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		(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.

Index

			Page
Part I Financial Information			2
Item 1. Financial Statements
Consolidated Statements of Income — Three Months Ended September 30, 2010 and 2009			2
Consolidated Statements of Income — Nine Months Ended September 30, 2010 and 2009			3
Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009			5
Consolidated Statements of Changes in Stockholders’ Equity — Nine Months Ended September 30, 2010 and 2009			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			26
Part II Other Information			27
Item 1. Legal Proceedings			27
Item 1a. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults upon Senior Securities			27
Item 4. Removed and reserved			27
Item 5. Other Information			27
Item 6. Exhibits			27
Signatures			27
Certifications			28
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
		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

F & M BANK CORP.

		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

F & M BANK CORP.

		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

F & M BANK CORP.

		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

F & M BANK CORP.

		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

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.

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	)

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.

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	)

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

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

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.

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.

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. 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

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.

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.

     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	%