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F&M BANK CORP - Quarter Report: 2010 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, 2010.
     
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes 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 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
     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 10, 2010
     
Common Stock, par value — $5   2,304,692 shares
 
 

 


 

F & M BANK CORP.
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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,  
    2010     2009  
Interest income
               
Interest and fees on loans held for investment
  $ 6,524     $ 6,302  
Interest and fees on loans held for sale
    411       259  
Interest on federal funds sold
    1       3  
Interest on interest bearing deposits
    7       7  
Dividends on equity securities
    49       61  
Interest on debt securities
    83       129  
 
           
Total interest income
    7,075       6,761  
 
           
 
               
Interest expense
               
Interest on demand deposits
    502       355  
Interest on savings accounts
    48       47  
Interest on time deposits over $100,000
    332       477  
Interest on time deposits
    705       1,024  
 
           
Total interest on deposits
    1,587       1,903  
Interest on short-term debt
    9       9  
Interest on long-term debt
    617       563  
 
           
Total Interest Expense
    2,213       2,475  
 
               
Net interest income
    4,862       4,286  
 
               
Provision for loan losses
    1,300       2,790  
 
           
Net interest income after provision for loan losses
    3,562       1,496  
 
               
Noninterest income
               
Service charges
    296       342  
Insurance and other commissions
    173       104  
Other
    255       167  
Income on bank owned life insurance
    85       92  
Other than temporary impairment losses
    (65 )     (786 )
Gain (loss) on the sale of securities
    384       0  
 
           
Total noninterest income
    1,128       (81 )
 
               
Noninterest expense
               
Salaries
    1,365       1,349  
Employee benefits
    416       440  
Occupancy expense
    131       144  
Equipment expense
    146       165  
Intangible amortization
    69       69  
FDIC insurance assessment
    297       282  
Other
    833       800  
 
           
Total noninterest expense
    3,257       3,249  
 
               
Income (loss) before income taxes
    1,433       (1,834 )
Income tax expense (benefit)
    508       (978 )
 
           
Consolidated net income (loss)
    925       (856 )
Net income — Noncontrolling interest
    (34 )     (20 )
 
           
Net Income (Loss)— F & M Bank Corp
  $ 891     $ (876 )
 
           
 
               
Per share data
               
Net income (loss)
  $ .39     $ (.38 )
Cash dividends
  $ .15     $ .23  
Weighted average shares outstanding
    2,298,801       2,294,275  
See notes to unaudited consolidated financial 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,  
    2010     2009  
Interest income
               
Interest and fees on loans held for investment
  $ 19,417     $ 18,905  
Interest and fees on loans held for sale
    873       810  
Interest on federal funds sold
    18       5  
Interest on interest bearing deposits
    20       17  
Dividends on equity securities
    154       165  
Interest on debt securities
    302       579  
 
           
Total interest income
    20,784       20,481  
Interest expense
               
Interest on demand deposits
    1,465       870  
Interest on savings accounts
    144       155  
Interest on time deposits over $100,000
    1,120       1,580  
Interest on time deposits
    2,320       3,336  
 
           
Total interest on deposits
    5,049       5,941  
Interest on short-term debt
    22       65  
Interest on long-term debt
    1,798       1,718  
 
           
Total Interest Expense
    6,869       7,724  
 
               
Net interest income
    13,915       12,757  
 
               
Provision for loan losses
    3,100       3,310  
 
           
Net interest income after provision for loan losses
    10,815       9,447  
 
               
Noninterest income
               
Service charges
    910       943  
Insurance and other commissions
    369       385  
Other
    922       722  
Income on bank owned life insurance
    252       272  
Other than temporary impairment losses
    (65 )     (1,612 )
Gain (loss) on the sale of securities
    414       (5 )
 
           
Total noninterest income
    2,802       705  
 
               
Noninterest expense
               
Salaries
    3,943       3,836  
Employee benefits
    1,177       1,321  
Occupancy expense
    423       427  
Equipment expense
    444       433  
Intangible amortization
    207       207  
FDIC insurance assessment
    876       562  
Other
    2,576       2,345  
 
           
Total noninterest expense
    9,646       9,131  
 
               
Income before income taxes
    3,971       1,021  
Income taxes
    1,287       (144 )
 
           
Consolidated net income
    2,684       1,165  
Net income — Noncontrolling interest
    (57 )     (66 )
 
           
Net Income — F & M Bank Corp
  $ 2,627     $ 1,099  
 
           
 
               
Per share data
               
Net income
  $ 1.14     $ .48  
Cash dividends
  $ .45     $ .69  
Weighted average shares outstanding
    2,297,191       2,290,859  
See notes to unaudited consolidated financial statements

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F & M BANK CORP.
Consolidated Balance Sheets
(In Thousands of Dollars Except per Share Amounts)
                 
    September 30,     December 31,  
    2010     2009  
    (Unaudited)     (Audited)  
Assets
               
Cash and due from banks
  $ 5,553     $ 5,314  
Federal funds sold
    6,096       18,326  
 
           
Cash and cash equivalents
    11,649       23,640  
Interest bearing deposits in banks
    3,252       65  
Securities:
               
Held to maturity — fair value of $109,000 in 2010 and $110,000 in 2009. (note 2)
    109       110  
Available for sale (note 2)
    14,722       16,430  
Other investments
    9,049       9,681  
Loans held for sale
    34,497       31,168  
Loans held for investment (note 3)
    446,595       434,403  
Less allowance for loan losses (note 4)
    (5,200 )     (3,836 )
 
           
Net loans held for investment
    441,395       430,567  
 
               
Other real estate owned
    1,789       526  
Bank premises and equipment, net
    6,834       7,080  
Interest receivable
    1,876       2,038  
Core deposit intangible
    115       322  
Goodwill
    2,670       2,670  
Bank owned life insurance
    6,810       6,593  
Other assets
    7,851       8,333  
 
           
Total assets
  $ 542,618     $ 539,223  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest bearing
  $ 56,392     $ 53,475  
Interest bearing:
               
Demand
    92,277       77,483  
Money market accounts
    21,646       23,231  
Savings
    35,195       34,229  
Time deposits over $100,000
    87,034       99,330  
All other time deposits
    132,714       132,895  
 
           
Total deposits
    425,258       420,643  
 
               
Short-term debt
    5,604       9,085  
Accrued liabilities
    7,065       7,397  
Subordinated debt
    8,268       2,715  
Long-term debt
    55,059       60,381  
 
           
Total liabilities
    501,254       500,221  
 
               
Stockholders’ Equity
               
Common stock, $5 par value, 6,000,000 shares authorized, 2,304,692 and 2,295,053 shares issued and outstanding in 2010 and 2009, respectively
    11,523       11,475  
Retained earnings
    30,052       27,989  
Noncontrolling interest
    153       123  
Accumulated other comprehensive income (loss)
    (364 )     (585 )
 
           
Total stockholders’ equity
    41,364       39,002  
Total liabilities and stockholders’ equity
  $ 542,618     $ 539,223  
 
           
See notes to unaudited consolidated financial statements

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F & M BANK CORP.
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Cash flows from operating activities
               
Net income
  $ 2,627     $ 1,099  
Net change — Noncontrolling interest
    30       (66 )
Adjustments to reconcile net income to net cash provided (used) by operating activities:
               
Depreciation
    480       488  
Amortization (accretion) of security premiums (discounts)
    29       26  
Net (increase) decrease in loans held for sale
    (3,330 )     (18,434 )
Provision for loan losses
    3,100       3,310  
Intangible amortization
    207       207  
(Increase) decrease in interest receivable
    161       193  
(Increase) decrease in other assets
    (78 )     492  
Gain on sale of other real estate owned
    (18 )        
Increase (decrease) in accrued expenses
    512       (1,096 )
(Gain)/loss on security transactions
    (349 )     1,617  
Amortization of limited partnership investments
    306       277  
Income from life insurance investment
    (217 )     (216 )
Net adjustments
    803       (13,136 )
 
           
Net cash provided (used) by operating activities
    3,460       (12,103 )
 
           
 
               
Cash flows from investing activities
               
Purchase of investments available for sale
    (17,127 )     (6,948 )
Proceeds from sales of investments available for sale
    1,860       12,097  
Proceeds from maturity of investments available for sale
    17,905       16  
Net increase in loans held for investment
    (16,382 )     (28,853 )
Proceeds from the sale of other real estate owned
    1,210          
Purchase of property and equipment
    (234 )     (212 )
Net (increase) decrease in interest bearing bank deposits
    (3,187 )     1,099  
 
           
Net cash used in investing activities
    (15,955 )     (22,801 )
 
           
 
               
Cash flows from financing activities
               
Net change in demand and savings deposits
    17,091       30,645  
Net change in time deposits
    (12,477 )     16,056  
Net change in short-term debt
    (3,481 )     (16,489 )
Cash dividends paid
    (1,036 )     (1,587 )
Repurchase of common stock
            (54 )
Proceeds from issuance of common stock
    175       157  
Proceeds of long-term debt
    14,289       13,275  
Repayment of long-term debt
    (14,057 )     (13,579 )
 
           
Net cash provided (used) by financing activities
    504       28,424  
 
           
 
               
Net Increase (Decrease) in Cash and Cash Equivalents
    (11,991 )     (6,480 )
 
           
Cash and cash equivalents, beginning of period
    23,640       14,666  
 
           
Cash and cash equivalents, end of period
  $ 11,649     $ 8,186  
 
           
Supplemental disclosure
               
Cash paid for:
               
Interest expense
  $ 6,815     $ 7,904  
Income taxes
    500       620  
Transfers from loans to Other Real Estate Owned
    2,456          
See notes to unaudited consolidated financial 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,  
    2010     2009  
Balance, beginning of period
  $ 39,002     $ 36,258  
 
               
Comprehensive income
               
Net income — F & M Bank Corp
    2,627       1,165  
Change — Noncontrolling interest (net of dividends)
    30       (66 )
Net change in unrealized appreciation on securities available for sale, net of taxes
    220       1,642  
 
           
Total comprehensive income
    2,877       2,741  
 
               
Issuance of common stock
    175       157  
Repurchase of common stock
            (54 )
Dividends declared
    (690 )     (1,397 )
 
           
Balance, end of period
  $ 41,364     $ 37,705  
 
           
See notes to unaudited consolidated financial 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 of America and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2010 and the results of operations for the nine and three month periods ended September 30, 2010 and September 30, 2009. The notes included herein should be read in conjunction with the notes to financial statements included in the 2009 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 comprehensive income and related tax effects are as follows:
                 
    September 30,     September 30,  
    2010     2009  
Changes in:
               
 
               
Net Income:
               
Net Income — F & M Bank Corp
  $ 2,627     $ 1,165  
Net Income — Noncontrolling Interest
    30       (66 )
 
           
 
    2,657       1,099  
 
           
Unrealized holding gains (losses) on available-for-sale securities:
    682       759  
Reclassification adjustment for other than temporary impairment losses
    65       1,612  
Reclassification adjustment for (gains) losses realized in income
    (414 )     5  
 
           
Net unrealized gains (losses)
    333       2,376  
Tax effect
    113       734  
 
           
Unrealized holding gain (losses), net of tax
    220       1,642  
 
           
 
               
Comprehensive income
  $ 2,877     $ 2,741  
 
           
Subsequent Events
     In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

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F & M BANK CORP.
Notes to Consolidated Financial Statements
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, 2010 and December 31, 2009 are as follows:
                                 
    2010     2009  
            Market             Market  
    Cost     Value     Cost     Value  
Securities held to maturity
                               
U. S. Treasury and agency obligations
  $ 109     $ 109     $ 110     $ 110  
 
                       
Total
  $ 109     $ 109     $ 110     $ 110  
 
                       
                                 
    2010     2009  
    Market             Market        
    Value     Cost     Value     Cost  
Securities available for sale
                               
Government sponsored enterprises
  $ 7,030     $ 7,015     $ 6,012     $ 5,976  
Equity securities
    3,149       2,622       3,743       3,768  
Mortgage-backed securities
    4,543       4,290       6,170       5,896  
Corporate Bonds
                    505       281  
Municipals
                       
 
                       
Total
  $ 14,722     $ 13,927     $ 16,430     $ 15,921  
 
                       
     The amortized cost and fair value of securities at September 30, 2010, 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     $ 109     $ 1,271     $ 1,270  
Due after one year through five years
                    6,015       6,030  
Due after five years
                  4,019       4,273  
 
                         
 
    109       109       11,305       11,573  
 
                       
Marketable equities
                  2,622       3,149  
 
                         
Total
  $ 109     $ 109     $ 13,927     $ 14,722  
 
                       
     There were no sales of debt securities during the three and nine month periods ending September 30, 2010 and 2009. Following is a table reflecting gains and losses on sales of equity securities:
                                 
    Nine Months Ended     Three Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
Gains
  $ 506     $     $ 392     $  
Losses
    (92 )     (5 )     (8 )     (5 )
 
                       
Net Gains (Losses)
  $ 414     $ (5 )   $ 384     $ (5 )
 
                       

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F & M BANK CORP.
Notes to Consolidated Financial Statements
Note 2. Investment Securities, continued
Securities Impairment
     The Company follows the guidance in ASC 320-10 and Staff Accounting Bulletin (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 policies/procedures for the evaluation for Other Than Temporary Impairment (OTTI):
    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 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, 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.
    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 recovery, 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. There were $65,000 which were deemed to have other than temporary impairment through September of 2010. Such charges were $1,612,000 through September of 2009.

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F & M BANK CORP.
Notes to Consolidated Financial Statements
Note 2. Investment Securities, continued
     The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2010 and December 31, 2009 were as follows (dollars in thousands):
                                                 
    Less than 12 Months     More than 12 Months     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
September 30, 2010
                                               
Government sponsored Enterprises
  $     $     $     $     $     $  
Mortgage backed Obligations
                269       (2 )     269       (2 )
Marketable equities
    531       (57 )                 531       (57 )
 
                                   
Total
  $ 531     $ (57 )   $ 269     $ (2 )   $ 800     $ (59 )
 
                                   
 
                                               
December 31, 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 )
 
                                   

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F & M BANK CORP.
Notes to Consolidated Financial Statements
Note 3. Loans Held for Investment
     Loans outstanding at September 30, 2010 and December 31, 2009 are summarized as follows:
                 
    2010     2009  
Real Estate
               
Construction
  $ 84,730     $ 86,320  
Residential
    189,624       191,382  
Commercial and agricultural
    150,685       134,993  
Consumer loans to individuals
    18,931       19,247  
Credit cards
    2,560       2,355  
Other
    65       106  
 
           
Total
  $ 446,595     $ 434,403  
 
           
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,  
    2010     2009     2010     2009  
Balance, beginning of period
  $ 3,836     $ 2,189     $ 4,890     $ 2,556  
Provisions charged to operating expenses
    3,100       3,310       1,300       2,790  
Net (charge-offs) recoveries:
                               
Loan recoveries
    60       51       20       22  
Loan charge-offs
    (1,796 )     (850 )     (1,010 )     (668 )
 
                       
Total Net (Charge-Offs) Recoveries*
    (1,736 )     (799 )     (990 )     (646 )
 
                       
Balance, End of Period
  $ 5,200     $ 4,700     $ 5,200     $ 4,700  
 
                       
 
                               
 
 
*   Components of Net (Charge-Offs) Recoveries
                               
Real Estate
    (1,633 )     (699 )     (979 )     (612 )
Commercial
    (33 )     (44 )     (2 )        
Consumer and other
    (70 )     (56 )     (9 )     (34 )
 
                       
Total
  $ (1,736 )   $ (799 )   $ (990 )   $ (646 )
 
                       
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 Bank contributed $1 million to the plan in the first quarter of 2010 and does not anticipate additional contributions for the 2010 plan year. The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, 2010 and 2009.
                                 
    Nine Months Ended     Three Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
Service cost
  $ 290,937     $ 269,100     $ 96,979     $ 89,700  
Interest cost
    237,750       204,999       79,250       68,333  
Expected return on plan assets
    (361,281 )     (235,284 )     (120,427 )     (78,428 )
Amortization of net obligation at transition
                               
Amortization of prior service cost
    (3,975 )     (3,975 )     (1,325 )     (1,325 )
Amortization of net (gain) or loss
    49,134       93,153       16,378       31,051  
 
                       
Net periodic benefit cost
  $ 212,565     $ 327,993     $ 70,855     $ 109,331  
 
                       

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F & M BANK CORP.
Notes to Consolidated Financial Statements
Note 6. Fair Value
     Accounting Standards Codification (ASC) 820, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement
     The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
     Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
     Impaired Loans: ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.
     Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the lower of carrying amount or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.
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, 2010   Total     Level 1     Level 2     Level 3  
Government sponsored enterprises
    7,030               7,030          
Mortgage-backed obligations of federal agencies
    4,543               4,543          
Marketable Equities
    3,149       3,149                  
Corporate Bonds
                         
 
                         
Investment securities available for sale
    14,722       3,149       11,573          
 
                         
 
                               
Total assets at fair value
    14,722       3,149       11,573          
 
                         
 
                               
Total liabilities at fair value
                               

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F & M BANK CORP.
Notes to Consolidated Financial Statements
Note 6. Fair Value, continued
                                 
December 31, 2009   Total     Level 1     Level 2     Level 3  
Government sponsored enterprises
    6,013               6,013          
Mortgage-backed obligations of federal agencies
    6,170               6,170          
Marketable Equities
    3,743       3,743                  
Corporate Bonds
    504       504                
 
                         
Investment securities available for sale
    16,430       4,247       12,183          
 
                         
 
                               
Total assets at fair value
    16,430       4,247       12,183          
 
                         
 
                               
Total liabilities at fair value
                               
Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
     The table below presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.
                                 
September 30, 2010   Total     Level 1     Level 2     Level 3  
Loans Held for Sale
    34,497               34,497          
Other Real Estate Owned
    1,789               1,789          
 
                               
Real Estate
    508               508          
Commercial
    6,081               6,081          
Consumer
                               
Impaired loans
    6,589               6,589          
 
                           
 
                               
Total assets at fair value
    42,875               42,875          
 
                           
 
                               
Total liabilities at fair value
                               
                                 
December 31, 2009   Total     Level 1     Level 2     Level 3  
Loans Held for Sale
    31,168               31,168          
Other Real Estate Owned
    526               526          
 
                               
Real Estate
    1,123               1,123          
Commercial
    5,585               5,585          
Consumer
                               
Impaired loans
    6,708               6,708          
 
                           
 
                               
Total assets at fair value
    38,402               38,402          
 
                           
 
                               
Total liabilities at fair value
                               
     There were no significant transfers between levels 1 and 2.

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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” 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, 2010 and December 31, 2009 are as follows (in thousands):
                                 
    September 30, 2010     December 31, 2009  
    Estimated     Carrying     Estimated     Carrying  
    Fair Value     Value     Fair Value     Value  
Financial Assets
                               
Cash
  $ 5,553     $ 5,553     $ 5,314     $ 5,314  
Interest bearing deposits
    3,252       3,252       65       65  
Federal funds sold
    6,096       6,096       18,326       18,326  
Securities available for sale
    14,722       14,722       16,430       16,430  
Securities held to maturity
    109       109       110       110  
Other investments
    9,049       9,049       9,681       9,681  
Loans
    476,249       446,595       481,967       434,403  
Loans held for sale
    34,497       34,497       31,168       31,168  
Bank owned life insurance
    6,810       6,810       6,593       6,593  
Accrued interest receivable
    1,876       1,876       2,038       2,038  
 
                               
Financial Liabilities
                               
Demand Deposits:
                               
Non-interest bearing
    56,392       56,392       53,475       53,475  
Interest bearing
    113,923       113,923       100,714       100,714  
Savings deposits
    35,195       35,195       34,229       34,229  
Time deposits
    222,105       219,748       234,032       232,225  
Short-term debt
    5,604       5,604       9,085       9,085  
Subordinated debt
    8,268       8,268       2,715       2,715  
Long-term debt
    57,252       55,059       61,216       60,381  
     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. 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 originates conventional and government sponsored mortgages through their offices in Harrisonburg and Woodstock. VBS began operating its Woodstock office in February 2010 in space leased from Farmers & Merchants Bank.
     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 of this Form 10-Q.
Forward-Looking Statements
     Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise and 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 two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. For further discussion refer to page 20 in the Management Discussion & Analysis.
Goodwill and Intangibles
     ASC 805 “Business Combinations” and ASC 350 “Intangibles” require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
     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
     For a complete discussion of securities impairment see Note 2 of the Notes to Consolidated Financial Statements.
Overview
     Net income for the nine months ended September 30, 2010 was $2,627,000 or $1.14 per share, compared to $1,099,000 or $.48 in the same period in 2009, an increase of 139%. During the nine months ended September 30, 2010, noninterest income, exclusive of securities transactions, increased 5.64% and noninterest expense also increased 5.64% during the same period. Net income from Bank operations adjusted for income or loss from Parent activities is as follows:
                 
In thousands   2010     2009  
Net Income from Bank Operations
  $ 2,811     $ 1,799  
Income or loss from Parent Company Activities
    (184 )     (700 )
 
           
Net Income for the nine months ended September 30
    2,627       1,099  
 
           

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
     Core operating earnings, (exclusive of gains or losses on the Parent’s equity portfolio and historic rehabilitation credits related to the investment in low income housing projects) totaled $2,408,000 in 2010 and $2,062,000 in 2009, an increase of 16.77%. Income from core operations increased in 2010 primarily due to the increase in the net interest margin and change in securities gain (loss) both of which were partially offset by additional FDIC assessments and increased income tax expense. A reconciliation of core earnings follows:
                 
In thousands   2010     2009  
Net Income
  $ 2,627     $ 1,099  
Non-recurring Tax Items
    48       (16 )
Non-recurring Securities Transactions
    (267 )     979  
 
           
Core Earnings for the six months ended September 30
  $ 2,408     $ 2,062  
 
           
     Management and the Board of Directors use Core Earnings (a non-GAAP financial measure) in a variety of ways, including comparing various operating units (branches) to prior periods, establishing goals and incentive plans that are based on Core Earnings.
Results of Operations
     Year to Date
     The 2010 year to date tax equivalent net interest income increased $1,142,000 or 8.86% compared to the same period in 2009. The yield on earning assets decreased .35%, while the cost of funds decreased .44% compared to the same period in 2009. The Federal Reserve has continued to maintain short-term interest rates at historically low levels. Longer term rates are also at historical lows due to the sluggish economy and Federal Reserve monetary policy. Yields on assets and costs of liabilities continue to reprice at lower levels due to the current monetary policy described above.
     The Interest Sensitivity Analysis on page 25 indicates the Company is in an asset sensitive position in the one year time horizon, the recent decrease in rates and asset growth has resulted in a .04% increase in the net interest margin compared to the same period in 2009. A schedule of the net interest margin for the three month and nine month periods ending September 30, 2010 and 2009 can be found in Table I on page 24.
     Noninterest income, exclusive of securities transactions, increased $131,000 or 5.64% through September 30, 2010 compared to the same period in 2009. Increases were due to debit card fee income and revenue from low income housing investments.
     Noninterest expense increased $515,000 through nine months of 2010 as compared to 2009. Salary and benefits expense decreased $37,000 (.72%) through September 2010. This decrease resulted from a reduction in pension expense ($117,000) and workers compensation expenses ($15,000), which were partially offset by normal salary increases and increases in group health insurance premiums. Exclusive of personnel expenses, other noninterest expenses increased at an annualized rate of 13.89% in 2010 compared to 2009. The majority of the increase is an increase in the FDIC assessment of $314,000 ($876,000 in 2010 versus $562,000 in 2009). The increase in FDIC assessment is due to the growth of the Bank as well as increased assessment rates imposed to cover FDIC fund shortages. Other loan expense increased $176,000; this increase resulted when the bank forfeited an escrow deposit on a loan participation when it chose to not pursue the purchase of the controlling interest in the loan. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available (June 30, 2010) Bank Holding Company Performance Report, the Company’s and peer’s noninterest expenses averaged 2.37% and 2.89% 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.
          Quarter to Date
          For the three months ended September 30, 2010, the Company’s net income was $891,073, an increase of $1,766,649, compared to the same period in the prior year when the Company reported a net loss of ($875,576). For the third quarter, earnings per share were $.38 in 2010 versus a loss of ($.38) in 2009.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
     On a pre-tax basis, factors contributing to the improved results include a $1.49 million decrease in funding for the Allowance for Loan Losses ($1.3 million of expense in 2010 versus $2.79 million in 2009), a $572,000 increase in Net Interest Income ($4.862 million in 2010 versus $4.287 million in 2009), and a change in Securities Gain/(Loss) of $1.106 million ($319,000 gain in 2010 versus a loss of ($787,000) in 2009).
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 0% to .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 fed 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 Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders’ equity.
     As of September 30, 2010, the market value of securities available for sale exceeded their cost by $795,000. This includes increases in value in the equity securities portfolio held by the Company and an increase in the value of government obligations held by the Bank. 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 $566,000 in 2010. 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 security pay downs have been used to support growth in the loan portfolio. Scheduled maturities for the remainder of 2010 total $1.4 million and these bonds have an average yield of approximately 1.64%. Based on current market rates, as these bonds mature, the funds will be reinvested at rates that are significantly lower.
     In reviewing these investments as of September 30, 2010, a portion of the Equity portfolio was determined to be other than temporarily impaired resulting in a $65,000 impairment write down. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.
Loan Portfolio
     The Company operates in a predominately rural area that includes the counties of Rockingham, Page 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.

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     The allowance for loan losses (see subsequent section) provides for the risk that borrowers will be unable to repay their obligations and is reviewed quarterly for adequacy. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
     While lending is geographically diversified within the service area, the Company does have loan concentrations in agricultural (primarily poultry farming), construction/development, hotels, and multifamily housing. Management and the Board of Directors review these concentrations quarterly. The first nine months of 2010 resulted in a increase of $12 million in the Bank’s core loan portfolio.
     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 $9,495,000 at September 30, 2010 compared to $7,653,000 at December 31, 2009. Although the potential exists for loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of September 30, 2010, the Company holds $1,789,000 of real estate which was acquired through foreclosure. The Company is under contract to sell foreclosed properties totaling approximately $700,000 in value. Closing is expected on these sales during the month of November, 2010.
     The following is a summary of information pertaining to risk elements and impaired loans:
                 
    September 30, 2010     December 31, 2009  
Nonaccrual Loans:
               
Real Estate
  $ 1,887     $ 3,245  
Commercial
    5,828       261  
Other
    285        
 
           
 
               
Loans past due 90 days or more:
               
Real Estate
    1,204       3,850  
Commercial
    134       57  
Other
    157       240  
 
           
 
               
Total Nonperforming loans
  $ 9,495     $ 7,653  
 
           
 
               
Nonperforming loans as a percentage of loans held for investment
    2.13 %     1.76 %
 
               
Net Charge Offs to Total Loans
    .39 %     .59 %
 
               
Allowance for loan and lease losses to loans held for investment
    1.16 %     .88 %
 
               
Allowance for loan and lease losses to nonperforming loans
    54.77 %     50.12 %

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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 trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.
     In evaluating the portfolio, loans are segregated into loans with identified potential losses 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 $200,000 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, 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 ASC 450.
     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 two years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates.
     All potential losses are evaluated within a range of low to high. An unallocated reserve has been established to reflect other unidentified losses within the portfolio. This helps to offset the increased risk of loss associated with fluctuations in past due trends, changes in the local and national economies, and other unusual events. The Board approves the loan loss provision for the following quarter based on this evaluation and an effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.
     The allowance for loan losses of $5,200,000 at September 30, 2010 is equal to 1.16% of loans held for investment. This compares to an allowance of $3,836,000 (.88%) at December 31, 2009. Based on the evaluation of the loan portfolio described above management has funded the allowance a total of $3,100,000 in the first nine months of 2010. Net charge-offs year to date totaled $1,736,000.
     The overall level of the allowance is below its peer group average, but has been increasing in recent quarters. Management feels a lower reserve 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Deposits and Other Borrowings
     The Company’s main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits have increased $4,615,000 since December 31, 2009. Time deposits decreased $12,477,000 during this period while demand deposits and savings deposits increased $17,092,000. The decrease in certificates of deposits is a result of the Bank’s membership in the CDARS One-Way Buy 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 quarter end the Bank had a total of $35.9 million in CDARS funding, a decrease of $10.8 million since December 31, 2009.
Short-term debt
     Short-term debt consists of federal funds purchased, commercial repurchase agreements (repos.) and daily rate credit from the Federal Home Loan Bank (FHLB). Commercial customers deposit operating funds into their checking account and by mutual agreement with the bank their excess funds are swept daily into the repurchase accounts. These accounts are not considered deposits and are not insured by the FDIC. The Bank pledges securities held in its investment portfolio as collateral for these short-term loans. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Daily rate credit from the FHLB has been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans.
Long-term debt
     Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be an important source of funding. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes. Scheduled repayments totaled $15,825,000 through September 30, 2010. Additional borrowings of $11,250,000 through September 30, 2010, were obtained to refinance maturing debt at more favorable longer term rates.
     In November 2009, the Company entered into an agreement with Page Valley Bank (and several sub-participants) to refinance a line of credit previously owed to Silverton Bank as a five year, fixed rate, amortizing loan at 6%. At September 30, 2010 the outstanding balance was $4,250,000.
     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 10 year note. As of September 30, 2010 the balance outstanding was $8,268,000.
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, 2010, the Company’s total risk based capital and leverage ratios were 12.72% and 7.27%, respectively. These ratios are in excess of regulatory minimums. For the same period, Bank only total risk based capital and leverage ratios were 13.07% and 7.49%, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity
     Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.
     Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution. The 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, 2010, the Company had a cumulative Gap Rate Sensitivity Ratio of 15.48% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.
     A summary of asset and liability repricing opportunities is shown in Table II, on page 25.
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. However, due to the impact on capital ratios resulting from the growth in the balance sheet, other than temporary impairment securities write downs in 2009 and increased funding of the allowance for loan losses, the stock repurchase plan has been suspended. There were no stock repurchases in 2010.
Effect of Newly Issued Accounting Standards
     In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Effect of Newly Issued Accounting Standards (continued)
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.
     In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”. The updates were effective upon issuance and are reflected in the Company’s 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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TABLE I
F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)
(Dollar Amounts in Thousands)
                                                                                                 
    Nine Months Ended     Nine Months Ended     Three Months Ended     Three Months Ended  
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
            Income/     Average             Income/                     Income/     Average             Income/     Average  
Average   Balance2     Expense     Rates4     Balance2     Expense     Rates4     Balance2     Expense     Rates4     Balance2     Expense     Rates4  
Interest income
                                                                                               
Loans held for investment1,2
  $ 442,830     $ 19,498       5.87 %   $ 412,984     $ 19,001       6.13 %   $ 446,721     $ 6,551       5.87 %   $ 422,056     $ 6,331       6.00 %
Loans held for sale
    28,891       873       4.03 %     27,860       810       3.88 %     40,075       410       4.09 %     27,576       259       3.76 %
Federal funds sold
    10,818       18       .22 %     3,515       5       .19 %     2,066       1       .19 %     5,874       3       .20 %
Interest bearing deposits
    3,018       20       .88 %     1,148       16       1.86 %     3,063       7       .91 %     1,077                  
Investments
                                                                                               
Taxable 3
    12,457       313       3.35 %     16,268       585       4.79 %     12,009       83       2.76 %     13,190       140       4.25 %
Partially taxable
    3,824       182       6.35 %     3,773       197       6.96 %     3,467       62       7.15 %     3,834       77       8.03 %
Tax exempt 2,3
                      %     51       3       7.84 %                                                
Total earning assets
  $ 501,838     $ 20,904       5.55 %   $ 465,599     $ 20,617       5.90 %   $ 507,401     $ 7,114       5.61 %   $ 473,607     $ 6,810       5.75 %
Interest Expense
                                                                                               
Demand deposits
  $ 107,896     $ 1,465       1.81 %   $ 73,166     $ 869       1.58 %   $ 112,941     $ 502       1.78 %   $ 81,956     $ 354       1.73 %
Savings
    35,396       144       .54 %     32,363       155       .64 %     36,906       49       .53 %     33,996       47       .55 %
Time deposits
    224,841       3,440       2.04 %     216,545       4,917       3.03 %     219,105       1,036       1.89 %     221,804       1,501       2.71 %
Short-term debt
    5,956       22       .49 %     16,882       65       .51 %     6,646       9       .54 %     7,175       9       .50 %
Long-term debt
    63,616       1,798       3.77 %     67,466       1,718       3.40 %     64,348       617       3.84 %     65,637       563       3.43 %
Total interest bearing liabilities
  $ 437,705     $ 6,869       2.09 %   $ 406,422     $ 7,724       2.53 %   $ 439,946     $ 2,213       2.01 %   $ 410,568     $ 2,474       2.41 %
 
                                                                                               
Tax equivalent net interest income 1
          $ 14,035                     $ 12,893                     $ 4,901                     $ 4,336          
 
                                                                                               
Net interest margin
                    3.73 %                     3.69 %                     3.86 %                     3.66 %
 
1   Interest income on loans includes loan fees.
 
2   An incremental income tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans. The taxable equivalent adjustment was $120 thousand and $136,000 for the nine months ended September 30, 2010 and 2009, respectively. The taxable equivalent adjustment was $39 thousand and $50 thousand for The three months ended September 30, 2010 and 2009, respectively.
 
3   Average balance information is reflective of historical cost and has not been adjusted for changes in market value.
 
4   Annualized.

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TABLE II
F & M BANK CORP.
Interest Sensitivity Analysis
September 30, 2010
(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
  $ 105,717     $ 23,706     $ 86,452     $ 6,102             $ 221,977  
Installment
    10,304       1,287       8,618       685               20,894  
Real estate for investments
    41,898       14,175       122,976       22,114               201,163  
Real estate held for sale
    34,497                                       34,497  
Credit cards
    2,560                                       2,560  
Federal funds sold
    6,096                                       6,096  
Interest bearing bank deposits
    2,256       996                               3,252  
Investment securities
    1,051       218       4,131       6,282       3,149       14,831  
 
                                   
Total
  $ 204,379     $ 40,382     $ 222,177     $ 35,183     $ 3,149     $ 505,270  
 
                                   
 
                                               
Sources of funds
                                               
Interest bearing demand deposits
          $ 29,279     $ 66,189     $ 18,455             $ 113,923  
Savings deposits
            7,039       21,117       7,039               35,195  
Certificates of deposit $100,000 and over
    30,236       17,158       39,640                       87,034  
Other certificates of deposit
    20,906       42,992       68,816                       132,714  
Short-term borrowings
    5,604                                       5,604  
Long-term borrowings
    5,023       8,322       41,714       8,268               63,327  
 
                                     
Total
  $ 61,769     $ 104,790     $ 237,476     $ 33,762           $ 437,797  
 
                                   
 
                                               
Discrete Gap
  $ 142,610     $ (64,408 )   $ (15,299 )   $ 1,421     $ 3,149     $ 67,473  
 
                                   
 
                                               
Cumulative Gap
  $ 142,610     $ 78,202     $ 62,903     $ 64,324     $ 67,473          
 
                                     
 
                                               
Ratio of Cumulative Gap to Total Earning Assets
    28.22 %     15.48 %     12.45 %     12.73 %     13.35 %        
     Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2010. 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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
     As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the “Act”) are required to include in those reports certain information concerning the issuer’s controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     We have established our disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer, and the other executive officers of the Company and its subsidiaries to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company’s operations. As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.
     The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13(a)-14(e) and timely, alerting them to financial information relating to the Company required to be included in the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Controls
     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 —   Not Applicable
         
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds —   Not Applicable
         
Item 3.
  Defaults Upon Senior Securities —   Not Applicable
         
Item 4.
  Removed and reserved-    
         
Item 5.
  Other Information —   Not Applicable
         
Item 6.
  Exhibits    
  (a)   Exhibits
  3 i    Restated Articles of Incorporation of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.’s 2001 Form 10K filed March 1, 2002.
 
  3 ii    Amended and Restated Bylaws of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.’s Form 10K filed March 1, 2002.
 
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
 
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
  32   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (filed herewith).

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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 12, 2010

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