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F&M BANK CORP - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
     
þ   Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2009.
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 000-13273
F & M BANK CORP.
     
Virginia   54-1280811
     
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
(540) 896-8941
(Registrant’s Telephone Number, Including Area Code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 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 oAccelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting Company þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at November 1, 2009
Common Stock, par value — $5   2,294,433 shares
 
 

 


 

F & M BANK CORP.
INDEX
             
        Page  
 
   
  FINANCIAL INFORMATION     2  
  Financial Statements        
 
  Consolidated Statements of Income — Three Months Ended September 30, 2009 and 2008     2  
 
  Consolidated Statements of Income — Nine Months Ended September 30, 2009 and 2008     3  
 
  Consolidated Balance Sheets — September 30, 2009 and December 31, 2008     4  
 
  Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and 2008     5  
 
  Consolidated Statements of Changes in Stockholders’ Equity — Nine Months September 30, 2009 and 2008     6  
 
  Notes to Consolidated Financial Statements     7  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
  Quantitative and Qualitative Disclosures About Market Risk     25  
  Controls and Procedures     25  
 
   
  OTHER INFORMATION     26  
  Legal Proceedings     26  
  Risk Factors     26  
  Unregistered Sales of Equity Securities and Use of Proceeds     26  
  Defaults upon Senior Securities     26  
  Submission of Matters to a Vote of Security Holders     26  
  Other Information     26  
  Exhibits     26  
 
   
SIGNATURES     27  
 
   
CERTIFICATIONS     28  
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
                 
    Three Months Ended  
    September 30,  
    2009     2008  
 
               
Interest Income
               
Interest and fees on loans held for investment
  $ 6,302     $ 6,125  
Interest and fees on loans held for sale
    259       65  
Interest on federal funds sold
    3       17  
Interest on interest bearing deposits
    7       24  
Dividends on equity securities
    61       140  
Interest on debt securities
    129       246  
 
           
Total Interest Income
    6,761       6,617  
 
           
 
               
Interest Expense
               
Interest on demand deposits
    355       187  
Interest on savings accounts
    47       77  
Interest on time deposits over $100,000
    477       281  
Interest on time deposits
    1,024       1,370  
 
           
Total interest on deposits
    1,903       1,915  
Interest on short-term debt
    9       216  
Interest on long-term debt
    563       534  
 
           
Total Interest Expense
    2,475       2,665  
 
           
Net Interest Income
    4,286       3,952  
 
               
Provision for Loan Losses
    2,790       120  
 
           
Net Interest Income after Provision for Loan Losses
    1,496       3,832  
 
           
 
               
Noninterest Income
               
Service charges
    342       367  
Insurance and other commissions
    104       54  
Other
    167       272  
Income on bank owned life insurance
    92       94  
Security gains
    0       208  
Other than temporarily impaired losses
    (786 )     (520 )
 
           
Total Noninterest Income
    (81 )     475  
 
           
 
               
Noninterest Expense
               
Salaries
    1,349       1,279  
Employee benefits
    440       396  
Occupancy expense
    144       145  
Equipment expense
    165       147  
Intangible amortization
    69       69  
Other
    1,082       757  
 
           
Total Noninterest Expense
    3,249       2,793  
 
           
 
               
Income before Income Taxes
    (1,834 )     1,514  
 
               
Income Tax expense (benefit)
    (978 )     428  
Minority interest in consolidated subsidiary (earnings) losses
    (20 )        
 
           
Net Income (Loss)
  $ (876 )   $ 1,086  
 
           
 
               
Per Share Data
               
Net Income (Loss)
  $ (.38 )   $ .47  
 
           
Cash Dividends
  $ .23     $ .23  
 
           
Weighted Average Shares Outstanding
    2,294,275       2,314,827  
 
           
The accompanying notes are an integral part of these statements.

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F & M BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except per Share Amounts)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2009     2008  
 
               
Interest Income
               
Interest and fees on loans held for investment
  $ 18,905     $ 17,315  
Interest and fees on loans held for sale
    810       185  
Interest on federal funds sold
    5       46  
Interest on interest bearing deposits
    17       99  
Dividends on equity securities
    165       400  
Interest on debt securities
    579       734  
 
           
Total Interest Income
    20,481       18,779  
 
           
 
               
Interest Expense
               
Interest on demand deposits
    870       567  
Interest on savings accounts
    155       222  
Interest on time deposits over $100,000
    1,580       1,345  
Interest on time deposits
    3,336       3,797  
 
           
Total interest on deposits
    5,941       5,931  
Interest on short-term debt
    65       402  
Interest on long-term debt
    1,718       1,389  
 
           
Total Interest Expense
    7,724       7,722  
 
           
Net Interest Income
    12,757       11,057  
 
               
Provision for Loan Losses
    3,310       385  
 
           
Net Interest Income after Provision for Loan Losses
    9,447       10,672  
 
           
 
               
Noninterest Income
               
Service charges
    943       1,007  
Insurance and other commissions
    385       223  
Other
    722       923  
Income on bank owned life insurance
    272       242  
Security gains (losses)
    (5 )     177  
Other than temporarily impaired losses
    (1,612 )     (520 )
 
           
Total Noninterest Income
    705       2,052  
 
           
 
               
Noninterest Expense
               
Salaries
    3,836       3,773  
Employee benefits
    1,321       1,122  
Occupancy expense
    427       422  
Equipment expense
    433       413  
Intangible amortization
    207       207  
Other
    2,907       2,270  
 
           
Total Noninterest Expense
    9,131       8,207  
 
           
 
               
Income before Income Taxes
    1,021       4,517  
Income Tax expense (benefit)
    (144 )     1,283  
Minority interest in consolidated subsidiary (earnings) losses
    (66 )        
 
           
Net Income
  $ 1,099     $ 3,234  
 
           
 
               
Per Share Data
               
Net Income
  $ .48     $ 1.39  
 
           
Cash Dividends
  $ .69     $ .67  
 
           
Weighted Average Shares Outstanding
    2,290,859       2,327,735  
 
           
The accompanying notes are an integral part of these statements.

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F & M BANK CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
                 
    September 30,     December 31,  
    2009     2008  
    (Unaudited)     (Audited)  
 
               
Assets
               
Cash and due from banks
  $ 5,775     $ 5,687  
Federal funds sold
    2,411       8,979  
 
           
Cash and cash equivalents
    8,186       14,666  
Interest bearing deposits in banks
    63       1,162  
Securities:
               
Held to maturity — fair value of $110,000 in 2009 and 2008 (note 2)
    110       110  
Available for sale (note 2)
    16,935       22,237  
Other investments
    9,031       8,439  
Loans held for sale
    22,215       3,780  
Loans held for investment (note 3)
    426,763       399,233  
Less allowance for loan losses (note 4)
    (4,700 )     (2,189 )
 
           
Net loans held for investment
    422,063       397,044  
 
               
Bank premises and equipment
    7,182       7,457  
Interest receivable
    1,863       2,056  
Core deposit intangible
    391       598  
Goodwill
    2,670       2,670  
Bank owned life insurance
    6,520       6,304  
Other assets
    5,896       5,535  
 
           
Total assets
  $ 503,125     $ 472,058  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest bearing
  $ 51,250     $ 49,786  
Interest bearing:
               
Demand
    64,394       39,773  
Money market accounts
    22,822       22,779  
Savings
    33,884       29,367  
Time deposits over $100,000
    77,762       63,855  
All other time deposits
    138,814       136,665  
 
           
Total deposits
    388,926       342,225  
 
           
 
               
Short-term debt
    4,022       20,510  
Accrued liabilities
    7,332       7,687  
Subordinated Debt
    875          
Long-term debt
    64,152       65,331  
 
           
Total liabilities
    465,307       435,753  
 
           
Minority interest in consolidated subsidiary
    113       47  
 
           
 
               
Stockholders’ Equity
               
Common stock, $5 par value, 6,000,000 shares authorized, 2,294,340 and 2,289,497 shares issued and outstanding in 2009 and 2008, respectively
    11,472       11,447  
Retained earnings
    27,468       27,687  
Accumulated other comprehensive loss
    (1,235 )     (2,876 )
 
           
Total stockholders’ equity
    37,705       36,258  
 
           
Total liabilities and stockholders’ equity
  $ 503,125     $ 472,058  
 
           
The accompanying notes are an integral part of these statements.

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F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2009     2008  
 
               
Cash Flows from Operating Activities
               
Net income
  $ 1,099     $ 3,234  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    488       468  
Amortization (accretion) of security premiums (discounts)
    26       (29 )
Net (increase) decrease in loans held for sale
    (18,434 )        
Provision for loan losses
    3,310       385  
Intangible amortization
    207       207  
(Increase) decrease in interest receivable
    193       47  
(Increase) decrease in other assets
    426       640  
Increase in accrued expenses
    (1,096 )     (606 )
(Gain) loss on security transactions
    1,617       343  
Amortization of limited partnership investments
    277       335  
Income from life insurance investment
    (216 )     (223 )
 
           
Net Adjustments
    (13,202 )     1,567  
 
           
Net Cash Provided (Used) by Operating Activities
    (12,103 )     4,801  
 
           
 
               
Cash Flows from Investing Activities
               
Purchase of investments available for sale
    (6,948 )     (19,449 )
Proceeds from sales of investments available for sale
    12,097       20,393  
Proceeds from maturity of investments available for sale
    16       1,010  
Net increase in loans held for investment
    (28,843 )     (64,879 )
Purchase of property and equipment
    (212 )     (734 )
Net (increase) decrease in interest bearing bank deposits
    1,099       397  
 
           
Net Cash Used in Investing Activities
    (22,801 )     (63,262 )
 
           
 
               
Cash Flows from Financing Activities
               
Net change in demand and savings deposits
    30,645       9,003  
Net change in time deposits
    16,056       15,780  
Net change in short-term debt
    (16,489 )     10,935  
Cash dividends paid
    (1,587 )     (1,561 )
Repurchase of common stock
    (54 )     (1,536 )
Change in federal funds purchased
            (2,932 )
Proceeds of long-term debt
    13,275       42,000  
Proceeds from issuance of common stock
    157       118  
Repayment of long-term debt
    (13,579 )     (7,929 )
 
           
Net Cash Provided (Used) by Financing Activities
    28,424       63,878  
 
           
 
               
Net Decrease (Increase) in Cash and Cash Equivalents
    (6,480 )     5,417  
Cash and Cash Equivalents, Beginning of Period
    14,666       8,706  
 
           
Cash and Cash Equivalents, End of Period
  $ 8,186     $ 14,123  
 
           
 
               
Supplemental Disclosure
               
Cash paid for:
               
Interest expense
  $ 7,904     $ 7,952  
Income taxes
    620       700  
The accompanying notes are an integral part of these statements.

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F & M BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands of Dollars)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2009     2008  
 
               
Balance, beginning of period, as previously stated
  $ 36,258     $ 39,165  
 
               
Cumulative effect of initial adoption of ASC Topic 715 (formerly FAS 106)
            (428 )
 
           
 
               
Balance, beginning of period, restated
  $ 36,258     $ 38,737  
 
               
Comprehensive Income
               
Net income
    1,099       3,234  
Net change in unrealized appreciation on securities available for sale, net of taxes (Note 1)
    1,642       (710 )
 
           
Total comprehensive income
    2,741       2,524  
 
               
Repurchase of common stock
    (54 )     (1,536 )
Common stock sold
    157       118  
Dividends declared
    (1,397 )     (1,569 )
 
           
Balance, end of period
  $ 37,705     $ 38,274  
 
           
The accompanying notes are an integral part of these statements.

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F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements include the accounts of F & M Bank Corp. and its subsidiaries (the “Company”). Significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements conform to accounting principles generally accepted in the United States and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2009 and the results of operations for the nine month periods ended September 30, 2009 and September 30, 2008. The notes included herein should be read in conjunction with the notes to financial statements included in the 2008 annual report to stockholders of the F & M Bank Corp.
The Company does not expect the anticipated adoption of any newly issued accounting standards to have a material impact on future operations or financial position.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and gains or losses on certain derivative contracts, are reported as a separate component of the equity section of the balance sheet. Such items, along with operating net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
                 
    September 30,     December 31,  
    2009     2008  
 
               
Changes in:
               
Net Income
  $ 1,099,027     $ 3,204,015  
 
               
Adjustment for initial adoption of ASC 715
               
Funded Status Adjustment
            (1,835,082 )
Tax effect
            623,928  
 
           
Pension plan adjustment, net of tax
            (1,211,154 )
 
           
 
               
Unrealized holding gains (losses) on available-for-sale securities:
    758,466       (2,742,769 )
Other than temporary impairment losses
    1,612,355       1,758,730  
Reclassification adjustment for (gains) losses realized in income
    4,899       (78,173 )
 
           
Net unrealized gains (losses)
    2,375,720       (1,062,212 )
Tax effect
    734,179       361,152  
 
           
Unrealized holding gain (losses), net of tax
    1,641,541       (701,060 )
 
           
Net change in other comprehensive income
  $ 2,740,568     $ 1,291,801  
 
           
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 13, 2009, the date the financial statements were issued.

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F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 2 INVESTMENT SECURITIES:
The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2009 and December 31, 2008 are as follows (in thousands):
                                 
    2009     2008  
            Market             Market  
    Cost     Value     Cost     Value  
 
                               
Securities Held to Maturity
                               
U. S. Treasury and agency obligations
  $ 110     $ 110     $ 110     $ 110  
 
                       
Total
  $ 110     $ 110     $ 110     $ 110  
 
                       
                                 
    2009     2008  
            Market             Market  
    Cost     Value     Cost     Value  
 
                               
Securities Available for Sale
                               
Government sponsored enterprises
  $ 5,977     $ 6,018     $ 10,013     $ 10,194  
Equity securities
    3,886       3,724       5,430       3,064  
Mortgage-backed securities
    6,418       6,715       8,391       8,573  
Corporate Bonds
    281       478       281       281  
Municipals
                    125       125  
 
                       
Total
  $ 16,562     $ 16,935     $ 24,240     $ 22,237  
 
                       
The amortized cost and fair value of securities at September 30, 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
  $ 110     $ 110     $ 2,319     $ 2,315  
Due after one year through five years
                    3,978       4,020  
Due after five years
                    6,379       6,876  
 
                       
 
    110       110       12,676       13,211  
Marketable equities
                    3,886       3,724  
 
                       
Total
  $ 110     $ 110     $ 16,562     $ 16,935  
 
                       
There were no sales of debt securities during the first three quarters of 2009 or in all of 2008. Following is a table reflecting gains and losses on sales of equity securities:
                 
    2009     2008  
 
               
Gains
  $       $ 244  
Losses
    (5 )     (166 )
 
           
Net Gains (Losses)
  $ (5 )   $ 78  
 
           

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F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 2 INVESTMENT SECURITIES (CONTINUED):
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 as of September 30, 2009 (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  
Government sponsored enterprises
  $       $       $       $       $       $    
Mortgage backed obligations
                    317       (3 )     317       (3 )
Marketable equities
    28       (12 )     1,334       (331 )     1,362       (343 )
 
                                   
Total
  $ 28     $ (12 )   $ 1,651     $ (334 )   $ 1,679     $ (346 )
 
                                   
The losses above are not considered to be other than temporarily impaired at the end of the period. See page 14 for further discussion.
NOTE 3 LOANS HELD FOR INVESTMENT:
Loans outstanding at September 30, 2009 and December 31, 2008 are summarized as follows:
                 
    2009     2008  
 
               
Real Estate
               
Construction
  $ 86,123     $ 71,259  
Residential
    183,795       169,122  
Commercial and agricultural
    135,743       134,008  
Installment loans to individuals
    18,866       22,792  
Credit cards
    2,116       1,940  
Other
    120       112  
 
           
Total
  $ 426,763     $ 399,233  
 
           

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F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses follows:
                                 
    Nine Months Ended     Three Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
 
                               
Balance, beginning of period
  $ 2,189     $ 1,703     $ 2,556     $ 1,707  
Provisions charged to operating expenses
    3,310       385       2,790       120  
Net (charge-offs) recoveries:
                               
Loan recoveries
    51       59       22       18  
Loan charge-offs
    (850 )     (327 )     (668 )     (25 )
 
                       
Total Net Charge-Offs *
    (799 )     (268 )     (646 )     (7 )
 
                       
Balance, End of Period
  $ 4,700     $ 1,820     $ 4,700     $ 1,820  
 
                       
 
* Components of Net Charge-Offs
                               
   Real Estate
    (699 )     1       (612 )        
   Commercial
    (44 )     (260 )                
   Installment
    (56 )     (9 )     (34 )     (7 )
 
                       
Total
  $ (799 )   $ (268 )   $ (646 )   $ (7 )
 
                       
NOTE 5 EMPLOYEE BENEFIT PLAN
The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. The benefits are primarily based on years of service and earnings. The following is a summary of net periodic pension costs for the nine-month periods ended September 30, 2009 and 2008.
                 
    2009     2008  
 
               
Service cost
  $ 269,100     $ 241,785  
Interest cost
    204,999       192,162  
Expected return on plan assets
    (235,284 )     (282,534 )
Amortization of net obligation at transition
               
Amortization of prior service cost
    (3,975 )     (3,975 )
Amortization of net (gain) or loss
    93,153       8,841  
 
           
Net periodic benefit cost
  $ 327,993     $ 156,279  
 
           

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F & M BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 FAIR VALUE
FASB Accounting Standards Codification “ASC” 820 (Topic 820) Fair Value Measures and Disclosures (formerly “SFAS 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: ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 “Receivables” 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 ASC 820.
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.
                                 
September 30, 2009   Total     Level 1     Level 2     Level 3  
Investment securities available-for-sale
  $ 16,935     $ 4,202     $ 12,733          
Loans held for sale
    22,215               22,215          
Impaired loans
    6,966       5,322       1,644          
Other real estate owned
    524               524          
 
                         
Total assets at fair value
    46,640       9,524       37,116          
 
                               
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
ASC 825 “Financial Instruments” (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 September 30, 2009 and December 31, 2008 are as follows (in thousands):
                                 
    September 30, 2009   December 31, 2008
    Estimated   Carrying   Estimated   Carrying
    Fair Value   Value   Fair Value   Value
 
                               
Financial Assets
                               
Cash
  $ 5,775     $ 5,775     $ 5,687     $ 5,687  
Interest bearing deposits
    63       63       1,164       1,162  
Federal funds sold
    2,411       2,411       8,979       8,979  
Securities available for sale
    16,935       16,935       22,237       22,237  
Securities held to maturity
    110       110       110       110  
Other investments
    9,031       9,031       8,439       8,439  
Loans
    449,442       422,063       418,630       399,233  
Loan held for sale
    22,215       22,215       3,780       3,780  
Bank owned life insurance
    6,520       6,520       6,304       6,304  
Accrued interest receivable
    1,863       1,863       2,056       2,056  
 
                               
Financial Liabilities
                               
Demand Deposits:
                               
Non-interest bearing
    51,250       51,250       49,786       49,786  
Interest bearing
    87,216       87,216       62,552       62,552  
Savings deposits
    33,884       33,884       29,367       29,367  
Time deposits
    218,631       216,576       202,082       200,521  
Accrued liabilities
    7,332       7,332       7,687       7,687  
Short-term debt
    4,022       4,022       20,569       20,510  
Long-term debt
    65,176       65,027       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 as of the end of each respective period shown above.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     F & M Bank Corp. (Company), incorporated in Virginia in 1983, is a one-bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly-owned subsidiaries of the Bank. Ownership of TEB was transferred from the Company to the Bank during the first quarter of 2009. The Bank also holds a majority ownership in VBS Mortgage LLC (VBS).
     The Bank is a full service commercial bank offering a wide range of banking and financial services through its nine branch offices. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides title insurance, brokerage services and property/casualty insurance to customers of the Bank. VBS provides a variety of mortgage products including FHA, VA and VHDA loans. VBS was founded in Harrisonburg, VA in 1999. VBS has two offices, located in Harrisonburg and Broadway Virginia.
     The Company’s primary trade area services customers in Rockingham County, Shenandoah County, Page County and the northern part of Augusta County.
     Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 or this Form 10Q.
Forward-Looking Statements
     Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events.
     Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits.
     We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies
General
     The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.
Allowance for Loan Losses
     The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on ASC 450 (formerly SFAS No. 5), “Contingencies” which requires that losses be accrued when occurrence is probable and can be reasonably estimated and ASC 310 (formerly SFAS 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.
Goodwill and Intangibles
     ASC 805 “Business Combinations” and ASC 350 “Intangibles” requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
     Core deposit intangibles are amortized on a straight-line basis over ten years. 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.
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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Securities Impairment, continued
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 will 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 will be conducted at each filing date.
 
    For purposes of determining OTTI, the security value recovery period will be projected for a maximum of a two year holding period. This will be 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, will be the prospects for the individual security, rather than broad market indices. All available evidentiary material will be considered, including the Company’s public filings with the SEC, press releases, analyst reports, etc.
 
    Secondary consideration will be 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 would only be considered when the declines in value were not limited to the individual security, but were prevalent over the broader market. This measure will be 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 Q1, 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 Q1 or Q2 rather than continuing to evaluate the security over several quarters, based on holding period projections.
Results of Operations
Net Income
     Net loss for the third quarter of 2009 was $876,000 or $.38 per share, compared to net income of $1,086,000 or $.47 per share in the second quarter of 2008. Noninterest income, exclusive of securities transactions, decreased 10.42% and noninterest expense increased 16.33% during the same period.
     Earnings from Bank Operations are reflected in table below, these represent the core earnings from banking operations for the first nine months of 2009 and 2008, respectively. These amounts are exclusive of gains or losses on the Parent’s equity portfolio and historic rehabilitation credits related to the investment in low income housing projects.
                 
    2009     2008  
Net Income from Bank Operations
  $ 1,799     $ 3,134  
Income or loss from Parent Company Activities
    (700 )     100  
 
           
Net Income for the year
    1,099       3,234  

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Net Interest Income
     The 2009 year to date tax equivalent net interest margin increased $1,652,000 or 14.70% compared to the same period in 2008. The yield on earning assets decreased .65%, while the cost of funds decreased .66% compared to the same period in 2008. In response to the economic slowdown, the Federal Reserve’s Federal Open Market Committee (FOMC) began lowering short-term interest rate in September 2007. In December 2008, the FOMC lowered the Federal Funds Rate to an historic low of 0 to 25 BP. The Prime Rate, which typically tracks at 3.00% above the Federal Funds Rate, currently stands at 3.25%.
     The Interest Sensitivity Analysis on page 24 indicates the Company is in a slightly asset sensitive position in the one year time horizon (1.46%), the recent decrease in rates and asset growth resulted in a .19% decrease in the net interest margin compared to the same period in 2008. This has resulted due to the fact that a large portion of rate sensitive liabilities (primarily interest bearing demand deposits and savings) have reached a virtual rate floor (due to the current level of market rates), while rate sensitive assets continue to reprice at lower rates.
     A schedule of the net interest margin for 2009 and 2008 can be found in Table I on page 23.
Provision for Loan Losses
     The provision for loan losses for the quarter ended September 30, 2009 was $2.79 million, an increase of $2.48 million from the most recent quarter and an increase of $2.79 million from the same quarter a year ago. Approximately $1.0 million of the current quarter provision for loan losses related to an increase in the specific reserve on one participation loan to a troubled bank that is at high risk of failure. 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. The allowance for loan losses as a percentage of the loan portfolio was 1.10% at September 30, 2009, .61% at June 30, 2009, .54% and .47% for the periods ending December 31, 2008 and September 30, 2008, respectively.
Noninterest Income
     Noninterest income, exclusive of securities transactions, decreased $73,000 or 3.05% through September 30, 2009. Items contributing to the decrease include a $64,000 decrease in service charges, and a $124,000 decrease in secondary market fees which were offset by a $162,000 increase in Insurance and other commissions. Revenue from FMFS, TEB Life Insurance Company and VBS Mortgage contributed $103,000 of the increase in Insurance and other commissions.
Noninterest Expense
     Noninterest expense increased $924,000 (11.26%) in 2009. The increase is the result of a $262,000 increase in salaries and benefits expense (5.4%). The increase in salaries and benefits is due primarily to increase in pension expense. Exclusive of personnel expenses, other noninterest expenses increased at an annualized rate of 20% in 2009 compared to 2008. Areas that increased include a $105,000 increase in data processing expense and a $473,000 increase in FDIC assessment fees.
     Data processing expense increased due primarily to the support of our rewards checking products, which have generated approximately $31 million in new deposits in the last year. The FDIC assessment increased due to an increase in our insured deposits and the accrual for the FDIC special assessment. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available Bank Holding Company Performance Report, the Company’s and peer group noninterest expenses averaged 2.36% and 3.51% of average assets, respectively. The Company’s operating costs have always compared favorably to the peer group due to an excellent asset to employee ratio and below average facilities costs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition
Federal Funds Sold and Interest Bearing Bank Deposits
     The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end was benchmarked at .25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Combined balances in federal funds sold and interest bearing bank deposits have decreased due to growth in the loan portfolio.
Securities
     The Company’s securities portfolio serves several purposes. Portions of the portfolio are held to assist the Company with liquidity, asset liability management, as security for certain public funds and repurchase agreements and for long-term growth potential.
     The securities portfolio consists of investment securities (commonly referred to as “securities held to maturity”) and securities available for sale. Securities are classified as investment securities when management has the intent and ability to hold the securities to maturity. Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders’ equity.
     As of September 30, 2009, the market value of securities available for sale exceeded their cost by $373,000. This includes decreases in the equity securities portfolio held by the Company and an increase in value of government obligations held by the Bank and the equities securities portfolio held by TEB Life Insurance Company. Management has traditionally held debt securities (regardless of classification) until maturity and thus it does not expect the fluctuations in value of these securities to have a direct impact on earnings.
     Investments in debt securities have decreased approximately $6.1 million of 2009. The portfolio is made up of primarily agency and mortgage-backed securities with an average portfolio life of approximately two years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. Given the historically low interest rates proceeds from bond maturities and mortgage-backed securities pay downs have been used to support the growth in the loan portfolio. Scheduled maturities for the remainder of 2009 total $4,124,000 and these bonds have an average yield of approximately 2.74%. Based on current market rates, as these bonds mature, the funds will be reinvested at rates that are significantly lower.
     A review of these investments as of September 30, 2009, revealed several securities that were impaired as of quarter end. The write down for the third quarter totaled $786,000 or $519,000 net of deferred tax. This results in a year to date write down on equity securities for book purposes of $1,612,000 or 1,064,000 net of deferred tax. Management continues to re-evaluate the portfolio for impairment on a quarterly basis. The Company also sustained losses of $5,000 year to date from the sale of securities.
     Subsequent to the aforementioned impairment write downs, the Company’s equity securities portfolio was $35,000 above cost at September 30, 2009. The increase in the value of the equities portfolio is spread over a number of asset sectors including holdings in the financial sector. This increase is reflective of, and consistent with, the recent recovery in stock market prices. To minimize risk the Company holds a diversified portfolio of equity investments in a number of large, regional financial institutions and a variety of other predominantly blue-chip securities. Management continues to believe that these investments offer adequate current returns (dividends) and have the potential for future increases in value.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Loan Portfolio
     The Company operates in a predominately rural area that includes the counties of Rockingham, Page and Shenandoah in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid size businesses and farms within its primary service area.
     The allowance for loan losses (see subsequent section) provides for the risk that borrowers will be unable to repay their obligations and is reviewed quarterly for adequacy. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
     While lending is geographically diversified within the service area, the Company does have loan concentrations, defined as loans that are 25% or more of Tier II capital (Tier I Capital plus Allowance for Loan and Lease Losses and Subordinated Debt), in agricultural (primarily poultry farming), construction (real estate development and spec housing) , hotels, bank holding companies, assisted living facilities and multi-family residential properties. Management and the Board of Directors review these concentrations quarterly. During the first nine months of 2009 the total loan portfolio increased $27,530,000.
     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 $8,017,000 at September 30, 2009 compared to $3,689,000 at September 30, 2008. Approximately 77% 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 September 30, 2009, the Company holds $524,000 of real estate which was acquired through foreclosure.
The following is a summary of information pertaining to risk elements and impaired loans:
                                         
    September 30,   June 30,   March 31,   December 31,   September 30,
    2009   2009   2009   2008   2008
Nonaccrual Loans:
                                       
Real Estate
    3,638       1,918       1,518       1,374       1,225  
Commercial
    1,364       31                          
Other
                                       
 
                                       
Loans past due 90 days or more:
                                       
Real Estate
    2,550       4,432       2,798       3,205       2,276  
Commercial
    312       432       497       26          
Other
    153       38       148       161       188  
 
                                       
 
                                       
Total Nonperforming loans
    8,017       6,461       4,961       4,766       3,689  
 
                                       
Nonperforming loans as a percentage of loans held for investment
    1.88 %     1.55 %     1.21 %     1.19 %     .97 %
 
                                       
Net Charge Offs to Total Loans
    .19 %     .04 %     .004 %     .08 %     .07 %
 
                                       
Allowance for loan and lease losses to nonperforming loans
    58.63 %     39.56 %     48.00 %     45.93 %     49.33 %

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Allowance for Loan Losses
     Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and the trend of past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Banks watch list or schedule of classified loans.
     In evaluating the portfolio, loans are segregated into loans with identified potential losses and pools of loans by type (commercial, residential, consumer, credit cards). Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $100,000 are reviewed individually for impairment under FAS 114. A variety of factors are taken into account when reviewing these credits including borrower cash flow, payment history, fair value of collateral, company management, the industry in which the borrower is involved and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under FAS 5.
     Loan pools are further segmented into watch list, past due over 90 days and all other loans by type. Watch list loans include loans that are 60 days past due, and may include restructured loans, borrowers that are highly leveraged, loans that have been upgraded from classified or loans that contain policy exceptions (term, collateral coverage, etc.). Loss estimates on these loans reflect the increased risk associated with these assets due to any of the above factors. The past due pools contain loans that are currently 90 days or more past due. Loss rates assigned reflect the fact that these loans bear a significantly higher risk of charge-off. Loss rates vary by loan type to reflect the likelihood that collateral values will offset a portion of the anticipated losses.
     The remainder of the portfolio falls into pools by type of homogenous loans that do not exhibit any of the above described weaknesses. Loss rates are assigned based on historical loss rates over the prior five years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates.
     All potential losses are evaluated within a range of low to high. A general reserve has been established to reflect other unidentified losses within the portfolio. This helps to offset the increased risk of loss associated with fluctuations in past due trends, changes in the local and national economies, and other unusual events. The Board approves the loan loss provision for the following quarter based on this evaluation and an effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.
     The allowance for loan losses of $4,700,000 at September 30, 2009 is equal to 1.10% of loans held for investment. This compares to an allowance of $1,820,000 at September 30, 2008. Management has funded the allowance a total of $3,310,000 through September 30, 2009. Net charge-offs year to date total $799,000.
     The overall level of the allowance is somewhat below its peer group average. 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.
Deposits and Other Borrowings
     The Company’s main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits have increased $46,701,000 since December 31, 2008. Time deposits increased $16,056,000 during this period while demand deposits and savings deposits increased $30,645,000. Certificates of deposit increased 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 September 30, 2009 the Bank had obtained a total of $32,844,000 in CDARS funding. Demand deposits and savings deposits increased as a result of the rewards checking product which has generated approximately $31 million in new deposits in the last year.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Short-term debt
     Short-term debt consists of federal funds purchased, commercial repurchase agreements (repos.) and daily rate credit from the Federal Home Loan Bank (FHLB). With the commercial repos customers deposit operating funds into their checking account and by mutual agreement with the bank their excess funds are swept daily into the repurchase accounts. These accounts are not considered deposits and are not insured by the FDIC. The Bank pledges securities held in its investment portfolio as collateral for these short-term loans. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Daily rate credit from the FHLB has been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans.
Long-term debt
     Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be an important source of funding real estate loan growth. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund loan growth. By borrowing from the FHLB at various fixed rate terms, the program allows the Bank to match the maturity of its rate real estate portfolio with the maturity of its debt. This reduces the Company’s exposure to interest rate changes. Scheduled repayments totaled $13,579,000 through September 30, 2009. Additional borrowings of $13,275,000 were obtained to support loan growth and to extend maturities at more favorable longer term rates
     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%. At September 30, 2009, $5 million was owed on this line of credit. Subsequent to quarter end 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%. This transaction took place on November 2, 2009.
     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 bears a rate of prime. Repayment terms include quarterly payments of $250,000 plus interest beginning in December 2008, at September 30, 2009 the balance on this loan was $250,000 (paid in full subsequent to quarter end on October 2, 2009).
     In August 2009, the Company began to issue Subordinated debt agreements with local investors with 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 September 30, 2009 the balance outstanding was $875,000.
Capital
     The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level. As of September 30, 2009, the Company’s total risk based capital and total capital to total assets ratios were 10.45% and 7.10%, respectively. Both ratios are in excess of regulatory minimums and exceed the ratios of the Company’s peers.
Liquidity
     Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
     Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates, the purchase of federal funds and funds raised through the CDARS One-Way Buy Program. To further meet its liquidity needs, the Company also maintains lines of credit with correspondent financial institutions. The Company’s subsidiary bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.
Interest Rate Sensitivity
     In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.
     As of September 30, 2009, the Company had a cumulative Gap Rate Sensitivity Ratio of 1.46 % for the one year repricing period. This generally indicates that earnings would decrease in an increasing interest rate environment as liabilities reprice more quickly than assets. However, in actual practice, this may not be the case as loans tied to the prime rate of interest will reprice immediately with an increase in short term market rates, while deposit rates will remain stable until competitive market conditions dictate the necessity for an increase in rates. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.
     A summary of asset and liability repricing opportunities is shown in Table II, on page 24.
Stock Repurchase
     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 September 30, 2009 total 164,132; of this amount, 2,122 shares were repurchased in 2009, at an average cost of $25.58 per share.
Effect of Newly Issued Accounting Standards
     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification.
     In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 —Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
     The FASB issued ASU 2009—05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value. The ASU was effective October 1, 2009 for the Company and will have no impact on financial position or operations.
     The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on the Company’s financial statements.
SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the standard to have any impact on the Company’s financial position.
     ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) — Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.
Existence of Securities and Exchange Commission Web Site
     The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
TABLE 1
F & M BANK CORP.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)
(Dollar Amounts in Thousands)
                                                                                                 
    Nine Months Ended     Nine Months Ended     Three Months Ended     Three Months Ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
    Average     Income/             Average     Income/             Average     Income/             Average     Income/        
    Balance     Expense     Rates     Balance     Expense     Rates     Balance     Expense     Rates     Balance     Expense     Rates  
 
 
Rate related income
                                                                                               
Loans held for investment1
  $ 412,984     $ 19,001       6.13 %   $ 343,996     $ 17,412       6.75 %   $ 422,056     $ 6,331       6.00 %   $ 370,276     $ 6,159       6.65 %
Loans held for sale
    27,860       810       3.88 %     5,958       185       4.14 %     27,576       259       3.76 %     6,196       65       4.20 %
Federal funds sold
    3,515       5       .19 %     3,012       46       2.04 %     5,874       3       .20 %     4,001       17       1.70 %
Bank deposits
    1,148       16       1.86 %     2,712       99       4.87 %     1,077                       2,058       24       4.66 %
Investments
                                                                                               
Taxable3
    16,268       585       4.79 %     19,873       846       5.68 %     13,190       140       4.25 %     19,365       289       5.97 %
Partially taxable 2,3
    3,773       197       6.96 %     10,091       369       4.88 %     3,834       77       8.03 %     8,834       125       5.66 %
Tax exempt 2,3
    51       3       7.84 %     184       6       4.35 %                             125       1       3.20 %
 
                                                                       
Total earning assets
    465,599       20,617       5.90 %     385,826       18,963       6.55 %     473,607       6,810       5.75 %     410,855       6,680       6.50 %
 
                                                                       
 
                                                                                               
Interest Expense
                                                                                               
Demand deposits
    73,166       869       1.58 %     58,053       567       1.30 %     81,956       354       1.73 %     58,629       187       1.28 %
Savings
    32,363       155       .64 %     30,057       222       .98 %     33,996       47       .55 %     31,921       77       .96 %
Time deposits
    216,545       4,917       3.03 %     163,867       5,142       4.18 %     221,804       1,501       2.71 %     165,370       1,651       3.99 %
Short-term debt
    16,882       65       .51 %     24,007       402       2.23 %     7,175       9       .50 %     38,992       216       2.22 %
Long-term debt
    67,466       1,718       3.40 %     46,962       1,389       3.94 %     65,637       563       3.43 %     54,007       533       3.95 %
 
                                                                       
 
                                                                                               
Total interest bearing liabilities
    406,422       7,724       2.53 %     322,946       7,722       3.19 %     410,568       2,474       2.41 %     348,919       2,664       3.05 %
 
                                                                       
 
                                                                                               
Net interest income 1
            12,893                     $ 11,241                     $ 4,336                     $ 4,016          
 
                                                                                       
 
                                                                                               
Net yield on interest earning assets 1
                    3.69 %                     3.88 %                     3.66 %                     3.91 %
 
                                                                                       

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TABLE II
F & M BANK CORP.
INTEREST SENSITIVITY ANALYSIS
September 30, 2009
(In Thousands of Dollars)
The following table presents the Company’s interest sensitivity.
                                                 
    0 - 3     4 - 12     1 - 5     Over 5     Not        
    Months     Months     Years     Years     Classified     Total  
 
 
Uses of Funds
                                               
Loans
                                               
Commercial
  $ 112,235     $ 18,175     $ 77,734     $ 5,180     $       $ 213,324  
Installment
    10,653       863       9,428       3,262               24,206  
Real estate for investments
    39,758       12,394       117,943       17,022               187,117  
Real estate for sale
    22,215                                       22,215  
Credit cards
    2,116                                       2,116  
Federal funds sold
    2,411                                       2,411  
Interest bearing bank deposits
    70                                       70  
Investment securities
    60       2,366       4,020       6,397       4,202       17,045  
 
                                   
Total
    189,518       33,798       209,125       31,861       4,202       468,504  
 
                                   
 
                                               
Sources of Funds
                                               
Interest bearing demand deposits
            24,289       50,047       12,879               87,215  
Savings deposits
            6,777       20,330       6,777               33,884  
Certificates of deposit $100,000 and over
    23,234       34,806       19,723                       77,763  
Other certificates of deposit
    20,173       70,847       47,794                       138,814  
Short-term borrowings
    4,022                                       4,022  
Long-term borrowings
    22,771       9,575       31,806       875               65,027  
 
                                   
Total
  $ 70,200     $ 146,294     $ 169,700     $ 20,531     $       $ 406,725  
 
                                   
 
                                               
Discrete Gap
    119,318       (112,496 )     39,425       11,330       4,202       61,779  
 
                                               
Cumulative Gap
    119,318       6,822       46,247       57,577       61,779          
 
                                               
Ratio of Cumulative Gap to Total Earning Assets
    25.47 %     1.46 %     9.87 %     12.29 %     13.19 %        
     Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2009. In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Not Applicable
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
     As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the “Act”) are required to include in those reports certain information concerning the issuer’s controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     We have established our disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer, and the other executive officers of the Company and its subsidiaries to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company’s operations. As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.
     The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13(a)-14(e) and timely, alerting them to financial information relating to the Company required to be included in the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Controls
     Due to the nature of the Company’s business as stewards of assets of customers; internal controls are of the utmost importance. The Company has established procedures during the normal course of business to reasonably ensure that fraudulent activity of either a material amount to these results or in any amount is not occurring. In addition to these controls and review by executive officers, the Company retains the services of an internal auditor to complete regular audits, which examine the processes and procedures of the Company and the Bank to ensure that these processes are reasonably effective to prevent internal or external fraud and that the processes comply with relevant regulatory guidelines of all relevant banking authorities. The findings of the internal auditor are presented to management of the Bank and to the Audit Committee of the Company.

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Part II Other Information
Item 1. Legal Proceedings — Not Applicable
Item 1a.   Risk Factors — There have been no material changes from the risk factors previously disclosed in Item 1a of the Corporation’s Form 10k filed on March 23,2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds— Not Applicable
Item 3. Defaults Upon Senior Securities — Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders— Not Applicable
Item 5. Other Information — Not Applicable
Item 6. Exhibits
  (a)   Exhibits
     
3 i
  Restated Articles of Incorporation of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.’s 2001 Form 10K filed August 17, 2007.
 
   
3 ii
  Amended and Restated Bylaws of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.’s Form 10K filed March 1, 2002.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
   
32
  Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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Table of Contents

Signatures
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  F & M BANK CORP.
 
 
  /s/ DEAN W. WITHERS    
  Dean W. Withers   
  President and Chief Executive Officer   
     
  /s/ NEIL W. HAYSLETT    
  Neil W. Hayslett   
  Executive Vice President and Chief Financial Officer   
 
November 13, 2009

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