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F&M BANK CORP - Annual Report: 2009 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2009
Commission file number: 0-13273
F & M BANK CORP.
(Exact name of registrant as specified in its charter)
     
Virginia   54-1280811
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
P. O. Box 1111, Timberville, Virginia 22853
(Address of principal executive offices) (Zip Code)
(540) 896-8941
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock — $5 Par value per share
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Sarbanes Act. Yes o No þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No o
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting Company þ
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     The registrant’s Common Stock is traded Over-the-Counter under the symbol FMBM. The aggregate market value of the 2,193,453 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2009 was approximately $53,739,599 based on the closing sales price of $24.50 per share on that date. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant.
     As of the close of business on March 1, 2010, there were 2,295,828 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
     Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2010 (the “Proxy Statement”).
 
 

 


 

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 EX-21
 EX-31.1
 EX-31.2
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PART I
Item 1. Business
General
F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one-bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and owns 100% of the outstanding stock of its affiliate, Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services, Inc. (FMFS) are wholly owned subsidiaries of Farmers & Merchants Bank. Farmers & Merchants Bank also holds a majority ownership in VBS Mortgage LLC. (VBS).
Farmers & Merchants Bank was chartered on April 15, 1908, as a state chartered bank under the laws of the Commonwealth of Virginia. TEB was incorporated on January 27, 1988, as a captive life insurance company under the laws of the State of Arizona. FMFS is a Virginia chartered corporation and was incorporated on February 25, 1993. VBS (formerly Valley Broker Services, Inc.) was incorporated on May 11, 1999. The Bank purchased a majority interest in VBS on November 3, 2008.
The Bank offers all services normally offered by a full-service commercial bank, including commercial and individual demand and time deposit accounts, repurchase agreements for commercial customers, commercial and individual loans, and drive-in banking services. TEB was organized to re-insure credit life and accident and health insurance currently being sold by the Bank in connection with its lending activities. FMFS was organized to write title insurance but now provides brokerage and other financial services to customers of Farmers & Merchants Bank. VBS originates conventional and government sponsored mortgages through their office in Harrisonburg.
The Bank makes various types of commercial and consumer loans and has a heavy concentration of residential and agricultural real estate loans. The local economy is relatively diverse with strong employment in the agricultural, manufacturing, service and governmental sectors.
The Company’s and the Bank’s principal executive office is at 205 South Main Street, Timberville, VA 22853, and its phone number is (540) 896-8941.
Filings with the SEC
The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”). These reports are posted and are available at no cost on the Company’s website, www.farmersandmerchants.biz, as soon as reasonably practicable after the Company files such documents with the SEC. The Company’s filings are also available through the SEC’s website at www.sec.gov.
Employees
On December 31, 2009, the Bank had 138 full-time and part-time employees; including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers their employee relations to be excellent. No one employee devotes full-time services to F&M Bank Corp.
Competition
The Bank’s offices face strong competition from numerous other financial institutions. These other institutions include large national and regional banks, other community banks, nationally chartered savings banks, credit unions, consumer finance companies, mortgage companies, loan production offices, mutual funds and life insurance companies. Competition for loans and deposits is affected by a variety of factors including interest rates, types of products offered, the number and location of branch offices, marketing strategies and the reputation of the Bank within the communities served.
Regulation and Supervision
General. The operations of F & M Bank Corp. and the Bank are subject to federal and state statutes, which apply to state member banks of the Federal Reserve System.

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The stock of F & M Bank Corp. is subject to the registration requirements of the Securities Act of 1934. F & M Bank Corp. is subject to the periodic reporting requirements of the Securities Exchange Act of 1934. These include, but are not limited to, the filing of annual, quarterly and other current reports with the Securities and Exchange Commission. As an Exchange Act reporting company, the Corporation is directly affected by the Sarbanes-Oxley Act of 2002, which is aimed at improving corporate governance and reporting procedures. The Corporation is complying with SEC and other rules and regulations implemented pursuant to Sarbanes-Oxley and intends to comply with any applicable rules and regulations implemented in the future.
F & M Bank Corp., as a bank holding company, is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “Act”). It is registered as such and is supervised by the Federal Reserve Board. The Act requires F & M Bank Corp. to secure the prior approval of the Federal Reserve Board before F & M Bank Corp. acquires ownership or control of more than 5% of the voting shares or substantially all of the assets of any institution, including another bank.
As a bank holding company, F & M Bank Corp. is required to file with the Federal Reserve Board an annual report and such additional information as it may require pursuant to the Act. The Federal Reserve Board may also conduct examinations of F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the 1970 Amendments to the Act and the regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, provision of credit, sale or lease of property or furnishing of services.
Federal Reserve Board regulations permit bank holding companies to engage in non-banking activities closely related to banking or to managing or controlling banks. These activities include the making or servicing of loans, performing certain data processing services, and certain leasing and insurance agency activities. Since 1994, the Company has entered into agreements with the Virginia Community Development Corporation to purchase equity positions in several Low Income Housing Funds; these funds provide housing for low-income individuals throughout Virginia. Approval of the Federal Reserve Board is necessary to engage in any of the activities described above or to acquire interests engaging in these activities.
The Bank as a state member bank is supervised and regularly examined by the Virginia Bureau of Financial Institutions and the Federal Reserve Board. Such supervision and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Board is intended primarily for the protection of depositors and not for the stockholders of F & M Bank Corp.
Payment of Dividends. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company. Under the current regulatory guidelines, prior approval from the Board of Governors of the Federal Reserve System is required if cash dividends declared in any given year exceed net income for that year, plus retained net profits of the two preceding years. The payment of dividends by the Bank or the Company may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines.
Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting their businesses. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice. Based on the Bank’s current financial condition, the Company does not expect that any of these laws will have any impact on its ability to obtain dividends from the Bank.
Capital Requirements. The Federal Reserve has issued risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements, the Company and Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be “Tier 1 capital”, which consists principally of common and certain qualifying preferred shareholders’ equity (including Trust Preferred Securities), less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2009 were 9.01% and 10.65%, respectively, exceeding the minimum requirements.

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In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average adjusted assets) (“Tier 1 leverage ratio”). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2009, was 7.08%, which is above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The Gramm-Leach-Bliley Act. Effective on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB Act”) allows a bank holding company or other company to certify status as a financial holding company, which will allow such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker; underwriting; dealing in or making markets in securities; and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.
USA Patriot Act of 2001. In October, 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Northern Virginia which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Community Reinvestment The requirements of the Community Reinvestment Act are also applicable to the Bank. The act imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.
Forward-Looking Statements
F & M Bank Corp. makes forward-looking statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other portions of this Annual Report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include: estimates of risks and of future costs and benefits; assessments of probable loan losses and statements of goals and expectations. These forward-looking statements are subject to significant uncertainties because they are based upon management’s estimates and projections of future interest rates and other economic conditions; future laws and regulations; and a variety of other matters. As a result of these uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate its future results.

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Item 1A. Risk Factors
General economic conditions, either national or within the Company’s local markets.
The Company is affected by general economic conditions in the United States and the local markets within which it operates. An economic downturn within the Company’s markets, or the nation as a whole; a significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond the Company’s control could negatively impact the growth rate of loans and deposits, the quality of the loan portfolio, loan and deposit pricing and other key factors of the Company’s business. Such negative developments could adversely impact the Company’s financial condition and performance.
Changes in interest rates could affect the Company’s income and cash flows.
The direction and speed of interest rate changes affects our net interest margin and net interest income. Typically, in a period of declining interest rates our net interest income is negatively affected in the short term as our interest earning assets (primarily loans and investment securities) reprice more quickly than our interest bearing liabilities (deposits and borrowings).
We attempt to mitigate this risk by maintaining a neutral position regarding the volume of assets and liabilities that mature or reprice during any period; however, interest rate fluctuations, loan prepayments, loan production and deposit flows constantly change and influence the ability to maintain a neutral position. Generally speaking, the Company’s earnings will be more sensitive to fluctuations in interest rates the greater the variance in volume of assets and liabilities that mature and reprice in any period. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company’s net interest margin may be impacted.
The Company faces substantial competition that could adversely affect the Company’s growth and/or operating results.
The Company operates in a competitive market for financial services and faces intense competition from other financial institutions both in making loans and in attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, have established customer bases, and have greater financial resources and lending limits.
There could be an adverse effects on the way in which we do business if we do not maintain our capital requirements and our status as a ‘well-capitalized” bank.
The Bank is subject to regulatory capital adequacy guidelines. If the Bank fails to meet the capital adequacy guidelines for a “well-capitalized” bank, it could increase the regulatory scrutiny for the Bank and the Company; increase our FDIC insurance premiums, and could lead to a decline in the confidence that our customers have in us and a reduction in the demand for our products and services.
The inability of the Company to successfully manage its growth or implement its growth strategy may adversely affect the result of operations and financial conditions.
The Company may not be able to successfully implement its growth strategy if unable to identify attractive markets, locations or opportunities to expand in the future. The ability to manage growth successfully also depends on whether the Company can maintain capital levels adequate to support its growth, maintain cost controls, asset quality and successfully integrate any businesses acquired into the organization.
As the Company continues to implement its growth strategy by opening new branches it expects to incur increased personnel, occupancy and other operating expenses. The Company must absorb those higher expenses while it begins to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, the Company’s plans to branch could depress earnings in the short run, even if it efficiently executes a branching strategy leading to long-term financial benefits.

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The Company’s exposure to operational risk may adversely affect the Company.
Similar to other financial institutions, the Company is exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
The Company’s concentration in loans secured by real estate may adversely impact earnings due to changes in the real estate markets.
The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of the Company’s loans are secured by real estate (both residential and commercial) in the Company’s market area. A major change in the real estate market, resulting in deterioration in the value of this collateral, or in the local or national economy, could adversely affect the customers’ ability to pay these loans, which in turn could impact the Company. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and the Company tries to limit its exposure to this risk by monitoring extensions of credit carefully. The Company cannot fully eliminate credit risk, and as a result credit losses may occur in the future.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact the Company or the businesses in which the Company is engaged.
The Company is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Additionally, actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defending itself and may lead to penalties that materially affect the Company and its shareholders. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse to the Company and its shareholders.
Changes in accounting standards could impact reported earnings.
The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Item 1B. Unresolved Staff Comments
The Company does not have any unresolved staff comments to report for the year ended December 31, 2009.

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Item 2. Description of Properties
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
     
Timberville Main Office   Elkton Branch
205 South Main Street   127 West Rockingham Street
Timberville, VA 22853   Elkton, VA 22827
     
Broadway Branch   Port Road Branch
126 Timberway   1085 Port Republic Road
Broadway, VA 22815   Harrisonburg, VA 22801
     
Bridgewater Branch   Edinburg Branch
100 Plaza Drive   120 South Main Street
Bridgewater, VA 22812   Edinburg, VA 22824
     
Woodstock Branch   Crossroads Branch
161 South Main Street   80 Cross Keys Road
Woodstock, VA 22664   Harrisonburg, VA 22801
     
Luray Branch    
700 East Main Street    
Luray, VA 22835    
With the exception of the Edinburg Branch, Port Road Branch and the Luray Branch, all facilities are owned by Farmers & Merchants Bank. ATMs are available at all locations.
Through an agreement with Nationwide Money ATM Services, the Bank also operates cash only ATMs at five Food Lion grocery stores, one in Mt. Jackson, VA and four in Harrisonburg, VA.
VBS’ office is located at:
Harrisonburg Office
2040 Deyerle Avenue

     Suite 102
Harrisonburg, VA 22801
Item 3. Legal Proceedings
In the normal course of business, the Company may become involved in litigation arising from banking, financial, or other activities of the Company. Management after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company during the fourth quarter of the period covered by this report.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Stock Listing
The Company’s Common Stock trades under the symbol “FMBM” on the OTC Bulletin Board. The bid and asked price of the Company’s stock is not published in any newspaper. Although several firms in both Harrisonburg and Richmond, Virginia occasionally take positions in the Company stock, they typically only match buyers and sellers.

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Transfer Agent and Registrar
Farmers & Merchants Bank
205 South Main Street
P.O. Box 1111
Timberville, VA 22853
Stock Performance
The following graph compares the cumulative total return to the shareholders of the Company for the last five fiscal years with the total return of the Russell 2000 Index and the SNL Bank Index, as reported by SNL Financial, LC, assuming an investment of $100 in the Company’s common stock on December 31, 2003, and the reinvestment of dividends.
(GRAPH)
                                                 
    Period Ending December 31,
Index   2004   2005   2006   2007   2008   2009
F & M Corp
    100.00       102.85       114.67       129.94       130.24       102.25  
Russell 2000
    100.00       104.55       123.76       121.82       80.66       102.58  
SNL Bank Index
    100.00       101.36       118.57       92.14       52.57       52.03  
Recent Stock Prices and Dividends
Dividends to shareholders totaled $1,743,000 and $2,083,000 in 2009 and 2008, respectively. Regular quarterly dividends have been declared for fifty six consecutive quarters. In the third quarter of 2009 dividends per share were reduced from $.23 to $.15 per quarter. This decrease was the result of reduced earnings and an effort to bring the dividend payout ratio within stated goals. Dividends per share decreased 16% in 2009.
The ratio of dividends per share to net income per share was 89.18% in 2009, compared to 65.01% in 2008. The decision as to timing, amount and payment of dividends is at the discretion of the Company’s Board of Directors. The payment of dividends depends on the earnings of the Company and its subsidiaries, the financial condition of the Company and other factors including capital adequacy, regulatory requirements, general economic conditions and shareholder returns.

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Stock Repurchases
As previously reported, on September 18, 2008, the Company’s Board of Directors approved an increase in the number of shares of common stock that the Company can repurchase under the share repurchase program from 150,000 to 200,000 shares. Shares repurchased through the end of 2009 totaled 164,132 shares; of this amount, 2,122 shares were repurchased in 2009, at an average cost of $25.58 per share.
The number of common shareholders of record was approximately 1,725 as of March 1, 2010. This amount includes all shareholders, whether titled individually or held by a brokerage firm or custodian in street name.
Quarterly Stock Information
These quotes include the terms of trades transacted through a broker. The terms of exchanges occurring between individual parties may not be known to the Company.
                                                 
    2009     2008  
    Per Share Range     Per Share     Stock Price Range     Per Share  
Quarter   Low     High     Dividend     Low     High     Dividend  
1st
    20.00       30.75     $ .23       29.50       32.05     $ .22  
2nd
    22.00       28.15       .23       31.75       32.50       .22  
3rd
    22.95       26.65       .15       30.10       33.00       .23  
4th
    20.00       24.90       .15       28.80       31.50       .23  
 
                                           
Total
                  $ .76                     $ .90  
 
                                           

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Item 6. Selected Financial Data
Five Year Summary of Selected Financial Data
                                         
(Dollars in thousands, except per share data)   2009     2008     2007     2006     2005  
Income Statement Data:
                                       
Interest and Dividend Income
  $ 27,516     $ 25,544     $ 24,635     $ 22,526     $ 19,878  
Interest Expense
    10,182       10,498       11,043       9,091       6,998  
 
                             
 
                                       
Net Interest Income
    17,334       15,046       13,592       13,435       12,880  
Provision for Loan Losses
    4,210       815       270       240       360  
 
                             
 
                                       
Net Interest Income after Provision for Loan Losses
    13,124       14,231       13,322       13,195       12,520  
Noninterest Income
    3,111       3,169       3,215       2,754       2,643  
Securities Gains (Losses)
    (1,754 )     (1,680 )     101       193       71  
Noninterest Expenses
    12,188       11,097       10,532       9,688       8,608  
 
                             
 
                                       
Income before Income Taxes
    2,293       4,623       6,106       6,454       6,626  
Income Tax Expense
    339       1,419       1,653       1,925       1,846  
 
                             
Net Income
  $ 1,954     $ 3,204     $ 4,453     $ 4,529     $ 4,780  
 
                             
 
                                       
Per Share Data:
                                       
Net Income
  $ .85     $ 1.38     $ 1.89     $ 1.90     $ 1.99  
Dividends Declared
    .76       .90       .86       .82       .78  
Book Value
    16.99       15.64       16.71       16.05       15.22  
 
                                       
Balance Sheet Data:
                                       
Assets
  $ 539,223     $ 472,058     $ 386,727     $ 375,924     $ 346,328  
Loans Held for Investment
    434,403       399,233       317,180       309,461       277,398  
Loans Held for Sale
    31,168       3,780                   3,528  
Securities
    26,230       30,785       36,614       37,373       34,921  
Deposits
    420,643       342,225       298,560       289,522       267,310  
Short-Term Debt
    9,085       20,510       12,743       11,717       14,345  
Long-Term Debt
    63,096       65,331       29,714       29,247       22,808  
Shareholders’ Equity
    39,002       36,305       39,165       38,105       36,567  
Average Shares Outstanding
    2,292       2,319       2,360       2,386       2,404  
 
                                       
Financial Ratios:
                                       
Return on Average Assets1
    .38 %     .75 %     1.17 %     1.26 %     1.34 %
Return on Average Equity1
    5.10 %     8.50 %     11.53 %     12.13 %     13.56 %
Net Interest Margin
    3.70 %     3.89 %     3.94 %     4.17 %     4.01 %
Efficiency Ratio 2
    57.74 %     58.60 %     60.31 %     57.45 %     53.07 %
Dividend Payout Ratio
    89.18 %     65.01 %     45.60 %     43.12 %     38.70 %
 
                                       
Capital and Credit Quality Ratios:
                                       
Average Equity to Average Assets1
    7.37 %     8.85 %     10.05 %     10.36 %     9.86 %
Allowance for Loan Losses to Loans3
    .88 %     .55 %     .54 %     .58 %     .60 %
Nonperforming Assets to Total Assets
    1.42 %     1.01 %     1.11 %     .58 %     .20 %
Net Charge-offs to Total Loans3
    .59 %     .08 %     .11 %     .04 %     .07 %
 
1   Ratios are primarily based on daily average balances.
 
2   The Efficiency Ratio equals noninterest expenses divided by the sum of tax equivalent net interest income and noninterest income. Noninterest expenses exclude intangible asset amortization. Noninterest income excludes gains (losses) on securities transactions.
 
3   Calculated based on Loans Held for Investment, excludes Loans Held for Sale.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of F & M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.
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. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.
In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 (formerly SFAS No. 5) “Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 (formerly SFAS No. 114), “Receivables", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
The Company’s allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management’s estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.
Allowances for commercial loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the commercial loan portfolio. Allowances are provided for noncommercial loan categories using estimated loss factors applied to the total outstanding loan balance of each loan category. Specific allowances are typically provided on all impaired commercial loans in excess of a defined threshold that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.
While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued ASC 805 (formerly SFAS No. 141), Business Combinations and ASC 350 (formerly SFAS No. 142), Intangibles. ASC 850 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 was effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
The Company adopted ASC 350 on January 1, 2002. Goodwill totaled $2,639,000 at January 1, 2002. As of December 31, 2008, the Company recognized $30,000 in additional goodwill related to the purchase of 70% ownership in VBS Mortgage. The goodwill is not amortized but is tested for impairment at least annually. Based on this testing, there were no impairment charges for 2009 or 2008. Application of the non-amortization provisions of the Statement resulted in additional net income of $120,000 for each of the years ended December 31, 2009, 2008 and 2007.
Core deposit intangibles are amortized on a straight-line basis over a ten year life. Core deposit intangible, net of amortization, amounted to $322,000 and $598,000 at December 31, 2009 and 2008, respectively. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over its estimated useful life.
Securities Impairment
     The Company follows the guidance in ASC 320-10 and SAB Topic 5M, Other Than Temporary Impairment in evaluating if these impairments are temporary or other than temporary in nature. This determination is made on an investment by investment basis and includes all available evidence at the time of the determination including the following:
    The length of time of impairment;
 
    The extent of the impairment relative to the cost of the investment;
 
    Recent volatility in the market value of the investment;
 
    The financial condition and near-term prospects of the issuer, including any specific events which may impair the earnings potential of the issuer; or
 
    The intent and ability of the Company to hold its investment for a period of time sufficient to allow for any anticipated recovery in market value.
The following description provides our revised policies/procedures for the evaluation for Other Than Temporary Impairment (OTTI) for the quarter ended September 30, 2009 and for subsequent periods:
    We begin our evaluation using a default position that OTTI has occurred and then use all available evidence to determine whether prospects for the individual security are sufficient to support temporary impairment at the date of the SEC filing. This evaluation is conducted at each filing date.
 
    For purposes of determining OTTI, the security value recovery period is projected for a maximum of a two year holding period. This is the maximum; a shorter period may be used when there are particular conditions related to the individual security which make recovery unlikely.
 
    The primary focus in determining whether a security is OTTI, and projecting potential recovery, is the prospects for the individual security, rather than broad market indices. All available evidentiary material is considered, including the Company’s public filings with the SEC, press releases, analyst reports, etc.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Securities Impairment, continued
    Secondary consideration is given to historic returns, but only to the extent that this evidence is instructive in determining whether the individual security has shown a history of outperforming (or underperforming) the market (or industry) in prior economic cycles. This factor is only considered when the declines in value were not limited to the individual security, but were prevalent over the broader market. This measure is considered to aid in determining whether OTTI should be recognized earlier, rather than later (ie. a security which underperforms relative to the industry or market will result in early recognition of OTTI). In no event will OTTI recognition be delayed beyond the two year projection period.
 
    OTTI may be recognized as early as quarter 1, regardless of holding period projections, when there are specific factors relative to the security which make recovery unlikely. These factors could include evidence contained in the aforementioned SEC filings, press releases, analyst reports, but may also be based on the severity of the impairment.
 
    Situations where a security has declined in value more rapidly than the industry (or market), absent strong evidence supporting prospects for recover, will result in OTTI being recognized in quarter 1 or quarter 2 rather than continuing to evaluate the security over several quarters, based on holding period projections.
Declines determined to be other than temporary are charged to operations and included in the gain (loss) on security sales. Such charges were $1,751,000 for 2009, $1,759,000 for 2008 and $171,000 for 2007.
Overview
The Company’s net income for 2009 totaled $1,954,000 or $.85 per share, down 39% from $3,204,000 or $1.38 a share in 2008. Return on average equity decreased in 2009 to 5.10% versus 8.50% in 2008, while the return on average assets decreased from .75% to .38%. The Company’s operating earnings, which are net earnings excluding gains (losses) on the sale of investments, non-recurring tax entries and other non-recurring income was $3,095,000 in 2009 versus $4,293,000 in 2008, a decrease of 27.9%. Core profitability decreased due to the increase in the provision for loan and lease losses and increased FDIC deposit insurance assessment. These amounts were partially offset by growth in net interest income, which was driven by the significant loan portfolio growth of the Bank.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
See page 10 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
                 
    2009     2008  
    to 2008     to 2007  
Prior Year Net Income Per Share
  $ 1.38     $ 1.89  
Change from differences in:
               
Net interest income
    1.07       .73  
Provision for credit losses
    (1.49 )     (.24 )
Noninterest income, excluding securities gains
    (.01 )     (.01 )
Securities gains
    (.05 )     (.76 )
Noninterest expenses
    (.51 )     (.32 )
Income taxes
    .46       .09  
 
           
Total Change
    (.53 )     (.51 )
 
           
Net Income Per Share
  $ .85     $ 1.38  
 
           
Net Interest Income
The largest source of operating revenue for the Company is net interest income, which is calculated as the difference between the interest earned on earning assets and the interest expense paid on interest bearing liabilities. The net interest margin is the net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and interest bearing liabilities, along with their yields and rates, have a significant impact on the level of net interest income.
Net interest income for 2009 was $17,518,000 representing an increase of $2,221,000 or 14.52%. A 10.92% increase in 2008 versus 2007 resulted in total net interest income of $15,297,000. In this discussion and in the tabular analysis of net interest income performance, entitled “Consolidated Average Balances, Yields and Rates,” (found on page 15), the interest earned on tax exempt loans and investment securities has been adjusted to reflect the amount that would have been earned had these investments been subject to normal income taxation. This is referred to as tax equivalent net interest income.
Loans held for investment, expressed as a percentage of total earning assets, decreased slightly in 2009 to 88.65% as compared to 90.44% in 2008. Tax equivalent income on earning assets increased $1,905,000, supported by the increase in loan income of $2,677,000.
During 2009, yields on earning assets decreased 71 basis points (BP), primarily due to a .60BP decrease in the yield on loans held for investment. This decrease is consistent with declining market rates resulting from Federal Reserve interest rate cuts and a slowing economy.
The average cost of interest bearing liabilities decreased 69BP in 2009, following a decrease of 66BP in 2008. The decrease in average cost resulted from maturing liabilities repricing at lower rates following action by the Federal Reserve’s Federal Open Market Committee (FOMC), which cut the Federal Funds rate on seven occasions in 2008. These rate cuts were in response to the aforementioned slowing in the national economy following the subprime mortgage crisis and resulting capital markets crisis.
The analysis on the next page reveals a decrease in net interest margin to 3.70% in 2009 primarily due to changes in balance sheet leverage as loan growth was funded primarily by increasing long-term debt and through the higher rate Platinum Rewards Checking product which caused a 30BP increase in the average cost of interest bearing demand accounts.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Consolidated Average Balances, Yields and Rates1
                                                                         
    2009     2008     2007  
    Balance     Interest     Rate     Balance     Interest     Rate     Balance     Interest     Rate  
ASSETS
                                                                       
Loans:2
                                                                       
Commercial 
  $ 172,883       9,382       5.43 %   $ 128,815       7,976       6.19 %   $ 98,027       7,629       7.78 %
Real estate
    217,677       13,473       6.19 %     195,743       13,061       6.67 %     185,383       12,415       6.70 %
Installment
    28,945       2,663       9.20 %     31,239       2,735       8.76 %     29,516       2,606       8.83 %
 
                                                     
 
Loans held for investment
    419,505       25,518       6.08 %     355,797       23,772       6.68 %     312,926       22,650       7.24 %
Loans held for sale
    29,619       1,169       3.95 %     5,816       238       4.09 %     296       22       7.43 %
 
Investment securities:3 Fully taxable
    15,602       720       4.61 %     19,813       1,101       5.56 %     23,743       1,341       5.65 %
Partially taxable
    3,542       267       7.54 %     6,583       509       7.73 %     7,116       488       6.86 %
Tax exempt
    38       3       7.89 %     169       8       4.73 %     287       14       4.88 %
 
                                                     
 
Total investment securities
    19,182       990       5.16 %     26,565       1,618       6.09 %     31,146       1,843       5.92 %
 
Interest bearing deposits in banks
    924       16       1.73 %     2,426       117       4.82 %     1,821       123       6.75 %
Federal funds sold
    3,964       7       .18 %     2,821       50       1.77 %     3,960       196       4.95 %
 
                                                     
Total Earning Assets
    473,194       27,700       5.85 %     393,425       25,795       6.56 %     350,149       24,834       7.09 %
 
                                                     
 
Allowance for loan losses
    (3,132 )                     (1,946 )                     (1,747 )                
Nonearning assets
    37,962                       34,748                       32,972                  
 
                                                                 
Total Assets
  $ 508,024                     $ 426,227                     $ 381,374                  
 
                                                                 
                                                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                                                  
Deposits:
                                                                       
Demand –interest bearing
  $ 78,556     $ 1,306       1.66 %   $ 58,682     $ 798       1.36 %   $ 52,857     $ 1,172       2.22 %
Savings
    32,650       202       .62 %     30,073       293       .97 %     30,457       331       1.09 %
Time deposits
    218,396       6,294       2.88 %     169,978       6,955       4.09 %     168,005       7,819       4.65 %
 
                                                     
Total interest bearing deposits
    329,602       7,802       2.37 %     258,733       8,046       3.11 %     251,319       9,322       4.00 %
 
                                                                       
Short-term debt
    14,700       78       .53 %     23,622       456       1.93 %     11,040       502       4.55 %
Long-term debt
    67,320       2,302       3.42 %     50,135       1,996       3.98 %     26,940       1,219       4.52 %
 
                                                     
 
                                                                       
Total interest bearing liabilities
    411,622       10,182       2.47 %     332,490       10,498       3.16 %     289,299       11,043       3.82 %
 
                                                     
 
Noninterest bearing deposits
    51,124                       49,557                       46,465                  
Other liabilities
    6,929                       6,469                       6,975                  
 
                                                                 
 
                                                                       
Total liabilities
    469,675                       388,516                       342,739                  
Stockholders’ equity
    38,349                       37,711                       38,635                  
 
                                                                 
Total liabilities and stock-holders’ equity
  $ 508,024                     $ 426,227                     $ 381,374                  
 
                                                                 
Net interest earnings
          $ 17,518                     $ 15,297                     $ 13,791          
 
                                                                 
Net yield on interest earning assets (NIM)
                    3.70 %                     3.89 %                     3.94 %
 
                                                                 
 
1   Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate.
 
2   Interest income on loans includes loan fees.
 
3   Average balance information is reflective of historical cost and has not been adjusted for changes in market value.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
The following table illustrates the effect of changes in volumes and rates.
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
    Increase (Decrease)     Increase (Decrease)  
    Due to Change             Increase     Due to Change         Increase  
    in Average:             or     in Average             or  
    Volume     Rate     (Decrease)     Volume     Rate     (Decrease)  
Interest income
                                               
Loans held for investment
  $ 4,256     $ (2,510 )   $ 1,746     $ 3,104     $ (1,982 )   $ 1,122  
Loans held for sale
    974       (43 )     931       410       (194 )     216  
Investment securities:
                                               
Taxable
    (234 )     (147 )     (381 )     (222 )     (18 )     (240 )
Partially taxable
    (235 )     (7 )     (242 )     (37 )     58       21  
Tax exempt
    (6 )     1       (5 )     (6 )             (6 )
Interest bearing deposits in banks
    (72 )     (29 )     (101 )     41       (47 )     (6 )
Federal funds sold
    20       (63 )     (43 )     (56 )     (90 )     (146 )
 
                                   
Total Interest Income
    4,703       (2,798 )     1,905       3,234       (2,273 )     961  
 
                                   
 
                                               
Interest expense
                                               
Deposits:
                                               
Demand
    270       238       508       129       (503 )     (374 )
Savings
    25       (116 )     (91 )     (4 )     (34 )     (38 )
Time deposits
    1,980       (2,641 )     (661 )     92       (956 )     (864 )
 
Short-term debt
    (172 )     (206 )     (378 )     572       (618 )     (46 )
Long-term debt
    684       (378 )     306       1,048       (271 )     777  
 
                                   
Total Interest Expense
    2,787       (3,103 )     (316 )     1,837       (2,382 )     (545 )
 
                                   
Net Interest Income
  $ 1,916     $ 305     $ 2,221     $ 1,397     $ 109     $ 1,506  
 
                                   
 
Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change.
Interest Income
Tax equivalent interest income increased $1,905,000 or 7.39% in 2009, after increasing 3.87% or $961,000 in 2008. Overall, the yield on earning assets decreased .71%, from 6.56% to 5.85%. Average loans outstanding grew at a record pace during 2009, with average loans outstanding increasing $63,708,000 to $419,505,000. Real estate loans increased 11.21% and commercial loans increased 34.21%. Combined these categories accounted for the total increase in year ending loans. The increase in both residential real estate and commercial loans is primarily the result of market conditions. Market conditions contributed as other banks began to pull back on lending due to their rising loan losses or exposure to subprime lending..
Average total securities, yielding 5.16%, decreased $7,383,000 during 2009. Proceeds from the sale and maturity of investment securities were used to fund (in part) the growth in the loan portfolio. Income on loans held for sale totaled $1,169,000, as compared to the $238,000 during 2008. The bank entered into this participation arrangement as a higher yielding alternative to federal funds sold. Due to the slowdown in secondary market lending, there was very little activity on this participation commitment during 2008. However, as market rates began to fall in the early part of 2009 the originating bank had an increased need for participating banks to fund a portion of these loans. The Bank purchases a 95% participation interest in these loans. These participations are short-term, real estate loan participations that have an average life of approximately ten days. The Bank holds its participation interest in these loans during the period of time between loan closing and when the loan is paid off by the secondary market purchaser.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Interest Expense
Interest expense decreased $316,000 or 3.01% during 2009, which followed a 4.94% decrease $545,000 in 2008. The average cost of funds of 2.47% decreased .69% compared to 2008. Average interest bearing liabilities increased $79,132,000 in 2009 following an increase of $43,191,000 in 2008. The increase in interest bearing liabilities was primarily the result of an increase in interest bearing demand deposits, time deposits and long term debt. Interest bearing demand deposits increased primarily due to the aforementioned Platinum Rewards Checking product. This product pays an above market interest rate, but rewards the customer to adopt certain behaviors that either drive down operating expenses or drive up non-interest income for the Bank. Interest expense of demand deposits increased $508,000 (63.6%), while the average balance in interest bearing demand deposits increased $19.9 million in 2009.
Time deposits increased primarily due to the Bank’s participation in the Certificate of Deposit Account Registry Service (CDARS), which through reciprocal agreements among banks allows customers to gain access to significantly higher levels of FDIC deposit insurance coverage. Due to declining rates, both locally and nationally, the expense associated with time deposits decreased $661,000 (9.5%) in 2009, in spite of an increase in balances of $48.4 million.
Long term debt increased $17.2 million as the Bank supported its lending growth and converted some of its short term debt to long term at favorable market rates. Expense of long-term debt increased $306,000 in 2009 after an increase of $777,000 in 2008. The average cost of long term debt declined from 3.98% in 2008 to 3.42% in 2009. The Company borrowed $30,115,000 in 2009 and $39,747,000 in 2008. Changes in the cost of funds attributable to rate and volume variances can be found in the table at the top of page 16.
Noninterest Income
Noninterest income continues to be an increasingly important factor in maintaining and growing profitability. Management is conscious of the need to constantly review fee income and develop additional sources of complementary revenue. The Bank continues to enjoy significant revenue from its subsidiary Farmers & Merchants Financial Services (FMFS). However, gross revenue for FMFS decreased $87,000 in 2009. This decrease resulted primarily from a reduction in brokerage income as sales of investment products declined due to concerns over stock market volatility and the slowing of the national economy.
Exclusive of losses, non-interest income decreased 1.83% ($58,000) in 2009 following an decrease of 1.43% in 2008. Investments in bank owned life insurance (BOLI) on officers of the Company resulted in tax-free income of $331,000 and $336,000 in 2009 and 2008, respectively. Investments in low income housing projects resulted in non-interest income of $193,000 in 2009 and $102,000 in 2008, an increase of $91,000.
Securities transactions in 2009 resulted in losses of $1,754,000 after recognition of impairment write-downs totaling $1,751,000 on several holdings within the equities portfolio. This followed a loss of $1,681,000 in 2008. The losses within the securities portfolio were not the result of securities actually sold, but due to the recognition of Other Than Temporary Impairment (OTTI) losses on securities that declined significantly in value. Typically securities are considered impaired when their value has been significantly below cost for over a year. Based on the losses already recognized in 2008 and 2009, there is minimal risk of additional significant OTTI in 2010.
Noninterest Expense
Noninterest expenses increased from $11,097,000 in 2008 to $12,188,000 in 2009, a 9.83% increase. Salary and benefits increased 1.60% to $6,728,000 in 2009 and 5.77% in 2008. The 2009 increase resulted from additions to staff to support Bank growth and expansion, and increases in insurance cost, offset by reduced bonus compensation. Occupancy and equipment expense increased 1.1% ($13,000) in 2009, following a 5.85% increase in 2008.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Noninterest Expense, continued
The FDIC insurance assessment increased $791,000 in 2009 to $935,000. This increase was a result of increases in the standard assessment rates and a special assessment enacted by the FDIC to cover expenses to the fund resulting from failed institutions. Other operating expense increased $182,000 in 2009, following a $164,000 increase in 2008. Much of the increase was due to increases in data processing and legal fees. During 2009, noninterest expenses dropped as a percentage of total assets due to the rapid growth in total assets. Noninterest expenses continue to be substantially lower than peer group averages. Total noninterest expense as a percentage of average assets totaled 2.41%, 2.60%, and 2.76%, in 2009, 2008 and 2007, respectively. Peer group averages have ranged between 3.14% and 3.45% over the same time period.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and volume of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance for loan losses include internally generated loan review reports, past due reports and historical loan loss experience. This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates nonperforming loans relative to their collateral value and makes the appropriate adjustments to the allowance for loan losses when needed. Based on the factors outlined above, the current year provision for loan losses increased from $815,000 in 2008 to $4,210,000 in 2009. The increase in the provision for loan losses and the current levels of the allowance for loan losses reflect specific reserves related to nonperforming loans, changes in risk rating on loans, net charge-off activity, loan growth, delinquency trends and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses
Actual net loan charge-offs were $2,563,000 in 2009 and $329,000 in 2008. Loan losses as a percentage of average loans held for investment totaled .61% and .09% in 2009 and 2008, respectively. This loss rate is significantly better than peer group averages which were 1.12% in 2009 and .84% in 2008.
Balance Sheet
Total assets increased 14.22% during the year to $539,223,000, an increase of $67,165,000 from $472,058,000 in 2008. Earning assets increased 14.93% or $65,001,000 to $500,502,000 at December 31, 2009. Virtually all of the increase in earning assets resulted from growth in the portfolio of loans held for investment and loans held sale which increased $35,170,000 and $27,387,000, respectively. Deposit growth for 2009 totaled $78,418,000 or 22.91%, much of the growth resulted from the growth in interest bearing demand deposits and time deposits, due to the Bank’s participation in the CDARS program. The Company continues to utilize its assets well with 92.80% of year-end assets consisting of earning assets.
Investment Securities
Average balances in investment securities decreased 27.79% in 2008 to $19,182,000. Proceeds from the sale or maturity of investments were used in part to support loan growth and for debt repayment. At year end, 4.05% of earning assets of the Company were held as investment securities to provide security for public deposits and to secure repurchase agreements. Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 5.16% for 2009, down from 6.09% in 2008. Average yields on the investment portfolio exceed peer group averages primarily due to dividend yielding investments held by the Company. Yields on these types of investments increased as balances decreased due to the decline in market value of equity securities. It is anticipated that these yields will fall in 2010 as maturing debt securities reprice at lower yields and as some of the issuers of equity securities have recently cut dividends due to the weakening economy.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Investment Securities, continued
The Company recognized losses totaling $1,754,000 on its equities portfolio. Of this amount, $1,751,000 in losses resulted from Other Than Temporary Impairment (OTTI) write-downs on several of its holdings. Management considers a number of factors in determining whether to recognize OTTI on any of its securities, including current market conditions, historical trends in individual securities, historical trends in the overall market and length of time that a security has been below cost. Additional information on the securities impairment write-downs can be found on page 12 under the caption “Securities Impairment” and page 17 under the caption “Noninterest Income”.
The composition of securities at December 31 was:
                         
(Dollars in thousands)   2009     2008     2007  
Available for Sale:1
                       
U.S. Treasury and Agency
  $ 6,012     $ 10,194     $ 16,459  
Municipal
            125       250  
Mortgage-backed2
    6,170       8,574       5,411  
Corporate bonds
    505       281       2,426  
Marketable equity securities
    3,742       3,063       5,668  
 
                 
Total
    16,429       22,237       30,214  
Held to Maturity:
                       
U.S. Treasury and Agency
    110       110       109  
 
                 
Total
    110       110       109  
Other Equity Investments
    9,681       8,439       6,291  
 
                 
Total Securities
  $ 26,220     $ 30,786     $ 36,614  
 
                 
 
1   At estimated fair value.
 
2   Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral.
Maturities and weighted average yields of debt securities at December 31, 2009 are presented in the table below. Amounts are shown by contractual maturity; expected maturities will differ as issuers may have the right to call or prepay obligations.
                                                                 
                    Years to Maturity                    
    Less     One to     Over              
    than one     Five     Five              
(Dollars in thousands)   Amount     Yield     Amount     Yield     Amount     Yield     Total     Yield  
Debt Securities Available for Sale:                                                        
U.S. Treasury & Agency
  $ 2,000       .23 %   $ 4,012       3.48 %   $           %   $ 6,012       2.40 %
Municipal
              %               %               %               %
Mortgage-backed
              %               %     6,170       5.08 %     6,170       5.08 %
Corporate bonds
              %               %     505       8.86 %     505       8.86 %
 
                                                       
Total
  $ 2,000       .23 %   $ 4,012       3.48 %   $ 6,675       5.37 %   $ 12,687       3.96 %
 
                                                       
 
                                                               
Debt Securities Held to Maturity:                                                        
U.S. Treasury & Agency
  $ 110       2.25 %                                     110       2.25 %
 
                                                           
Total
  $ 110       2.25 %                                   $ 110       2.25 %
 
                                                           

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Analysis of Loan Portfolio
The Company’s portfolio of loans held for investment totaled $434,403,000 at December 31, 2009 compared with $399,233,000 at the beginning of the year. The Company’s policy has been to make conservative loans that are held for future interest income. Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Commercial loans, including agricultural and multi family loans, increased 2.45% during 2009 to $145,384,000. Real estate mortgages increased $19,766,000 (12.26%). Growth has included a variety of loan and collateral types including residential real estate and real estate development.
Construction loans increased $15,061,000 or 21.14%, this increase resulted primarily from several large real estate development loans. The growth in construction loans within our portfolio was broadly diversified with loans to a variety of developers, including large multi-unit single family developments, single lot spec homes; and multifamily properties in various locations throughout our market area. The Bank also has loan participation arrangements with several other banks within the region to aid in diversification of the loan portfolio geographically, by collateral type and by borrower.
Consumer installment loans decreased $3,545,000. This category includes personal loans, auto loans and other loans to individuals. This category continues to suffer from strong competition by other providers of automobile financing. Credit card balances increased $416,000 to $2,356,000 but are a minor component of the loan portfolio. The following table presents the changes in the loan portfolio over the previous five years.
                                         
    December 31  
(Dollars in thousands)   2009     2008     2007     2006     2005  
Real estate — mortgage
  $ 180,990     $ 161,224     $ 141,836     $ 137,595     $ 133,826  
Real estate — construction
    86,320       71,259       51,301       46,669       33,540  
Consumer installment
    19,247       22,792       18,772       15,990       16,435  
Commercial
    115,638       115,297       86,048       89,347       73,896  
Agricultural
    19,355       18,711       15,701       14,587       14,759  
Multi-family residential
    10,391       7,898       1,412       3,462       3,261  
Credit cards
    2,356       1,940       1,800       1,709       1,616  
Other
    106       112       310       102       65  
 
                             
Total Loans
  $ 434,403     $ 399,233     $ 317,180     $ 309,461     $ 277,398  
 
                             

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Analysis of Loan Portfolio, continued
The following table shows the Company’s loan maturity and interest rate sensitivity as of December 31, 2009:
                                 
    Less Than     1-5     Over        
(Dollars in thousands)   1 Year     Years     5 Years     Total  
Commercial and agricultural loans
  $ 54,834     $ 73,169     $ 6,990     $ 134,993  
Multi-family residential
    2,741       7,650               10,391  
Real Estate — mortgage
    51,543       113,112       16,335       180,990  
Real Estate — construction
    76,643       9,600       77       86,320  
Consumer — installment/other
    13,296       8,358       55       21,709  
 
                       
Total
  $ 199,057     $ 211,889     $ 23,457     $ 434,403  
 
                       
Loans with predetermined rates
  $ 15,312     $ 32,690     $ 22,848     $ 70,850  
Loans with variable or adjustable rates
    183,745       179,199       609       363,553  
 
                       
Total
  $ 199,057     $ 211,889     $ 23,457     $ 434,403  
 
                       
Residential real estate loans are generally made for a period not to exceed 25 years and are secured by a first deed of trust which normally does not exceed 90% of the appraised value. If the loan to value ratio exceeds 90%, the Company requires additional collateral, guarantees or mortgage insurance. On approximately 80% of the real estate loans, interest is adjustable after each three or five year period. Fixed rate loans are generally made for a fifteen-year or a twenty-year period with an interest rate adjustment after ten years.
Since 1992, fixed rate real estate loans have been funded with fixed rate borrowings from the Federal Home Loan Bank, which allows the Company to control its interest rate risk. In addition, the Company makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 90% of the appraised value. Home equity loans are made for three, five or ten year periods at a fixed rate or as a revolving line of credit.
Construction loans may be made to individuals, who have arranged with a contractor for the construction of a residence, or to contractors that are involved in building pre-sold, spec-homes or subdivisions. The majority of commercial loans are made to small retail, manufacturing and service businesses. Consumer loans are made for a variety of reasons; however, approximately 26% of the loans are secured by automobiles and trucks.
The Company’s market area has a stable economy which tends to be less cyclical than the national economy. Major industries in the market area include agricultural production and processing, higher education, retail sales, services and light manufacturing. The agricultural production and processing industry is a major contributor to the local economy and its performance and growth tend to be cyclical in nature, however, this cyclical nature is offset by other stable industries in the trade area. In addition to direct agricultural loans, a large percentage of residential real estate loans and consumer installment loans are made to borrowers whose income is derived from the agricultural sector of the economy. A large percentage of the agricultural loans are made to poultry growers.
During recent years, real estate values in the Company’s market area for commercial, agricultural and residential property increased, on the average, between 5% and 8% annually depending on the location and type of property, however due to the slowing economy and declining real estate sales it is estimated that values actually declined approximately 10%-15% in 2009. Approximately 89% of the Company’s loans are secured by real estate; however, policies relating to appraisals and loan to value ratios are adequate to control the related risk. Unemployment rates in the Company’s market area continue to be below both the national and state averages.
The Bank has identified loan concentrations of greater than 25% of capital in the following categories, poultry related, motel properties, multi-family properties, spec homes and construction/development. While the Bank has not developed a formal policy limiting the concentration level to any particular loan type or industry segment, it has established target limits on both a nominal and percentage of capital basis. Concentrations are monitored and reported to the board of directors quarterly. Concentration levels have been used by management to determine how aggressively they may price or pursue new loan requests. At December 31, 2009, there are no industry categories of loans that exceed 10% of total loans.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Nonaccrual and Past Due Loans
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. Nonperforming loans totaled $7,653,000 at December 31, 2009 compared to $4,766,000 at December 31, 2008. Approximately 93% of these past due loans are secured by real estate. Although management expects that there will be some loan losses, the bank is generally well secured and continues to actively work with its customers to effect payment. As of December 31, 2009, the Company holds $526,000 of real estate which was acquired through foreclosure.
The following is a summary of information pertaining to risk elements and impaired loans:
                                         
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2009     2009     2009     2009     2008  
Nonaccrual Loans:
                                       
Real Estate
    3,245       3,638       1,918       1,518       1,374  
Commercial
    261       1,364       31                  
Other
                                       
 
                                       
Loans past due 90 days or more:
                                       
Real Estate
    3,850       2,550       4,042       2,798       3,205  
Commercial
    57       312       432       497       26  
Other
    240       153       38       148       161  
 
                                       
Total Nonperforming loans
    7,653       8,017       6,461       4,961       4,766  
 
                                       
Nonperforming loans as a percentage of loans held for investment
    1.76 %     1.88 %     1.55 %     1.21 %     1.19 %
 
                                       
Net Charge Offs to Total Loans
    .59 %     .19 %     .04 %     .004 %     .08 %
 
                                       
Allowance for loan and lease losses to nonperforming loans
    50.12 %     58.63 %     39.56 %     48.00 %     45.93 %
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Nor do they represent material credits about which management is aware of any information which causes it to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of December 31, 2009, management is not aware of any potential problem loans which are not already classified for regulatory purposes or on the watch list as part of the Bank’s internal grading system.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Loan Losses and the Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with identified potential losses, 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 ASC 310. A variety of factors are taken into account when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.
Loan pools are further segmented into watch list, past due over 90 days and all other. 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 to these past due loans 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 rates over the prior two year period. 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 allowance for environmental factors (such as trends in past due/impaired loans, volume and terms of loans, changes in lending policies/procedures, experience of lending staff/management, local/national economic trends and credit concentrations) has been established to reflect other unidentified losses within the portfolio. The environment factor allowance mitigates 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 each quarter based on this evaluation. An effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.
The allowance for loan losses of $3,836,000 at December 31, 2009 is equal to .88% of total loans held for investment. This compares to an allowance of $2,189,000 (.55%) at December 31, 2008. The overall level of the allowance remains well below the peer group averages. Management feels this is appropriate based on its loan loss history and the composition of its loan portfolio. 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.
Loan losses, net of recoveries, totaled $2,563,000 in 2009 which is equivalent to .59% of total loans outstanding. Over the preceding five years, the Company has had an average loss rate of .18% which is approximately one third the loss rate of its peer group.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Loan Losses and the Allowance for Loan Losses, continued
A summary of the activity in the allowance for loan losses follows:
                                         
(Dollars in thousands)   2009     2008     2007     2006     2005  
Balance at beginning of period
  $ 2,189     $ 1,703     $ 1,791     $ 1,673     $ 1,511  
Provision charged to expenses
    4,210       815       270       240       360  
Loan losses:
                                       
Commercial
    1,110       294       331       19       128  
Installment
    193       106       119       143       135  
Real estate
    1,336                                  
 
                             
Total loan losses
    2,639       400       450       162       263  
 
                             
 
                                       
Recoveries:
                                       
Commercial
    10       7       9       4       19  
Installment
    63       63       83       36       46  
Real estate
    3       1                          
 
                             
Total recoveries
    76       71       92       40       65  
 
                             
 
                                       
Net loan losses
    (2,563 )     329       358       122       198  
 
                             
Balance at end of period
  $ 3,836     $ 2,189     $ 1,703     $ 1,791     $ 1,673  
 
                             
 
                                       
Allowance for loan losses as a percentage of loans
    .88 %     .55 %     .54 %     58 %     .60 %
 
                                       
Net loan losses to loans outstanding
    .59 %     .08 %     .11 %     .04 %     .07 %
The Company has allocated the allowance according to the amounts deemed to be reasonably necessary to provide for the possibility of losses occurring within each of the loan categories as shown below. The allocation of the allowance as shown below should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
The following table shows the allocation of the allowance by loan type and the related outstanding loan balances to total loans.
                                                                                 
    2009     2008     2007     2006     2005  
            % of             % of             % of             % of             % of  
    Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans  
                                    (Dollars in thousands)                                  
Commercial
  $ 2,220       31 %   $ 1,200       36 %   $ 900       32 %   $ 666       34 %   $ 648       32 %
Real estate
    1,168       64 %     450       58 %     300       61 %     300       61 %     300       61 %
Installment
    448       5 %     539       6 %     428       7 %     750       5 %     650       7 %
Unallocated
              %               %     75             75           75        
 
                                                           
Total
  $ 3,836       100 %   $ 2,189       100 %   $ 1,703       100 %   $ 1,791       100 %   $ 1,673       100 %
 
                                                           

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Deposits and Borrowings
The Bank recognized an increase in year-end deposits in 2009 of 22.91%. Interest bearing demand deposits have increased primarily as a result of the new Platinum Rewards interest bearing checking account which the Bank began offering in March 2008. At year end there were balances of approximately $48 million in this account category which is a $33 million increase over 2008. Balances in certificates of deposit increased $31.7 million as a result of the Bank’s membership in the CDARS program. CDARS (Certificate of Deposit Account Registry Service) is a program that allows the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks offer FDIC insurance up to as much as $50 million in deposits. The CDARS program also allows the Bank to purchase funds through its One-Way Buy program. At year end the Bank had obtained a total of $44.6 million in CDARS funding.
The Bank has traditionally avoided brokered deposits believing that they were unstable and, thus not desirable. However, some of the deposits raised through the online listing service are considered brokered deposits. Also, under current banking regulations, CDARS deposits are considered brokered deposits even though in the reciprocal program the original source of funds came from local customers. Certificates of deposit over $100,000 totaled $99,330,000 at December 31, 2009. The maturity distribution of these certificates is as follows:
                 
(Dollars in thousands)   2009     2008  
Less than 3 months
  $ 31,381     $ 15,314  
3 to 12 months
    36,631       29,553  
1 year to 5 years
    31,318       18,988  
 
           
Total
  $ 99,330     $ 63,855  
 
           
Non-deposit borrowings include repurchase agreements, federal funds purchased, Federal Home Loan Bank (FHLB) daily rate credit and long-term debt obtained through the FHLB. Repurchase agreements continue to be an important source of funding and provide commercial customers the opportunity to earn market rates of interest on funds that are secured by specific securities owned by the Bank.
Borrowings from the Federal Home Loan Bank are used to support the Bank’s lending program and allow the Bank to mange interest rate risk by laddering maturities and matching funding terms to the terms of various loan types in the loan portfolio. The Bank borrowed $22,250,000 in 2009 and $34,747,000 in 2008 in long term loans. Repayment of amortizing and fixed maturity loans through FHLB totaled $27,350,000 for the year. These loans carry an average rate of 3.23% at December 31, 2009.
Stockholder’s Equity
Total stockholders’ equity increased $2,698,000 or 7.43% in 2009. While net income totaled $1,954,000, noncontrolling interest net income totaled $$76,000 and changes in other comprehensive income increased $2,292,000, capital was reduced by dividends ($1.743 million) and shares repurchased ($54 thousand). As of December 31, 2009, book value per share was $16.99 compared to $15.64 as of December 31, 2008. Dividends are paid to stockholders on a quarterly basis in uniform amounts unless unexpected fluctuations in net income indicate a change to this policy is needed.
Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity’s investments, the more capital it is required to maintain. The Bank, as well as the Company, is required to maintain these minimum capital levels. The two types of capital guidelines are Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At December 31, 2009, the Company had Tier I capital of 9.01% of risk weighted assets and combined Tier I and II capital of 10.65% of risk weighted assets. Regulatory minimums at this date were 4% and 8%, respectively. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Company to raise additional capital and/or reallocate present capital.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Stockholder’s Equity, continued
In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 3% for this ratio, but can increase the minimum requirement based upon an institution’s overall financial condition. At December 31, 2009, the Company reported a leverage ratio of 7.08%. The Bank’s leverage ratio was also substantially above the minimum.
Market Risk Management
Most of the Company’s net income is dependent on the Bank’s net interest income. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest bearing liabilities and interest earning assets. The net interest margin decreased .19% in 2009 and decreased .05% in 2008. Due to a slowing of the national economy and market turbulence related to the sub-prime mortgage lending crisis, the Federal Reserve began cutting short term interest rates in September 2007. The Federal Reserve cut short term rates a total of 5.00% to a target of 0 to .25%.
Net interest income is also affected by changes in the mix of funding that supports earning assets. For example, higher levels of non-interest bearing demand deposits and leveraging earning assets by funding with stockholder’s equity would result in greater levels of net interest income than if most of the earning assets were funded with higher cost interest-bearing liabilities, such as certificates of deposit.
Liquidity as of December 31, 2009 is acceptable; the Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Bank’s membership in the Federal Home Loan Bank has historically provided liquidity as the Bank borrows money that is repaid over a five to ten year period and uses the money to make fixed rate loans. The matching of the long-term receivables and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.
The following table depicts the Company’s interest rate sensitivity, as measured by the repricing of its interest sensitive assets and liabilities as of December 31, 2009. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. The analysis indicates a liability sensitive one-year cumulative GAP position of 6.86% of total earning assets, compared to (3.58%) in 2008. Approximately 50.26% of rate sensitive assets and 49.44% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less than one year) increased $58,718,000 during the year, while total earning assets increased $65,001,000. Growth in the loan portfolio was concentrated in real estate secured loans, including both amortizing residential and commercial loans which typically have an initial rate adjustment period of three to five years and construction loans which typically have a term of one year and a rate that floats with the prime rate. Short term liabilities increased $8,820,000, while total interest bearing liabilities increased $61,069,000. Due to the relatively flat yield curve, management has aggressively cut deposit rates and has lengthened the term on some of its fixed rate borrowings with FHLB. These actions have resulted in the improvement in the negative GAP position in the one year time period and have helped to mitigate the decline in the net interest margin.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Market Risk Management, continued
The following GAP analysis shows the time frames as of December 31, 2009, in which the Company’s assets and liabilities are subject to repricing:
                                                 
    1-90     91-365     1-5     Over 5     Not        
(Dollars in thousands)   Days     Days     Years     Years     Classified     Total  
Rate Sensitive Assets:
                                               
Loans held for investment
  $ 162,938     $ 34,277     $ 210,867     $ 23,965     $       $ 432,047  
Loans held for sale
    31,168                                       31,168  
Federal Funds Sold
    18,326                                       18,326  
Investments securities
    2,066       344       4,012       5,871       4,247       16,540  
Credit Cards
    2,356                                       2,356  
Interest bearing bank deposits
    65                                       65  
 
                                   
Total
    216,919       34,621       214,879       29,836       4,247       500,502  
 
                                               
Rate Sensitive Liabilities:
                                               
Interest bearing demand deposits
            27,111       58,106       15,497               100,714  
Savings
            6,846       20,537       6,846               34,229  
Certificates of deposit $100,000 and over
    31,380       36,631       31,319                       99,330  
Other certificates of deposit
    23,658       66,912       42,325                       132,895  
 
                                   
 
                                               
Total Deposits
    55,038       137,500       152,287       22,343               367,168  
Short-term debt
    9,085                                       9,085  
Long-term debt
    10,275       5,325       44,781       2,715               63,096  
 
                                   
Total
    74,398       142,825       197,068       25,058               439,349  
 
                                               
Discrete Gap
    142,521       (108,204 )     17,811       4,778       4,247       61,153  
Cumulative Gap
    142,521       34,317       52,128       56,906       61,153          
As a % of Earning Assets
    28.48 %     6.86 %     10.42 %     11.37 %     12.22 %        
    In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run off. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities on deposits which have no stated maturity dates were derived from guidance contained in FDICIA 305.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which restructured generally accepted accounting principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritative nongovernmental GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standards Codification (“ASC”). The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included is considered nonauthoritative.
In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allow the shareholder to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid. The amendment states that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance. The amendment is effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes. The amendment provides that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a decrease in ownership in transactions related to sales of in substance real estate or conveyances of oil and gas mineral rights. The update is effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Quarterly Results
The table below lists the Company’s quarterly performance for the years ended December 31, 2009 and 2008:
                                         
    2009  
(Dollars in thousands)   Fourth     Third     Second     First     Total  
Interest and Dividend Income
  $ 7,035     $ 6,761     $ 7,019     $ 6,701     $ 27,516  
Interest Expense
    2,458       2,475       2,548       2,701       10,182  
 
                             
 
                                       
Net Interest Income
    4,577       4,286       4,471       4,000       17,334  
Provision for Loan Losses
    900       2,790       310       210       4,210  
 
                             
 
                                       
Net Interest Income after Provision, For Loan Losses
    3,677       1,496       4,161       3,790       13,124  
 
                                       
Non-Interest Income
    718       (101 )     420       320       1,357  
Non-Interest Expense
    3,057       3,249       3,088       2,794       12,188  
 
                             
 
                                       
Income before taxes
    1,338       (1,854 )     1,493       1,316       2,293  
Income Tax Expense
    483       (978 )     402       432       339  
 
                             
 
                                       
Net Income
  $ 855     $ (876 )   $ 1,091     $ 884     $ 1,954  
 
                             
 
                                       
Net Income Per Share
  $ .36     $ (.38 )   $ .48     $ .39     $ .85  
                                         
    2008  
(Dollars in thousands)   Fourth     Third     Second     First     Total  
Interest and Dividend Income
  $ 6,765     $ 6,617     $ 6,128     $ 6,034     $ 25,544  
Interest Expense
    2,776       2,665       2,453       2,604       10,498  
 
                             
 
                                       
Net Interest Income
    3,989       3,952       3,675       3,430       15,046  
Provision for Loan Losses
    430       120       175       90       815  
 
                             
 
                                       
Net Interest Income after Provision For Loan Losses
    3,559       3,832       3,500       3,340       14,231  
 
                                       
Non-Interest Income
    (563 )     475       896       681       1,489  
Non-Interest Expense
    2,890       2,793       2,761       2,653       11,097  
 
                             
 
                                       
Income before taxes
    106       1,514       1,635       1,368       4,623  
Income Tax Expense
    136       428       491       364       1,419  
 
                             
 
                                       
Net Income
  $ (30 )   $ 1,086     $ 1,144     $ 1,004     $ 3,204  
 
                             
 
                                       
Net Income Per Share
  $ (.01 )   $ .47     $ .49     $ .43     $ 1.38  

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Item 8. Financial Statements and Supplementary Information
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
                 
    2009     2008  
Assets
               
Cash and due from banks (notes 3 and 13)
  $ 5,314,285     $ 5,686,781  
Federal funds sold
    18,326,000       8,979,000  
 
           
Cash and cash equivalents
    23,640,285       14,665,781  
 
               
Interest bearing deposits (note 13)
    64,971       1,162,265  
Securities:
               
Held to maturity — fair value of $110,000 in 2009 and 2008 (note 4)
    109,813       109,634  
Available for sale (note 4)
    16,429,533       22,237,430  
Other investments (note 4)
    9,680,733       8,438,964  
Loans held for sale
    31,167,763       3,780,287  
Loans held for investment (notes 5 and 13)
    434,402,916       399,232,536  
Less allowance for loan losses (note 6)
    (3,835,698 )     (2,189,261 )
 
           
Net Loans Held for Investment
    430,567,218       397,043,275  
 
               
Other real estate owned
    525,897          
Bank premises and equipment, net (note 7)
    7,079,504       7,457,128  
Interest receivable
    2,037,612       2,056,162  
Core deposit intangible (note 21)
    321,932       597,874  
Goodwill (note 21)
    2,669,517       2,669,517  
Bank owned life insurance (note 22)
    6,593,081       6,304,263  
Other assets
    8,334,778       5,535,207  
 
           
Total Assets
    539,222,637       472,057,787  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest bearing
    53,475,063       49,785,896  
Interest bearing:
               
Demand
    77,483,164       39,772,929  
Money market accounts
    23,230,861       22,779,161  
Savings
    34,228,965       29,366,527  
Time deposits over $100,000 (note 8)
    99,329,716       63,855,260  
All other time deposits (note 8)
    132,895,542       136,665,430  
 
           
Total Deposits
    420,643,311       342,225,203  
 
           
 
               
Short-term debt (note 9)
    9,084,909       20,510,287  
Accrued liabilities
    7,396,233       7,686,661  
Subordinated debt
    2,715,000          
Long-term debt (note 10)
    60,380,702       65,330,833  
 
           
Total Liabilities
    500,220,155       435,752,984  
 
           
 
               
Stockholders’ Equity (Note 20)
               
Common stock $5 par value, 6,000,000 shares authorized, 2,295,053 and 2,289,497 shares issued and outstanding for 2009 and 2008, respectively
    11,475,265       11,447,485  
Capital surplus
               
Retained earnings (note 17)
    27,989,144       27,686,745  
Noncontrolling interest
    122,709       46,829  
Accumulated other comprehensive income (loss)
    (584,636 )     (2,876,256 )
 
           
Total Stockholders’ Equity
    39,002,482       36,304,803  
 
           
Total Liabilities and Stockholders’ Equity
  $ 539,222,637     $ 472,057,787  
 
           
     The accompanying notes are an integral part of this statement.

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F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
For the years ended 2009, 2008 and 2007
                         
    2009     2008     2007  
Interest and Dividend Income
                       
Interest and fees on loans held for investment
  $ 25,393,347     $ 23,638,923     $ 22,560,401  
Interest on loans held for sale
    1,169,228       238,249       21,794  
Interest on deposits and federal funds sold
    23,533       167,441       319,048  
Interest on debt securities
    697,982       970,523       1,231,825  
Dividends on equity securities
    231,838       529,268       502,080  
 
                 
Total Interest and Dividend Income
    27,515,928       25,544,404       24,635,148  
 
                 
 
                       
Interest Expense
                       
Interest on demand deposits
    1,306,439       798,137       1,171,782  
Interest on savings deposits
    202,027       293,461       331,218  
Interest on time deposits over $100,000
    1,551,360       1,906,538       2,304,597  
Interest on all other time deposits
    4,742,443       5,047,994       5,513,883  
 
                 
 
                       
Total interest on deposits
    7,802,269       8,046,130       9,321,480  
Interest on short-term debt
    77,818       456,398       501,932  
Interest on long-term debt
    2,302,246       1,995,514       1,219,489  
 
                 
Total Interest Expense
    10,182,333       10,498,042       11,042,901  
 
                 
 
                       
Net Interest Income
    17,333,595       15,046,362       13,592,247  
 
                 
 
                       
Provision for Loan losses (note 6)
    4,210,000       815,000       270,000  
 
                 
 
                       
Net Interest Income After Provision for Loan Losses
    13,123,595       14,231,362       13,322,247  
 
                 
 
                       
Noninterest Income (Expenses)
                       
Service charges on deposit accounts
    1,292,965       1,356,494       1,209,972  
Insurance and other commissions
    476,734       271,078       368,990  
Other operating income
    1,086,890       1,193,991       1,342,851  
Income on bank owned life insurance
    330,756       336,459       293,271  
Other than temporary impairment losses
    (1,751,169 )     (1,758,730 )     (171,000 )
Gain (loss) on the sale of securities (note 4)
    (2,424 )     78,173       272,185  
 
                 
Total Noninterest Income
    1,433,752       1,477,465       3,316,269  
 
                 
 
                       
Noninterest Expenses
                       
Salaries
    5,037,699       5,131,045       4,737,325  
Employee benefits (note 12)
    1,690,834       1,491,847       1,524,208  
Occupancy expense
    563,923       578,735       598,598  
Equipment expense
    592,075       564,410       615,083  
Amortization of intangibles (notes 2 and 21)
    275,942       275,942       275,942  
FDIC insurance assessment
    934,864       144,308       34,459  
Other operating expenses
    3,092,799       2,911,190       2,746,691  
 
                 
Total Noninterest Expenses
    12,188,136       11,097,477       10,532,306  
 
                 
 
                       
Income before Income Taxes
    2,369,211       4,611,350       6,106,210  
 
                       
Income Tax Expense (note 11)
    339,309       1,418,628       1,653,124  
 
                 
 
                       
Consolidated Net Income
    2,029,902       3,192,722       4,453,086  
 
                       
Net Income — Noncontrolling interest
    (75,880 )     11,294          
 
                 
 
                       
Net Income-F & M Bank Corp.
  $ 1,954,022     $ 3,204,016     $ 4,453,086  
 
                 
 
Per Share Data Net Income
  $ .85     $ 1.38     $ 1.89  
 
                 
 
                       
Cash Dividends
  $ .84     $ .90     $ .86  
 
                 
Average Common Shares Outstanding
    2,291,845       2,318,998       2,359,540  
 
                 
     The accompanying notes are an integral part of this statement

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F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2009, 2008 and 2007
                                                 
                                    Accumulated        
                                    Other        
                                    Comprehensive        
    Common     Capital     Retained     Noncontrolling     Income        
    Stock     Surplus     Earnings     Interest     (Loss)     Total  
Balance December 31, 2006
    11,870,965     $       $ 26,794,238     $       $ (560,359 )   $ 38,104,844  
Comprehensive Income:
                                               
Net income
                    4,453,086                       4,453,086  
Net change in other comprehensive income (note 2)
                                    (403,683 )     (403,683 )
 
                                             
Total Comprehensive Income
            4,049,403                                  
 
                                               
Tax benefit of ESOP dividends Dividends on common stock
                    (2,030,564 )                     (2,030,564 )
Stock issued (294 shares)
    1,470               8,082                       9,552  
Stock repurchased (30,597 shares)
    (152,985 )             (815,569 )                     (968,554 )
 
                                   
Balance December 31, 2007
    11,719,450               28,409,273               (964,042 )     39,164,681  
 
                                               
Cumulative effect of initial adoption of EITF 06-4
                    (428,112 )                     (428,112 )
Comprehensive Income:
                                               
Net income
                    3,204,016       46,829               3,250,845  
Net change in other comprehensive income (note 2)
                                    (1,912,214 )     (1,912,214 )
Total Comprehensive Income
                                            1,338,631  
 
                                               
Dividends on common stock
                    (2,083,015 )                     (2,083,015 )
Stock issued (3,951 shares)
    19,755       98,380                               118,135  
Stock repurchased (58,344 shares)
    (291,720 )     (98,380 )     (1,415,417 )                     (1,805,517 )
 
                                   
Balance December 31, 2008
    11,447,485             27,686,745       46,829       (2,876,256 )     36,304,803  
 
                                               
Comprehensive Income:
                                               
Net income
                    1,954,022       75,880               2,029,902  
Net change in other comprehensive income (note 2)
                                    2,291,620       2,291,620  
 
                                             
Total Comprehensive Income
                                            4,321,522  
 
                                               
Dividends on common stock
                    (1,742,637 )                     (1,742,637 )
Stock issued (8,478 shares)
    38,390               134,680                       173,070  
Stock repurchased (2,122 shares)
    (10,610 )             (43,666 )                     (54,276 )
 
                                   
Balance December 31, 2009
    11,475,265     $       $ 27,989,144     $ 122,709     $ (584,636 )   $ 39,002,482  
 
                                   
The accompanying notes are an integral part of this statement.

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F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2009, 2008 and 2007
                         
    2009     2008     2007  
Cash Flows from Operating Activities
                       
Net income
  $ 1,954,022     $ 3,204,016     $ 4,453,086  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
(Gain) loss on securities transactions
    2,424       (78,173 )     (272,185 )
Other than temporary impairment losses
    1,751,169       1,758,730       171,000  
Depreciation
    654,401       630,314       697,659  
Accretion of securities
    27,383       (29,717 )     (111,489 )
Net decrease (increase) in loans held for sale
    (27,387,476 )     (3,780,287 )      
Provision for loan losses
    4,210,000       815,000       270,000  
Provision for deferred taxes
    (694,041 )     (159,824 )     (346,191 )
(Increase) decrease in interest receivable
    18,550       (124,187 )     (55,326 )
(Increase) decrease in other assets
    (3,187,314 )     (69,785 )     (831,946 )
Increase (decrease) in accrued expenses
    (15,740 )     538,980       (299,666 )
Change in pension liability
    852,683       (1,835,082 )     531,150  
Amortization of limited partnership investments
    370,808       431,584       722,041  
Amortization of intangibles
    275,942       275,942       275,942  
Gain on sale of property and equipment
            (1,902 )     (68,904 )
Income from life insurance investment
    (288,818 )     (298,952 )     (293,271 )
 
                 
Net Cash Provided by Operating Activities
    (21,456,007 )     1,276,657       4,841,900  
 
                 
 
                       
Cash Flows from Investing Activities
                       
(Increase) decrease in interest bearing bank deposits
    1,097,294       1,969,600       (1,127,083 )
Purchase of securities held to maturity
                  (108,166 )
Proceeds from maturities of securities held to maturity
                  110,000  
Proceeds from maturities of securities available for sale
    17,618,208       23,843,841       22,499,667  
Proceeds from sales of securities available for sale
    32,228       1,511,286       2,172,552  
Purchases of securities available for sale
    (12,724,664 )     (22,654,078 )     (25,514,141 )
Net increase in loans held for investment
    (38,259,840 )     (82,381,163 )     (8,077,058 )
Purchase of life insurance
                   
Purchase of property and equipment
    (276,777 )     (864,047 )     (140,648 )
Proceeds from life insurance policy
                  246,332  
 
                 
Net Cash Used in Investing Activities
    (32,513,551 )     (78,574,561 )     (9,938,545 )
 
                 
 
                       
Cash Flows from Financing Activities
            (2,932,000 )     370,000  
Net change in federal funds purchased
                       
Net change in demand and savings deposits
    46,713,540       8,147,063       8,044,854  
Net change in time deposits
    31,704,568       35,518,478       992,378  
Net change in short-term debt
    (11,425,378 )     10,699,236       656,122  
Dividends paid in cash
    (1,932,332 )     (2,103,775 )     (2,016,246 )
Proceeds from long-term debt
    27,400,000       39,747,500       10,000,000  
Proceeds for issuance of subordinated debt
    2,715,000                  
Payments to repurchase common stock
    (54,276 )     (1,805,517 )     (968,554 )
Proceeds from issuance of common stock
    173,071       118,135       9,552  
Repayments of long-term debt
    (32,350,131 )     (4,130,953 )     (9,532,966 )
 
                 
Net Cash Provided by Financing Activities
    62,944,062       83,258,167       7,555,140  
 
                 
 
                       
Net Increase (Decrease) in Cash and Cash Equivalents
    8,974,504       5,960,263       2,458,495  
 
                       
Cash and Cash Equivalents, Beginning of Year
    14,665,781       8,705,518       6,247,023  
 
                 
Cash and Cash Equivalents, End of Year
  $ 23,640,285     $ 14,665,781     $ 8,705,518  
 
                 
 
                       
Supplemental Disclosure:
                       
Cash paid for:
                       
Interest expense
  $ 10,419,858     $ 10,646,216     $ 10,801,426  
Income taxes
    720,000       950,000       1,155,000  
The accompanying notes are an integral part of this statement.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 1 NATURE OF OPERATIONS:
F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers located mainly in Rockingham, Shenandoah and Page Counties in Virginia, and the adjacent counties of Augusta, Virginia and Hardy, West Virginia. Services are provided at nine branch offices. The Company offers insurance, mortgage lending and financial services through its subsidiaries, TEB Life Insurance, Inc. and Farmers & Merchants Financial Services, Inc, and VBS Mortgage, LLC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and to accepted practice within the banking industry.
The following is a summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Farmers and Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc. and VBS Mortgage, LLC. (net of minority interest). Significant inter-company accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in those statements; actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, which is sensitive to changes in local and national economic conditions, and the other than temporary impairment of investments in the investment portfolio.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits at other financial institutions whose initial maturity is ninety days or less and Federal funds sold.
Investment Securities
Management reviews the securities portfolio and classifies all securities as either held to maturity or available for sale at the date of acquisition. Securities that the Company has both the positive intent and ability to hold to maturity (at time of purchase) are classified as held to maturity securities. All other securities are classified as available for sale. Securities held to maturity are carried at historical cost and adjusted for amortization of premiums and accretion of discounts, using the effective interest method. Securities available for sale are carried at fair value with any valuation adjustments reported, net of deferred taxes, as a part of other accumulated comprehensive income. Also included in securities available for sale are marketable equity securities.
Interest, amortization of premiums and accretion of discounts on securities are reported as interest income using the effective interest method. Gains (losses) realized on sales and calls of securities are determined on the specific identification method.
Accounting for Historic Rehabilitation and Low Income Housing Partnerships
The Company periodically invests in low income housing partnerships whose primary benefit is the distribution of federal income tax credits to partners. The Company recognizes these benefits and the cost of the investments over the life of the partnership (usually 15 years). In addition, state and federal historic rehabilitation credits are generated from some of the partnerships. Amortization of these investments are prorated based on the amount of benefits received in each year to the total estimated benefits over the life of the projects. All benefits have been shown as investment income since income tax benefits are the only anticipated benefits of ownership.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans
Loans are carried on the balance sheet net of any unearned interest and the allowance for loan losses. Interest income on loans is determined using the effective interest method on the daily amount of principal outstanding except where serious doubt exists as to collectibility of the loan, in which case the accrual of income is discontinued.
Allowance for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Nonaccrual Loans
Commercial loans are placed on nonaccrual status when they become ninety days or more past due, unless there is an expectation that the loan will either be brought current or paid in full in a reasonable period of time. Interest accruals are continued on past due, secured residential real estate loans and consumer purpose loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the financial condition of the borrower deteriorates to the point that any further accrued interest would be determined to be uncollectible.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over the estimated useful lives of the assets on a combination of the straight-line and accelerated methods. The ranges of the useful lives of the premises and equipment are as follows:
         
Buildings and Improvements
10-40years      
Furniture and Fixtures
5-20years      
Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and losses on dispositions are reflected in other income or expense.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Intangible Assets
Core deposit intangibles are amortized on a straight-line basis over ten years. Core deposit intangibles, net of amortization totaled $321,932 and $597,874 at December 31, 2009 and 2008, respectively. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over the estimated useful life.
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ASC 850, Business Combinations and ASC 350, Intangibles. ASC 850 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 became effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an impairment review on an annual basis and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
Goodwill totaled $2,669,517 at December 31, 2009 and 2008. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2009, 2008 or 2007.
Pension Plans
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its employees. The benefits are primarily based on years of service and earnings. On December 31, 2006 the Company adopted ASC 325-960 “Defined Benefit Pension Plans” (formerly SFAS No. 158), which was issued in September of 2006 and amends SFAS 87 and SFAS 106 to require recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Total advertising costs included in other operating expenses for 2009, 2008, and 2007 were $223,762, $295,214 and $244,930, respectively.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes
Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes.
In 2006, the FASB issued ASC 740 (formerly Interpretation No. 48), “Income Taxes.” ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Company’s consolidated financial position.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities and changes in pension plan funding status, such as unrealized gains and losses on available-for-sale securities and gains or losses on certain derivative contracts, are reported as a separate component of the equity section of the balance sheet. Such items, along with operating net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
                         
    Years Ended December 31,  
    2009     2008     2007  
Changes in:
                       
Net income
  $ 2,029,902     $ 3,250,845     $ 4,453,086  
Adjustment for initial adoption of ASC 325-960 funded status adjustment
    852,683       (1,835,082 )     531,150  
Tax effect
    (289,912 )     623,928       (180,591 )
 
                 
Pension plan adjustment, net of tax
    562,771       (1,211,154 )     350,559  
 
                 
 
                       
Unrealized holding gains (losses) on available-for-sale securities
    865,875       (2,742,769 )     (1,041,606 )
Other than temporary impairment losses
    1,751,169       1,758,730       171,000  
Reclassification adjustment for (gains) losses realized in income
    2,424       (78,173 )     (272,185 )
 
                 
Net unrealized gains (losses)
    2,619,468       (1,062,212 )     (1,142,791 )
Tax effect
    890,619       361,152       388,549  
 
                 
Unrealized holding gain (losses), net of tax
    1,728,849       (701,060 )     (754,242 )
 
                 
Total other comprehensive income
  $ 4,321,522     $ 1,338,631     $ 4,049,403  
 
                 
Earnings Per Share
Earnings per share are based on the weighted average number of shares outstanding. The Company had no potentially dilutive instruments during the three-year period ended December 31, 2009.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Derivative Financial Instruments and Change in Accounting Principle
On January 1, 2001, the Company adopted ASC 815 “Derivative and Hedging Investments” (formerly SFAS No. 133). This statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value.
Under ASC 815, the gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedging item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in their fair values due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair value of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at offsetting changes in the fair value of the hedging items due to the designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed out and settled or classified as a trading activity.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 18, 2010, the date the financial statements were issued.
NOTE 3 CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $25,000 for the years ended December 31, 2009 and 2008.
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair value of securities held to maturity are as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
December 31, 2009
                               
U. S. Treasuries
  $ 109,813     $       $       $ 109,813  
 
                       
December 31, 2008
                               
U. S. Treasuries
  $ 109,634     $     $     $ 109,634  
 
                       

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
The amortized cost and fair value of securities available for sale are as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
December 31, 2009
                               
Government sponsored enterprises
  $ 5,975,816     $ 35,878     $       $ 6,011,694  
Mortgage-backed obligations of federal agencies
    5,895,747       277,032       2,439       6,170,340  
Marketable equities
    3,768,175       263,700       288,906       3,742,969  
Municipals
                               
Corporate bonds
    280,800       223,730               504,530  
 
                       
Total Securities Available for Sale
  $ 15,920,538     $ 800,340     $ 291,345     $ 16,429,533  
 
                       
 
                               
December 31, 2008
                               
Government sponsored enterprises
  $ 10,012,805     $ 202,895     $ 21,860     $ 10,193,840  
Mortgage-backed obligations of federal agencies
    8,391,182       193,059       10,475       8,573,766  
Marketable equities
    5,430,255       22       2,366,026       3,064,251  
Municipals
    125,000               227       124,773  
Corporate bonds
    280,800                       280,800  
 
                       
Total Securities Available for Sale
  $ 24,240,042     $ 395,976     $ 2,398,588     $ 22,237,430  
 
                       
The amortized cost and fair value of securities at December 31, 2009, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                                 
    Securities Held to Maturity     Securities Available for Sale  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Due in one year or less
  $ 109,813     $ 109,813     $ 2,301,928     $ 2,299,622  
Due after one year through five years
                    3,976,069       4,011,814  
Due after five years
                    5,874,366       6,375,128  
 
                       
 
    109,813       109,813       12,152,363       12,686,564  
Marketable equities
                    3,768,175       3,742,969  
 
                       
Total
  $ 109,813     $ 109,813     $ 15,920,538     $ 16,429,533  
 
                       
There were no sales of debt securities during 2009, 2008, or 2007. Following is a table reflecting gains and losses on equity securities:
                         
    2009     2008     2007  
Gains
  $ 2,475     $ 244,181     $ 344,944  
Losses
    (4,899 )     (166,008 )     (72,759 )
 
                 
Net Gains
  $ (2,424 )   $ 78,173     $ 272,185  
 
                 
The carrying value (which approximates fair value) of securities pledged by the Bank to secure deposits and for other purposes amounted to $15,229,000 at December 31, 2009 and $21,078,000 at December 31, 2008.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
Other investments consist of investments in fourteen low-income housing and historic equity partnerships (carrying basis of $4,204,000), stock in the Federal Home Loan Bank (carrying basis of $4,543,000), and various other investments (carrying basis of $933,000). The interests in the low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The market values of these securities are estimated to approximate their carrying value as of December 31, 2009. At December 31, 2009, the Company was committed to invest an additional $2,770,938 in five low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in accrued liabilities on the balance sheet.
The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio includes fixed rate bonds, whose prices move inversely with rates, variable rate bonds and equity securities. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business behind the instrument. Bonds deteriorate in value due to credit quality of the individual issuer and changes in market conditions. These losses relate to market conditions and the timing of purchases.
A summary of these losses (in thousands) is as follows:
                                                 
    Less than 12 Months     More than 12 Months     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
2009
                                               
Government sponsored enterprises
  $       $       $       $       $       $    
Mortgage backed obligations
                    300       (2 )     300       (2 )
Marketable equities
                    1,891       (289 )     1,891       (289 )
 
                                   
Total
  $       $       $ 2,191     $ (291 )   $ 2,191     $ (291 )
 
                                   
 
                                               
2008
                                               
Government sponsored enterprises
  $ 2,002     $ (22 )   $       $       $ 2,002     $ (22 )
Mortgage backed obligations
                    373       (11 )     373       (11 )
Marketable equities
    598       (381 )     1,853       (1,985 )     2,451       (2,366 )
 
                                   
Total
  $ 2,600     $ (403 )   $ 2,226     $ (1,996 )   $ 4,826     $ (2,399 )
 
                                   
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.
The Company recognized other-than-temporary impairment losses of $1,751,000, $1,759,000, and $171,000 in the carrying basis of its equity holdings in 2009, 2008, and 2007, respectively. These write downs were a result of management’s evaluation and determination that these assets met the definition of other than temporary impairment under ASC 320-10.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 5 LOANS:
Loans held for investment as of December 31:
                 
    2009     2008  
Real Estate
               
Construction
  $ 86,319,632     $ 71,259,034  
Mortgage
    191,381,547       169,121,443  
Commercial and agricultural
    134,992,512       134,008,258  
Installment
    19,247,550       22,791,468  
Credit cards
    2,355,510       1,940,301  
Other
    106,165       112,032  
 
           
Total
  $ 434,402,916     $ 399,232,536  
 
           
The Company has pledged loans as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $155,632,000 and $167,246,000 as of December 31, 2009 and 2008, respectively. During 2005, the Company switched to a blanket lien on its entire residential real estate portfolio and also began pledging commercial and home equity loans.
The following is a summary of information pertaining to impaired loans (in thousands):
                         
    2009     2008     2007  
Impaired loans without a valuation allowance
  $ 1,241     $ 1,743     $  
Impaired loans with a valuation allowance
    7,694       1,676       2,748  
 
                 
Total impaired loans
  $ 8,935     $ 3,419     $ 2,748  
 
                 
Valuation allowance related to impaired loans
  $ 986     $ 468     $ 682  
 
                 
Average investment in impaired loans
  $ 5,666     $ 3,908     $ 3,408  
 
                 
Interest income recognized on impaired loans
  $ 347     $ 162     $ 247  
 
                 
Loans held for sale consists of the Bank’s commitment to purchase up to $35,000,000 in residential mortgage loan participations. These loans are purchased as a 95% participation in loans that are warehoused by a bank in California. Loans are originated by a network of mortgage loan originators throughout the United States. A take out commitment is in place at the time the participation interests are purchased. The Bank receives certain loan documents daily for review, makes its purchase decision and wires funds to the bank in California. By contract terms, the Bank will hold these loans up to 60 days. The actual holding period of individual loans has ranged from 1 day to 50 days, with an average of 10 days during 2008 and 2009.
The commitment to purchase these loan participations was entered into in 2003, as a $30,000,000 commitment, but actual purchases were immaterial until March 2004. This program was entered into as an alternative to selling Federal Funds and other short-term investments. As demand within the program increased, the Bank recognized an opportunity to earn a return based on the spread between the participation interest received and the cost of borrowing daily rate credit from the FHLB. The volume of loans purchased fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank.
Loans held for sale as of December 31:
                 
    2009   2008
Real Estate
  $ 31,167,763       3,780,287  

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses is shown in the following schedule:
                         
    2009     2008     2007  
Balance, beginning of year
  $ 2,189,261     $ 1,702,501     $ 1,791,248  
Provision charged to operating expenses
    4,210,000       815,000       270,000  
Loan recoveries
    75,997       71,751       91,620  
Loans charged off
    (2,639,560 )     (399,991 )     (450,367 )
 
                 
Balance, end of year
  $ 3,835,698     $ 2,189,261     $ 1,702,501  
 
                 
 
                       
Percentage of loans held for investment
    .88 %     .55 %     .54 %
NOTE 7 BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31 are summarized as follows:
                 
    2009     2008  
Land
  $ 1,145,204     $ 1,063,320  
Buildings and improvements
    6,883,232       6,844,160  
Furniture and equipment
    4,964,684       4,810,223  
 
           
 
    12,993,120       12,717,703  
Less — accumulated depreciation
    (5,913,616 )     (5,260,575 )
 
           
Net
  $ 7,079,504     $ 7,457,128  
 
           
Provisions for depreciation of $654,401 in 2009, $630,314 in 2008, and $697,659 in 2007 were charged to operations.
NOTE 8 TIME DEPOSITS:
At December 31, 2009, the scheduled maturities of time deposits are as follows:
         
2010
  $ 157,529,288  
2011
    46,155,551  
2012
    8,547,164  
2013
    9,039,683  
2014
    10,953,572  
 
     
Total
  $ 232,225,258  
 
     
NOTE 9 SHORT-TERM DEBT:
Short-term debt information is summarized as follows:
                                         
    Maximum                     Weighted        
    Outstanding     Outstanding     Average     Average     Year End  
    at any     at     Balance     Interest     Interest  
    Month End     Year End     Outstanding     Rate     Rate  
2009
                                       
Short term note
  $ 750,000     $       $ 400,000       5.00 %     %  
Federal funds purchased
    14,924,000               1,369,148       .80 %     %  
FHLB daily rate credit
    21,002,500       2,800,000       6,890,041       .49 %     .36 %
Securities sold under agreements to repurchase
    9,895,231       6,284,909       6,090,608       .43 %     .47 %
 
                               
Totals
          $ 9,084,909     $ 14,749,797       .62 %     .44 %
 
                               

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 9 SHORT-TERM DEBT (CONTINUED):
                                         
    Maximum                     Weighted        
    Outstanding     Outstanding     Average     Average     Year End  
    at any     at     Balance     Interest     Interest  
    Month End     Year End     Outstanding     Rate     Rate  
2008
                                       
Short term note
  $ 1,000,000     $ 750,000     $ 437,500       5.00 %     5.00 %
Federal funds purchased
    10,684,000               1,993,844       2.18 %      
FHLB daily rate credit
    35,000,000       12,252,500       12,366,810       2.15 %     .70 %
Securities sold under agreements to repurchase
    10,005,446       7,507,787       8,886,829       1.61 %     .59 %
 
                               
Totals
          $ 20,510,287     $ 23,684,983       2.00 %     .75 %
 
                               
 
                                       
2007
                                       
Federal funds purchased
  $ 2,932,000     $ 2,932,000     $ 494,066       5.26 %     4.36 %
FHLB daily rate credit
    7,500,000             626,027       5.58 %     4.40 %
Securities sold under agreements to repurchase
    10,957,095       9,811,051       9,920,289       4.40 %     3.83 %
 
                               
Totals
          $ 12,743,051     $ 11,040,382       4.51 %     3.95 %
 
                               
Repurchase agreements are secured transactions with customers and generally mature the day following the date sold. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB daily rate credit, which is secured by the loan portfolio is a variable rate loan that acts as a line of credit to meet financing needs. Margin borrowings which carry a variable rate are secured by investment securities and are used to finance equity acquisitions on a short term basis.
As of December 31, 2009, the Company had lines of credit with correspondent banks totaling $20,000,000, which may be used in the management of short-term liquidity.
In September 2008 the Company entered into an agreement with Page Valley Bank to provide a $1 million term loan to be used for a capital contribution to the Bank. The loan is unsecured and carried an interest rate of prime. Repayment terms include quarterly payments of $250,000 plus interest beginning in December 2008. The loan was paid in full on October 2, 2009.
NOTE 10 LONG-TERM DEBT:
New borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $22,250,000 in 2009, $34,747,000 in 2008, and $10,000,000 in 2007. The interest rates on the notes payable are fixed at the time of the advance and range from 1.12% to 4.82%; the weighted average interest rate was 3.23% and 3.74% at December 31, 2009 and 2008, respectively. The balance of these obligations at December 31, 2009 was $55,381,000. The long-term debt is secured by qualifying mortgage loans owned by the Company.
In March 2008, the Company entered into an agreement with a correspondent bank (Silverton Bank) to provide a $5 million line of credit to be used for general corporate purposes, including capital contributions to the Bank and for the current stock repurchase program. The loan is unsecured and bears a rate of prime minus 1.25%. In November 2009, the Company entered into an agreement with Page Valley Bank (and several sub-participants) to refinance the Silverton line of credit as a five year, fixed rate, amortizing loan at 6%. The Company will make quarterly installments of $250,000 plus interest beginning in February 2010.
In August 2009, the Company began to issue Subordinated debt agreements with local investors bearing terms of 7 to 10 years. Interest rates are fixed on the notes for the full term but vary by maturity. Rates range from 7.0% on the 7 year note to 8.05% on the ten year note. As of December 31, 2009 the balance outstanding was $2,715,000. Due to their terms (greater than five years) and priority (subordinate to deposits and other borrowings) this debt is counted with capital for purposes of calculating the Total Risk Based Capital Ratio.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 10 LONG-TERM DEBT (CONTINUED):
The maturities of long-term debt, including Federal Home Loan Bank of Atlanta borrowings, the Page Valley Bank Loan and Subordinated debt agreements, as of December 31, 2009 are as follows:
         
2010
  $ 11,345,238  
2011
    8,925,571  
2012
    17,982,857  
2013
    12,214,286  
2014
    9,912,750  
Thereafter
    2,715,000  
 
     
Total
  $ 63,095,702  
 
     
NOTE 11 INCOME TAX EXPENSE:
The components of the income tax expense are as follows:
                         
    2009     2008     2007  
Current expense
                       
Federal
  $ 1,033,350     $ 1,578,452     $ 1,999,315  
Deferred benefit
                       
Federal
    (678,041 )     (140,074 )     (61,390 )
State
    (16,000 )     (19,750 )     (284,801 )
 
                 
Total Income Tax Expense
  $ 339,309     $ 1,418,628     $ 1,653,124  
 
                 
 
                       
Amounts in above arising from gains (losses) on security transactions
  $ (550,660 )   $ (402,807 )   $ 21,232  
 
                 
The deferred tax effects of temporary differences are as follows:
                         
    2009     2008     2007  
LIH Partnership Losses
  $ (21,505 )   $ (32,850 )   $ (95,210 )
Securities impairment
    (549,836 )     (378,759 )     (27,724 )
Local & Historic State Credits Recognized
    (16,000 )     (19,750 )     (284,801 )
Provision for loan losses
    (404,016 )     (165,498 )     30,108  
Non-qualified deferred compensation
    30,072       (4,460 )     (10,268 )
Depreciation
    48,163       143,858       (44,906 )
Core deposit intangible amortization
    (33,113 )     (33,113 )     (33,113 )
Pension expense
    190,722       269,154       57,509  
Goodwill tax amortization
    61,424       61,424       61,424  
Other
    48       170       790  
 
                 
Deferred Income Tax Expense (Benefit)
  $ (694,041 )   $ (159,824 )   $ (346,191 )
 
                 
The components of the deferred taxes as of December 31 are as follows:
                 
    2009     2008  
Deferred Tax Assets
               
Allowance for loan losses
  $ 994,117     $ 590,101  
Split dollar life insurance
    4,892       1,506  
Nonqualified deferred compensation
    345,483       374,498  
Securities impairment
    1,179,426       474,085  
Core deposit amortization
    264,906       231,793  
State historic tax credits
    292,184       276,184  
Securities available for sale
    (34,260 )     715,944  
Bank owned life insurance
    484,091          
Other
    977       1,644  
 
           
Total Assets
  $ 3,531,816     $ 2,665,755  
 
           

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 11 INCOME TAX EXPENSE (CONTINUED):
                 
    2009     2008  
Deferred Tax Liabilities:
               
Unearned low income housing credits
  $ 762,373     $ 782,608  
Depreciation
    322,110       273,948  
Pension
    766,774       576,052  
Goodwill tax amortization
    542,578       481,154  
Securities available for sale
    105,560       123,552  
Other
    51,628          
 
           
Total Liabilities
    2,551,023       2,237,314  
 
           
Deferred Tax Asset (Liability)
  $ 980,793     $ 428,441  
 
           
The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rates:
                         
    2009     2008     2007  
Tax expense at federal statutory rates
  $ 779,734     $ 1,571,699     $ 2,076,111  
Increases (decreases) in taxes resulting from:
                       
State income taxes, net
    3,514       4,497       (55,130 )
Partially exempt income
    (64,592 )     (19,524 )     (135,259 )
Tax-exempt income
    (157,454 )     (170,210 )     (159,916 )
Prior year LIH credits
    (27,521 )     (27,356 )     (51,735 )
Other
    (194,372 )     59,522       (20,947 )
 
                 
Total Income Tax Expense
  $ 339,309     $ 1,418,628     $ 1,653,124  
 
                 
NOTE 12 EMPLOYEE BENEFITS:
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its employees. The benefits are primarily based on years of service and earnings. On December 31, 2006 the Company adopted ASC 325-960 “Defined Benefit Pension Plans” (formerly “SFAS 158”), which was issued in September of 2006 and amends SFAS 87 and SFAS 106 to require recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.
The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets for 2009, 2008 and 2007:
                         
    2009     2008     2007  
Change in Benefit Obligation
                       
Benefit obligation, beginning
  $ 4,582,997     $ 4,111,188     $ 3,975,983  
Service cost
    358,799       402,976       316,786  
Interest cost
    273,333       320,270       237,892  
Actuarial gain (loss)
    110,390       46,725       (333,377 )
Benefits paid
    (13,668 )     (298,162 )     (86,096 )
 
                 
Benefit obligation, ending
  $ 5,311,851     $ 4,582,997     $ 4,111,188  
 
                 
 
                       
Change in Plan Assets
                       
Fair value of plan assets, beginning
    3,948,698       4,072,435       3,236,937  
Actual return on plan assets
    1,157,880       (1,325,575 )     421,594  
Employer contribution
            1,500,000       500,000  
Benefits paid
    (13,668 )     (298,162 )     (86,096 )
 
                 
Fair value of plan assets, ending
  $ 5,092,910     $ 3,948,698     $ 4,072,435  
 
                 
Funded status at the end of the year
  $ (218,941 )   $ (634,299 )   $ (38,753 )
 
                 

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 12 EMPLOYEE BENEFITS (CONTINUED):
                         
    2009     2008     2007  
Amount recognized in the Balance Sheet
                       
Accrued prepaid benefit cost
  $ 1,204,854     $ 1,642,179     $ 402,643  
Unfunded pension benefit obligation under ASC 325-960
    (1,423,795 )     (2,276,478 )     (441,396 )
 
                 
Amount recognized in other liabilities
  $ (218,941 )   $ (634,299 )   $ (38,753 )
 
                 
 
                       
Amount recognized in accumulated other comprehensive income
                       
Net Gain/(Loss)
  $ (1,570,180 )   $ (2,428,163 )   $ (599,706 )
Prior service cost
    146,385       151,685       158,310  
Net obligation at transition
                     
 
                 
Amount recognized
    (1,423,795 )     (2,276,478 )     (441,396 )
Deferred Taxes
    484,091       774,003       150,075  
 
                 
Amount recognized in accumulated comprehensive income
  $ (939,704 )   $ (1,502,475 )   $ (291,321 )
 
                 
 
                       
(Accrued) Prepaid benefit detail
                       
Benefit obligation
  $ (5,311,851 )   $ (4,582,997 )   $ (4,111,188 )
Fair value of assets
    5,092,910       3,948,698       4,072,435  
Unrecognized net actuarial loss
    1,570,180       2,428,163       599,706  
Unrecognized transition obligation
                   
Unrecognized prior service cost
    (146,385 )     (151,685 )     (158,310 )
 
                 
Prepaid (accrued) benefits
  $ 1,204,854     $ 1,642,179     $ 402,643  
 
                 
 
                       
Components of net periodic benefit cost
                       
Service cost
  $ 358,799     $ 322,381     $ 316,786  
Interest cost
    273,333       256,216       237,892  
Expected return on plan assets
    (313,710 )     (376,713 )     (274,201 )
Amortization of prior service cost
    (5,300 )     (5,300 )     (5,300 )
Amortization of transition obligation
                  10,155  
Recognized net actuarial (gain) loss
    124,203       11,787       45,525  
 
                 
Net periodic benefit cost
  $ 437,325     $ 208,371     $ 330,857  
 
                 
 
                       
Additional disclosure information
                       
Accumulated benefit obligation
  $ 3,538,352     $ 2,977,671     $ 2,575,783  
Vested benefit obligation
  $ 3,398,034     $ 2,871,201     $ 2,497,484  
Discount rate used for net pension cost
    6.00 %     6.25 %     6.00 %
Discount rate used for disclosure
    6.00 %     6.00 %     6.25 %
Expected return on plan assets
    8.00 %     8.50 %     8.50 %
Rate of compensation increase
    4.00 %     4.00 %     5.00 %
Average remaining service (years)
    16       16       16  
Funding Policy
It is the Bank’s policy to normally contribute the maximum tax-deductible amount each year as determined by the plan administrator. Based on current information, the 2010 contribution will be $1,000,000 and pension cost for 2010 will be approximately $283,000.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 12 EMPLOYEE BENEFITS (CONTINUED):
Long-Term Rate of Return
The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with their advisors and the plan actuary, and with concurrence from their auditor. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the trust. Undue weight is not given to recent experience, which may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further — solely for this purpose the plan is assumed to continue in force and not terminate during the period during which the assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Asset Allocation
The following table provides the pension plan’s asset allocation as of December 31:
                 
    2009   2008
Mutual funds — equity
    61 %     64 %
Mutual funds —fixed income
    38 %     31 %
Cash and equivalents
    1 %     5 %
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equity. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
Estimated Future Benefit Payments
         
2010
  $ 57,847  
2011
    58,503  
2012
    80,634  
2013
    100,492  
2014
    168,391  
2015-2017
    1,094,838  
 
     
 
  $ 1,560,705  
 
     
Employee Stock Ownership Plan (ESOP)
The Company sponsors an ESOP which provides stock ownership to substantially all employees of the Bank. The Plan provides total vesting upon the attainment of five years of service. Contributions to the plan are made at the discretion of the Board of Directors and are allocated based on the compensation of each employee relative to total compensation paid by the Bank. All shares issued and held by the Plan are considered outstanding in the computation of earnings per share. Dividends on Company stock are allocated and paid to participants at least annually. Shares of Company stock, when distributed, have restrictions on transferability. The Company contributed $180,000 in 2009, $275,000 in 2008, and $250,000 in 2007 to the Plan and charged this expense to operations. The shares held by the ESOP totaled 123,908 and 114,991 at December 31, 2009 and 2008, respectively.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 12 EMPLOYEE BENEFITS (CONTINUED):
401K Plan
The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 20 percent of their salary on a pretax basis, subject to certain IRS limits. Under the Safe Harbor rules employees are automatically enrolled at 3% (in the third year this increases by 1% per year up to 6%) of their salary unless elected otherwise. The Company matches a hundred percent of the first 1% contributed by the employee and fifty percent of the next 2% to 6% of employee contributions. Vesting in the contributions made by the bank is 100% after two years of service. Contributions under the plan amounted to $142,853, $116,422 and $108,717 in 2009, 2008 and 2007, respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for several of its key employee’s and directors. The Company may make annual contributions to the plan, and the employee or director has the option to defer a portion of their salary or bonus based on qualifying annual elections. Due to the level of earnings, the Company did not contribute to the plan in 2009. Contributions to the plan totaled $60,000 and $50,000 in 2008, 2007, respectively.
NOTE 13 CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks totaling $3,062,630 and $4,775,222 at December 31, 2009 and 2008, respectively.
The Company grants commercial, residential real estate and consumer loans to customers located primarily in the northwestern portion of the State of Virginia. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the agribusiness economic sector, specifically the poultry industry for which loans outstanding total $16,120,000. Other identified loan concentration areas greater than 25% of capital include motel properties, multi-family residential, spec homes and construction/development. Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Approximately 89% of the loan portfolio is secured by real estate.
NOTE 14 COMMITMENTS:
The Company makes commitments to extend credit in the normal course of business and issues standby letters of credit to meet the financing needs of its customers. The amount of the commitments represents the Company’s exposure to credit loss that is not included in the balance sheet. As of the balance sheet dates, the Company had the following commitments outstanding:
                 
    2009   2008
Commitments to loan money
  $ 83,081,156     $ 95,106,266  
Standby letters of credit
    1,108,419       1,677,343  
The Company uses the same credit policies in making commitments to lend money and issue standby letters of credit as it does for the loans reflected in the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral required, if any, upon extension of credit is based on management’s credit evaluation of the borrower’s ability to pay. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment.

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 14 COMMITMENTS (CONTINUED):
The Bank leases three of its branch offices on long term lease arrangements of either five or ten years. Lease expense for 2009, 2008 and 2007 were $71,760, $71,760 and $69,960, respectively. As of December 31, 2009, the required lease payments for the next five years are as follows:
         
2010
  $ 64,260  
2011
    26,640  
2012
    21,600  
2013
    21,600  
2014
    21,600  
NOTE 15 ON BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Derivative Financial Instruments
The Company has stand alone derivative financial instruments in the form of forward option contracts. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s balance sheet as derivative assets and derivative liabilities.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.
Derivative instruments are generally either negotiated OTC contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.
The Company issues to customers certificates of deposit with an interest rate that is derived from the rate of return on the stock of the companies that comprise The Dow Jones Industrial Average. In order to manage the interest rate risk associated with this deposit product, the Company has purchased a series of forward option contracts. These contracts provide the Company with a rate of return commensurate with the return of The Dow Jones Industrial Average from the time of the contract until maturity of the related certificate of deposit. These contracts are accounted for as fair value hedges. Because the certificates of deposit can be redeemed by the customer at anytime and this related forward options contracts cannot be cancelled by the Company, the hedge is not considered effective.
At December 31, the information pertaining to the forward option contracts, included in other liabilities on the balance sheet, is as follows:
                 
    2009   2008
Notional amount
  $ 497,691     $ 551,250  
Fair market value of contracts
  $ 13,295     $ 15,471  
      

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Table of Contents

F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 16 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by them) were customers of and had transactions with the Company in the normal course of business. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
Loan transactions with related parties are shown in the following schedule:
                 
    2009     2008  
Total loans, beginning of year
  $ 7,246,384     $ 7,417,401  
New loans
    1,271,666       2,046,744  
Participation Sold
            (986,845 )
Repayments
    (1,793,627 )     (1,230,916 )
 
           
Total loans, end of year
  $ 6,724,423     $ 7,246,384  
 
           
NOTE 17 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
The principal source of funds of F & M Bank Corp. is dividends paid by the Farmers and Merchants Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. As of January 1, 2008, approximately $1,926,000 was available for dividend distribution without permission of the Board of Governors. Dividends paid by the Bank to the Company totaled $2,428,000 in 2009, $2,559,000 in 2008 and $2,516,000 in 2007.

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Table of Contents

NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
ASC 825 “Financial Intruments” (formerly SFAS 107) defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale. As the majority of the Bank’s financial instruments lack an available trading market, significant estimates, assumptions and present value calculations are required to determine estimated fair value. Estimated fair value and the carrying value of financial instruments at December 31, 2009 and 2008 are as follows (in thousands):
                                 
    2009     2008  
    Estimated     Carrying     Estimated     Carrying  
    Fair Value     Value     Fair Value     Value  
Financial Assets
                               
Cash
  $ 5,314     $ 5,314     $ 5,687     $ 5,687  
Interest bearing deposits
    65       65       1,164       1,162  
Federal funds sold
    18,326       18,326       8,979       8,979  
Securities available for sale
    16,430       16,430       22,237       22,237  
Securities held to maturity
    110       110       110       110  
Other investments
    9,681       9,681       8,439       8,439  
Loans
    481,967       434,403       418,630       399,233  
Loan held for sale
    31,168       31,168       3,780       3,780  
Bank owned life insurance
    6,593       6,593       6,304       6,304  
Accrued interest receivable
    2,038       2,038       2,056       2,056  
 
                               
Financial Liabilities
                               
Demand Deposits:
                               
Non-interest bearing
    53,475       53,475       49,786       49,786  
Interest bearing
    100,714       100,714       62,552       62,552  
Savings deposits
    34,229       34,229       29,367       29,367  
Time deposits
    234,032       232,225       202,082       200,521  
Accrued liabilities
    7,534       7,396       7,687       7,687  
Short-term debt
    9,085       9,085       20,569       20,510  
Subordinated debt
    2,715       2,715                  
Long-term debt
    61,216       60,381       68,846       65,331  
The carrying value of cash and cash equivalents, other investments, deposits with no stated maturities, short-term borrowings, and accrued interest approximate fair value. The fair value of securities was calculated using the most recent transaction price or a pricing model, which takes into consideration maturity, yields and quality. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments entered into during the month of December of each year.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 19 FAIR VALUE MEASUREMENTS
Accounting Standards Codification (ASC 820), “Fair Value Measurement Disclosures” (formerly “FAS No. 157”), defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
             
 
  Level 1     Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
  Level 2     Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
 
  Level 3     Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.
Impaired Loans: SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.
Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
                                 
December 31, 2009   Total     Level 1     Level 2     Level 3  
Investment securities available-for-sale
  $ 16,430     $ 4,247     $ 12,183     $    
Loans held for sale
    31,168               31,168          
Impaired loans
    6,708               6,708          
Other real estate owned
    526               526          
 
                       
Total assets at fair value
  $ 54,832     $ 4,247     $ 50,585     $    
 
                       
 
                               
Total liabilities at fair value
  $       $       $       $    
 
                       
There were no assets or liabilities recorded at fair value on a non-recurring basis.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 20 REGULATORY MATTERS:
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation, to ensure capital adequacy, require the Company to maintain minimum amounts and ratios. These ratios are defined in the regulations and the amounts are set forth in the table below. Management believes, as of December 31, 2009, that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.
As of the most recent notification from the Federal Reserve Bank Report of Examination (which was as of May 10, 2006), the subsidiary bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Company’s actual capital ratios are presented in the following table:
                                                 
    Actual        
    December 31,     Regulatory Requirements  
    2009     2008     Adequately     Well  
    $     %     $     %     Capitalized     Capitalized  
Total risk-based ratio
                                               
Consolidated
  $ 43,324       10.65 %   $ 36,441       10.04 %     8.00 %   none
Bank only
    44,488       11.07 %     35,895       10.07 %     8.00 %     10.00 %
Tier 1 risk-based ratio
                                               
Consolidated
    36,623       9.01 %     34,252       9.44 %     4.00 %   none
Bank only
    37,853       9.42 %     33,727       9.46 %     4.00 %     6.00 %
Total assets leverage ratio
                                               
Consolidated
    36,623       7.08 %     34,252       7.64 %     3.00 %   none
Bank only
    37,853       7.32 %     33,727       7.53 %     3.00 %     5.00 %
NOTE 21 INTANGIBLES:
Core deposit intangible costs recognized from the acquisition of the Woodstock and Edinburg branches are being amortized using the straight-line method over a ten-year period. The core deposit intangibles and goodwill totaled $2,833,476 and $2,638,677, respectively at the acquisition date. Amortization expense for the years ending December 31, 2009, 2008 and 2007 was $276,000 in each year.
NOTE 22 INVESTMENT IN LIFE INSURANCE CONTRACTS
The Bank currently offers a variety of benefit plans to all full time employees. While the costs of these plans are generally tax deductible to the Bank, the cost has been escalating greatly in recent years. To help offset escalating benefit costs and to attract and retain qualified employees, the Bank purchased Bank Owned Life Insurance (BOLI) contracts that will provide benefits to employees during their lifetime. Dividends received on these policies are tax-deferred and the death benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are very favorable when compared to other long-term investments which the Bank might make.

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 23 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31, 2009 and 2008
                 
    2009     2008  
Assets
               
Cash and cash equivalents
  $ 174,950     $ 194,266  
Investment in subsidiaries
    40,109,958       38,871,291  
Securities available for sale
    3,347,452       2,682,791  
Limited partnership investments
    1,814,800       2,681,931  
Deferred income taxes
    592,604       683,605  
Other Assets
    61,839       292,232  
 
           
Total Assets
  $ 46,101,603     $ 45,406,116  
 
           
 
               
Liabilities
               
Short term debt
  $       $ 750,000  
Long term debt
    6,389,650       6,360,000  
Accrued interest payable
    57,129       50,135  
Other liabilities
    44,882       78,567  
Dividends payable
    345,731       528,479  
Due to subsidiaries
    18,000       481,605  
Demand obligations for low income housing investment
    366,438       899,356  
 
           
Total Liabilities
    7,221,830       9,148,142  
 
           
 
               
Stockholders’ Equity
               
Common stock par value $5 per share, 6,000,000 shares authorized, 2,295,053 and 2,289,497 shares issued and outstanding for 2009 and 2008, respectively
    11,475,265       11,447,485  
Capital surplus
               
Retained earnings
    27,989,144       27,686,745  
Accumulated other comprehensive income (loss)
    (584,636 )     (2,876,256 )
 
           
Total Stockholders’ Equity
    38,879,773       36,257,974  
 
           
Total Liabilities and Stockholders’ Equity
  $ 46,101,603     $ 45,406,116  
 
           

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 23 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
Statements of Net Income and Retained Earnings
For the years ended December 31, 2009, 2008 and 2007
                         
    2009     2008     2007  
Income
                       
Dividends from affiliate
  $ 2,428,000     $ 2,809,000     $ 2,516,000  
Investment income
    101       465       13,407  
Dividend income
    169,966       324,219       310,919  
Interest Income
            64,777       40,031  
Other than temporary impairment losses
    (1,617,165 )     (1,206,581 )     (171,000 )
Security gains (losses)
    (2,424 )     21,855       233,446  
Net limited partnership income
    192,597       101,518       226,889  
 
                 
Total Income
    1,171,075       2,115,253       3,169,692  
 
                 
 
                       
Expenses
                       
Interest expense
    233,627       219,492       80,476  
Administrative expenses
    211,294       182,285       171,001  
 
                 
Total Expenses
    444,921       401,777       251,477  
 
                 
 
                       
Net income before income tax expense (benefit) and undistributed subsidiary net income
    726,154       1,713,476       2,918,215  
 
                       
Income Tax Expense (Benefit)
    (824,542 )     (430,706 )     (74,560 )
 
                 
 
                       
Income before undistributed subsidiary net income
    1,550,696       2,144,182       2,992,775  
 
                       
Undistributed subsidiary net income
    403,326       1,059,834       1,460,311  
 
                 
 
                       
Net Income
    1,954,022       3,204,016       4,453,086  
 
                       
Retained earnings, beginning of year
    27,686,745       28,409,273       26,794,238  
Adoption of FAS 106
            (428,112 )        
Stock issuance
    134,680              
Stock repurchase
    (43,666 )     (1,415,417 )     (807,487 )
Dividends on common stock
    (1,742,637 )     (2,083,015 )     (2,030,564 )
 
                 
Retained Earnings, End of Year
  $ 27,989,144     $ 27,686,745     $ 28,409,273  
 
                 
 
                       

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 23 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
Statements of Cash Flows
For the years ended December 31, 2009, 2008 and 2007
                         
    2009     2008     2007  
Cash Flows from Operating Activities
                       
Net income
  $ 1,954,022     $ 3,204,016     $ 4,453,086  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Undistributed subsidiary income
    (403,326 )     (1,059,834 )     (1,460,311 )
Gain (Loss) on sale of securities
    2,424       (21,855 )     (233,446 )
Other than temporary impairment losses
    1,617,165       1,206,581       171,000  
Deferred tax (benefit) expense
    (276,118 )     (1,269 )     (389,105 )
Increase (decrease) in other assets
    (510,937 )     144,130        
Increase (decrease) in other liabilities
    261,568       97,407       39,396  
Net change in deferred tax credits
    (20,235 )     15,931       29,628  
Amortization of limited partnership investments
    354,108       431,584       722,041  
 
                 
Net Cash Provided by Operating Activities
    2,978,671       4,016,691       3,332,289  
 
                 
 
                       
Cash Flows from Investing Activities
                       
Change in loans receivable
            1,089,167       (1,089,167 )
Proceeds from sales of securities available for sale
    32,228       1,511,286       2,172,408  
Proceeds from maturities of securities available for sale
    656,250                  
Purchase of securities available for sale
    (253,222 )     (962,408 )     (2,763,932 )
Capital contributed to subsidiary
            (5,500,000 )        
 
                 
Net Cash Provided by (Used in) Investing Activities
    435,256       (3,861,955 )     (1,680,691 )
 
                 
 
                       
Cash Flows from Financing Activities
                       
Proceeds of long-term debt
    5,150,000       5,650,000       2,826,500  
Payments on long-term debt
    (6,019,706 )     (2,626,540 )     (2,080,210 )
Change in short term debt
    (750,000 )     750,000          
Payments to repurchase common stock
    (54,276 )     (1,805,517 )     (968,554 )
Proceeds from issuance of common stock
    173,071       118,135       9,552  
Dividends paid in cash
    (1,932,332 )     (2,103,775 )     (2,016,246 )
 
                 
Net Cash Used in Financing Activities
    (3,433,243 )     (17,697 )     (2,228,958 )
 
                 
 
                       
Net Increase in Cash and Cash Equivalents
    (19,316 )     137,039       (577,360 )
 
                       
Cash and Cash Equivalents, Beginning of Year
    194,266       57,227       634,587  
 
                 
Cash and Cash Equivalents, End of Year
  $ 174,950     $ 194,266     $ 57,227  
 
                 

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F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
NOTE 24 INVESTMENT IN VBS MORTGAGE, LLC
On November 3, 2008, the Bank acquired a 70% ownership interest in VBS Mortgage, LLC (formerly Valley Broker Services, DBA VBS Mortgage). VBS originates both conventional and government sponsored mortgage for sale in the secondary market. As of December 31, 2009 and 2008, VBS’ summarized balance sheet and short period income statement were as follows:
Balance Sheets
December 31, 2009 and 2008
                 
    2009     2008  
Assets
               
Cash and cash equivalents
  $ 382,601     $ 29,397  
Interest bearing deposits with banks
            159,678  
Property and equipment, net
    36,688       28,575  
Other Assets
    127,448       27,274  
 
           
Total Assets
    546,737       244,924  
 
           
 
               
Liabilities
               
Line of credit
  $       $ 19,943  
Other liabilities
    137,707       68,884  
 
           
Total Liabilities
    137,707       88,827  
 
           
 
               
Equity
               
Capital
    219,634       219,634  
Retained earnings
    189,396       (63,537 )
 
           
Total Equity
    409,030       156,097  
 
           
Total Liabilities and Equity
  $ 546,737     $ 244,924  
 
           
Statements of Income
For the years ended December 31, 2009 and 2008
                 
    2009     2008  
Income
               
Mortgage origination income
  $ 1,740,801     $ 115,543  
Other income
    5,933       1,961  
 
           
Total Income
    1,746,734       117,504  
 
           
 
               
Expenses
               
Interest expense
    6       111  
Salaries and employee benefits
    775,521       93,057  
Occupancy and equipment expense
    111,583       21,584  
Management and professional fees
    382,076       2,966  
Other
    224,615       37,431  
 
           
Total Expenses
    1,493,801       155,149  
 
           
 
               
Net income (loss)
  $ 252,933     $ (37,645 )
 
           

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(ELLIOTTDAVIS LOGO)
Report of Independent Registered Public Accounting Firm
To the Board of Directors
F & M Bank Corp. and Subsidiaries
Timberville, Virginia
We have audited the accompanying consolidated balance sheets of F & M Bank Corp. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity and cash flows each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of F & M Bank Corp. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the three years in the period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assertion about the effectiveness of F & M Bank Corp.’s internal control over financial reporting as of December 31, 2009 included in the accompanying 2009 Form 10-K, item 8, and, accordingly, we do not express an opinion thereon.
(GRAPHIC)

Galax, Virginia
March 25, 2010
104 Cranberry Road, P.O Box 760, Galax, VA 24333 Phone: 276.238.1800 Fax: 276.238.1801 elliottdavis.com

 


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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.   Controls and Procedures
Disclosure Controls and Procedures. The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s report on internal control over financial reporting and the audit report of the Registered Public Accounting Firm for the year ended December 31, 2009 are included in Item 8 of the annual report on Form 10-K. Management’s Report on Internal Control over Financial Reporting. Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment of the design and effectiveness of its internal controls over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the assessment using these criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2009.
Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.   Other Information
None.

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PART III
Item 10.   Directors and Executive Officers of the Registrant
Information regarding directors, executive officers and the audit committee financial expert is incorporated by reference from the Company’s definitive proxy statement for the Company’s 2010 Annual Meeting of Shareholders to be held May 8, 2010 (“Proxy Statement”), under the captions “Election of Directors,” “Board of Directors and Committees,” and “Executive Officers.”
Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the Company is incorporated by reference from the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
The Company has adopted a broad based code of ethics for all employees and directors. The Company has also adopted a code of ethics tailored to senior officers who have financial responsibilities. A copy of the codes may be obtained without charge by request from the corporate secretary.
Item 11.   Executive Compensation
This information is incorporated by reference from the Proxy Statement under the caption “Executive Compensation.”
Item 12.   Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference from the Proxy Statement under the caption “Ownership of Company Common Stock” and “Executive Compensation” and from Item 5 of this 10-K.
Item 13.   Certain Relationships and Related Transactions
This information is incorporated by reference from the Proxy Statement under the caption “Interest of Directors and Officers in Certain Transactions.”
Item 14.   Principal Accounting Fees and Services
This information is incorporated by reference from the Proxy Statement under the caption “Principal Accounting Fees.”
Item 15.   Exhibits and Financial Statement Schedules
The following financial statements are filed as a part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent auditors of the Company are in Part II, Item 8 on pages 30 thru 56:
         
    30  
    31  
    32  
    33  
    34  
    58  

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(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as a part of this form 10-K and this list includes the Exhibit index:
     
Exhibit   No.
3.1
  Restated Articles of Incorporation of F & M Bank Corp. as incorporated by reference to F & M Bank Corp.’s 10-Q filed August 13, 2007.
 
3.2
  Amended and Restated Bylaws of F & M Bank Corp. as incorporated by reference to F & M Bank Corp.’s 10-K filed March 8, 2002.
 
21.0
  Subsidiaries of the Registrant
 
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Shareholders may obtain, free of charge, a copy of the exhibits to this Report on Form 10-K by writing Larry A. Caplinger, Corporate Secretary, at F & M Bank Corp., P.O. Box 1111, Timberville, VA 22853 or our website at www.farmersandmerchants.biz.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
  F & M Bank Corp.
(Registrant)
         
By:
  /s/ Dean W. Withers
 
Date March 25, 2010
 
       
 
  Dean W. Withers
Director, President and Chief Executive Officer
   
 
       
By:
  /s/ Neil W. Hayslett
 
Date March 25, 2010
 
       
 
  Neil W. Hayslett
Executive Vice President and Chief Financial Officer
   
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated.
         
Signature   Title   Date
/s/ Thomas L. Cline
  Director   March 25, 2010
 
       
Thomas L. Cline
       
 
       
/s/ John N. Crist
  Director   March 25, 2010
 
       
John N. Crist
       
 
       
/s/ Julian D. Fisher
  Director, Chairman   March 25, 2010
 
       
Julian D. Fisher
       
 
       
/s/ Ellen R. Fitzwater
  Director   March 25, 2010
 
       
Ellen R. Fitzwater
       
 
       
/s/ Daniel J. Harshman
  Director   March 25, 2010
 
       
Daniel J. Harshman
       
 
       
/s/ Richard S. Myers
  Director   March 25, 2010
 
       
Richard S. Myers
       
 
       
/s/ Michael W. Pugh
  Director   March 25, 2010
 
       
Michael W. Pugh
       
 
       
/s/ Ronald E. Wampler
  Director   March 25, 2010
 
       
Ronald E. Wampler
       

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