F&M BANK CORP – 10-Q – 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. As well as its loan production offices located in Penn Laird, VA (which specializes in providing automobile financing through a network of automobile dealers) and in Fishersville, VA. 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 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.

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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 of America ("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 31 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.  

Securities Impairment

For a complete discussion of securities impairment see Note 2 of the Notes to Consolidated Financial Statements.

Overview

  Net income for the three months ended March 31, 2013 was $1,216,000 or $.49 per share, compared to $1,135,000 or $.46 in the same period in 2012, an increase of 7.14%. During the three months ended March 31, 2013, noninterest income, exclusive of securities transactions, increased 15.33% and noninterest expense increased 10.83% during the same period. Net income from Bank operations adjusted for income or loss from Parent activities is as follows:  In thousands                                       2013        2012  Net Income from Bank Operations                   $ 1,207$ 1,104

Income or (loss) from Parent Company Activities 9 31 Net Income for the three months ended March 31$ 1,216$ 1,135

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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

  Core operating earnings, (exclusive of securities transactions, non-recurring tax adjustments and non-recurring historic rehabilitation credits related to the investment in low income housing projects) totaled $1,148,000 in 2013 and $1,048,000 in 2012, an increase of 9.54%. Income from core operations increased in 2013 primarily due to a decrease in interest expense. A reconciliation of core earnings follows:  In thousands                                         2013        2012  Net Income                                          $ 1,216$ 1,135 Non-recurring Tax Items                                 (68 )       (87 ) Non-recurring Securities Transactions, net of tax         -           - 

Core Earnings for the three months ended March 31$ 1,148$ 1,048

    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 2013 year to date tax equivalent net interest income increased $326,000 or 6.50% compared to the same period in 2012. The yield on earning assets decreased .25%, while the cost of funds decreased .39% compared to the same period in 2012.  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 increasing to 3.98%, an increase of .10% when compared to the same period in 2012. A schedule of the net interest margin for the three month periods ended March 31, 2013 and 2012 can be found in Table I on page 35.  The Interest Sensitivity Analysis contained in Table II on page 36 indicates the Company is in an asset sensitive position in the one year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 51.52% of rate sensitive assets and 43.64% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has continued to reduce deposit rates. Liquid assets have been used to pay off maturing long term FHLB borrowings, which when coupled with depositors reluctance to tie up funds at historically low rates has resulted in the decrease in the positive GAP position in the one year time period.  Noninterest income, exclusive of securities transactions, increased $119,000 or 15.33% for the three month period ended March 31, 2013. The increase is primarily due to increase in Insurance and Other Commissions income and income derived from Bank Owned Life Insurance.  Noninterest expense increased $352,000 for the three month period ended March 31, 2013 as compared to 2012. Salary and benefits expense increased $235,000 (12.32%) through March 2013. This increase is resulted primarily from lending personnel hired to staff the new loan production offices, as well as normal salary increases, health insurance and retirement plan expenses.  Exclusive of personnel expenses, other noninterest expenses increased at a rate of 8.70% for the first three months of 2013 as compared to 2012. The primary reasons for the increase in these expenses relates to increases in the FDIC Assessment, legal and professional expenses, and data processing expenses. Operating costs continue to compare very favorably to the peer group. As stated in the most recently available (December 31, 2012) Bank Holding Company Performance Report, the Company's and peer's noninterest expenses averaged 2.35% and 3.14% 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.                                          28

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Table of contents

F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements

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

  Balance Sheet  

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 increased since year end.  

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.  As of March 31, 2013, the market value of securities available for sale exceeded their cost by $36,000. This includes an increase in the value of government obligations held by the Bank. The portfolio is made up of primarily agency securities with an average portfolio life of just over one year. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. There is $2,010,000 of securities scheduled to mature in 2013.  In reviewing investments as of March 31, 2103, there were no securities which met the definition for 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, Shenandoah and Augusta 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.  

Lending is geographically diversified within the service area. The only concentration within the portfolio is in construction and development lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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

  Loans Held for Investment at $465,742,000 remained virtually flat compared to December 31, 2012. However, the dealer finance portfolio increased $4.2 million and construction and land development loans increased $4.3 million. These increases were offset by decreases in the amortizing real estate lending (both consumer and commercial) totaling $5.4 million and consumer loans totaling $1.5 million.  Loans Held for Sale totaled $21,130,000 at March 31, 2013, a decrease of $56,067,000 compared to December 31, 2012. Secondary Market loan originations are typically subject to seasonal declines in the first quarter of each calendar year. This seasonal drop in volume was compounded by a modest increase in interest rates, which resulted in a reduction in mortgage refinancing for the period. The funds resulting from this decrease allowed the Company to repay FHLB short term borrowings and led to increased liquidity in the first quarter.  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 $11,685,000 at March 31, 2013 compared to $13,386,000 at December 31, 2012. 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 March 31, 2013, the Company holds $2,769,000 of real estate which was acquired through foreclosure. This is decrease of $115,000 compared to December 31, 2012.  

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

                                                                     March 31,       December 31,                                                                       2013              2012  Nonaccrual Loans    Real Estate                                                     $     8,164$        9,611    Commercial                                                            2,690              2,914    Home Equity                                                             474                740    Other                                                                   108                121                                                                         11,436             13,386 

Loans past due 90 days or more (excluding nonaccrual)

   Real Estate                                                             172                  -    Commercial                                                               74                  -    Home Equity                                                               -                  -    Other                                                                     3                  -                                                                            249                  -  Total Nonperforming loans                                          $    11,685$       13,386

Nonperforming loans as a percentage of loans held for investment 2.51 %

             2.87 %  Net Charge Offs to total loans held for investment                         .17 %              .64 %  Allowance for loan and lease losses to nonperforming loans               70.68 %            60.91 %                                            30

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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

  Allowance for Loan Losses  The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. 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.  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 and a general allowance based on a variety of criteria.  Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 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.  For loans that are not impaired, the portfolio is segmented into multiple pools of homogenous loan types that do not exhibit any signs of weakness. Loss rates are assigned based on historical charge offs over the prior two year period. A general allowance for inherent losses (such as trends in past due/criticized loans, volume and terms of loans, changes in lending policies/procedures, experience of lending staff/management, local/national economic trends and credit concentrations) has been established to reflect other unidentified losses within the portfolio. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans or in the homogeneous pools based on two year loss histories. The Board approves the loan loss provision for each quarter based on this evaluation. 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 $8,259,000 at March 31, 2013 is equal to 1.77% of loans held for investment. This compares to an allowance of $8,154,000 (1.75%) at December 31, 2012. Based on the evaluation of the loan portfolio described above, management has funded the allowance a total of $900,000 in the first three months of 2013. Net charge-offs year to date totaled $795,000.  The overall level of the allowance has been increasing for several years and now approximates the national peer group average. 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.                                          31

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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 $5,184,000 since December 31, 2012. Time deposits decreased $609,000 during this period while demand deposits and savings deposits increased $5,793,000. The decrease in certificates of deposits is a result of a decrease in core time deposits. The increase in demand deposits and savings deposits is a result of new account growth during the year. 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 $10.6 million in CDARS funding, which is an increase of $2.9 million over December 31, 2012.  Short-term debt  Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), short-term fixed rate FHLB borrowings 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. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. As of March 31, 2013 there were no FHLB short-term borrowings and commercial repurchase agreements totaled $3,172,000.  

Long-term debt

  Borrowings from the 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 $5,428,000 through March 31, 2013. There were no additional borrowings through March 31, 2013.  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 March 31, 2013 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 March 31, 2013, the Company's total risk based capital and leverage ratios were 14.82% and 8.61%, respectively, increasing over year end from 13.98% and 8.29%, respectively. For the same period, Bank only total risk based capital and leverage ratios were 14.92% and 8.68%, respectively, increasing over year end from 14.10% and 8.36%, respectively . For both the Company and the Bank these ratios are in excess of regulatory minimums.                                          32

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  Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements 

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. Liquidity increased significantly in the first quarter as repayments of Loans Held for Sale were used to increase Federal Funds Sold and to repay short term FHLB debt. The decrease in Loans Held for Sale is a result of seasonal fluctuations in mortgage lending and an uptick in mortgage rates. 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 March 31, 2013, the Company had a cumulative Gap Rate Sensitivity Ratio of 16.73% 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 36.

  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 2013.  

Effect of Newly Issued Accounting Standards

  In July 2012, the Intangibles topic was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that indefinite-lived intangible assets are impaired. If it is determined to be more likely than not that indefinite-lived intangible assets are impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments did not have a material effect on the Company's financial statements.                                          33

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F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements

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

  In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. These amendments did not have a material effect on the Company's financial statements.  

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).

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   Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements                                                                           TABLE I                                 F & M BANK CORP.                           Net Interest Margin Analysis                      (on a fully taxable equivalent basis)                          (Dollar Amounts in Thousands)                                      Three Months Ended                             Three Months Ended                                       March 31, 2013                                 March 31, 2012        Average                            Income/        Average                         Income/        Average                          Balance2,4       Expense         Rates        

Balance2,4       Expense         Rates Interest income    Loans held for investment1,2           $    467,240$    6,238           5.41 %   $    450,331$    6,281           5.59 %    Loans held for sale                          42,362            330           3.16 %         40,877            379           3.73 %    Federal funds sold         20,144             10            .20 %         13,021              7            .22 %    Interest bearing deposits                       1,690              2            .48 %          1,489              2            .27 %    Investments Taxable 3                     12,463             43           1.40 %         13,181             46           1.37 % Partially taxable                107              0              -              108              -           1.86 %    Total earning assets                  $    544,006$    6,623           4.94 %   $    519,007$    6,715           5.19 % Interest Expense    Demand deposits           122,253            189            .63 %        121,169            346           1.15 %    Savings                    49,942             50            .41 %         41,808             49            .48 %    Time deposits             204,426            634           1.26 %        206,206            776           1.51 %    Short-term debt            13,679             17            .50 %          6,428              6            .37 %    Long-term debt             42,929            388           3.67 %         52,248            519           3.98 %    Total interest bearing liabilities     $    433,229$    1,278           1.20 %   $    427,859$    1,696           1.59 %  Tax equivalent net interest income 1                        $    5,345$    5,019  Net interest margin                                           3.98 %                                         3.88 %   __________________________ 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 annualized.                                          35

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   Table of contents                                  F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements                                                                         TABLE II                                  F & M BANK CORP.                          Interest Sensitivity Analysis                                   March 31, 2013                            (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              $  35,063$  30,526$  86,098$  13,614     $          -     $ 165,301 Installment                 4,499         1,123        10,980         2,551                -        19,153 Real estate loans for investments                88,234        57,382       118,966        14,165                -       278,747 Loans held for sale        21,130             -             -             -                -        21,130 Credit cards                2,541             -             -             -                -         2,541 Federal funds sold         27,244             -             -             -                -        27,244 Interest bearing bank deposits                      730           248             -             -                -           978 

Investment securities 107 2,010 7,010 1,463

               -        10,590 Total                   $ 179,548$  91,289$ 223,054$  31,793     $          -     $ 525,684  Sources of funds Interest bearing demand deposits         $       -     $  32,023$  70,748$  19,362     $          -     $ 122,133 Savings deposits                -        10,096        30,289        10,096                -        50,481 Certificates of deposit $100,000 and over                       12,250        27,232        30,559             -                -        70,041 Other certificates of deposit                    18,775        54,575        57,518             -                -       130,868 Short-term borrowings       3,172             -             -             -                -         3,172 

Long-term borrowings 9,429 15,357 11,138 6,553

               -        42,477 Total                   $  43,626$ 139,283$ 200,252$  36,011     $          -     $ 419,172  Discrete Gap            $ 135,922$ (47,994 )$  22,802$  (4,218 )   $          -     $ 106,512  Cumulative Gap          $ 135,922$  87,928$ 110,730$ 106,512$    106,512  Ratio of Cumulative Gap to Total Earning Assets                      25.86 %       16.73 %       21.06 %       20.26 %          20.26 %    Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of March 31, 2013. 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.                                          36

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F & M BANK CORP.              Notes to (unaudited) Consolidated Financial Statements