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