Note 15. Benefit Plans

The Bank has a 401(k) plan covering substantially all employees of F&M Trust who have completed one year and 1,000 hours of service. In 2011, employee contributions to the plan were matched at 100% up to 4% of each employee's deferrals plus 50% of the next 2% of deferrals from participants' eligible compensation. Under this plan, the maximum amount of employee contributions in any given year is defined by Internal Revenue Service regulations. In addition, a 100% discretionary profit sharing contribution of up to 2% of each employee's eligible compensation is possible provided net income targets are achieved. The Personnel Committee of the Corporation's Board of Directors approves the established net income targets annually. The related expense for the 401(k) plan, and the profit sharing plan as approved by the Board of Directors, was approximately $394 thousand in 2011, $368 thousand in 2010 and $366 thousand in 2009.

The Bank has a noncontributory pension plan covering substantially all employees of F&M Trust who meet certain age and service requirements. Benefits are based on years of service and the employee's compensation using a career average formula for all employees. The pension plan was closed to new participants on April 1, 2007. The change to a career average formula in 2008 affected future pension benefits for some employees more than others, primarily long-term employees. In an attempt to minimize the affect of the change on these employees the Bank added the following benefits: (1) an additional annual contribution over 10 years to the 401(k) plan for pension participants that were deemed to have a significant expected shortfall as a result of the change to a career average formula; and (2) contributions to a non-qualified deferred compensation plan for current or potential highly-compensated employees that were deemed to have a significant expected shortfall as a result of the change to a career average formula. The annual contribution to the non-qualified plan ranges from 1% to 9% of the covered employee's salary depending on such factors as the employee's length of service and time to retirement. Any contribution made to the non-qualified plan is in lieu of the additional contribution made to the 401(k) plan identified as change number 1 above. The expense associated with the additional plans described above was $42 thousand in 2011, $46 thousand in 2010 and $51 thousand in 2009. The Bank's funding policy is to contribute annually the amount required to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for the benefits attributed to service to date but also for those expected to be earned in the future.

Due to the low interest rate environment, the pension plan returns have been negatively affected and the Bank incurred substantially higher pension expense, $705 thousand in 2011, $441 thousand in 2010 and $567 thousand in 2009.

Pension plan asset classes include cash, fixed income securities and equities. The fixed income portion is comprised of Government Bonds, Corporate Bonds and Taxable Municipal Bonds; the equity portion is comprised of financial institution equities and individual corporate equities across a broad range of sectors. Investments are made on the basis of sound economic principles and in accordance with established guidelines. Target allocations of fund assets measured at fair value are as follows: fixed income, a range of 60% – 90%, equities, a range of 10% to 30% and cash as needed. The allocation as of December 31, 2011 is shown in a table within this note. The Bank has undertaken a restructuring of the portfolio in order to more closely align the duration of the assets with the duration of the pension liability.

On a regular basis, the Pension and Benefits Committee (the "Committee") monitors the allocation to each asset class. Due to changes in market conditions, the asset allocation may vary from time to time. The Committee is responsible to direct the rebalancing of Plan assets when allocations are not within the established guidelines and to ensure that such action is implemented. The Bank has currently begun a process of reallocating pension assets in an attempt to more closely match the structure of pension liabilities. This has and will to continue to result in a smaller allocation of equity investments and a higher allocation of longer duration bonds. Once completed, the new allocation should reduce large fluctuations in projected benefit obligations.

Specific guidelines for fixed income investments are that no individual bond shall have a rating of less than an A as rated by Standard and Poor and Moodys at the time of purchase. If the rating subsequently falls below an A rating, the Committee, at its next quarterly meeting, will discuss the merits of retaining that particular security. Allowable securities include obligations of the U.S. Government and its agencies, CDs, commercial paper, corporate obligations and insured municipal bonds.

General guidelines for equities are that a diversified common stock program is used and that diversification patterns can be changed with the ongoing analysis of the outlook for economic and financial conditions. Specific guidelines for equities include a sector cap and an individual stock cap. The guidelines for the sector cap direct that because the Plan sponsor is a bank, a significantly large exposure to the financial sector is permissible; therefore, there is no sector cap for financial equities. All other sectors are limited to 25% of the equity component. The individual stock cap guidelines direct that no one stock may represent more than 5% of the total equity portfolio.

The Committee revisits and determines the expected long-term rate of return on Plan assets annually. The policy of the Committee has been to take a conservative approach to all Plan assumptions. The expected long-term rate of return has remained steady at 7.5%, but is reviewed annually and historical investment returns play a significant role in determining what this rate should be.

The following table sets forth the plan's funded status, based on the December 31, 2011, 2010 and 2009 actuarial valuations.


	For the Years Ended December 31
(Amounts in thousands)	2011		2010			2009
Change in projected benefit obligation
Benefit obligation at beginning of measurement year	$	14,252	$	13,287		$	12,149
Service cost		358		365			354
Interest cost		729		742			738
Actuarial loss		2,570		782			748
Benefits paid		(771)		(924	)		(702	)
Benefit obligation at end of measurement year		17,138		14,252			13,287
Change in plan assets
Fair value of plan assets at beginning of measurement year		9,056		8,985			8,059
Actual return on plan assets net of expenses		1,261		369			1,385
Employer contribution		2,112		626			243
Benefits paid		(771)		(924	)		(702	)
Fair value of plan assets at end of measurement year		11,658		9,056			8,985
Funded status of projected benefit obligation at end of measurement year	$	(5,480)	$	(5,196	)	$	(4,302	)


	For the Years Ended December 31
	2011		2010			2009
Amounts recognized in accumulated other comprehensive income (loss), net of tax
Net actuarial loss	$	(8,059)	$	(6,494	)	$	(5,541	)
Prior service cost obligation		597		723			848
		(7,462)		(5,771	)		(4,693	)
Tax effect		2,537		1,962			1,596
Net amount recognized in accumulated comprehensive loss	$	(4,925)	$	(3,809	)	$	(3,097	)


	For the Years Ended December 31
	2011		2010			2009
Components of net periodic pension cost
Service cost	$	358	$	365		$	354
Interest cost		729		742			738
Expected return on plan assets		(757)		(838	)		(753	)
Amortization of prior service cost		(126)		(125	)		(126	)
Recognized net actuarial loss		501		297			354
Net periodic pension cost	$	705	$	441		$	567


	For the Years Ended December 31
	2011		2010			2009
Assumptions used to determine benefit obligations as of measurement date:
Discount rate		4.18%		5.28	%		5.79	%
Rate of compensation increase		4.00%		4.00	%		4.50	%
Assumptions used to determine net periodic benefit cost:
Discount rate		5.28%		5.79	%		6.13	%
Expected long-term return on plan assets		7.50%		8.00	%		8.00	%
Rate of compensation increase		4.50%		4.50	%		4.50	%
Asset allocations as of measurement date:
Cash and cash equivalents		3%		12	%		3	%
Common stocks		25%		18	%		23	%
Corporate bonds		7%		7	%		12	%
Municipal bonds		62%		59	%		58	%
Insurance contracts		3%		4	%		4	%
Total		100%		100	%		100	%
Shares of the Corporation's common stock held in the plan Value of shares (in thousands)	$	36	$	52		$	47
Percent of total plan assets		0.3%		0.6	%		0.5	%


	For the Years Ended December 31
	2011		2010			2009
Reconciliation of Funded Status
Funded Status	$	(5,480)	$	(5,196	)	$	(4,302	)
Unrecognized net actuarial loss		8,059		6,494			5,541
Unrecognized prior service cost		(597)		(723	)		(848	)
Net Asset recognized	$	1,982	$	575		$	391
Accumulated Benefit Obligation	$	16,532	$	13,680		$	12,691

The following table sets forth by level, within the fair value hierarchy, the Plan's investments at fair value as of December 31, 2011 and 2010:

For more information on the levels within the fair value hierarchy, please refer to Note 20.


(Dollars in Thousands)	December 31, 2011
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	394	$	395	$	—	$	—
Common stocks		2,870		2,870		—		—
Corporate bonds		833		—		833		—
Municipal bonds		7,238		—		7,238		—
Cash value of life insurance		83		—		—		83
Deposit in immediate participation guarantee contract		240		—		—		240
Total assets	$	11,658	$	3,265	$	8,071	$	323


(Dollars in Thousands)	December 31, 2010
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	1,128	$	1,128	$	—	$	—
Common stocks		1,655		1,655		—		—
Corporate bonds		610		—		610		—
Municipal bonds		5,314		—		5,314		—
Cash value of life insurance		122		—		—		122
Deposit in immediate particpation guarantee contract		227		—		—		227
Total assets	$	9,056	$	2,783	$	5,924	$	349

The following table sets forth a summary of the changes in the fair value of the Plan's level 3 investments for the year ended December 31, 2011:


	Cash Value of Life Insurance		Deposits in Immediate Participation Guarantee Contract
Balance – January 1, 2011	$	122	$	227
Unrealized gain (loss) relating to investments held at the reporting date		5		4
Purchases, sales, issuances and settlement, net		(44)		9
Balance – December 31, 2011	$	83	$	240

Contributions

The Bank expects to contribute $980 thousand to its pension plan in 2012. This amount will meet the minimum funding requirements.


Estimated future benefit payments at December 31, 2011 (in thousands)
2012	$	756
2013		791
2014		854
2015		843
2016		916
2017 – 2021		4,725
	$	8,885