Your Community Bankshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - Your Community Bankshares, Inc.	a15-15453_1ex31d1.htm
EX-32.2 - EX-32.2 - Your Community Bankshares, Inc.	a15-15453_1ex32d2.htm
EX-32.1 - EX-32.1 - Your Community Bankshares, Inc.	a15-15453_1ex32d1.htm
EX-31.2 - EX-31.2 - Your Community Bankshares, Inc.	a15-15453_1ex31d2.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

o TRANSITION 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

Community Bank Shares of Indiana, Inc.

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 Companyo

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: 5,405,079 shares of common stock were outstanding as of August 7, 2015.

Table of Contents

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	50

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

Item 4.	Controls and Procedures	67

Part II	Other Information

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 6.	Exhibits	68

Signatures		69

Exhibit Index		70

Table of Contents

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2015			December 31, 2014
	(In thousands, except share data)
ASSETS
Cash and due from financial institutions	$	28,947		$	12,872
Interest-bearing deposits in other financial institutions	32,383			6,808
Deposit for partial redemption of acquiree’s preferred stock and unpaid dividend	—			11,341
Securities available for sale	398,292			202,177
Loans held for sale	390			—
Loans, net of allowance for loan losses of $8,045 and $6,465	996,971			597,110
Federal Home Loan Bank and Federal Reserve stock	3,807			4,964
Accrued interest receivable	5,083			3,152
Premises and equipment, net	31,462			18,124
Premises and equipment held for sale	5,635			—
Company owned life insurance	33,348			22,058
Goodwill	6,375			—
Core deposit intangible	5,634			682
Foreclosed and repossessed assets	8,354			4,431
Other assets	30,647			5,027
Total Assets	$	1,587,328		$	888,746

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non interest-bearing	$	292,179		$	200,142
Interest-bearing	1,014,357			450,802
Total deposits	1,306,536			650,944
Short-term borrowings	42,989			45,818
Subscription agreement proceeds in escrow	—			20,774
Other borrowings	83,000			67,000
Accrued interest payable	703			158
Other liabilities	8,741			4,504
Total liabilities	1,441,969			789,198

Commitments and contingent liabilities	—			—

Shareholders’ equity
Preferred stock, without par value; 5,000,000 authorized; 28,000 shares issued and outstanding in 2015 and 2014; aggregate liquidation preference of $28,000	28,000			28,000
Common stock, $.10 par value per share; 10,000,000 shares authorized; 5,776,244 and 3,863,937 shares issued in 2015 and 2014, respectively; 5,405,079 and 3,447,826 outstanding in 2015 and 2014, respectively	578			386
Additional paid-in capital	89,791			44,421
Retained earnings	33,228			32,110
Accumulated other comprehensive income	150			1,809
Treasury stock, at cost (2015- 371,165 shares, 2014- 416,111 shares)	(6,388		)	(7,178		)
Total shareholders’ equity	145,359			99,548
Total Liabilities and Shareholders’ Equity	$	1,587,328		$	888,746

See accompanying notes to consolidated financial statements.

Table of Contents

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(In thousands, except share data)
Interest and dividend income
Loans, including fees	$	12,787		$	7,098		$	25,310		$	13,722
Taxable securities	1,320			489			2,660			1,050
Tax-exempt securities	881			751			1,624			1,488
Federal Home Loan Bank and Federal Reserve dividends	69			63			164			116
Interest-bearing deposits in other financial institutions	49			9			104			35
Interest and dividend income	15,106			8,410			29,862			16,411

Interest expense
Deposits	580			267			1,154			520
Short-term borrowings	23			23			45			53
Other borrowings	589			183			1,265			376
Interest expense	1,192			473			2,464			949
Net interest income	13,914			7,937			27,398			15,462

Provision for loan losses	2,155			190			2,261			472

Net interest income after provision for loan losses	11,759			7,747			25,137			14,990

Non-interest income
Service charges on deposit accounts	1,669			835			3,060			1,627
Commission income	50			48			97			96
Net gain on sales of available for sale securities	—			1			51			296
Mortgage banking income	74			28			191			44
Earnings on company owned life insurance	253			168			505			332
Interchange income	476			330			920			600
Other income	130			130			240			222
Non-interest income	2,652			1,540			5,064			3,217

Non-interest expense
Salaries and employee benefits	5,086			3,366			14,205			6,733
Occupancy	1,200			549			2,827			1,249
Equipment	472			301			1,053			628
Data processing	921			663			2,735			1,329
Marketing and advertising	142			89			352			195
Legal and professional service fees	853			738			2,411			1,158
FDIC insurance premiums	372			129			645			293
Foreclosed assets, net	(95		)	53			249			191
Other expense	1,524			641			3,922			1,304
Total non-interest expense	10,475			6,529			28,399			13,080
Income before income taxes	3,936			2,758			1,802			5,127

Income tax expense	371			610			(827		)	867

Net income	3,565			2,148			2,629			4,260

Preferred stock dividend	(109		)	(109		)	(219		)	(219		)

Net income available to common shareholders	$	3,456		$	2,039		$	2,410		$	4,041

Table of Contents

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(In thousands, except share data)
Earnings per common share:
Basic	$	0.64	$	0.59	$	0.45	$	1.18
Diluted	$	0.64	$	0.59	$	0.44	$	1.17

Dividends per common share	$	0.12	$	0.12	$	0.24	$	0.24

See accompanying notes to consolidated financial statements.

Table of Contents

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,
	2015			2014			2015			2014
	(in thousands)
Net income	$	3,565		$	2,148		$	2,629		$	4,260

Other comprehensive income (loss), net of tax
Unrealized gain on securities:
Unrealized gain (loss) arising during the period	(5,500		)	2,116			(2,461		)	4,045
Reclassification adjustment for gains included in net income	—			(1		)	(51		)	(296		)
Net unrealized gains (losses)	(5,500		)	2,115			(2,512		)	3,749
Tax effect	1,871			(711		)	855			(1,266		)
Net of tax	(3,629		)	1,404			(1,657		)	2,483

Defined benefit pension plans:
Net gain (loss) arising during the period	(13		)	16			(3		)	6
Tax effect	4			(5		)	1			(2		)
Net of tax	(9		)	11			(2		)	4

Total other comprehensive income (loss)	(3,638		)	1,415			(1,659		)	2,487

Comprehensive income (loss)	$	(73	)	$	3,563		$	970		$	6,747

See accompanying notes to consolidated financial statements.

Table of Contents

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Preferred Stock			Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total Shareholders’ Equity
Balance, January 1, 2015	$	28,000		$	386	$	44,421		$	32,110		$	1,809		$	(7,178	)	$	99,548
Net income	—			—		—			2,629			—			—			2,629
Other comprehensive loss	—			—		—			—			(1,659		)	—			(1,659		)
Assumption of First Financial Service Corporation’s preferred stock	12,309			—		—			—			—			—			12,309
Redemption of preferred stock	(12,309		)	—		—			—			—			—			(12,309		)
Issuance of common shares for acquisition of First Financial Service Corporation	—			80		21,446			—			—			—			21,526
Issuance of common shares	—			112		23,656			—			—			—			23,768
Dividends declared on common stock ($0.24 per share)	—			—		—			(1,292		)	—			—			(1,292		)
Dividends on preferred stock	—			—		—			(219		)	—			—			(219		)
Issuance of treasury stock under dividend reinvestment plan	—			—		37			—			—			63			100
Issuance of stock award shares	—			—		(384		)	—			—			273			(111		)
Stock options exercised	—			—		119			—			—			454			573
Stock award expense	—			—		441			—			—			—			441
Tax benefit from vesting of stock award shares	—			—		55			—			—			—			55
Balance, June 30, 2015	$	28,000		$	578	$	89,791		$	33,228		$	150		$	(6,388	)	$	145,359

See accompanying notes to consolidated financial statements.

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PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2015			2014
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,629		$	4,260
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	2,261			472
Depreciation and amortization	(459		)	945
Net amortization of securities	1,002			240
Net gain on sales of available for sale securities	(51		)	(296		)
Mortgage loans originated for sale	(11,192		)	(1,985		)
Proceeds from mortgage loan sales	12,767			1,847
Net gain on sales of mortgage loans	(191		)	(40		)
Earnings on company owned life insurance	(505		)	(332		)
Stock award compensation expense	441			201
Net (gain) loss on disposition of premises and equipment	(171		)	3
Net (gain) loss on disposition of foreclosed and repossessed assets	65			(53		)
Net change in:
Accrued interest receivable	(292		)	5
Accrued interest payable	(360		)	(19		)
Other assets	(1,345		)	933
Other liabilities	(4,841		)	1,591
Net cash from operating activities	(242		)	7,772
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of First Financial Service Corporation, net	12,979			—
Net change in interest-bearing deposits	38,422			(7,831		)
Available for sale securities:
Sales	38,877			32,757
Purchases	(42,001		)	(28,886		)
Maturities, prepayments and calls	27,126			7,230
Loan originations and payments, net	(5,831		)	(28,359		)
Proceeds from the sale of foreclosed and repossessed assets	8,754			1,289
Purchases of premises and equipment	(930		)	(536		)
Proceeds from the sale of premises and equipment	191			—
Additions to foreclosed and repossessed assets	—			(37		)
Redemption of Federal Reserve and FHLB Stock	5,253			—
Purchase of Federal Reserve and FHLB stock	(16		)	(9		)
Net cash from investing activities	82,824			(24,382		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	(48,175		)	39,990
Net change in short-term borrowings	(2,829		)	(8,263		)
Proceeds from issuance of other borrowings	—			110,000
Repayment of other borrowings	(10,846		)	(120,000		)
Taxes paid on stock award shares for employees	(111		)	(267		)
Proceeds from stock options exercised	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		)	(181		)
Cash dividends paid on common shares	(1,192		)	(712		)
Net cash from financing activities	(66,507		)	20,567
Net change in cash and due from financial institutions	16,075			3,957
Cash and due from financial institutions at beginning of period	12,872			15,393
Cash and due from financial institutions at end of period	$	28,947		$	19,350

Table of Contents

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2015		2014
	(In thousands)
Supplemental cash flow information:
Interest paid	$	1,603	$	968
Income taxes paid, net of refunds	—		345

Supplemental noncash disclosures:
Transfer from loans to foreclosed and repossessed assets	10,197		1,240
Issuance of treasury shares under dividend reinvestment plan	63		80
Issuance of treasury shares for net settlement of stock options	63		29
Sale and financing of foreclosed and repossessed assets	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		110

See accompanying notes to consolidated financial statements.

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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 subsidiaries are Your Community Bank (“Your Community Bank” or “YCB”), and The Scott County State Bank (“Scott County State Bank”). YCB and SCSB (YCB and SCSB are at times collectively referred to herein as the “Banks”) are state-chartered commercial banks headquartered in New Albany, Indiana and Scottsburg, Indiana, respectively, and are both 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. Scott County State Bank is also regulated by the Federal Reserve. 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 corporation 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”). 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, 2015, the results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014. 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, 2014. The consolidated financial statements include our accounts and our subsidiaries’ accounts. All material intercompany balances and transactions have been eliminated in consolidation.

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Acquisition

On January 1, 2015, the Company acquired First Financial Service Corporation (“FFKY”) and its wholly-owned subsidiary, First Federal Savings Bank of Elizabethtown (“FFSB”). FFKY was headquartered in Elizabethtown, Kentucky with $774.1 million in total assets and operated 17 financial centers. The acquisition expanded the Company’s presence into central Kentucky with minimal overlap of its existing market footprint.

The total purchase price for FFKY was $21.9 million, consisting of $423,000 of cash and the issuance of 791,357 shares of the Company’s common stock valued at $21.5 million. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $3.0 million of transaction and integration costs associated with the acquisition were expensed as incurred. Based on the initial preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, $7.5 million of the purchase price was allocated to goodwill which is not considered deductible for tax purposes.

During the quarter ended June 30, 2015, management obtained information regarding the initial valuations of certain assets which were adjusted to reflect the revised estimated fair value resulting in adjusted goodwill of $6.4 million. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the FFKY acquisition is allocated as follows (in thousands):

	As Previously Reported		Recast Adjustments			As Recast
Cash and cash equivalents	$	13,401	$	—		$	13,401
Interest-bearing deposits in other financial institutions	63,997		—			63,997
Securities available for sale	223,579		—			223,579
Loans held for sale	1,774		—			1,774
Loans	402,259		1,802			404,061
Federal Home Loan Bank Stock	4,080		—			4,080
Accrued interest receivable	1,639		—			1,639
Premises and equipment	20,216		(500		)	19,716
Company owned life insurance	10,785		—			10,785
Foreclosed and repossessed assets	3,228		127			3,355
Core deposit intangible	5,667		—			5,667
Deferred tax assets	15,290		(260		)	15,030
Other assets	7,786		—			7,786
Total assets acquired	773,701		1,169			774,870

Deposits	704,784		—			704,784
Other borrowings	26,489		—			26,489
Accrued interest payable	6,639		—			6,639
Other liabilities	9,076		—			9,076
Total liabilities assumed	746,988		—			746,988

Liquidation amount of preferred stock	12,309		—			12,309

Total identifiable net assets	14,404		1,169			15,573

Goodwill	7,544		(1,169		)	6,375

	$	21,948				$	21,948

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Acquisition (Continued)

The following table presents unaudited pro-forma information below for the three and six month periods ended June 30, 2015 and 2014 and gives effect to the FFKY acquisition as if it had occurred on January 1, 2014. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisition occurred as of that date. The 2015 pro-forma information was adjusted to exclude acquisition-related costs incurred during the period while 2014 was adjusted to include the costs. Additionally, adjustments were made for interest income on loans and securities, interest expense on deposits and other borrowings assumed, amortization of intangibles arising from the transaction, and the related income tax effects.

	Three Months Ended June 30				Six Months Ended June 30
	2015		2014		2015		2014
	(In thousands except per share amounts)

Net interest income	$	13,620	$	14,506	$	26,907	$	28,689

Net income	$	3,482	$	650	$	4,772	$	902

Net income available to common shareholders	$	3,373	$	114	$	4,553	$	(197	)

Basic earnings per share	$	0.63	$	0.02	$	0.85	$	(0.04	)

Diluted earnings per share	$	0.62	$	0.02	$	0.84	$	(0.04	)

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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, 2015:
Securities available for sale:
State and municipal	$	112,340	$	3,993	$	(982	)	$	115,351
Residential mortgage-backed agencies issued by U.S. Government sponsored entities	246,598		607		(2,526		)	244,679
U.S. Government sponsored entities and agencies	34,802		57		(216		)	34,643
Corporate	3,359		14		—			3,373
Mutual funds	250		—		(4		)	246
Total securities available for sale	$	397,349	$	4,671	$	(3,728	)	$	398,292

December 31, 2014:
Securities available for sale:
State and municipal	$	80,623	$	5,002	$	(174	)	$	85,451
Residential mortgage-backed agencies issued by U.S. Government sponsored entities	108,377		690		(1,750		)	107,317
U.S. Government sponsored entities and agencies	9,472		8		(319		)	9,161
Mutual funds	250		—		(2		)	248
Total securities available for sale	$	198,722	$	5,700	$	(2,245	)	$	202,177

Sales of available for sale securities were as follows.

	Three Months Ended June 30					Six Months Ended June 30
	2015		2014			2015			2014
	(In thousands)
Proceeds	$	—	$	8,947		$	38,877		$	32,757
Gross gains	—		44			366			339
Gross losses	—		(43		)	(315		)	(43		)

The tax provision applicable to these net realized gains amounted to $0 and $17,000 for the three and six months ended June 30, 2015, respectively, and $0 and $101,000 for the three and six months ended June 30, 2014, respectively.

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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, 2015 were as follows. Mortgage-backed agencies and mutual funds which do not have a single maturity date are shown separately.

	June 30, 2015
	Amortized Cost		Fair Value
	(In thousands)
Within one year	$	946	$	959
One to five years	13,000		13,216
Five to ten years	48,093		49,599
Beyond ten years	88,462		89,593
Residential mortgage-backed securities issued by U.S. Government sponsored entities	246,598		244,679
Mutual funds	250		246
Total	$	397,349	$	398,292

Securities with unrealized losses at June 30, 2015 and December 31, 2014, 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, 2015
State and municipal	$	37,778	$	(808	)	$	2,912	$	(174	)	$	40,690	$	(982	)
Residential mortgage-backed securities issued by U.S. Government sponsored entities	119,965		(957		)	49,303		(1,569		)	169,268		(2,526		)
U.S. Government sponsored entities and agencies	13,604		(44		)	8,844		(172		)	22,448		(216		)
Mutual Funds	246		(4		)	—		—			246		(4		)
Total temporarily impaired	$	171,593	$	(1,813	)	$	61,059	$	(1,915	)	$	232,652	$	(3,728	)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(In thousands)
December 31, 2014
State and municipal	$	1,715	$	(8	)	$	6,786	$	(166	)	$	8,501	$	(174	)
Residential mortgaged-backed securities issued by U.S. Government sponsored agencies	3,443		(20		)	55,224		(1,730		)	58,667		(1,750		)
U.S. Government sponsored entities and agencies	—		—			8,699		(319		)	8,699		(319		)
Mutual funds	—		—			248		(2		)	248		(2		)
Total temporarily impaired	$	5,158	$	(28	)	$	70,957	$	(2,217	)	$	76,115	$	(2,245	)

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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. Investment securities are generally evaluated for OTTI under FASB ASC 320-10.

In determining OTTI under the FASB ASC 320-10 model, 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, 2015, the Company’s security portfolio consisted of 297 securities, 159 of which were in an unrealized loss position. The unrealized losses are related to the Company’s state and municipal, residential mortgage-backed securities issued by U.S. Government sponsored entities and agencies, and U.S. Government sponsored entities and agencies, as discussed below.

State and Municipal

At June 30, 2015 the Company had approximately $40.7 million of state and municipal securities with an unrealized loss of $982,000. Of the 268 state and municipal securities in the Company’s portfolio, 266 had an investment grade rating as of June 30, 2015 while two 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, 2015.

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

At June 30, 2015, 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, 2015.

U.S. Government sponsored entities and agencies

At June 30, 2015, the unrealized losses in the Company’s U.S. Government sponsored entities and agencies securities portfolio were attributed to changes in interest rates and liquidity, and not due to credit quality. Because the company does not have the intent to sell these securities and it is not likely that they will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired as of June 30, 2015.

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Loans

Loans at June 30, 2015 and December 31, 2014 consisted of the following:

	June 30, 2015			December 31, 2014
	(In thousands)
Commercial	$	168,370		$	123,727
Construction	87,153			42,848
Commercial real estate:
Owner occupied nonfarm/residential	156,932			112,405
Other nonfarm/residential	188,746			100,632
Residential real estate:
Secured by first liens	309,019			183,837
Home equity	73,593			34,850
Consumer	21,203			5,276
Subtotal	1,005,016			603,575
Less:
Allowance for loan losses	(8,045		)	(6,465		)
Loans, net	$	996,971		$	597,110

During 2015 and 2014, 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.

As discussed under Footnote 2 “Acquisition”, the above loan balances include loans purchased in the First Financial Service Corporation acquisition. The composition of loans acquired as of June 30, 2015 is as follows:

	June 30, 2015
	(In thousands)
Commercial	$	21,201
Construction	33,681
Commercial real estate:
Owner occupied nonfarm/residential	42,765
Other nonfarm/residential	81,905
Residential real estate:
Secured by first liens	122,925
Home equity	38,574
Consumer	13,666
Total Loans	$	354,717

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Loans (Continued)

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, 2015		December 31, 2014
	(In thousands)
Commercial	$	493	$	113
Construction	7,106		35
Commercial Real Estate	31,384		3,124
Residential Real Estate	14,614		4,890
Consumer	11		—
Carrying amount	$	53,608	$	8,162

There was no associated allowance for loan losses as of June 30, 2015 or December 31, 2014 for purchased credit impaired loans.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Balance, beginning of period	$	1,754		$	491		$	306		$	545
New loans purchased	—			—			1,632			—
Accretion of income	(620		)	(34		)	(804		)	(62		)
Reclassifications from nonaccretable difference	315			419			315			419
Disposals	—			—			—			(26		)
Balance, end of period	$	1,449		$	876		$	1,449		$	876

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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, 2015 and 2014 (in thousands):

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

Three Months Ended June 30, 2014:

	Commercial			Construction			Commercial Real Estate			Residential Real Estate			Consumer			Total

Beginning balance	$	1,948		$	2,460		$	1,374		$	2,523		$	73		$	8,378
Provision for loan losses	(227		)	(19		)	6			404			26			190
Loans charged-off	—			—			(23		)	(135		)	(52		)	(210		)
Recoveries	67			—			21			8			27			123
Ending balance	$	1,788		$	2,441		$	1,378		$	2,800		$	74		$	8,481

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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, 2015 and 2014 (in thousands):

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

Six Months Ended June 30, 2014:

	Commercial			Construction		Commercial Real Estate			Residential Real Estate			Consumer			Total

Beginning balance	$	1,757		$	2,210	$	1,565		$	2,383		$	94		$	8,009
Provision for loan losses	(58		)	164		(259		)	587			38			472
Loans charged-off	(1		)	—		(23		)	(186		)	(111		)	(321		)
Recoveries	90			67		95			16			53			321
Ending balance	$	1,788		$	2,441	$	1,378		$	2,800		$	74		$	8,481

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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, 2015 and December 31, 2014 (in thousands):

June 30, 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	$	158	$	801	$	69	$	1,000	$	9	$	2,037
Collectively evaluated for impairment	1,683		1,411		1,215		1,567		132		6,008
Acquired with deteriorated credit quality	—		—		—		—		—		—
Total ending allowance balance	$	1,841	$	2,212	$	1,284	$	2,567	$	141	$	8,045

Loans:
Loans individually evaluated for impairment	$	2,419	$	5,323	$	1,772	$	5,650	$	10	$	15,174
Loans collectively evaluated for impairment	165,458		74,724		312,522		362,348		21,182		936,234
Loans acquired with deteriorated credit quality	493		7,106		31,384		14,614		11		53,608
Total ending loans balance	$	168,370	$	87,153	$	345,678	$	382,612	$	21,203	$	1,005,016

December 31, 2014:

	Commercial		Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	65	$	790	$	72	$	736	$	9	$	1,672
Collectively evaluated for impairment	905		1,202		1,196		1,397		93		4,793
Acquired with deteriorated credit quality	—		—		—		—		—		—
Total ending allowance balance	$	970	$	1,992	$	1,268	$	2,133	$	102	$	6,465

Loans:
Loans individually evaluated for impairment	$	4,251	$	6,105	$	1,822	$	4,459	$	10	$	16,647
Loans collectively evaluated for impairment	119,363		36,708		208,091		209,338		5,266		578,766
Loans acquired with deteriorated credit quality	113		35		3,124		4,890		—		8,162
Total ending loans balance	$	123,727	$	42,848	$	213,037	$	218,687	$	5,276	$	603,575

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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, 2015 (in thousands):

June 30, 2015:

	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	$	2,885	$	1,026	$	—	$	3,758	$	2
Construction	2,420		1,646		—		3,150		16
Commercial real estate:
Owner occupied nonfarm/nonresidential	1,014		1,014		—		798		25
Other nonfarm/nonresidential	539		539		—		777		14
Residential real estate:
Secured by first liens	2,010		1,907		—		2,085		6
Home equity	102		102		—		39		—
Consumer	1		1		—		1		—
Total	$	8,971	$	6,235	$	—	$	10,608	$	63

With an allowance recorded:
Commercial	$	1,393	$	1,393	$	158	$	533	$	—
Construction	3,677		3,677		801		3,720		68
Commercial real estate:
Owner occupied nonfarm/nonresidential	219		219		69		207		4
Other nonfarm/nonresidential	—		—		—		—		—
Residential real estate:
Secured by first liens	2,982		2,903		771		2,126		33
Home equity	738		738		229		738		16
Consumer	9		9		9		9		—
Total	$	9,018	$	8,939	$	2,037	$	7,333	$	121

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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, 2014:

December 31, 2014:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial	$	4,409	$	4,138	$	—
Construction	5,458		2,357		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	742		742		—
Other nonfarm/nonresidential	900		900		—
Residential real estate:
Secured by first liens	1,877		1,800		—
Home equity	62		14		—
Consumer	1		1		—
Total	$	13,449	$	9,952	$	—

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With an allowance recorded:
Commercial	$	113	$	113	$	65
Construction	3,748		3,748		790
Commercial real estate:
Owner occupied nonfarm/nonresidential	180		180		72
Other nonfarm/nonresidential	—		—		—
Residential real estate:
Secured by first liens	1,983		1,905		519
Home equity	740		740		217
Consumer	9		9		9
Total	$	6,773	$	6,695	$	1,672

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.

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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, 2015:

	Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With no related allowance recorded:
Commercial	$	3,567	$	—
Construction	3,546		8
Commercial real estate:
Owner occupied nonfarm/nonresidential	826		15
Other nonfarm/nonresidential	715		7
Residential real estate:
Secured by first liens	2,227		2
Home equity	51		—
Consumer	1		—
Total	$	10,933	$	32

	Average Recorded Investment		Interest Income Recognized and Received
	(In thousands)
With an allowance recorded:
Commercial	$	744	$	—
Construction	3,707		34
Commercial real estate:
Owner occupied nonfarm/nonresidential	220		2
Other nonfarm/nonresidential	—		—
Residential real estate:
Secured by first liens	2,237		16
Home equity	737		8
Consumer	9		—
Total	$	7,654	$	60

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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, 2014:

	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	$	1,255	$	23	$	1,350	$	23
Construction	2,330		8		2,313		15
Commercial real estate:
Owner occupied nonfarm/nonresidential	859		12		807		24
Other nonfarm/nonresidential	1,442		2		1,354		5
Residential real estate:
Secured by first liens	2,456		3		2,457		6
Home equity	138		1		345		2
Consumer	4		—		11		—
Total	$	8,484	$	49	$	8,637	$	75

With an allowance recorded:
Commercial	$	3,013	$	1	$	2,991	$	1
Construction	4,739		40		4,764		82
Commercial real estate:
Owner occupied nonfarm/nonresidential	184		2		186		4
Other nonfarm/nonresidential	—		—		—		—
Residential real estate:
Secured by first liens	2,140		20		2,018		32
Home equity	872		11		932		22
Consumer	24		—		29		—
Total	$	10,972	$	74	$	10,920	$	141

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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, 2015 and December 31, 2014:

	June 30, 2015				December 31, 2014
	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Commercial	$	2,129	$	—	$	3,917	$	—
Construction	2,951		—		2,045		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	281		—		90		—
Other nonfarm/nonresidential	1,920		—		—		—
Residential real estate:
Secured by first liens	4,103		220		1,218		—
Home equity	662		—		184		—
Consumer	59		—		81		—
Total	$	12,105	$	220	$	7,535	$	—

Of the loans on non-accrual status as of June 30, 2015, $6.0 million were acquired from First Financial Service Corporation.

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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, 2015 and December 31, 2014 by class of loans:

June 30, 2015:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Commercial	$	378	$	—	$	2,129	$	2,507	$	165,863	$	—
Construction	—		35		2,951		2,986		84,167		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	72		—		281		353		156,579		—
Other nonfarm/nonresidential	175		—		1,920		2,095		186,651		—
Residential real estate:
Secured by first liens	1,253		1,031		4,182		6,466		302,553		220
Home equity	622		119		662		1,403		72,190		—
Consumer	213		52		60		325		20,878		—
Total	$	2,713	$	1,237	$	12,185	$	16,135	$	988,881	$	220
Loans included in totals above acquired from First Financial Service Corporation	$	870	$	560	$	6,114	$	7,544	$	347,173	$	—

December 31, 2014:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Commercial	$	179	$	13	$	3,917	$	4,109	$	119,618	$	—
Construction	62		—		2,045		2,107		40,741		—
Commercial real estate:
Owner occupied nonfarm/nonresidential	—		—		90		90		112,315		—
Other nonfarm/nonresidential	—		—		—		—		100,632		—
Residential real estate:
Secured by first liens	2,817		1,171		1,218		5,206		178,631		—
Home equity	341		12		184		538		34,312		—
Consumer	16		—		81		97		5,179		—
Total	$	3,416	$	1,196	$	7,535	$	12,147	$	591,428	$	—

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Loans (Continued)

Troubled Debt Restructurings:

Troubled debt restructurings totaled $17.4 million and $11.9 million at June 30, 2015 and at December 31, 2014. Of the total TDRs outstanding at June 30, 2015, $7.2 million were acquired from First Financial Service Corporation that have been modified by the Company subsequent to acquisition. There were $2.6 million and $4.1 million TDRs on non-accrual as of June 30, 2015 and December 31, 2014. 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, 2015 and December 31, 2014.

The detail of outstanding TDRs by class and modification type as of June 30, 2015 and December 31, 2014 follows (in thousands):

June 30, 2015:

	Recorded Investment		Allowance for Loan Losses Allocated
Commercial:
Extended maturity	$	2,134	$	47
Multiple modifications	28		18
Construction:
Interest rate reduction	1,386		180
Extended maturity	2,971		—
Interest only payments	556		—
Multiple modifications	2,522		405
Commercial real estate:
Owner occupied nonfarm/nonresidential
Extended maturity	180		—
Interest only payments	174		67
Other nonfarm/nonresidential
Extended maturity	3,269		—
Multiple modifications	343		—
Residential real estate:
Secured by first liens
Interest rate reduction	320		138
Extended maturity	2,012		40
Multiple modifications	859		91
Home equity
Multiple modifications	638		214
Total	$	17,392	$	1,200

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Loans (Continued)

December 31, 2014:

	Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
Commercial:
Extended maturity	$	3,902	$	—
Multiple modifications	18		—
Construction:
Interest rate reduction	1,386		180
Extended maturity	115		—
Interest only payments	556		—
Multiple modifications	2,559		393
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only payments	180		72
Other nonfarm/nonresidential
Extended maturity	551		—
Multiple modifications	348		—
Residential real estate:
Secured by first liens
Interest rate reduction	907		140
Extended maturity	477		44
Multiple modifications	250		30
Home equity
Multiple modifications	648		209
Total	$	11,897	$	1,068

Table of Contents

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, 2015 and December 31, 2014 (in thousands):

June 30, 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
Commercial:
Extended maturity	$	—	$	1,790	$	1,790	$	344
Multiple modifications	—		—		—		28
Construction:
Interest rate reduction	—		—		—		1,386
Extended maturity	—		—		—		2,971
Interest only payments	—		556		556		—
Multiple modifications	—		—		—		2,522
Commercial real estate:
Owner occupied nonfarm/nonresidential
Extended maturity	—		—		—		180
Interest only payments	—		—		—		174
Other nonfarm/nonresidential
Extended maturity	—		—		—		3,269
Multiple modifications	—		—		—		343
Residential:
Secured by first liens
Interest rate reduction	—		—		—		320
Extended maturity	—		—		—		2,012
Multiple modifications	220		—		220		639
Home equity
Multiple modifications	—		—		—		638
Total	$	220	$	2,346	$	2,566	$	14,826

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4. Loans (Continued)

December 31, 2014:

	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	$	—	$	3,558	$	3,558	$	344
Multiple modifications	—		—		—		18
Construction:
Interest rate reduction	—		—		—		1,386
Extended maturity	—		—		—		115
Interest only payments	—		556		556		—
Multiple modifications	—		—		—		2,559
Commercial real estate:
Owner occupied nonfarm/nonresidential
Interest only	—		—		—		180
Other nonfarm/nonresidential
Extended maturity	—		—		—		551
Multiple modifications	—		—		—		348
Residential:
Secured by first liens
Interest rate reduction	583		—		583		324
Extended maturity	—		—		—		477
Multiple modifications	220		—		220		30
Home equity
Multiple modifications	—		—		—		648
Total	$	803	$	4,114	$	4,917	$	6,980

There were no trouble debt restructurings that defaulted within 12 months of modifications during the three and six months ended June 30, 2015 and June 30, 2014.

During the quarter and six months ended June 30, 2015, 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.

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4. Loans (Continued)

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2015 and 2014 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	—

June 30, 2014:
Residential:
Secured by first liens
Multiple modifications	1	31	31	31	—

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4. Loans (Continued)

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2015 and 2014 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:
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		—

June 30, 2014:
Commercial:
Interest only payments	1	$	556	$	556	$	556	$	—
Residential:
Secured by first liens
Multiple modifications	1	31		31		31		—

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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, 2015 and December 31, 2014 is as follows:

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4. Loans (Continued)

June 30, 2015:

	Criticized		Classified		Pass		Total
	(In thousands)
Commercial	$	6,814	$	3,988	$	157,568	$	168,370
Construction	3,137		12,399		71,617		87,153
Commercial real estate:
Owner occupied nonfarm/residential	4,685		8,673		143,574		156,932
Other nonfarm/residential	13,088		20,619		155,039		188,746
Residential real estate:
Secured by first liens	21,314		10,144		277,561		309,019
Home equity	514		2,194		70,885		73,593
Consumer	3		104		21,096		21,203
Total	$	49,555	$	58,121	$	897,340	$	1,005,016

Loans included in totals above acquired First Financial Service Corporation	$	4,989	$	42,203	$	307,525	$	354,717

December 31, 2014:

	Criticized		Classified		Pass		Total
	(In thousands)
Commercial	$	6,394	$	3,930	$	113,403	$	123,727
Construction	3,476		6,105		33,267		42,848
Commercial real estate:
Owner occupied nonfarm/residential	7,144		742		104,519		112,405
Other nonfarm/residential	9,583		551		90,498		100,632
Residential real estate:
Secured by first liens	16,590		3,502		163,745		183,837
Home equity	647		802		33,401		34,850
Consumer	2		107		5,167		5,276
Total	$	43,836	$	15,739	$	544,000	$	603,575

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(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, 2015		December 31, 2014
	(In thousands)
Construction	$	1,577	$	1,407
Commercial real estate:
Owner occupied nonfarm/residential	708		2,036
Other nonfarm/residential	4,536		588
Residential real estate:
Secured by first liens	1,398		400
Consumer	135		—
	$	8,354	$	4,431

Foreclosed and repossessed asset activity was as follows for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended June 30						Six Months Ended June 30
	2015			2014			2015			2014
	(In thousands)
Balance as of January 1	$	15,818		$	6,334		$	4,431		$	5,988
Loans transferred to foreclosed and repossessed assets	711			263			10,197			1,240
Foreclosed and repossessed assets acquired from First Financial Service Corporation	—			—			3,228			—
Direct write-downs	(12		)	—			(75		)	—
Sales	(8,163		)	(568		)	(9,427		)	(1,199		)
Balance as of June 30	$	8,354		$	6,029		$	8,354		$	6,029

Expenses for the three and six months ended June 30, 2015 and 2014 related to foreclosed and repossessed assets include:

	Three Months Ended June 30						Six Months Ended June 30
	2015			2014			2015			2014
	(In thousands)
Net gain on sales	$	(21	)	$	(68	)	$	(10	)	$	(53	)
Direct write-downs	12			—			75			—
Operating expenses, net of rental income	(86		)	121			184			244
	$	(95	)	$	53		$	249		$	191

The Company was in process of foreclosure of residential real estate loans with outstanding balances of $2.0 million and $805,000 as June 30, 2015 and December 31, 2014, respectively.

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(Unaudited)

6. Deposits

Deposits at June 30, 2015 and December 31, 2014 consisted of the following:

	June 30, 2015		December 31, 2014
	(In thousands)

Demand (NOW)	$	318,134	$	124,625
Money market accounts	220,477		145,731
Savings	136,400		49,088
Time deposits $250,000 and over	47,906		26,018
Time deposits less than $250,000	291,440		105,340
Total interest bearing deposits	1,014,357		450,802
Total non-interest bearing deposits	292,179		200,142
Total deposits	$	1,306,536	$	650,944

7. Earnings Per Common Share

Earnings per common share were computed as follows:

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
	(In thousands, except for share and per share amounts)
Basic:
Net income	$	3,565		$	2,148		$	2,629		$	4,260
Preferred stock dividend	(109		)	(109		)	(219		)	(219		)
Net income available to common shareholders	$	3,456		$	2,039		$	2,410		$	4,041
Average shares outstanding	5,383,887			3,438,794			5,379,379			3,430,025
Net income per common share, basic	$	0.64		$	0.59		$	0.45		$	1.18

Diluted:
Net income available to common shareholders	$	3,456		$	2,039		$	2,410		$	4,041
Average shares:
Common shares outstanding for basic	5,383,887			3,438,794			5,379,379			3,430,025
Add: Dilutive effects of outstanding stock options	18,357			16,669			18,048			26,129
Add: Dilutive effects of outstanding stock awards	35,358			12,961			29,082			5,134
Average dilutive potential common shares	5,437,602			3,468,424			5,426,509			3,461,288
Net income per common share, diluted	$	0.64		$	0.59		$	0.44		$	1.17

No stock options were excluded from the calculation of diluted net income per common share for the three months ended June 30, 2015 and 2014. Stock options for 0 and 54,000 shares of common stock were excluded from the calculation of diluted net income per common share for the six months ended June 30, 2015 and 2014, respectively, because their effect was antidilutive.

No restricted share awards were excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2015 and 2014.

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8. Stock-Based Compensation Plans

Our stock award plan provides for the granting of both incentive and nonqualified stock options 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 our 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. We may grant stock options under the current plan for an additional 435,000 shares of common stock. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2015 and December 31, 2014 was $399,000 and $518,000, respectively. There was no remaining compensation cost related to unvested options as of June 30, 2015 and December 31, 2014. The Company did not recognize expense for stock options for the three and six months ended June 30, 2015 and 2014, respectively. The Company has options vested and expected to vest of 77,000 with aggregate intrinsic value of $399,000 and a weighted average remaining contractual term of 1.5 years as of June 30, 2015. As of December 31, 2014, the Company had options vested and expected to vest of 123,500 which had an aggregate intrinsic value of $518,000 and a weighted average remaining contractual term of 1.4 years. During the six months ended June 30, 2015, no options were granted or forfeited, 7,700 options expired, and 38,800 stock options were exercised. The Company received proceeds of $591,000 for the exercise of 23,300 stock options while the remainder were exercised using the cashless option, with the Company issuing net shares to the option holders.

For the three and six months ended June 30, 2015, we recognized $239,000 and $441,000 in expense for restricted stock units, respectively. During the three months ended June 30, 2015, we granted 65,000 restricted stock units while 300 units were forfeited. During the six months ended June 30, 2015, 66,800 restricted stock units were granted while 300 units were forfeited. The restricted stock units granted during the three months and six months ended June 30, 2015 had an aggregate fair value of $1.8 million and $1.9 million, respectively. Of the total awards granted during the six months ended June 30, 2015, 19,300 of awards vest in 2015, 17,150 vest in 2016, 13,550 vest in 2017, and 16,800 vest in 2018. The fair value of the restricted stock awards was calculated based on the Company’s stock price at the date of issuance. At June 30, 2015, there were 142,375 outstanding and unvested restricted stock units. For the three and six months ended June 30, 2014, we recognized $101,000 and $201,000 in expense for restricted stock awards, respectively.

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(Unaudited)

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.

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.

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(Unaudited)

9. Fair Value (Continued)

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, 2015):
Available for sale securities:
State and municipal	$	115,351	$	—	115,351		$	—
U.S. Government sponsored entities and agencies	34,643		—		34,643		—
Residential mortgage-backed securities issued by U.S. Government sponsored entities	244,679		—		244,679		—
Corporate	3,373		—		3,373		—
Mutual Funds	246		—		246		—
Total available for sale securities	$	398,292	$	—	$	398,292	$	—

Assets (December 31, 2014):
Available for sale securities:
State and municipal	$	85,451	$	—	$	85,451	$	—
U.S. Government sponsored entities and agencies	9,161		—		9,161		—
Residential mortgage-backed securities issued by U.S. Government sponsored entities	107,317		—		107,317		—
Mutual Funds	248		—		248		—
Total available for sale securities	$	202,177	$	—	$	202,177	$	—

There were no transfers between Level 1 and Level 2 during 2015 or 2014.

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(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, 2015):
Impaired loans:
Commercial	$	928	$	—	$	—	$	928
Construction	1,382		—		—		1,382
Commercial real estate:
Owner Occupied nonfarm/nonresidential	192		—		—		192
Residential real estate:
Secured by first liens	2,087		—		—		2,087
Home equity	84		—		—		84

Foreclosed and repossessed assets:
Commercial real estate:
Other nonfarm/nonresidential	204		—		—		204

Assets (December 31, 2014):
Impaired loans:
Commercial	$	47	$	—	$	—	$	47
Construction	1,426		—		—		1,426
Commercial real estate:
Owner Occupied nonfarm/nonresidential	108		—		—		108
Residential real estate:
Secured by first liens	1,338		—		—		1,338
Home equity	84		—		—		84

Foreclosed and repossessed assets:
Construction	1,407		—		—		1,407
Commercial real estate:
Owner occupied nonfarm/nonresidential	2,036		—		—		2,036
Other nonfarm/nonresidential	588		—		—		588
Residential real estate:
Secured by first liens	400		—		—		400

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(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 $6.0 million as of June 30, 2015 with a valuation allowance of $1.4 million, resulting in provision for loan losses of $2.2 million for the three and six months ended June 30, 2015. The Company recorded $192,000 and $452,000 in provision for loan losses for collateral-dependent impaired loans for the three and six months ended June 30, 2014. Impaired loans totaled $15.0 million as of December 31, 2014, which included collateral dependent loans with a carrying value of $4.1 million and a valuation allowance of $1.1 million.

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 and six months ended June 30, 2015 the Company recognized charges to write down foreclosed and repossessed assets to their fair value of $12,000 and $75,000, respectively and did not write down foreclosed and repossessed assets for the three and six months ended June 30, 2014.

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(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, 2015:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
June 30, 2015:
Impaired Loans:
Commercial	$	928	Sales comparison approach	Adjustments for differences between comparable sales	28%
Construction	1,382		Sales comparison approach	Adjustments for differences between comparable sales	23%-55% (48%)
Commercial real estate	192		Income capitalization approach	Capitalization rate	26%
Residential real estate	2,171		Sales comparison approach	Adjustments for differences between comparable sales	14%-84% (33%)
Foreclosed and repossessed assets:
Commercial real estate	$	204	Sales comparison approach	Adjustments for differences between comparable sales	30%-33% (33%)

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(Unaudited)

9. Fair Value (Continued)

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range - (Weighted Average)
	(in thousands)
December 31, 2014:
Impaired Loans:
Commercial	$	47	Sales comparison approach	Adjustments for differences between comparable sales	24%-28% (24%)
Construction	1,426		Sales comparison approach	Adjustments for differences between comparable sales	23%-55% (48%)
Commercial real estate	108		Income capitalization approach	Capitalization rate	22%
Residential real estate	1,422		Sales comparison approach	Adjustments for differences between comparable sales	14%-84% (24%)

Foreclosed and repossessed assets:
Construction	$	1,407	Income capitalization approach	Capitalization rate	9%
			Sales comparison approach	Adjustments for differences between comparable sales	15%-23% (22%)
Commercial real estate	2,624		Income capitalization approach	Capitalization rate	4%
			Sales comparison approach	Adjustments for differences between comparable sales	10%-52% (31%)
Residential real estate	400		Sales comparison approach	Adjustments for differences between comparable sales	14%-60% (25%)

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(Unaudited)

9. Fair Value (Continued)

Fair value of Financial Instruments

Carrying amount and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014 were as follows:

			Fair Value Measurements Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
June 30, 2015:
Financial assets:
Cash and due from financial institutions	$	28,947	$	28,947	$	—	$	—	$	28,947
Interest-bearing deposits in other financial institutions	32,383		32,383		—		—		32,383
Securities available for sale	398,292		—		398,292		—		398,292
Loans held for sale	390		—		399		—		399
Loans, net	996,971		—		—		1,027,089		1,027,089
Accrued interest receivable	5,083		16		1,737		3,330		5,083
Federal Home Loan Bank and Federal Reserve Stock	3,807		n/a		n/a		n/a		n/a

Financial liabilities:
Deposits	1,306,536		—		1,323,485		—		1,323,485
Short-term borrowings	42,989		—		43,498		—		43,498
Other borrowings	83,000		—		53,261		23,993		77,254
Accrued interest payable	703		—		308		395		703

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(Unaudited)

9. Fair Value (Continued)

			Fair Value Measurements Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2014:
Financial assets:
Cash and due from financial institutions	$	12,872	$	12,872	$	—	$	—	$	12,872
Interest-bearing deposits in other financial institutions	6,808		6,808		—		—		6,808
Deposit for partial redemption of acquiree’s preferred stock and unpaid dividends	11,341		11,341		—		—		11,341
Securities available for sale	202,177		—		202,177		—		202,177
Loans, net	597,110		—		—		606,554		606,554
Accrued interest receivable	3,152		—		1,016		2,136		3,152
Federal Home Loan Bank and Federal Reserve Stock	4,964		n/a		n/a		n/a		n/a

Financial liabilities:
Deposits	650,944		—		654,986		—		654,986
Short-term borrowings	45,818		—		45,744		—		45,744
Other borrowings	67,000		—		50,061		9,836		59,897
Accrued interest payable	158				140		18		158

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.

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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.

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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, 2015 and 2014 (in thousands):

	Unrealized Gains and Losses on Available- for-Sale Securities			Defined Benefit Pension Items			Total
June 30, 2015:
Balance, beginning of period	$	4,252		$	(464	)	$	3,788
Other comprehensive loss before reclassifications	(3,629		)	(6		)	(3,635		)
Amounts reclassified from accumulated other comprehensive income	—			(3		)	(3		)
Balance, end of period	$	623		$	(473	)	$	150

June 30, 2014:
Balance, beginning of period	$	(285	)	$	(376	)	$	(661	)
Other comprehensive income (loss) before reclassifications	1,405			25			1,430
Amounts reclassified from accumulated other comprehensive income	(1		)	(14		)	(15		)
Balance, end of period	$	1,119		$	(365	)	$	754

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the six month periods ended June 30, 2015 and 2014 (in thousands):

	Unrealized Gains and Losses on Available- for-Sale Securities			Defined Benefit Pension Items			Total
June 30, 2015:
Balance, beginning of period	$	2,280		$	(471	)	$	1,809
Other comprehensive income (loss) before reclassifications	(1,623		)	3			(1,620		)
Amounts reclassified from accumulated other comprehensive income	(34		)	(5		)	(39		)
Balance, end of period	$	623		$	(473	)	$	150

June 30, 2014:
Balance, beginning of period	$	(1,364	)	$	(369	)	$	(1,733	)
Other comprehensive income before reclassifications	2,678			11			2,689
Amounts reclassified from accumulated other comprehensive income	(195		)	(7		)	(202		)
Balance, end of period	$	1,119		$	(365	)	$	754

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. Accumulated other comprehensive income (loss)

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, 2015 and 2014:

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

June 30, 2014:

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	$	(1	)	Net gain on sales of available-for-sale securities
	—			Income tax expense
	$	(1	)	Net of tax

Amortization of defined benefit pension plan unrecognized loss	$	(21	)	Salaries and employee benefits
	7			Income tax expense
	$	(14	)	Net of tax

Total reclassifications for the period	$	(15	)	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, 2015 and 2014:

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	$	(39	)	Net of tax

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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. Accumulated other comprehensive income (loss)

June 30, 2014:

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	$	(296	)	Net gain on sales of available-for-sale securities
	101			Income tax expense
	$	(195	)	Net of tax

Amortization of defined benefit pension plan unrecognized loss	$	(10	)	Salaries and employee benefits
	3			Income tax expense
	$	(7	)	Net of tax

Total reclassifications for the period	$	(202	)	Net of tax

11. Repurchase agreements

Repurchase agreements totaled $43.0 million as of June 30, 2015 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 $48.8 million to secure repurchase agreements as of June 30, 2015.

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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 increased to $1.587 billion as of June 30, 2015 from $888.7 million as of December 31, 2014 due to the acquisition of First Financial Service Corporation (“First Financial”) on January 1, 2015. Most categories of assets were impacted by the acquisition, primarily net loans which increased to $997.0 million at June 30, 2015 from $597.1 million as of December 31, 2014 and securities available for sale which increased to $398.3 million from $202.2 million over the same periods. In connection with the acquisition, the Company recorded goodwill of $6.4 million after determining the fair value of assets acquired and liabilities assumed. The Company is still in the process of gathering information about the day one fair values of assets acquired and liabilities assumed which are subject to change during the measurement period. See footnote 2 to the Company’s consolidated financial statements for further information on the acquisition of First Financial.

Net loans increased $399.9 million to $997.0 million as of June 30, 2015 from $597.1 million as of December 31, 2014. As previously discussed, the biggest driver of the increase was the acquisition of First Financial. The Company determined the fair value of loans acquired in the transaction was $404.2 million which included a non-accretable yield adjustment of $18.0 million on purchased credit impaired loans and an accretable yield adjustment of $6.1 million (see footnote 4 to the consolidated financial statements for more information on acquired loans).

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Securities available for sale increased to $398.3 million at June 30, 2015 from $202.2 million as of December 31, 2014 due to the acquisition of investments with a fair value of $223.6 million and purchases of $42.0 million during 2015. During the six months ended June 30, 2015, the Company sold $38.9 million of securities primarily to conform the acquired portfolio to the Company’s investment policy and overall strategic plan. 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.

Total deposits increased to $1.307 billion at June 30, 2015 from $650.9 million at December 31, 2014 as deposits with a fair value of $704.8 million were assumed in the First Financial transaction. Excluding the assumption of First Financial’s deposits, total deposits decreased by $48.2 million as the Company repriced the higher costing deposits assumed from First Financial resulting in deposit run-off.

Net Income Available to Common Shareholders. Net income available to common shareholders increased to $3.5 million for the three months ended June 30, 2015 from $2.0 million for the same period in 2014. Basic and diluted earnings per common share increased to $0.64 per share for the second quarter of 2015 as compared to $0.59 per common share for the second quarter of 2014. The increase in net income available to common shareholders was mostly attributable to the acquisition of First Financial in the first quarter which led to increases in net interest income of $6.0 million and non-interest income of $1.1 million, offset by increases in non-interest expense of $3.9 million and provision for loan losses of $2.0 million. The annualized return on average assets and average shareholders’ equity were 0.89% and 9.75% for the three months ended June 30, 2015, respectively, compared to 1.00% and 9.25% for the equivalent period in 2014.

Net income available to common shareholders for the six month period ended June 30, 2015 decreased to $2.4 million from $4.0 million in the equivalent period in 2014. Basic earnings per share was $0.45 and diluted earnings per common share was $0.44 in 2015, a decrease from basic and diluted earnings per share of $1.18 and $1.17, respectively, in 2014. The decrease in net income available to common shareholders was 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 increase in non-interest expense to $28.4 million in 2015 from $13.1 million 2014, net income available to common shareholders declined due to an increase in provision for loan losses of $1.8 million to $2.3 million, offset by increases in net interest income of $11.9 million and non-interest income of $1.8 million. The annualized return on average assets and shareholders’ equity were 0.33% and 3.60% for the six months ended June 30, 2015, respectively, compared to 1.01% and 9.36% for the equivalent period in 2014.

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Net interest income. Net interest income increased by $6.0 million to $13.9 million for the second quarter of 2015 compared to 2014, while the Company’s net interest margin on a fully taxable equivalent basis decreased from 4.19% in 2014 to 4.04% in 2015. The growth in net interest income was due to average earning assets increasing to $1.441 billion in 2015 from $796.5 million as a result of the First Financial acquisition. The average balances for all earnings assets and interest-bearing liabilities increased, with the exception of short-term borrowings, from the same period in 2014. The yield on earning assets on a fully taxable equivalent basis declined to 4.37% in 2015 from 4.43% in 2014 due to a higher average balance in low earning interest-bearing deposits in other financial institutions. In anticipation of a reduction in time deposits assumed from First Financial due to rate reductions at maturity, the Company has maintained higher on balance sheet liquidity. Also impacting the yield on interest earning assets was accretion of $1.0 million on acquired loans in 2015 compared to $61,000 in 2014. The average balance of interest-bearing liabilities increased to $1.163 billion with an average cost of 0.41% in 2015 compared to $573.5 million and 0.33% in 2014. The increase in the average balance and cost between the periods was the assumption of First Financial’s liabilities which generally were higher costing compared to the legacy deposits of the Company. Offsetting the higher contractual rates of liabilities assumed was accretion of $573,000 recognized for time deposits and other borrowings.

Net interest income for the six months ended June 30, 2015 increased to $27.4 million from $15.5 million while the net interest margin on a fully taxable equivalent basis declined to 3.95% in 2015 from 4.14% in 2014. The increase in net interest income was due to the increase in average interest earning assets over the period as a result of the aforementioned First Financial acquisition. Average earning assets increased to $1.453 billion for the period ending June 30, 2015 with the majority of the increase in net loans to $997.2 million and securities available for sale to $394.4 million. The Company’s yield on earning assets was lower period to period due to an increase in interest-bearing deposits in other financial institutions which had an average balance of $55.5 million yielding 0.38% in 2015 compared to an average balance of $13.3 million and average yield of 0.53% in 2014. Also impacting the yield was accretion recognized on loans of $1.6 million in 2015 compared to $106,000 in 2014. Average interest-bearing liabilities increased to $1.182 billion for the six months ended June 30, 2015 compared to $570.7 million in 2014 while the average cost increased to 0.42% from 0.34% over the respective periods. The increase in average balance and cost was the assumption of deposits from First Financial which had higher costs than the Company’s legacy funding. The Company’s cost of funds for 2015 was reduced due to accretion recognized during 2015 of $1.2 million, primarily on time deposits.

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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,
	2015								2014
	Average Balance			Interest			Average Yield/Cost		Average Balance			Interest			Average Yield/Cost
	(In thousands)								(In thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks	$	48,008		$	49		0.41	%	$	13,433		$	9		0.26	%
Taxable securities	288,420			1,320			1.84		112,139			489			1.75
Tax-exempt securities	98,423			1,355			5.52		81,619			1,138			5.59
Total loans and fees (1) (2)	1,000,865			12,902			5.17		583,345			7,098			4.88
FHLB and Federal Reserve stock	4,860			69			5.69		5,962			63			4.24
Total earning assets	1,440,576			15,695			4.37		796,498			8,797			4.43

Less: Allowance for loan losses	(7,532		)						(8,501		)
Non-earning assets:
Cash and due from banks	35,902								16,788
Bank premises and equipment, net	37,778								18,376
Other assets	96,967								39,963
Total assets	$	1,603,691							$	863,124

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Savings and other	$	688,831		$	162		0.15	%	$	329,190		$	162		0.20	%
Time deposits	352,394			105			0.36		144,331			105			0.29
Short-term borrowings	39,033			23			0.24		39,813			23			0.23
Other borrowings	83,170			82			2.84		60,187			183			1.22
Total interest-bearing liabilities	1,163,428			1,192			0.41		573,521			473			0.33

Non-interest bearing liabilities:
Non-interest demand deposits	283,101								191,466
Accrued interest payable and other liabilities	10,453								4,968
Stockholders’ equity	146,709								93,169
Total liabilities and stockholders’ equity	$	1,603,691							$	863,124

Net interest income (taxable equivalent basis)				$	14,503							$	8,324
Less: taxable equivalent adjustment				(589		)						(387		)
Net interest income				$	13,914							$	7,937
Net interest spread							3.96	%							4.10	%
Net interest margin							4.04								4.19

(1) The amount of direct loan origination cost included in interest on loans was $75 and $99 for the three months ended June 30, 2015 and 2014.

(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 $1,016 and $61 for the three months ended June 30, 2015 and 2014.

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	Six Months Ended June 30,
	2015								2014
	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	$	55,508		$	104		0.38	%	$	13,304		$	35		0.53	%
Taxable securities	303,474			2,660			1.77		116,686			1,050			1.81
Tax-exempt securities	90,862			2,498			5.54		80,301			2,254			5.66
Total loans and fees (1) (2)	997,221			25,527			5.16		574,042			13,722			4.82
FHLB and Federal Reserve stock	5,667			164			5.84		5,959			116			3.92
Total earning assets	1,452,732			30,953			4.30		790,292			17,177			4.38

Less: Allowance for loan losses	(7,187		)						(8,491		)
Non-earning assets:
Cash and due from banks	37,436								13,446
Bank premises and equipment, net	37,956								18,425
Other assets	99,279								40,701
Total assets	$	1,620,216							$	854,373

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Savings and other	$	692,940		$	530		0.15	%	$	319,487		$	304		0.19	%
Time deposits	364,743			624			0.34		146,383			216			0.30
Short-term borrowings	38,645			45			0.23		42,586			53			0.25
Other borrowings	85,571			1,265			2.98		62,249			376			1.22
Total interest-bearing liabilities	1,181,899			2,464			0.42		570,705			949			0.34

Non-interest bearing liabilities:
Non-interest demand deposits	281,499								187,298
Accrued interest payable and other liabilities	9,737								4,592
Stockholders’ equity	147,081								91,778
Total liabilities and stockholders’ equity	$	1,620,216							$	854,373

Net interest income (taxable equivalent basis)				$	28,489							$	16,228
Less: taxable equivalent adjustment				(1,091		)						(766		)
Net interest income				$	27,398							$	15,462
Net interest spread							3.88	%							4.04	%
Net interest margin							3.95								4.14

(1) The amount of direct loan origination cost included in interest on loans was $96 and $198 for the six months ended June 30, 2015 and 2014.

(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 $1,617 and $106 for the six months ended June 30, 2015 and 2014.

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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, 2015 compared to Three Months Ended June 30, 2014 Increase/(Decrease) Due to								Six Months Ended June 30, 2015 compared to Six Months Ended June 30, 2014 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	$	40	$	33		$	7		$	69		$	82		$	(13	)
Taxable securities	831		806			25			1,610			1,638			(28		)
Tax-exempt securities	217		232			(15		)	244			291			(47		)
Total loans and fees	5,804		5,359			445			11,805			10,770			1,035
FHLB and Federal Reserve stock	6		(13		)	19			48			(6		)	54
Total increase in interest income	6,898		6,417			481			13,776			12,775			1,001
Interest expense:
Savings and other	104		145			(41		)	226			296			(70		)
Time Deposits	211		181			30			408			369			39
Short-term borrowings	—		—			—			(8		)	(5		)	(3		)
Other borrowings	405		91			314			889			183			706
Total increase in interest expense	720		417			303			1,515			843			672
Increase in net interest income	$	6,178	$	6,000		$	178		$	12,261		$	11,932		$	329

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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,
	2015			2014			2015			2014
	(In thousands)
Activity for the period ended:
Beginning balance	$	7,120		$	8,378		$	6,465		$	8,009
Charge-offs:
Residential real estate	(71		)	(93		)	(204		)	(144		)
Commercial real estate	1			(23		)	(1		)	(23		)
Construction	(32		)	—			(32		)	—
Commercial business	(1,786		)	—			(1,910		)	(1		)
Home equity	(34		)	(42		)	(48		)	(42		)
Consumer	(78		)	(52		)	(151		)	(111		)
Total	(2,000		)	(210		)	(2,346		)	(321		)

Recoveries:
Residential real estate	43			2			48			7
Commercial real estate	61			21			849			95
Construction	521			—			521			67
Commercial business	22			67			41			90
Home equity	8			6			29			9
Consumer	115			27			177			53
Total	770			123			1,665			321
Net loan charge-offs	(1,230		)	(87		)	(681		)	—
Provision for loan losses	2,155			190			2,261			472

Ending balance	$	8,045		$	8,481		$	8,045		$	8,481

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Provision for loan losses increased to $2.2 million and $2.3 million for the three and six months ending June 30, 2015 from $190,000 and $472,000 for the same periods in 2014. Net charge-offs for the three and six months ended June 30, 2015 were $1.2 million and $681,000 compared to $87,000 and $0 in 2014. Net-charge-offs for the six months ended June 30, 2015 increased from 2014 due to a $1.7 million charge-off for one credit relationship, or the full amount of allocated reserves during the second quarter of 2015. The Company’s non-performing loans increased to $12.1 million as of June 30, 2015 from $7.8 million as of December 31, 2014 due primarily to the acquisition of loans acquired from First Financial which comprised $6.0 million of the total non-performing loans at June 30, 2015. The increase in the Company’s provision for loan losses for the three and six months ended June 30, 2015 was due primarily to the allocation and charge-off of $1.7 million for one credit in the second quarter of 2015. The Company recognized the additional provision for the credit due to updated information obtained in the second quarter about the value of the collateral securing the loan and immediately charged-off the allocation as the loan is considered collateral dependent. Subsequent to the charge-off, the loan had a remaining carrying amount of $890,000 and was included in the Company’s non-accrual loans as of June 30, 2015. Currently, the Company does not have an allocation for loan losses for this credit. Additionally, the provision for loan losses for the three and six months in 2015 was negatively impacted by the aforementioned $1.7 million charge-off. 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 charge-offs increase for a loan class, the amount allocated increases as well. The $1.7 million charge-off impacted the Company’s allocation for commercial loans collectively evaluated for impairment only.

The Company’s classified loans (substandard and doubtful) increased to $58.1 million as of June 30, 2015 from $15.7 million as of December 31, 2014 while criticized loans (watch and special mention) increased to $49.6 million from $43.8 million. The increase in both was due to the acquisition of loans from First Financial which accounted for $42.2 million of the Company’s classified loans and $5.0 million of its criticized loans. As of June 30, 2015, the Company had $53.6 million in purchased credit impaired loans, the majority of which were acquired from First Financial (see footnote 2 to Company’s consolidated financial statements for more information). Due to the aforementioned provision and charge-off activity, the allowance for loan losses as a percentage of loans decreased to 0.81% of loans as of June 30, 2015 from 1.07% at December 31, 2014. Excluding acquired loans, the Company’s allowance as a percentage of loans was 1.29% at June 30, 2015.

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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 $17.4 million at June 30, 2015 and $11.9 million December 31, 2014, while $2.3 million and $4.1 million were included in the Company’s non-accrual loans as of the same dates, respectively.

The Company’s non-performing assets as of June 30, 2015 and December 31, 2014 were as follows:

	June 30, 2015			December 31, 2014
	(In thousands)

Loans on non-accrual status	$	12,105		$	7,535
Loans past due over 90 days still on accrual	220			—
Total non-performing loans	12,325			7,535
Foreclosed and repossessed assets	8,354			4,431
Total non-performing assets	$	20,679		$	11,966

Non-performing loans to total loans	1.23		%	1.25		%
Non-performing assets to total loans	22.06			1.98
Allowance as a percent of non-performing loans	65.27			85.79
Allowance as a percent of total loans	0.80			1.07

Included in the totals above for June 30, 2015 were non-accrual loans with a carrying amount of $6.0 million and foreclosed and repossessed assets of $4.7 million that were acquired from First Financial Service Corporation.

Non-interest income. Non-interest income increased to $2.7 million for the second quarter of 2015 from $1.5 million for the equivalent period in 2014. The increase was driven primarily by service charges on deposit accounts and interchange income as well as earnings on company owned life insurance. Service charges on deposit accounts increased to $1.7 million in 2015 from $835,000 in 2014 while interchange income increased to $476,000 from $330,000 over the respective periods. The increase in both categories was directly attributable to the assumed deposit accounts from First Financial and the corresponding interchange activity. Earnings on bank owned life insurance increased to $253,000 in 2015 from $168,000 in 2014 as the Company acquired $10.8 million in bank owned life insurance in connection with the First Financial acquisition.

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Non-interest income increased by $1.8 million to $5.1 million for the six months ended June 30, 2015 from $3.2 million in 2014 due to increases in service charges on deposit accounts of $1.4 million, earnings on bank owned life insurance of $173,000, and interchange income of $320,000, offset by a decrease in net gains on sales of available for sale securities of $245,000. As previously discussed, the increase in service charges on deposit accounts and interchange income was driven by the assumption of deposits from First Financial and the corresponding increase in transaction volume driving interchange and service fee income. Earnings on bank owned life insurance were higher in 2015 due to the aforementioned acquisition of First Financial’s life insurance policies in the first quarter of 2015. Net gains on sales of securities declined to $51,000 for the first six months of 2015 compared to $296,000 in 2014 while sales of securities increased to $38.9 million from $32.8 million over the respective periods. Most of the securities sold were acquired from First Financial and were disposed shortly after acquisition resulting in minimal fluctuation between the acquisition date fair value and disposition. The Company sold securities to conform the merged portfolio to policy and investment strategy.

Non-interest expense. Non-interest expense increased to $10.5 million for the three months ended June 30, 2015 from $6.5 million in 2014 due to increases salaries and employee benefits, occupancy expenses, data processing, FDIC insurance premiums, and other expenses, offset by a decrease in foreclosed assets, net expense. Salaries and employee benefits was $5.1 million in 2015 compared to $3.4 million in 2014 and is attributable to an increase in employees associated with the acquisition of First Financial. Total full time equivalent employees increased to 329 as of June 30, 2015 from 198 at June 30, 2014 with corresponding increases in compensation, insurance expense, taxes, and other benefits. Occupancy expense was $1.2 million in 2015, an increase from $549,000 in 2014 as the number of branches operated by the Company increased to 41 as a result of the First Financial acquisition with corresponding increases to rent expense, depreciation, and utilities. Data processing expense was $921,000 for the second quarter of 2015 as compared to $663,000 in 2014 and was primarily driven by charges for core processing which is based, in part, on the number of loan and deposit accounts. FDIC insurance premiums were $372,000 in 2015, an increase from $129,000 in 2014 due to a larger assessment base from the First Financial acquisition. Other expenses were $1.5 million in 2015, an increase from $641,000 as the Company recognized increases advertising and marketing, other taxes and assessments, and amortization of core deposit intangibles. Other foreclosed assets, net was $(95,000) in 2015 compared to $53,000 in 2014 due to a decrease in expenses including property taxes and maintenance, an increase in rental income from foreclosed properties, and net gains recorded during the quarter.

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Non-interest expense was $28.3 million for the six months ended June 30, 2015, an increase of $15.3 million from $13.1 million in 2014 as all categories were impacted by the acquisition of First Financial and the corresponding merger and integration charges. Salaries and employee benefits rose to $14.2 million for 2015 from $6.7 million in 2014 due to the increase in full time equivalent employees to 329 as of June 30, 2015 from 210 at December 31, 2014. Additionally, the Company incurred $2.1 million of expense in the first six months associated with severance and change in control payments. Occupancy expense was $2.8 million in 2015 compared to $1.3 million in 2014 as the Company acquired additional branches in the First Financial transaction and recognized $310,000 in merger and integration expenses in 2015. Data processing expense increased to $2.7 million for the first six months of 2015 from $1.3 million in 2014 as the Company converted core processing during the period as well as other redundant services. The Company recognized $746,000 in data processing merger and integration expenses including contract termination penalties during the period. Legal and professional service expenses were $2.4 million for 2015 compared to $1.2 million in 2014 as the Company incurred legal services associated with the merger and related filing requirements, valuation services, and consulting fees for integration in addition to $138,000 in contract termination charges. Other expenses increased to $3.9 million in 2015 from $1.3 million in 2014 as the Company incurred additional advertising and marketing expenses, fees and other tax assessments, charitable contributions, core deposit intangible amortization, and merger and integration expenses of $564,000 during the period.

Income tax expense. Income tax expense was $371,000 for the second quarter of 2015 compared to $610,000 for the equivalent period in 2014 while the effective tax rate was 9.42% and 22.12% for the respective periods. The reduction in income tax expense and effective rate in 2015 was due to $323,000 in non-deductible acquisition related expenses incurred in 2014 that were not repeated in 2015 and the recognition of $438,000 of tax credits acquired from First Financial in the second quarter of 2015.

Income tax benefit for the six months ended June 30, 2015 was $827,000 compared to income tax expense of $867,000 in 2014. The reduction in income tax expense was due to lower proportional growth in pre-tax income compared to tax preference items recognized during 2015. Pre-tax income was reduced due to $3.9 million in merger and integration charges during the period while the Company’s tax preference items increased due to acquired tax credits of $438,000, an increase in bank owned life insurance earnings of $173,000, and tax exempt investment income of $136,000.

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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, 2015, we had cash and interest-bearing deposits with banks of $61.3 million and securities available-for-sale with a fair value of $398.3 million. If we require funds beyond the funds we are able to generate internally, we have $150.0 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 $31.5 million. Management believes the Company’s liquidity sources are adequate to meet its operational needs.

The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements. As of June 30, 2015, Your Community Bank and Scott County State Bank were each considered well capitalized under regulatory capital requirements and were in compliance with all regulatory capital requirements that were effective as of such date with capital ratios as follows:

June 30, 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 Asset
Consolidated	10.2	%	9.5	%	14.5	%	15.3	%
Your Community Bank	10.4	%	13.7	%	13.7	%	14.3	%
Scott County State Bank	10.2	%	15.8	%	15.8	%	16.7	%

Minimum for banks to be well capitalized under regulatory capital requirements:	5.0	%	6.5	%	8.0	%	10.0	%

December 31, 2014:

	Total Capital To Risk-weighted Assets		Tier 1 Capital To Risk-weighted Assets		Tier 1 Capital To Average Assets
Consolidated	18.7	%	17.7	%	13.0	%
Your Community Bank	18.1	%	17.1	%	12.9	%
Scott County State Bank	17.3	%	16.3	%	9.9	%

Minimum for banks to be well capitalized under regulatory capital requirements:	10.0	%	6.0	%	5.0	%

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We have been repurchasing shares of our common stock since May 21, 1999. A net total of 371,165 shares at an aggregate cost of $6.4 million have been repurchased since that time under both the current and prior repurchase plans. Our Board of Directors authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of our common stock may be purchased. Through June 30, 2015, a total of $1.6 million had been expended to purchase 85,098 shares under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”). Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

During June 2004 and 2006, we completed placements of $7.0 million and $10.0 million floating rate subordinated debentures through Community Bank Shares (IN) Statutory Trust I and Trust II, (trusts we formed), respectively. These securities are reported as liabilities for financial reporting, but Tier 1 Capital for regulatory purposes. We used the proceeds for general business purposes and to support our future opportunities for growth. The Company assumed subordinated debentures of $13.7 million in its acquisition of First Financial, net of appropriate purchase accounting adjustments. In June 2008, First Financial completed the placement of $8.0 million subordinated debentures with a maturity date of June 24, 2038, callable at par in whole or in part on or after June 24, 2018, and which pay a fixed interest rate of 8.00% for thirty years. In March 2007, First Financial completed the placement of $10.0 million cumulative subordinated debentures at a 10-year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points. These securities mature on March 22, 2037, and can be called at par in whole or in part on or after March 15, 2017.

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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, 2015:

	(In thousands)
Commitments to make loans	$	42,549
Unused lines of credit	236,969
Standby letters of credit	748
Total	$	280,266

Aggregate Contractual Obligations

As of June 30, 2015:	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
(Dollars in thousands)
Time deposits	$	339,346	$	196,008	$	90,354	$	19,866	$	33,118
Short-term borrowings	42,989		42,989		—		—		—
Other borrowings	83,000		22,315		25,136		3,940		31,609
Defined benefit plan	888		274		116		161		337
Lease commitments	7,403		1,228		1,718		1,093		3,364
Total	$	473,626	$	262,814	$	117,324	$	25,060	$	68,428

Time deposits represent certificates of deposit held by the Company.

Short-term borrowings consist of repurchase agreements of $43.0 million and note payable of $32,000. 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 $42.3 million, subordinated debentures of $31.1 million, and a term loan of $9.5 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. 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, 2014 and June 30, 2015 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, 2015 our net interest income would increase by an estimated 0.7%, or $374,000, over the one year forecast horizon. As of December 31, 2014, in the Up 200 Scenario we estimated that net interest income would decrease $349,000, 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, 2015 and December 31, 2014, 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, 2015 and ending on June 30, 2016:

	Interest Rate Sensitivity as of June 30, 2015:
	Base		Gradual Increase in Rates of 200 Basis Points
	(In thousands)
Projected interest income:
Loans	$	50,007	$	52,125
Investments	9,587		9,729
FHLB and FRB stock	134		166
Interest-bearing deposits in other financial institutions	79		314
Total interest Income	59,807		62,334

Projected interest expense:
Deposits	2,341		3,754
Short-term borrowings	96		565
Other borrowings	3,085		3,556
Total interest expense	5,522		7,675
Net interest income	$	54,285	$	54,659

Change from base			374
Percent change from base			0.7		%

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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, 2014 and ending December 31, 2015:

	Interest Rate Sensitivity as of December 31, 2014
	Base		Gradual Increase in Rates of 200 Basis Points
	(In thousands)
Projected interest income:
Loans	$	28,824	$	29,858
Investments	5,249		5,319
FHLB and FRB stock	161		161
Interest-bearing deposits in other financial institutions	7		31
Total interest income	34,241		35,369

Projected interest expense:
Deposits	891		1,660
Short-term borrowing	96		596
Other borrowings	1,330		1,538
Total interest expense	2,317		3,794
Net interest income	$	31,924	$	31,575

Change from base			$	(349	)
% Change from base			(1.1		)%

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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, 2015, 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, 2014.

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, 2015.

The Board of Directors of the Company authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of the Company’s common stock can be purchased. As of June 30, 2014, the Company could repurchase up to $3.4 million of the Company’s common stock under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”). Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

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 10, 2015	BY:	/s/ James D. Rickard
			James D. Rickard
			President and Chief Executive Officer
			(Principal Executive Officer)

Dated:	August 10, 2015	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

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 Community Bank Shares of Indiana, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 2015, filed with the SEC on August 10, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2015 and June 30, 2014, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and June 30, 2014 (iv) Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2015, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014 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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