farmland
  95 
  - 
  - 
  (59)
  36 
  - 
  36 
Real Estate
  806 
  23 
  4 
  208 
  995 
  219 
  776 
Multi-Family
  71 
  - 
  - 
  (47)
  24 
  - 
  24 
Commercial Real Estate
  445 
  18 
  114 
  179 
  720 
  53 
  667 
Home Equity – closed end
  174 
  6 
  - 
  (78)
  90 
  - 
  90 
Home Equity – open end
  634 
  348 
  106 
  308 
  700 
  241 
  459 
 Commercial & Industrial – Non-Real Estate
  1,055 
  293 
  39 
  (144)
  657 
  - 
  657 
 Consumer
  108 
  35 
  13 
  16 
  102 
  - 
  102 
Dealer Finance
  836 
  618 
  164 
  510 
  892 
  18 
  874 
Credit Cards
  115 
  63 
  44 
  (24)
  72 
  - 
  72 
Total
 $8,781 
 $1,698 
 $488 
 $- 
 $7,571 
 $2,132 
 $5,439 
 
Twelve months ended December 31, 2015
 
(in thousands)
 
12/31/14
 Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
12/31/15
Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $4,738 
 $156 
 $85 
 $(225)
 $4,442 
 $2,373 
 $2,069 
Farmland
  - 
  - 
  - 
  95 
  95 
  - 
  95 
Real Estate
  623 
  25 
  37 
  171 
  806 
  238 
  568 
Multi-Family
  - 
  - 
  - 
  71 
  71 
  - 
  71 
Commercial Real Estate
  126 
  - 
  65 
  254 
  445 
  18 
  427 
Home Equity – closed end
  188 
  26 
  6 
  6 
  174 
  - 
  174 
Home Equity – open end
  154 
  51 
  - 
  531 
  634 
  269 
  365 
 Commercial & Industrial – Non-Real Estate
  1,211 
  - 
  62 
  (218)
  1,055 
  - 
  1,055 
 Consumer
  214 
  32 
  32 
  (106)
  108 
  - 
  108 
Dealer Finance
  1,336 
  251 
  24 
  (273)
  836 
  17 
  819 
Credit Cards
  135 
  60 
  46 
  (6)
  115 
  - 
  115 
Total
 $8,725 
 $601 
 $357 
 $300 
 $8,781 
 $2,915 
 $5,866 
 
 
17
 
  F & M BANK CORP.
Note 4.
Allowance for Loan Losses, continued
 
A summary of changes in the allowance for loan losses follows for the three months ended September 30, 2016 and December 31, 2015:
 
Three months ended September 30, 2016
 
(in thousands)
 
6/30/16
Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
9/30/16 Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $3,382 
 $- 
 $2 
 $(101)
 $3,283 
 $1,601 
 $1,682 
Farmland
  38 
  - 
  - 
  (2)
  36 
  - 
  36 
Real Estate
  1,031 
  - 
  - 
  (36)
  995 
  219 
  776 
Multi-Family
  24 
  - 
  - 
  - 
  24 
  - 
  24 
Commercial Real Estate
  704 
  - 
  27 
  (11)
  720 
  53 
  667 
Home Equity – closed end
  167 
  5 
  - 
  (72)
  90 
  - 
  90 
Home Equity – open end
  963 
  347 
  36 
  48 
  700 
  241 
  459 
 Commercial & Industrial – Non-Real Estate
  793 
  63 
  - 
  (73)
  657 
  - 
  657 
 Consumer
  130 
  12 
  2 
  (18)
  102 
  - 
  102 
Dealer Finance
  764 
  232 
  107 
  253 
  892 
  18 
  874 
Credit Cards
  72 
  32 
  20 
  12 
  72 
  - 
  72 
Total
 $8,068 
 $691 
 $194 
 $- 
 $7,571 
 $2,132 
 $5,439 
 
 
Three months ended December 31, 2015
 
(in thousands)
 
9/30/15
 Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
12/31/15
Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $5,154 
 $18 
 $2 
 $(696)
 $4,442 
 $2,373 
 $2,069 
Farmland
  87 
  - 
  - 
  8 
  95 
  - 
  95 
Real Estate
  486 
  - 
  37 
  283 
  806 
  238 
  568 
Multi-Family
  82 
  - 
  - 
  (11)
  71 
  - 
  71 
Commercial Real Estate
  95 
  - 
  17 
  333 
  445 
  18 
  427 
Home Equity – closed end
  160 
  1 
  - 
  15 
  174 
  - 
  174 
Home Equity – open end
  185 
  - 
  - 
  449 
  634 
  269 
  365 
 Commercial & Industrial – Non-Real Estate
  828 
  - 
  2 
  225 
  1,055 
  - 
  1,055 
 Consumer
  205 
  8 
  11 
  (100)
  108 
  - 
  108 
Dealer Finance
  1,477 
  140 
  4 
  (505)
  836 
  17 
  819 
Credit Cards
  111 
  4 
  9 
  (1)
  115 
  - 
  115 
Total
 $8,870 
 $171 
 $82 
 $- 
 $8,781 
 $2,915 
 $5,866 
 
 
 
18
 
  F & M BANK CORP.
Note 4.
Allowance for Loan Losses, continued
 
The following is a summary of total loans by loan segments, as well as total loans by each segment individually and collectively evaluated for impairment as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $77,478 
 $10,749 
 $66,729 
Farmland
  12,697 
  - 
  12,697 
Real Estate
  168,911 
  1,984 
  166,927 
Multi-Family
  6,929 
  - 
  6,929 
Commercial Real Estate
  143,376 
  2,940 
  140,436 
Home Equity – closed end
  10,775 
  - 
  10,775 
Home Equity –open end
  55,852 
  1,061 
  54,791 
Commercial & Industrial – Non-Real Estate
  28,760 
  173 
  28,587 
Consumer
  7,218 
  15 
  7,203 
Dealer Finance
  63,406 
  81 
  63,325 
Credit Cards
  2,687 
  - 
  2,687 
 
 $578,089 
 $17,003 
 $561,086 
Total
    
    
    
 
December 31, 2015
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $69,759 
 $12,895 
 $56,864 
Farmland
  13,378 
  - 
  13,378 
Real Estate
  166,587 
  1,421 
  165,167 
Multi-Family
  7,559 
  - 
  7,559 
Commercial Real Estate
  128,032 
  1,197 
  126,835 
Home Equity – closed end
  9,135 
  - 
  9,135 
Home Equity –open end
  56,599 
  2,573 
  54,026 
Commercial & Industrial – Non-Real Estate
  27,954 
  181 
  27,773 
Consumer
  8,219 
  18 
  8,201 
Dealer Finance
  54,086 
  72 
  54,013 
Credit Cards
  2,745 
  - 
  2,745 
 
 $544,053 
 $18,357 
 $525,696 
Total
    
    
    
 
The following table presents the aging of the recorded investment in past due loans by segments as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days (excluding non-accrual)
 
 
Non-Accrual Loans
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $141 
 $49 
 $- 
 $3,624 
 $3,814 
 $73,664 
 $77,478 
Farmland
  - 
  - 
  - 
  - 
  - 
  12,697 
  12,697 
Real Estate
  1,813 
  802 
  367 
  618 
  3,600 
  165,311 
  168,911 
Multi-Family
  - 
  - 
  - 
  - 
  - 
  6,929 
  6,929 
Commercial Real Estate
  166 
  - 
  - 
  - 
  166 
  143,210 
  143,376 
Home Equity – closed end
  7 
  32 
  - 
  - 
  39 
  10,736 
  10,775 
Home Equity – open end
  177 
  - 
  24 
  1,294 
  1,495 
  54,357 
  55,852 
Commercial & Industrial – Non- Real Estate
  114 
  - 
  - 
  71 
  185 
  28,575 
  28,760 
Consumer
  55 
  11 
  - 
  3 
  69 
  7,149 
  7,218 
Dealer Finance
  818 
  179 
  128 
  67 
  1,192 
  62,214 
  63,406 
Credit Card
  27 
  - 
  - 
  - 
  27 
  2,660 
  2,687 
Total
 $3,318 
 $1,073 
 $519 
 $5,677 
 $10,587 
 $567,502 
 $578,089 

 
19
 
  F & M BANK CORP.
Note 4.  
Allowance for Loan Losses, continued
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days (excluding non-accrual)
 
 
Non-Accrual Loans
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $104 
 $- 
 $- 
 $4,688 
 $4,792 
 $64,967 
 $69,759 
Farmland
  - 
  - 
  - 
  - 
  - 
  13,378 
  13,378 
Real Estate
  2,684 
  1,332 
  272 
  1,010 
  5,298 
  161,289 
  166,587 
Multi-Family
  - 
  - 
  - 
  - 
  - 
  7,559 
  7,559 
Commercial Real Estate
  340 
  241 
  - 
  - 
  581 
  127,451 
  128,032 
Home Equity – closed end
  41 
  7 
  - 
  - 
  48 
  9,087 
  9,135 
Home Equity – open end
  918 
  46 
  107 
  40 
  1,111 
  55,488 
  56,599 
Commercial & Industrial – Non- Real Estate
  114 
  3 
  25 
  109 
  251 
  27,703 
  27,954 
Consumer
  120 
  10 
  - 
  - 
  130 
  8,089 
  8,219 
Dealer Finance
  905 
  183 
  152 
  108 
  1,348 
  52,738 
  54,086 
Credit Cards
  10 
  13 
  15 
  - 
  38 
  2,707 
  2,745 
Total
 $5,236 
 $1,835 
 $571 
 $5,955 
 $13,597 
 $530,456 
 $544,053 
 
The following tables represent the corporate credit exposure by presenting the loan portfolio by the following credit quality indicators (loan grades):
 
Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.
 
Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.
 
Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.
 
Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.
 
Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.
 
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.
 
 
20
 
  F & M BANK CORP.
Note 4.   Allowance for Loan Losses, continued
 
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.
 
 
CREDIT QUALITY INDICATORS (in thousands)
 
 
AS OF SEPTEMBER 30, 2016
 
 
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
 $- 
 $1,061 
 $12,674 
 $39,583 
 $11,711 
 $1,913 
 $10,536 
 $- 
 $77,478 
Farmland
  65 
  - 
  2,983 
  3,272 
  3,943 
  2,434 
  - 
  - 
  12,697 
Real Estate
  - 
  1,168 
  50,958 
  81,142 
  28,400 
  5,614 
  1,629 
  - 
  168,911 
Multi-Family
  - 
  331 
  3,045 
  3,363 
  190 
  - 
  - 
  - 
  6,929 
Commercial Real Estate
  - 
  2,897 
  30,154 
  84,555 
  21,148 
  1,534 
  3,088 
  - 
  143,376 
Home Equity – closed end
  - 
  - 
  3,352 
  4,189 
  1,780 
  1,454 
  - 
  - 
  10,775 
Home Equity – open end
  124 
  1,540 
  15,299 
  32,318 
  4,540 
  480 
  1,551 
  - 
  55,852 
Commercial & Industrial (Non-Real Estate)
  1,416 
  786 
  6,262 
  17,655 
  2,473 
  78 
  90 
  - 
  28,760 
Total
 $1,605 
 $7,783 
 $124,727 
 $266,077 
 $74,185 
 $13,507 
 $16,894 
 $- 
 $504,778 
 
    
    
    
    
    
    
    
    
    
 
 
Consumer Credit Exposure
 
 
Credit Risk Profile Based on Payment Activity
 
 
 
Credit Cards
 
 
Consumer
 
Performing
 $2,687 
 $70,426 
Non performing
  - 
  198 
Total
 $2,687 
 $70,624 
 
 
21
 
  F & M BANK CORP.
Note 4.   
Allowance for Loan Losses, continued
 
 
CREDIT QUALITY INDICATORS (in thousands)
 
 
AS OF DECEMBER 31, 2015
 
 
Corporate Credit Exposure
 
 
Credit Risk Profile by Creditworthiness Category
 
 
 
 
 
 
Grade 1
Minimal
Risk
 
 
Grade 2
Modest
Risk
 
 
Grade 3
Average
Risk
 
 
Grade 4
Acceptable
Risk
 
 
Grade 5
Marginally Acceptable
 
 
Grade 6
Watch
 
 
Grade 7
Substandard
 
 
Grade 8
Doubtful
 
 
Total
 
Construction/Land Development
 $- 
 $485 
 $8,410 
 $31,783 
 $14,260 
 $3,216 
 $11,605 
 $- 
 $69,759 
Farmland
  66 
  - 
  2,615 
  3,768 
  4,952 
  1,977 
  - 
  - 
  13,378 
Real Estate
  - 
  955 
  54,400 
  76,545 
  23,695 
  8,334 
  2,658 
  - 
  166,587 
Multi-Family
  - 
  391 
  3,925 
  3,046 
  197 
  - 
  - 
  - 
  7,559 
Commercial Real Estate
  - 
  2,087 
  25,889 
  74,337 
  20,271 
  4,149 
  1,299 
  - 
  128,032 
Home Equity – closed end
  - 
  - 
  3,549 
  3,792 
  1,661 
  114 
  19 
  - 
  9,135 
Home Equity – open end
  - 
  1,657 
  15,043 
  31,455 
  4,827 
  398 
  3,219 
  - 
  56,599 
Commercial & Industrial (Non-Real Estate)
  896 
  646 
  6,423 
  17,053 
  2,281 
  517 
  138 
  - 
  27,954 
Total
 $962 
 $6,221 
 $120,254 
 $241,779 
 $72,144 
 $18,705 
 $18,938 
 $- 
 $479,003 
 
    
    
    
    
    
    
    
    
    
 
 
Consumer Credit Exposure
 
 
Credit Risk Profile Based on Payment Activity
 
 
 
Credit Cards
 
 
Consumer
 
Performing
 $2,730 
 $62,046 
Non performing
  15 
  259 
Total
 $2,745 
 $62,305 
 
Note 5.   
Employee Benefit Plan
 
The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Bank does not plan to make any contributions for the 2016 plan year. The following is a summary of net periodic pension costs for the three and nine-month periods ended September 30, 2016 and 2015.
 
 
 
Nine Months Ended
 
 
Three Months Ended
 
 
 
September 30, 2016
 
 
September 30, 2015
 
 
September 30, 2016
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 $473,904 
 $486,251 
 $157,968 
 $162,084 
Interest cost
  339,672 
  318,208 
  113,224 
  102,736 
Expected return on plan assets
  (640,812)
  (629,114)
  (213,604)
  (209,705)
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
  167,358 
  135,482 
  55,786 
  45,161 
Net periodic pension cost
 $328,695 
 $289,400 
 $109,565 
 $96,467 
 
 
22
 
  F & M BANK CORP.
 
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. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
 
Loans Held for Sale: Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan.  These loans are generally repurchased within 15 days.  Because of the short-term nature and fixed repurchased price, the book value of these loans approximates fair value.
 
Impaired Loans: ASC 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.
 
23
 
  F & M BANK CORP.
Note 6. 
Fair Value, continued
 
For level 3 assets and liabilities measured at fair value on a recurring basis or non-recurring basis as of September 30, 2016 and December 31, 2015 and significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
 
 
Fair Value at September 30, 2016
 
Valuation Technique
Significant Unobservable Inputs
 
Range   
 
Impaired Loans
 $7,987
Discounted appraised value
Discount for selling costs and age of appraisals
  15%-55%
Other Real Estate Owned
 $2,076 
Discounted appraised value
Discount for selling costs and age of appraisals
  15%-55%
 
 
 
Fair Value at December 31, 2015
 
Valuation Technique
Significant Unobservable Inputs
 
Range   
 
Impaired Loans
 $11,315 
Discounted appraised value
Discount for selling costs and age of appraisals
  15%-55%
Other Real Estate Owned
 $2,128 
Discounted appraised value
Discount for selling costs and age of appraisals
  15%-55%
 
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, 2016
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
U. S. Treasuries
 $24,027 
 $- 
 $24,027 
 $- 
Government sponsored enterprises
  - 
  - 
  - 
  - 
Mortgage-backed obligations of federal agencies
  697 
  - 
  697 
  - 
Marketable Equities
  135 
  - 
  135 
  - 
Investment securities available for sale
 $24,859 
  - 
 $24,859 
  - 
 
    
    
    
    
Total assets at fair value
 $24,859 
 $- 
 $24,859 
 $- 
 
    
    
    
    
Derivative financial instruments at fair value
 $15 
  - 
 $15 
  - 
 
    
    
    
    
Total liabilities at fair value
 $15 
 $- 
 $15 
 $- 
 
 
December 31, 2015
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
U. S. Treasuries
 $4,021 
 $- 
 $4,021 
 $- 
Government sponsored enterprises
  8,074 
  - 
  8,074 
  - 
Mortgage-backed obligations of federal agencies
  817 
  - 
  817 
  - 
Marketable Equities
  135 
  - 
  135 
  - 
Investment securities available for sale
  13,047 
  - 
  13,047 
  - 
 
    
    
    
    
Total assets at fair value
 $13,047 
 $- 
 $13,047 
 $- 
 
    
    
    
    
Derivative financial instruments at fair value
 $15 
  - 
 $15 
  - 
 
    
    
    
    
Total liabilities at fair value
 $15 
 $- 
 $15 
 $- 
 
 
24
 
  F & M BANK CORP.
Note 6.  
Fair Value, continued
 
Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
 
The table below presents the recorded amount of assets and liabilities measured at fair value (in thousands) on a non-recurring basis. The Company has determined that Other Real Estate Owned and Impaired Loans are Level 3.
 
September 30, 2016
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Other Real Estate Owned
 $2,076 
  - 
  - 
 $2,076 
 
    
  - 
  - 
    
     Construction/Land Development
  5,235 
  - 
  - 
  5,235 
     Farmland
  - 
  - 
  - 
  - 
     Real Estate
  991 
  - 
  - 
  991 
     Multi-Family
  - 
  - 
  - 
  - 
     Commercial Real Estate
  902 
  - 
  - 
  902 
     Home Equity – closed end
  - 
  - 
  - 
  - 
     Home Equity – open end
  820 
  - 
  - 
  820 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  - 
     Consumer
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
     Dealer Finance
 39
  - 
  - 
 39
Impaired loans
  7,987
  - 
  - 
  7,987
 
    
    
    
    
Loans held for sale
  83,164 
  - 
  83,164 
  - 
 
    
    
    
    
Total assets at fair value
 $93,228 
 $- 
 $83,164 
 $10,064 
 
    
    
    
    
Total liabilities at fair value
 $- 
 $- 
 $- 
 $- 
 
December 31, 2015
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Other Real Estate Owned
 $2,128 
  - 
  - 
 $2,128 
 
    
  - 
  - 
    
     Construction/Land Development
  9,161 
  - 
  - 
  9,161 
     Farmland
  - 
  - 
  - 
  - 
     Real Estate
  85 
  - 
  - 
  85 
     Multi-Family
  - 
  - 
  - 
  - 
     Commercial Real Estate
  872 
  - 
  - 
  872 
     Home Equity – closed end
  - 
  - 
  - 
  - 
     Home Equity – open end
  1,145 
  - 
  - 
  1,145 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  - 
     Consumer
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
     Dealer Finance
  52 
  - 
  - 
  52 
Impaired loans
  11,315 
  - 
  - 
  11,315 
 
    
    
    
    
Loans held for sale
  57,806 
  - 
  57,806 
  - 
 
    
    
    
    
Total assets at fair value
 $71,249 
  - 
 $57,806 
 $13,443 
 
    
    
    
    
Total liabilities at fair value
 $- 
 $- 
 $- 
 $- 
 
 
 
25
 
  F & M BANK CORP.
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, 2016 and December 31, 2015.
 
 
 
September 30, 2016
 
 
December 31, 2015
 
 
 
Estimated
 
 
Carrying
 
 
Estimated
 
 
Carrying
 
 
 
Fair Value
 
 
Value
 
 
Fair Value
 
 
Value
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
               Cash and cash equivalents
 $12,156 
 $12,156 
 $8,519 
 $8,519 
Loans held for investment
  587,288 
  578,089 
  555,762 
  544,053 
               Loans held for sale
  83,164 
  83,164 
  57,806 
  57,806 
               Interest receivable
  1,680 
  1,680 
  1,709 
  1,709 
               Investments
  38,642 
  38,605 
  25,329 
  25,324 
Financial Liabilities
    
    
    
    
Time deposits
  158,964 
  158,116 
  162,524 
  161,040 
               Short-term debt
  51,229 
  51,229 
  24,954 
  24,954 
Long-term debt
  64,856 
  65,089 
  48,565 
  48,161 
 
The carrying value of cash and cash equivalents, deposits with no stated maturities, 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.
 
During the nine months ended September 30, 2016, there were seven loan modification that were considered to be troubled debt restructurings, however one is now paid off and one is charged off. 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, 2016
 
 
 
 
 
 
Pre-Modification
 
 
Post-Modification
 
 
 
 
 
 
Outstanding (in thousands)
 
 
Outstanding (in thousands)
 
 
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
Real Estate
  2 
 $142 
 $142 
Consumer
  4 
  33 
  33 
Total
  7 
 $175 
 $175 
 
 
26
 
  F & M BANK CORP.
Note 8.
Troubled Debt Restructuring, continued
 
During the quarter ended September 30, 2016, there was one loan modifications that was a troubled debt restructurings.
 
 
 
Three Months ended September 30, 2016
 
 
 
 
 
 
Pre-Modification
 
 
Post-Modification
 
 
 
 
 
 
Outstanding (in thousands)
 
 
Outstanding (in thousands)
 
 
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
Consumer
  1 
 $6 
 $6 
Total
  1 
 $6 
 $6 
 
At September 30, 2016, six loans that had been restructured in the previous 12 months, were in default or were on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
 
 
September 30, 2016
 
 
 
 
 
 
Pre-Modification
 
 
Post-Modification
 
 
 
 
 
 
Outstanding (in thousands)
 
 
Outstanding (in thousands)
 
 
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
Real Estate
  5 
 $2,053 
 $2,053 
Consumer
  1 
  15 
  15 
Total
  6 
 $2,068 
 $2,068 
 
During 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 (in thousands)
 
 
Outstanding (in thousands)
 
 
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
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 
 
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 (in thousands)
 
 
Outstanding (in thousands)
 
 
 
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 
 
At September 30, 2015, there were no trouble debt restructurings from the previous 12 months that went into default or was on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
 
27
F & M BANK CORP.

 
Item 2.  
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
F & M Bank Corp. (Company) incorporated in Virginia in 1983, is a one-bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly-owned subsidiaries of the Bank. The Bank also holds a majority ownership in VBS Mortgage LLC (VBS).
 
The Bank is a full service commercial bank offering a wide range of banking and financial services through its twelve 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, Woodstock and Fishersville, 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.
 
 
28
F & M BANK CORP.
 
 
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 33 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, 2016 was $7,050,000 or $2.03 per share, compared to $6,237,000 or $1.78 in the same period in 2015, an increase of 13.04%. During the nine months ended September 30, 2016, noninterest income increased 13.42% and noninterest expense increased 8.18% during the same period. Net income from Bank operations adjusted for income from Parent activities is as follows:
 
In thousands
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Net Income from Bank Operations
 $6,836 
 $6,090 
Income from Parent Company Activities
  214 
  147 
Net Income for the nine months ended September 30
 $7,050 
 $6,237 
 
During the three months ended September 30, 2016, net income was $2,602,000 or $.75 per share, compared to $2,190,000 or $.63 in the same period in 2015, an increase of 18.81%. In the three months ended September 30, 3016, noninterest income increased 25.93% and noninterest expense increased 10.41% compared to the same period in 2015.
 
 
29
 
 
F & M BANK CORP.
 
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 39, the 2016 year to date tax equivalent net interest income increased $1,421,000 or 7.18% compared to the same period in 2015. The tax equivalent adjustment to net interest income totaled $98,000 for the nine months. The yield on earning assets decreased .05%, while the cost of funds increased .10% compared to the same period in 2015. The three months ended September 30, 2016 tax equivalent net interest income increased $532,000 or 7.91% compared to the same period in 2015. The tax equivalent adjustment to net interest income totaled $33,000 for the three months.
 
The combination of the decrease in yield on assets and the increase in cost of funds for the three and nine month periods coupled with changes in balance sheet leverage has resulted in the net interest margin decreasing to 4.33%, a decrease of 12 basis points year to date when compared to the same period in 2015. The quarter to date net interest margin of 4.23% is an 18 basis points decrease from the same period in 2015. The loans held for sale portfolio has had substantial growth in the average balances and while the portfolio is highly profitable, the yield is lower. A schedule of the net interest margin for the three and nine month periods ended September 30, 2016 and 2015 can be found in Table I on page 39.
 
The Interest Sensitivity Analysis contained in Table II on page 40 indicates the Company is in an asset sensitive position in the one year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 47.21% of rate sensitive assets and 33.13% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has kept deposit rates low. The growth in earning assets and the growth in noninterest bearing accounts has resulted in the decrease in the positive GAP position in the one year time period.
 
The increase in noninterest income of $324,000 for the nine-month period ended September 30, 2016 and $217,000 for the three-month period ended 2016 is primarily due to an increase in income from VBS Mortgage, service charge income and debit card fees over the same period in 2015.
 
Noninterest expense increased $1,094,000 for the nine-month period ended September 30, 2016 as compared to 2015. Expense increased in the areas of salaries and benefits (additions to staff at new branches), legal and professional fees, and demand account program fees. The noninterest expense for the three ended September 30, 2016 increased $468,000 over the same period in 2015. As stated in the most recently available (September 30, 2016) Uniform Bank Performance Report, the Company’s and peer’s noninterest expenses averaged 2.76% and 2.84% of average assets, respectively. The Company’s operating costs have always compared favorably to the peer group due to an excellent asset to employee ratio and below average facilities costs.
 
 
30
F & M BANK CORP.
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Balance Sheet
 
Federal Funds Sold and Interest Bearing Bank Deposits
 
The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at .25% to .50% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Combined balances in fed funds sold and interest bearing bank deposits have increased since year end due to the growth in Loans Held for Sale. At September 30, 2016, the Company held $286,000 in interest bearing bank deposits and $4,151,000 in federal funds sold as compared to $1,596,000 in interest bearing bank deposits and $0 in federal funds sold at December 31, 2015.
 
Securities
 
The Company’s securities portfolio serves several purposes. Portions of the portfolio are held to assist the Company with 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.
 
At September 30, 2016, the Company’s investment portfolio totaled $38.6 million as compared to $25.3 million at December 31, 2015. As of September 30, 2016, the market value of securities available for sale exceeded their cost by $37,000. The portfolio is made up of primarily agency securities with an average portfolio life of just over two years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. Other investments consist of stock of correspondent banks and investments in low income housing projects. There are $20 million in securities that mature in 2016.
 
In reviewing investments as of September 30, 2016, 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 Company has loan concentrations within the portfolio in construction and development lending as well as hotel/motel lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.
 
 
31
F & M BANK CORP.
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Loans Held for Investment of $578,089,000 increased $34.0 million at September 30, 2016 compared to December 31, 2015. Commercial real estate increased $15.3 million, dealer finance portfolio increased $9.3 million, construction and land development increased $7.7 million and the real estate portfolio increased $3.2 million. Increases in other loan categories totaled $1.0 million with decreases in farmland, multifamily, consumer and credit cards.
 
Loans Held for Sale totaled $83,164,000 at September 30, 2016, an increase of $25,358,000 compared to December 31, 2015. Secondary market loan originations have been very strong for both VBS Mortgage and Northpointe Bank during the first nine months of 2016.
 
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $6,196,000 at September 30, 2016 compared to $6,526,000 at December 31, 2015. 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, 2016, the Company holds $2,076,000 of real estate which was acquired through foreclosure. This is a decrease of $52,000 compared to December 31, 2015.
 
The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):
 
 
 
September 30, 2016
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Nonaccrual Loans
 
 
 
 
 
 
     Real Estate
 $4,241 
 $5,698 
     Commercial
  71 
  109 
     Home Equity
  1,295 
  40 
     Other
  70 
  108 
 
  5,677 
  5,955 
 
    
    
Loans past due 90 days or more (excluding nonaccrual)
    
    
     Real Estate
  367 
  272 
     Commercial
  - 
  25 
     Home Equity
  23 
  107 
     Other
  129 
  167 
 
  519 
  571 
 
    
    
Total Nonperforming loans
 $6,196 
 $6,526 
 
    
    
Restructured Loans current and performing:
    
    
      Real Estate
  8,751 
  8,713 
      Commercial
  1,128 
  1,463 
      Home Equity
  - 
  1,414 
       Other
  87 
  91 
 
    
    
Nonperforming loans as a percentage of loans held for investment
  1.07%
  1.20%
 
    
    
Net Charge Offs to total loans held for investment
  .21%
  .04%
 
    
    
Allowance for loan and lease losses to nonperforming loans
  122.19%
  134.55%
 
32
F & M BANK CORP.
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Allowance for Loan Losses
 
The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
 
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.
 
In evaluating the portfolio, loans are segregated into loans with identified potential losses, unimpaired/nonclassified loans and classified loans. Loans with identified potential losses include examiner and bank classified loans. Relationships rated substandard and 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.
 
Classified loans are segmented by call report code, past due status and risk rating. Loss rates are assigned based on actual loss experience over the last five years, calculated quarterly and multiplied by a risk factor. Each classified loan segment is given an appropriate factor.
 
Loans that are unimpaired/nonclassified are categorized by call report code and an estimate is calculated based on actual loss experience over the last five years. Dealer finance loans utilize a loss rate based on the highest loss in the last five years due the growth in the portfolio and the age of the division. Six environmental factors are used to reflect other changes in the collectability of the portfolio not captured by the historical loss date (loan growth, unemployment, interest rates, changes in underwriting practices, local real estate industry conditions, and experience of lending staff). The Board approves the loan loss provision for each quarter based on this evaluation.
 
The allowance for loan losses of $7,571,000 at September 30, 2016 is equal to 1.31% of loans held for investment. This compares to an allowance of $8,781,000 (1.61%) at December 31, 2015. Based on the evaluation of the loan portfolio described above, management has not funded the allowance in the first nine months of 2016. Net charge-offs year to date totaled $1,210,000.
 
The overall level of the allowance is slightly higher than 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.
 
 
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
 
 
 
 
Allowance for loan losses (in thousands)
 
September 30, 2016
 
 
Percentage of Loans in Each Category
 
 
December 31, 2015
 
 
Percentage of Loans in Each Category
 
Construction/Land Development
 $3,283 
  43.36%
 $4,442 
  50.59%
Real Estate
  995 
  13.14%
  806 
  9.18%
Commercial, Financial and Agricultural
  1,437 
  18.98%
  1,666 
  18.97%
Consumer
  1,066 
  14.09%
  1,059 
  12.06%
Home Equity
  790 
  10.42%
  808 
  9.20%
Total
 $7,571 
  100.00%
 $8,781 
  100.00%
 
 
33
 
 
F & M BANK CORP.
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Deposits and Other Borrowings
 
The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits have increased $33,154,000 since December 31, 2015. Time deposits decreased $2,924,000 during this period while demand deposits and savings deposits increased $36,078,000. The increase in deposits can be attributed to all branches and areas in our footprint; programs and products have been put into place in the last several years to grow deposits. 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 $1.8 million in CDARS funding, which is a decrease of $3.87 million from December 31, 2015.
 
Short-term borrowings
 
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, 2016, there were $50,000,000 in FHLB short-term borrowings and commercial repurchase agreements totaled $1,229,000. This compared to FHLB short-term borrowings of $20,000,000, federal funds purchased of $959,000 and commercial repurchase agreements of $3,995,000 at December 31, 2015.
 
Long-term borrowings
 
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. For the nine months ended September 30, 2016 there were $3,072,000 in scheduled repayments and $20,000,000 in additional borrowings. There were $1,107,000 of scheduled repayments and no additional borrowings during the quarter ended September 30, 2016.
 
Capital
 
The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.
 
At September 30, 2016, Company’s total risk based capital and leverage ratios were 14.70% and 11.61%, respectively, as compared to December 31, 2015 of 15.38% and 12.18%, respectively. For the same period, Bank-only total risk based capital and leverage ratios were 14.37% and 11.32%, respectively, as compared to December 31, 2015 of 15.24% and 12.06%, respectively. Both the Company and the Bank are reporting common equity tier 1 capital ratios of 11.98% and 13.16%, respectively as compared to December 31, 2015 of 12.46% and 13.99%. The Bank also reported a Capital conservation buffer of 6.37% as of September 30, 2016. For both the Company and the Bank these ratios are in excess of regulatory minimums to be considered “well capitalized”.
 
 
34
 
 
F & M BANK CORP.
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Contractual Obligations
 
The Company’s significant fixed and determinable contractual obligations include time deposits and short term debt, the payment dates of which are presented in Table II on page 40. The payment amounts represent those amounts contractually due to the recipient.
 
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 maintains lines of credit with its primary correspondent financial institution, Community Bankers Bank, and Zions Bank. The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta (FHLB) that allows for secured borrowings.
 
The following table presents the available and outstanding balances of the Company’s lines of credit
 
 
 
September 30, 2016
 
(in thousands)
 
Available
 
 
Outstanding
 
 
 
Balance
 
 
Balance
 
Federal Funds Line - Community Bankers Bank
 $15,000 
 $- 
Federal Funds Line - Zions Bank
  11,000 
  - 
 
 $26,000 
 $- 
 
The following table presents the borrowing capacity with the FHLB from pledged loans as of September 30, 2016:
 
(in thousands)
 
September 30, 2016
 
Borrowing capacity
 $142,229 
Outstanding borrowings
  120,089 
Total credit available
 $22,140 
 
The outstanding borrowings includes $50 million in short term borrowings that directly support the loans held for sale.
 
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, 2016, the Company had a cumulative Gap Rate Sensitivity Ratio of 23.31% 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 40.
 
 
35
 
 
F & M BANK CORP.
 
Item 2.    
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Off-Balance Sheet Risk
 
                The Company makes commitments to extend credit in the normal course of business and issues standby letters of credit to meet the financing needs of its customers. The amount of the commitments represents the Company's exposure to credit loss that is not included in the balance sheet. As of the balance sheet dates, the Company had the following commitments outstanding:
 
 
 
September 30, 2016
 
 
December 31, 2015
 
Commitments to loan money
 $156,166,861 
 $135,138,834 
Standby letters of credit
  1,059,128 
  1,344,191 
 
The Company uses the same credit policies in making commitments to lend money and issue standby letters of credit as it does for the loans reflected in the balance sheet.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Collateral required, if any, upon extension of credit is based on management's credit evaluation of the borrower’s ability to pay. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment.
 
Effect of Newly Issued Accounting Standards
 
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017.
 
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
 
In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments were effective for the Company on January 1, 2016, and did not have a material effect on its financial statements.
 
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. The amendments were expected to result in the deconsolidation of many entities. The amendments were effective for the Company on January 1, 2016. The adoption of these amendments did not have a material effect on the Company’s financial statements. 
 
In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments were effective for the Company on January 1, 2016. The Company’s adoption of these amendments did not have a material effect on its financial statements.
 
36
 
 
F & M BANK CORP.
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards, continued
 
In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements
 
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for [fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
 
In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position. The provisions of this guidance are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. These provisions are to be applied using a modified retrospective approach. The Company is evaluating the effect that this new guidance will have on our consolidated financial statements, but does not expect it will have a material effect on its financial statements.
 
In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The Company does not expect these amendments to have a material effect on its financial statements. 
 
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments 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.
 
In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments 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.
 
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments 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.
 
37
 
 
F & M BANK CORP.
 
Item 2.   
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards, continued
 
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
 
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. 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).
 
 
38

 
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, 2016
 
 
September 30, 2015
 
 
September 30, 2016
 
 
September 30, 2015
 
 
 
Average
 
 
Income/
 
 

 
 
Average
 
 
Income/
 
   
 
Average
 
 
Income/
 
 

 
 
Average
 
 
Income/
 
 

 
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates5
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates5
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment1,2
 $561,347 
 $22,162 
  5.27%
 $529,007 
 $20,878 
  5.28%
 $570,252 
 $7,575 
  5.27%
 $536,507 
 $7,086 
  5.24%
Loans held for sale
  68,145 
  1,430 
  2.80%
  39,813 
  808 
  2.71%
  84,165 
  540 
  2.55%
  42,335 
  295 
  2.76%
Federal funds sold
  6,402 
  22 
  .46%
  7,394 
  12 
  .22%
  8,863 
  10 
  .45%
  7,643 
  4 
  .21%
Interest bearing deposits
  778 
  2 
  .34%
  1,388 
  - 
  - 
  594 
  - 
  - 
  1,506 
  - 
  - 
Investments
    
    
    
    
    
    
    
    
    
    
    
    
Taxable 3
  17,388 
  245 
  1.88%
  17,416 
  202 
  1.55%
  16,576 
  106 
  2.50%
  17,895 
  66 
  1.44%
Partially taxable
  125 
  - 
  - 
  125 
  - 
  - 
  125 
  - 
  - 
  125 
  - 
  - 
Total earning assets
 $654,185 
 $23,861 
  4.87%
 $595,143 
 $21,900 
  4.92%
 $680,575 
 $8,231 
  4.80%
 $606,011 
 $7,451 
  4.88%
Interest Expense
    
    
    
    
    
    
    
    
    
    
    
    
Demand deposits
  111,516 
  371 
  .44%
  115,081 
  426 
  .49%
  114,850 
  126 
  .44%
  103,357 
  112 
  .43%
Savings
  97,803 
  322 
  .44%
  72,611 
  134 
  .25%
  102,757 
  114 
  .44%
  81,579 
  64 
  .31%
Time deposits
  161,025 
  1,064 
  .88%
  174,696 
  1,067 
  .82%
  158,572 
  369 
  .92%
  170,834 
  350 
  .81%
Short-term debt
  39,406 
  35 
  .12%
  34,198 
  54 
  .21%
  45,881 
  9 
  .08%
  37,404 
  24 
  .25%
Long-term debt
  53,512 
  853 
  2.13%
  26,741 
  424 
  2.12%
  65,412 
  352 
  2.13%
  33,443 
  172 
  2.04%
Total interest bearing liabilities
 $463,262 
 $2,645 
  .76%
 $423,327 
 $2,105 
  .66%
 $487,472 
 $970 
  .79%
 $426,617 
 $722 
  .67%
 
    
    
    
    
    
    
    
    
    
    
    
    
Tax equivalent net interest income 1
    
 $21,216 
    
    
 $19,795 
    
    
 $7,261 
    
    
 $6,729 
    
 
    
    
    
    
    
    
    
    
    
    
    
    
Net interest margin
    
    
  4.33%
    
    
  4.45%
    
    
  4.23%
    
    
  4.41%
 


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.
 
 
39

 
TABLE II
 
F & M BANK CORP.
Interest Sensitivity Analysis
September 30, 2016
(In Thousands of Dollars)
 
The following table presents the Company’s interest sensitivity.
 
 
 
0 – 3
Months
 
 
  4 – 12
Months
 
 
1 – 5
Years
 
 
Over 5
Years
 
 
Not
Classified
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Uses of funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial
 $26,946 
 $23,373 
 $117,982 
 $23,461 
 $- 
 $191,762 
     Installment
  3,983 
  1,070 
  52,098 
  13,473 
  - 
  70,624 
     Real estate loans for investments
  96,013 
  60,394 
  146,061 
  10,548 
  - 
  313,016 
Loans held for sale
  83,164 
  - 
  - 
  - 
  - 
  83,164 
Credit cards
  2,687 
  - 
  - 
  - 
  - 
  2,687 
Federal funds sold
  4,151 
    
    
    
    
  4,151 
Interest bearing bank deposits
  286 
  - 
  - 
  - 
  - 
  286 
Investment securities
  20,000 
  4,027 
  125 
  697 
  135 
  24,984 
Total
 $237,230 
 $88,864 
 $316,266 
 $48,179 
 $135 
 $690,674 
 
    
    
    
    
    
    
Sources of funds
    
    
    
    
    
    
Interest bearing demand deposits
 $- 
 $32,351 
 $67,931 
 $17,789 
 $- 
 $118,071 
Savings deposits
  - 
  21,161 
  63,483 
  21,161 
  - 
  105,805 
Certificates of deposit $100,000 and over
  4,646 
  11,360 
  35,052 
  - 
  - 
  51,058 
Other certificates of deposit
  13,444 
  26,467 
  67,147 
  - 
  - 
  107,058 
Short-term borrowings
  51,229 
  - 
  - 
  - 
  - 
  51,229 
Long-term borrowings
  1,107 
  3,322 
  41,964 
  18,696 
  - 
  65,089 
Total
 $70,426 
 $94,661 
 $275,577 
 $57,646 
 $- 
 $498,310 
 
    
    
    
    
    
    
Discrete Gap
 $166,804 
 $(5,797)
 $40,689 
 $(9,467)
 $135 
 $192,364 
 
    
    
    
    
    
    
Cumulative Gap
 $166,804 
 $161,007 
 $201,696 
 $192,229 
 $192,364 
    
 
    
    
    
    
    
    
Ratio of Cumulative Gap to Total Earning Assets
  24.15%
  23.31%
  29.20%
  27.83%
  27.85%
    
 
Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2016. 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.
 
 
40
F & M BANK CORP.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Not Applicable
 
Item 4.
Controls and Procedures
 
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.
 
 
41
 
 
 F & M BANK CORP.
 
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, 2015.
 
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
 
Item 6.
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 Sabanes-Oxley Act of 2002 (filed herewith).
 
101 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended September 30, 2016, 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).
 
 
42
 
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
F & M BANK CORP.
 
 
 
 
 
 
By:  
/s/  Dean W. Withers
 
 
 
Dean W. Withers
 
 
 
President and Chief Executive Officer
 
 

 
 
 
 
 
By:  
/s/  Carrie A. Comer
 
 
 
Carrie A. Comer
 
 
 
Senior Vice President and Chief Financial Officer
 
 

 
November 14, 2016
 
 
 
43
 
 

Exhibit Index:
 
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).
 
32 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (filed herewith).
 
101 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended September 30, 2016, 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).
 
 
 
 44