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 2014, employee contributions to the plan were matched at 100% up to 4% of each participant’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 $606 thousand in 2015, $556 thousand in 2014 and $442 thousand in 2013.

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 Bank’s funding policy is to contribute the annual 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. In 2014, the Bank added a plan option that allows for terminating employees to receive a lump-sum payout of their pension benefits. This option was added in another attempt to control the Bank’s pension liability and expense.

The return on pension assets and the discount rate are the two largest variables in determining pension expense. A low rate environment generally results in higher pension expense. The Bank uses the Citigroup Above Median Pension Discount Curve from the Citigroup Pension Discount Curve and Liability Index for its discount rate. The Bank’s pension expense for each of the last three years is shown in the section of the following table titled “Components of Net Periodic Pension Cost”. The Bank expects the 2016 pension expense to be lower than in 2015.

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, 2015 is shown in a table within this note. The Bank manages its pension portfolio in order to 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 attempts to allocate the pension assets in a manner that the cash flow from the assets is similar to the cash flow of the liabilities. This has and will continue to result in a smaller allocation of equity investments and a higher allocation of longer duration bonds. By closely matching the asset and liability cash flow, large fluctuations in projected benefit obligations should be reduced.

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’s and Moody’s 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. This rate 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, 2015, 2014 and 2013 actuarial valuations.



	For the Years Ended December 31
(Dollars in thousands)	2015		2014		2013

Change in projected benefit obligation

Benefit obligation at beginning of measurement year	$	19,679	$	17,281	$	18,648
Service cost		377		337		456
Interest cost		695		778		715
Actuarial loss		(906)		2,529		(1,798)
Benefits paid		(1,236)		(1,246)		(740)
Benefit obligation at end of measurement year		18,609		19,679		17,281

Change in plan assets

Fair value of plan assets at beginning of measurement year		19,677		18,600		18,764
Actual return on plan assets net of expenses		(140)		2,323		576
Employer contribution		-		-		-
Benefits paid		(1,236)		(1,246)		(740)
Fair value of plan assets at end of measurement year		18,301		19,677		18,600

Funded status of projected benefit obligation	$	(308)	$	(2)	$	1,319



Amounts recognized in accumulated other comprehensive	For the Years Ended December 31
income (loss), net of tax	2015		2014		2013

Net actuarial loss	$	(6,871)	$	(7,078)	$	(6,159)
Prior service cost obligation		94		220		345
		(6,777)		(6,858)		(5,814)
Tax effect		2,304		2,332		1,977
Net amount recognized in accumulated other comprehensive loss	$	(4,473)	$	(4,526)	$	(3,837)



	For the Years Ended December 31
Components of net periodic pension cost	2015		2014		2013

Service cost	$	377	$	337	$	456
Interest cost		695		778		715
Expected return on plan assets		(1,182)		(1,163)		(1,247)
Amortization of prior service cost		(126)		(126)		(125)
Recognized net actuarial loss		623		450		761
Net periodic pension cost	$	387	$	276	$	560



	For the Years Ended December 31
	2015		2014		2013
Assumptions used to determine benefit obligations:
Discount rate		4.06%		3.72%		4.76%
Rate of compensation increase		4.00%		4.00%		4.00%

Assumptions used to determine net periodic benefit cost:
Discount rate		3.72%		4.76%		3.89%
Expected long-term return on plan assets		6.50%		6.50%		7.00%
Rate of compensation increase		4.00%		4.00%		4.00%

Asset allocations:
Cash and cash equivalents		9%		4%		10%
Common stocks		31%		33%		33%
Corporate bonds		7%		8%		6%
Municipal bonds		43%		45%		43%
Investment fund - debt		8%		8%		7%
Insurance contracts		2%		2%		1%
Total		100%		100%		100%

Shares of the Corporation's common stock held in the plan
Value of shares (in thousands)	$	68	$	63	$	49
Percent of total plan assets		0.4%		0.3%		0.3%

The following table sets forth by level, within the fair value hierarchy, the Plan's investments at fair value as of December 31, 2015 and 2014. For more information on the levels within the fair value hierarchy, please refer to Note 20.



(Dollars in Thousands)	December 31, 2015
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	1,579	$	1,579	$	-	$	-
Common stocks		5,691		5,691		-		-
Corporate bonds		1,336		-		1,336		-
Municipal bonds		7,898		-		7,898		-
Investment fund - debt		1,413		1,413		-		-
Cash value of life insurance		62		-		-		62
Deposit in immediate participation guarantee contract		322		-		-		322
Total assets	$	18,301	$	8,683	$	9,234	$	384


(Dollars in Thousands)	December 31, 2014
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	718	$	718	$	-	$	-
Common stocks		6,437		6,437		-		-
Corporate bonds		1,656		-		1,656		-
Municipal bonds		8,946		-		8,946		-
Investment fund - equity		40		40		-		-
Investment fund - debt		1,503		1,503		-		-
Cash value of life insurance		62		-		-		62
Deposit in immediate participation guarantee contract		315		-		-		315
Total assets	$	19,677	$	8,698	$	10,602	$	377

The following table sets forth a summary of the changes in the fair value of the Plan's level 3 investments for the years ended December 31, 2015 and 2014:



			Deposits in
			Immediate
	Cash Value		Participation
	of Life		Guarantee
	Insurance		Contract
Balance - January 1, 2015	$	62	$	315
Unrealized gain (loss) relating to investments held at the reporting date		-		(33)
Purchases, sales, issuances and settlement, net		-		40
Balance - December 31, 2015	$	62	$	322

Balance - January 1, 2014	$	91	$	31
Unrealized gain (loss) relating to investments held at the reporting date		3		16
Purchases, sales, issuances and settlement, net		(32)		268
Balance - December 31, 2014	$	62	$	315

Contributions

The Bank does not expect to make a pension contribution in 2016.

Estimated future benefit payments at December 31, 2015 (in thousands)



2016	$	1,616
2017		1,161
2018		1,036
2019		1,150
2020		1,521
2021-2022		5,398
	$	11,882