F&M BANK CORP - Quarter Report: 2010 March (Form 10-Q)

 

 

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

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 Incorporation or Organization)		(I.R.S. Employer Identification No.)

P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)

(540) 896-8941

     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 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 (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 May 5, 2010
	Common Stock, par value — $5			2,296,378 shares

 

 

F & M BANK CORP.

Index

		Page
Part I Financial Information			2
Item 1. Financial Statements
Consolidated Statements of Income — Three Months Ended March 31, 2010 and 2009			2
Consolidated Balance Sheets – March 31, 2010 and December 31, 2009			3
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2010 and 2009			4
Consolidated Statements of Changes in Stockholders’ Equity – Three Months March 31, 2010 and 2009			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			23
Part II Other Information			24
Item 1. Legal Proceedings			24
Item 1a. Risk Factors			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3. Defaults upon Senior Securities			24
Item 4. Removed and reserved			24
Item 5. Other Information			24
Item 6. Exhibits			24
Signatures			25
Certifications			26
EX-31.1
EX-31.2
EX-32

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
		March 31,
		2010				2009
Interest income
Interest and fees on loans held for investment		$	6,473			$	6,186
Interest and fees on loans held for sale			155				227
Interest on federal funds sold			13				1
Interest on interest bearing deposits			5				14
Dividends on equity securities			48				46
Interest on debt securities			113				227
Total interest income			6,807				6,701
Interest expense
Interest on demand deposits			458				234
Interest on savings accounts			46				63
Interest on time deposits over $100,000			416				559
Interest on time deposits			848				1,213
Total interest on deposits			1,768				2,069
Interest on short-term debt			7				28
Interest on long-term debt			629				604
Total Interest Expense			2,404				2,701
Net interest income			4,403				4,000
Provision for loan losses			900				210
Net interest income after provision for loan losses			3,503				3,790
Noninterest income
Service charges			305				286
Insurance and other commissions			81				102
Other			270				189
Income on bank owned life insurance			73				90
Other than temporary impairment losses							(330	)
Gain (loss) on the sale of securities			30
Total noninterest income			759				337
Noninterest expense
Salaries			1,317				1,236
Employee benefits			420				428
Occupancy expense			148				139
Equipment expense			146				132
Intangible amortization			69				69
FDIC insurance assessment			282				59
Other			764				731
Total noninterest expense			3,146				2,794
Income before income taxes			1,116				1,333
Income taxes			357				432
Consolidated net income			759				901
Net income – Noncontrolling interest			(3	)			(17	)
Net Income – F & M Bank Corp.		$	756			$	884
Per share data
Net income		$	.33			$	.39
Cash dividends		$	.15			$	.23
Weighted average shares outstanding			2,295,643				2,288,563

F & M BANK CORP.

Consolidated Balance Sheets
(In Thousands of Dollars Except per Share Amounts)

		March 31,				December 31,
		2010				2009
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$	5,027			$	5,314
Federal funds sold			7,467				18,326
Cash and cash equivalents			12,494				23,640
Interest bearing deposits in banks			5,210				65
Securities:
Held to maturity — fair value of $110,000 in 2010 and 2009, respectively (note 2)			110				110
Available for sale (note 2)			16,627				16,430
Other investments			9,578				9,681
Loans held for sale			22,153				31,168
Loans held for investment (note 3)			440,750				434,403
Less allowance for loan losses (note 4)			(4,510	)			(3,836	)
Net loans held for investment			436,240				430,567
Other real estate owned			1,465				526
Bank premises and equipment, net			6,945				7,080
Interest receivable			1,910				2,038
Core deposit intangible			253				322
Goodwill			2,670				2,670
Bank owned life insurance			6,664				6,593
Other assets			8,455				8,333
Total assets		$	530,774			$	539,223
Liabilities
Deposits:
Noninterest bearing		$	53,705			$	53,475
Interest bearing:
Demand			84,987				77,483
Money market accounts			21,432				23,231
Savings			35,138				34,229
Time deposits over $100,000			87,705				99,330
All other time deposits			133,329				132,895
Total deposits			416,296				420,643
Short-term debt			4,520				9,084
Accrued liabilities			7,138				7,398
Subordinated debt			3,806				2,715
Long-term debt			59,107				60,381
Total liabilities			490,867				500,221
Stockholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized, 2,296,428 and 2,295,053 shares issued and outstanding in 2010 and 2009, respectively			11,482				11,475
Retained earnings			28,425				27,989
Noncontrolling interest			100				123
Accumulated other comprehensive income (loss)			(100	)			(585	)
Total stockholders’ equity			39,907				39,002
Total liabilities and stockholders’ equity		$	530,774			$	539,223

F & M BANK CORP.

Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities
Net income		$	756			$	884
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation			163				158
Amortization (accretion) of security premiums (discounts)			15				11
Net (increase) decrease in loans held for sale			9,015				(15,937	)
Provision for loan losses			900				210
Intangible amortization			69				69
(Increase) decrease in interest receivable			127				(9	)
(Increase) decrease in other assets			(1,385	)			357
Increase in accrued expenses			375				(114	)
(Gain)/loss on security transactions			(30	)			330
Amortization of limited partnership investments			103				93
Income from life insurance investment			(71	)			(71	)
Net adjustments			9,281				(14,903	)
Net cash provided (used) by operating activities			10,037				(14,019	)
Cash flows from investing activities
Purchase of investments available for sale			(7,048	)			(736	)
Proceeds from sales of investments available for sale			853				4
Proceeds from maturity of investments available for sale			6,677				529
Proceeds from maturity of investments held to maturity Net increase in loans held for investment			(7,096	)			(9,552	)
Purchase of property and equipment			(28	)			(97	)
Net (increase) decrease in interest bearing bank deposits			(5,145	)			(251	)
Net cash used in investing activities			(11,787	)			(10,103	)
Cash flows from financing activities
Net change in demand and savings deposits			6,844				6,722
Net change in time deposits			(11,191	)			15,375
Net change in short-term debt			(4,565	)			(6,836	)
Cash dividends paid			(332	)			(528	)
Repurchase of common stock							(54	)
Proceeds from sale of common stock			31
Change in federal funds purchased
Proceeds of long-term debt			7,250				7,250
Repayment of long-term debt			(7,433	)			(6,202	)
Net cash provided (used) by financing activities			(9,396	)			15,727
Net Increase (Decrease) in Cash and Cash Equivalents			(11,146	)			(8,395	)
Cash and cash equivalents, beginning of period			23,640				13,208
Cash and cash equivalents, end of period		$	12,494			$	4,813
Supplemental disclosure
Cash paid for:
Interest expense		$	7,753			$	2,805
Income taxes

F & M BANK CORP.

		Three Months Ended
		March 31,
		2010				2009
Balance, beginning of period		$	39,002			$	36,258
Comprehensive income
Net income – F & M Bank Corp.			756				867
Net income – Noncontrolling interest			(23	)			17
Net change in unrealized appreciation on securities available for sale, net of taxes			485				(396	)
Total comprehensive income			1,218				488
Issuance of Common Stock			31
Repurchase of common stock							(54	)
Dividends declared			(344	)			(528	)
Balance, end of period		$	39,907			$	36,164

F & M BANK CORP.

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 March 31, 2010 and the results of operations for the three month periods ended March 31, 2010 and March 31, 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:

		March 31,				March 31,
		2010				2009
Changes in:
Net Income:
Net Income – F & M Bank Corp.		$	756			$	867
Net Income – Noncontrolling Interest			(23	)			17
			733				884
Unrealized holding gains (losses) on available-for-sale securities:			765				(930	)
Other than temporary impairment losses							330
Reclassification adjustment for (gains) losses realized in income			(30	)
Net unrealized gains (losses)			735				(600	)
Tax effect			250				204
Unrealized holding gain (losses), net of tax			485				(396	)
Net change in comprehensive income		$	1,218			$	488

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.

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 March 31, 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		$	110			$	110			$	110			$	110
Total		$	110			$	110			$	110			$	110

		2010								2009
		Market								Market
		Value				Cost				Value				Cost
Securities available for sale
Government sponsored enterprises		$	6,988			$	6,975			$	6,012			$	5,976
Equity securities			3,523				2,979				3,743				3,768
Mortgage-backed securities			5,527				5,217				6,170				5,896
Corporate Bonds			589				281				505				281
Municipals
Total		$	16,627			$	15,452			$	16,430			$	15,921

The amortized cost and fair value of securities at March 31, 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		$	110			$	110			$	1,288			$	1,286
Due after one year through five years											5,974				5,988
Due after five years											5,211				5,830
			110				110				12,473				13,104
Marketable equities											2,979				3,523
Total		$	110			$	110			$	15,452			$	16,627

There were no sales of debt securities during the first quarter of 2010 or in all of 2009. Following is a table reflecting gains and losses on sales of equity securities:

		2010				2009
Gains		$	114			$
Losses			(84	)
Net Gains (Losses)		$	30			$

F & M BANK CORP.
Notes to Consolidated Financial Statements

Note 3. Loans Held for Investment

     Loans outstanding at March 31, 2010 and December 31, 2009 are summarized as follows:

		2010				2009
Real Estate
Construction		$	85,925			$	86,320
Residential			181,747				191,382
Commercial and agricultural			151,553				134,993
Consumer loans to individuals			18,953				19,247
Credit cards			2,489				2,355
Other			83				106
Total		$	440,750			$	434,403

Note 4. Allowance for Loan Losses

     A summary of transactions in the allowance for loan losses follows:

		Three Months Ended
		March 31,
		2010				2009
Balance, beginning of period		$	3,836			$	2,189
Provisions charged to operating expenses			900				210
Net (charge-offs) recoveries:
Loan recoveries			27				12
Loan charge-offs			(253	)			(30	)
Total Net (Charge-Offs) Recoveries*			(226	)			(18	)
Balance, End of Period		$	4,510			$	2,381
* Components of Net (Charge-Offs) Recoveries
Real Estate			(184	)
Commercial
Consumer and other			(42	)			(18	)
Total		$	(226	)		$	(18	)

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 three-month periods ended March 31, 2010 and 2009.

		2010				2009
Service cost		$	96,979			$	89,700
Interest cost			79,250				68,333
Expected return on plan assets			(120,427	)			(78,428	)
Amortization of net obligation at transition
Amortization of prior service cost			(1,325	)			(1,325	)
Amortization of net (gain) or loss			16,378				31,051
Net periodic benefit cost		$	70,855			$	109,331

F & M BANK CORP.
Notes to Consolidated Financial Statements

Note 6. Fair Value

          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.

March 31, 2010		Total				Level 1				Level 2				Level 3
Government sponsored enterprises			6,988								6,988
Mortgage-backed obligations of federal agencies			5,527								5,527
Marketable Equities			3,523				3,523
Corporate Bonds			589				589
Investment securities available for sale			16,627				4,112				12,515
Total assets at fair value			16,627				4,112				12,515
Total liabilities at fair value

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.

March 31, 2010		Total				Level 1				Level 2				Level 3
Loans Held for Sale			22,153								22,153
Other Real Estate Owned			1,465								1,465
Real Estate			972								972
Commercial			5,986								5,986
Consumer
Impaired loans			6,958								6,958
Total assets at fair value			30,576								30,576
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.

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 March 31, 2010 and December 31, 2009 are as follows (in thousands):

		March 31, 2010								December 31, 2009
		Estimated				Carrying				Estimated				Carrying
		Fair Value				Value				Fair Value				Value
Financial Assets
Cash		$	5,027			$	5,027			$	5,314			$	5,314
Interest bearing deposits			5,207				5,210				65				65
Federal funds sold			7,467				7,467				18,326				18,326
Securities available for sale			16,627				16,627				16,430				16,430
Securities held to maturity			110				110				110				110
Other investments			9,578				9,578				9,681				9,681
Loans			472,337				440,750				481,967				434,403
Loan held for sale			22,153				22,153				31,168				31,168
Bank owned life insurance			6,664				6,664				6,593				6,593
Accrued interest receivable			1,910				1,910				2,038				2,038
Financial Liabilities
Demand Deposits:
Non-interest bearing			53,705				53,705				53,475				53,475
Interest bearing			106,419				106,419				100,714				100,714
Savings deposits			35,138				35,138				34,229				34,229
Time deposits			222,368				221,034				234,032				232,225
Accrued liabilities			7,138				7,138				7,534				7,396
Short-term debt			4,520				4,520				9,085				9,085
Subordinated debt			3,806				3,806				2,715				2,715
Long-term debt			59,931				59,107				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.

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.

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.

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

          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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Securities Impairment, continued

     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 recover, will result in OTTI being recognized in quarter 1 or quarter 2 rather than continuing to evaluate the security over several quarters, based on holding period projections.
	•		Declines determined to be other than temporary are charged to operations and included in gain (loss) on security sales.

There were no securities which were deemed to have other than temporary impairment in the first quarter of 2010. Such charges were $330,000 for the first quarter 2009.

Overview

          Net income for the first quarter of 2010 was $756,000 or $.33 per share, compared to $884,000 or $.39 in the first quarter of 2009, a decrease of 14.48%. During the first quarter, noninterest income, exclusive of securities transactions, increased 9.3% and noninterest expense increased 12.6% 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		$	799			$	1,136
Income or loss from Parent Company Activities			(43	)			(252	)
Net Income for the year			756				884

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 $748,000 in 2010 and $1,085,000 in 2009, a decrease of 31.05%. Income from core operations declined due to an increase in FDIC Assessments and increased funding of the Provision for Loan Losses. A reconciliation of core earnings follows:

In thousands		2010				2009
Net Income		$	756			$	884
Non-recurring Tax Items			11				(16	)
Non-recurring Securities Transactions			(19	)			217
Core Earnings			748				1,085

     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

          The 2010 year to date tax equivalent net interest margin increased $398,000 or 9.84% compared to the same period in 2009. The yield on earning assets decreased .49%, while the cost of funds decreased .55 % 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 22 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 .01% decrease in the net interest margin compared to the same period in 2009. 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 the three month period ending March 31, 2010 and 2009 can be found in Table I on page 21.

          Noninterest income, exclusive of securities transactions, increased $62,000 or 9.3% through March 31, 2010 compared to the same 3 month period in 2009. Items contributing to the increase include a $19,000 increase in service charges, and a $42,000 increase in debit card fee income,.

          Noninterest expense increased $352,000 in the first quarter of 2010. The increase is the result of a $73,000 increase in salaries and benefits expense (4.4%). The increase in salaries and benefits includes normal salary increases and growth in staff. Exclusive of personnel expenses, other noninterest expenses increased at an annualized rate of 24.69% in 2010 compared to 2009. The majority of the increase is a $223,000 increase in the FDIC Assessment. The increase in FDIC Assessment is due to the growth of the Bank as well as the increased assessment imposed due to FDIC fund shortages. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available (December 31, 2009) Bank Holding Company Performance Report, the Company’s and peer group noninterest expenses averaged 2.41% and 3.41% 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.

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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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 stockholders’ equity.

               As of March 31, 2010, the market value of securities available for sale exceeded their cost by $1,175,000. 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 increased approximately $320,000 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 $2,281,000 and these bonds have an average yield of approximately 5.24%. 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 March 31, 2010, no other than temporary impairments were identified. 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.

          The allowance for loan losses (see subsequent section) provides for the risk that borrowers will be unable to repay their obligations and is reviewed quarterly for adequacy. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.

          While lending is geographically diversified within the service area, the Company does have loan concentrations in agricultural (primarily poultry farming), construction, hotels, churches, assisted living facilities and the aforementioned mortgage participations. Management and the Board of Directors review these concentrations quarterly. The first three months of 2010 resulted in a increase of $4.9 million in the Bank’s core loan portfolio.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

     Nonperforming loans include nonaccrual loans, loans 90 days or more past due and restructured loans. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans which have had the original interest rate or repayment terms changed due to financial hardship. Nonperforming loans totaled $8,976,000 at March 31, 2010 compared to $7,653,000 at December 31, 2009. Although the potential exists for some loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of March 31, 2010, the Company holds $1,465,000 of real estate which was acquired through foreclosure.

     The following is a summary of information pertaining to risk elements and impaired loans:

		March 31, 2010				December 31, 2009
Nonaccrual Loans:
Real Estate			1,699				3,245
Commercial			4,173				261
Other			426
Loans past due 90 days or more:
Real Estate			2,231				3,850
Commercial			339				57
Other			108				240
Total Nonperforming loans			8,976				7,653
Nonperforming loans as a percentage of loans held for investment			2.04	%			1.76	%
Net Charge Offs to Total Loans			.05	%			.59	%
Allowance for loan and lease losses to nonperforming loans			50.25	%			50.12	%

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 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 five years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates.

     All potential losses are evaluated within a range of low to high. An unallocated reserve has been established to reflect other unidentified losses within the portfolio. This helps to offset the increased risk of loss associated with fluctuations in past due trends, changes in the local and national economies, and other unusual events. The Board approves the loan loss provision for the following quarter based on this evaluation and an effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.

     The allowance for loan losses of $4,510,000 at March 31, 2010 is equal to 1.02% 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 $900,000 in the first quarter of 2010. Net charge-offs year to date totaled $226,000.

     The overall level of the allowance is well below its peer group average. Management feels this is appropriate based on its loan loss history and the composition of its loan portfolio. 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.

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 decreased $4,347,000 since December 31, 2009. Time deposits decreased $11,192,000 during this period while demand deposits and savings deposits increased $6,844,000. 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 $35.2 million in CDARS funding, a decrease of $9 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 real estate loan growth. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund either a fifteen-year fixed rate loan or a twenty-year loan, of which the first ten years have a fixed rate. This program allows the Bank to match 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 $8,275,000 through March 31, 2010. Additional borrowings of $7,250,000 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 the Silverton line of credit as a five year, fixed rate, amortizing loan at 6%. At March 31, 2010 the outstanding balance was $4,750,000.

     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 March 31, 2010 the balance outstanding was $3,806,000.

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 March 31, 2010, the Company’s total risk based capital and total capital to total assets ratios were 11.40% and 7.12%, respectively. Both ratios are in excess of regulatory minimums. For the same period, Bank only total risk based capital and total capital to total assets ratios were 11.71% and 7.31%, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity

     Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

     Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company also maintains lines of credit with correspondent financial institutions. The Company’s subsidiary bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.

Interest Rate Sensitivity

     In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.

     As of March 31, 2010, the Company had a cumulative Gap Rate Sensitivity Ratio of 8.46% 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 22.

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. There were no stock repurchases in 2010.

Effect of Newly Issued Accounting Standards

     In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliations. The new disclosures are effective for the Company for the current quarter and have been reflected in the Fair Value footnote.

     Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated. The amendments were effective upon issuance and had no significant impact on 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).

TABLE 1

F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)

		Three Months Ended												Three Months Ended
		March 31, 2010												March 31, 2009
		Average				Income/								Average				Income/
		Balance2				Expense				Rates				Balance2				Expense				Rates
Interest income
Loans held for investment1,2		$	438,277			$	6,500				5.93	%		$	403,984			$	6,219				6.16	%
Loans held for sale			15,873				155				3.91	%			23,204				227				3.91	%
Federal funds sold			23,176				13				.22	%			2,089				1				.19	%
Interest bearing deposits			3,040				4				.53	%			1,306				13				3.98	%
Investments
Taxable 3			12,928				110				3.40	%			18,304				225				4.92	%
Partially taxable			4,180				65				6.22	%			2,902				59				8.13	%
Tax exempt 2,3												%			125				3				9.70	%
Total earning assets		$	497,474			$	6,847				5.51	%		$	451,914			$	6,747				5.97	%
Interest Expense
Demand deposits			103,345				458				1.77	%			63,884				234				1.47	%
Savings			33,508				46				.55	%			30,168				63				.84	%
Time deposits			230,585				1,264				2.19	%			209,334				1,772				3.39	%
Short-term debt			5,650				7				.50	%			20,246				28				.55	%
Long-term debt			59,939				629				4.20	%			70,785				604				3.41	%
Total interest bearing liabilities		$	433,027			$	2,404				.2.22	%		$	394,417			$	2,701				2.74	%
Net interest margin 1						$	4,443											$	4,046
Net yield on interest earning assets											3.57	%											3.58	%

TABLE II

F & M BANK CORP.
Interest Sensitivity Analysis
March 31, 2010

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		$	102,895			$	21,194			$	93,198			$	6,823			$				$	224,110
Installment			10,128				1,189				7,353				612								19,282
Real estate for investments			43,751				14,024				121,506				15,588								194,869
Real estate held for sale			22,153																				22,153
Credit cards			2,489																				2,489
Federal funds sold			7,467																				7,467
Interest bearing bank deposits			5,210																				5,210
Investment securities			56				1,340				5,988				5,241				4,112				16,737
Total			194,149				37,747				228,045				28,264				4,112				492,317
Sources of funds
Interest bearing demand deposits							27,714				61,708				16,997								106,419
Savings deposits							7,027				21,083				7,028								35,138
Certificates of deposit $100,000 and over			21,895				31,464				34,346												87,705
Other certificates of deposit			25,686				59,830				47,813												133,329
Short-term borrowings			4,520																				4,520
Long-term borrowings			1,023				11,096				46,988				3,806								62,913
Total		$	53,124			$	137,131			$	211,938			$	27,831			$				$	430,024
Discrete Gap			141,025				(99,384	)			16,107				433				4,112				62,293
Cumulative Gap			141,025				41,641				57,748				58,181				62,293
Ratio of Cumulative Gap to Total Earning Assets			28.65	%			8.46	%			11.73	%			11.82	%			12.65	%