-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tn776HwPHw8aqn8UIqVfeIFkW0yvQRcW8dgqRnCs6a9CvaE80DLiqgJwPqUVr9kv xXYKPl0VV4tzS8eWgJKkOQ== 0000950152-06-009247.txt : 20061113 0000950152-06-009247.hdr.sgml : 20061110 20061113122536 ACCESSION NUMBER: 0000950152-06-009247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061113 DATE AS OF CHANGE: 20061113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: F&M BANK CORP CENTRAL INDEX KEY: 0000740806 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541280811 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13273 FILM NUMBER: 061206993 BUSINESS ADDRESS: STREET 1: P.O. BOX 1111 CITY: TIMBERVILLE STATE: VA ZIP: 22853 BUSINESS PHONE: 540-896-8941 MAIL ADDRESS: STREET 1: P. O. BOX 1111 CITY: TIMBERVILLE STATE: VA ZIP: 22853 10-Q 1 l22908ae10vq.txt F & M BANK 10-Q 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, 2006. [ ] 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one) Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 3,2006 - ----- ------------------------------ Common Stock, par value - $5 2,366,500 shares
F & M BANK CORP. INDEX
Page ---- PART I FINANCIAL INFORMATION.......................................... 2 Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended September 30, 2006 and 2005.............................. 2 Consolidated Statements of Income - Nine Months Ended September 30, 2006 and 2005.............................. 3 Consolidated Balance Sheets - September 30, 2006 and December 31, 2005.......................................... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2006 and 2005.............................. 5 Consolidated Statements of Changes in Stockholders' Equity - Nine Months September 30, 2006 and 2005............... 6 Notes to Consolidated Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20 Item 4. Controls and Procedures........................................ 20 PART II OTHER INFORMATION.............................................. 21 Item 1. Legal Proceedings.............................................. 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 21 Item 3. Defaults upon Senior Securities................................ 21 Item 4. Submission of Matters to a Vote of Security Holders............ 21 Item 5. Other Information.............................................. 21 Item 6. Exhibits....................................................... 21 SIGNATURES..................................................... 22
Page 2 Part I Financial Information Item 1 Financial Statements F & M BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2006 2005 ---------- ---------- INTEREST INCOME Interest and fees on loans held for investment $ 5,362 $ 4,564 Interest and fees on loans held for sale 354 Interest on federal funds sold 34 32 Interest on interest bearing deposits 29 24 Dividends on equity securities 116 115 Interest on debt securities 252 169 ---------- ---------- Total Interest Income 5,793 5,258 ---------- ---------- INTEREST EXPENSE Interest on demand deposits 147 65 Interest on savings accounts 102 139 Interest on time deposits over $100,000 535 259 Interest on time deposits 1,180 791 ---------- ---------- Total interest on deposits 1,964 1,254 Interest on short-term debt 197 396 Interest on long-term debt 253 284 ---------- ---------- Total Interest Expense 2,414 1,934 ---------- ---------- Net Interest Income 3,379 3,324 PROVISION FOR LOAN LOSSES 60 90 ---------- ---------- Net Interest Income after Provision for Loan Losses 3,319 3,234 ---------- ---------- NONINTEREST INCOME Service charges 310 276 Insurance and other commissions 71 84 Other 244 263 Income on bank owned life insurance 71 56 Security gains (losses) 109 8 ---------- ---------- Total Noninterest Income 805 687 ---------- ---------- NONINTEREST EXPENSE Salaries 1,101 909 Employee benefits 361 310 Occupancy expense 130 106 Equipment expense 143 110 Intangible amortization 69 69 Other 675 650 ---------- ---------- Total Noninterest Expense 2,479 2,154 ---------- ---------- INCOME BEFORE INCOME TAXES 1,645 1,767 Income Taxes 482 557 ---------- ---------- NET INCOME $ 1,163 $ 1,210 ---------- ---------- PER SHARE DATA Net Income $ .49 $ .50 ---------- ---------- Cash Dividends $ .21 $ .20 ========== ========== Weighted Average Shares Outstanding 2,380,769 2,407,199 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 3 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, ----------------------- 2006 2005 ---------- ---------- INTEREST INCOME Interest and fees on loans held for Investment $ 15,332 $ 12,918 Interest and fees on loans held for sale 702 Interest on federal funds sold 54 56 Interest on interest bearing deposits 90 69 Dividends on equity securities 323 333 Interest on debt securities 648 529 ---------- ---------- Total Interest Income 16,447 14,607 ---------- ---------- INTEREST EXPENSE Interest on demand deposit 348 164 Interest on savings accounts 351 380 Interest on time deposits over $100,000 1,288 689 Interest on all other time deposits 3,095 2,236 ---------- ---------- Total interest on deposits 5,082 3,469 Interest on short-term debt 586 743 Interest on long-term debt 777 902 ---------- ---------- Total Interest Expense 6,445 5,114 ---------- ---------- Net Interest Income 10,002 9,493 PROVISION FOR LOAN LOSSES 180 270 ---------- ---------- Net Interest Income after Provision for Loan Losses 9,822 9,223 ---------- ---------- NONINTEREST INCOME Service charges 895 772 Insurance and other commissions 219 214 Other 672 826 Income on bank owned life insurance 204 186 Security gains 104 31 ---------- ---------- Total Noninterest Income 2,094 2,029 ---------- ---------- NONINTEREST EXPENSE Salaries 3,152 2,609 Employee benefits 1,071 930 Occupancy expense 355 315 Equipment expense 403 332 Intangibles amortization 207 207 Other 1,912 1,900 ---------- ---------- Total Noninterest Expense 7,100 6,293 ---------- ---------- INCOME BEFORE INCOME TAXES 4,816 4,959 Income Taxes 1,433 1,435 ---------- ---------- NET INCOME $ 3,383 $ 3,524 ---------- ========== PER SHARE DATA Net Income $ 1.41 $ 1.46 ========== ========== Cash Dividends $ .61 $ .58 ========== ========== Weighted Average Shares Outstanding 2,393,154 2,409,310 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 4 F & M BANK CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------ (Unaudited) (Audited) ASSETS Cash and due from banks $ 6,132 $ 7,904 Interest bearing deposits in banks 1,767 2,228 Fed funds sold 2,487 Securities held to maturity (note 2) 110 110 Securities available for sale (note 2) 30,160 28,507 Other investments 5,892 6,304 Loans held for sale 3,528 Loans held for investment (note 3) 301,908 277,398 Less allowance for loan losses (note 4) (1,801) (1,673) -------- -------- Net Loans Held for Investment 300,107 275,725 Bank premises and equipment 7,377 5,757 Interest receivable 1,732 1,367 Deposit intangible 1,219 1,426 Goodwill 2,639 2,639 Bank owned life insurance (note 5) 5,888 5,333 Other assets 2,679 3,013 -------- -------- Total Assets $365,702 $346,328 ======== ======== LIABILITIES Deposits Noninterest bearing demand $ 45,848 $ 46,325 Interest bearing Demand 42,024 38,970 Savings deposits 34,459 43,855 Time deposits over $100,000 47,878 35,462 Time deposits 116,717 102,697 -------- -------- Total Deposits 286,926 267,309 Short-term debt 13,015 14,345 Long-term debt 21,223 22,808 Accrued expenses 6,618 5,299 -------- -------- Total Liabilities 327,782 309,761 -------- -------- STOCKHOLDERS' EQUITY Common stock, $5 par value, 2,367,300 and 2,402,037 issued and outstanding, in 2006 and 2005, respectively 11,836 12,010 Retained earnings 26,262 25,136 Accumulated other comprehensive income (loss) (178) (579) -------- -------- Total Stockholders' Equity 37,920 36,567 -------- -------- Total Liabilities and Stockholders' Equity $365,702 $346,328 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 5 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2006 2005 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,383 $ 3,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 435 368 Amortization of security premiums 38 105 Net (increase) decrease in loans held for sale 3,528 24,796 Provision for loan losses 180 270 Intangible amortization 207 207 (Increase) decrease in interest receivable (365) (101) (Increase) decrease in other assets 41 126 Increase in accrued expenses 1,395 169 (Gain) loss on security transactions (104) (31) Amortization of limited partnership investments 280 229 Income from life insurance investment (203) (186) -------- -------- Net Adjustments 5,432 25,952 -------- -------- Net Cash Provided by Operating Activities 8,815 29,476 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments available for sale (11,621) (12,820) Proceeds from sales of investments available for sale 1,993 1,649 Proceeds from maturity of investments available for sale 8,771 12,610 Net increase in loans held for investment (24,562) (31,947) Purchase of property and equipment (2,055) (361) Change in federal funds sold 2,487 (887) Purchase of investment in life insurance (350) Net (increase) decrease in interest bearing bank deposits 461 5,989 -------- -------- Net Cash Used in Investing Activities (24,876) (25,767) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in demand and savings deposits (6,820) 1,963 Net change in time deposits 26,436 13,065 Net change in short-term debt (1,967) (16,184) Cash dividends paid (1,434) (1,374) Repurchase of common stock (976) (228) Change in federal funds purchased 635 Proceeds of long-term debt 5,000 5,000 Proceeds from issuance of common stock 73 Repayment of long-term debt (6,585) (6,338) -------- -------- Net Cash Provided (Used) by Financing Activities 14,289 (4,023) -------- -------- NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (1,772) (314) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,904 7,938 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,132 $ 7,624 ======== ======== SUPPLEMENTAL DISCLOSURE Cash paid for: Interest expense $ 6,179 $ 5,013 Income taxes 825 970
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 6 F & M BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2006 2005 -------- -------- BALANCE, BEGINNING OF PERIOD $36,567 $34,260 Comprehensive Income Net income 3,383 3,524 Net change in unrealized appreciation on securities available for sale, net of taxes 401 (204) ------- ------- TOTAL COMPREHENSIVE INCOME 3,784 3,320 Repurchase of common stock (976) (228) Common stock sold to ESOP 73 Dividends declared (1,455) (1,397) ------- ------- Balance, end of period $37,920 $36,028 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 7 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING PRINCIPLES: The consolidated financial statements include the accounts of F & M Bank Corp. and its subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements conform to accounting principles generally accepted in the United States 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, 2006 and the results of operations for the three month periods ended September 30, 2006 and September 30, 2005. The notes included herein should be read in conjunction with the notes to financial statements included in the 2005 annual report to stockholders of the F & M Bank Corp. The Company does not expect the anticipated adoption of any newly issued accounting standards to have a material impact on future operations or financial position. NOTE 2 INVESTMENT SECURITIES: The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2006 and December 31, 2005 are as follows:
2006 2005 ----------------- ----------------- MARKET MARKET COST VALUE COST VALUE ------- ------- ------- ------- Securities Held to Maturity U. S. Treasury and Agency obligations $110 $110 $110 $110 ---- ---- ---- ---- Total $110 $110 $110 $110 ==== ==== ==== ====
2006 2005 ----------------- ----------------- MARKET MARKET COST VALUE COST VALUE ------- ------- ------- ------- Securities Available for Sale U. S. Treasury and Agency obligations $17,937 $17,918 $16,007 $15,820 Equity securities 6,793 6,742 6,875 6,458 Mortgage-backed securities 2,811 2,727 3,604 3,510 Corporate Bonds 2,500 2,405 2,500 2,354 Municipals 375 368 375 365 ------- ------- ------- ------- Total $30,416 $30,160 $29,361 $28,507 ======= ======= ======= =======
Page 8 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE 3 LOANS HELD FOR INVESTMENT: Loans outstanding at September 30, 2006 and December 31, 2005 are summarized as follows:
2006 2005 -------- -------- Real Estate Construction $ 41,044 $ 33,540 Residential 141,852 137,087 Commercial and agricultural 99,085 88,656 Installment loans to individuals 18,236 16,434 Credit cards 1,567 1,616 Other 124 65 -------- -------- Total $301,908 $277,398 ======== ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES: A summary of transactions in the allowance for loan losses follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 2006 2005 2006 2005 ------ ------ ------ ------ Balance, beginning of period $1,673 $1,511 $1,775 $1,659 Provisions charged to operating expenses 180 270 60 90 Net (charge-offs) recoveries: Loan recoveries 33 46 15 10 Loan charge-offs (85) (193) (49) (125) ------ ------ ------ ------ Total Net Charge-Offs * (52) (147) (34) (115) ------ ------ ------ ------ Balance, End of Period $1,801 $1,634 $1,801 $1,634 ====== ====== ====== ====== * Components of Net Charge-Offs Real Estate Commercial (16) (100) (17) (105) Installment (36) (47) (17) (10) ------ ------ ------ ------ Total $ (52) $ (147) $ (34) $ (115) ====== ====== ====== ======
Page 9 F & M BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 BANK OWNED LIFE INSURANCE (BOLI) The Bank currently offers a variety of benefit plans to all full time employees. While the costs of these plans are generally tax deductible to the Bank, the cost has been escalating greatly in recent years. The Bank has determined that the benefits offered are necessary in order to attract and retain good employees. To help offset the growth in these costs, the Bank decided to enter into BOLI contracts. Dividends received on these policies are tax-deferred and are anticipated to be tax exempt as the death benefits under the policies are exempt from income taxation. Rates of return on a tax-equivalent basis are very favorable when compared to other long-term assets which the Bank could obtain. NOTE 6 EMPLOYEE BENEFIT PLAN The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. The benefits are primarily based on years of service and earnings. The following is a summary of net periodic pension costs for the nine-month periods ended, 2006 and 2005.
2006 2005 --------- --------- Service cost $ 227,433 $ 185,199 Interest cost 157,217 134,100 Expected return on plan assets (187,994) (148,605) Amortization of net obligation at transition 7,619 7,620 Amortization of prior service cost (3,975) (3,975) Amortization of net (gain) or loss 39,392 36,357 --------- --------- Net periodic benefit cost $ 239,692 $ 210,696 ========= =========
Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations F & M Bank Corp. (Company) is a one-bank holding company organized under Virginia law which provides financial services through its wholly-owned subsidiaries Farmers & Merchants Bank (Bank) and TEB Life Insurance Company (TEB). Farmers & Merchants Financial Services (FMFS) is a wholly-owned subsidiary of the Bank. The Bank is a full service commercial bank offering a wide range of banking and financial services through its nine branch offices. In April, the Bank opened its first office within the Harrisonburg, Virginia city limits on Port Republic Road. In early July, the Bank opened an office at 700 East Main Street, Luray, Virginia, its first office in Page County, Virginia. In late August the Bank opened an office approximately 2 miles east of the Harrisonburg city limits at the intersection of Route 33 and Route 276. Upon opening this office the Bank simultaneously closed and consolidated, into the new branch, the operation of its loan/investment production office located at 207 University Boulevard in Harrisonburg and its branch located at the Elkton Plaza Center, Elkton, VA. The Bank also operates a courier service which picks up commercial deposits on a daily basis in the Harrisonburg area. In September the Bank received regulatory approval to expand its courier service into Page and Shenandoah Counties. The Bank has since added a second courier vehicle to accommodate the additional customer deposit pick ups. 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. The Company's primary trade area services customers in Rockingham County, Shenandoah County, Page County and the northern part of Augusta County. The addition of the Luray branch recently increased the Company's service area to include eastern and northern Page 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 10Q. 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. Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CRITICAL ACCOUNTING POLICIES GENERAL The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("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) Statement of Financial Accounting Standard ("SFAS") No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, 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. GOODWILL AND INTANGIBLES In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 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. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill. Core deposit intangibles are amortized on a straight-line basis over ten years. The Company adopted SFAS 147 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over the estimated useful life. SECURITIES IMPAIRMENT The Company evaluates each of its investments in securities, debt and equity, under guidelines contained in SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. These guidelines require the Company to determine whether a decline in value below original cost is other than temporary. In making its determination, management considers current market conditions, historical trends in the individual securities, and historical trends in the total market. Expectations are developed regarding potential returns from dividend reinvestment and price appreciation over a reasonable holding period (five years). Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Net income for the third quarter of 2006 was $1,163,000 or $.49 per share, compared to $1,210,000 or $.50 in the third quarter of 2005, a decrease of 3.88%. Core operating earnings, (exclusive of securities transactions, net of tax effect) totaled $1,092,000 in 2006 and $1,204,000 in 2005, a decrease of 9.30%. For the nine months ended September 30, 2006, net income was $3,383,000 or $1.41 per share compared to $3,524,000 or $1.46 in 2005. This was a decrease of 4.00%. During the third quarter, noninterest income, exclusive of securities transactions, increased 2.50% and noninterest expense increased 15.09% during the same period. RESULTS OF OPERATIONS YEAR TO DATE The 2006 year to date tax equivalent net interest margin increased $498,000 or 5.16% compared to the same period 2005. The yield on earning assets increased ..81%, while the cost of funds increased .74% compared to the same period in 2005. These increases are consistent with market rates within the local and national economies and resulted as both maturing assets and liabilities repriced at higher rates. Beginning in June 2004, the Federal Reserve's Federal Open Market Committee (FOMC) reversed its accommodative monetary policy and has since raised short term interest rates, in .25% increments by a total of 4.25% through September 2006. Although the Interest Sensitivity Analysis on page 19 indicates the Company is in a liability sensitive position in the one year time horizon, the recent increase in rates has proven beneficial to the net interest margin. This has resulted due to the fact that a large portion of rate sensitive liabilities (checking and savings) do not reprice immediately with changes in market rates, but are adjusted at the discretion of management based on funding needs and competitive factors. While the net interest margin for both the six month (4.18%) and three month periods (4.14%) compare favorably to the prior year, it is notable that the net interest margin fell from 4.25% in the first quarter 2006 to its current level. This is indicative of strong competition locally for deposits (principally certificates of deposit) and the Banks current liability sensitive position. Based on the current rate environment, and baring a reversal by the FOMC in the direction of rates, it is anticipated that the net interest margin will continue to drift downward slightly through the one year time horizon. Changes in the distribution in assets and liabilities (balance sheet leverage) could affect these anticipated results. A schedule of the net interest margin for 2006 and 2005 can be found in Table I on page 18. Noninterest income, exclusive of securities transactions, decreased $8,000 or .40% through three quarters of 2006. Items contributing to the decrease include a $50,000 decrease in secondary market loan origination fees and a $148,000 decrease in returns on low income housing investments. The returns on these investments are principally in the form of tax credits and in 2005 included $93,000 related to the recognition of non-recurring deferred state tax credits. These credits have been classified as a return on investment rather than as a reduction of income tax expense. This has been done to reflect the fact that the Company entered into these investments with the expectation that tax credits would be the primary source of investment return and to avoid a distortion of income tax expense for the period. Partially offsetting the decreases listed above was a $123,000 increase in service charges on deposit accounts (including overdraft fees), card related income (credit, debit, merchant and ATM) also increased $42, 000 compared to 2005. Noninterest expense increased $807,000 in 2006. Of the total, $684,000 (a 19.33% increase) can be attributed to salaries and employee benefits. This increase includes normal salary increases for existing staff, an increase in full time equivalent (FTE) staff from 97 in 2005 to 116 in 2006, and an increase in the cost of group insurance of 22.63% The increase in FTEs includes hiring of staff related to three new branch offices, drivers for the courier service and staffing related to the creation of a centralized loan operations department. Exclusive of personnel expenses, other noninterest expenses increased at an annualized rate of 4.47% in 2006 compared to 2005. Virtually all the increase can be attributed to additional facilities and equipment expenses related to the new branch offices. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available Bank Holding Company Performance Report (June 30), noninterest expenses averaged 2.63% versus peer group average of 3.18%. 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. Page 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUARTER ENDING SEPTEMBER 30 The Company's net income totaled $1,163,000 compared to $1,210,000 in the third quarter of 2005. After adjusting to exclude securities transactions, core earnings decreased $112,000 or 9.30%. The tax equivalent net interest margin increased 17 basis points to 4.14%. The average balance of loans held for investment increased $19,990,000, while loans held for sale decreased $28,978,000. Although these changes resulted in a $10,912,000 decrease in earning assets, it proved accretive to the net interest margin due to the higher average yield on loans held for investment as compared to loans held for sale. Loans held for sale (prior year) consisted of short term mortgage participations that had an average life of approximately fifteen days. These loans were funded primarily though an increase in short-term debt (overnight borrowings). Due to changes in market conditions, the Bank no longer had access to these short term mortgage participations. The growth in the loan portfolio within the Bank's primary service areas was funded primarily through growth in deposits (principally certificates of deposit). Noninterest income, exclusive of securities transactions, increased 2.50% ($17,000) due primarily to higher income from overdraft fees. Personnel expenses increased 19.93% and other noninterest expenses increased 8.77% in the quarter for the same reasons cited in the nine month discussion. FINANCIAL CONDITION 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 was benchmarked at 5.25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Balances in interest bearing bank deposits and federal funds sold have both decreased due to growth in the loan portfolio. SECURITIES The Company's securities portfolio serves several purposes. Portions of the portfolio are held to assist the Company with liquidity, asset liability management, as collateral for certain public funds and repurchase agreements and for long-term growth potential. The securities portfolio consists of investment securities (commonly referred to as "securities held to maturity") and securities available for sale. Securities are classified as investment securities when management has the intent and ability to hold the securities 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 shareholders' equity. As of September 30, 2006, the cost of all securities available for sale exceeded their market value by $256,000. This includes declines in value in both the equity securities held by the Company and in the value of government obligations held by the Bank. Declines in the value of the bond portfolio are the result of recent changes in short term rates within the market for fixed income securities. Management has traditionally held debt securities (regardless of classification) until maturity and thus it does not expect the fluctuations in value of these securities to have a direct impact on earnings. Page 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Investments in debt securities increased $1,369,000 in the first nine months of 2006. This increase was the result of securities that were purchased to support pledging needs for public funds purposes. The portfolio is made up of primarily agency and mortgage-backed securities with an average portfolio life of approximately two years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. Scheduled maturities in 2006 total $12 million, of which $8 million have already matured, these bonds had and average yield of approximately 2.75%. Bonds purchased year to date total $10 million with an average yield of approximately 5.39% and an average maturity of 4.2 years, however some of these bonds have call provisions that may result in a shorter life than the contractual maturity.. The Company's equity securities portfolio was $51,000 below cost at September 30, 2006. Gains totaling $104,000 have been taken within the equities portfolio during 2006. In addition to the realized gains of $104,000, the market value of the portfolio has increased $284,000 year to date. This increase in value is consistent with the overall improvement in the equities markets during the first nine months of the year. To minimize risk the Company holds a diversified portfolio of equity investments in a number of large, regional financial institutions, a diversified portfolio of REITs and a variety of other predominantly blue-chip securities. Management continues to believe that these investments offer adequate current returns (dividends) and have the potential for future increases in value. A review of these investments as of September 30, 2006, did not reveal any investments that appeared to be impaired based on the criteria management has employed for the last several years to assess impairment. LOAN PORTFOLIO The Company operates in a predominately rural area that includes the counties of Rockingham, Page and Shenandoah in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities/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. The allowance for loan losses (see subsequent section) provides for the risk that borrowers will be unable to repay their obligations and is reviewed quarterly for adequacy. 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. While lending is geographically diversified within the service area, the Company does have loan concentrations in agricultural (primarily poultry farming), construction, hotels, churches, assisted living facilities and the aforementioned mortgage participations. Management and the Board of Directors review these concentrations quarterly. The first nine months of 2006 resulted in an increase of $24,582,000 in the Bank's core loan portfolio. The increase in the loan portfolio is reflective of the strong local economy. The growth has been concentrated within the real estate portfolio, both residential and commercial properties. Within the last two years, the bank hired two commercial lenders that brought experience from larger regional banks. Both these lenders have been successful in bringing loan customers from their former banks which has added to the growth in the portfolio. In 2003, management entered into an agreement with Gateway Bank (of California) to purchase short-term real estate loan participations. These loans have been purchased by Gateway from mortgage brokers and will be held until sold to the ultimate holder in the secondary market. All loans have firm take-out commitments and are held for periods ranging from two to sixty days, but averaging approximately fifteen days. These loans originate in several states throughout the country, however, a significant portion are from the state of California. These loans are designated on the balance sheet as "Loans Held for Sale". While a purchase commitment of $45,000,000 remains in place, due to a slowing of the real estate market, the bank has not held any of these loans since February of 2006. Page 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Nonperforming loans include nonaccrual loans, loans 90 days or more past due and restructured loans. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans which have had the original interest rate or repayment terms changed due to financial hardship. The following is a summary of information pertaining to risk elements and impaired loans:
September 30, December 31, 2006 2005 ------------- ------------ Nonaccrual loans $ 0 $ 63,000 Loans past due 90 days or more and still accruing interest 2,154,000 632,000 Restructured loans 0 0 ---------- -------- $2,154,000 $695,000 Percent of loans held for investment .71% .25%
Of the above total, loans totaling approximately $1.020 million were paid down and brought current through the borrower's sale of real property. Approximately 90% of the past due loans reflected above are secured by real estate. Although the potential exists for some 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, 2006, the Company does not hold any real estate which was acquired through foreclosure. ALLOWANCE FOR LOAN LOSSES 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 the trend of 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 Banks watch list or schedule of classified loans. In evaluating the portfolio, loans are segregated into loans with identified potential losses and pools of loans by type (commercial, residential, consumer, credit cards). Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $100,000 are reviewed individually for impairment under FAS 114. A variety of factors are taken into account when reviewing these credits including borrower cash flow, payment history, fair value of collateral, company management, the industry in which the borrower is involved and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under FAS 5. Loan pools are further segmented into watch list, past due over 90 days and all other loans by type. Watch list loans include loans that are 60 days past due, and may include restructured loans, borrowers that are highly leveraged, loans that have been upgraded from classified or loans that contain policy exceptions (term, collateral coverage, etc.). Loss estimates on these loans reflect the increased risk associated with these assets due to any of the above factors. The past due pools contain loans that are currently 90 days or more past due. Loss rates assigned reflect the fact that these loans bear a significant risk of charge-off. Loss rates vary by loan type to reflect the likelihood that collateral values will offset a portion of the anticipated losses. The remainder of the portfolio falls into pools by type of homogenous loans that do not exhibit any of the above described weaknesses. Loss rates are assigned based on historical loss rates over the prior five years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates. All potential losses are evaluated within a range of low to high. An unallocated reserve has been established to reflect other unidentified losses within the portfolio. This helps to offset the increased risk of loss associated with fluctuations in past due trends, changes in the local and national economies, and other unusual events. The Board approves the loan loss provision for the following quarter based on this evaluation and an effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process. Page 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The allowance for loan losses of $1,801,000 at September 30, 2006 is equal to .60% of loans held for investment. This compares to an allowance of $1,673,000 (.60%) at December 31, 2005. Management has funded the allowance at a rate of $20,000 per month throughout the year of 2006, for a total of $180,000. Total charge-offs, net of recoveries, equal $52,000 year to date. This is equivalent to an annualized loss rate of .02% of total loans. In recent years, the company has had an average loss rate of .08% which is less than one half the loss rate of its peer group. The overall level of the allowance is well below its peer group average. Management feels this is appropriate based on its loan loss history and the composition of its loan portfolio; the current allowance for loan losses is equal to approximately seven years of average loan losses. 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. 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 $19,617,000 since December 31, 2005. Time deposits increased $26,436,000 during this period while demand deposits and savings deposits decreased $6,819,000. The decrease in demand and savings deposits appears to be the result of customers moving funds from lower yielding savings accounts to higher yielding short term certificates of deposits. Due to the growth in its loan portfolio and competition for deposits within its market, the Bank has advertised several certificate of deposit rate specials to attract new funds. The Bank also continues to advertise a free checking account product. The growth in deposits appears to be a result of advertising of these accounts. SHORT-TERM DEBT Short-term debt consists of federal funds purchased, commercial repurchase agreements (repos.) and daily rate credit from the Federal Home Loan Bank (FHLB). 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. Daily rate credit from the FHLB has been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. LONG-TERM DEBT Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be an important source of funding real estate loan growth. The Company's subsidiary bank typically borrows funds on a fixed rate basis. These borrowings are used to match the maturities of its loan portfolio with the maturities of its debt and thus reduce its exposure to interest rate changes. Scheduled repayments totaled $6,585,000 through September 30, 2006. Additional borrowings of $5,000,000 were obtained to assist in funding the growth in the loans held for investment. In September 2002, the Company borrowed $3 million from SunTrust Bank. This loan carries an interest rate of LIBOR + 1.10% and is variable. Payments of $230,769 plus interest began in the second quarter of 2004 and will continue for a period of thirteen quarters. Proceeds of this loan were used primarily to provide a capital contribution to the Bank. 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. As of September 30, 2006, the Company's total risk based capital and total capital to total assets ratios were 13.57% and 9.81%, respectively. Both ratios are in excess of regulatory minimums and exceed the ratios of the Company's peers. Earnings have been satisfactory to allow an increase in the third quarter dividend in 2006 of 5.00%. Page 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 also maintains lines of credit with correspondent financial institutions. The Company's subsidiary bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. INTEREST RATE SENSITIVITY In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity. As of September 30, 2006, the Company had a cumulative Gap Rate Sensitivity Ratio of (15.41%) for the one year repricing period. This generally indicates that earnings would decrease in an increasing interest rate environment as liabilities reprice more quickly than assets. However, in actual practice, this may not be the case as loans tied to the prime rate of interest will reprice immediately with an increase in short term market rates, while deposit rates will remain stable until competitive market conditions dictate the necessity for an increase in rates. 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. STOCK REPURCHASE On June 12, 2003, the Board authorized the repurchase of 50,000 shares of the Company's outstanding common stock. Management has been authorized to repurchase shares from time to time in the open market or through privately negotiated transactions when market conditions warrant. The repurchased shares are accounted for as retired stock. On July 26, 2006, the Board of Directors approved an amendment to the share repurchase program. The amendment increases the number of shares of common stock that the Registrant can repurchase under the program from 50,000 to 100,000 shares. As of September 30, 2006, the Company had repurchased 69,862 shares of its common stock under the program. During the third quarter of 2006 26,787 shares were repurchased, at an average cost of $28.17 per share. EFFECT OF NEWLY ISSUED ACCOUNTING STANDARDS The Company does not believe that any newly issued but as yet unapplied accounting standards will have a material impact on the Company's financial position or operations. 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). Page 18 TABLE 1 F & M BANK CORP. NET INTEREST MARGIN ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended September 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005 ------------------------ ------------------------ ------------------------ ------------------------ Average Income/ Average Income/ Average Income/ Average Income/ Balance Expense Rates Balance Expense Rates Balance Expense Rates Balance Expense Rates -------- ------- ----- -------- ------- ----- -------- ------- ----- -------- ------- ----- Rate Related Income Loans held for investments (1, 2) $290,397 $15,388 7.07% $268,020 $12,975 6.45% $295,880 $5,383 7.28% $275,890 $4,586 6.65% Loans held for sale 188 9 6.38% 20,911 702 4.48% 28,978 354 4.89% Federal funds sold 1,486 54 4.85% 2,447 56 3.05% 2,667 34 5.10% 3,718 32 3.44% Bank deposits (2) 1,982 90 6.05% 4,305 69 2.14% 1,792 28 6.25% 3,191 24 3.01% Investments Taxable (3) 21,660 705 4.34% 23,042 580 3.36% 22,238 277 4.98% 22,272 188 3.38% Partially taxable (2, 3) 7,117 328 6.14% 6,988 362 6.91% 7,551 113 5.99% 6,991 131 7.50% Tax exempt (2, 3) 375 13 4.62% 375 13 4.62% 375 4 4.27% 375 4 4.27% -------- ------- ---- -------- ------- ---- -------- ------ ---- ------- ------ ---- Total Earning Assets 323,205 16,587 6.84% 326,088 14,757 6.03% 330,503 5,839 7.07% 341,415 5,319 6.23% -------- ------- ---- -------- ------- ---- -------- ------ ---- ------- ------ ---- Interest Expense Demand deposits 38,832 349 1.20% 38,837 164 .56% 39,412 149 1.51% 39,403 65 .66% Savings 39,514 351 1.18% 47,958 380 1.06% 35,865 102 1.14% 46,743 139 1.19% Time deposits 148,683 4,382 3.93% 128,279 2,925 3.04% 160,114 1,714 4.28% 132,077 1,050 3.18% Short-term debt 16,718 586 4.67% 31,282 743 3.17% 15,595 196 5.03% 43,883 396 3.61% Long-term debt 23,251 778 4.46% 28,121 902 4.28% 22,195 254 4.58% 26,357 284 4.31% -------- ------- ---- -------- ------- ---- -------- ------ ---- ------- ------ ---- Total Interest Bearing Liabilities 266,998 6,446 3.22% 274,477 5,114 2.48% 273,181 2,415 3.54% 288,463 1,934 2.68% -------- ------- ---- -------- ------- ---- -------- ------ ---- ------- ------ ---- Net Interest Income (1) $10,141 $ 9,643 $3,424 $3,385 ======= ======= ====== ====== Net Yield on Interest Earning Assets (1) 4.18% 3.94% 4.14% 3.97% ==== ==== ==== ====
(1) Interest income on loans includes loan fees. (2) An incremental tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable assets. (3) Average balance information is reflective of historical cost and has not been adjusted for changes in market value. Page 19 TABLE II F & M BANK CORP. INTEREST SENSITIVITY ANALYSIS SEPTEMBER 30, 2006 (IN THOUSANDS OF DOLLARS) The following table presents the Company's interest sensitivity.
0 - 3 4 - 12 1 - 5 OVER 5 NOT MONTHS MONTHS YEARS YEARS CLASSIFIED TOTAL ------- -------- -------- ------- ---------- -------- Uses of Funds Loans Commercial $46,700 $ 7,682 $ 80,830 $ 4,917 $______ $140,129 Installment 4,486 973 11,848 1,053 18,360 Real estate for investments 23,067 6,369 94,043 18,373 141,852 Credit cards 1,567 1,567 Federal funs sold Interest bearing bank deposits 777 594 396 1,767 Investment securities 4,992 5,049 13,068 7,161 30,270 ------- -------- -------- ------- ------- -------- Total 81,589 20,667 200,185 24,343 7,161 333,945 ------- -------- -------- ------- ------- -------- Sources of Funds Interest bearing demand deposits 14,229 23,273 4,522 42,024 Savings deposits 6,892 20,675 6,892 34,459 Certificates of deposit $100,000 and over 6,418 26,263 15,197 47,878 Other certificates of deposit 16,802 59,027 40,888 116,717 Short-term borrowings 13,015 13,015 Long-term borrowings 3,137 7,943 8,386 1,757 21,223 ------- -------- -------- ------- -------- Total 39,372 114,354 108,419 13,171 275,316 ------- -------- -------- ------- -------- Discrete Gap 42,217 (93,687) 91,766 11,172 7,161 58,629 Cumulative Gap 42,217 (51,470) 40,296 51,468 58,629 Ratio of Cumulative Gap to Total 12.64% (15.41)% 12.07% 15.41% 17.56% Earning Assets
Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2006. 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. Page 20 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 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. We have established our disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer, and the other executive officers of the Company and its subsidiaries to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company's operations. 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)-14(e) of the Securities Exchange Act of 1934), have concluded that the Company's disclosure controls and procedures are adequate and effective for purposes of Rule 13(a)-14(e) and timely, alerting them to financial information relating to the Company required to be included in the Company's filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934. CHANGES IN INTERNAL CONTROLS During the period reported upon, there were no significant changes in F & M Bank Corp.'s internal controls pertaining to its financial reporting and control of its assets or in other factors that could significantly affect these controls since the date of their evaluation. Due to the nature of the Company's business as stewards of assets of customers; internal controls are of the utmost importance. The Company has established procedures during the normal course of business to reasonably ensure that fraudulent activity of either a material amount to these results or in any amount is not occurring. In addition to these controls and review by executive officers, the Company retains the services of S. B. Hoover, LLP, a public accounting firm, to complete regular internal audits, which examine the processes and procedures of the Company and the Bank to ensure that these processes are reasonably effective to prevent internal or external fraud and that the processes comply with relevant regulatory guidelines of all relevant banking authorities. The findings of S. B. Hoover are presented to management of the Bank and to the Audit Committee of the Company. Page 21 Part II Other Information Item 1. Legal Proceedings - Not Applicable Item 1a. Risk Factors - There have been no material changes from the risk factors previously disclosed in Item 1a of the Corporation's Form 10k filed on March 24, 2006. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds- Not Applicable Item 3. Defaults Upon Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders- Not Applicable Item 5. Other Information - Not Applicable Item 6. Exhibits (a) EXHIBITS 3 i Restated Articles of Incorporation of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.'s 2001 Form 10K filed March 1, 2002. 3 ii Amended and Restated Bylaws of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.'s Form 10K filed March 1, 2002. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith). 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (filed herewith). (b) REPORTS FILED ON FORM 8-K None during the third quarter of 2006. Page 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. F & M BANK CORP. /s/ Dean W. Withers ---------------------------------------- Dean W. Withers President and Chief Executive Officer /s/ Neil W. Hayslett ---------------------------------------- Neil W. Hayslett Senior Vice President and Chief Financial Officer November 10, 2006 EX-31.1 2 l22908aexv31w1.txt EX-31.1 Page 23 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 USC SECTION 1350 (A) AND (B) I, Dean W. Withers, certify that: 1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2006 /s/ Dean W. Withers ---------------------------------------- Dean W. Withers President & Chief Executive Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request EX-31.2 3 l22908aexv31w2.txt EX-31.2 Page 24 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 USC SECTION 1350 (A) AND (B) I, Neil W. Hayslett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2006 /s/ Neil W. Hayslett ---------------------------------------- Neil W. Hayslett Senior Vice President & Chief Financial Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request EX-32 4 l22908aexv32.txt EX-32 Page 25 EXHIBIT 32 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) The undersigned, as the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer of F & M Bank Corp., respectively, certify that, to the best of each such individual's knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2006, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of F & M Bank Corp. at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law. /s/ Dean W. Withers ---------------------------------------- Dean W. Withers President and Chief Executive Officer /s/ Neil W. Hayslett ---------------------------------------- Neil W. Hayslett Senior Vice President & Chief Financial Officer November 10, 2006 -----END PRIVACY-ENHANCED MESSAGE-----