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

For the quarterly period ended September 30, 2011.

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 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	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 [   ] No [X]

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 4, 2011
Common Stock, par value - $5	2,490,990 shares

F & M BANK CORP.

Index

		Page
Part I - Financial Information
Item 1.	Financial Statements	2
	Consolidated Statements of Income – Three Months Ended September 30, 2011 and 2010		2
	Consolidated Statements of Income – Nine Months Ended September 30, 2011 and 2010		3
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010		4
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2011 and 2010		5
	Consolidated Statements of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2011 and 2010		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
Part II - Other Information
Item 1.	Legal Proceedings		36
Item 1a.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3.	Defaults upon Senior Securities		36
Item 4.	Removed and reserved		36
Item 5.	Other Information		36
Item 6.	Exhibits		36
Signatures			37
Certifications

1

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,
Interest income	2011			2010
Interest and fees on loans held for investment	$	6,540		$	6,524
Interest and fees on loans held for sale		420			411
Interest on federal funds sold		2			1
Interest on interest bearing deposits		8			7
Dividends on equity securities		21			49
Interest on debt securities		35			83
Total interest income		7,026			7,075
Interest expense
Interest on demand deposits		387			502
Interest on savings accounts		50			48
Interest on time deposits over $100,000		303			332
Interest on other time deposits		606			705
Total interest on deposits		1,346			1,587
Interest on short-term debt		11			9
Interest on long-term debt		544			617
Total interest expense		1,901			2,213
Net interest income		5,125			4,862
Provision for loan losses		900			1,300
Net interest income after provision for loan losses		4,225			3,562
Noninterest income
Service charges		296			296
Insurance and other commissions		162			173
Other		264			255
Income on bank owned life insurance		89			85
Other than temporary impairment losses		-			(65	)
Gain on the sale of securities		736			384
Total noninterest income		1,547			1,128
Noninterest expense
Salaries		1,409			1,365
Employee benefits		435			416
Occupancy expense		136			131
Equipment expense		148			146
Intangible amortization		-			69
FDIC insurance assessment		23			297
Other		933			833
Total noninterest expense		3,084			3,257
Income before income taxes		2,688			1,433
Income tax expense		1,330			508
Consolidated net income		1,358			925
Net income – Noncontrolling interest		(20	)		(34	)
Net Income – F & M Bank Corp	$	1,338		$	891
Per share data
Net income	$	.54		$	.39
Cash dividends	$	.15		$	.15
Weighted average shares outstanding		2,490,109			2,298,801

See notes to unaudited consolidated financial statements

2

F & M BANK CORP.

Consolidated Statements of Income

(In Thousands of Dollars Except per Share Amounts)

(Unaudited)

	Nine Months Ended
	September 30,
Interest income	2011			2010
Interest and fees on loans held for investment	$	19,553		$	19,417
Interest and fees on loans held for sale		731			873
Interest on federal funds sold		28			18
Interest on interest bearing deposits		24			20
Dividends on equity securities		108			154
Interest on debt securities		169			302
Total interest income		20,613			20,784
Interest expense
Interest on demand deposits		1,248			1,465
Interest on savings accounts		145			144
Interest on time deposits over $100,000		899			1,120
Interest on other time deposits		1,856			2,320
Total interest on deposits		4,418			5,049
Interest on short-term debt		20			22
Interest on long-term debt		1,751			1,798
Total interest expense		5,919			6,869
Net interest income		14,694			13,915
Provision for loan losses		3,100			3,100
Net interest income after provision for loan losses		11,594			10,815
Noninterest income
Service charges		815			910
Insurance and other commissions		396			369
Other		927			922
Income on bank owned life insurance		264			252
Other than temporary impairment losses		(57	)		(65	)
Gain on the sale of securities		1,082			414
Total noninterest income		3,427			2,802
Noninterest expense
Salaries		4,104			3,943
Employee benefits		1,340			1,177
Occupancy expense		411			423
Equipment expense		445			444
Intangible amortization		46			207
FDIC insurance assessment		591			876
Other		2,758			2,576
Total noninterest expense		9,695			9,646
Income before income taxes		5,326			3,971
Income taxes		2,031			1,287
Consolidated net income		3,295			2,684
Net income – Noncontrolling interest		(40	)		(57	)
Net Income – F & M Bank Corp	$	3,255		$	2,627
Per share data
Net income	$	1.34		$	1.14
Cash dividends	$	.45		$	.45
Weighted average shares outstanding		2,435,686			2,297,191

See notes to unaudited consolidated financial statements

3

F & M BANK CORP.

Consolidated Balance Sheets

(In Thousands of Dollars Except per Share Amounts)

	September 30,			December 31,
	2011			2010
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	5,827		$	4,586
Federal funds sold		-			16,338
Cash and cash equivalents		5,827			20,924
Interest bearing deposits in banks		2,403			2,927
Securities: (note 2)
Held to maturity - fair value of $108,000 in 2011 and $109,000 in 2010		108			109
Available for sale		11,088			15,247
Other investments		7,836			8,789
Loans held for sale		64,953			23,764
Loans held for investment (note 3)		452,758			445,147
Less allowance for loan losses (note 4)		(6,844	)		(5,786	)
Net loans held for investment		445,914			439,361
Other real estate owned		3,140			1,513
Bank premises and equipment, net		6,332			6,792
Interest receivable		1,682			2,001
Core deposit intangible		-			46
Goodwill		2,670			2,670
Bank owned life insurance		7,104			6,883
Other assets		8,169			7,829
Total assets	$	567,226		$	538,855
Liabilities
Deposits:
Noninterest bearing	$	68,752		$	58,497
Interest bearing:
Demand		93,546			94,091
Money market accounts		23,913			22,798
Savings		39,181			35,760
Time deposits over $100,000		82,972			80,060
All other time deposits		137,423			133,845
Total deposits		445,787			425,051
Short-term debt		15,789			5,355
Accrued liabilities		6,554			7,241
Subordinated debt		10,191			9,944
Long-term debt		42,714			49,035
Total liabilities		521,035			496,626
Stockholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized,
2,490,895 and 2,306,086 shares issued and outstanding
in 2011 and 2010, respectively		12,454			11,530
Retained earnings		34,477			30,837
Noncontrolling interest		195			186
Accumulated other comprehensive income (loss)		(935	)		(324	)
Total stockholders' equity		46,191			42,229
Total liabilities and stockholders’ equity	$	567,226		$	538,855

See notes to unaudited consolidated financial statements

4

F & M BANK CORP.

Consolidated Statements of Cash Flows

(In Thousands of Dollars)

(Unaudited)

	Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities
Net income	$	3,255		$	2,627
Net change – Noncontrolling interest		9			30
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation		457			480
Amortization of security premiums (discounts), net		44			29
Net increase in loans held for sale		(41,189	)		(3,330	)
Provision for loan losses		3,100			3,100
Intangible amortization		46			207
(Increase) decrease in interest receivable		319			161
Increase in other assets		(826	)		(78	)
Gain on sale of fixed assets		(86	)		(18	)
Increase (decrease) in accrued expenses		(25	)		512
Gain on security transactions		(1,025	)		(349	)
Amortization of limited partnership investments		349			306
Income from life insurance investment		(221	)		(217	)
Loss on Other Real Estate Owned		90
Net adjustments		(38,967	)		803
Net cash provided by (used in) operating activities		(35,703	)		3,460
Cash flows from investing activities
Purchase of investments available for sale		(14,969	)		(17,127	)
Proceeds from sales of investments available for sale		4,191			1,860
Proceeds from maturity of investments available for sale		15,684			17,905
Net increase in loans held for investment		(12,864	)		(16,382	)
Proceeds from the sale of other real estate owned		1,494			1,210
Proceeds from the sale of fixed assets		277
Purchase of property and equipment		(188	)		(234	)
Net (increase) decrease in interest bearing bank deposits		524			(3,187	)
Net cash used in investing activities		(5,851	)		(15,955	)
Cash flows from financing activities
Net change in demand and savings deposits		14,246			17,091
Net change in time deposits		6,490			(12,477	)
Net change in short-term debt		10,434			(3,481	)
Cash dividends paid		(1,093	)		(1,036	)
Proceeds from rights offering		2,381
Proceeds from issuance of common stock		73			175
Proceeds of long-term debt		247			14,289
Repayment of long-term debt		(6,321	)		(14,057	)
Net cash provided by financing activities		26,457			504
Net Increase (Decrease) in Cash and Cash Equivalents		(15,097	)		(11,991	)
Cash and cash equivalents, beginning of period		20,924			23,640
Cash and cash equivalents, end of period	$	5,827		$	11,649
Supplemental disclosure
Cash paid for:
Interest expense	$	5,942		$	6,815
Income taxes		1,000			500
Transfers from loans to Other Real Estate Owned		3,211			2,456

See notes to unaudited consolidated financial statements

5

F & M BANK CORP.

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands of Dollars)

(Unaudited)

	Nine Months Ended
	September 30,
	2011			2010
Balance, beginning of period	$	42,229		$	39,002
Comprehensive income
Net income – F & M Bank Corp		3,255			2,627
Net income - Noncontrolling interest		40			57
Minority Interest Contributed Capital (Distributions)		(31	)		(27	)
Prepaid pension adjustment		(52	)		-
Net change in unrealized appreciation on securities available for sale, net of taxes		(611	)		220
Total comprehensive income		2,601			2,877
Issuance of common stock		2,454			175
Dividends declared		(1,093	)		(690	)
Balance, end of period	$	46,191		$	41,364

See notes to unaudited consolidated financial statements

6

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, 2011 and the results of operations for the three and nine month periods ended September 30, 2011 and September 30, 2010.  The notes included herein should be read in conjunction with the notes to financial statements included in the 2010 annual report to stockholders of 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,
	2011			2010
Changes in:
Net Income:
Net Income – F & M Bank Corp	$	3,255		$	2,627
Net Income – Noncontrolling Interest		40			57
Noncontrolling Interest Contributed Capital (Distributions)		(31	)		(27	)
		3,264			2,657
Prepaid pension adjustment		(52	)
Unrealized holding gains on available-for-sale securities:		99			682
Reclassification adjustment for other than temporary impairment losses		57			65
Reclassification adjustment for gains realized in income		(1,082	)		(414	)
Net unrealized gains (losses)		(926	)		333
Tax effect		315			(113	)
Unrealized holding gain (loss), net of tax		(611	)		220
Comprehensive income	$	2,601		$	2,877

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.

7

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 1.                  Accounting Principles, continued

Loans

Loans are carried on the balance sheet net of any unearned interest and the allowance for loan losses.  Interest income on loans is determined using the effective interest method on the daily amount of principal outstanding except where serious doubt exists as to collectability of the loan, in which case the accrual of income is discontinued.

Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio.  Loans are charged against the allowance when management believes the collectability of the principal is unlikely.  Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Nonaccrual Loans

Commercial loans are placed on nonaccrual status when they become ninety days or more past due, unless there is an expectation that the loan will either be brought current or paid in full in a reasonable period of time. Interest accruals are generally continued on past due, secured residential real estate loans and consumer purpose loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the financial condition of the borrower deteriorates to the point that any further accrued interest would be determined to be uncollectible.

8

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 2.                  Investment Securities

The amortized cost of investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2011 and December 31, 2010 are as follows:

	2011				2010
			Market				Market
	Cost		Value		Cost		Value
Securities held to maturity
U. S. Treasury and agency obligations	$	108	$	108	$	109	$	109
Total	$	108	$	108	$	109	$	109
	September 30, 2011
			Unrealized				Market
	Cost		Gains		Losses		Value
Securities available for sale
Government sponsored enterprises	$	11,043	$	49	$	4	$	11,088
Total	$	11,043	$	49	$	4	$	11,088
	December 31, 2010
			Unrealized				Market
	Cost		Gains		Losses		Value
Securities available for sale
Government sponsored enterprises	$	7,997	$	7	$	3	$	8,001
Equity securities		2,643		711		39		3,315
Mortgage-backed securities		3,724		209		2		3,931
Total	$	14,364	$	927	$	44	$	15,247

The amortized cost and fair value of securities at September 30, 2011, 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.

9

F & M BANK CORP.

Notes to Consolidated Financial Statements

	Securities Held to Maturity				Securities Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	108	$	108	$	-	$	-
Due after one year through five years		-		-		11,043		11,088
Due after five years		-		-		-		-
		108		108		11,043		11,088
Marketable equities		-		-		-		-
Total	$	108	$	108	$	11,043	$	11,088

Following is a table reflecting gains and losses on sales of debt and equity securities:

	Nine Months Ended						Three Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Gains	$	1,144		$	506		$	798		$	392
Losses		(62	)		(92	)		(62	)		(8	)
Net Gains	$	1,082		$	414		$	736		$	384

10

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. These factors are only considered when the declines in value are 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 (i.e. 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; in the second quarter of 2011 we determined that one financial institution equity security met the above definition of OTTI and the charge to operations totaled $57,000. There were no additional OTTI charges in the third quarter of 2011.

11

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, 2011 and December 31, 2010 were as follows (dollars in thousands):

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2011
Government sponsored Enterprises	$	2,040	$	(4	)	$	-	$	-		$	2,040	$	(4	)
Total	$	2,040	$	(4	)	$	-	$	-		$	2,040	$	(4	)
December 31, 2010
Government sponsored Enterprises	$	2,004	$	(3	)	$	-	$	-		$	2,004	$	(3	)
Mortgage backed Obligations		-		-			260		(2	)		260		(2	)
Marketable equities		-		-			575		(39	)		575		(39	)
Total	$	2,004	$	(3	)	$	835	$	(41	)	$	2,839	$	(44	)

Other investments, which consists of stock of correspondent banks and investments in low income housing projects, decreased since December 31, 2010.  This decrease is due to a stock repurchase by the FHLB and regular amortization of the carrying value of the investment in low income housing projects.

Note 3.                 Loans Held for Investment

Loans outstanding at September 30, 2011 and December 31, 2010 are summarized as follows:

	2011		2010
Real Estate
Construction	$	71,085	$	79,337
Residential		208,230		202,420
Commercial and agricultural		157,437		141,253
Consumer loans to individuals		13,227		19,042
Credit cards		2,710		2,771
Other		69		324
Total	$	452,758	$	445,147

12

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 3.                 Loans Held for Investment, continued

The following is a summary of information pertaining to impaired loans (in thousands):

			Unpaid				Average		Interest
September 30, 2011	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance
Real Estate	$	4,624	$	4,624	$	-	$	4,468	$	177
Commercial		1,428		1,428		-		1,142		26
Home Equity		653		653		-		704		21
Other		147		147		-		236		7
		6,852		6,852		-		6,550		231
Impaired loans with a valuation allowance
Real Estate		6,047		6,047		673		6,053		207
Commercial		688		688		309		1,319		-
Home Equity		155		155		3		306		12
Other		-		-		-		-		-
		6,890		6,890		985		7,678		219
Total impaired loans	$	13,742	$	13,742	$	985	$	14,228	$	450

The Recorded Investment is defined as the principal balance, net of deferred fees, less principal payments and charge-offs.

			Unpaid				Average		Interest
December 31, 2010	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance
Real Estate	$	5,680	$	5,680	$	-	$	2,015	$	84
Commercial		888		888		-		606		19
Home Equity		673		673		-		260		5
Other		247		247		-		292		-
		7,488		7,488		-		3,173		108
Impaired loans with a valuation allowance
Real Estate		6,942		6,942		1,003		2,881		211
Commercial		1,149		1,149		161		5,013		17
Home Equity		439		439		118		333		11
Other		7		7		1		5		12
		8,537		8,537		1,283		8,232		251
Total impaired loans	$	16,025	$	16,025	$	1,283	$	11,405	$	359

13

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 4.                 Allowance for Loan Losses

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

Nine Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,724		$	1,814		$	407		$	59		$	111		$	1,671	$	5,786
Charge-offs		(973	)		(783	)		(306	)		(60	)		(72	)		-		(2,194	)
Recoveries		56			9			27			22			38			-		152
Provision		1,244			425			172			37			24			1,198		3,100
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859
Three Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,812		$	1,784		$	381		$	57		$	435		$	2,039	$	6,508
Charge-offs		(520	)		(77	)		(250	)		(15	)		238			-		(624	)
Recoveries		24			-			-			8			28			-		60
Provision		735			(242	)		169			8			(600	)		830		900
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859

Nine Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	3,836
Charge-offs		-		-		-		-		-		-		(1,796	)
Recoveries		-		-		-		-		-		-		60
Provision		-		-		-		-		-		-		3,100
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610
Three Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	4,890
Charge-offs		-		-		-		-		-		-		(1,010	)
Recoveries		-		-		-		-		-		-		20
Provision		-		-		-		-		-		-		1,300
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610

*Detailed table not required for September 2010 data.

14

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 4.                 Allowance for Loan Losses, continued

Recorded Investment in Loan Receivables (in thousands)

September 30, 2011	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Loan Receivable:	$	170,675	$	210,133	$	55,943	$	2,710	$	13,297	$	-	$	452,758
Individually evaluated for impairment	$	15,880	$	27,099	$	1,002	$	-	$	67	$	-	$	44,048
Collectively evaluated for impairment	$	154,795	$	183,034	$	54,941	$	2,710	$	13,230	$	-	$	408,710

Allowance for Loan Losses and Recorded Investment in Loan Receivables (in thousands)

December 31, 2010	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Ending Balance	$	1,724	$	1,814	$	407	$	59	$	111	$	1,671	$	5,786
Ending Balance:
Individually evaluated for impairment (specific reserve)		161		1,003		118		-		1		-		1,283
Collectively evaluated for impairment		1,563		811		289		59		110		1,671		4,503
Loans Receivable:	$	153,511	$	214,906	$	54,593	$	2,771	$	19,366	$	-	$	445,147
Individually evaluated for impairment	$	12,406	$	16,806	$	1,538	$	-	$	1,099	$	-	$	31,849
Collectively evaluated for impairment	$	141,105	$	198,100	$	53,055	$	2,771	$	18,267	$	-	$	413,298

Aging of Past Due Loans Receivable (in thousands) as of September 30, 2011

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	949	$	319	$	86	$	1,354	$	6,264	$	163,058	$	170,676
Real Estate		6,892		2,261		1,715		10,868		3,892		195,373		210,133
Home Equity		660		265		328		1,253		-		54,688		55,941
Credit Cards		28		14		-		42		-		2,668		2,710
Consumer		138		61		21		220		24		13,054		13,298
Total	$	8,667	$	2,920	$	2,150	$	13,737	$	10,180	$	428,841	$	452,758

15

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 4.                 Allowance for Loan Losses, continued

Aging of Past Due Loans Receivable (in thousands) as of December 31, 2010

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	756	$	382	$	4,581	$	5,719	$	1,656	$	146,137	$	153,512
Real Estate		6,303		1,395		3,021		10,719		5,189		198,998		214,906
Home Equity		1,302		595		588		2,485		715		51,392		54,592
Credit Cards		19		6		-		25		-		2,746		2,771
Consumer		1,240		67		54		1,361		30		17,975		19,366
Total	$	9,620	$	2,445	$	8,244	$	20,309	$	7,590	$	417,248	$	445,147

Credit quality indicators as of September 30, 2011

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	September 30, 2011
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	62	$	156	$	-
Grade 2 - Modest Risk		1,091		3,369		461
Grade 3 - Average Risk		23,740		16,483		7,753
Grade 4 - Acceptable Risk		90,270		85,491		38,720
Grade 5 - Marginally Acceptable		45,316		38,613		6,172
Grade 6 – Watch		18,540		9,302		1,261
Grade 7 – Substandard		31,030		17,061		1,574
Grade 8 – Doubtful		84		201		-
Total	$	210,133	$	170,676	$	55,941
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Credit Cards		Consumer
Performing	$	2,710	$	13,278
Non performing (past due 90 days or greater)		-		20
Total	$	2,710	$	13,298

See following page for description of loan grades.

16

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 4.                  Allowance for Loan Losses, continued

Credit quality indicators as of December 31, 2010

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	December 31, 2010
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	69	$	175	$	-
Grade 2 - Modest Risk		818		1,679		575
Grade 3 - Average Risk		30,042		16,254		7,943
Grade 4 - Acceptable Risk		107,028		77,472		37,847
Grade 5 - Marginally Acceptable		40,163		40,908		5,473
Grade 6 – Watch		16,785		7,781		905
Grade 7 – Substandard		19,719		8,640		1,849
Grade 8 – Doubtful		282		603		-
Total	$	214,906	$	153,512	$	54,592

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
	Credit Cards		Consumer
Performing	$	2,771	$	19,311
Non performing (past due 90 days or greater)		-		55
Total	$	2,771	$	19,366

17

F & M BANK CORP.

Notes to Consolidated Financial Statements

Description of loan grades:

Grade 1 – Minimal Risk:   Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk:  Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk:  Borrower generates sufficient cash flow to fund debt service.  Employment (or business) is stable with good future trends.  Credit is very good.

Grade 4 – Acceptable Risk:  Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt.  Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

Grade 5 – Marginally acceptable:  Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable.  Employment or business stability may be weak or deteriorating.  May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects.  Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch:  Loans are currently protected, but are weak due to negative balance sheet or income statement trends.  There may be a lack of effective control over collateral or the existence of documentation deficiencies.  These loans have potential weaknesses that deserve management’s close attention.  Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness.  Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans’ having well-defined weaknesses where a payment default and or loss is possible, but not yet probable.  Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt.  Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful:  The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety.  Cash flow is insufficient to service the debt.  It may be difficult to project the exact amount of loss, but the probability of some loss is great.  Loans are to be placed on non-accrual status when any portion is classified doubtful.

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 2011 and does not anticipate additional contributions for the 2011 plan year.  The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, 2011 and 2010.

	Nine Months Ended						Three Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Service cost	$	334,065		$	290,937		$	111,355		$	96,979
Interest cost		241,134			237,750			80,378			79,250
Expected return on plan assets		(378,327	)		(361,281	)		(126,109	)		(120,427	)
Amortization of net obligation at transition		-						-
Amortization of prior service cost		(5,829	)		(3,975	)		(1,943	)		(1,325	)
Amortization of net (gain) or loss		47,883			49,134			15,961			16,378
Net periodic benefit cost	$	238,926		$	212,565		$	79,642		$	70,855

18

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, 2011	Total		Level 1		Level 2		Level 3
Government sponsored enterprises	$	11,088	$	-	$	11,088
Mortgage-backed obligations of federal agencies		-		-		-
Marketable Equities		-		-		-
Investment securities available for sale	$	11,088	$	-	$	11,088
Total assets at fair value	$	11,088	$	-	$	11,088
Total liabilities at fair value	$	-	$	-	$	-

19

F & M BANK CORP.

Notes to Consolidated Financial Statements

Note 6.                 Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.

December 31, 2010	Total		Level 1		Level 2		Level 3
Government sponsored enterprises	$	8,001	$	-	$	8,001
Mortgage-backed obligations of federal agencies		3,931		-		3,931
Marketable Equities		3,315		3,315		-
Investment securities available for sale	$	15,247	$	3,315	$	11,932
Total assets at fair value	$	15,247	$	3,315	$	11,932
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, 2011	Total		Level 1	Level 2		Level 3
Loans Held for Sale	$	64,953		$	64,953
Other Real Estate Owned		3,140			3,140
Real Estate		5,374			5,374
Commercial		379			379
Consumer		-			-
Home Equity		152			152
Impaired loans		5,905			5,905
Total assets at fair value	$	73,998		$	73,998
Total liabilities at fair value

December 31, 2010	Total		Level 1	Level 2		Level 3
Loans Held for Sale	$	23,764		$	23,764
Other Real Estate Owned		1,513			1,513
Real Estate		5,938			5,938
Commercial		988			988
Consumer		7			7
Home Equity		321			321
Impaired loans		7,254			7,254
Total assets at fair value	$	32,531		$	32,531
Total liabilities at fair value

There were no significant transfers between levels 1 and 2.

20

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, 2011 and December 31, 2010 are as follows (in thousands):

	September 30, 2011				December 31, 2010
	Estimated		Carrying		Estimated		Carrying
	Fair Value		Value		Fair Value		Value
Financial Assets
Cash	$	5,827	$	5,827	$	4,586	$	4,586
Interest bearing deposits		2,403		2,403		2,927		2,927
Federal funds sold		-		-		16,338		16,338
Securities available for sale		11,088		11,088		15,247		15,247
Securities held to maturity		108		108		109		109
Other investments		7,836		7,836		8,789		8,789
Loans		485,237		452,758		475,166		445,147
Loans held for sale		64,953		64,953		23,764		23,764
Bank owned life insurance		7,104		7,104		6,883		6,883
Accrued interest receivable		1,682		1,682		2,001		2,001
Financial Liabilities
Demand Deposits:
Non-interest bearing		68,752		68,752		58,497		58,497
Interest bearing		117,459		117,459		116,889		116,889
Savings deposits		39,181		39,181		35,760		35,760
Time deposits		222,488		220,395		216,199		213,905
Accrued interest payable		2,778		2,778		2,707		2,707
Short-term debt		15,789		15,789		5,355		5,355
Subordinated debt		10,191		10,191		9,944		9,944
Long-term debt		45,143		42,714		51,566		49,035

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.

21

F & M BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Troubled Debt Restructuring

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance.  The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $7,020,000.

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the

environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually.

	For the nine months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Commercial		3	$	1,008	$	1,008
Real Estate		5		5,560		5,560
Home Equity		2		452		452
Credit Cards
Consumer
Total			$	7,020	$	7,020

	For the three months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Commercial		-	$	-	$	-
Real Estate		3		4,254		4,254
Home Equity		1		142		142
Credit Cards
Consumer
			$	4,396	$	4,396

During the nine months ended September 30, 2011, the Bank modified 10 loans that were considered to be troubled debt restructurings. These modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

22

F & M BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Troubled Debt Restructuring (continued)

	For the nine months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings that subsequently defaulted during the period:
Commercial		2	$	623	$	623
Real Estate		2		1,306		1,306
Home Equity				-		-
Credit Cards				-		-
Consumer				-		-
			$	1,929	$	1,929

	For the three months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings that subsequently defaulted during the period:
Commercial		2	$	623	$	623
Real Estate		1		1,040		1,040
Home Equity				-		-
Credit Cards				-		-
Consumer				-		-
			$	1,663	$	1,663

During the nine months ended September 30, 2011, four loans that had previously been restructured, were in default, three of which went into default in the quarter. One loan restructured in the twelve months prior to September 30, 2010 went into default during the nine months.

Note 8. Rights Offering

The Company completed a rights offering during the first quarter of 2011 that resulted in the issuance of 179,699 shares totaling $2,381,000 in additional capital.

23

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.

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 are not statements of historical fact.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. 

Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits.

We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

24

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 29 in the Management Discussion and 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 would continue to be amortized over the estimated useful life. As of February 2011 the Bank completed its amortization of the core deposit intangible arising from the branch purchase which occurred in February 2001.

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, 2011 was $3,255,000 or $1.34 per share, compared to $2,627,000 or $1.14 in the same period in 2010, an increase of 23.91%. During the nine months ended September 30, 2011, noninterest income, exclusive of securities transactions, decreased 2.08% and noninterest expense increased .51% during the same period.  Net income from Bank operations adjusted for income or loss from Parent activities is as follows:

In thousands	2011			2010
Net Income from Bank Operations	$	3,534		$	2,811
Income or (loss) from Parent Company Activities		(279	)		(184	)
Net Income for the nine months ended September 30	$	3,255			2,627

25

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Core operating earnings, (exclusive of securities gains and losses, non-recurring tax adjustments and non-recurring historic rehabilitation credits related to the investment in low income housing projects) totaled $2,927,000 in 2011 and $2,408,000 in 2010, an increase of 21.55%.  Income from core operations increased in 2011 primarily due to a decrease in interest expense.  A reconciliation of core earnings follows:

In thousands	2011			2010
Net Income	$	3,255		$	2,627
Non-recurring Tax Items		418			48
Non-recurring Securities Transactions, net of tax		(746	)		(267	)
Core Earnings for the nine months ended September 30	$	2,927		$	2,408

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

As shown in Table I, the 2011 year to date tax equivalent net interest income increased $745,000 or 5.31% compared to the same period in 2010.  The yield on earning assets decreased .19%, while the cost of funds decreased .27% compared to the same period in 2010.  For the three month period ending September 30, 2011, the tax equivalent net interest income increased $246,000 compared to the same period in 2010.

Year to date, the combination of the decrease in both yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage has resulted in the net interest margin rising to 3.83%, an increase of .10% when compared to the same period in 2010. While, for the three month period ending September 30, 2011, the tax equivalent net interest margin increased from 3.86% in 2010 to 3.96% in 2011. A schedule of the net interest margin for the nine month and three month periods ended September 30, 2011 and 2010 can be found in Table I on page 33.
 

The Interest Sensitivity Analysis on page 34 indicates the Company is in an asset sensitive position in the one year time horizon.

Noninterest income, exclusive of securities transactions, decreased $51,000 or 2.08% for the nine month period ending September 30, 2011 and increased $2,000 or .25% for the three month period.  The decrease was primarily due to the reduction in service charge and overdraft fee income.

Noninterest expense increased $49,000 for the nine month period and decreased $173,000 for the three month period of 2011 as compared to 2010. Salary and benefits expense increased $324,000 (6.33%) through September 2011. This increase is due to increases in professional personnel as well as salary increases and retirement plan expenses.   Exclusive of personnel expenses, other noninterest expenses decreased at an annualized rate of 6.08% for the first nine months of 2011 and 15.99% in the third quarter of 2011 as compared to 2010. The primary reason for the decrease in these expenses relates to the recently enacted revisions to the FDIC Assessment calculation which resulted in an adjustment to the third quarter expense. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available (June 30, 2011) Bank Holding Company Performance Report, the Company’s and peer’s noninterest expenses averaged 2.37% and 2.93% 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.

26

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Financial Condition

Federal Funds Sold and Interest Bearing Bank Deposits

The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were 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 and as security for certain public funds and repurchase agreements.

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.

During the third quarter of 2011, the Company liquidated its equities securities portfolio resulting in a pre-tax gain of $525,000 and proceeds totaling $2,470,000. These proceeds, along with cash raised in the rights offering (Note 9), were used to retire Company debt. Also, during the third quarter, the Bank liquidated all of its holdings in mortgage back securities at a pre-tax gain totaling $211,000 and proceeds totaling $3,157,000. The proceeds were reinvested in government sponsored agency obligations. These mortgage back securities were liquidated in order to capture gains resulting from the current low interest rate environment and to reposition the portfolio into securities with a fixed principal balance to facilitate pledging needs.

As of September 30, 2011, the market value of securities available for sale exceeded their cost by $45,000. This includes an increase in the value of government obligations held by the Bank.  Investments in debt securities have decreased approximately $678,000 in 2011. The portfolio is made up of primarily agency 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. There are no scheduled maturities for the remainder of 2011.

In reviewing investments as of September 30, 2011, there were no additional securities which met the definition for other than temporary impairment.  Through the third quarter the bank has recognized $57,000 of other than temporary impairment. 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.

27

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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 2011 resulted in an increase of $7.6 million in the Bank’s core loan portfolio.

Nonperforming loans include nonaccrual loans and loans 90 days or more past due.   Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently.  Nonperforming loans totaled $12,330,000 at September 30, 2011 compared to $15,834,000 at December 31, 2010.  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, 2011, the Company holds $3,140,000 of real estate which was acquired through foreclosure.

The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):

	September 30, 2011			December 31, 2010
Nonaccrual Loans
Real Estate	$	3,892		$	5,189
Commercial		6,264			1,656
Home Equity		-			715
Other		24			30
		10,180			7,590
Loans past due 90 days or more
Real Estate		1,715			3,021
Commercial		86			4,581
Home Equity		328			588
Other		21			54
		2,150			8,244
Total Nonperforming loans	$	12,330		$	15,834
Nonperforming loans as a percentage of loans held for investment		2.73	%		3.56	%
Net Charge Offs to Total Loans		.39	%		.53	%
Allowance for loan and lease losses to loans held for investment		1.51	%		1.30	%
Allowance for loan and lease losses to nonperforming loans		55.51	%		36.54	%

28

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Allowance for Loan Losses

Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans.  Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.

In evaluating the portfolio, loans are segregated into loans with identified potential losses and pools of loans by type (commercial, residential, consumer, credit cards). Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $200,000 are reviewed individually for impairment under ASC 310. A variety of factors are taken into account when reviewing these credits including borrower cash flow, payment history, fair value of collateral, company management, the industry in which the borrower is involved and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.

Loan pools are further segmented into watch list, past due over 90 days and all other loans by type. Watch list loans include loans that are 60 days past due, and may include restructured loans, borrowers that are highly leveraged, loans that have been upgraded from classified or loans that contain policy exceptions (term, collateral coverage, etc.). Loss estimates on these loans reflect the increased risk associated with these assets due to any of the above factors. The past due pools contain loans that are currently 90 days or more past due. Loss rates assigned reflect the fact that these loans bear a significantly higher risk of charge-off. Loss rates vary by loan type to reflect the likelihood that collateral values will offset a portion of the anticipated losses.

The remainder of the portfolio falls into pools by type of homogenous loans that do not exhibit any of the above described weaknesses. Loss rates are assigned based on historical loss rates over the prior two years. A multiplier has been applied to these loss rates to reflect the time for loans to season within the portfolio and the inherent imprecision of these estimates.

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

The allowance for loan losses of $6,844,000 at September 30, 2011 is equal to 1.51% of loans held for investment. This compares to an allowance of $5,786,000 (1.30%) at December 31, 2010.  Based on the evaluation of the loan portfolio described above, management has funded the allowance a total of $3,100,000 in the first nine months of 2011. Net charge-offs year to date totaled $2,042,000.

The overall level of the allowance is below its peer group average, but has been increasing in recent quarters. Management feels a lower reserve is appropriate based on its loan loss history and the composition of its loan portfolio.  Based on historical losses, delinquency rates, collateral values of delinquent loans and a thorough review of the loan portfolio, management is of the opinion that the allowance for loan losses fairly states the estimated losses in the current portfolio.

29

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area.  Deposit accounts include demand deposits, savings, money market and certificates of deposit.  Total deposits have increased $20,736,000 since December 31, 2010.  Time deposits increased $6,490,000 during this period while demand deposits and savings deposits increased $14,246,000.  The increase in certificates of deposits is a result of an increase in core time deposits. The Bank also participates in the CDARS program.  CDARS (Certificate of Deposit Account Registry Service) is a program that allows the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering 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 $24.6 million in CDARS funding, an increase of $166,000 since December 31, 2010.

Short-term debt

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB) and commercial repurchase agreements (repos). Commercial customers deposit operating funds into their checking account and by mutual agreement with the bank their excess funds are swept daily into the repurchase accounts.  These accounts are not considered deposits and are not insured by the FDIC.  The Bank pledges securities held in its investment portfolio as collateral for these short-term loans.  Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Daily rate credit from the FHLB has been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans.

Long-term debt

Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) continue to be an important source of funding.  The Company’s subsidiary bank borrows funds on a fixed rate basis.  These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes.  Scheduled repayments totaled $2,322,000 through September 30, 2011.  There were no additional borrowings through September 30, 2011.

In November 2009, the Company entered into an agreement with Page Valley Bank (and several sub-participants) to refinance a line of credit previously owed to Silverton Bank as a five year, fixed rate, amortizing loan at 6%.  This amortizing loan was paid in full during the third quarter of 2011.

In August 2009, the Company began issuing Subordinated debt agreements with local investors with terms of 7 to 10 years.  Interest rates are fixed on the notes for the full term but vary by maturity.  Rates range from 7.0% on the 7 year note to 8.05% on the 10 year note.  As of September 30, 2011 the balance outstanding was $10,191,000.

Capital

The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.  As of September 30, 2011, the Company's total risk based capital and leverage ratios were 13.96% and 8.01%, respectively. For the same period, Bank only total risk based capital and leverage ratios were 13.81% and 7.97%, respectively. For both the Company and the Bank these ratios are in excess of regulatory minimums.

The Company completed a stock rights offering during the first quarter of 2011 that resulted in the issuance of 179,699 shares and $2,381,000 in additional capital.

30

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity

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

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

Interest Rate Sensitivity

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

As of September 30, 2011, the Company had a cumulative Gap Rate Sensitivity Ratio of 12.06% 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 34.

Stock Repurchase

On September 18, 2008, the Company’s Board of Directors approved an increase in the number of shares of common stock that the Company can repurchase under the share repurchase program from 150,000 to 200,000 shares. However, due to the impact on capital ratios resulting from the growth in the balance sheet, other than temporary impairment securities write downs in 2009 and increased funding of the allowance for loan losses, the stock repurchase plan has been suspended. There have been no stock repurchases in 2011.

31

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Effect of Newly Issued Accounting Standards

The following is a summary of recent authoritative pronouncements:

On April 5, 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which clarifies the determination of TDRs and establishes the effective date of TDR disclosure requirements on credit quality and allowance for loan losses. For public companies, this ASU is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. Disclosures related to TDRs under ASU 2010-20 have been presented in Note 8.

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings. The amendment was effective for the Company on January 1, 2011.

In September 2011, the Intangibles topic was again amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  These amendments will be effective for the Company on January 1, 2012.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

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).

32

TABLE I

F & M BANK CORP.

Net Interest Margin Analysis

(on a fully taxable equivalent basis)

(Dollar Amounts in Thousands)

	Nine Months Ended							Nine Months Ended							Three Months Ended							Three Months Ended
	September 30, 2011							September 30, 2010							September 30, 2011							September 30, 2010
Average			Income/		Average					Income/		Average					Income/		Average					Income/		Average
	Balance2,4		Expense		Rates5			Balance2,4		Expense		Rates5			Balance2,4		Expense		Rates5			Balance2,4		Expense		Rates5
Interest income
Loans held for investment1,2	$	453,787	$	19,626		5.77	%	$	442,830	$	19,498		5.87	%	$	455,839	$	6,566		5.76	%	$	446,721	$	6,551		5.87	%
Loans held for sale		26,992		731		3.61	%		28,891		873		4.03	%		46,464		420		3.62	%		40,075		410		4.09	%
Federal funds sold		16,818		28		.22	%		10,818		18		.22	%		3,010		2		.27	%		2,066		1		.19	%
Interest bearing deposits		2,262		23		1.36	%		3,018		20		.88	%		1,883		7		1.49	%		3,063		7		.91	%
Investments
Taxable 3		12,563		210		2.23	%		12,457		313		3.35	%		11,747		42		1.43	%		12,009		83		2.76	%
Partially taxable 3		2,332		81		4.63	%		3,824		182		6.35	%		1,245		11		3.53	%		3,467		62		7.15	%
Total earning assets	$	514,754	$	20,699		5.36	%	$	501,838	$	20,904		5.55	%	$	520,188	$	7,048		5.42	%	$	507,401	$	7,114		5.61	%
Interest Expense
Demand deposits		117,742		1,248		1.41	%	$	107,896	$	1,465		1.81	%		116,348		387		1.33	%	$	112,941	$	502		1.78	%
Savings		37,833		145		.51	%		35,396		144		.54	%		38,560		50		.52	%		36,906		49		.53	%
Time deposits		215,548		2,755		1.70	%		224,841		3,440		2.04	%		217,513		909		1.67	%		219,105		1,036		1.89	%
Short-term debt		6,173		20		.43	%		5,956		22		.49	%		9,104		11		.48	%		6,646		9		.54	%
Long-term debt		56,903		1,751		4.10	%		63,616		1,798		3.77	%		55,099		544		3.95	%		64,348		617		3.84	%
Total interest bearing liabilities	$	434,199	$	5,919		1.82	%	$	437,705	$	6,869		2.09	%	$	436,624	$	1,901		1.74	%	$	439,946	$	2,213		2.01	%
Tax equivalent net interest income 1			$	14,780						$	14,035						$	5,147						$	4,901
Net interest margin						3.83	%						3.73	%						3.96	%						3.86	%

________________________________________

1 Interest income on loans includes loan fees.

2 Loans held for investment include nonaccrual loans.

3 An incremental income tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.

4 Average balance information is reflective of historical cost and has not been adjusted for changes in market value

5 Annualized.

33

 TABLE II

F & M BANK CORP.

Interest Sensitivity Analysis

September 30, 2011

(In Thousands of Dollars)

The following table presents the Company’s interest sensitivity.

		0 – 3			4 – 12			1 – 5		Over 5			Not
		Months			Months			Years		Years			Classified			Total
Uses of funds
Loans
Commercial	$	95,261		$	26,035		$	101,300		$	4,920		$	-		$	227,516
Installment		7,004			1,097			6,876			61			-			15,038
Real estate for investments		46,491			23,437			121,967			15,599			-			207,494
Real estate held for sale		64,953			-			-			-			-			64,953
Credit cards		2,710			-			-			-			-			2,710
Interest bearing bank deposits		1,657			498			248			-			-			2,403
Investment securities		-			-			11,197			-			-			11,197
Total	$	218,076		$	51,067		$	241,588		$	20,580		$	-		$	531,311
Sources of funds
Interest bearing demand deposits	$	-		$	30,665		$	68,085		$	18,709		$	-		$	117,459
Savings deposits		-			7,836			23,509			7,836			-			39,181
Certificates of deposit $100,000 and over		31,014			21,233			30,725			-			-			82,972
Other certificates of deposit		24,485			52,994			59,944			-			-			137,423
Short-term borrowings		15,789			-			-			-			-			15,789
Long-term borrowings		4,607			16,464			21,643			10,191			-			52,905
Total	$	75,895		$	129,192		$	203,906		$	36,736		$	-		$	445,729
Discrete Gap	$	142,181		$	(78,125	)	$	37,682		$	(16,156	)	$	-		$	85,582
Cumulative Gap	$	142,181		$	64,056		$	101,738		$	85,582		$	85,582
Ratio of Cumulative Gap to Total Earning Assets		26.76	%		12.06	%		19.15	%		16.11	%		16.11	%

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2011.  In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice.  Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity.  Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.

34

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have established our disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officers and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared.  These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer, and the other executive officers of the Company and its subsidiaries to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company’s operations.  As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13(a)-14(e) and timely, alerting them to financial information relating to the Company required to be included in the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Changes in Internal Controls

Due to the nature of the Company’s business as stewards of assets of customers; internal controls are of the utmost importance. The Company has established procedures during the normal course of business to reasonably ensure that fraudulent activity of either a material amount to these results or in any amount is not occurring. In addition to these controls and review by executive officers, the Company retains the services of an internal auditor to complete regular audits, which examine the processes and procedures of the Company and the Bank to ensure that these processes are reasonably effective to prevent internal or external fraud and that the processes comply with relevant regulatory guidelines of all relevant banking authorities. The findings of the internal auditor are presented to management of the Bank and to the Audit Committee of the Company.

35

Part II   Other Information

ITEM 1.	LEGAL PROCEEDINGS	NOT APPLICABLE
ITEM 1A.	RISK FACTORS	NOT APPLICABLE
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	NOT APPLICABLE
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	NOT APPLICABLE
ITEM 4.	REMOVED AND RESERVED
ITEM 5.	OTHER INFORMATION	NOT APPLICABLE
ITEM 6.	EXHIBITS

(a)           Exhibits

3 i Restated Articles of Incorporation of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.’s 2001 Form 10K filed March 1, 2002.

3 ii Amended and Restated Bylaws of F & M Bank Corp. are incorporated by reference to Exhibits to F & M Bank Corp.'s Form 10K filed March 1, 2002.

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (filed herewith).

101 Interactive Data File

36

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

F & M BANK CORP.
By:	/s/ Dean W. Withers
	Dean W. Withers
	President and Chief Executive Officer

By:	/s/ Neil W. Hayslett
	Neil W. Hayslett
	Executive Vice President and Chief Financial Officer

November 14, 2011

37

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(Chapter 63, Title 18 USC Section 1350 (A) and (B)

I, Dean W. Withers, certify that:

1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated:  November 14, 2011	By:	/s/ Dean W. Withers
		Dean W. Withers,
		President  & Chief Executive Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(Chapter 63, Title 18 USC Section 1350 (A) and (B)

I, Neil W. Hayslett, certify that:

1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated:  November 14, 2011	By:	/s/ Neil W. Hayslett
		Neil W. Hayslett,
		Executive Vice President  & Chief Financial Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request

EX-32

EXHIBIT  32

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER,

SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer of F & M Bank Corp., respectively, certify that, to the best of each such individual’s knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2011, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of F & M Bank Corp. at the dates and for the periods indicated.  The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.  The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

By:	/s/ Dean W. Withers
	Dean W. Withers,
	President and Chief Executive Officer
By:	/s/ Neil W. Hayslett
	Neil W. Hayslett,
	Executive Vice President &
	Chief Financial Officer

Dated: November 14, 2011

XML

Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
STOCKHOLDERS EQUITY:
Common stock, par value	$ 5	$ 5
Common stock shares authorized	6,000,000	6,000,000
Common stock shares issued	2,490,895	2,306,086
Common stock shares outstanding	2,490,895	2,306,086

XML

Statements of Operations (Unaudited) (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Interest income
Interest and fees on loans held for investment	$ 6,540	$ 6,524	$ 19,553	$ 19,417
Interest and fees on loans held for sale	420	411	731	873
Interest on federal funds sold	2	1	28	18
Interest on interest bearing deposits	8	7	24	20
Dividends on equity securities	21	49	108	154
Interest on debt securities	35	83	169	302
Total interest income	7,026	7,075	20,613	20,784
Interest expense
Interest on demand deposits	387	502	1,248	1,465
Interest on savings accounts	50	48	145	144
Interest on time deposits over $100,000	303	332	899	1,120
Interest on time deposits	606	705	1,856	2,320
Total interest on deposits	1,346	1,587	4,418	5,049
Interest on short-term debt	11	9	20	22
Interest on long-term debt	544	617	1,751	1,798
Total Interest Expense	1,901	2,213	5,919	6,869
Net interest income	5,125	4,862	14,694	13,915
Provision for loan losses	900	1,300	3,100	3,100
Net interest income after provision for loan losses	4,225	3,562	11,594	10,815
Noninterest income
Service charges	296	296	815	910
Insurance and other commissions	162	173	396	369
Other	264	255	927	922
Income on bank owned life insurance	89	85	264	252
Other than temporary impairment losses	0	65	57	65
Gain on the sale of securities	736	384	1,082	414
Total noninterest income	1,547	1,128	3,427	2,802
Noninterest expense
Salaries	1,409	1,365	4,104	3,943
Employee benefits	435	416	1,340	1,177
Occupancy expense	136	131	411	423
Equipment expense	148	146	445	444
Intangible amortization	0	69	46	207
FDIC insurance assessment	23	297	591	876
Other	933	833	2,758	2,576
Total noninterest expense	3,084	3,257	9,695	9,646
Income before income taxes	2,688	1,433	5,326	3,971
Income tax expense	1,330	508	2,031	1,287
Consolidated net income	1,358	925	3,295	2,684
Net (income) loss - Noncontrolling interest	20	34	40	57
Net Income - F & M Bank Corp	$ 1,338	$ 891	$ 3,255	$ 2,627
Per share data
Net income	$ 0.54	$ 0.39	$ 1.34	$ 1.14
Cash dividends	$ 0.15	$ 0.15	$ 0.45	$ 0.45
Weighted average shares outstanding	2,490,109	2,298,801	2,435,686	2,297,191

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 14, 2011
Document And Entity Information
Entity Registrant Name	F&M BANK CORP
Entity Central Index Key	0000740806
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,490,895
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011

XML

Fair Value

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

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, 2011	Total		Level 1		Level 2		Level 3
Government sponsored enterprises	$	11,088	$	-	$	11,088
Mortgage-backed obligations of federal agencies		-		-		-
Marketable Equities		-		-		-
Investment securities available for sale	$	11,088	$	-	$	11,088
Total assets at fair value	$	11,088	$	-	$	11,088
Total liabilities at fair value	$	-	$	-	$	-

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.

December 31, 2010	Total		Level 1		Level 2		Level 3
Government sponsored enterprises	$	8,001	$	-	$	8,001
Mortgage-backed obligations of federal agencies		3,931		-		3,931
Marketable Equities		3,315		3,315		-
Investment securities available for sale	$	15,247	$	3,315	$	11,932
Total assets at fair value	$	15,247	$	3,315	$	11,932
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, 2011	Total		Level 1	Level 2		Level 3
Loans Held for Sale	$	64,953		$	64,953
Other Real Estate Owned		3,140			3,140
Real Estate		5,374			5,374
Commercial		379			379
Consumer		-			-
Home Equity		152			152
Impaired loans		5,905			5,905
Total assets at fair value	$	73,998		$	73,998
Total liabilities at fair value

December 31, 2010	Total		Level 1	Level 2		Level 3
Loans Held for Sale	$	23,764		$	23,764
Other Real Estate Owned		1,513			1,513
Real Estate		5,938			5,938
Commercial		988			988
Consumer		7			7
Home Equity		321			321
Impaired loans		7,254			7,254
Total assets at fair value	$	32,531		$	32,531
Total liabilities at fair value

There were no significant transfers between levels 1 and 2.

XML

Investment Securities

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Investment Securities

The amortized cost of investment securities are carried in the consolidated balance sheets and their approximate market values at September 30, 2011 and December 31, 2010 are as follows:

	2011				2010
			Market				Market
	Cost		Value		Cost		Value
Securities held to maturity
U. S. Treasury and agency obligations	$	108	$	108	$	109	$	109
Total	$	108	$	108	$	109	$	109
	September 30, 2011
			Unrealized				Market
	Cost		Gains		Losses		Value
Securities available for sale
Government sponsored enterprises	$	11,043	$	49	$	4	$	11,088
Total	$	11,043	$	49	$	4	$	11,088
	December 31, 2010
			Unrealized				Market
	Cost		Gains		Losses		Value
Securities available for sale
Government sponsored enterprises	$	7,997	$	7	$	3	$	8,001
Equity securities		2,643		711		39		3,315
Mortgage-backed securities		3,724		209		2		3,931
Total	$	14,364	$	927	$	44	$	15,247

The amortized cost and fair value of securities at September 30, 2011, 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	$	108	$	108	$	-	$	-
Due after one year through five years		-		-		11,043		11,088
Due after five years		-		-		-		-
		108		108		11,043		11,088
Marketable equities		-		-		-		-
Total	$	108	$	108	$	11,043	$	11,088

Following is a table reflecting gains and losses on sales of debt and equity securities:

	Nine Months Ended						Three Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Gains	$	1,144		$	506		$	798		$	392
Losses		(62	)		(92	)		(62	)		(8	)
Net Gains	$	1,082		$	414		$	736		$	384

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. These factors are only considered when the declines in value are 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 (i.e. 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; in the second quarter of 2011 we determined that one financial institution equity security met the above definition of OTTI and the charge to operations totaled $57,000. There were no additional OTTI charges in the third quarter of 2011.

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, 2011 and December 31, 2010 were as follows (dollars in thousands):

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2011
Government sponsored Enterprises	$	2,040	$	(4	)	$	-	$	-		$	2,040	$	(4	)
Total	$	2,040	$	(4	)	$	-	$	-		$	2,040	$	(4	)
December 31, 2010
Government sponsored Enterprises	$	2,004	$	(3	)	$	-	$	-		$	2,004	$	(3	)
Mortgage backed Obligations		-		-			260		(2	)		260		(2	)
Marketable equities		-		-			575		(39	)		575		(39	)
Total	$	2,004	$	(3	)	$	835	$	(41	)	$	2,839	$	(44	)

Other investments, which consists of stock of correspondent banks and investments in low income housing projects, decreased since December 31, 2010.  This decrease is due to a stock repurchase by the FHLB and regular amortization of the carrying value of the investment in low income housing projects.

XML

Troubled Debt Restructuring

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Troubled Debt Restructuring

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance.  The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $7,020,000.

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the

environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually.

	For the nine months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Commercial		3	$	1,008	$	1,008
Real Estate		5		5,560		5,560
Home Equity		2		452		452
Credit Cards
Consumer
Total			$	7,020	$	7,020

	For the three months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Commercial		-	$	-	$	-
Real Estate		3		4,254		4,254
Home Equity		1		142		142
Credit Cards
Consumer
			$	4,396	$	4,396

During the nine months ended September 30, 2011, the Bank modified 10 loans that were considered to be troubled debt restructurings. These modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

	For the nine months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings that subsequently defaulted during the period:
Commercial		2	$	623	$	623
Real Estate		2		1,306		1,306
Home Equity				-		-
Credit Cards				-		-
Consumer				-		-
			$	1,929	$	1,929

	For the three months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of Contracts		Recorded Investment		Recorded Investment
Troubled Debt Restructurings that subsequently defaulted during the period:
Commercial		2	$	623	$	623
Real Estate		1		1,040		1,040
Home Equity				-		-
Credit Cards				-		-
Consumer				-		-
			$	1,663	$	1,663

During the nine months ended September 30, 2011, four loans that had previously been restructured, were in default, three of which went into default in the quarter. One loan restructured in the twelve months prior to September 30, 2010 went into default during the nine months.

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Rights Offering

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Rights Offering

The Company completed a rights offering during the first quarter of 2011 that resulted in the issuance of 179,699 shares totaling $2,381,000 in additional capital.

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Disclosures About Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

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, 2011 and December 31, 2010 are as follows (in thousands):

	September 30, 2011				December 31, 2010
	Estimated		Carrying		Estimated		Carrying
	Fair Value		Value		Fair Value		Value
Financial Assets
Cash	$	5,827	$	5,827	$	4,586	$	4,586
Interest bearing deposits		2,403		2,403		2,927		2,927
Federal funds sold		-		-		16,338		16,338
Securities available for sale		11,088		11,088		15,247		15,247
Securities held to maturity		108		108		109		109
Other investments		7,836		7,836		8,789		8,789
Loans		485,237		452,758		475,166		445,147
Loans held for sale		64,953		64,953		23,764		23,764
Bank owned life insurance		7,104		7,104		6,883		6,883
Accrued interest receivable		1,682		1,682		2,001		2,001
Financial Liabilities
Demand Deposits:
Non-interest bearing		68,752		68,752		58,497		58,497
Interest bearing		117,459		117,459		116,889		116,889
Savings deposits		39,181		39,181		35,760		35,760
Time deposits		222,488		220,395		216,199		213,905
Accrued interest payable		2,778		2,778		2,707		2,707
Short-term debt		15,789		15,789		5,355		5,355
Subordinated debt		10,191		10,191		9,944		9,944
Long-term debt		45,143		42,714		51,566		49,035

The carrying value of cash and cash equivalents, other investments, deposits with no stated maturities, short-term borrowings, and accrued interest approximate fair value. The fair value of securities was calculated using the most recent transaction price or a pricing model, which takes into consideration maturity, yields and quality.  The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments entered into as of the end of each respective period shown above.

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Shareholders Equity (Unaudited) (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Beginning Balance, Amount	$ 42,229	$ 39,002
Net Income - F & M Bank Corp	3,255	2,627
Net Income - Noncontrolling interest	40	57
Minority Interest Contributed Capital (Distributions)	(31)	(27)
Prepaid pension adjustment	(52)	0
Net change in unrealized appreciation on securities available for sale, net of taxes	(611)	220
Total comprehensive income	2,601	2,877
Issuance of Common Stock, Amount	2,454	175
Dividends declared	(1,093)	(690)
Ending Balance, Amount	$ 46,191	$ 41,364

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Loans Held for Investment

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Loans Held for Investment

Loans outstanding at September 30, 2011 and December 31, 2010 are summarized as follows:

	2011		2010
Real Estate
Construction	$	71,085	$	79,337
Residential		208,230		202,420
Commercial and agricultural		157,437		141,253
Consumer loans to individuals		13,227		19,042
Credit cards		2,710		2,771
Other		69		324
Total	$	452,758	$	445,147

 The following is a summary of information pertaining to impaired loans (in thousands):

			Unpaid				Average		Interest
September 30, 2011	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance
Real Estate	$	4,624	$	4,624	$	-	$	4,468	$	177
Commercial		1,428		1,428		-		1,142		26
Home Equity		653		653		-		704		21
Other		147		147		-		236		7
		6,852		6,852		-		6,550		231
Impaired loans with a valuation allowance
Real Estate		6,047		6,047		673		6,053		207
Commercial		688		688		309		1,319		-
Home Equity		155		155		3		306		12
		6,890		6,890		985		7,678		219
Total impaired loans	$	13,742	$	13,742	$	985	$	14,228	$	450

The Recorded Investment is defined as the principal balance, net of deferred fees, less principal payments and charge-offs.

			Unpaid				Average		Interest
December 31, 2010	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance
Real Estate	$	5,680	$	5,680	$	-	$	2,015	$	84
Commercial		888		888		-		606		19
Home Equity		673		673		-		260		5
Other		247		247		-		292		-
		7,488		7,488		-		3,173		108
Impaired loans with a valuation allowance
Real Estate		6,942		6,942		1,003		2,881		211
Commercial		1,149		1,149		161		5,013		17
Home Equity		439		439		118		333		11
Other		7		7		1		5		12
		8,537		8,537		1,283		8,232		251
Total impaired loans	$	16,025	$	16,025	$	1,283	$	11,405	$	359

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Allowance for Loan Losses

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

Nine Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,724		$	1,814		$	407		$	59		$	111		$	1,671	$	5,786
Charge-offs		(973	)		(783	)		(306	)		(60	)		(72	)		-		(2,194	)
Recoveries		56			9			27			22			38			-		152
Provision		1,244			425			172			37			24			1,198		3,100
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859
Three Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,812		$	1,784		$	381		$	57		$	435		$	2,039	$	6,508
Charge-offs		(520	)		(77	)		(250	)		(15	)		238			-		(624	)
Recoveries		24			-			-			8			28			-		60
Provision		735			(242	)		169			8			(600	)		830		900
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859

Nine Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	3,836
Charge-offs		-		-		-		-		-		-		(1,796	)
Recoveries		-		-		-		-		-		-		60
Provision		-		-		-		-		-		-		3,100
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610
Three Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	4,890
Charge-offs		-		-		-		-		-		-		(1,010	)
Recoveries		-		-		-		-		-		-		20
Provision		-		-		-		-		-		-		1,300
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610

*Detailed table not required for September 2010 data.

Recorded Investment in Loan Receivables (in thousands)

September 30, 2011	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Loan Receivable:	$	170,675	$	210,133	$	55,943	$	2,710	$	13,297	$	-	$	452,758
Individually evaluated for impairment	$	15,880	$	27,099	$	1,002	$	-	$	67	$	-	$	44,048
Collectively evaluated for impairment	$	154,795	$	183,034	$	54,941	$	2,710	$	13,230	$	-	$	408,710

Allowance for Loan Losses and Recorded Investment in Loan Receivables (in thousands)

December 31, 2010	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Ending Balance	$	1,724	$	1,814	$	407	$	59	$	111	$	1,671	$	5,786
Ending Balance:
Individually evaluated for impairment (specific reserve)		161		1,003		118		-		1		-		1,283
Collectively evaluated for impairment		1,563		811		289		59		110		1,671		4,503
Loans Receivable:	$	153,511	$	214,906	$	54,593	$	2,771	$	19,366	$	-	$	445,147
Individually evaluated for impairment	$	12,406	$	16,806	$	1,538	$	-	$	1,099	$	-	$	31,849
Collectively evaluated for impairment	$	141,105	$	198,100	$	53,055	$	2,771	$	18,267	$	-	$	413,298

Aging of Past Due Loans Receivable (in thousands) as of September 30, 2011

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	949	$	319	$	86	$	1,354	$	6,264	$	163,058	$	170,676
Real Estate		6,892		2,261		1,715		10,868		3,892		195,373		210,133
Home Equity		660		265		328		1,253		-		54,688		55,941
Credit Cards		28		14		-		42		-		2,668		2,710
Consumer		138		61		21		220		24		13,054		13,298
Total	$	8,667	$	2,920	$	2,150	$	13,737	$	10,180	$	428,841	$	452,758

Aging of Past Due Loans Receivable (in thousands) as of December 31, 2010

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	756	$	382	$	4,581	$	5,719	$	1,656	$	146,137	$	153,512
Real Estate		6,303		1,395		3,021		10,719		5,189		198,998		214,906
Home Equity		1,302		595		588		2,485		715		51,392		54,592
Credit Cards		19		6		-		25		-		2,746		2,771
Consumer		1,240		67		54		1,361		30		17,975		19,366
Total	$	9,620	$	2,445	$	8,244	$	20,309	$	7,590	$	417,248	$	445,147

Credit quality indicators as of September 30, 2011

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	September 30, 2011
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	62	$	156	$	-
Grade 2 - Modest Risk		1,091		3,369		461
Grade 3 - Average Risk		23,740		16,483		7,753
Grade 4 - Acceptable Risk		90,270		85,491		38,720
Grade 5 - Marginally Acceptable		45,316		38,613		6,172
Grade 6 – Watch		18,540		9,302		1,261
Grade 7 – Substandard		31,030		17,061		1,574
Grade 8 – Doubtful		84		201		-
Total	$	210,133	$	170,676	$	55,941
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Credit Cards		Consumer
Performing	$	2,710	$	13,278
Non performing (past due 90 days or greater)		-		20
Total	$	2,710	$	13,298

See following page for description of loan grades.

Credit quality indicators as of December 31, 2010

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	December 31, 2010
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	69	$	175	$	-
Grade 2 - Modest Risk		818		1,679		575
Grade 3 - Average Risk		30,042		16,254		7,943
Grade 4 - Acceptable Risk		107,028		77,472		37,847
Grade 5 - Marginally Acceptable		40,163		40,908		5,473
Grade 6 – Watch		16,785		7,781		905
Grade 7 – Substandard		19,719		8,640		1,849
Grade 8 – Doubtful		282		603		-
Total	$	214,906	$	153,512	$	54,592

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
	Credit Cards		Consumer
Performing	$	2,771	$	19,311
Non performing (past due 90 days or greater)		-		55
Total	$	2,771	$	19,366

Description of loan grades:

Grade 1 – Minimal Risk:   Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk:  Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk:  Borrower generates sufficient cash flow to fund debt service.  Employment (or business) is stable with good future trends.  Credit is very good.

Grade 4 – Acceptable Risk:  Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt.  Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

Grade 5 – Marginally acceptable:  Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable.  Employment or business stability may be weak or deteriorating.  May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects.  Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch:  Loans are currently protected, but are weak due to negative balance sheet or income statement trends.  There may be a lack of effective control over collateral or the existence of documentation deficiencies.  These loans have potential weaknesses that deserve management’s close attention.  Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness.  Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans’ having well-defined weaknesses where a payment default and or loss is possible, but not yet probable.  Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt.  Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful:  The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety.  Cash flow is insufficient to service the debt.  It may be difficult to project the exact amount of loss, but the probability of some loss is great.  Loans are to be placed on non-accrual status when any portion is classified doubtful.

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Employee Benefit Plan

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

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 2011 and does not anticipate additional contributions for the 2011 plan year.  The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, 2011 and 2010.

	Nine Months Ended						Three Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Service cost	$	334,065		$	290,937		$	111,355		$	96,979
Interest cost		241,134			237,750			80,378			79,250
Expected return on plan assets		(378,327	)		(361,281	)		(126,109	)		(120,427	)
Amortization of net obligation at transition		-						-
Amortization of prior service cost		(5,829	)		(3,975	)		(1,943	)		(1,325	)
Amortization of net (gain) or loss		47,883			49,134			15,961			16,378
Net periodic benefit cost	$	238,926		$	212,565		$	79,642		$	70,855

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Statements of Cash Flows (Unaudited) (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities
Net income	$ 3,255	$ 2,627
Net change - Noncontrolling interest	9	30
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	457	480
Amortization (accretion) of security premiums (discounts), net	44	29
Net (increase) decrease in loans held for sale	(41,189)	(3,330)
Provision for loan losses	3,100	3,100
Intangible amortization	46	207
(Increase) decrease in interest receivable	319	161
(Increase) decrease in other assets	(826)	(78)
Gain on sale of fixed assets	(86)	(18)
Increase (decrease) in accrued expenses	(25)	512
Gain on security transactions	(1,025)	(349)
Amortization of limited partnership investments	349	306
Income from life insurance investment	(221)	(217)
Loss on other real estate owned	90	0
Net adjustments	(38,967)	803
Net cash provided by (used in) operating activities	(35,703)	3,460
Cash flows from investing activities
Purchase of investments available for sale	(14,969)	(17,127)
Proceeds from sales of investments available for sale	4,191	1,860
Proceeds from maturity of investments available for sale	15,684	17,905
Net increase in loans held for investment	(12,864)	(16,382)
Proceeds from the sale of other real estate owned	1,494	1,210
Proceeds from the sale of fixed assets	277	0
Purchase of property and equipment	(188)	(234)
Net (increase) decrease in interest bearing bank deposits	524	(3,187)
Net cash used in investing activities	(5,851)	(15,955)
Cash flows from financing activities
Net change in demand and savings deposits	14,246	17,091
Net change in time deposits	6,490	(12,477)
Net change in short-term debt	10,434	(3,481)
Cash dividends paid	(1,093)	(1,036)
Proceeds from rights offering	2,381	0
Proceeds from issuance of common stock	73	175
Proceeds of long-term debt	247	14,289
Repayment of long-term debt	(6,321)	(14,057)
Net cash provided (used) by financing activities	26,457	504
Net Increase (Decrease) in Cash and Cash Equivalents	(15,097)	(11,991)
Cash and cash equivalents, beginning of period	20,924	23,640
Cash and cash equivalents, end of period	5,827	11,649
Supplemental disclosure
Cash paid for Interest	5,942	6,815
Cash paid for Income taxes	1,000	500
Transfers from loans to Other Real Estate Owned	$ 3,211	$ 2,456

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Accounting Principles

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

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, 2011 and the results of operations for the three and nine month periods ended September 30, 2011 and September 30, 2010.  The notes included herein should be read in conjunction with the notes to financial statements included in the 2010 annual report to stockholders of 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,
	2011			2010
Changes in:
Net Income:
Net Income – F & M Bank Corp	$	3,255		$	2,627
Net Income – Noncontrolling Interest		40			57
Noncontrolling Interest Contributed Capital (Distributions)		(31	)		(27	)
		3,264			2,657
Prepaid pension adjustment		(52	)
Unrealized holding gains on available-for-sale securities:		99			682
Reclassification adjustment for other than temporary impairment losses		57			65
Reclassification adjustment for gains realized in income		(1,082	)		(414	)
Net unrealized gains (losses)		(926	)		333
Tax effect		315			(113	)
Unrealized holding gain (loss), net of tax		(611	)		220
Comprehensive income	$	2,601		$	2,877

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.

Loans

Loans are carried on the balance sheet net of any unearned interest and the allowance for loan losses.  Interest income on loans is determined using the effective interest method on the daily amount of principal outstanding except where serious doubt exists as to collectability of the loan, in which case the accrual of income is discontinued.

Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio.  Loans are charged against the allowance when management believes the collectability of the principal is unlikely.  Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Nonaccrual Loans

Commercial loans are placed on nonaccrual status when they become ninety days or more past due, unless there is an expectation that the loan will either be brought current or paid in full in a reasonable period of time. Interest accruals are generally continued on past due, secured residential real estate loans and consumer purpose loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the financial condition of the borrower deteriorates to the point that any further accrued interest would be determined to be uncollectible.

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Balance Sheets (Unaudited) (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 5,827	$ 4,586
Federal funds sold	0	16,338
Cash and cash equivalents	5,827	20,924
Interest bearing deposits in banks	2,403	2,927
Securities: (note 2)
Held to maturity - fair value of $108,000 in 2011 and $109,000 in 2010	108	109
Available for sale	11,088	15,247
Other investments	7,826	8,789
Loans held for sale	64,953	23,764
Loans held for investment (note 3)	452,758	445,147
Less allowance for loan losses (note 4)	6,844	5,786
Net loans held for investment	445,914	439,361
Other real estate owned	3,140	1,513
Bank premises and equipment, net	6,332	6,792
Interest receivable	1,682	2,001
Core deposit intangible	0	46
Goodwill	2,670	2,670
Bank owned life insurance	7,104	6,883
Other assets	8,169	7,829
Total assets	567,226	538,855
Deposits:
Noninterest bearing	68,752	58,497
Interest bearing:
Demand	93,546	94,091
Money market accounts	23,913	22,798
Savings	39,181	35,760
Time deposits over $100,000	82,972	80,060
All other time deposits	137,423	133,845
Total deposits	445,787	425,051
Short-term debt	15,789	5,355
Accrued liabilities	6,554	7,241
Subordinated debt	10,191	9,944
Long-term debt	42,714	49,035
Total liabilities	521,035	496,626
Stockholders Equity
Common stock, $5 par value, 6,000,000 shares authorized, 2,490,895 and 2,306,086 shares issued and outstanding in 2011 and 2010, respectively	12,545	11,530
Retained earnings	34,477	30,837
Noncontrolling interest	195	186
Accumulated other comprehensive income (loss)	(935)	(324)
Total stockholders equity	46,191	42,229
Total liabilities and stockholders equity	$ 567,226	$ 538,855