UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to               

Commission File No. 0-25766

Your Community Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Indiana	35-1938254
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

101 W. Spring Street, New Albany, Indiana	47150
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code   812-944-2224

Former name, former address and former fiscal year, if changed since last report

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.  x  Yes  o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

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 the definitions 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 x Non- Accelerated Filer o Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:  Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  o Yes  o No

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  5,503,438 shares of common stock were outstanding as of August 4, 2016.

YOUR COMMUNITY BANKSHARES, INC.

INDEX

		Page
Part I	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income (Loss)	6
	Consolidated Statement of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	64
Part II	Other Information
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 6.	Exhibits	65
Signatures		66
Exhibit Index		67

2

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2016			December 31, 2015
	(In thousands, except share data)
ASSETS
Cash and due from financial institutions	$	44,417		$	30,425
Interest-bearing deposits in other financial institutions	9,676			13,365
Securities available for sale	287,436			378,978
Loans held for sale	851			1,015
Loans, net of allowance for loan losses of $6,561 and $6,851	1,070,015			1,009,463
Federal Home Loan Bank and Federal Reserve stock	4,233			3,890
Accrued interest receivable	5,359			5,328
Premises and equipment, net	31,916			33,270
Company owned life insurance	32,931			33,127
Goodwill	4,945			4,945
Core deposit intangible	4,430			5,015
Foreclosed and repossessed assets	4,166			9,952
Other assets	23,953			27,242
Total Assets	$	1,524,328		$	1,556,015
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non interest-bearing	$	303,039		$	286,739
Interest-bearing	921,502			975,325
Total deposits	1,224,541			1,262,064
Short-term borrowings	44,507			48,785
Other borrowings	106,927			108,347
Accrued interest payable	437			451
Other liabilities	9,223			9,282
Total liabilities	1,385,635			1,428,929
Commitments and contingent liabilities	—			—
Shareholders’ equity
Common stock, $0.10 par value per share; 10,000,000 shares authorized; 5,776,244 and 5,776,237 shares issued in 2016 and 2015, respectively; 5,492,470 and 5,429,766 outstanding in 2016 and 2015, respectively	578			578
Additional paid-in capital	91,773			90,869
Retained earnings	45,667			39,512
Accumulated other comprehensive income	5,555			2,089
Treasury stock, at cost (2016- 283,767 shares, 2015- 346,471 shares)	(4,880		)	(5,962		)
Total shareholders’ equity	138,693			127,086
Total Liabilities and Shareholders’ Equity	$	1,524,328		$	1,556,015

See accompanying notes to consolidated financial statements.

3

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands, except share data)
Interest and dividend income
Loans, including fees	$	12,639		$	12,787		$	25,012		$	25,310
Taxable securities	911			1,320			2,064			2,660
Tax-exempt securities	1,018			881			2,045			1,624
Federal Home Loan Bank and Federal Reserve dividends	47			69			97			164
Interest-bearing deposits in other financial institutions	25			49			63			104
Interest and dividend income	14,640			15,106			29,281			29,862
Interest expense
Deposits	551			580			1,111			1,154
Short-term borrowings	66			23			133			45
Other borrowings	1,044			589			2,062			1,265
Interest expense	1,661			1,192			3,306			2,464
Net interest income	12,979			13,914			25,975			27,398
Provision for loan losses	405			2,155			405			2,261
Net interest income after provision for loan losses	12,574			11,759			25,570			25,137
Non-interest income
Service charges on deposit accounts	1,471			1,669			2,949			3,060
Commission income	45			50			91			97
Net gain on sales of available for sale securities	89			—			386			51
Mortgage banking income	121			74			199			191
Earnings on company owned life insurance	253			253			507			505
Gain recognition of life insurance benefit	621			—			621			—
Interchange income	710			476			1,282			920
Amortization of tax credit investments	(350		)	(92		)	(700		)	(178		)
Gain on branch divestiture	422			—			422			—
Other income	238			222			427			418
Non-interest income	3,620			2,652			6,184			5,064
Non-interest expense
Salaries and employee benefits	6,281			5,086			12,307			14,205
Occupancy	1,082			1,200			2,322			2,827
Equipment	480			472			992			1,053
Data processing	1,105			921			2,194			2,735
Marketing and advertising	183			142			328			352
Legal and professional service fees	977			853			1,600			2,411
FDIC insurance premiums	165			372			390			645
Foreclosed assets, net	210			(95		)	100			249
Amortization of intangible assets	285			318			584			715
Other expense	1,339			1,206			2,526			3,207
Total non-interest expense	12,107			10,475			23,343			28,399
Income before income taxes	4,087			3,936			8,411			1,802
Income tax expense	318			371			947			(827		)
Net income	3,769			3,565			7,464			2,629
Preferred stock dividend	—			(109		)	—			(219		)
Net income available to common shareholders	$	3,769		$	3,456		$	7,464		$	2,410

4

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In thousands, except share data)
Earnings per common share:
Basic	$	0.69	$	0.64	$	1.37	$	0.45
Diluted	$	0.68	$	0.64	$	1.34	$	0.44
Dividends per common share	$	0.12	$	0.12	$	0.24	$	0.24

See accompanying notes to consolidated financial statements.

5

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)
Net income	$	3,769		$	3,565		$	7,464		$	2,629
Other comprehensive income (loss), net of tax
Unrealized gain on securities:
Unrealized gain (loss) arising during the period	2,260			(5,500		)	5,805			(2,461		)
Reclassification adjustment for gains included in net income	(89		)	—			(386		)	(51		)
Tax effect	(800		)	1,871			(1,936		)	855
Net of tax	1,371			(3,629		)	3,483			(1,657		)
Defined benefit pension plans:
Net loss arising during the period	(4		)	(18		)	(35		)	(11		)
Reclassification adjustment for amortization of unrecognized loss included in net periodic pension cost	5			4			10			8
Tax effect	—			5			8			1
Net of tax	1			(9		)	(17		)	(2		)
Total other comprehensive income (loss)	1,372			(3,638		)	3,466			(1,659		)
Comprehensive income (loss)	$	5,141		$	(73	)	$	10,930		$	970

See accompanying notes to consolidated financial statements.

6

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity
Balance, January 1, 2016	$	578	$	90,869		$	39,512		$	2,089	$	(5,962	)	$	127,086
Net income	—		—			7,464			—		—			7,464
Other comprehensive income	—		—			—			3,466		—			3,466
Dividends declared on common stock ($0.24 per share)	—		—			(1,309		)	—		—			(1,309		)
Issuance of treasury stock under dividend reinvestment plan	—		49			—			—		50			99
Stock activity under incentive compensation plans	—		(351		)	—			—		1,032			681
Stock award expense	—		1,206			—			—		—			1,206
Balance, June 30, 2016	$	578	$	91,773		$	45,667		$	5,555	$	(4,880	)	$	138,693

See accompanying notes to consolidated financial statements.

7

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2016			2015
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,464		$	2,629
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	405			2,261
Depreciation	1,257			1,630
Net amortization of securities	865			1,002
Amortization and accretion of purchase accounting adjustments, net	(1,215		)	(2,089		)
Net gain on sales of available for sale securities	(386		)	(51		)
Mortgage loans originated for sale	(14,912		)	(11,192		)
Proceeds from mortgage loan sales	15,273			12,767
Net gain on sales of mortgage loans	(197		)	(191		)
Earnings on company owned life insurance	(507		)	(505		)
Gain on recognition of life insurance benefit	(621		)	—
Stock award compensation expense	1,206			441
Amortization of tax credit investments	700			178
Net (gain) loss on disposition of premises and equipment	11			(171		)
Net loss on disposition of foreclosed and repossessed assets	214			65
Gain on branch divestiture	(422		)	—
Net change in:
Accrued interest receivable	(31		)	(292		)
Accrued interest payable	(12		)	(360		)
Other assets	799			(1,523		)
Other liabilities	(79		)	(4,841		)
Net cash from operating activities	9,812			(242		)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of First Financial Service Corporation, net	—			12,979
Net cash settlement for branch divestiture	(22,167		)	—
Net change in interest-bearing deposits	3,689			38,422
Available for sale securities:
Sales	74,377			38,877
Purchases	(2,723		)	(42,001		)
Maturities, prepayments and calls	24,827			27,126
Loan originations and payments, net	(59,255		)	(5,831		)
Proceeds from the sale of foreclosed and repossessed assets	4,712			8,754
Purchases of premises and equipment	(384		)	(930		)
Proceeds from the sale of premises and equipment	242			191
Proceeds from life insurance benefit	1,324			—
Redemption of Federal Reserve and FHLB Stock	9			5,253
Purchase of Federal Reserve and FHLB stock	(352		)	(16		)
Net cash from investing activities	24,299			82,824
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	(13,965		)	(48,175		)
Net change in short-term borrowings	(4,278		)	(2,829		)
Proceeds from issuance of other borrowings	335,000			—
Repayment of other borrowings	(336,216		)	(10,846		)
Taxes paid on stock award shares for employees	(117		)	(111		)
Proceeds from stock options exercised	666			573
Issuance costs paid for common shares issued	—			(1,263		)
Redemption of acquired preferred shares and dividends	—			(2,445		)
Cash dividends paid on preferred shares	—			(219		)
Cash dividends paid on common shares	(1,209		)	(1,192		)
Net cash from financing activities	(20,119		)	(66,507		)
Net change in cash and due from financial institutions	13,992			16,075
Cash and due from financial institutions at beginning of period	30,425			12,872
Cash and due from financial institutions at end of period	$	44,417		$	28,947

8

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2016		2015
	(In thousands)
Supplemental cash flow information:
Interest paid	$	3,320	$	1,919
Income taxes paid, net of refunds	—		—
Supplemental noncash disclosures:
Transfer from loans to foreclosed and repossessed assets	768		10,197
Issuance of treasury shares under dividend reinvestment plan	50		63
Issuance of treasury shares for net settlement of stock options	177		63
Sale and financing of foreclosed and repossessed assets	1,622		683
Issuance of common shares	—		25,031
Redemption of preferred shares and unpaid dividends of First Financial Service Corporation	—		18,043
Declared, unpaid dividends on preferred stock	—		110

See accompanying notes to consolidated financial statements.

9

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Presentation of Interim Information

Your Community Bankshares, Inc. (“we,” “our”, “us”, or “the Company”) is a bank holding company headquartered in New Albany, Indiana. Our wholly-owned banking subsidiary is Your Community Bank (“Your Community Bank” or “YCB”).  YCB (at times referred to herein as the “Bank”) is a state-chartered commercial bank regulated by the Indiana Department of Financial Institutions.  Your Community Bank is also regulated by the Federal Deposit Insurance Corporation and, with respect to its Kentucky branches, the Kentucky Office of Financial Institutions.  The Company formed a captive insurance company in 2012, CBIN Insurance, Inc., which issues policies to the Company’s subsidiaries to cover gaps in coverage and other risks not insured by its third-party provider.

Your Community Bank has three wholly-owned subsidiaries to manage its investment portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are Nevada corporations which jointly own CBSI Investment Portfolio Management, LLC, a Nevada limited liability company which holds and manages investment securities previously owned by Your Community Bank.

In June 2004 and June 2006, we completed placements of floating rate subordinated debentures through two trusts that we formed, Community Bank Shares (IN) Statutory Trust I and Trust II (“Trusts”).  Also, in conjunction with the acquisition of First Financial Service Corporation in 2015, the Company acquired First Federal Statutory Trust II and III and assumed their underlying subordinated debentures.  Because the Trusts are not consolidated with us, our financial statements reflect the subordinated debt we issued to the Trusts.

To prepare financial statements in conformity with U.S. generally accepted accounting principles management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015.  All of these adjustments are of a normal, recurring nature.  Interim results are not necessarily indicative of results for a full year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions for Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2015.  The consolidated financial statements include our accounts and our subsidiaries’ accounts.  All material intercompany balances and transactions have been eliminated in consolidation.

Reclassifications:  Some of the items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholder’s equity.

10

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.   Recent Accounting Pronouncements

FASB ASC 842 — In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is expected to have a material impact.

FASB ASC 326 — In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326).  The provisions of ASU 2016-13 were issued to provide financial statement users with more information about the expected credit losses of loans held for investment and other financial instruments.  ASU 2016-13 eliminates the probable incurred loss recognition in current GAAP and will require us to estimate all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of financial instruments.  Additionally, for purchased financial assets with a more than insignificant amount of credit deterioration since origination that are measured at amortized cost (“PCD assets”), an initial allowance for credit losses will be established at the acquisition date with subsequent changes recognized through provision for loan losses.  ASU 2016-13 does not apply to available-for-sale securities (“AFS”).  For AFS securities, credit losses will be recognized through an allowance for credit losses rather than a direct write-down to the security.  The amendments in this updated become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.  Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is expected to have a material impact.

11

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.   Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2016:
Securities available for sale:
State and municipal	$	118,029	$	7,273	$	(18	)	$	125,284
Residential mortgage-backed agencies issued by U.S. Government sponsored entities	139,044		1,741		(125		)	140,660
U.S. Government sponsored entities and agencies	20,771		470		—			21,241
Mutual funds	250		1		—			251
Total securities available for sale	$	278,094	$	9,485	$	(143	)	$	287,436
December 31, 2015:
Securities available for sale:
State and municipal	$	117,995	$	5,553	$	(56	)	$	123,492
Residential mortgage-backed agencies issued by U.S. Government sponsored entities	221,944		320		(1,933		)	220,331
U.S. Government sponsored entities and agencies	31,472		145		(154		)	31,463
Corporate	3,394		43		—			3,437
Mutual funds	250		5		—			255
Total securities available for sale	$	375,055	$	6,066	$	(2,143	)	$	378,978

Sales of available for sale securities were as follows.

	Three Months Ended June 30					Six Months Ended June 30
	2016			2015		2016			2015
	(In thousands)
Proceeds	$	50,685		$	—	$	74,377		$	38,877
Gross gains	371			—		668			366
Gross losses	(282		)	—		(282		)	(315		)

The tax provision applicable to these net realized gains amounted to $31,000 and $135,000 for the three and six months ended June 30, 2016, respectively, and $0 and $17,000 for the three and six months ended June 30, 2015, respectively.

12

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.   Securities (Continued)

The amortized cost and fair value of the contractual maturities of available for sale securities at June 30, 2016 were as follows.  Mortgage-backed agencies and mutual funds which do not have a single maturity date are shown separately.

	June 30, 2016
	Amortized Cost		Fair Value
	(In thousands)
Within one year	$	1,793	$	1,818
One to five years	12,335		13,202
Five to ten years	43,144		45,663
Beyond ten years	81,528		85,842
Residential mortgage-backed securities issued by U.S. Government sponsored entities	139,044		140,660
Mutual funds	250		251
Total	$	278,094	$	287,436

Securities with unrealized losses at June 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(In thousands)
June 30, 2016
State and municipal	$	797	$	(5	)	$	716	$	(13	)	$	1,513	$	(18	)
Residential mortgage-backed securities issued by U.S. Government sponsored entities	3,881		(1		)	15,410		(124		)	19,291		(125		)
Total temporarily impaired	$	4,678	$	(6	)	$	16,126	$	(137	)	$	20,804	$	(143	)
December 31, 2015
State and municipal	$	2,835	$	(16	)	$	3,041	$	(40	)	$	5,876	$	(56	)
Residential mortgaged-backed securities issued by U.S. Government sponsored agencies	114,227		(574		)	45,516		(1,359		)	159,743		(1,933		)
U.S. Government sponsored entities and agencies	—		—			8,861		(154		)	8,861		(154		)
Total temporarily impaired	$	117,062	$	(590	)	$	57,418	$	(1,553	)	$	174,480	$	(2,143	)

13

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.   Securities (Continued)

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

As of June 30, 2016, the Company’s security portfolio consisted of 346 securities, eight of which were in an unrealized loss position. The unrealized losses are related to the Company’s state and municipal and residential mortgage-backed securities issued by U.S. Government sponsored entities and agencies as discussed below.

State and Municipal

At June 30, 2016 the Company had approximately $1.5 million of state and municipal securities with a gross unrealized loss of $18,000.  Of the 273 state and municipal securities in the Company’s portfolio, 269 had an investment grade rating as of June 30, 2016 while four were not rated.  The decline in value in these securities is attributable to interest rate and liquidity, and not credit quality.  All of the state and municipal securities in the Company’s portfolio have a fair value as a percentage of amortized cost greater than 90%.  The Company does not have the intent to sell its state and municipal securities and it is unlikely that we will be required to sell the securities before the anticipated recovery.  The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

Residential mortgage-backed Securities issued by U.S. Government sponsored entities

At June 30, 2016, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

14

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans

Loans at June 30, 2016 and December 31, 2015 consisted of the following:

	June 30,  2016			December 31,  2015
	(In thousands)
Commercial	$	194,666		$	179,753
Construction	88,343			89,833
Commercial real estate:
Owner occupied nonfarm/residential	180,701			157,653
Other nonfarm/residential	213,689			191,016
Residential real estate:
Secured by first liens	303,759			301,597
Home equity	74,179			76,285
Consumer	21,239			20,177
Subtotal	1,076,576			1,016,314
Allowance for loan losses	(6,561		)	(6,851		)
Loans, net	$	1,070,015		$	1,009,463

During 2016 and 2015, substantially all of the Company’s residential and commercial real estate loans were pledged as collateral to the Federal Home Loan Bank to secure advances.

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows:

	June 30, 2016		December 31,  2015
	(In thousands)
Commercial	$	91	$	283
Construction	1,931		2,525
Commercial Real Estate	19,026		19,454
Residential Real Estate	10,517		11,668
Consumer	7		9
Carrying amount	$	31,572	$	33,939

There was $79,000 and $59,000 allowance for loan losses as of June 30, 2016 and December 31, 2015, respectively, for purchased credit impaired loans.

15

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

Accretable yield, or income expected to be collected, is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Balance, beginning of period	$	1,152		$	1,754		$	979		$	306
New loans purchased	—			—			—			1,632
Accretion of income	(71		)	(620		)	(128		)	(804		)
Reclassifications from nonaccretable difference	213			315			443			315
Disposals	—			—			—			—
Balance, end of period	$	1,294		$	1,449		$	1,294		$	1,449

16

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 and 2015 (in thousands):

Three Months Ended June 30, 2016:

	Commercial			Construction			Commercial  Real Estate			Residential  Real Estate			Consumer			Total
Beginning balance	$	1,721		$	1,912		$	832		$	1,370		$	353		$	6,188
Provision for loan losses	278			(46		)	(61		)	167			67			405
Loans charged-off	(1		)	—			(11		)	(207		)	(100		)	(319		)
Recoveries	59			2			124			28			74			287
Ending balance	$	2,057		$	1,868		$	884		$	1,358		$	394		$	6,561

Three Months Ended June 30, 2015:

	Commercial			Construction			Commercial  Real Estate			Residential  Real Estate			Consumer			Total
Beginning balance	$	1,219		$	2,182		$	1,468		$	2,162		$	89		$	7,120
Provision for loan losses	2,386			(459		)	(246		)	459			15			2,155
Loans charged-off	(1,786		)	(32		)	1			(105		)	(78		)	(2,000		)
Recoveries	22			521			61			51			115			770
Ending balance	$	1,841		$	2,212		$	1,284		$	2,567		$	141		$	8,045

17

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016 and 2015 (in thousands):

Six Months Ended June 30, 2016:

	Commercial			Construction			Commercial  Real Estate			Residential  Real Estate			Consumer			Total
Beginning balance	$	1,907		$	1,943		$	1,368		$	1,374		$	259		$	6,851
Provision for loan losses	636			(78		)	(643		)	174			316			405
Loans charged-off	(579		)	—			(11		)	(288		)	(291		)	(1,169		)
Recoveries	93			3			170			98			110			474
Ending balance	$	2,057		$	1,868		$	884		$	1,358		$	394		$	6,561

Six Months Ended June 30, 2015:

	Commercial			Construction			Commercial  Real Estate			Residential  Real Estate			Consumer			Total
Beginning balance	$	970		$	1,992		$	1,268		$	2,133		$	102		$	6,465
Provision for loan losses	2,740			(269		)	(832		)	609			13			2,261
Loans charged-off	(1,910		)	(32		)	(1		)	(252		)	(151		)	(2,346		)
Recoveries	41			521			849			77			177			1,665
Ending balance	$	1,841		$	2,212		$	1,284		$	2,567		$	141		$	8,045

18

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015 (in thousands):

June 30, 2016:

	Commercial		Construction		Commercial Real Estate		Residential  Real Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	317	$	316	$	55	$	255	$	—	$	943
Collectively evaluated for impairment	1,740		1,546		756		1,103		394		5,539
Acquired with deteriorated credit quality	—		6		73		—		—		79
Total ending allowance balance	$	2,057	$	1,868	$	884	$	1,358	$	394	$	6,561
Loans:
Loans individually evaluated for impairment	$	1,468	$	1,836	$	1,220	$	1,884	$	—	$	6,408
Loans collectively evaluated for impairment	193,107		84,576		374,144		365,537		21,232		1,038,596
Loans acquired with deteriorated credit quality	91		1,931		19,026		10,517		7		31,572
Total ending loans balance	$	194,666	$	88,343	$	394,390	$	377,938	$	21,239	$	1,076,576

December 31, 2015:

	Commercial		Construction		Commercial  Real Estate		Residential  Real Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	497	$	368	$	1	$	325	$	—	$	1,191
Collectively evaluated for impairment	1,410		1,571		1,312		1,049		259		5,601
Acquired with deteriorated credit quality	—		4		55		—		—		59
Total ending allowance balance	$	1,907	$	1,943	$	1,368	$	1,374	$	259	$	6,851
Loans:
Loans individually evaluated for impairment	$	3,944	$	2,288	$	862	$	2,690	$	—	$	9,784
Loans collectively evaluated for impairment	175,526		85,020		328,353		363,524		20,168		972,591
Loans acquired with deteriorated credit quality	283		2,525		19,454		11,668		9		33,939
Total ending loans balance	$	179,753	$	89,833	$	348,669	$	377,882	$	20,177	$	1,016,314

19

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the six month period ending June 30, 2016 (in thousands):

June 30, 2016:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With no related allowance recorded:
Commercial	$	956	$	956	$	—	$	2,361	$	52
Construction	—		—		—		31		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	82		82		—		54		—
Other nonfarm/nonresidential	329		329		—		332		10
Residential real estate:
Secured by first liens	176		176		—		116		—
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total	$	1,543	$	1,543	$	—	$	2,894	$	62
With an allowance recorded:
Commercial	$	512	$	512	$	317	$	579	$	3
Construction	1,836		1,836		316		1,961		41
Commercial real estate:
Owner occupied nonfarm/nonresidential	297		297		51		197		—
Other nonfarm/nonresidential	512		512		4		518		13
Residential real estate:
Secured by first liens	1,099		1,099		217		1,426		27
Home equity	609		609		38		615		15
Consumer	—		—		—		—		—
Total	$	4,865	$	4,865	$	943	$	5,296	$	99

20

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015:

December 31, 2015:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial	$	2,886	$	2,886	$	—
Construction	93		93		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	—		—		—
Other nonfarm/nonresidential	337		337		—
Residential real estate:
Secured by first liens	173		173		—
Home equity	—		—		—
Consumer	—		—		—
Total	$	3,489	$	3,489	$	—

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With an allowance recorded:
Commercial	$	2,916	$	1,058	$	497
Construction	2,195		2,195		368
Commercial real estate:
Owner occupied nonfarm/nonresidential	—		—		—
Other nonfarm/nonresidential	525		525		1
Residential real estate:
Secured by first liens	1,895		1,895		285
Home equity	622		622		40
Consumer	—		—		—
Total	$	8,153	$	6,295	$	1,191

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.  For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.

21

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the information related to loans individually evaluated for impairment by class of loans for the three month period ending June 30, 2016:

	Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With no related allowance recorded:
Commercial	$	2,098	$	11
Construction	—		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	81		—
Other nonfarm/nonresidential	330		5
Residential real estate:
Secured by first liens	88		—
Home equity	—		—
Consumer	—		—
Total	$	2,597	$	16

	Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With an allowance recorded:
Commercial	$	340	$	—
Construction	1,844		20
Commercial real estate:
Owner occupied nonfarm/nonresidential	296		—
Other nonfarm/nonresidential	515		6
Residential real estate:
Secured by first liens	1,191		14
Home equity	612		8
Consumer	—		—
Total	$	4,798	$	48

22

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents information related to loans individually evaluated for impairment by class of loans for the three and six month periods ending June 30, 2015:

	Three Months				Six Months
	Average Recorded Investment		Interest Income Recognized and Received		Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With no related allowance recorded:
Commercial	$	3,567	$	—	$	3,758	$	2
Construction	3,546		8		3,150		16
Commercial real estate:
Owner occupied nonfarm/nonresidential	826		15		798		25
Other nonfarm/nonresidential	715		7		777		14
Residential real estate:
Secured by first liens	2,227		2		2,085		6
Home equity	51		—		39		—
Consumer	1		—		1		—
Total	$	10,933	$	32	$	10,608	$	63
With an allowance recorded:
Commercial	$	744	$	—	$	533	$	—
Construction	3,707		34		3,720		68
Commercial real estate:
Owner occupied nonfarm/nonresidential	220		2		207		4
Other nonfarm/nonresidential	—		—		—		—
Residential real estate:
Secured by first liens	2,237		16		2,126		33
Home equity	737		8		738		16
Consumer	9		—		9		—
Total	$	7,654	$	60	$	7,333	$	121

23

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and December 31, 2015:

	June 30, 2016				December 31, 2015
	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Commercial	$	528	$	—	$	944	$	—
Construction	—		—		—		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	607		—		41		—
Other nonfarm/nonresidential	—		—		—		—
Residential real estate:
Secured by first liens	1,379		53		2,810		89
Home equity	126		—		176		—
Consumer	11		—		42		—
Total	$	2,651	$	53	$	4,013	$	89

24

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by class of loans:

June 30, 2016:

	30 — 59 Days Past Due		60 — 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due
Commercial	$	50	$	—	$	528	$	578	$	194,088
Construction	272		—		—		272		88,071
Commercial real estate:
Owner occupied nonfarm/nonresidential	25		—		607		632		180,069
Other nonfarm/nonresidential	—		—		—		—		213,689
Residential real estate:
Secured by first liens	682		646		1,432		2,760		300,999
Home equity	568		119		126		813		73,366
Consumer	153		18		11		182		21,057
Total	$	1,750	$	783	$	2,704	$	5,237	$	1,071,339

December 31, 2015:

	30 — 59 Days Past Due		60 — 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due
Commercial	$	373	$	29	$	944	$	1,346	$	178,407
Construction	—		34		—		34		89,799
Commercial real estate:
Owner occupied nonfarm/nonresidential	34		160		41		235		157,418
Other nonfarm/nonresidential	—		—		—		—		191,016
Residential real estate:
Secured by first liens	3,801		1,194		2,787		7,782		293,815
Home equity	292		58		176		526		75,759
Consumer	342		20		42		404		19,773
Total	$	4,842	$	1,495	$	3,990	$	10,327	$	1,005,987

25

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

Troubled Debt Restructurings:

Troubled debt restructurings totaled $9.7 million and $11.4 million at June 30, 2016 and at December 31, 2015.  There were TDRs on non-accrual of $0 and $1.6 million as of June 30, 2016 and December 31, 2015.  The Company has allocated $584,000 and $1.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2016 and December 31, 2015, respectively.  The Company did not have any commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of June 30, 2016 and December 31, 2015.

The detail of outstanding TDRs by class and modification type as of June 30, 2016 and December 31, 2015 follows (in thousands):

June 30, 2016:

	Recorded Investment		Allowance for Loan Losses Allocated
Commercial:
Extended maturity	$	17	$	17
Multiple modifications	17		—
Construction:
Extended maturity	51		—
Multiple modifications	1,836		316
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only payments	168		—
Other nonfarm/nonresidential
Extended maturity	3,064		4
Multiple modifications	779		—
Residential real estate:
Secured by first liens
Interest rate reduction	312		132
Extended maturity	1,762		40
Multiple modifications	1,124		37
Home equity
Multiple modifications	609		38
Total	$	9,739	$	584

26

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

December 31, 2015:

	Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
Commercial:
Extended maturity	$	890	$	390
Multiple modifications	35		18
Construction:
Extended maturity	93		—
Multiple modifications	2,195		368
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only payments	171		—
Other nonfarm/nonresidential
Extended maturity	3,105		23
Multiple modifications	801		—
Residential real estate:
Secured by first liens
Interest rate reduction	316		134
Extended maturity	1,966		44
Multiple modifications	1,216		63
Home equity
Multiple modifications	622		40
Total	$	11,410	$	1,080

27

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

A loan is considered in payment default once it is 30 days contractually past due under the modified terms.  The following table summarizes the Company’s TDR’s by class, modification type and performance as of June 30, 2016 and December 31, 2015 (in thousands):

June 30, 2016:

	TDRs Greater than 30 Days Past Due and Still Accruing		TDRs on Nonaccrual		Total TDRs Not Performing to Modified Terms		Total TDRs Performing to Modified Terms
Commercial:
Extended maturity	$	—	$	—	$	—	$	17
Multiple modifications	—		—		—		17
Construction:
Extended maturity	—		—		—		51
Multiple modifications	—		—		—		1,836
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only payments	—		—		—		168
Other nonfarm/nonresidential
Extended maturity	—		—		—		3,064
Multiple modifications	—		—		—		779
Residential:
Secured by first liens
Interest rate reduction	—		—		—		312
Extended maturity	—		—		—		1,762
Multiple modifications	—		—		—		1,124
Home equity
Multiple modifications	—		—		—		609
Total	$	—	$	—	$	—	$	9,739

28

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

December 31, 2015:

	TDRs Greater than 30 Days Past Due and Still Accruing		TDRs on Nonaccrual		Total TDRs Not Performing to Modified Terms		Total TDRs Performing to Modified Terms
	(In thousands)
Commercial:
Extended maturity	$	—	$	890	$	890	$	—
Multiple modifications	—		—		—		35
Construction:
Extended maturity	—		—		—		93
Multiple modifications	—		—		—		2,195
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only	—		—		—		171
Other nonfarm/nonresidential
Extended maturity	—		—		—		3,105
Multiple modifications	—		—		—		801
Residential:
Secured by first liens
Interest rate reduction	—		—		—		316
Extended maturity	—		64		64		1,902
Multiple modifications	—		615		615		601
Home equity
Multiple modifications	—		—		—		622
Total	$	—	$	1,569	$	1,569	$	9,841

There were no trouble debt restructurings that defaulted within 12 months of modifications during the three and six months ended June 30, 2016 and June 30, 2015.

During the six months ended June 30, 2016, the terms of certain loans were modified as troubled debt restructurings.  The modification of the terms of such loans included one or a combination of the following:  a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or adjustment of scheduled loan payments from principal and interest to interest only.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

29

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

There were no loan modifications for the three months ended June 30, 2016 that were classified as troubled debt restructurings.  The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2015 and their performance, by modification type (in thousands):

	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms
June 30, 2015:
Construction:
Extended maturity	4	$	2,866	$	2,866	$	2,971	$	—
Commercial real estate:
Owner occupied nonfarm/nonresidential
Extended maturity	1	175		175		180		—
Other nonfarm/nonresidential
Extended maturity	3	2,840		2,840		2,731		—
Residential:
Secured by first liens
Extended maturity	2	1,529		1,529		1,543		—
Multiple modifications	1	615		615		611		—

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2016 and 2015 and their performance, by modification type (in thousands):

	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms
June 30, 2016:
Residential:
Secured by first liens
Multiple modifications	2	$	521	$	533	$	531	$	—
June 30, 2015:
Commercial:
Interest only payments	1	53		53		10		—
Construction:
Extended maturity	4	2,866		2,866		2,971		—
Commercial real estate:
Owner occupied nonfarm/nonresidential
Extended maturity	1	175		175		180		—
Other nonfarm/nonresidential
Extended maturity	3	2,840		2,840		2,731		—
Residential:
Secured by first liens
Extended maturity	2	1,529		1,529		1,543		—
Multiple modifications	1	615		615		611		—

30

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  On a monthly basis, the Company reviews its loans that are risk rated Watch, Special Mention, Substandard, or Doubtful to determine they are properly classified.  In addition, the Company reviews loans rated as a “pass” that have exhibited signs that may require a classification change, such as past due greater than 30 days and other relevant information including:  loan officer recommendations, knowledge of specific borrower circumstances, and receipt of borrower financial statements.  The Company uses the following definitions for risk ratings:

The Company uses the following definitions for its criticized loan risk ratings:

Watch.  Loans classified as watch are not considered “rated” or “classified” for regulatory purposes, but are considered criticized assets which exhibit modest deterioration in financial performance or external threats.

Special Mention.  Loans classified as special mention exhibit potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, or in the Company’s credit position at some future date.  Economic or market conditions exist which may affect the borrower more severely than other companies in its industry.

The Company uses the following definitions for its classified loan risk ratings:

Substandard.  Loans classified as substandard are characterized by having well defined financial weakness.  Substandard loans are usually evidenced by chronic or emerging past due performance and serious deficiencies in the primary source of repayment.

Doubtful.  Loans classified as doubtful have a well-defined and documented financial weaknesses.  They have all the weaknesses of a substandard loan with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Generally, loans classified as doubtful are on non-accrual.

Loans not meeting the criteria above that are listed as pass are included in groups of homogeneous loans.  The risk category of loans by class of loans based on the most recent analysis performed as of June 30, 2016 and December 31, 2015 is as follows:

31

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.   Loans (Continued)

June 30, 2016:

	Criticized		Classified		Pass		Total
	(In thousands)
Commercial	$	6,900	$	1,544	$	186,222	$	194,666
Construction	3,824		1,887		82,632		88,343
Commercial real estate:
Owner occupied nonfarm/residential	6,382		3,463		170,856		180,701
Other nonfarm/residential	16,130		11,331		186,228		213,689
Residential real estate:
Secured by first liens	19,911		3,967		279,881		303,759
Home equity	544		947		72,688		74,179
Consumer	2		8		21,229		21,239
Total	$	53,693	$	23,147	$	999,736	$	1,076,576

December 31, 2015:

	Criticized		Classified		Pass		Total
	(In thousands)
Commercial	$	7,318	$	4,076	$	168,359	$	179,753
Construction	4,270		3,490		82,073		89,833
Commercial real estate:
Owner occupied nonfarm/residential	3,184		3,042		151,427		157,653
Other nonfarm/residential	13,434		13,460		164,122		191,016
Residential real estate:
Secured by first liens	19,005		7,238		275,354		301,597
Home equity	441		1,920		73,924		76,285
Consumer	28		36		20,113		20,177
Total	$	47,680	$	33,262	$	935,372	$	1,016,314

32

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.   Foreclosed and Repossessed Assets

The following table presents the major categories of foreclosed and repossessed assets Foreclosed and repossessed asset activity was as follows:

	June 30, 2016		December 31, 2015
	(In thousands)
Construction	$	1,458	$	1,917
Commercial real estate:
Owner occupied nonfarm/residential	400		791
Other nonfarm/residential	957		5,648
Residential real estate:
Secured by first liens	1,332		1,529
Consumer	19		67
	$	4,166	$	9,952

Foreclosed and repossessed asset activity was as follows for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended June 30						Six Months Ended June 30
	2016			2015			2016			2015
	(In thousands)
Period beginning balance	$	6,228		$	15,818		$	9,952		$	4,431
Loans transferred to foreclosed and repossessed assets	119			711			768			10,197
Foreclosed and repossessed assets acquired from First Financial Service Corporation	—			—			—			3,228
Direct write-downs	(101		)	(12		)	(278		)	(75		)
Sales	(2,080		)	(8,163		)	(6,276		)	(9,427		)
Balance as of June 30	$	4,166		$	8,354		$	4,166		$	8,354

Expenses for the three and six months ended June 30, 2016 and 2015 related to foreclosed and repossessed assets include:

	Three Months Ended June 30					Six Months Ended June 30
	2016		2015			2016			2015
	(In thousands)
Net gain on sales	$	80	$	(21	)	$	(64	)	$	(10	)
Direct write-downs	101		12			278			75
Operating expenses, net of rental income	29		(86		)	(114		)	184
	$	210	$	(95	)	$	100		$	249

The Company was in process of foreclosure of residential real estate loans with outstanding balances of $1.4 million and $1.7 million as of June 30, 2016 and December 31, 2015, respectively.

33

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.   Deposits

Deposits at June 30, 2016 and December 31, 2015 consisted of the following:

	June 30, 2016		December 31, 2015
	(In thousands)
Demand (NOW)	$	312,291	$	312,149
Money market accounts	195,622		212,233
Savings	137,707		137,765
Time deposits $250,000 and over	41,147		42,291
Time deposits less than $250,000	234,735		270,887
Total interest bearing deposits	921,502		975,325
Total non-interest bearing deposits	303,039		286,739
Total deposits	$	1,224,541	$	1,262,064

7.   Earnings Per Common Share

Earnings per common share were computed as follows:

	Three months ended June 30,					Six months ended June 30,
	2016		2015			2016		2015
	(In thousands, except for share and per share amounts)
Basic:
Net income	$	3,769	$	3,565		$	7,464	$	2,629
Preferred stock dividend	—		(109		)	—		(219		)
Net income available to common shareholders	$	3,769	$	3,456		$	7,464	$	2,410
Average shares outstanding	5,467,989		5,383,887			5,458,672		5,379,379
Net income per common share, basic	$	0.69	$	0.64		$	1.37	$	0.45
Diluted:
Net income available to common shareholders	$	3,769	$	3,456		$	7,464	$	2,410
Average shares:
Common shares outstanding for basic	5,467,989		5,383,887			5,458,672		5,379,379
Add: Dilutive effects of outstanding stock options	20,059		18,357			22,068		18,048
Add: Dilutive effects of outstanding stock awards	78,323		35,358			71,204		29,082
Average dilutive potential common shares	5,566,371		5,437,602			5,551,944		5,426,509
Net income per common share, diluted	$	0.68	$	0.64		$	1.34	$	0.44

No stock options or restricted stock unit awards were excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2016 and 2015.

34

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8.   Stock-Based Compensation Plans

The Company has three share based compensation plans as described below.  Total compensation cost for those plans was $547,000 and $239,000 for the three months ended June 30, 2016 and 2015 and $1.2 million and $441,000 for the six months ended June 30, 2016 and 2015.  The total income tax benefit was $191,000 and $84,000 for the three months ended June 30, 2016 and 2015 and $422,000 and $154,000 for the six months ended June 30, 2016 and 2015.

Stock Options:  The Company’s stock option plan provides for the granting of both incentive and nonqualified stock options and other share based awards, including restricted stock and deferred stock units, for up to 500,000 shares of common stock at exercise prices not less than the fair market value of the common stock on the date of grant and expiration dates of up to ten years.  Terms of the options are determined by the Board of Directors at the date of grant and generally vest over periods of three to four years.  Payment of the option price may be in cash or shares of common stock at fair market value on the exercise date at the election of the employee.  Non-employee directors are eligible to receive only nonqualified stock options.  As of June 30, 2016, the plan allows for additional option and share-based award grants of up to 339,000 shares.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model.  Expected volatilities are based on historical volatilities of the Company’s common stock.  The Company uses historical data to estimate option exercise and post-vesting termination behavior.  The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

A summary of the activity in the stock option plan for 2016 follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands, except exercise prices)
Outstanding at beginning of year	76		$	22.20
Granted	—		—
Exercised	(55	)	21.93
Forfeited	—		—
Expired	—		—
Outstanding at end of period	21		$	22.89	0.6	$	300
Vested and expected to vest	21		$	22.89	0.6	$	300
Exercisable at end of period	21		$	22.89	0.6	$	300

35

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8.   Stock-Based Compensation Plans (Continued)

For the three and six months ended June 30, 2016 no options were granted while 50,500 and 55,000 stock options were exercised.  The Company received proceeds of $666,000 for the exercise of 30,000 stock options while the remainder were exercised using the cashless option, with the Company issuing net shares to option holders.  The intrinsic value of stock options exercised during 2016 was $830,000.    As of June 30, 2016, all outstanding stock options had vested and there was no remaining compensation cost to be recognized.

Performance Units Awards:  The Company may grant performance unit awards to employees for up to 275,000 shares of common stock.  The level of performance shares eventually distributed is contingent upon the achievement of specific performance criteria within a specified award period set at the grant date.  The Company estimates the progress toward achieving these objectives when estimating the number of awards expected to vest and correspondingly, periodic compensation expense.

The compensation cost attributable to these restricted performance units awards is based on both the fair market value of the shares at the grant date and the Company’s stock price at the end of a reporting cycle.  Thirty-five percent of the total award will be paid in cash and is therefore classified as a liability, with total compensation cost changing as the Company’s stock price changes.  The remaining sixty-five percent is classified as an equity award; total compensation cost is based on the fair market value of sixty-five percent of the total award on the date of grant.  The compensation expense is recognized over the specified performance period.

As of June 30, 2016, there were no outstanding units granted under the Plan.  There were no units outstanding during the periods ended June 30, 2016 and 2015.  There were no modifications or cash paid to settle performance unit awards during the three month periods ending June 30, 2016 and 2015.

Restricted Stock Units:  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.  The fair value of the units was determined using the market value of the Company’s stock on the grant date.  The restricted stock units have vesting periods ranging from one to five years from the anniversary of the grant date.

A summary of changes in the Company’s nonvested restricted stock units for the year follows:

	Units		Weighted-Average Grant-Date Fair Value
	(In thousands, except per share amounts)
Nonvested at beginning of year	191		$	27.31
Granted	8		33.52
Vested	(23	)	25.96
Forfeited	—		—
Nonvested at June 30, 2016	176		$	27.78

36

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8.   Stock-Based Compensation Plans (Continued)

As of June 30, 2016, there was $2.8 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 2.0 years.  The fair value of units vested during the three and six months ended June 30, 2016 and 2015 was $747,000 and $536,000.  There were no modifications or cash paid to settle restricted stock units during the three and six month periods ended June 20, 2016 and 2015.

9. Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair value:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value.

Securities:  The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. These valuation methods are classified as Level 2 in the fair value hierarchy.

Impaired Loans:  Impaired loans are evaluated at the time the loan is identified as impaired and are recorded at the lower of the carrying amount of the loan or the fair value of the underlying collateral.  For collateral dependent loans, the fair value of real estate is primarily determined based on appraisals by qualified licensed appraisers.  These appraisals may use a single valuation approach or a combination depending on the type of collateral including the comparable sales or income capitalization approach.  The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances and condition of the collateral including the market for the particular collateral and management’s experience with similar types of collateral.  Impaired loans are evaluated quarterly for additional impairment.  Fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

37

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

Foreclosed and Repossessed Assets:  Foreclosed and repossessed assets are initially recorded at fair value less estimated costs to sell when acquired.  The fair value of foreclosed and repossessed assets is primarily determined based on appraisals by qualified appraisers whose qualifications have been reviewed by the Company.  The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances of the collateral and reduced by management’s estimate of costs to dispose of the asset.  Also, management reviews the assumptions included the appraisals and makes adjustments where circumstances warrant such as recent experience with similar assets.  Fair value of foreclosed and repossessed assets is classified as Level 3 in the fair value hierarchy.

Assets measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using
	Assets at Fair  Value		Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)		Significant  Other  Observable  Inputs  (Level 2)		Significant  Unobservable  Inputs (Level 3)
			(in thousands)
Assets (June 30, 2016):
Available for sale securities:
State and municipal	$	125,284	$	—	125,284		$	—
U.S. Government sponsored entities and agencies	21,241		—		21,241		—
Residential mortgage-backed securities issued by U.S. Government sponsored entities	140,660		—		140,660		—
Mutual Funds	251		—		251		—
Total available for sale securities	$	287,436	$	—	$	287,436	$	—
Assets (December 31, 2015):
Available for sale securities:
State and municipal	$	123,492	$	—	$	123,492	$	—
U.S. Government sponsored entities and agencies	31,463		—		31,463		—
Residential mortgage-backed securities issued by U.S. Government sponsored entities	220,331		—		220,331		—
Corporates	3,437		—		3,437		—
Mutual Funds	255		—		255		—
Total available for sale securities	$	378,978	$	—	$	378,978	$	—

There were no transfers between Level 1 and Level 2 during 2016 or 2015.

38

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

Assets measured at fair value on a nonrecurring basis are summarized below.

			Fair Value Measurements Using
	Assets at  Fair Value		Quoted  Prices in  Active  Markets for  Identical  Assets  (Level 1)		Significant  Other  Observable  Inputs  (Level 2)		Significant  Unobservable  Inputs  (Level 3)
			(in thousands)
Assets (June 30, 2016):
Impaired loans:
Commercial	$	195	$	—	$	—	$	195
Commercial real estate:
Owner Occupied nonfarm/nonresidential	246		—		—		246
Residential real estate:
Secured by first liens	882		—		—		882
Foreclosed and repossessed assets:
Residential real estate:
Secured by first liens	90		—		—		90
Commercial real estate:
Other nonfarm/nonresidential	400		—		—		400
Assets (December 31, 2015):
Impaired loans:
Commercial	560		—		—		560
Residential real estate:
Secured by first liens	1,610		—		—		1,610
Foreclosed and repossessed assets:
Commercial real estate:
Owner occupied nonfarm/nonresidential	119		—		—		119

39

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

The Company measures for impairment using the fair value of the collateral less costs to sell for collateral-dependent loans.  The Company’s collateral dependent impaired loans had a carrying value of $1.9 million as of June 30, 2016 with a valuation allowance of $586,000, resulting in provision for loan losses of $243,000 and $296,000 million for the three and six months ended June 30, 2016.  The Company recorded $2.2 million in provision for loan losses for collateral-dependent impaired loans for the three and six months ended June 30, 2015.  Impaired loans totaled $9.8 million as of December 31, 2015, which included collateral dependent loans with a carrying value of $3.0 million and a valuation allowance of $782,000.

The Company evaluates the fair value of foreclosed and repossessed assets at the time they are transferred from loans and on a quarterly basis thereafter.  During the three months ended June 30, 2016 and 2015, the Company recognized charges to write down foreclosed and repossessed assets to their fair value of $101,000 and $12,000, respectively.  The Company also had write downs of foreclosed and repossessed assets for the six months ended June 30, 2016 and 2015 of $278,000 and $75,000.

40

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2016:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
June 30, 2016:
Impaired Loans:
Commercial	$	195	Sales comparison approach	Adjustments for differences between comparable sales	33%
Commercial real estate	246		Sales comparison approach	Adjustments for differences between comparable sales	40%
Residential real estate	882		Sales comparison approach	Adjustments for differences between comparable sales	19%-43% (33%)
Foreclosed and repossessed assets:
Commercial real estate	400		Sales comparison approach	Adjustments for differences between comparable sales	33%
Residential real estate	90		Sales comparison approach	Adjustments for differences between comparable sales	11%

41

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range - (Weighted Average)
	(in thousands)
December 31, 2015:
Impaired Loans:
Commercial	$	560	Sales comparison approach	Adjustments for differences between comparable sales	28%-81% (72%)
Residential real estate	1,610		Sales comparison approach	Adjustments for differences between comparable sales	19%-37% (30%)
Foreclosed and repossessed assets:
Commercial real estate	$	119	Sales comparison approach	Adjustments for differences between comparable sales	33%

42

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

Fair value of Financial Instruments

Carrying amount and estimated fair values of financial instruments at June 30, 2016 and December 31, 2015 were as follows:

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
June 30, 2016:
Financial assets:
Cash and due from financial institutions	$	44,417	$	44,417	$	—	$	—	$	44,417
Interest-bearing deposits in other financial institutions	9,676		9,676		—		—		9,676
Securities available for sale	287,436		—		287,436		—		287,436
Loans held for sale	851		—		868		—		868
Loans, net	1,070,015		—		—		1,087,195		1,087,195
Accrued interest receivable	5,359		18		1,704		3,637		5,359
Federal Home Loan Bank and Federal Reserve Stock	4,233		n/a		n/a		n/a		n/a
Financial liabilities:
Deposits	1,224,541		—		1,224,984		—		1,224,984
Short-term borrowings	44,507		—		44,497		—		44,497
Other borrowings	106,927		—		49,592		50,747		100,339
Accrued interest payable	437		—		285		152		437

43

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2015:
Financial assets:
Cash and due from financial institutions	$	30,425	$	30,425	$	—	$	—	$	30,425
Interest-bearing deposits in other financial institutions	13,365		13,365		—		—		13,365
Loans held for sale	1,015		—		1,038		—		1,038
Loans, net	1,009,463		—		—		1,023,175		1,023,175
Accrued interest receivable	5,328		17		1,879		3,432		5,328
Federal Home Loan Bank and Federal Reserve Stock	3,890		n/a		n/a		n/a		n/a
Financial liabilities:
Deposits	1,262,064		—		1,261,084		—		1,261,084
Short-term borrowings	48,785		—		48,776		—		48,776
Other borrowings	108,347		—		51,269		50,472		101,741
Accrued interest payable	451		—		366		85		451

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB and FRB Stock

It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on transferability.

(c) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

44

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.  Fair Value (Continued)

(d) Deposits

The fair value disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Other Borrowings

The fair values of the Company’s other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(f) Short-Term Borrowings

The fair values of the Company’s short-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the classification of the associated asset or liability.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

45

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.  Accumulated other comprehensive income (loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the three month periods ended June 30, 2016 and 2015 (in thousands):

	Unrealized Gains and Losses on Available- for-Sale Securities			Defined Benefit Pension Items			Total
June 30, 2016:
Balance, beginning of period	$	4,701		$	(518	)	$	4,183
Other comprehensive income (loss) before reclassifications	1,429			(2		)	1,427
Amounts reclassified from accumulated other comprehensive income	(58		)	3			(55		)
Balance, end of period	$	6,072		$	(517	)	$	5,555
June 30, 2015:
Balance, beginning of period	$	4,252		$	(464	)	$	3,788
Other comprehensive loss before reclassifications	(3,629		)	(12		)	(3,641		)
Amounts reclassified from accumulated other comprehensive income	—			3			3
Balance, end of period	$	623		$	(473	)	$	150

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the six month periods ended June 30, 2016 and 2015 (in thousands):

	Unrealized Gains and Losses on Available- for-Sale Securities			Defined Benefit Pension Items			Total
June 30, 2016:
Balance, beginning of period	$	2,589		$	(500	)	$	2,089
Other comprehensive income (loss) before reclassifications	3,734			(23		)	3,711
Amounts reclassified from accumulated other comprehensive income	(251		)	6			(245		)
Balance, end of period	$	6,072		$	(517	)	$	5,555
June 30, 2015:
Balance, beginning of period	$	2,280		$	(471	)	$	1,809
Other comprehensive income before reclassifications	(1,623		)	(7		)	(1,630		)
Amounts reclassified from accumulated other comprehensive income	(34		)	5			(29		)
Balance, end of period	$	623		$	(473	)	$	150

46

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.  Accumulated other comprehensive income (loss) (Continued)

The following is a detail of amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ending June 30, 2016 and 2015:

June 30, 2016:

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
	(In Thousands)
Unrealized gains and losses on available-for-sale securities	$	(89	)	Net gain on sales of available-for-sale securities
	31			Income tax expense
	(58		)	Net of tax
Amortization of defined benefit pension plan unrecognized loss	5			Salaries and employee benefits
	(2		)	Income tax expense
	3			Net of tax
Total reclassifications for the period	$	(55	)	Net of tax

June 30, 2015:

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
	(In Thousands)
Amortization of defined benefit pension plan unrecognized loss	$	4		Salaries and employee benefits
	(1		)	Income tax expense
	3			Net of tax
Total reclassifications for the period	$	3		Net of tax

The following is a detail of amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six months ending June 30, 2016 and 2015:

June 30, 2016:

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
	(In Thousands)
Unrealized gains and losses on available-for-sale securities	$	(386	)	Net gain on sales of available-for-sale securities
	135			Income tax expense
	(251		)	Net of tax
Amortization of defined benefit pension plan unrecognized loss	10			Salaries and employee benefits
	(4		)	Income tax expense
	6			Net of tax
Total reclassifications for the period	$	(245	)	Net of tax

47

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.  Accumulated other comprehensive income (loss) (Continued)

June 30, 2015:

Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
	(In Thousands)
Unrealized gains and losses on available-for-sale securities	$	(51	)	Net gain on sales of available-for-sale securities
	17			Income tax expense
	(34		)	Net of tax
Amortization of defined benefit pension plan unrecognized loss	8			Salaries and employee benefits
	(3		)	Income tax expense
	5			Net of tax
Total reclassifications for the period	$	(29	)	Net of tax

11.  Repurchase Agreements

Repurchase agreements totaled $44.5 million as of June 30, 2016 and consisted entirely of overnight obligations.  The Company pledged residential mortgage-backed agencies issued by U.S. Government sponsored entities with a carrying amount of $57.3 million to secure repurchase agreements as of June 30, 2016.

12.  Merger Agreement

On May 3, 2016, the Company entered into a definitive agreement and plan of merger with WesBanco, Inc. (“WesBanco”) providing for the merger of the Company with and into WesBanco.  The merger agreement provides that Company shareholders will receive 0.964 of a share of WesBanco common stock plus $7.70 in cash for each share of Company common stock they own on the date the merger becomes effective.  The merger is expected to be completed in the third or fourth quarter of 2016.  Consummation of the merger is subject to approval of the merger agreement by the Company’s shareholders, receipt of required regulatory approvals, the aggregate amount of certain Company loans not exceeding an agreed upon amount, and other customary conditions.

48

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOUR COMMUNITY BANKSHARES, INC.

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws.  These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance.  Numerous risks and uncertainties could cause or contribute to our actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.  Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our filings with the Securities and Exchange Commission.

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by us or on our behalf.  We assume no obligation to update any forward-looking statements.

Financial Condition

Total assets of the Company decreased to $1.5 billion as of June 30, 2016 from $1.6 billion as of December 31, 2015 primarily due to a decline in securities available for sale of $91.5 million from sales and maturities, partially offset by an increase in net loans of $60.6 million over the same period.

Net loans increased $1.1 billion as of June 30, 2016 from $1.0 billion as of December 31, 2015.  The primary area of growth was in commercial real estate loans, which grew $45.7 million during the six months ended June 30, 2016.  Of the total growth in commercial real estate loans, $23.0 million was in owner-occupied non-farm/non-residential loans with the remaining $22.7 million in other non-farm/non-residential loans.  Additionally, commercial loans increased by $14.9 million during the period to $194.7 million.

Securities available for sale decreased to $287.4 million at June 30, 2016.  During the six months ended June 30, 2016, the Company sold $74.4 million of securities to provide liquidity for loan growth.  In addition, the Company realized $24.8 million in repayments of securities and purchased $2.7 million of securities.  The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk.  The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates.

49

Total deposits decreased to $1.2 billion at June 30, 2016 from $1.3 billion at December 31, 2015 as the Company continued to experience run-off in higher cost deposits assumed in the First Financial transaction.  Also, during the second quarter of 2016, the Company sold $22.4 million of deposits as part of the divestiture of one branch.

Net Income Available to Common Shareholders.  Net income available to common shareholders increased to $3.8 million for the three months ended June 30, 2016 from $3.5 million for the same period in 2015.  Basic and diluted earnings per common share increased to $0.69 and $0.68 per share, respectively, for the second quarter of 2016 as compared to $0.64 per common share for both measures for the second quarter of 2015.  The increase in net income available to common shareholders was mostly attributable to a reduction in provision for loan losses of $1.8 million and an increase in non-interest income of $968,000 between the periods, offset by an increase in non-interest expense of $1.6 million and a decrease in net interest income of $935,000.  The annualized return on average assets and average shareholders’ equity were 0.98% and 11.17% for the three months ended June 30, 2016, respectively, compared to 0.89% and 9.75% for the equivalent period in 2015.

Net income available to common shareholders for the six-month period ended June 30, 2016 increased to $7.5 million from $2.4 million in the equivalent period in 2015.  Basic earnings per share was $1.37 and diluted earnings per common share was $1.34 in 2016, an increase from basic and diluted earnings per share of $0.45 and $0.44, respectively, in 2015.  The increase in net income available to common shareholders was mainly attributable to merger and integration charges of $3.8 million recognized in non-interest expense in the first quarter of 2015 associated with the First Financial transaction.  In addition to the decline in non-interest expense to $23.3 million in 2016 from $28.4 million 2015, net income available to common shareholders increased due to a decrease in provision for loan losses of $1.9 million to $405,000 and an increase in non-interest income of $1.1 million, offset by a decline in net interest income of $1.4 million. The annualized return on average assets and shareholders’ equity were 0.97% and 11.26% for the six months ended June 30, 2016, respectively, compared to 0.33% and 3.60% for the equivalent periods in 2015.

50

Net interest income.  Net interest income decreased by $935,000 to $13.0 million for the second quarter of 2016 compared to 2015, while the Company’s net interest margin on a fully taxable equivalent basis decreased from 4.04% in 2015 to 3.90% in 2016.  The decline in net interest income was due mainly to an increase in the cost of other borrowings from 2.84% in the second quarter of 2015 to 3.56% in the second quarter 2016 and a reduction in yield on loans to 4.84% in 2016 from 5.17% in 2015.  Yield on loans was negatively impacted in 2016 due to a reduction in accretion in income from $1.0 million recognized in the second quarter of 2015 to $432,000 recognized in 2016.  The increase in the cost of other borrowings was primarily attributable to the issuance of $25.0 million in subordinated debentures in the fourth quarter of 2015 at a rate of 6.25% to redeem $28.0 million in preferred stock issued under the U.S. Treasury’s Small Business Lending Fund program.

Net interest income for the six months ended June 30, 2016 decreased to $26.0 million from $27.4 million while the net interest margin on a fully taxable equivalent basis declined to 3.90% in 2016 from 3.95% in 2015.  The decrease in net interest income was due to the issuance of subordinated debentures discussed above and a decline in total earning assets of $65.7 million between the periods.  Also contributing to the decrease in net interest income for the six month period was a reduction in accretion income on loans from $1.6 million in 2015 to $848,000 in 2016.  The decline in earning assets was partially offset by an increase in the yield on total earning assets from 4.30% in 2015 to 4.37% in 2016 as the Company continued to shift assets from lower-yielding securities into higher-yielding loans.

51

Average Balance Sheets.  The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.  Average balances are computed on daily average balances.  For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities.  A tax rate of 35% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent (“FTE”) basis.  Loans held for sale and loans no longer accruing interest are included in total loans.

	Three Months Ended June 30,
	2016								2015
	Average Balance			Interest			Average Yield/Cost		Average Balance			Interest			Average Yield/Cost
	(In thousands)								(In thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks	$	28,946		$	25		0.35	%	$	48,008		$	49		0.41	%
Taxable securities	200,447			911			1.83		288,420			1,320			1.84
Tax-exempt securities	118,342			1,567			5.33		98,423			1,355			5.52
Total loans and fees (1) (2)	1,068,274			12,865			4.84		1,000,865			12,902			5.17
FHLB and Federal Reserve stock	4,048			47			4.67		4,860			69			5.69
Total earning assets	1,420,057			15,415			4.37		1,440,576			15,695			4.37
Less: Allowance for loan losses	(6,166		)						(7,532		)
Non-earning assets:
Cash and due from banks	16,799								35,902
Bank premises and equipment, net	32,253								37,778
Other assets	87,094								96,967
Total assets	$	1,550,037							$	1,603,691
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and other	$	651,192		$	273		0.17	%	$	688,831		$	265		0.15	%
Time deposits	286,858			278			0.39		352,394			315			0.36
Short-term borrowings	62,256			66			0.43		39,033			23			0.24
Other borrowings	117,783			1,044			3.56		83,170			589			2.84
Total interest-bearing liabilities	1,118,089			1,661			0.60		1,163,428			1,192			0.41
Non-interest bearing liabilities:
Non-interest demand deposits	287,720								283,101
Accrued interest payable and other liabilities	8,524								10,453
Stockholders’ equity	135,704								146,709
Total liabilities and stockholders’ equity	$	1,550,037							$	1,603,691
Net interest income (taxable equivalent basis)				$	13,754							$	14,503
Less: taxable equivalent adjustment				(775		)						(589		)
Net interest income				$	12,979							$	13,914
Net interest spread							3.77	%							3.96	%
Net interest margin							3.90								4.04

(1)The amount of direct loan origination cost included in interest on loans was $77 and $75 for the three months ended June 30, 2016 and 2015.

(2)Calculations include non-accruing loans in the average loan amounts outstanding.

(3)The amount of accretion recorded for acquired loans included in interest income was $432 and $1,016 for the three months ended June 30, 2016 and 2015.

52

	Six Months Ended June 30,
	2016								2015
	Average Balance			Interest			Average Yield/Cost		Average Balance			Interest			Average Yield/Cost
	(In thousands)								(In thousands)
ASSETS
Earning assets:
Interest-bearing deposits in other financial institutions	$	20,636		$	63		0.62	%	$	55,508		$	104		0.38	%
Taxable securities	222,566			2,064			1.86		303,474			2,660			1.77
Tax-exempt securities	118,635			3,146			5.33		90,862			2,498			5.54
Total loans and fees (1) (2)	1,052,707			25,466			4.86		997,221			25,527			5.16
FHLB and Federal Reserve stock	3,967			97			4.92		5,667			164			5.84
Total earning assets	1,418,511			30,836			4.37		1,452,732			30,953			4.30
Less: Allowance for loan losses	(6,242		)						(7,187		)
Non-earning assets:
Cash and due from banks	22,098								37,436
Bank premises and equipment, net	32,665								37,956
Other assets	87,498								99,279
Total assets	$	1,554,530							$	1,620,216
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and other	$	652,278		$	540		0.17	%	$	692,940		$	530		0.15	%
Time deposits	297,397			571			0.39		364,743			624			0.34
Short-term borrowings	62,522			133			0.43		38,645			45			0.23
Other borrowings	114,734			2,062			3.61		85,571			1,265			2.98
Total interest-bearing liabilities	1,126,931			3,306			0.59		1,181,899			2,464			0.42
Non-interest bearing liabilities:
Non-interest demand deposits	285,789								281,499
Accrued interest payable and other liabilities	8,460								9,737
Stockholders’ equity	133,350								147,081
Total liabilities and stockholders’ equity	$	1,554,530							$	1,620,216
Net interest income (taxable equivalent basis)				$	27,530							$	28,489
Less: taxable equivalent adjustment				(1,555		)						(1,091		)
Net interest income				$	25,975							$	27,398
Net interest spread							3.78	%							3.88	%
Net interest margin							3.90								3.95

(1)The amount of direct loan origination cost included in interest on loans was $74 and $96 for the six months ended June 30, 2016 and 2015.

(2)Calculations include non-accruing loans in the average loan amounts outstanding.

(3)The amount of accretion recorded for acquired loans included in interest income was $848 and $1,617 for the six months ended June 30, 2016 and 2015.

53

Rate/Volume Analysis.  The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense on a fully taxable equivalent basis during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Three Months Ended June 30, 2016 compared to Three Months Ended June 30, 2015 Increase/(Decrease) Due to									Six Months Ended June 30, 2016 compared to Six Months Ended June 30, 2015 Increase/(Decrease) Due to
	Total Net Change			Volume			Rate			Total Net Change			Volume			Rate
	(In thousands)									(In thousands)
Interest income:
Interest-bearing deposits in other financial institutions	$	(24	)	$	(19	)	$	(5	)	$	(41	)	$	(87	)	$	46
Taxable securities	(409		)	(400		)	(9		)	(596		)	(743		)	147
Tax-exempt securities	212			265			(53		)	648			739			(91		)
Total loans and fees	(37		)	840			(877		)	(61		)	1,382			(1,443		)
FHLB and Federal Reserve stock	(22		)	(11		)	(11		)	(67		)	(44		)	(23		)
Total increase in interest income	(280		)	675			(955		)	(117		)	1,247			(1,364		)
Interest expense:
Savings and other	8			(14		)	22			10			(32		)	42
Time Deposits	(37		)	(62		)	25			(53		)	(124		)	71
Short-term borrowings	43			18			25			88			38			50
Other borrowings	455			282			173			797			488			309
Total increase in interest expense	469			224			245			842			370			472
Increase in net interest income	$	(749	)	$	451		$	(1,200	)	$	(959	)	$	877		$	(1,836	)

54

Allowance and Provision for Loan Losses.  Our financial performance depends on the quality of the loans we originate and management’s ability to assess the degree of risk in existing loans when it determines the allowance for loan losses.  An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses could have an adverse effect on net income.  The allowance is determined based on the application of loss estimates to graded loans by categories.

Summary of Loan Loss Experience:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Activity for the period ended:
Beginning balance	$	6,188		$	7,120		$	6,851		$	6,465
Charge-offs:
Residential real estate	(181		)	(71		)	(262		)	(204		)
Commercial real estate	(11		)	1			(11		)	(1		)
Construction	—			(32		)	—			(32		)
Commercial business	(1		)	(1,786		)	(579		)	(1,910		)
Home equity	(26		)	(34		)	(26		)	(48		)
Consumer	(100		)	(78		)	(291		)	(151		)
Total	(319		)	(2,000		)	(1,169		)	(2,346		)
Recoveries:
Residential real estate	13			43			72			48
Commercial real estate	124			61			170			849
Construction	2			521			3			521
Commercial business	59			22			93			41
Home equity	15			8			26			29
Consumer	74			115			110			177
Total	287			770			474			1,665
Net loan charge-offs	(32		)	(1,230		)	(695		)	(681		)
Provision for loan losses	405			2,155			405			2,261
Ending balance	$	6,561		$	8,045		$	6,561		$	8,045

55

Provision for loan losses decreased to $405,000 for both the three and six months ending June 30, 2016 from $2.2 million and $2.3 million for the same periods in 2015.  Net charge-offs for the three and six months ended June 30, 2016 were $32,000 and $695,000 compared to $1.2 million and $681,000 in 2015.  The Company’s non-performing loans decreased to $2.7 million as of June 30, 2016 from $4.1 million as of December 31, 2015.  Allowance as a percent of non-performing loans increased to 242.55% from 170.72%.  The provision for the loan losses for both the three and six months ended June 30, 2016 was due to loan growth during the periods as well as the receipt of an updated appraisal for an impaired loan relationship.  The decrease in the provision for loan losses from 2015 was the result of a large provision for one credit relationship during the second quarter of 2015.  Offsetting the impact of loan growth on the provision for loan losses was a decrease in the average net charge-off history.  The Company allocates allowance for loan losses for loans collectively evaluated for impairment by using its average three-year charge-off history, adjusted for certain qualitative factors.  As the Company’s three-year charge-offs decrease for a loan class, the amount allocated decreases as well.

The Company’s classified loans (substandard and doubtful) decreased to $23.1 million as of June 30, 2016 from $33.3 million as of December 31, 2015 while criticized loans (watch and special mention) increased to $53.7 million from $47.7 million.

Asset Quality.  Loans, including impaired loans, are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the process of collection.  When these loans are placed on non-accrual status, all unpaid accrued interest is reversed and the loans remain on non-accrual status until the loan becomes current or the loan is deemed uncollectible and is charged off.  Impaired loans are those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement.  A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  TDR’s totaled $9.7 million at June 30, 2016 and $11.4 million December 31, 2015, while $0 million and $1.6 million were included in the Company’s non-accrual loans as of the same dates, respectively.

56

The Company’s non-performing assets as of June 30, 2016 and December 31, 2015 were as follows:

	June 30, 2016			December 31, 2015
	(In thousands)
Loans on non-accrual status	$	2,652		$	4,013
Loans past due over 90 days still on accrual	53			89
Total non-performing loans	2,705			4,102
Foreclosed and repossessed assets	4,166			9,952
Total non-performing assets	$	6,871		$	14,054
Non-performing loans to total loans	0.25		%	0.40		%
Non-performing assets to total loans	0.64			1.38
Allowance as a percent of non-performing loans	242.55			170.72
Allowance as a percent of total loans	0.61			0.67

Non-interest income.  Non-interest income increased to $3.6 million for the second quarter of 2016 from $2.7 million for the equivalent period in 2015.  The increase was driven primarily by a $621,000 life insurance benefit and a gain on branch divestiture of $422,000 as the result of selling a branch in Munfordville, Kentucky to another financial institution during the second quarter of 2016.  Also impacting non-interest income during the three months ended June 30, 2016 was amortization of tax credit investments of $350,000 as compared to $92,000 in the equivalent period in 2015.

Non-interest income increased by $1.1 million to $6.2 million for the six months ended June 30, 2016 from $5.1 million in 2015 due primarily to the same factors that caused the increase in the second quarter of 2016 relative to 2015.

Non-interest expense.  Non-interest expense increased to $12.1 million for the three months ended June 30, 2016 from $10.5 million in 2015 due primarily to increases in salaries and employee benefits and net foreclosed assets expense.  Salaries and employee benefits was $6.3 million in 2016 compared to $5.1 million in 2015 and is attributable to an increase in incentive compensation including stock based compensation expense and bonuses.  Other foreclosed assets, net was $210,000 in 2016 compared to $(95,000) in 2015 due to higher losses on sales of foreclosed assets during the quarter in addition to lower foreclosed asset income as compared 2015.

Non-interest expense was $23.3 million for the six months ended June 30, 2016, a decrease of $5.1 million from $28.4 million in 2015 as most categories were impacted in the first quarter of 2015 by the acquisition of First Financial and the corresponding merger and integration charges. The Company recognized $3.9 million in merger and integration expenses in the first six months of 2015, primarily in salaries and benefits and data processing.  Additionally, legal and professional service fees were lower due to expenses incurred during 2015 associated with the First Financial acquisition including legal, valuations of assets acquired and liabilities assumed, and additional audit fees.

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Income tax expense.  Income tax expense was $318,000 for the second quarter of 2016 compared to $371,000 for the equivalent period in 2015 while the effective tax rate was 7.78% and 9.42% for the respective periods.  The reduction in income tax expense and effective rate in 2016 was due to $621,000 in non-taxable gain on recognition of life insurance benefit.

Income tax expense for the six months ended June 30, 2016 was $947,000 compared to income tax benefit of $827,000 in 2015.  The increase in income tax expense was due to a substantial increase in income before income taxes between the periods.  Also impacting the provision during the six months ended June 30, 2016 was the aforementioned non-taxable gain on recognition of life insurance benefit.

Liquidity and Capital Resources Liquidity levels are adjusted in order to meet funding needs for deposit outflows, repayment of borrowings, and loan commitments and to meet asset/liability objectives.  Our primary sources of funds are customer deposits, customer repurchase agreements, proceeds from loan repayments, maturing securities and FHLB advances.  While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition.  At June 30, 2016, we had cash and interest-bearing deposits with banks of $54.1 million and securities available-for-sale with a fair value of $287.4 million.  If we require funds beyond the funds we are able to generate internally, we have $65.0 million in additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis based on our current FHLB stock holdings, unused federal funds lines of credit with various nonaffiliated financial institutions of $18.5 million.  Management believes the Company’s liquidity sources are adequate to meet its operational needs.

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The Company is subject to various regulatory capital requirements administered by federal banking agencies.  At June 30, 2016, the Company and its subsidiaries exceed the regulatory minimums and met the regulatory definition of well-capitalized based on the most recent regulatory definition as detailed below:

June 30, 2016:

	Tier 1 Capital to Total Average Assets		Common Equity Tier 1 Capital to Risk-Adjusted Total Assets		Tier 1 Capital to Risk- Adjusted Total Assets		Total Capital to Risk- Adjusted Total Assets
Consolidated	9.9	%	10.0	%	12.4	%	15.0	%
Your Community Bank	10.1	%	12.6	%	12.6	%	15.2	%
Minimum for banks to be well capitalized under regulatory capital requirements:	5.0	%	6.5	%	8.0	%	10.0	%

December 31, 2015:

	Tier 1 Capital to Total Average Assets		Common Equity Tier 1 Capital to Risk-Adjusted Total Assets		Tier 1 Capital to Risk- Adjusted Total Assets		Total Capital to Risk- Adjusted Total Assets
Consolidated	9.2	%	9.7	%	12.0	%	14.7	%
Your Community Bank	9.7	%	12.4	%	12.4	%	15.0	%
Minimum for banks to be well capitalized under regulatory capital requirements:	5.0	%	6.5	%	8.0	%	10.0	%

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and YCB on January 1, 2015, and include new minimum risk-based capital and leverage ratios.  These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and YCB opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%.  The phase-in of the capital conservation buffer requirement begins in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

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Off Balance Sheet Arrangements and Contractual Obligations

The Company uses off balance sheet financial instruments, such as commitments to make loans, credit lines and letters of credit to meet customer financing needs. These agreements provide credit or support the credit of others and usually have expiration dates but may expire without being used. In addition to credit risk, the Company also has liquidity risk associated with these commitments as funding for these obligations could be required immediately. The contractual amount of these financial instruments with off balance sheet risk was as follows at June 30, 2016:

	(In thousands)
Commitments to make loans	$	7,275
Unused lines of credit	209,641
Standby letters of credit	3,820
Total	$	220,736

Aggregate Contractual Obligations

As of June 30, 2016: (Dollars in thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Time deposits	$	275,882	$	166,136	$	67,728	$	36,881	$	5,137
Short-term borrowings	44,507		44,507		—		—		—
Other borrowings	106,927		32,249		15,240		1,500		57,938
Defined benefit plan	888		274		116		161		337
Lease commitments	7,524		1,208		1,829		1,507		2,980
Total	$	435,728	$	244,374	$	84,913	$	40,049	$	66,392

Time deposits represent certificates of deposit held by the Company.

Short-term borrowings consist of repurchase agreements of $44.5 million and note payable of $30,000.  The note payable represents amounts due for the participation in construction of a low income housing development project and is payable on demand.

Other borrowings consist of FHLB advances of $41.7 million, subordinated debentures of $32.7 million, subordinated debt of $25.0 million, and a term loan of $7.5 million.  FHLB advances represent the amounts that are due from the FHLB and consist of fixed rate advances.  Subordinated debentures represent the scheduled maturities of subordinated debentures issued to trusts formed by the Company in connection with the issuance of trust preferred securities.  Subordinated debt represents the scheduled maturities of subordinated debt issued by the Bank.  The term loan represents the scheduled maturities of holding company debt.

The defined benefit plan represents expected benefit payments to be paid to participants.

Lease commitments represent the total minimum lease payments under noncancelable operating leases, before considering renewal options that generally are present.

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PART I - ITEM 3

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Asset/liability management is the process of balance sheet control designed to ensure safety and soundness and to maintain liquidity and regulatory capital standards while maintaining acceptable net interest income.  Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates.  Management continually monitors interest rate and liquidity risk so that it can implement appropriate funding, investment, and other balance sheet strategies.  Management considers market interest rate risk to be our most significant ongoing business risk consideration.

We currently contract with an independent third party consulting firm to measure our interest rate risk position.  The consulting firm utilizes an earnings simulation model to analyze net interest income sensitivity.  Current balance sheet amounts, current yields and costs, corresponding maturity and repricing amounts and rates, other relevant information, and certain assumptions made by management are combined with gradual movements in interest rates of 200 basis points up at December 31, 2015 and June 30, 2016 within the model to estimate their combined effects on net interest income over a one-year horizon.  In 2008, the Federal Open Market Committee lowered its target for the federal funds rate to 0-25 bps.  A majority of our loans are indexed to the prime rate, therefore, the Company has excluded an evaluation of the effect on net interest income assuming a decrease in interest rates as further reductions in the prime rate are extremely unlikely.  We feel that using gradual interest rate movements within the model is more representative of future rate changes than instantaneous interest rate shocks.  Growth in amounts are not projected for any balance sheet category when constructing the model because of the belief that projected growth can mask current interest rate risk imbalances over the projected horizon.  We believe that the changes made to the model’s interest rate risk measurement process have improved the accuracy of results of the process, consequently giving better information on which to base asset and liability allocation decisions going forward.

Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are incorporated into the model.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.  We continually monitor and update the assumptions as new information becomes available.  Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, and actual variations from the managerial assumptions utilized under the model, as well as changes in market conditions and the application and timing of various management strategies.

The base scenario represents projected net interest income over a one year forecast horizon exclusive of interest rate changes to the simulation model.  Given a gradual 200 basis point increase in the projected yield curve used in the simulation model (Up 200 Scenario), we estimated that as of June 30, 2016 our net interest income would decrease by an estimated 1.1%, or $549,000, over the one year forecast horizon.  As of December 31, 2015, in the Up 200 Scenario we estimated that net interest income would decrease $467,000, over a one year forecast horizon ending December 31, 2015.

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The projected results are within our asset/liability management policy limits which states that the negative impact to net interest income should not exceed 7% in a 100 or 200 basis point increase or decrease in the projected yield curve over a one year forecast horizon.  The forecast results are heavily dependent on the assumptions regarding changes in deposit rates; we can minimize the reduction in net interest income in a period of rising interest rates to the extent that we can curtail raising deposit rates during this period.  We continue to explore transactions and strategies to both increase our net interest income and minimize our interest rate risk.

Our interest sensitivity profile at any point in time will be affected by a number of factors.  These factors include the mix of interest sensitive assets and liabilities as well as their relative repricing schedules.  It is also influenced by market interest rates, deposit growth, loan growth, and other factors.  The tables below illustrate our estimated annualized earnings sensitivity profile based on the above referenced asset/liability model as of June 30, 2016 and December 31, 2015, respectively.  The tables below are representative only and are not precise measurements of the effect of changing interest rates on our net interest income in the future.

The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of June 30, 2016 and ending on June 30, 2017:

	Interest Rate Sensitivity as of June 30, 2016:
	Base		Gradual Increase in Rates of 200 Basis Points
	(In thousands)
Projected interest income:
Loans	$	49,770	$	52,236
Investments	7,523		7,788
FHLB and FRB stock	180		180
Interest-bearing deposits in other financial institutions	35		107
Total interest Income	57,508		60,311
Projected interest expense:
Deposits	2,430		4,801
Short-term borrowings	99		586
Other borrowings	4,050		4,544
Total interest expense	6,579		9,931
Net interest income	$	50,929	$	50,380
Change from base			(549		)
Percent change from base			(1.1		)%

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The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of December 31, 2015 and ending December 31, 2016:

	Interest Rate Sensitivity as of December 31, 2015
	Base		Gradual Increase in Rates of 200 Basis Points
Projected interest income:
Loans	$	48,447	$	50,733
Investments	9,328		9,490
FHLB and FRB stock	165		165
Interest-bearing deposits in other financial Institutions	37		119
Total interest income	57,977		60,507
Projected interest expense:
Deposits	2,298		4,561
Short-term borrowings	104		639
Other borrowings	3,987		4,186
Total interest expense	6,389		9,386
Net interest income	$	51,588	$	51,121
Change from base			$	(467	)
% Change from base			(0.9		)%

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PART I — ITEM 4

CONTROLS AND PROCEDURES

With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Your Community Bankshares, Inc. (“YCBI”), YCBI’s management has evaluated the effectiveness of YCBI’s disclosure controls and procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, YCBI’s Chief Executive Officer and Chief Financial Officer have concluded that YCBI’s disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by YCBI in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by YCBI in the reports that it files or submits under the Exchange Act is accumulated and communicated to YCBI’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in YCBI’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, YCBI’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

There are various claims and lawsuits in which the Company or its subsidiaries are periodically involved, such as claims to enforce liens, foreclosure or condemnation proceedings on properties in which the Banks hold mortgages or security interests, claims involving the making and servicing of real property loans and other issues incidental to the Banks’ business.  In the opinion of management, no material loss is expected from any such pending claims or lawsuits.

Item 1A.  Risk Factors

In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not purchase its common shares during the six months ended June 30, 2016.

Item 6.  Exhibits

Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index of this Form 10-Q and are filed as a part of this report.

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SIGNATURES

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

	YOUR COMMUNITY BANKSHARES, INC.
	(Registrant)
Dated: August 9, 2016	By:	/s/ James D. Rickard
		James D. Rickard
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated: August 9, 2016	By:	/s/ Paul. A. Chrisco
		Paul A. Chrisco
		Executive Vice-President and Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX

YOUR COMMUNITY BANKSHARES, INC.

EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Merger dated May 3, 2016 by and between Wesbanco, Inc., Wesbanco Bank, Inc., Your Community Bankshares, Inc. and Your Community Bank (incorporated by reference to Form 8-K of Wesbanco, Inc. dated May 3, 2016).
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*	The following financial information from Your Community Bankshares, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed with the SEC on August 9, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2016 and June 30, 2015, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and June 30, 2015 (iv) Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2016, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015 and (vi) Notes to Consolidated Financial Statements.

*Pursuant to Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 of the Securities Act of 1933 and Section 12 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

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