Note 14. 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. Employee contributions to the plan are 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. Effective January 1, 2017 the time in service requirement for 401(k) eligibility was reduced from one year to four months, the hours of service requirement was removed and an auto-enrollment feature was added. The related expense for the 401(k) plan, and the profit sharing plan as approved by the Board of Directors, was $707 thousand in 2017, $494 thousand in 2016, and $606 thousand in 2015.

The Bank has a noncontributory defined benefit pension plan covering employees hired prior to April 1, 2007. The pension plan was closed to new participants on April 1, 2007. Benefits are based on years of service and the employee’s compensation using a career average formula. 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. Employees who are eligible for pension benefits may elect to receive an annuity style payment or a lump-sum payout of their pension benefits.

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 pension expense in 2017 was less than in 2016 due to the expense of a lump sum settlement loss that was recorded in 2016.

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, 2017 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, 2017, 2016 and 2015 actuarial valuations.


	For the Years Ended December 31
(Dollars in thousands)	2017		2016		2015
Change in projected benefit obligation
Benefit obligation at beginning of measurement year	$	17,881	$	18,609	$	19,679
Service cost		317		337		377
Interest cost		667		701		695
Actuarial loss (gain)		2,260		632		(906)
Settlement loss		—		(1,590)		—
Benefits paid		(1,236)		(808)		(1,236)
Benefit obligation at end of measurement year		19,889		17,881		18,609

Change in plan assets
Fair value of plan assets at beginning of measurement year		17,062		18,301		19,677
Actual return on plan assets net of expenses		1,366		1,159		(140)
Settlement loss		—		(1,590)		—
Employer contribution		—		—		—
Benefits paid		(1,236)		(808)		(1,236)
Fair value of plan assets at end of measurement year		17,192		17,062		18,301

Funded status of projected benefit obligation	$	(2,697)	$	(819)	$	(308)


Amounts recognized in accumulated other comprehensive	For the Years Ended December 31
income (loss), net of tax	2017		2016		2015
Net actuarial loss	$	(7,784)	$	(6,366)	$	(6,871)
Prior service cost obligation		—		—		94
		(7,784)		(6,366)		(6,777)
Tax effect		1,635		2,164		2,304
Net amount recognized in accumulated other comprehensive loss	$	(6,149)	$	(4,202)	$	(4,473)


	For the Years Ended December 31
Components of net periodic pension cost	2017		2016		2015
Service cost	$	317	$	337	$	377
Interest cost		667		701		695
Expected return on plan assets		(1,072)		(1,165)		(1,182)
Amortization of prior service cost		—		(94)		(126)
Recognized net actuarial loss		547		579		623
Net periodic pension cost		459		358		387
Effect of settlement loss		—		564		—
Total pension expense	$	459	$	922	$	387


	For the Years Ended December 31
	2017		2016		2015
Assumptions used to determine benefit obligations:
Discount rate		3.46%		3.89%		4.06%
Rate of compensation increase		4.00%		4.00%		4.00%

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

Asset allocations:
Cash and cash equivalents		2%		4%		8%
Common stocks		24%		33%		31%
Corporate bonds		18%		8%		7%
Municipal bonds		38%		42%		43%
Investment fund - debt		9%		9%		8%
Insurance contracts		4%		3%		2%
Other		5%		1%		1%
Total		100%		100%		100%

Shares of the Corporation's common stock held in the plan
Value of shares (in thousands)	$	—	$	—	$	68
Percent of total plan assets		0.0%		0.0%		0.4%

The following table sets forth by level, within the fair value hierarchy, the Plan's investments at fair value as of December 31, 2017 and 2016. For more information on the levels within the fair value hierarchy, please refer to Note 19.


(Dollars in Thousands)	December 31, 2017
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	399	$	399	$	—	$	—
Common stocks		4,158		4,158		—		—
Corporate bonds		3,108		—		3,108		—
Municipal bonds		6,556		—		6,556		—
Investment fund - debt		1,570		1,570		—		—
Cash value of life insurance		25		—		—		25
Deposit in immediate participation guarantee contract		683		683		—		—
Other		693		143		550		—
Total assets	$	17,192	$	6,953	$	10,214	$	25


(Dollars in Thousands)	December 31, 2016
Asset Description	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	726	$	726	$	—	$	—
Common stocks		5,688		5,688		—		—
Corporate bonds		1,310		—		1,310		—
Municipal bonds		7,146		—		7,146		—
Investment fund - debt		1,454		1,454		—		—
Cash value of life insurance		25		—		—		25
Deposit in immediate participation guarantee contract		479		479				—
Other		234		234		—		—
Total assets	$	17,062	$	8,581	$	8,456	$	25

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, 2017 and 2016


	Cash Value of Life Insurance
	December 31
	2017		2016
Balance at the beginning of the period	$	25	$	62
Unrealized gain (loss) relating to investments held at the reporting date		—		1
Purchases, sales, issuances and settlement, net		—		(38)
Balance at the end of the period	$	25	$	25

Contributions

The Bank contributed $1.0 million to its pension plan in February 2018, but does not expect to make any additional contributions in 2018.

Estimated future benefit payments at December 31, 2017 (in thousands)


2018	$	1,043
2019		1,064
2020		1,483
2021		969
2022		1,209
2023-2027		6,580
Total	$	12,348