F&M BANK CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
fiscal year ended December 31,
2017
Commission file
number: 0-13273
F
& M BANK CORP.
(Exact
name of registrant as specified in its charter)
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Virginia
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54-1280811
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(State or other
jurisdiction of
incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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P.
O. Box 1111, Timberville, Virginia 22853
(Address of
principal executive offices) (Zip Code)
(540)
896-8941
(Registrant’s
telephone number including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock - $5 Par value per share
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Sarbanes Act. Yes [ ] No [x]
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[x]
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. Yes
[x] 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). Yes [X] No [ ]
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer
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☐
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Accelerated filer
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☒
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Non-accelerated
filer
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☐
(Do not check if a
smaller reporting company)
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Smaller reporting company
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☒
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Emerging growth
company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [x]
The
registrant’s Common Stock is traded Over-the-Counter under
the symbol FMBM. The aggregate market value of the 2,932,029 shares
of Common Stock of the registrant issued and outstanding held by
non-affiliates on June 30, 2017 was approximately $85,615,255 based
on the closing sales price of $29.20 per share on that date. For
purposes of this calculation, the term “affiliate”
refers to all directors and executive officers of the
registrant.
As of
the close of business on March 9, 2018, there were 3,256,579 shares
of the registrant's Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III:
Proxy Statement for the Annual Meeting of
Shareholders to be held on May 12, 2018 (the “Proxy
Statement”).
Table
of Contents
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Page
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PART I
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Item
1
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Business
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2
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Item
1A
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Risk
Factors
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8
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Item
1B
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Unresolved
Staff Comments
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15
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Item
2
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Properties
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15
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Item
3
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Legal
Proceedings
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15
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Item
4
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Mine
Safety Disclosures
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16
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PART II
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Item
5
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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16
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Item
6
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Selected
Financial Data
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19
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Item
7
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Management’s
Discussion and Analysis of Financial Condition
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and
Results of Operations
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20
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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42
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Item
8
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Financial
Statements and Supplementary Data
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43
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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98
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Item
9A
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Controls
and Procedures
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98
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Item
9B
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Other
Information
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99
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PART III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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99
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Item
11
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Executive
Compensation
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99
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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99
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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99
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Item
14
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Principal
Accounting Fees and Services
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99
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PART IV
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Item
15
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Exhibits
and Financial Statement Schedules
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100
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Item
16
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Form
10-K Summary
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101
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Signatures
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102
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PART
I
Item
1. Business
General
F &
M Bank Corp. (the “Company” or “we”),
incorporated in Virginia in 1983, is a one bank financial holding
company pursuant to section 3(a)(1) of the Bank Holding Company Act
of 1956, and owns 100% of the outstanding stock of its affiliate,
Farmers & Merchants Bank (“Bank”) and a majority
interest in VS Title, LLC (“VST”). TEB Life Insurance
Company (“TEB”) and Farmers & Merchants Financial
Services, Inc. (“FMFS”) are wholly owned subsidiaries
of the Bank. The Bank also holds a majority ownership in VBS
Mortgage, LLC (“VBS”).
The
Bank was chartered on April 15, 1908, as a state chartered bank
under the laws of the Commonwealth of Virginia. TEB was
incorporated on January 27, 1988, as a captive life insurance
company under the laws of the State of Arizona. FMFS is a Virginia
chartered corporation and was incorporated on February 25, 1993.
VBS (formerly Valley Broker Services, Inc.) was incorporated on May
11, 1999. The Bank purchased a majority interest in VBS on November
3, 2008 and the Company purchased a majority interest in VST on
January 1, 2017. VBS Mortgage owns the remaining minority interest
in VST.
As a
commercial bank, the Bank offers a wide range of banking services
including commercial and individual demand and time deposit
accounts, commercial and individual loans, internet and mobile
banking, drive-in banking services, ATMs at all branch locations
and several off-site locations, as well as a courier service for
its commercial banking customers. TEB was organized to re-insure
credit life and accident and health insurance currently being sold
by the Bank in connection with its lending activities. FMFS was
organized to write title insurance but now provides brokerage
services, commercial and personal lines of insurance to customers
of the Bank. VBS originates conventional and government sponsored
mortgages through their offices in Harrisonburg, Woodstock and
Fishersville. VS Title provides title insurance and real estate
settlement services through their offices in Harrisonburg,
Fishersville and Charlottesville, VA.
The
Bank makes various types of commercial and consumer loans and has a
large portfolio of residential mortgages and indirect auto lending.
The local economy is relatively diverse with strong employment in
the agricultural, manufacturing, service and governmental
sectors.
The
Company’s and the Bank’s principal executive office is
at 205 South Main Street, Timberville, VA 22853, and its phone
number is (540) 896-8941.
Filings
with the SEC
The
Company files annual, quarterly and other reports under the
Securities Exchange Act of 1934 with the Securities and Exchange
Commission (“SEC”). These reports are posted and are
available at no cost on the Company’s website,
www
.
FMBankVA.com
, as soon as reasonably
practicable after the Company files such documents with the SEC.
The Company’s filings are also available through the
SEC’s website at
www.sec.gov
.
Employees
On
December 31, 2017, the Bank had 178 full-time and part-time
employees; including executive officers, loan and other banking
officers, branch personnel, operations personnel and other support
personnel. None of the Company’s employees is represented by
a union or covered under a collective bargaining agreement.
Management of the Company considers their employee relations to be
excellent. No one employee devotes full-time services to F & M
Bank Corp.
Competition
The
Bank's offices face strong competition from numerous other
financial institutions. These other institutions include large
national and regional banks, other community banks, nationally
chartered savings banks, credit unions, consumer finance companies,
mortgage companies, loan production offices, mutual funds and life
insurance companies. Competition for loans and deposits is affected
by a variety of factors including interest rates, types of products
offered, the number and location of branch offices, marketing
strategies and the reputation of the Bank within the communities
served.
2
PART
I, continued
Item
1. Business, continued
Regulation
and Supervision
General.
The operations of the Company
and the Bank are subject to federal and state statutes, which apply
to financial holding companies and state member banks of the
Federal Reserve System. The common stock of the Company is
registered pursuant to and subject to the periodic reporting
requirements of the Securities Exchange Act of 1934 (the
“Exchange Act”). These include, but are not limited to,
the filing of annual, quarterly, and other current reports with the
Securities and Exchange Commission (the “SEC”). As an
Exchange Act reporting company, the Company is directly affected by
the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”). The Company believes it is in
compliance with SEC and other rules and regulations implemented
pursuant to Sarbanes-Oxley and intends to comply with any
applicable rules and regulations implemented in the
future.
The
Company, as a financial holding company, is subject to the
provisions of the Bank Holding Company Act of 1956, as amended (the
"Act") and is supervised by the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board”). The Act
requires the Company to secure the prior approval of the Federal
Reserve Board before the Company acquires ownership or control of
more than 5% of the voting shares or substantially all of the
assets of any institution, including another bank.
As a
financial holding company, the Company is required to file with the
Federal Reserve Board an annual report and such additional
information as it may require pursuant to the Act. The Federal
Reserve Board may also conduct examinations of F & M Bank Corp.
and any or all of its subsidiaries. Under Section 106 of the 1970
Amendments to the Act and the regulations of the Federal Reserve
Board, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with an
extension of credit, provision of credit, sale or lease of property
or furnishing of services.
The
Federal Reserve Board regulations limit activities of financial
holding companies to managing or controlling banks or non-banking
activities closely related to banking. These activities include the
making or servicing of loans, performing certain data processing
services, and certain leasing and insurance agency activities.
Since 1994, the Company has entered into agreements with the
Virginia Community Development Corporation to purchase equity
positions in several Low-Income Housing Funds; these funds provide
housing for low-income individuals throughout Virginia. Approval of
the Federal Reserve Board is necessary to engage in any of the
activities described above or to acquire interests engaging in
these activities.
The
Bank as a state member bank is supervised and regularly examined by
the Virginia Bureau of Financial Institutions and the Federal
Reserve Board; such supervision and examination by the Virginia
Bureau of Financial Institutions and the Federal Reserve Board is
intended primarily for the protection of depositors and not the
stockholders of the Company.
Payment of Dividends.
The Company is a
legal entity, separate and distinct from its subsidiaries. A
significant portion of the revenues of the Company result from
dividends paid to it by the Bank. There are various legal
limitations applicable to the payment of dividends by the Bank to
the Company. Under the current regulatory guidelines, prior
approval from the Federal Reserve Board is required if cash
dividends declared in any given year exceed net income for that
year, plus retained net profits of the two preceding years. A bank
also may not declare a dividend out of or in excess of its net
undivided profits without regulatory approval. The payment of
dividends by the Bank or the Company may also be limited by other
factors, such as requirements to maintain capital above regulatory
guidelines.
Bank
regulatory agencies have the authority to prohibit the Bank or the
Company from engaging in an unsafe or unsound practice in
conducting their businesses. The payment of dividends, depending on
the financial condition of the Bank, or the Company, could be
deemed to constitute such an unsafe or unsound practice. Based on
the Bank’s current financial condition, the Company does not
expect that any of these laws will have any impact on its ability
to obtain dividends from the Bank.
3
PART
I, continued
Item
1. Business, continued
Regulation
and Supervision, continued
The
Company also is subject to regulatory restrictions on dividends to
its shareholders. Regulators have indicated that bank holding
companies should generally pay dividends only if the
organization’s net income available to common shareholders
over the past year has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears consistent
with the organization’s capital needs, asset quality, and
overall financial condition. Further, a bank holding company should
inform and consult with the Federal Reserve Board prior to
declaring a dividend that exceeds earnings for the period (e.g.,
quarter) for which the dividend is being paid or that could result
in a material adverse change to the organization’s capital
structure.
Capital Requirements.
In 2013, the Federal
Reserve, the Federal Deposit Insurance Company (FDIC) and the
Office of the Comptroller of the Currency (OCC) approved a new rule
that substantially amends the regulatory risk-based capital rules
applicable to us. The final rule implements the "Basel III"
regulatory capital reforms and changes required by the Dodd-Frank
Act (see definition below). The final rule includes new minimum
risk-based capital and leverage ratios which was effective for us
on January 1, 2015, and refines the definition of what
constitutes "capital" for purposes of calculating these ratios. The
new minimum capital requirements are: (i) a new common equity
Tier 1 ("CET1") capital ratio of 4.5%; (ii) a Tier 1
to risk-based assets capital ratio of 6%, which is increased from
4%; (iii) a total capital ratio of 8%, which is unchanged from
the previous rules; and (iv) a Tier 1 leverage ratio of
4%. The final rule also establishes a "capital conservation buffer"
of 2.5% above the new regulatory minimum capital ratios, and when
fully effective in 2019, will result in the following minimum
ratios: (a) a common equity Tier 1 capital ratio of 7.0%;
(b) a Tier 1 to risk-based assets capital ratio of 8.5%;
and (c) a total capital ratio of 10.5%. The capital
conservation buffer is being phased in from 0.00% for 2015 to 2.50%
by 2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary
bonuses if its capital level falls below the buffer amount. These
limitations will establish a maximum percentage of eligible
retained income that can be utilized for such
activities.
The
CETI and Tier 1 leverage ratio of the Bank as of December 31, 2017,
were 14.43% and 12.07%, respectively, which are significantly above
the minimum requirements. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance
on intangible assets.
In
September 2017, the federal bank regulatory agencies proposed to
revise and simplify the capital treatment for certain deferred tax
assets, mortgage servicing assets, investments in non-consolidated
financial entities and minority interests for banking
organizations, such as the Bank, that are not subject to the
advanced approaches requirements. In November 2017, the regulatory
agencies revised the capital rules enacted in 2013 to extend the
current transitional treatment of these items for non-advanced
approaches banking organizations until the September 2017 proposal
is finalized. The September 2017 proposal would also change the
capital treatment of certain commercial real estate loans under the
standardized approach, which the Bank uses to calculate its capital
ratios.
In
December 2017, the Basel Committee published standards that it
described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as
“Basel IV”). Among other things, these standards revise
the Basel Committee’s standardized approach for credit risk
(including by recalibrating risk weights and introducing new
capital requirements for certain “unconditionally cancellable
commitments,” such as unused credit card lines of credit) and
provide a new standardized approach for operational risk capital.
Under the proposed framework, these standards will generally be
effective on January 1, 2022, with an aggregate output floor
phasing-in through January 1, 2027. Under the current capital
rules, operational risk capital requirements and a capital floor
apply only to advanced approaches institutions, and not to the
Company. The impact of Basel IV on the Company and the Bank will
depend on the manner in which it is implemented by the federal bank
regulatory agencies.
4
PART
I, continued
Item
1. Business, continued
Regulation
and Supervision, continued
Source of
Strength
. Federal Reserve
policy has historically required bank holding companies to act as a
source of financial and managerial strength to their subsidiary
banks. The Dodd-Frank Act codified this policy as a statutory
requirement. Under this requirement, the Company is expected to
commit resources to support the Bank, including at times when the
Company may not be in a financial position to provide such
resources. Any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to
depositors and to certain other indebtedness of such subsidiary
banks. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to priority of
payment.
Safety and
Soundness
. There are a number
of obligations and restrictions imposed on bank holding companies
and their subsidiary banks by law and regulatory policy that are
designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance fund in the event of
a depository institution default. For example, under the Federal
Deposit Insurance Corporation Improvement Act of 1991, to avoid
receivership of an insured depository institution subsidiary, a
bank holding company is required to guarantee the compliance of any
subsidiary bank that may become "undercapitalized" with the terms
of any capital restoration plan filed by such subsidiary with its
appropriate federal bank regulatory agency up to the lesser of (i)
an amount equal to 5% of the institution's total assets at the time
the institution became undercapitalized or (ii) the amount that is
necessary (or would have been necessary) to bring the institution
into compliance with all applicable capital standards as of the
time the institution fails to comply with such capital restoration
plan. Under the Federal Deposit Insurance Act, the federal bank
regulatory agencies have adopted guidelines prescribing safety and
soundness standards. These guidelines establish general standards
relating to internal controls and information systems, internal
audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risk and exposures
specified in the guidelines.
The Gramm-Leach-Bliley Act.
Effective
on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB
Act”) allows a bank holding company or other company to
certify status as a financial holding company, which will allow
such company to engage in activities that are financial in nature,
that are incidental to such activities, or are complementary to
such activities. The GLB Act enumerates certain activities that are
deemed financial in nature, such as underwriting insurance or
acting as an insurance principal, agent or broker; dealing in or
making markets in securities; and engaging in merchant banking
under certain restrictions. It also authorizes the Federal Reserve
to determine by regulation what other activities are financial in
nature, or incidental or complementary thereto.
USA Patriot Act of 2001.
In October
2001, the USA Patriot Act of 2001 was enacted in response to the
terrorist attacks in New York, Pennsylvania and Northern Virginia
which occurred on September 11, 2001. The Patriot Act is intended
to strengthen U.S. law enforcements’ and the intelligence
communities’ abilities to work cohesively to combat terrorism
on a variety of fronts. The continuing and potential impact of the
Patriot Act and related regulations and policies on financial
institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial
transparency laws, and imposes various regulations, including
standards for verifying client identification at account opening,
and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering.
Community Reinvestment Act.
The requirements of
the Community Reinvestment Act are also applicable to the Bank. The
act imposes on financial institutions an affirmative and ongoing
obligation to meet the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. A financial
institution’s efforts in meeting community needs currently
are evaluated as part of the examination process pursuant to twelve
assessment factors. These factors are also considered in evaluating
mergers, acquisitions and applications to open a branch or
facility.
5
PART
I, continued
Item
1. Business, continued
Regulation
and Supervision, continued
Dodd-Frank Wall Street Reform and Consumer
Protection Act.
The Dodd-Frank Act was signed into law on
July 21, 2010. Its wide-ranging provisions affect all federal
financial regulatory agencies and nearly every aspect of the
American financial services industry. Among the provisions of the
Dodd-Frank Act that directly impact the Company is the creation of
an independent Consumer Financial Protection Bureau (CFPB), which
has the ability to implement, examine and enforce complaints with
federal consumer protection laws, which govern all financial
institutions. For smaller financial institutions, such as the
Company and the Bank, their primary regulators will continue to
conduct its examination activities.
The
Dodd-Frank Act contains provisions designed to reform mortgage
lending, which includes the requirement of additional disclosures
for consumer mortgages. In addition, the Federal Reserve has issued
new rules that have the effect of limiting the fees charged to
merchants for debit card transactions. The result of these rules
will be to limit the amount of interchange fee income available
explicitly to larger banks and indirectly to us. The Dodd-Frank Act
also contains provisions that affect corporate governance and
executive compensation.
Although the
Dodd-Frank Act provisions themselves are extensive, the ultimate
impact on the Company of this massive legislation is unknown. The
Act provides that several federal agencies, including the Federal
Reserve and the Securities and Exchange Commission, shall issue
regulations implementing major portions of the legislation, and
this process is ongoing.
Mortgage Lending.
In 2013, the CFPB
adopted a rule, effective in January 2014, to implement certain
sections of the Dodd-Frank Act requiring creditors to make a
reasonable, good faith determination of a consumer’s ability
to repay any closed-end consumer credit transaction secured by a
1-4 family dwelling. The rule also establishes certain protections
from liability under this requirement to ensure a borrower’s
ability to repay for loans that meet the definition of
“qualified mortgage.” Loans that satisfy this
“qualified mortgage” safe harbor will be presumed to
have complied with the new ability-to-repay standard.
Forward-Looking
Statements
Certain
information contained in this report may include
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act. These forward-looking statements are
generally identified by phrases such as “we expect,”
“we believe” or words of similar import. Such
forward-looking statements involve known and unknown risks
including, but not limited to:
●
Changes in the
quality or composition of our loan or investment portfolios,
including adverse developments in borrower industries, declines in
real estate values in our markets, or in the repayment ability of
individual borrowers or issuers;
●
The strength of the
economy in our target market area, as well as general economic,
market, or business conditions;
●
An insufficient
allowance for loan losses as a result of inaccurate
assumptions;
●
Our ability to
maintain our “well-capitalized” regulatory
status;
●
Changes in the
interest rates affecting our deposits and our loans;
●
Changes in our
competitive position, competitive actions by other financial
institutions and the competitive nature of the financial services
industry and our ability to compete effectively against other
financial institutions in our banking markets;
●
Our ability to
manage growth;
●
Our potential
growth, including our entrance or expansion into new markets, the
opportunities that may be presented to and pursued by us and the
need for sufficient capital to support that growth;
●
Our exposure to
operational risk;
●
Our ability to
raise capital as needed by our business;
●
Changes in laws,
regulations and the policies of federal or state regulators and
agencies;
●
Other
circumstances, many of which are beyond our control;
and
●
Other factors
identified in “Risk Factors” below and in other reports
the Company files with the SEC from time to time.
6
PART
I, continued
Item
1. Business, continued
Forward-Looking
Statements, continued
Although we believe
that our expectations with respect to the forward-looking
statements are based upon reliable assumptions within the bounds of
our knowledge of our business and operations, there can be no
assurance that our actual results, performance or achievements will
not differ materially from any future results, performance or
achievements expressed or implied by such forward-looking
statements.
Operating
Revenue
The
following table displays components that contributed 15% or more of
the Company’s total operating revenue for the years ended
December 31, 2017, 2016, and 2015:
|
Period
|
Class of
Service
|
Percentage of
Total Revenues
|
|
|
|
|
|
December 31,
2017
|
Interest and fees
on loans held for investment
|
77.35%
|
|
December 31,
2016
|
Interest and fees
on loans held for investment
|
79.02%
|
|
December 31,
2015
|
Interest and fees
on loans held for investment
|
81.75%
|
Executive
Officers of the Company
Dean
W. Withers, 60, has served as CEO of the Company and Bank since
March 1, 2018. Prior to that he served as President/CEO of the Bank
since May 2004; Executive Vice President of the Bank from Jan. 2003
to May 2004; Vice President of the Bank from 1993 to 2003. As
stated in the form 8-K/A filed in December 2017, Mr. Withers will
continue as CEO of the Company and Bank for a transition period, no
official retirement date has been set.
Mark
C. Hanna, 49, has served as President of the Bank since December
2017. Prior to joining the Company, he served as Executive Vice
President and Tidewater Regional President of EVB and its
successor, Sonabank from November 2014 through October 2017.
Previously, he served as President and Chief Executive Officer of
Virginia Company Bank from November 2006 through November
2014.
Neil
W. Hayslett, 56, has served as Executive Vice President and Chief
Operating Officer of the Bank and the Company since March 1, 2018,
prior to that he served as Executive Vice President/Chief
Administrative Officer of the Bank and the Company from June 2013
until March 2018 and Executive Vice President/Chief Financial
Officer from November 2007 until June 2013. Prior to that time, he
served as Senior Vice President/Chief Financial Officer of the Bank
and the Company from January 2003 until November 2007 and served as
Vice President/Chief Financial Officer from October 1996 to January
2003.
Carrie
A. Comer, 48, has served as Executive Vice President and Chief
Financial Officer of the Bank and the Company since March 1, 2018,
prior to that she served as Senior Vice President/Chief Financial
Officer of the Company and Bank since June 2013. Ms. Comer served
as Vice President/Controller of the Bank from March 2009 to June
2013. From December 2005 to March 2009, Ms. Comer served as
Assistant Vice President/Controller of F&M Bank.
Larry
A. Caplinger, 65, has served as Executive Vice President and Chief
Projects Officer of the Bank and the Company since January 1, 2018.
Prior to that he served as Executive Vice President/Chief Lending
Officer of the Bank and the Company since November 2007. Prior to
that time, he served as Senior Vice President of the Bank from May
1990 until November 2007 and Senior Vice President of the Company
from April 2002 until November 2007. Larry has held a number of
positions with the Bank over his 45-year career with the
Company.
Stephanie
E. Shillingburg, 56, has served as Executive Vice President/Chief
Banking Officer of the Bank and the Company since July 2016,
Executive Vice President/Chief Retail Officer from June 2013 until
July 2016, Senior Vice President/Branch Administrator from February
2005 until June 2013. She also served as Vice President/Branch
Administrator from March 2003 until February 2005 and as Branch
Manager of the Edinburg Branch from February 2001 until March
2003.
7
PART
I, continued
Item
1. Business, continued
Executive
Officers of the Company continued
Edward
Strunk, 61, has served as Executive Vice President and Chief Credit
Officer of the Bank and the Company since March 1, 2018. Prior to
that he serviced as Senior Vice President/Senior Lending Officer
since July 2006, Senior Vice President/Commercial Loan
Administrator from May 2011 until July 2016, Vice
President/Commercial Loan Administrator from February 2011 until
May 2011 and Vice Present/Business Development Officer III from May
2007 until February 2011.
Josh
Hale, 41, has served as Executive Vice President and Chief Lending
Officer of the Bank and the Company since March 1, 2018. Prior to
that he served as Senior Vice President/Business Development Leader
since June 2013, Vice President/Commercial Relationship Manager III
from December 2010 until June 2013, Vice President/Business
Development Officer II from March 2009 until December 2010 and
Assistant Vice President/Business Development Officer II from
December 2004 until March 2009.
Item
1A. Risk Factors
General economic conditions in our market area could adversely
affect us.
We
are affected by the general economic conditions in the local
markets in which we operate. Conditions such as economic recession,
falling home prices, rising foreclosures and other factors beyond
our control could lead to, among other things, an increased level
of commercial and consumer delinquencies. If economic conditions in
our market deteriorate, we could experience further adverse
consequences, including a decline in demand for our products and
services and an increase in problem assets, forecloses and loan
losses. Future economic conditions in our market will depend on
factors outside of our control such as political and market
conditions, broad trends in industry and finance, legislative and
regulatory changes, changes in government, military and fiscal
policies and inflation, any of which could negatively affect our
performance and financial condition.
Our allowance for loan losses may prove to be insufficient to
absorb losses in the loan portfolio.
Like
all financial institutions, we maintain an allowance for loan
losses to provide for loans that our borrowers may not repay in
their entirety. We believe that we maintain an allowance for loan
losses at a level adequate to absorb probable losses inherent in
the loan portfolio. Through a periodic review and consideration of
the loan portfolio, management determines the amount of the
allowance for loan losses by considering general market conditions,
credit quality of the loan portfolio, the collateral supporting the
loans and performance of customers relative to their financial
obligations with us. At December 31, 2017, our non-performing loans
were $7.1 million, compared to $4.9 million at December 31, 2016.
Approximately $1.5 million of the increase is related to one
relationship that is reviewed for impairment and a specific reserve
of $249,000 has been recorded. The Company did not record a
provision for loan losses for the year ended December 31, 2017, and
our loan loss allowance was $6.04 million, or .98% of total loans
held for investment at December 31, 2017. The Company anticipates
that a provision for loan losses will be required in 2018 based on
expected growth coupled with normalized five year historical
charge-offs in the lookback period.
The
amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest
rates, which may be beyond our control, and these losses may exceed
current estimates. Although we believe the allowance for loan
losses is a reasonable estimate of known and inherent losses in the
loan portfolio, it cannot fully predict such losses or that the
loss allowance will be adequate in the future. While the risk of
nonpayment is inherent in banking, we could experience greater
nonpayment levels than we anticipate. In addition, we have loan
participation arrangements with several other banks within the
region and may not be able to exercise control of negotiations with
borrowers in the event these loans do not perform. Additional
problems with asset quality could cause our interest income and net
interest margin to decrease and our provisions for loan losses to
increase, which could adversely affect our results of operations
and financial condition.
Federal
and state regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses
or recognize further loan charge-offs, based on judgments different
than those of management. Any increase in the amount of the
provision or loans charged-off as required by these regulatory
agencies could have a negative effect on our operating
results.
8
PART
I, continued
Item
1A. Risk Factors, continued
Our loan concentrations could, as a result of adverse market
conditions, increase credit losses which could adversely impact
earnings.
We
offer a variety of secured loans, including commercial lines of
credit, commercial term loans, real estate, construction, home
equity, consumer and other loans. Many of our loans are secured by
real estate (both residential and commercial) in our market area,
which could result in adverse consequences to us in the event of a
prolonged economic downturn in our market. As of December 31, 2017,
approximately 80% of our loans had real estate as a primary or
secondary component of collateral. A significant decline
in real estate values in our market would mean that the collateral
for many of our loans would provide less security. As a result, we
would be more likely to suffer losses on defaulted loans because
our ability to fully recover on defaulted loans by selling the real
estate collateral would be diminished. In addition, our consumer
loans (such as automobile loans) are collateralized, if at all,
with assets that may not provide an adequate source of repayment of
the loan due to depreciation, damage or loss.
In
addition, we have a large portfolio of residential mortgages which
could be adversely affected by a decline in the real estate
markets. Construction and development lending entails significant
additional risks, because these loans, which often involve larger
loan balances concentrated with single borrowers or groups of
related borrowers, are dependent on the successful completion of
real estate projects. Loan funds for construction and development
loans often are advanced upon the security of the land or home
under construction, which value is estimated prior to the
completion of construction. The deterioration of one or a few
of these loans could cause a significant increase in the percentage
of non-performing loans. An increase in non-performing loans could
result in a loss of earnings from these loans, an increase in the
provision for loan losses and an increase in charge-offs, all of
which could have a material adverse effect on our financial
condition.
Our
dealer finance division exposes us to increased credit
risks
.
In
2012, the Bank began a loan production office which specializes in
providing consumer installment loans to finance automobile
purchases through a network of automobile dealers. As of December
31, 2017, we had approximately $75 million in loans outstanding in
this portfolio. We serve customers over a broad range of
creditworthiness, and the required terms and rates are reflective
of those risk profiles. While these loans have higher yields than
many of our other loans, such loans involve significant risks in
addition to normal credit risk. Potential risk elements associated
with indirect lending include the limited personal contact with the
borrower as a result of indirect lending through our network of
dealers, the absence of assured continued employment of the
borrower, the varying general creditworthiness of the borrower,
changes in the local economy and difficulty in monitoring
collateral. While indirect automobile loans are secured, such loans
are secured by depreciating assets and characterized by loan to
value ratios that could result in us not recovering the full value
of an outstanding loan upon default by the borrower. Delinquencies,
charge-offs and repossessions of vehicles in this portfolio are
always concerns. If general economic conditions worsen, we may
experience higher levels of delinquencies, repossessions and
charge-offs.
Our small-to-medium sized business target market may have fewer
financial resources to weather continued downturn in the
economy.
We
target our commercial development and marketing strategy primarily
to serve the banking and financial services needs of small and
medium sized businesses. These businesses generally have less
capital or borrowing capacity than larger entities. If general
economic conditions negatively impact this major economic sector in
the markets in which we operate, our results of operations and
financial condition may be adversely affected.
9
PART
I, continued
Item
1A. Risk Factors, continued
Our inability to maintain adequate sources of funding and liquidity
may negatively impact our current financial condition or our
ability to grow.
Our
access to funding and liquidity sources in amounts adequate to
finance our activities on terms which are acceptable to us could be
impaired by factors that affect us specifically or the financial
services industry or economy in general. In managing our
balance sheet, a primary source of funding asset growth and
liquidity historically has been deposits, including both local
customer deposits and brokered deposits. If the level of
deposits were to materially decrease, we would have to raise
additional funds by increasing the interest that we pay on
certificates of deposit or other depository accounts, seek other
debt or equity financing, or draw upon our available lines of
credit. Our access to these funding and liquidity
sources could be detrimentally impacted by a number of factors,
including operating losses, rising levels of non-performing assets,
a decrease in the level of our business activity as a result of a
downturn in the markets in which our loans or deposits are
concentrated or regulatory restrictions. In addition,
our ability to continue to attract deposits and other funding or
liquidity sources is subject to variability based upon additional
factors including volume and volatility in the securities markets
and the relative interest rates that we are prepared to pay for
these liabilities. We do not maintain significant
additional sources of liquidity through potential sales in our
investment portfolio or liquid assets at the holding company
level. Our potential inability to maintain adequate
sources of funding or liquidity may, among other things, inhibit
our ability to fund asset growth or negatively impact our financial
condition, including our ability to pay dividends or satisfy our
obligations.
If we do not maintain our capital requirements and our status as a
“well-capitalized” bank, there could an adverse effect
on our liquidity and our ability to fund our loan
portfolio.
We
are subject to regulatory capital adequacy guidelines. If we fail
to meet the capital adequacy guidelines for a
“well-capitalized” bank, it could increase the
regulatory scrutiny for the Bank and the Company. In
addition, if we failed to be “well capitalized” for
regulatory capital purposes, we would not be able to renew or
accept brokered deposits without prior regulatory approval and we
would not be able to offer interest rates on our deposit accounts
that are significantly higher than the average rates in our market
area. As a result, it would be more difficult for us to attract new
deposits as our existing brokered deposits mature and do not roll
over and to retain or increase existing, non-brokered
deposits. If we are prohibited from renewing or
accepting brokered deposits and are unable to attract new deposits,
our liquidity and our ability to fund our loan portfolio may be
adversely affected. In addition, we would be required to
pay higher insurance premiums to the FDIC, which would reduce our
earnings.
We are subject to more stringent capital requirements as a result
of the Basel III regulatory capital reforms and the Dodd-Frank Act
which could adversely affect our results of operations and future
growth.
In 2013, the Federal Reserve, the FDIC and the OCC
approved a new rule that substantially amends the regulatory
risk-based capital rules applicable to us. The final rule
implements the “Basel III” regulatory capital reforms
and changes required by the Dodd-Frank Act. The final rule includes
new minimum risk-based capital and leverage ratios which were
effective for us on January 1, 2015 and refines the definition of
what constitutes “capital” for purposes of calculating
these ratios. The new minimum capital requirements are: (i) a new
common equity Tier 1 (“CET1”) capital ratio of
4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which
is increased from 4%; (iii) a total capital ratio of 8%, which
is unchanged from the previous rules; and (iv) a Tier 1 leverage
ratio of 4%. The final rule also establishes a “capital
conservation buffer” of 2.5% above the new regulatory minimum
capital ratios, and when fully effective in 2019, will result in
the following minimum ratios: (a) a common equity Tier 1
capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital
ratio of 8.5%; and (c) a total capital ratio of 10.5%.
The capital
conservation buffer is being phased in from 0.00% for 2015 to 2.50%
by 2019.
An institution will be
subject to limitations on paying dividends, engaging in share
repurchases, and paying discretionary bonuses if its capital level
falls below the buffer amount. These limitations will establish a
maximum percentage of eligible retained income that can be utilized
for such activities. In addition, the final rule provides for a
number of new deductions from and adjustments to capital and
prescribes a revised approach for risk weightings that could result
in higher risk weights for a variety of asset
categories.
The
application of these more stringent capital requirements for us
could, among other things, result in lower returns on equity,
require the raising of additional capital, adversely affect our
future growth opportunities, and result in regulatory actions such
as a prohibition on the payment of dividends or on the repurchase
shares if we are unable to comply with such
requirements.
10
PART
I, continued
Item
1A. Risk Factors, continued
Consumer
financial protection laws and regulations could adversely impact
our earnings due to, among other things, increased compliance costs
or costs due to noncompliance.
The
Dodd-Frank Act established the Consumer Financial Protection Bureau
(“CFPD”) with broad authority to administer a new
federal regulatory framework of consumer financial regulation,
including consumer mortgage banking. For example, the CFPB issued a
rule, effective as of January 14, 2014, designed to clarify for
lenders how they can avoid monetary damages under the Dodd-Frank
Act, which would hold lenders accountable for ensuring a
borrower’s ability to repay a mortgage. Loans that satisfy
this “qualified mortgage” safe-harbor will be presumed
to have complied with the new ability-to-repay standard. Under the
Consumer Financial Protection Bureau’s rule, a
“qualified mortgage” loan must not contain certain
specified features, including but not limited to:
●
excessive upfront
points and fees (those exceeding 3% of the total loan amount, less
“bona fide discount points” for prime
loans);
●
interest-only
payments;
●
negative-amortization;
and
●
terms longer than
30 years.
Also,
to qualify as a “qualified mortgage,” a
borrower’s total monthly debt-to-income ratio may not exceed
43%. Lenders must also verify and document the income and financial
resources relied upon to qualify the borrower for the loan and
underwrite the loan based on a fully amortizing payment schedule
and maximum interest rate during the first five years, taking into
account all applicable taxes, insurance and assessments. The
CFPB’s rule on qualified mortgages and other consumer
financial protection laws could limit our ability or desire to make
certain types of loans or loans to certain borrowers or could make
it more expensive and/or time consuming to make these loans, which
could adversely impact our growth or profitability.
In
addition, the CFPB has been directed to write rules identifying
practices or acts that are unfair, deceptive or abusive in
connection with any transaction with a consumer for a consumer
financial product or service, or the offering of a consumer
financial product or service, and has initiated enforcement actions
against a variety of bank and non-bank market participants with
respect to a number of consumer financial products and services.
These enforcement actions may serve as precedent for how the CFPB
and other regulatory agencies interpret and enforce consumer
protection laws, including practices or acts that are deemed to be
unfair, deceptive or abusive, with respect to all supervised
institutions, which may result in the imposition of higher
standards of compliance with such laws.
Our future success is dependent on our ability to effectively
compete in the face of substantial competition from other financial
institutions in our primary markets.
We
encounter significant competition for deposits, loans and other
financial services from banks and other financial institutions,
including savings and loan associations, savings banks, finance
companies, and credit unions in our market area. A number of these
banks and other financial institutions are significantly larger
than us and have substantially greater access to capital and other
resources, larger lending limits, more extensive branch systems,
and may offer a wider array of banking services. To a limited
extent, we compete with other providers of financial services, such
as money market mutual funds, brokerage firms, consumer finance
companies, insurance companies and governmental organizations any
of which may offer more favorable financing rates and terms than
us. Many of these non-bank competitors are not subject to the same
extensive regulations that govern us. As a result, these non-bank
competitors may have advantages in providing certain services. This
competition may reduce or limit our margins and our market share
and may adversely affect our results of operations and financial
condition.
11
PART
I, continued
Item
1A. Risk Factors, continued
Our exposure to operational risk may adversely affect
us.
Similar
to other financial institutions, we are exposed to many types of
operational risk, including reputational risk, legal and compliance
risk, the risk of fraud or theft by employees or outsiders,
unauthorized transactions by employees or operational errors,
including clerical or record-keeping errors or those resulting from
faulty or disabled computer or telecommunications
systems.
Reputational risk,
or the risk to our earnings and capital from negative public
opinion, could result from our actual alleged conduct in any number
of activities, including lending practices, corporate governance,
regulatory compliance or the occurrence of any of the events or
instances mentioned below, or from actions taken by government
regulators or community organizations in response to that conduct.
Negative public opinion could also result from adverse news or
publicity that impairs the reputation of the financial services
industry generally.
Further, if any of
our financial, accounting, or other data processing systems fail or
have other significant shortcomings, we could be adversely
affected. We depend on internal systems and outsourced technology
to support these data storage and processing operations. Our
inability to use or access these information systems at critical
points in time could unfavorably impact the timeliness and
efficiency of our business operations. We could be adversely
affected if one of our employees causes a significant operational
break-down or failure, either as a result of human error or where
an individual purposefully sabotages or fraudulently manipulates
our operations or systems. We are also at risk of the impact of
natural disasters, terrorism and international hostilities on our
systems or for the effects of outages or other failures involving
power or communications systems operated by others.
Misconduct by
employees could include fraudulent, improper or unauthorized
activities on behalf of clients or improper use of confidential
information. We may not be able to prevent employee errors or
misconduct, and the precautions we take to detect this type of
activity might not be effective in all cases. Employee errors or
misconduct could subject us to civil claims for negligence or
regulatory enforcement actions, including fines and restrictions on
our business.
In
addition, there have been instances where financial institutions
have been victims of fraudulent activity in which criminals pose as
customers to initiate wire and automated clearinghouse transactions
out of customer accounts. Although we have policies and procedures
in place to verify the authenticity of our customers, we cannot
assure that such policies and procedures will prevent all
fraudulent transfers. Such activity can result in financial
liability and harm to our reputation.
If any
of the foregoing risks materialize, it could have a material
adverse effect on our business, financial condition and results of
operations.
Changes in market interest rates could affect our cash flows and
our ability to successfully manage our interest rate
risk.
Our
profitability and financial condition depend to a great extent on
our ability to manage the net interest margin, which is the
difference between the interest income earned on loans and
investments and the interest expense paid for deposits and
borrowings. The amounts of interest income and interest expense are
principally driven by two factors; the market levels of interest
rates, and the volumes of earning assets or interest bearing
liabilities. The management of the net interest margin is
accomplished by our Asset Liability Committee. Short term interest
rates are highly sensitive to factors beyond our control and are
effectively set and managed by the Federal Reserve, while longer
term rates are generally determined by the market based on
investors’ inflationary expectations. Thus, changes in
monetary and or fiscal policy will affect both short term and long
term interest rates which in turn will influence the origination of
loans, the prepayment speed of loans, the purchase of investments,
the generation of deposits and the rates received on loans and
investment securities and paid on deposits or other sources of
funding. The impact of these changes may be magnified if we do not
effectively manage the relative sensitivity of our earning assets
and interest bearing liabilities to changes in market interest
rates. We generally attempt to maintain a neutral position in terms
of the volume of earning assets and interest bearing liabilities
that mature or can re-price within a one year period in order that
we may maintain the maximum net interest margin; however, interest
rate fluctuations, loan prepayments, loan production and deposit
flows are constantly changing and greatly influence this ability to
maintain a neutral position.
12
PART
I, continued
Item
1A. Risk Factors, continued
Generally,
our earnings will be more sensitive to fluctuations in interest
rates the greater the difference between the volume of earning
assets and interest bearing liabilities that mature or are subject
to re-pricing in any period. The extent and duration of this
sensitivity will depend on the cumulative difference over time, the
velocity and direction of interest rate changes, and whether we are
more asset sensitive or liability sensitive. Additionally, the
Asset Liability Committee may desire to move our position to more
asset sensitive or more liability sensitive depending upon their
expectation of the direction and velocity of future changes in
interest rates in an effort to maximize the net interest margin.
Should we not be successful in maintaining the desired position, or
should interest rates not move as anticipated, our net interest
margin may be negatively impacted.
Our inability to successfully manage growth or implement our growth
strategy may adversely affect our results of operations and
financial condition.
We
may not be able to successfully implement our growth strategy if we
are unable to identify attractive markets, locations or
opportunities to expand in the future. Our ability to
manage growth successfully also depends on whether we can maintain
capital levels adequate to support our growth, maintain cost
controls, asset quality and successfully integrate any businesses
acquired into the organization.
As
we continue to implement our growth strategy, we may incur
increased personnel, occupancy and other operating expenses. We
must absorb those higher expenses while we begin to generate new
deposits, and there is a further time lag involved in redeploying
new deposits into attractively priced loans and other higher
yielding earning assets. Thus, our plans to branch could depress
earnings in the short run, even if we efficiently execute a
branching strategy leading to long-term financial
benefits.
Our operations rely on certain external vendors.
We
are reliant upon certain external vendors to provide products and
services necessary to maintain our day-to-day operations.
Accordingly, our operations are exposed to risk that these vendors
will not perform in accordance with the contracted arrangements
under service agreements. Although we maintain a system of
comprehensive policies and a control framework designed to monitor
vendor risks, the failure of an external vendor to perform in
accordance with the contracted arrangements under service
agreements could be disruptive to our operations, which could have
a material adverse impact on our business and, in turn, our
financial condition and results of operations.
Our
operations may be adversely affected by cyber security
risks.
In the
ordinary course of business, we collect and store sensitive data,
including proprietary business information and personally
identifiable information of its customers and employees in systems
and on networks. The secure processing, maintenance and use of this
information is critical to operations and our business strategy. We
have invested in accepted technologies and review processes and
practices that are designed to protect our networks, computers and
data from damage or unauthorized access. Despite these security
measures, our computer systems and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error,
malfeasance or other disruptions. A breach of any kind could
compromise systems and the information stored there could be
accessed, damaged or disclosed. A breach in security could result
in legal claims, regulatory penalties, disruption in operations,
and damage to our reputation, which could adversely affect our
business.
Legislative or regulatory changes or actions, or significant
litigation, could adversely impact us or the businesses in which we
are engaged.
We
are subject to extensive state and federal regulation, supervision
and legislation that govern almost all aspects of our operations.
Laws and regulations may change from time to time and are primarily
intended for the protection of consumers, depositors and the
deposit insurance funds. The impact of any changes to laws and
regulations or other actions by regulatory agencies may negatively
impact us or our ability to increase the value of our business.
Additionally, actions by regulatory agencies or significant
litigation against us could cause us to devote significant time and
resources to defending ourselves and may lead to penalties that
materially affect us. Future changes in the laws or regulations or
their interpretations or enforcement could be materially adverse us
and our shareholders.
13
PART
I, continued
Item
1A. Risk Factors, continued
Changes in accounting standards could impact reported
earnings.
The
accounting standard setters, including the Financial Accounting
Standards Board (FASB), SEC and other regulatory bodies,
periodically change the financial accounting and reporting
standards that govern the preparation of our consolidated financial
statements. These changes can be difficult to predict and can
materially impact how we record and report our financial condition
and results of operations. In some cases, we could be required to
apply a new or revised standard retroactively, resulting in the
restatement of prior period financial statements.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology and
other changes are allowing parties to complete financial
transactions through alternative methods that historically have
involved banks. The activity and prominence of so-called
marketplace lenders and other technological financial service
companies have grown significantly over recent years and is
expected to continue growing. In addition, consumers can now
maintain funds that would have historically been held as bank
deposits in brokerage accounts, mutual funds or general-purpose
reloadable prepaid cards. Consumers can also complete transactions,
such as paying bills and/or transferring funds directly without the
assistance of banks. If we are unable to address the competitive
pressures that we face, we could lose market share, which could
result in reduced net revenue and profitability and lower returns,
as well as the loss of customer deposits. The loss of these revenue
streams and the lower cost of deposits as a source of funds could
have a material adverse effect on our financial condition and
results of operations.
Failure
to keep pace with technological change could adversely affect our
business.
The
financial services industry is continually undergoing rapid
technological change with frequent introductions of new
technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions
to better serve customers and to reduce costs. Our future success
depends, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that
will satisfy customer demands, as well as to create additional
efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in
marketing these products and services to our customers. Failure to
successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on
our business and, in turn, our financial condition and results of
operations.
The
full impact of changes to federal tax laws is uncertain and may
negatively impact our financial performance.
We are
subject to changes in tax law that could increase our effective tax
rates. These law changes may be retroactive to previous periods
and, as a result, could negatively affect our current and future
financial performance.
The Tax
Cuts and Jobs Act, the full impact of which is subject to further
evaluation and analysis, is likely to have both positive and
negative effects on our financial performance. For example, the new
legislation will result in a reduction in our federal corporate tax
rate from 35% to 21% beginning in 2018, which is expected to have a
favorable impact on our earnings and capital generation abilities.
However, the new legislation also enacted limitations on certain
deductions, such as the deduction of FDIC deposit insurance
premiums, which will partially offset the anticipated increase in
net earnings from the lower tax rate. In addition, as a result of
the lower corporate tax rate, we were required under Generally
Accepted Accounting Principles (GAAP) to record a tax expense due
to remeasurement in the fourth quarter of 2017 with respect to our
deferred tax assets amounting to $811,000. Further, the full impact
of the Tax Act may differ from the foregoing and from our
expectations, possibly materially, due to changes in
interpretations or in assumptions that we have made or that we make
in 2018, guidance or regulations that may be promulgated, and other
actions that we may take as a result of the Tax Act.
Similarly, the
Bank’s customers are likely to experience varying effects
from both the individual and business tax provisions of the Tax
Act. For example, changes to tax deductibility of business interest
expense could impact business customer borrowing. Such effects,
whether positive or negative, may have a corresponding impact on
our business and the economy as a whole.
14
The
Company does not have any unresolved staff comments to report for
the year ended December 31, 2017.
The
locations of F & M Bank Corp. and its subsidiaries are shown
below.
|
Corporate
Offices
|
Timberville
Branch
|
Elkton
Branch
|
|
205
South Main Street
|
165
New Market Road
|
127
West Rockingham Street
|
|
Timberville,
VA 22853
|
Timberville,
VA 22853
|
Elkton,
VA 22827
|
|
Broadway
Branch
|
Coffman’s
Corner Branch
|
|
126
Timberway
|
2030
Legacy Lane
|
|
Broadway,
VA 22815
|
Harrisonburg,
VA 22801
|
|
|
|
|
Bridgewater
Branch
|
Edinburg
Branch
|
|
100
Plaza Drive
|
120
South Main Street
|
|
Bridgewater,
VA 22812
|
Edinburg,
VA 22824
|
|
|
|
|
Woodstock
Branch
|
Crossroads
Branch
|
|
161
South Main Street
|
80
Cross Keys Road
|
|
Woodstock,
VA 22664
|
Harrisonburg,
VA 22801
|
|
|
|
|
Luray
Branch
|
Dealer
Finance Division
|
|
700
East Main Street
|
4759
Spotswood Trail
|
|
Luray,
VA 22835
|
Penn
Laird, VA 22846
|
|
|
|
|
Myers
Corner Branch
|
North
Augusta Branch
|
|
30
Gosnell Crossing
|
2813
North Augusta Street
|
|
Staunton,
VA 24401
|
Staunton,
VA 22401
|
|
|
|
|
Craigsville
Branch
|
Grottoes
Branch
|
|
125
W. Craig Street
|
200
Augusta Avenue
|
|
Craigsville,
VA 24430
|
Grottoes,
VA 24441
|
With
the exception of the Edinburg Branch, Luray Branch, Dealer Finance
Division, and the North Augusta Branch, the remaining facilities
are owned by Farmers & Merchants Bank. ATMs are available at
all branch locations.
Through
an agreement with FCTI, Inc., the Bank also operates cash only ATMs
at five Food Lion grocery stores, one in Mt. Jackson, VA and four
in Harrisonburg, VA. The Bank has an agreement with CardTronics ATM
to operate twelve cash only ATMs in various Rite Aid Pharmacies,
CVS Pharmacies and Target Stores in Rockingham and Augusta Counties
of VA. The Bank also has an agreement with ATM USA to operate ATMs
in various locations in our market area.
|
VBS’ offices
are located at:
|
|
|
|
Harrisonburg
Office
|
Fishersville
Office
|
Woodstock
Office
|
|
2040
Deyerle Avenue
|
1842
Jefferson Hwy
|
161
South Main Street
|
|
Suite
107
|
Fishersville,
VA 22939
|
Woodstock,
VA 22664
|
|
Harrisonburg,
VA 22801
|
|
|
|
|
|
|
|
VS
Title’s offices are located at:
|
|
|
|
Harrisonburg
Office
|
Fishersville
Office
|
Charlottesville
Office
|
|
410
Neff Avenue
|
1707
Jefferson Highway
|
154
Hansen Rd., Suite 202-C
|
|
Harrisonburg,
VA 22801
|
Fishersville,
VA 22939
|
Charlottesville,
VA 22911
|
In the
normal course of business, the Company may become involved in
litigation arising from banking, financial, or other activities of
the Company. Management after consultation with legal counsel, does
not anticipate that the ultimate liability, if any, arising out of
these matters will have a material effect on the Company’s
financial condition, operating results or liquidity.
15
None.
Stock
Listing
The
Company’s Common Stock is quoted under the symbol
“FMBM” on the OTCQX Market. The bid and ask price is
quoted at
www.OTCMARKETS.com/Stock/FMBM/quote
.
With its inclusion on the OTCQX Markets, there are now several
active market makers for FMBM stock.
Transfer
Agent and Registrar
Broadridge
Financial Solutions
2
Journal Plaza Square, 7
th
Floor
Jersey
City, NJ 07306
Stock
Performance
The
following graph compares the cumulative total return to the
shareholders of the Company for the last five fiscal years with the
total return of the Russell 2000 Index and the SNL Bank Index, as
reported by SNL Financial, LC, assuming an investment of $100 in
the Company’s common stock on December 31, 2012, and the
reinvestment of dividends.
|
|
Period Ending
|
|||||
|
Index
|
12/31/12
|
12/31/13
|
12/31/14
|
12/31/15
|
12/31/16
|
12/31/17
|
|
F
& M Bank Corp.
|
100.00
|
126.23
|
138.04
|
166.31
|
197.11
|
258.36
|
|
Russell 2000
Index
|
100.00
|
138.82
|
145.62
|
139.19
|
168.85
|
193.58
|
|
SNL Bank
Index
|
100.00
|
137.30
|
153.48
|
156.10
|
197.23
|
232.91
|
16
17
PART
II, continued
Recent
Stock Prices and Dividends
Dividends to common
shareholders totaled $2,972,000 and $2,628,000 in 2017 and 2016,
respectively. Preferred stock dividends were $415,000 and $487,000
in 2017 and 2016, respectively. Regular quarterly dividends have
been declared for at least 25 years. The payment of dividends
depends on the earnings of the Company and its subsidiaries, the
financial condition of the Company and other factors including
capital adequacy, regulatory requirements, general economic
conditions and shareholder returns. The ratio of dividends per
common share to net income per common share was 35.67% in 2017,
compared to 28.88% in 2016.
Refer
to
Payment of Dividends
in
Item 1. Business, Regulation and Supervision section above for a
summary of applicable restrictions on the Company’s ability
to pay dividends.
Stock
Repurchases
As
previously reported, on September 18, 2008, the Company’s
Board of Directors approved an increase in the number of shares of
common stock that the Company can repurchase under the share
repurchase program from 150,000 to 200,000 shares. On October 20,
2016, the Company’s Board of Directors approved a plan to
repurchase up to an additional 150,000 shares of common stock.
Shares repurchased through the end of 2017 totaled 221,976 shares;
of this amount, 21,984 were repurchased in 2017 at an average price
of $32.39 per share.
The
number of common shareholders was approximately 2,104 as of March
9, 2018. This amount includes all shareholders, whether titled
individually or held by a brokerage firm or custodian in street
name.
Quarterly
Stock Information
These
quotes include the terms of trades transacted through a broker. The
terms of exchanges occurring between individual parties may not be
known to the Company.
|
|
2017
|
2016
|
||||
|
|
Stock Price
Range
|
Per
Share
|
Stock Price
Range
|
Per
Share
|
||
|
Quarter
|
Low
|
High
|
Dividends
Declared
|
Low
|
High
|
Dividends
Declared
|
|
|
|
|
|
|
|
|
|
1
st
|
$
26.50
|
$
28.45
|
$
.22
|
$
21.75
|
$
23.55
|
$
.19
|
|
2
nd
|
27.50
|
29.35
|
.23
|
23.02
|
25.00
|
.19
|
|
3
rd
|
29.20
|
32.00
|
.24
|
23.50
|
26.25
|
.20
|
|
4
th
|
30.02
|
34.50
|
.25
|
24.82
|
27.00
|
.22
|
|
Total
|
|
|
$
.94
|
|
|
$
.80
|
18
PART
II, continued
Five
Year Summary of Selected Financial Data
|
(Dollars and shares in thousands, except per share
data)
|
2017
|
2016
6
|
2015
6
|
2014
|
2013
|
|
Income Statement Data:
|
|
|
|
|
|
|
Interest and
Dividend Income
|
$
34,095
|
$
32,150
|
$
29,404
|
$
26,772
|
$
25,966
|
|
Interest
Expense
|
3,897
|
3,599
|
2,876
|
3,648
|
4,773
|
|
Net Interest
Income
|
30,198
|
28,551
|
26,528
|
23,124
|
21,193
|
|
Provision for
Loan Losses
|
-
|
-
|
300
|
2,250
|
3,775
|
|
Net Interest
Income After Provision for Loan Losses
|
30,198
|
28,551
|
26,228
|
20,874
|
17,418
|
|
Noninterest
Income
6
|
8,517
|
6,313
|
5,412
|
3,530
|
4,032
|
|
Low income
housing partnership losses
|
(625
)
|
(731
)
|
(619
)
|
(608
)
|
(856
)
|
|
Noninterest
Expenses
6
|
24,719
|
21,272
|
19,554
|
15,656
|
14,720
|
|
Income before
income taxes
|
13,371
|
12,861
|
11,467
|
8,140
|
5,874
|
|
Income Tax
Expense
|
4,330
|
3,099
|
2,886
|
2,293
|
1,051
|
|
Net income
attributable to noncontrolling interest
|
(31
)
|
(194
)
|
(164
)
|
(45
)
|
(107
)
|
|
Net Income
attributable to F & M Bank Corp.
|
$
9,010
|
$
9,568
|
$
8,417
|
$
5,802
|
$
4,716
|
|
Per Common Share Data:
|
|
|
|
|
|
|
Net Income
– basic
|
$
2.63
|
$
2.77
|
$
2.40
|
$
1.82
|
$
1.88
|
|
Net Income -
diluted
|
$
2.48
|
$
2.57
|
$
2.25
|
$
1.80
|
$
1.88
|
|
Dividends
Declared
|
.94
|
.80
|
.73
|
.68
|
.68
|
|
Book Value per
Common Share
|
25.73
|
24.18
|
22.38
|
20.77
|
21.56
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
Assets
|
$
753,270
|
$
744,889
|
$
665,357
|
$
605,308
|
$
552,788
|
|
Loans Held for
Investment
|
616,974
|
591,636
|
544,053
|
518,202
|
478,453
|
|
Loans Held for
Sale
|
39,775
|
62,735
|
57,806
|
13,382
|
3,804
|
|
Securities
|
41,243
|
39,475
|
25,329
|
22,305
|
38,486
|
|
Deposits
|
569,177
|
537,085
|
494,670
|
491,505
|
464,149
|
|
Short-Term
Debt
|
25,296
|
40,000
|
24,954
|
14,358
|
3,423
|
|
Long-Term
Debt
|
49,733
|
64,237
|
48,161
|
9,875
|
21,691
|
|
Stockholders’
Equity
|
91,275
|
86,682
|
82,950
|
77,798
|
54,141
|
|
Average Common
Shares Outstanding – basic
|
3,270
|
3,282
|
3,291
|
3,119
|
2,504
|
|
Average Common
Shares Outstanding – diluted
|
3,632
|
3,717
|
3,735
|
3,230
|
2,504
|
|
Financial Ratios:
|
|
|
|
|
|
|
Return on Average
Assets
1
|
1.21
%
|
1.34
%
|
1.31
%
|
1.00
%
|
.82
%
|
|
Return on Average
Equity
1
|
10.01
%
|
11.18
%
|
10.46
%
|
8.65
%
|
9.11
%
|
|
Net Interest
Margin
|
4.53
%
|
4.34
%
|
4.43
%
|
4.30
%
|
4.02
%
|
|
Efficiency Ratio
2
|
63.54
%
|
60.78
%
|
60.97
%
|
58.51
%
|
58.15
%
|
|
Dividend Payout
Ratio - Common
|
35.74
%
|
28.88
%
|
30.42
%
|
37.36
%
|
36.17
%
|
|
Capital and Credit Quality Ratios:
|
|
|
|
|
|
|
Average Equity to
Average Assets
1
|
12.10
%
|
11.97
%
|
12.49
%
|
11.59
%
|
9.00
%
|
|
Allowance for
Loan Losses to Loans
3
|
.98
%
|
1.27
%
|
1.61
%
|
1.68
%
|
1.71
%
|
|
Nonperforming
Loans to Total Assets
4
|
.94
%
|
.65
%
|
.98
%
|
1.15
%
|
2.28
%
|
|
Nonperforming
Assets to Total Assets
5
|
1.21
%
|
.94
%
|
1.34
%
|
1.73
%
|
2.75
%
|
|
Net Charge-offs
to Total Loans
3
|
.24
%
|
.21
%
|
.04
%
|
.33
%
|
.78
%
|
1
Ratios are
primarily based on daily average balances.
2
The Efficiency
Ratio equals noninterest expenses divided by the sum of tax
equivalent net interest income and noninterest income. Noninterest
income excludes gains (losses) on securities transactions and LIH
Partnership losses. Ratio for 2017, 2016 and 2015 reflects
reclassification of VBS and VST (2017 only) to report gross
income/expense rather than net.
3
Calculated based on
Loans Held for Investment, excludes Loans Held for
Sale.
4
Calculated based on
90 day past due and non-accrual to Total Assets.
5
Calculated based on
90 day past due, non-accrual and OREO to Total Assets
6
Data
reflects reclassification of VBS (2017, 2016, 2015) and VST (2017)
to report gross income/expense rather than net
19
PART
II, continued
The
following discussion provides information about the major
components of the results of operations and financial condition,
liquidity and capital resources of F & M Bank Corp. and its
subsidiaries. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and the
Notes to the Consolidated Financial Statements presented in Item 8,
Financial Statements and Supplementary Information, of this Form
10-K.
Lending Activities
Credit
Policies
The
principal risk associated with each of the categories of loans in
our portfolio is the creditworthiness of our borrowers. Within each
category, such risk is increased or decreased, depending on
prevailing economic conditions. In an effort to manage the risk,
our loan policy gives loan amount approval limits to individual
loan officers based on their position and level of experience and
to our loan committees based on the size of the lending
relationship. The risk associated with real estate and construction
loans, commercial loans and consumer loans varies, based on market
employment levels, consumer confidence, fluctuations in the value
of real estate and other conditions that affect the ability of
borrowers to repay indebtedness. The risk associated with real
estate construction loans varies, based on the supply and demand
for the type of real estate under construction.
We have
written policies and procedures to help manage credit risk. We have
a loan review policy that includes regular portfolio reviews to
establish loss exposure and to ascertain compliance with our loan
policy.
We use
a management loan committee and a directors’ loan committee
to approve loans. The management loan committee is comprised of
members of senior management, and the directors’ loan
committee is comprised of any six directors. Both committees
approve new, renewed and or modified loans that exceed officer loan
authorities. The directors’ loan committee also reviews any
changes to our lending policies, which are then approved by our
board of directors.
Construction
and Development Lending
We make
construction loans, primarily residential, and land acquisition and
development loans. The construction loans are secured by
residential houses under construction and the underlying land for
which the loan was obtained. The average life of a construction
loan is approximately 12 months, and it is typically re-priced as
the prime rate of interest changes. The majority of the interest
rates charged on these loans float with the market. Construction
lending entails significant additional risks, compared with
residential mortgage lending. Construction loans often involve
larger loan balances concentrated with single borrowers or groups
of related borrowers. Another risk involved in construction lending
is attributable to the fact that loan funds are advanced upon the
security of the land or home under construction, which value is
estimated prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to
complete a project and related loan-to-value ratios. To mitigate
the risks associated with construction lending, we generally limit
loan amounts to 75% to 90% of appraised value, in addition to
analyzing the creditworthiness of our borrowers. We also obtain a
first lien on the property as security for our construction loans
and typically require personal guarantees from the borrower’s
principal owners.
20
PART
II, continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Commercial
Real Estate Lending
Commercial real
estate loans are secured by various types of commercial real estate
in our market area, including multi-family residential buildings,
commercial buildings and offices, shopping centers and churches.
Commercial real estate lending entails significant additional
risks, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated
with single borrowers or groups of related borrowers. Additionally,
the payment experience on loans secured by income producing
properties is typically dependent on the successful operation of a
business or a real estate project and thus may be subject, to a
greater extent, to adverse conditions in the real estate market or
in the economy in general. Our commercial real estate loan
underwriting criteria require an examination of debt service
coverage ratios and the borrower’s creditworthiness, prior
credit history and reputation. We also evaluate the location of the
security property and typically require personal guarantees or
endorsements of the borrower’s principal owners.
Business
Lending
Business loans
generally have a higher degree of risk than residential mortgage
loans but have higher yields. To manage these risks, we generally
obtain appropriate collateral and personal guarantees from the
borrower’s principal owners and monitor the financial
condition of our business borrowers. Residential mortgage loans
generally are made on the basis of the borrower’s ability to
make repayment from employment and other income and are secured by
real estate whose value tends to be readily ascertainable. In
contrast, business loans typically are made on the basis of the
borrower’s ability to make repayment from cash flow from its
business and are secured by business assets, such as real estate,
accounts receivable, equipment and inventory. As a result, the
availability of funds for the repayment of business loans is
substantially dependent on the success of the business itself.
Furthermore, the collateral for business loans may depreciate over
time and generally cannot be appraised with as much precision as
residential real estate.
Consumer
Lending
We
offer various consumer loans, including personal loans and lines of
credit, automobile loans, deposit account loans, installment and
demand loans, and home equity lines of credit and loans. Such loans
are generally made to clients with whom we have a pre-existing
relationship. We currently originate all of our consumer loans in
our geographic market area.
The
underwriting standards employed by us for consumer loans include a
determination of the applicant’s payment history on other
debts and an assessment of their ability to meet existing
obligations and payments on the proposed loan. The stability of the
applicant’s monthly income may be determined by verification
of gross monthly income from primary employment and additionally
from any verifiable secondary income. Although creditworthiness of
the applicant is of primary consideration, the underwriting process
also includes an analysis of the value of the security in relation
to the proposed loan amount. For home equity lines of credit and
loans we require title insurance, hazard insurance and, if
required, flood insurance.
Residential
Mortgage Lending
The
Bank makes residential mortgage loans for the purchase or refinance
of existing loans with loan to value limits ranging between 80 and
90% depending on the age of the property, borrower’s income
and credit worthiness. Loans that are retained in our portfolio
generally carry adjustable rates that can change every three to
five years, based on amortization periods of twenty to thirty
years.
21
PART
II, continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Loans
Held for Sale
The
Bank makes fixed rate mortgage loans with terms of typically
fifteen or thirty years through its subsidiary VBS Mortgage. These
loans are funded by VBS utilizing a line of credit at the Bank
until sold to investors in the secondary market. Similarly, the
Bank also has a relationship with Northpointe Bank in Grand Rapids,
MI whereby it purchases fixed rate conforming 1-4 family mortgage
loans for short periods of time pending those loans being sold to
investors in the secondary market. These loans have an average
duration of ten days to two weeks, but occasionally remain on the
Bank’s books for up to 60 days. The Bank began its
relationship with Northpointe Bank in 2014 and had a similar
program with a prior bank since 2003. This relationship allows the
Bank to achieve a higher rate of return than is available on other
short term investment opportunities.
Dealer
Finance Division
In
September 2012, the Bank started a loan production office in Penn
Laird, VA which specializes in providing automobile financing
through a network of automobile dealers. The Dealer Finance
Division was originally staffed with three officers that have
extensive experience in Dealer Finance. Based on the strong growth
of this division the staff has been increased to six employees.
This office is serving the automobile finance needs for customers
of dealers throughout the existing geographic footprint of the
Bank. Approximately fifty dealers have signed contracts to
originate loans on behalf of the Bank. As of year end 2017, the
division had total loans outstanding of $75.2 million.
Critical Accounting Policies
General
The
Company’s financial statements are prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”). The financial information
contained within the statements is, to a significant extent,
financial information that is based on measures of the financial
effects of transactions and events that have already occurred. The
Company’s financial position and results of operations are
affected by management’s application of accounting policies,
including estimates, assumptions and judgments made to arrive at
the carrying value of assets and liabilities and amounts reported
for revenues, expenses and related disclosures. Different
assumptions in the application of these policies could result in
material changes in the Company’s consolidated financial
position and/or results of operations.
In
addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of these
transactions would be the same, the timing of events that would
impact these transactions could change. Following is a summary of
the Company’s significant accounting policies that are highly
dependent on estimates, assumptions and judgments.
Allowance for Loan Losses
The allowance for loan losses is an estimate of
the losses that may be sustained in the loan portfolio. The
allowance is based on two basic principles of accounting: (i) ASC
450 (formerly SFAS No. 5)
“Contingencies”
,
which requires that losses be accrued when they
are probable of occurring and estimable and (ii) ASC 310 (formerly
SFAS No.
114), “Receivables”
,
which requires that losses be accrued
based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the
secondary market and the loan balance. The Company’s
allowance for loan losses is the accumulation of various components
that are calculated based on independent methodologies. All
components of the allowance represent an estimation performed
pursuant to either ASC 450 or ASC 310. Management’s estimate
of each ASC 450 component is based on certain observable data that
management believes are most reflective of the underlying credit
losses being estimated. This evaluation includes credit quality
trends; collateral values; loan volumes; geographic, borrower and
industry concentrations; seasoning of the loan portfolio; the
findings of internal credit quality assessments and results from
external bank regulatory examinations. These factors, as well as
historical losses and current economic and business conditions, are
used in developing estimated loss factors used in the
calculations.
22
PART
II, continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, continued
Allowance for Loan Losses, continued
Allowances for
loans are determined by applying estimated loss factors to the
portfolio based on management’s evaluation and “risk
grading” of the loan portfolio. Specific allowances are
typically provided on all impaired loans in excess of a defined
loan size threshold that are classified in the Substandard or
Doubtful risk grades. The specific reserves are determined on a
loan-by-loan basis based on management’s evaluation of the
Company’s exposure for each credit, given the current payment
status of the loan and the value of any underlying
collateral.
While
management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the
allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations
or, if required by regulators, based upon information available to
them at the time of their examinations. Such adjustments to
original estimates, as necessary, are made in the period in which
these factors and other relevant considerations indicate that loss
levels may vary from previous estimates.
Goodwill and Intangibles
In
June 2001, the Financial Accounting Standards Board issued ASC 805,
Business Combinations
and
ASC 350,
Intangibles
. The
provisions of ASC 350 discontinue and amortization of goodwill and
intangible assets with indefinite lives. Instead, these assets are
subject to an annual impairment review and more frequently if
certain impairment indicators are in evidence. ASC 350 also
requires that reporting units be identified for the purpose of
assessing potential future impairments of
goodwill.
The
Company adopted ASC 350 on January 1, 2002. Goodwill totaled
$2,639,000 at January 1, 2002. As of December 31, 2008, the Company
recognized $31,000 in additional goodwill related to the purchase
of 70% ownership in VBS Mortgage. In 2017 the Company recognized
$211,000 in goodwill and $285,000 in intangibles related to the
purchase of 76% ownership in VST. The goodwill is not amortized but
is tested for impairment at least annually. Based on this testing,
there were no impairment charges for 2017, 2016 or 2015.
The Intangibles related to the VST
purchase are amortized over periods up to 15 years with $53,000
recorded in 2017.
Income
Tax
The
determination of income taxes represents results in income and
expense being recognized in different periods for financial
reporting purposes versus for the purpose of computing income taxes
currently payable. Deferred taxes are provided on such temporary
differences and are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. Further, the
Company seeks strategies that minimize the tax effect of
implementing its business strategies. Management makes judgments
regarding the ultimate consequence of long-term tax planning
strategies, including the likelihood of future recognition of
deferred tax benefits. As a result, it is considered a significant
estimate.
23
PART
II, continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, continued
Fair
Value
The
estimate of fair value involves the use of (1) quoted prices for
identical instruments traded in active markets, (2) quoted prices
for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active,
and model-based valuation techniques using significant assumptions
that are observable in the market or (3) model-based techniques
that use significant assumptions not observable in the market. When
observable market prices and parameters are not fully available,
management’s judgment is necessary to arrive at fair value
including estimates of current market participant expectations of
future cash flows, risk premiums, among other things. Additionally,
significant judgment may be required to determine whether certain
assets measured at fair value are classified within the fair value
hierarchy as Level 2 or Level 3. The estimation process and the
potential materiality of the amounts involved result in this item
being identified as critical.
Pension
Plan Accounting
The
accounting guidance for the measurement and recognition of
obligations and expense related to pension plans generally applies
the concept that the cost of benefits provided during retirement
should be recognized over the employees’ active working life.
Inherent in this concept is the requirement to use various
actuarial assumptions to predict and measure costs and obligations
many years prior to the settlement date. Major actuarial
assumptions that require significant management judgment and have a
material impact on the measurement of benefits expense and
accumulated obligation include discount rates, expected return on
assets, mortality rates, and projected salary increases, among
others. Changes in assumptions or judgments related to any of these
variables could result in significant volatility in the
Company’s financial condition and results of operations. As a
result, accounting for the Company’s pension expense and
obligation is considered a significant estimate. The estimation
process and the potential materiality of the amounts involved
result in this item being identified as critical.
Other
Real Estate Owned (OREO)
OREO is
held for sale and represents real estate acquired through or in
lieu of foreclosure. OREO is initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis.
Physical possession of residential real estate property
collateralizing a consumer mortgage loan occurs when legal title is
obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through
completion of a deed in lieu of foreclosure or through a similar
legal agreement. The Company’s policy is to carry OREO on its
balance sheet at the lower of cost or fair value less estimated
costs to sell. If fair value declines subsequent to foreclosure, a
valuation allowance is recorded through expense. Operating costs
after acquisition are expensed.
24
Overview
The
Company’s net income for 2017 totaled $9,010,000 or $2.63 per
common share, a decrease of 5.83% from $9,568,000 or $2.77 a share
in 2016. Return on average equity decreased in 2017 to 10.01%
versus 11.18% in 2016, and the return on average assets decreased
from 1.34% in 2016 to 1.21% in 2017. These results reflect an
$811,000 tax adjustment due to the write down of deferred tax
assets as a result of the change in federal corporate income tax
rate from 34% to 21% with the passing of the Tax Cuts & Jobs
Act.
See
page 19 for a
five-year summary of selected financial data.
Changes
in Net Income per Common Share (Basic)
|
|
2017
|
2016
|
|
|
to 2016
|
to 2015
|
|
|
|
|
|
Prior Year Net
Income Per Common Share (Basic)
|
$
2.77
|
$
2.40
|
|
Change from
differences in:
|
|
|
|
Net interest
income
1
|
.52
|
.62
|
|
Provision for
loan losses
|
-
|
.09
|
|
Noninterest
income, excluding securities gains
|
1.36
|
(.08
)
|
|
Security gains
(losses), net
|
(.01
)
|
-
|
|
Noninterest
expenses
1
|
(1.66
)
|
(.40
)
|
|
Income
taxes
|
(.38
)
|
.12
|
|
Effect of
preferred stock dividend
|
.02
|
.01
|
|
Change in average
shares outstanding
|
.01
|
.01
|
|
Total
Change
|
(.14
)
|
.37
|
|
Net Income Per
Common Share (Basic)
|
$
2.63
|
$
2.77
|
1
Noninterest income
and noninterest expense reflect the reclassification of VBS to
record gross income/expense rather than net.
Net
Interest Income
The
largest source of operating revenue for the Company is net interest
income, which is calculated as the difference between the interest
earned on earning assets and the interest expense paid on interest
bearing liabilities. Net interest income increased 5.78% from 2016
to 2017 following an increase of 7.60% from 2015 to 2016. The net
interest margin is the net interest income expressed as a
percentage of interest earning assets. Changes in the volume and
mix of interest earning assets and interest bearing liabilities,
along with their yields and rates, have a significant impact on the
level of net interest income. Tax equivalent net interest income
for 2017 was $30,342,000 representing an increase of $1,714,000 or
5.99% over the prior year. A 7.60% increase in 2016 versus 2015
resulted in total tax equivalent net interest income of
$28,683,000.
In this
discussion and in the tabular analysis of net interest income
performance, entitled “Consolidated Average Balances, Yields
and Rates,” (found on page 26), the interest earned on tax
exempt loans and investment securities has been adjusted to reflect
the amount that would have been earned had these investments been
subject to normal income taxation. This is referred to as tax
equivalent net interest income. For a reconciliation of tax
equivalent net interest income to GAAP measures, see the table on
page 40.
Tax
equivalent income on earning assets increased $2,012,000 in 2017
compared to 2016. Loans held for investment, expressed as a
percentage of total earning assets, increased in 2017 to 90.29% as
compared to 86.02% in 2016. During 2017, yields on earning assets
increased 23 basis points (BP), primarily due to rate increases
during 2017 specifically in commercial loans, investments and
federal funds sold. The average cost of interest bearing
liabilities increased 6BP in 2017, following an increase of 9BP in
2016. The increase in 2017 in due to increased cost of deposits and
debt as rates increased.
The
analysis on the next page reveals an increase in the net interest
margin to 4.53% in 2017 from 4.34% in 2016, primarily due to
changes in balance sheet leverage and increased interest rates
during the year.
25
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Consolidated
Average Balances, Yields and Rates
1
|
|
2017
|
2016
|
2015
|
||||||
|
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Loans
2
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
182,646
|
$
9,475
|
5.19
%
|
$
176,389
|
$
8,362
|
4.74
%
|
$
170,272
|
$
8,103
|
4.76
%
|
|
Real
estate
|
330,828
|
16,678
|
5.04
%
|
312,435
|
15,781
|
5.05
%
|
295,892
|
14,976
|
5.07
%
|
|
Installment
|
90,787
|
6,470
|
7.13
%
|
78,524
|
5,805
|
7.39
%
|
65,870
|
4,981
|
7.56
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for investment
4
|
604,261
|
32,623
|
5.40
%
|
567,348
|
29,948
|
5.28
%
|
532,034
|
28,087
|
5.28
%
|
|
Loans
held for sale
|
37,008
|
1,112
|
3.00
%
|
68,438
|
1,924
|
2.81
%
|
40,450
|
1,099
|
2.72
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
3
|
|
|
|
|
|
|
|
|
|
|
Fully
taxable
|
10,886
|
338
|
3.10
%
|
15,714
|
372
|
2.37
%
|
17,372
|
327
|
1.88
%
|
|
Partially
taxable
|
125
|
-
|
-
|
125
|
-
|
-
|
125
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
11,011
|
338
|
3.07
%
|
15,839
|
372
|
2.37
%
|
17,497
|
327
|
1.88
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits in banks
|
1,512
|
10
|
.66
%
|
727
|
3
|
.41
%
|
1,223
|
-
|
-
|
|
Federal funds
sold
|
15,475
|
156
|
1.01
%
|
7,195
|
35
|
.49
%
|
9,310
|
21
|
.23
%
|
|
Total
Earning Assets
|
669,267
|
34,239
|
5.12
%
|
659,547
|
32,282
|
4.89
%
|
600,514
|
29,534
|
4.92
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses
|
(6,793
)
|
|
|
(8,162
)
|
|
|
(8,933
)
|
|
|
|
Nonearning
assets
|
81,552
|
|
|
63,205
|
|
|
52,378
|
|
|
|
Total
Assets
|
$
744,026
|
|
|
$
714,590
|
|
|
$
643,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
Demand
–interest bearing
|
$
121,095
|
$
538
|
.44
%
|
$
113,525
|
$
499
|
.44
%
|
$
112,334
|
$
539
|
.48
%
|
|
Savings
|
114,489
|
516
|
.45
%
|
100,298
|
441
|
.44
%
|
76,491
|
212
|
.28
%
|
|
Time
deposits
|
159,415
|
1,634
|
1.02
%
|
160,221
|
1,440
|
.90
%
|
171,829
|
1,402
|
.82
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing deposits
|
394,999
|
2,688
|
.68
%
|
374,044
|
2,380
|
.64
%
|
360,654
|
2,153
|
.60
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
20,398
|
63
|
.31
%
|
37,716
|
55
|
.15
%
|
32,017
|
69
|
.22
%
|
|
Long-term
debt
|
53,004
|
1,146
|
2.16
%
|
56,253
|
1,164
|
2.07
%
|
31,856
|
654
|
2.05
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
468,401
|
3,897
|
.83
%
|
468,013
|
3,599
|
.77
%
|
424,527
|
2,876
|
.68
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing deposits
|
153,640
|
|
|
141,180
|
|
|
125,665
|
|
|
|
Other
liabilities
|
31,936
|
|
|
19,824
|
|
|
13,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
653,977
|
|
|
629,017
|
|
|
563,510
|
|
|
|
Stockholders’
equity
|
90,049
|
|
|
85,572
|
|
|
80,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
744,026
|
|
|
$
714,590
|
|
|
$
643,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$
30,342
|
|
|
$
28,683
|
|
|
$
26,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
yield on interest earning assets (NIM)
|
|
|
4.53
%
|
|
|
4.34
%
|
|
|
4.44
%
|
|
|
|
|
|
|
|
|
|
|
|
1
Income and yields
are presented on a tax-equivalent basis using the applicable
federal income tax rate of 34%.
2
Interest income on
loans includes loan fees.
3
Average balance
information is reflective of historical cost and has not been
adjusted for changes in market value.
4
Includes nonaccrual
loans.
26
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
The
following table illustrates the effect of changes in volumes and
rates.
|
|
2017 Compared
to 2016
|
2016 Compared
to 2015
|
||||
|
|
Increase
(Decrease)
|
Increase
(Decrease)
|
||||
|
|
Due to
Change
|
Increase
|
Due to
Change
|
Increase
|
||
|
|
in
Average:
|
Or
|
in
Average:
|
or
|
||
|
|
Volume
|
Rate
|
(Decrease)
|
Volume
|
Rate
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
Loans held for
investment
|
$
1,949
|
$
726
|
$
2,675
|
$
1,865
|
$
(4)
|
$
1,861
|
|
Loans held for
sale
|
(884
)
|
72
|
(812
)
|
761
|
64
|
825
|
|
Investment
securities
|
|
|
|
|
|
|
|
Fully
taxable
|
(114
)
|
80
|
(34
)
|
(31
)
|
76
|
45
|
|
Partially
taxable
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits in banks
|
3
|
4
|
7
|
-
|
3
|
3
|
|
Federal funds
sold
|
40
|
81
|
121
|
(5
)
|
19
|
14
|
|
Total Interest
Income
|
994
|
963
|
1,957
|
2,590
|
158
|
2,748
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
Demand - interest
bearing
|
33
|
6
|
39
|
6
|
(46
)
|
(40
)
|
|
Savings
|
62
|
13
|
75
|
67
|
162
|
229
|
|
Time
deposits
|
(7
)
|
201
|
194
|
(95
)
|
133
|
38
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
(25
)
|
33
|
8
|
13
|
(27
)
|
(14
)
|
|
Long-term
debt
|
(67
)
|
49
|
(18
)
|
500
|
10
|
510
|
|
Total Interest
Expense
|
(4
)
|
302
|
298
|
491
|
232
|
723
|
|
Net Interest
Income
|
$
998
|
$
661
|
$
1,659
|
$
2,099
|
$
(74
)
|
$
2,025
|
Note:
Volume changes have been
determined by multiplying the prior years’ average rate by
the change in average balances outstanding. The rate change is
determined by multiplying the current year average balance
outstanding by the change in rate from the prior year to the
current year.
Interest
Income
Tax
equivalent interest income increased $2,012,000 or 6.24% in 2017,
after increasing 9.31% or $2,744,000 in 2016. Overall, the yield on
earning assets increased .23%, from 4.89% to 5.12%. Average loans
held for investment grew during 2017, with average loans
outstanding increasing $36,913,000 to $604,261,000. Average real
estate loans increased 5.89%, commercial loans increased 3.55% and
consumer installment loans increased 15.62% on average. The
increase in average consumer loans is a result of the growth in our
Dealer Finance Division which opened at the end of 2012. The
increase in tax equivalent interest income is primarily due to the
growth in the loan portfolio, with commercial loans contributing
the most interest income growth.
27
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
The
following table provides detail on the components of tax equivalent
net interest income:
|
GAAP
Financial Measurements:
(Dollars in
thousands).
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Interest Income
– Loans
|
$
33,591
|
$
31,740
|
$
29,056
|
|
Interest Income -
Securities and Other Interest-Earnings Assets
|
504
|
410
|
348
|
|
Interest Expense
– Deposits
|
2,688
|
2,380
|
2,153
|
|
Interest Expense -
Other Borrowings
|
1,209
|
1,219
|
723
|
|
Total
Net Interest Income
|
30,198
|
28,551
|
26,528
|
|
|
|
|
|
|
Non-GAAP
Financial Measurements:
|
|
|
|
|
Add: Tax Benefit on
Tax-Exempt Interest Income – Loans
|
144
|
132
|
130
|
|
Add: Tax Benefit on
Tax-Exempt Interest Income - Securities and Other Interest-Earnings
Assets
|
-
|
-
|
-
|
|
Total
Tax Benefit on Tax-Exempt Interest Income
|
144
|
132
|
130
|
|
Tax-Equivalent
Net Interest Income
|
$
30,342
|
$
28,683
|
$
26,658
|
Interest
Expense
Interest expense
increased $298,000 or 8.28% during 2017, which followed a 25.14%
increase or $723,000 in 2016. The average cost of funds of .83%
increased .06% compared to 2016, which followed an increase of .09%
in 2016 compared to 2015. Average interest bearing liabilities
increased $388,000 in 2017
following an increase of
$43,486,000
in 2016.
The average interest bearing liabilities have remained flat in 2017
and increased 10.24% in 2016. Changes in the cost of funds
attributable to rate and volume variances can be found in the table
at the top of page 27.
Noninterest
Income
Noninterest income
continues to be an increasingly important factor in maintaining and
growing profitability. Management is conscious of the need to
constantly review fee income and develop additional sources of
complementary revenue. During 2017, VBS Mortgage’s income was
reclassified to report gross income and gross expenses in the
appropriate income statement categories rather than netting in
noninterest income, 2016 and 2015 income statements were
reclassified to be comparative.
Noninterest income,
exclusive of security gains or losses, increased 42.14% or
$2,352,000, in 2017 following an increase of 16.46% in 2016. The
increase is due to the addition of VST Title, increases in VBS
Mortgage gross revenue and service charges on deposit account. In
addition, the FHLB prepayment gain of $504,000 is recorded in
noninterest income. The losses on low income housing projects
decreased 14.5% for 2017 due to recognition of $162,000 in gains
related to a fund that was dissolved. The 2016 increase over 2015
was primarily due to record earnings at VBS Mortgage.
The
Company reported an investment loss related to both the Bank and
VBS exiting the Bankers Title investment in 2017. The total loss
was $42,000. There were no security transactions in 2016 or 2015
which resulted in a gain or loss.
28
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Noninterest
Expense
Noninterest
expenses increased from $21,272,000 in 2016 to $24,719,000 in 2017,
a 16.20% increase. Salary and benefits increased 16.05% to
$14,854,000 in 2017 following an increase of 11.72% in 2016. This
increase was the result of normal salary increases, additions to
staff for new branches, the addition of VS Title (in 2017) and
administrative positions as well as increasing benefit costs
(including health care cost, pension expense and profit sharing
expenses). Occupancy and Equipment expenses increased $268,000 or
16.72% due to the growth in our branch network following an
increase of 5.74% in 2016. Other operating expenses increased
$1,125,000 in 2017, following a $288,000 increase in 2016. The
primary increases were in the areas of information technology
($211,000), credit and debit card related services ($114,000),
contributions ($266,000), and VBS and VST other operating expense
growth ($101,000). The 2016 primary increases were in advertising
and employee appreciation ($70,000), other loan related costs
($127,000), legal and professional expense ($108,000) and checking
account program expenses ($257,000). Total noninterest expense as a
percentage of average assets totaled 3.32%, 2.98%, and 3.04%, in
2017, 2016 and 2015, respectively. With the growth in branches,
addition of VST and increased staff at VBS mortgage noninterest
expenses have shown increase relative to peer data. Peer group
averages (as reported in the most recent Uniform Bank Performance
Report) have ranged between 2.80%, 2.84% and 2.86% over the same
time period.
Provision
for Loan Losses
Management
evaluates the loan portfolio in light of national and local
economic trends, changes in the nature and volume of the portfolio
and industry standards. Specific factors considered by management
in determining the adequacy of the level of the allowance for loan
losses include internally generated loan review reports, past due
reports and historical loan loss experience. This review also
considers concentrations of loans in terms of geography, business
type and level of risk. Management evaluates nonperforming loans
relative to their collateral value, when deemed collateral
dependent, and makes the appropriate adjustments to the allowance
for loan losses when needed. Based on the factors outlined above,
the current year provision for loan losses remained at $0 as in
2016. The current levels of the allowance for loan losses reflect
increased net charge-off activity, loan growth, and other credit
risk factors that the Company considers in assessing the adequacy
of the allowance for loan losses. The Company has experienced an
increase in past due loans and nonperforming loans at year end; the
nonperforming loans increase can be attributed to one borrower
($1.1 million) that has a specific reserve in the allowance for
loan losses; the past due loan increase is primarily attributed to
one borrower ($5.9 million) that is being closely monitored.
Management is in the process of restructuring the relationship and
has determined that there is no impairment at this time. Management
will continue to monitor nonperforming and past due loans and will
make necessary adjustments to specific reserves and record
provision for loan losses if conditions change regarding collateral
values or cash flow expectations. Management anticipates the Bank
will need to record provision expense in 2018 due to expected
growth and a normalized historical charge-off rate.
Actual
net loan charge-offs were $1,499,000 in 2017 and $1,238,000 in
2016. Net charge-offs as a percentage of loans held for investment
totaled .24% and .21% in 2017 and 2016, respectively. The Dealer
Finance Division’s charge-off percentage is the largest
category at .11% of loans held for investment and land development
was .09%. As stated in the most recently available Uniform Bank
Performance Report (UPBR), peer group loss averages were .10% in
2017 and .11% in 2016. The Bank anticipates losses will remain
above peer due to the Dealer Finance Division, however these losses
have been in line with expectations and are more than offset by the
increased yield derived from this portfolio.
Total
assets increased 1.13% during the year to $753,270,000, an increase
of $8,381,000 from $744,889,000 in 2016. Loans held for investment
grew $25,338,000, Bank premises and equipment increased $5,554,000,
whereas loans held for sale decreased $22,960,000 and other asset
categories experienced modest fluctuations. Average earning assets
increased 1.47% or $9,720,000 to $669,267,000 at December 31, 2017.
The increase in earning assets is due largely to the growth in the
loans held for investment offset by the decrease in short-term loan
participation program with Northpointe Bank. Deposits grew
$32,092,000 and other liabilities decreased $28,304,000 in 2017.
Average interest bearing deposits increased $20,955,000 for 2017 or
5.60%, with increases in both interest-bearing demand accounts and
savings accounts. There was a slight decrease in the time deposit
category. The Company continues to utilize its assets well, with
89.95% of average assets consisting of earning assets.
29
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Investment
Securities
Total
securities increased $1,768,000 or 4.48% in 2017 to $41,243,000 at
December 31, 2017 from $39,475,000 at December 31, 2016. Average
balances in investment securities decreased 30.48% in 2017 to
$11,011,000. At year end, 1.65% of average earning assets of the
Company were held as investment securities, all of which are
unpledged. Management strives to match the types and maturities of
securities owned to balance projected liquidity needs, interest
rate sensitivity and to maximize earnings through a portfolio
bearing low credit risk. Portfolio yields averaged 3.07% for 2017,
up from 2.37% in 2016.
There
were no Other Than Temporary Impairments (OTTI) write-downs in
2017, 2016 or 2015. In 2017, the Company recognized a $42,000 loss
on exit of the Banker’s Title investment; there were no
security gains or losses in 2016 or 2015.
The
composition of securities at December 31 was:
|
(Dollars in thousands)
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Available for
Sale
1
|
|
|
|
|
U.S.
Treasury and Agency
|
$
27,978
|
$
24,014
|
$
12,095
|
|
Mortgage-backed
obligations of federal agencies
2
|
502
|
634
|
817
|
|
Equity
securities
|
135
|
135
|
135
|
|
Total
|
28,615
|
24,783
|
13,047
|
|
|
|
|
|
|
Held to
Maturity
|
|
|
|
|
U.S.
Treasury and Agency
|
125
|
125
|
125
|
|
Total
|
125
|
125
|
125
|
|
|
|
|
|
|
Other Equity
Investments
|
12,503
|
14,567
|
12,157
|
|
Total
Securities
|
$
41,243
|
$
39,475
|
$
25,329
|
1
At estimated fair
value. See Note 4 to the Consolidated Financial Statements for
amortized cost.
2
Issued by a U.S.
Government Agency or secured by U.S. Government Agency
collateral.
Maturities and weighted average yields of
securities at December 31, 2017 are presented in the table below.
Amounts are shown by contractual maturity; expected maturities will
differ as issuers may have the right to call or prepay
obligations
.
Maturities of
other investments are not readily determinable due to the nature of
the investment; see Note 4 to the Consolidated Financial Statements
for a description of these investments.
|
|
Less
|
One
to
|
Five
to
|
Over
|
|
|
||||
|
|
Than one
Year
|
Five
Years
|
Ten
Years
|
Ten
Years
|
|
|
||||
|
(Dollars in
thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Total
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury &
Agency
|
$
19,998
|
1.05
%
|
$
7,980
|
2.06
%
|
$
-
|
|
$
-
|
|
$
27,978
|
1.34
%
|
|
Mortgage-backed obligations of
federal agencies
|
|
|
|
|
502
|
2.41
%
|
-
|
|
502
|
2.41
%
|
|
Equity
securities
|
-
|
|
-
|
|
-
|
|
135
|
|
135
|
|
|
Total
|
$
19,978
|
1.05
%
|
$
7,980
|
2.06
%
|
$
502
|
2.41
%
|
$
135
|
|
$
28,615
|
1.36
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury &
Agency
|
$
125
|
.75
%
|
|
|
|
|
|
|
$
125
|
.75
%
|
|
Total
|
$
125
|
.75
%
|
|
|
|
|
|
|
$
125
|
.75
%
|
30
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Analysis
of Loan Portfolio
The
Company’s market area has a relatively stable economy which
tends to be less cyclical than the national economy. Major
industries in the market area include agricultural production and
processing, higher education, retail sales, services and light
manufacturing.
The
Company’s portfolio of loans held for investment totaled
$616,974,000 at December 31, 2017 compared with $591,636,000 at the
beginning of the year. The Company’s policy has been to make
conservative loans that are held for future interest income,
utilizing prudent underwriting and a strong loan review program.
Collateral required by the Company is determined on an individual
basis depending on the purpose of the loan and the financial
condition of the borrower. Commercial loans, including agricultural
and multifamily loans, increased 3.89% during 2017 to $209,721,000.
Real estate mortgages increased $12,260,000 or 5.14%. Growth has
included a variety of loan and collateral types including owner
occupied residential real estate and residential rental properties.
Construction loans decreased $4,552,000 or 5.98%. The Bank also has
loan participation arrangements with several other banks within the
region to aid in diversification of the loan portfolio
geographically, by collateral type and by borrower.
Consumer
installment loans increased $9,411,000 or 13.06%. This category
includes personal loans, auto loans and other loans to individuals.
This category began increasing during the fourth quarter of 2012
due to the opening of the Dealer Finance Division in Penn Laird,
Virginia; at year end this Division had a loan portfolio of
$75,169,000. Credit card balances increased $117,000 to $2,939,000
but are a minor component of the loan portfolio. The following
table presents the changes in the loan portfolio over the previous
five years.
|
|
December
31
|
||||
|
(Dollars in
thousands)
|
2017
|
2016
|
2015
|
2014
|
2013
|
|
|
|
|
|
|
|
|
Real estate –
mortgage
|
$
250,891
|
$
238,631
|
$
232,321
|
$
223,824
|
$
212,630
|
|
Real estate –
construction
|
71,620
|
76,172
|
69,759
|
67,180
|
68,512
|
|
Consumer
installment
|
81,458
|
72,048
|
62,239
|
49,615
|
30,643
|
|
Commercial
|
182,360
|
178,392
|
153,691
|
147,599
|
135,835
|
|
Agricultural
|
17,064
|
15,876
|
15,672
|
15,374
|
16,265
|
|
Multi-family
residential
|
10,298
|
7,605
|
7,559
|
11,775
|
11,797
|
|
Credit
cards
|
2,939
|
2,822
|
2,745
|
2,705
|
2,680
|
|
Other
|
344
|
90
|
67
|
130
|
91
|
|
Total
Loans
|
$
616,974
|
$
591,636
|
$
544,053
|
$
518,202
|
$
478,453
|
The
following table shows the Company’s loan maturity and
interest rate sensitivity as of December 31, 2017:
|
|
Less
Than
|
1-5
|
Over
|
|
|
(Dollars in
thousands)
|
1
Year
|
Years
|
5
Years
|
Total
|
|
|
|
|
|
|
|
Commercial
and
|
|
|
|
|
|
agricultural
loans
|
$
66,586
|
$
106,048
|
$
26,790
|
$
199,424
|
|
Multi-family
residential
|
4,628
|
5,173
|
497
|
10,298
|
|
Real Estate
– mortgage
|
104,699
|
141,572
|
4,620
|
250,891
|
|
Real Estate
– construction
|
50,857
|
18,637
|
2,126
|
71,620
|
|
Consumer –
installment/credit cards/other
|
9,027
|
61,600
|
14,114
|
84,741
|
|
Total
|
$
235,797
|
$
333,030
|
$
48,147
|
$
616,974
|
|
|
|
|
|
|
|
Loans with
predetermined rates
|
$
28,101
|
$
79,748
|
$
30,378
|
$
138,227
|
|
Loans with
variable or
|
|
|
|
|
|
adjustable
rates
|
207,696
|
253,282
|
17,769
|
478,747
|
|
Total
|
$
235,797
|
$
333,030
|
$
48,147
|
$
616,974
|
31
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Analysis
of Loan Portfolio, continued
Residential real
estate loans are generally made for a period not to exceed 25 years
and are secured by a first deed of trust which normally does not
exceed 90% of the appraised value. If the loan to value ratio
exceeds 90%, the Company requires additional collateral, guarantees
or mortgage insurance. On approximately 94% of the real estate
loans, interest is adjustable after each one, three or five-year
period. The remainder of the portfolio is comprised of fixed rate
loans that are generally made for a fifteen-year or a twenty-year
period with an interest rate adjustment after ten
years.
Since
1992, fixed rate real estate loans have been funded with fixed rate
borrowings from the Federal Home Loan Bank, which allows the
Company to control its interest rate risk. In addition, the Company
makes home equity loans secured by second deeds of trust with total
indebtedness not to exceed 90% of the appraised value. Home equity
loans are made for three, five or ten year periods at a fixed rate
or as a revolving line of credit.
Construction loans
may be made to individuals, who have arranged with a contractor for
the construction of a residence, or to contractors that are
involved in building pre-sold, spec-homes or subdivisions. The
majority of commercial loans are made to small retail,
manufacturing and service businesses. Consumer loans are made for a
variety of reasons; however, approximately 74% of the loans are
secured by automobiles and trucks.
Approximately 80%
of the Company’s loans are secured by real estate; however,
policies relating to appraisals and loan to value ratios are
adequate to control the related risk. Market values appear to have
rebounded from the recession with modest increases in 2015, 2016,
and 2017. Unemployment rates in the Company’s market area
continue to be below both the national and state
averages.
The
Bank has not identified any loan categories that would be
considered loan concentrations of greater than 25% of capital.
While the Bank has not developed a formal policy limiting the
concentration level to any particular loan type or industry
segment, it has established target limits on both a nominal and
percentage of capital basis. Concentrations are monitored and
reported to the board of directors quarterly. Concentration levels
have been used by management to determine how aggressively we may
price or pursue new loan requests. At December 31, 2017, there are
no industry categories of loans that exceed 10% of total
loans.
Nonaccrual
and Past Due Loans
Nonperforming loans
include nonaccrual loans and loans 90 days or more past due.
Nonaccrual loans are loans on which interest accruals have been
suspended or discontinued permanently. The Company would have
earned approximately $102,000 in additional interest income had the
loans on nonaccrual status been current and performing.
Nonperforming loans totaled $7,102,000 at December 31, 2017
compared to $4,870,000 at December 31, 2016. At December 31,
2017, $198,000 of loans 90 days or more past due were not on
nonaccrual status. Approximately 88% of these nonperforming loans
are secured by real estate. Although management expects that there
may be additional loan losses, the Bank believes that it is
generally well secured and continues to actively work with its
customers to effect payment. As of December 31, 2017, the Company
holds $1,984,000 of real estate which was acquired through
foreclosure.
Nonperforming loans
have increased approximately $2,232,000 since December 31, 2016. Of
the increase, $1.5 million relates to two borrowers; one of which
has sold equipment and the loan will be modified for collection of
the remaining balance, with no loss anticipated as of December 31,
2017. The other relationship is in the process of subdividing
property to sell in order to bring the loan current; this loan has
been reviewed for impairment and has a specific reserve of $249,000
in our allowance for loan losses at December 31, 2017.
32
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Nonaccrual
and Past Due Loans, continued
The
following is a summary of information pertaining to nonperforming
loans:
|
(Dollars in
thousands)
|
2017
|
2016
|
2015
|
2014
|
2013
|
|
Nonaccrual
Loans:
|
|
|
|
|
|
|
Real
Estate
|
$
5,628
|
$
4,204
|
$
5,698
|
$
5,481
|
$
9,963
|
|
Commercial
|
599
|
70
|
109
|
1,179
|
1,890
|
|
Home
Equity
|
451
|
311
|
40
|
153
|
402
|
|
Other
|
226
|
178
|
108
|
161
|
-
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more:
|
|
|
|
|
|
|
Real Estate
|
143
|
81
|
272
|
0
|
246
|
|
Commercial
|
-
|
-
|
25
|
0
|
4
|
|
Home
Equity
|
-
|
-
|
107
|
0
|
61
|
|
Other
|
55
|
26
|
67
|
1
|
16
|
|
|
|
|
|
|
|
|
Total
Nonperforming loans
|
$
7,102
|
$
4,870
|
$
6,526
|
$
6,975
|
$
12,582
|
|
|
|
|
|
|
|
|
Restructured
Loans current and performing:
|
|
|
|
|
|
|
Real
Estate
|
7,710
|
8,641
|
8,713
|
3,913
|
7,484
|
|
Commercial
|
-
|
1,121
|
1,463
|
518
|
3,989
|
|
Home
Equity
|
-
|
-
|
1,414
|
290
|
727
|
|
Other
|
78
|
76
|
91
|
22
|
-
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of loans held for investment
|
1.15
%
|
.82
%
|
1.20
%
|
1.35
%
|
2.63
%
|
|
|
|
|
|
|
|
|
Net
Charge Offs to Total Loans Held for Investment
|
.24
%
|
.21
%
|
.04
%
|
.33
%
|
.78
%
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to nonperforming loans
|
85.10
%
|
154.89
%
|
134.55
%
|
125.09
%
|
65.04
%
|
Potential
Problem Loans
Loans
classified for regulatory purposes as loss, doubtful, substandard,
or special mention do not represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources.
Nor do they represent material credits about which management is
aware of any information which causes it to have serious doubts as
to the ability of such borrowers to comply with the loan repayment
terms. As of December 31, 2017, management is not aware of any
potential problem loans which are not already classified for
regulatory purposes or on the watch list as part of the
Bank’s internal grading system.
33
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Loan
Losses and the Allowance for Loan Losses
In
evaluating the portfolio, loans are segregated into loans with
identified potential losses, pools of loans by type, with separate
weighting for past dues and adverse rated loans, and a general
allowance based on a variety of criteria. Loans with
identified potential losses include examiner and bank classified
loans. Classified relationships in excess of $500,000 and loans
identified as troubled debt restructurings are reviewed
individually for impairment under ASC 310. A variety of factors are
considered when reviewing these credits, including borrower cash
flow, payment history, fair value of collateral, company
management, industry and economic factors.
Loans
that are not impaired are categorized by call report code into
unimpaired and classified loans. For unimpaired loans an estimate
is calculated based on actual loss experience over the last five
years, for loans of that type. During 2015, the Company felt
the two-year loss history utilized in 2014 and prior would not be
indicative of the amount of losses that could occur in our current
economic cycle, therefore the loss history was expanded to five
years to capture a more representative loss history. Dealer
finance loans utilize a two-year loss history. The Company monitors
the net losses for this division and adjusts based on how the
portfolio performs since the department was established in
2012. For classified loans, loans are grouped by call code
and past due or adverse risk rating. Loss rates are assigned based
on actual loss experience over the last five years multiplied by a
risk factor. The Dealer finance loans are given a higher risk
factor for past due and adverse risk ratings based on back testing
of the risk factors.
A
general allowance for inherent losses has been established to
reflect other unidentified losses within the portfolio. The general
allowance is calculated using nine qualitative factors identified
in the 2006 Interagency Policy Statement on the allowance for loan
losses. The general allowance assists in managing recent
changes in portfolio risk that may not be captured in individually
impaired loans, or in the homogeneous pools based on loss
histories. The Board approves the loan loss provision for each
quarter based on this evaluation.
The
allowance for loan losses of $6,044,000 at December 31, 2017 is
equal to .98% of total loans held for investment. This compares to
an allowance of $7,543,000 or 1.27% at December 31, 2016 and 1.61%
at December 31, 2015. Management and the Board of Directors
feel that the current reserve level is adequate based on the
analysis of historical losses, delinquency rates, collateral values
of delinquent loans and a thorough review of the loan portfolio.
The allowance for loan losses to nonperforming loans has decreased
from 154.89% to 85.10% in 2017; increases in the nonperforming
loans have been analyzed and, where necessary, a specific reserve
has been recorded. In addition, past due and adversely risk rated
loans have higher allocation factors within the allowance for loan
losses calculation. The Company has experienced a continued decline
in historical charge-off rates with 2017 replacing 2012 in the
five-year lookback and the local economy showing continued
improvements in unemployment. Management will continue to monitor
relationships that have recently become past due but are not
considered impaired at this time.
Loan
losses, net of recoveries, totaled $1,499,000 in 2017 which is
equivalent to .24% of total loans outstanding. Over the preceding
three years, the Company has had an average loss rate of .16%,
compared to a .11% loss rate for its peer group.
34
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Loan
Losses and the Allowance for Loan Losses, continued
A
summary of the activity in the allowance for loan losses
follows:
|
(Dollars in thousands)
|
2017
|
2016
|
2015
|
2014
|
2013
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
$
7,543
|
$
8,781
|
$
8,725
|
$
8,184
|
$
8,154
|
|
Provision charged
to expenses
|
-
|
-
|
300
|
2,250
|
3,775
|
|
Loan
losses:
|
|
|
|
|
|
|
Construction/land
development
|
620
|
356
|
156
|
1,611
|
2,127
|
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
|
Real
Estate
|
-
|
23
|
25
|
208
|
173
|
|
Multi-family
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
-
|
19
|
-
|
-
|
201
|
|
Home
Equity – closed end
|
7
|
8
|
26
|
-
|
159
|
|
Home
Equity – open end
|
26
|
370
|
51
|
80
|
68
|
|
Commercial
& Industrial – Non Real Estate
|
179
|
293
|
-
|
385
|
986
|
|
Consumer
|
136
|
37
|
32
|
33
|
173
|
|
Dealer
Finance
|
1,806
|
1,081
|
251
|
107
|
17
|
|
Credit
Cards
|
98
|
74
|
60
|
46
|
121
|
|
Total loan
losses
|
2,872
|
2,261
|
601
|
2,470
|
4,025
|
|
Recoveries:
|
|
|
|
|
|
|
Construction/land
development
|
-
|
7
|
85
|
223
|
40
|
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
|
Real
Estate
|
2
|
4
|
37
|
-
|
-
|
|
Multi-family
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
13
|
135
|
65
|
108
|
42
|
|
Home
Equity – closed end
|
25
|
-
|
6
|
-
|
-
|
|
Home
Equity – open end
|
53
|
120
|
-
|
-
|
29
|
|
Commercial
& Industrial – Non Real Estate
|
72
|
267
|
62
|
356
|
127
|
|
Consumer
|
28
|
19
|
32
|
33
|
14
|
|
Dealer
Finance
|
1,143
|
417
|
24
|
6
|
-
|
|
Credit
Cards
|
37
|
54
|
46
|
35
|
28
|
|
Total
recoveries
|
1,373
|
1,023
|
357
|
761
|
280
|
|
Net loan
losses
|
(1,499
)
|
(1,238
)
|
(244
)
|
(1,709
)
|
(3,745
)
|
|
Balance at end of
period
|
$
6,044
|
$
7,543
|
$
8,781
|
$
8,725
|
$
8,184
|
|
|
|
|
|
|
|
|
Allowance for loan
losses as a
|
|
|
|
|
|
|
percentage of
loans
|
.98
%
|
1.27
%
|
1.61
%
|
1.68
%
|
1.71
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan losses to
loans held for investment
|
.24
%
|
.21
%
|
.04
%
|
.33
%
|
.78
%
|
35
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Loan
Losses and the Allowance for Loan Losses, continued
|
ALLOCATION OF
THE ALLOWANCE FOR LOAN LOSSES
|
||||||||||
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||
|
Allowance for
loan losses: (dollars in thousands)
|
Balance
|
Percentage of
Loans in Each Category
|
Balance
|
Percentage of
Loans in Each Category
|
Balance
|
Percentage of
Loans in Each Category
|
Balance
|
Percentage of
Loans in Each Category
|
Balance
|
Percentage of
Loans in Each Category
|
|
Construction/Land
Development
|
$
2,547
|
42.14
%
|
$
3,381
|
44.82
%
|
$
4,442
|
50.59
%
|
$
4,738
|
54.30
%
|
$
4,007
|
48.96
%
|
|
Real
Estate
|
719
|
11.90
%
|
843
|
11.18
%
|
806
|
9.18
%
|
623
|
7.14
%
|
400
|
4.89
%
|
|
Commercial,
Financial and Agricultural
|
863
|
14.28
%
|
1,348
|
17.88
%
|
1,666
|
18.97
%
|
1,337
|
15.33
%
|
2,239
|
27.36
%
|
|
Consumer
|
1,640
|
27.13
%
|
1,426
|
18.90
%
|
1,059
|
12.06
%
|
1,685
|
19.31
%
|
905
|
11.06
%
|
|
Home
Equity
|
275
|
4.55
%
|
545
|
7.22
%
|
808
|
9.20
%
|
342
|
3.92
%
|
633
|
7.73
%
|
|
Total
|
$
6,044
|
100.00
%
|
$
7,543
|
100.00
%
|
$
8,781
|
100.00
%
|
$
8,725
|
100.00
%
|
$
8,184
|
100.00
%
|
Deposits
and Borrowings
The
average deposit balances and average rates paid for 2017, 2016 and
2015 were as follows:
Average
Deposits and Rates Paid (Dollars in thousands)
|
|
December
31,
|
|||||
|
|
2017
|
2016
|
2015
|
|||
|
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
$
153,640
|
|
$
141,180
|
|
$
125,665
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
Interest
Checking
|
$
121,095
|
.44
%
|
$
113,525
|
.44
%
|
$
112,334
|
.48
%
|
|
Savings
Accounts
|
114,489
|
.45
%
|
100,298
|
.44
%
|
76,491
|
.28
%
|
|
Time
Deposits:
|
|
|
|
|
|
|
|
CDARS
|
1,247
|
.56
%
|
1,253
|
.88
%
|
11,247
|
.18
%
|
|
All
other
|
158,168
|
1.03
%
|
158,968
|
.90
%
|
160,582
|
.86
%
|
|
Total
interest-bearing
|
394,999
|
.68
%
|
374,044
|
.64
%
|
360,654
|
.60
%
|
|
Total
deposits
|
$
548,639
|
.49
%
|
$
515,224
|
.46
%
|
$
486,319
|
.44
%
|
Average
noninterest-bearing demand deposits, which are comprised of
checking accounts, increased $12,460,000 or 8.83% from $141,180,000
during 2016 to $153,640,000 during 2017. Average interest-bearing
deposits, which include interest checking accounts, money market
accounts, regular savings accounts and time deposits, increased
$20,955,000 or 5.60% from $374,044,000 at December 31, 2016 to
$394,999,000 at December 31, 2017. Total average interest
checking (including money market) account balances increased
$7,570,000 or 6.67% from $113,525,000 at December 31, 2016 to
$121,095,000 at December 31, 2017. Total average savings and
money market account balances increased $14,191,000 or 14.15% from
$100,298,000 at December 31, 2016 to $114,489,000 at
December 31, 2017.
Average
time deposits decreased $806,000 or .50% from $160,221,000 at
December 31, 2016 to $159,415,000 at December 31,
2017.
36
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Deposits
and Borrowings, continued
The
maturity distribution of certificates of deposit of $100,000 or
more is as follows:
|
(Actual Dollars in
thousands)
|
2017
|
2016
|
|
|
|
|
|
Less than 3
months
|
$
4,392
|
$
2,379
|
|
3 to 6
months
|
7,212
|
4,332
|
|
6 to 12
months
|
11,410
|
7,624
|
|
1 year to 5
years
|
37,606
|
36,534
|
|
|
|
|
|
Total
|
$
60,620
|
$
50,869
|
Non-deposit
borrowings include federal funds purchased and Federal Home Loan
Bank (FHLB) borrowings, (both short term and long term).
Non-deposit borrowings are an important source of funding for the
Bank. These sources assist in managing short and long-term funding
needs, often at rates that are more favorable than raising
additional funds within the deposit portfolio.
Borrowings from the
FHLB are used to support the Bank’s lending program and allow
the Bank to manage interest rate risk by laddering maturities and
matching funding terms to the terms of various loan types in the
loan portfolio. The Company did not borrow long term FHLB loans
during 2017. This compares to $20,000,000 borrowed in 2016 and
$40,000,000 in 2015. Repayment of amortizing and fixed maturity
loans through FHLB totaled $14,429,000 during 2017, including
prepayment of $10,000,000 resulting in a prepayment gain of
$504,000. These long-term loans carry an average rate of 1.86% at
December 31, 2017.
Contractual
Obligations and Scheduled Payments (dollars in
thousands)
|
|
December 31,
2017
|
||||
|
|
Less
than
|
One Year
Through
|
Three Years
Through
|
More
than
|
|
|
|
One
Year
|
Three
Years
|
Five
Years
|
Five
Years
|
Total
|
|
|
|
|
|
|
|
|
Federal funds
purchased
|
$
5,296
|
$
-
|
$
-
|
$
-
|
$
5,296
|
|
FHLB Short term
advances
|
20,000
|
-
|
-
|
-
|
20,000
|
|
FHLB long term
advances
|
9,429
|
21,357
|
8,643
|
10,125
|
49,554
|
|
Total
|
$
34,725
|
$
21,357
|
$
8,643
|
$
10,125
|
$
74,850
|
See
Note 11 (Short Term Debt) and Note 12 (Long Term Debt) to the
Consolidated Financial Statements for a discussion of the rates,
terms, and conversion features on these advances
37
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Deposits
and Borrowings, continued
Stockholders’
Equity
Total
stockholders' equity increased $4,593,000 or 5.30% in 2017. Net
income totaled $9,010,000, noncontrolling interest net income
totaled $31,000, issuance of common stock totaled $197,000 and
capital was reduced by dividends of $3,387,000, decreases in other
comprehensive income of $295,000, repurchases of common stock of
$712,000, repurchase of preferred stock $101,000 and minority
interest distributions of $150,000. As of December 31, 2017,
book value per common share was $25.73 compared to $24.18 as of
December 31, 2016. Dividends are paid to stockholders on a
quarterly basis in uniform amounts unless unexpected fluctuations
in net income indicate a change to this policy is
needed.
The
Company adopted ASU 2018-02 which allows financial statement
preparers an option to reclassify stranded tax effects within
accumulated other comprehensive income to retained earnings in each
period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion
thereof) is recorded. Therefore retained earnings has been adjusted
by $682,000 for reflect these changes.
Banking
regulators have established a uniform system to address the
adequacy of capital for financial institutions. The rules require
minimum capital levels based on risk-adjusted assets. Simply
stated, the riskier an entity's investments, the more capital it is
required to maintain. The Bank is required to maintain these
minimum capital levels. In March 2015, the Bank implemented the
Basel III capital requirements, which introduced the Common Equity
Tier I ratio in addition to the two previous capital guidelines of
Tier I capital (referred to as core capital) and Tier II capital
(referred to as supplementary capital). At December 31, 2017, the
Bank had Common Equity Tier I capital of 14.43%, Tier I
capital of 14.43% of risk weighted assets and combined Tier I and
II capital of 15.41% of risk weighted assets. Regulatory minimums
at this date were 4.5%, 6% and 8%, respectively. The Bank has
maintained capital levels far above the minimum requirements
throughout the year. In the unlikely event that such capital levels
are not met, regulatory agencies are empowered to require the Bank
to raise additional capital and/or reallocate present
capital.
In
addition, the regulatory agencies have issued guidelines requiring
the maintenance of a capital leverage ratio. The leverage ratio is
computed by dividing Tier I capital by average total assets. The
regulators have established a minimum of 4% for this ratio but can
increase the minimum requirement based upon an institution's
overall financial condition. At December 31, 2017, the Bank
reported a leverage ratio of 12.07%. The Bank's leverage ratio was
also substantially above the minimum. The Bank also reported a
capital conservation buffer of 7.41% at December 31, 2017. The
capital conservation buffer is designed to strengthen an
institution’s financial resilience during economic cycles.
Financial institutions are required to maintain a minimum buffer as
required by the Basel III final rules in order to avoid
restrictions on capital distributions and other payments. Beginning
January 1, 2016, a capital conservation buffer of 0.625% became
effective. The capital conservations buffer for 2017 is 1.25% and
will gradually be increased through January 1, 2019 to
2.5%.
38
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Market
Risk Management
Most of
the Company’s net income is dependent on the Bank’s net
interest income. Rapid changes in short-term interest rates may
lead to volatility in net interest income resulting in additional
interest rate risk to the extent that imbalances exist between the
maturities or repricing of interest bearing liabilities and
interest earning assets. The Company’s net interest margin
increased .19% in 2017 following a decrease of .09% in 2016. This
increase is due to increases in interest rates in 2017, loan growth
and the growth in noninterest bearing deposits to support loan
growth. In December 2017, the Federal Open Market Committee elected
to raise the short-term rates target .25% to 1.25 to 1.50% due to
expanding economic activity.
Net
interest income is also affected by changes in the mix of funding
that supports earning assets. For example, higher levels of
non-interest bearing demand deposits and leveraging earning assets
by funding with stockholder’s equity would result in greater
levels of net interest income than if most of the earning assets
were funded with higher cost interest-bearing liabilities, such as
certificates of deposit.
Liquid
assets, which include cash and cash equivalents, federal funds
sold, interest bearing deposits and short term investments averaged
$40,189,000 for 2017. The Bank historically has had a stable core
deposit base and, therefore, does not have to rely on volatile
funding sources. Because of the stable core deposit base, changes
in interest rates should not have a significant effect on
liquidity. The Bank's membership in the Federal Home Loan Bank has
historically provided liquidity as the Bank borrows money that is
repaid over a five to ten-year period and uses the money to make
fixed rate loans. The matching of the long-term receivables and
liabilities helps the Bank reduce its sensitivity to interest rate
changes. The Company reviews its interest rate gap periodically and
makes adjustments as needed. There are no off-balance sheet items
that will impair future liquidity.
The
following table depicts the Company’s interest rate
sensitivity, as measured by the repricing of its interest sensitive
assets and liabilities as of December 31, 2017. As the notes to the
table indicate, the data was based in part on assumptions as to
when certain assets or liabilities would mature or reprice. The
analysis indicates an asset sensitive one-year cumulative GAP
position of 21.36% of total earning assets, compared to 23.71% in
2016. Approximately 44.40% of rate sensitive assets and 32.83% of
rate sensitive liabilities are subject to repricing within one
year. Short term assets (less than one year) decreased $11,305,000
during the year, while total earning assets decreased $1,106,000.
The decrease is attributed to a decrease in loans held for sale of
$22,960,000 and a decrease in federal funds sold of $7,926,000
which were offset by growth in loans held for investment of
$25,221,000 and investments of $3,832,000. Growth in the loans held
for investment portfolio was concentrated in real estate secured
loans, commercial and the Dealer Finance division. Short term
liabilities increased $5,059,000, while total interest bearing
liabilities decreased $12,732,000. The decrease in short term
liabilities is due to the decreased demand in the loans held for
sale program. Management has raised deposit rates minimally in
2017.
39
PART
II, Continued
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Market
Risk Management, continued
The
following GAP analysis shows the time frames as of December 31,
2017, in which the Company’s assets and liabilities are
subject to repricing:
|
|
1-90
|
91-365
|
1-5
|
Over
5
|
Not
|
|
|
(Dollars in
thousands)
|
Days
|
Days
|
Years
|
Years
|
Classified
|
Total
|
|
Rate Sensitive
Assets:
|
|
|
|
|
|
|
|
Loans held for
investment
|
$
136,692
|
$
96,166
|
$
333,030
|
$
48,147
|
$
-
|
$
614,035
|
|
Loans held for
sale
|
39,775
|
-
|
-
|
-
|
-
|
39,775
|
|
Federal funds
sold
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Investment
securities
|
20,123
|
7,980
|
-
|
502
|
135
|
28,740
|
|
Credit
cards
|
2,939
|
-
|
-
|
-
|
-
|
2,939
|
|
Interest bearing
bank deposits
|
1,285
|
-
|
-
|
-
|
-
|
1,285
|
|
|
|
|
|
|
|
|
|
Total
|
200,814
|
104,146
|
333,030
|
48,649
|
135
|
686,774
|
|
|
|
|
|
|
|
|
|
Rate Sensitive
Liabilities:
|
|
|
|
|
|
|
|
Interest bearing
demand deposits
|
-
|
32,473
|
69,810
|
18,668
|
-
|
120,951
|
|
Savings
deposits
|
-
|
24,144
|
72,434
|
24,145
|
-
|
120,723
|
|
Certificates of
deposit $100,000 and over
|
4,192
|
17,223
|
39,205
|
-
|
-
|
60,620
|
|
Other certificates
of deposit
|
13,313
|
32,095
|
59,242
|
-
|
-
|
104,650
|
|
Total
Deposits
|
17,505
|
105,935
|
240,691
|
42,813
|
-
|
406,944
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
25,296
|
-
|
-
|
-
|
-
|
25,296
|
|
Long-term
debt
|
1,192
|
8,322
|
30,094
|
10,125
|
-
|
49,733
|
|
Total
|
43,993
|
114,257
|
270,785
|
52,938
|
-
|
481,973
|
|
Discrete
Gap
|
156,821
|
(10,111
)
|
62,245
|
(4,289
)
|
135
|
204,801
|
|
Cumulative
Gap
|
156,821
|
146,710
|
208,955
|
204,666
|
204,801
|
|
|
As a % of Earning
Assets
|
22.83
%
|
21.36
%
|
30.43
%
|
29.80
%
|
29.82
%
|
|
●
In preparing the
above table, no assumptions are made with respect to loan
prepayments or deposit run off. Loan principal payments are
included in the earliest period in which the loan matures or can be
repriced. Principal payments on installment loans scheduled prior
to maturity are included in the period of maturity or repricing.
Proceeds from the redemption of investments and deposits are
included in the period of maturity. Estimated maturities on
deposits which have no stated maturity dates were derived from
guidance contained in FDICIA 305.
40
Quarterly
Results (unaudited)
The
table below lists the Company’s quarterly performance for the
years ended December 31, 2017 and 2016:
|
|
2017
|
||||
|
(Dollars in thousands)
|
Fourth
|
Third
|
Second
|
First
|
Total
|
|
Interest
and Dividend Income
|
$
9,141
|
$
8,688
|
$
8,256
|
$
8,010
|
$
34,095
|
|
Interest
Expense
|
1,036
|
1,030
|
925
|
906
|
3,897
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
8,105
|
7,658
|
7,331
|
7,104
|
30,198
|
|
Provision
for Loan Losses
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Net
Interest Income after Provision
|
|
|
|
|
|
|
for
Loan Losses
|
8,105
|
7,658
|
7,331
|
7,104
|
30,198
|
|
|
|
|
|
|
|
|
Non-Interest
Income
|
1,820
|
2,145
|
1,882
|
2,045
|
7,892
|
|
Non-Interest
Expense
|
6,489
|
6,259
|
6,017
|
5,954
|
24,719
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
3,436
|
3,544
|
3,196
|
3,195
|
13,371
|
|
Income
Tax Expense
|
1,698
|
946
|
809
|
877
|
4,330
|
|
Noncontrolling
interest (income)/expense
|
49
|
(48
)
|
(59
)
|
(4
)
|
(31
)
|
|
|
|
|
|
|
|
|
Net
Income
|
$
1,787
|
$
2,602
|
$
2,328
|
$
2,090
|
$
9,010
|
|
|
|
|
|
|
|
|
Net
Income Per Average
|
|
|
|
|
|
|
Common
Share Basic
|
$
.52
|
$
.75
|
$
.68
|
$
.68
|
$
2.63
|
Note
that fourth quarter 2017 includes the one time deferred tax asset
write down due to the Tax Cuts and Jobs Act.
|
|
2016
|
||||
|
(Dollars in
thousands)
|
Fourth
|
Third
|
Second
|
First
|
Total
|
|
|
|
|
|
|
|
|
Interest
and Dividend Income
|
$
8,387
|
$
8,198
|
$
7,931
|
$
7,634
|
$
32,150
|
|
Interest
Expense
|
954
|
969
|
862
|
814
|
3,599
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
7,433
|
7,229
|
7,069
|
6,820
|
28,551
|
|
Provision
for Loan Losses
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Net
Interest Income after Provision
|
|
|
|
|
|
|
for
Loan Losses
|
7,433
|
7,229
|
7,069
|
6,820
|
28,551
|
|
|
|
|
|
|
|
|
Non-Interest
Income
|
2,843
|
1,054
|
986
|
699
|
5,582
|
|
Non-Interest
Expense
|
6,806
|
4,962
|
4,772
|
4,732
|
21,272
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
3,470
|
3,321
|
3,283
|
2,787
|
12,861
|
|
Income
Tax Expense
|
912
|
655
|
839
|
693
|
3,099
|
|
Noncontrolling
interest
|
(40
)
|
(64
)
|
(86
)
|
(4
)
|
(194
)
|
|
|
|
|
|
|
|
|
Net
Income
|
$
2,518
|
$
2,602
|
$
2,358
|
$
2,090
|
$
9,568
|
|
|
|
|
|
|
|
|
Net
Income Per Average
|
|
|
|
|
|
|
Common
Share Basic
|
$
.74
|
$
.75
|
$
.68
|
$
.60
|
$
2.77
|
41
Interest
Rate Sensitivity
The
Company considers interest rate risk to be a significant risk and
has systems in place to measure the exposure of net interest income
and fair values to movement in interest rates. Among the tools
available to management is interest rate sensitivity analysis,
which provides information related to repricing opportunities.
Interest rate shock simulations indicate potential economic loss
due to future interest rate changes. Shock analysis is a test that
measures the effect of a hypothetical, immediate and parallel shift
in interest rates. The following table shows the results of a rate
shock and the effect on net income, net interest income and net
interest margin. The information is an excerpt from our Interest
Rate Risk model run as of November 30, 2017 and 2016:
|
Rate Shift
(bp)
|
Net
Income
|
Net Interest
Income
|
Net Interest
Margin
|
|||
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
|
300
|
16,084
|
14,583
|
38,622
|
35,480
|
5.71
%
|
5.21
%
|
|
200
|
14,832
|
13,118
|
36,904
|
33,492
|
5.46
%
|
4.96
%
|
|
100
|
13,414
|
11,507
|
34,959
|
31,306
|
5.18
%
|
4.61
%
|
|
(-)100
|
12,291
|
10,458
|
33,418
|
29,883
|
4.96
%
|
4.41
%
|
|
(-)200
|
11,999
|
10,319
|
33,017
|
29,694
|
4.90
%
|
4.38
%
|
See accompanying Notes to the Consolidated Financial
Statements.
42
F
& M Bank Corp. and Subsidiaries
Consolidated Balance Sheets (dollars in thousands, except per share
data)
As of December 31, 2017 and 2016
|
|
2017
|
2016
|
|
Assets
|
|
|
|
Cash and due from
banks
|
$
10,622
|
$
7,755
|
|
Money market
funds
|
1,285
|
674
|
|
Federal funds
sold
|
-
|
7,926
|
|
Cash and cash
equivalents
|
11,907
|
16,355
|
|
|
|
|
|
Securities:
|
|
|
|
Held to maturity -
fair value of $125 in 2017 and 2016
|
125
|
125
|
|
Available for
sale
|
28,615
|
24,783
|
|
Other
investments
|
12,503
|
14,567
|
|
Loans held for
sale
|
39,775
|
62,735
|
|
Loans held for
investment
|
616,974
|
591,636
|
|
Less: allowance for
loan losses
|
(6,044
)
|
(7,543
)
|
|
Net loans held for
investment
|
610,930
|
584,093
|
|
|
|
|
|
Other real estate
owned
|
1,984
|
2,076
|
|
Bank premises and
equipment, net
|
15,894
|
10,340
|
|
Interest
receivable
|
2,007
|
1,785
|
|
Goodwill
|
2,881
|
2,670
|
|
Bank owned life
insurance
|
13,950
|
13,513
|
|
Other
assets
|
12,699
|
11,847
|
|
Total
Assets
|
$
753,270
|
$
744,889
|
|
|
|
|
|
Liabilities
|
|
|
|
Deposits:
|
|
|
|
Noninterest
bearing
|
$
162,233
|
$
146,617
|
|
Interest
bearing
|
406,944
|
390,468
|
|
Total
deposits
|
569,177
|
537,085
|
|
|
|
|
|
Short-term
debt
|
25,296
|
40,000
|
|
Accrued
liabilities
|
17,789
|
16,885
|
|
Long-term
debt
|
49,733
|
64,237
|
|
Total
Liabilities
|
661,995
|
658,207
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Preferred Stock $25
par value, 400,000 shares authorized, 324,150 and 327,350
shares
|
|
|
|
issued and
outstanding at December 31, 2017 and 2016,
respectively
|
7,529
|
7,609
|
|
Common stock $5 par
value, 6,000,000 shares authorized, 3,255,036 and
3,270,315
|
|
|
|
shares issued and
outstanding at December 31, 2017 and 2016,
respectively
|
16,275
|
16,352
|
|
Additional paid in
capital – common stock
|
10,225
|
10,684
|
|
Retained
earnings
|
60,814
|
54,509
|
|
Noncontrolling
interest in consolidated subsidiaries
|
574
|
693
|
|
Accumulated other
comprehensive loss
|
(4,142
)
|
(3,165
)
|
|
Total Stockholders'
Equity
|
91,275
|
86,682
|
|
Total Liabilities
and Stockholders' Equity
|
$
753,270
|
$
744,889
|
See accompanying Notes to the Consolidated Financial
Statements.
43
F
& M Bank Corp. and Subsidiaries
Consolidated Statements of Income (dollars in thousands, except per
share data)
For the years ended 2017, 2016 and 2015
|
|
2017
|
2016
|
2015
|
|
Interest and Dividend Income
|
|
|
|
|
Interest and fees
on loans held for investment
|
$
32,479
|
$
29,816
|
$
27,957
|
|
Interest from loans
held for sale
|
1,112
|
1,924
|
1,099
|
|
Interest from money
market funds and federal funds sold
|
166
|
38
|
21
|
|
Interest from debt
securities – taxable
|
338
|
372
|
327
|
|
Total interest and
dividend income
|
34,095
|
32,150
|
29,404
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
Total interest on
deposits
|
2,688
|
2,380
|
2,153
|
|
Interest from
short-term debt
|
63
|
55
|
69
|
|
Interest from
long-term debt
|
1,146
|
1,164
|
654
|
|
Total interest
expense
|
3,897
|
3,599
|
2,876
|
|
|
|
|
|
|
Net Interest Income
|
30,198
|
28,551
|
26,528
|
|
|
|
|
|
|
Provision for Loan Losses
|
-
|
-
|
300
|
|
|
|
|
|
|
Net
Interest Income After Provision for Loan Losses
|
30,198
|
28,551
|
26,228
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
Service charges on
deposit accounts
|
1,360
|
1,174
|
963
|
|
Insurance, other
commissions and mortgage banking, net
|
4,137
|
3,006
|
2,575
|
|
Other operating
income
|
2,109
|
1,657
|
1,401
|
|
Income from bank
owned life insurance
|
449
|
476
|
473
|
|
Gain on prepayment
of long term debt
|
504
|
-
|
-
|
|
Loss on sale of
other investments
|
(42
)
|
-
|
-
|
|
Low income housing
partnership losses
|
(625
)
|
(731
)
|
(619
)
|
|
Total noninterest
income
|
7,892
|
5,582
|
4,793
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expenses
|
|
|
|
|
Salaries
|
11,482
|
9,986
|
9,018
|
|
Employee
benefits
|
3,372
|
2,814
|
2,439
|
|
Occupancy
expense
|
1,035
|
868
|
801
|
|
Equipment
expense
|
836
|
735
|
715
|
|
FDIC insurance
assessment
|
190
|
388
|
587
|
|
Other real estate
owned, net
|
76
|
86
|
566
|
|
Other operating
expenses
|
7,728
|
6,395
|
5,428
|
|
Total noninterest
expenses
|
24,719
|
21,272
|
19,554
|
|
|
|
|
|
|
Income before
income taxes
|
13,371
|
12,861
|
11,467
|
|
|
|
|
|
|
Income Tax Expense
|
4,330
|
3,099
|
2,886
|
|
|
|
|
|
|
Net
Income
|
9,041
|
9,762
|
8,581
|
|
|
|
|
|
|
Net Income
attributable to noncontrolling interests
|
(31
)
|
(194
)
|
(164
)
|
|
Net Income
attributable to F & M Bank Corp.
|
$
9,010
|
$
9,568
|
$
8,417
|
|
|
|
|
|
|
Dividends
paid/accumulated on preferred stock
|
415
|
487
|
510
|
|
Net
income available to common stockholders
|
$
8,595
|
$
9,081
|
$
7,907
|
|
|
|
|
|
|
Per Common Share Data
|
|
|
|
|
Net
income - basic
|
$
2.63
|
$
2.77
|
$
2.40
|
|
Net
income - diluted
|
$
2.48
|
$
2.57
|
$
2.25
|
|
Cash
dividends on common stock
|
$
.94
|
$
.80
|
$
.73
|
|
Weighted average common shares outstanding –
basic
|
3,269,713
|
3,282,335
|
3,290,812
|
|
Weighted average common shares outstanding –
diluted
|
3,631,984
|
3,716,591
|
3,735,212
|
See accompanying Notes to the Consolidated Financial
Statements.
44
F
& M BANK CORP.
For the years ended 2017, 2016 and 2015
|
|
Years Ended
December 31,
|
||
|
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Net
Income
|
$
9,041
|
$
9,762
|
$
8,581
|
|
|
|
|
|
|
Other comprehensive
income (loss):
|
|
|
|
|
Pension plan
adjustment
|
(414
)
|
(738
)
|
(537
)
|
|
Tax
effect
|
141
|
251
|
183
|
|
Pension plan
adjustment, net of tax
|
(273
)
|
(487
)
|
(354
)
|
|
|
|
|
|
|
Unrealized holding
gains
|
|
|
|
|
on
available-for-sale securities
|
(34
)
|
3
|
2
|
|
Tax
effect
|
12
|
(1
)
|
(1
)
|
|
Unrealized holding
gains, net of tax
|
(22
)
|
2
|
1
|
|
Total other
comprehensive income (loss)
|
(295
)
|
(485
)
|
(353
)
|
|
Total comprehensive
income
|
$
8,746
|
$
9,277
|
$
8,228
|
|
|
|
|
|
|
Comprehensive
income attributable to noncontrolling interests
|
$
(31
)
|
$
(194
)
|
$
(164
)
|
|
|
|
|
|
|
Comprehensive
income attributable to F&M Bank Corp.
|
$
8,715
|
$
9,083
|
$
8,064
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial
Statements.
45
F
& M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands, except share and per share
data)
For the years ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Preferred
|
Common
|
Additional
Paid in
|
Retained
|
Noncontrolling
|
Income
|
|
|
|
Stock
|
Stock
|
Capital
|
Earnings
|
Interest
|
(Loss)
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2014
|
$
9,425
|
$
16,459
|
$
11,260
|
$
42,554
|
$
426
|
$
(2,327
)
|
$
77,797
|
|
Net
income
|
|
|
|
8,417
|
164
|
|
8,581
|
|
Other comprehensive
loss
|
|
|
|
|
|
(353
)
|
(353
)
|
|
|
|
|
|
|
|
|
|
|
Distributions to
noncontrolling interest
|
|
|
|
|
(17
)
|
|
(17
)
|
|
Dividends on
preferred stock ($1.275 per share)
|
|
|
|
(510
)
|
|
|
(510
)
|
|
Dividends on common
stock ($.73 per share)
|
|
|
|
(2,405
)
|
|
|
(2,405
)
|
|
Common stock
repurchased (13,277 shares)
|
|
(67
)
|
(223
)
|
|
|
|
(290
)
|
|
Common stock issued
(6,916 shares)
|
|
35
|
112
|
-
|
-
|
-
|
147
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
$
9,425
|
$
16,427
|
$
11,149
|
$
48,056
|
$
573
|
$
(2,680
)
|
$
82,950
|
|
Net income
|
|
|
|
9,568
|
194
|
|
9,762
|
|
Other
comprehensive loss
|
|
|
|
|
|
(485
)
|
(485
)
|
|
|
|
|
|
|
|
|
|
|
Distributions to
noncontrolling interest
|
|
|
|
|
(74
)
|
|
(74
)
|
|
Dividends on
preferred stock ($1.488 per share)
|
|
|
|
(487
)
|
|
|
(487
)
|
|
Dividends on common
stock ($.80 per share)
|
|
|
|
(2,628
)
|
|
|
(2,628
)
|
|
Common stock
repurchased (22,583 shares)
|
|
(112
)
|
(466
)
|
|
|
|
(578
)
|
|
Common stock issued
(7,494 shares)
|
|
37
|
146
|
|
|
|
183
|
|
Preferred stock
repurchased (72,650 shares)
|
(1,816
)
|
|
(145
)
|
|
|
|
(1,961
)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
7,609
|
$
16,352
|
$
10,684
|
$
54,509
|
$
693
|
$
(3,165
)
|
$
86,682
|
|
Net income
|
|
|
|
9,010
|
31
|
|
9,041
|
|
Other
comprehensive loss
|
|
|
|
|
|
(295
)
|
(295
)
|
|
|
|
|
|
|
|
|
|
|
Distributions to
noncontrolling interest
|
|
|
|
|
(150
)
|
|
(150
)
|
|
Dividends on
preferred stock ($1.28 per share)
|
|
|
|
(415
)
|
|
|
(415
)
|
|
Dividends on common
stock ($.94 per share)
|
|
|
|
(2,972
)
|
|
|
(2,972
)
|
|
Common stock
repurchased (21,984 shares)
|
|
(110
)
|
(602
)
|
|
|
|
(712
)
|
|
Common stock issued
(6,705 shares)
|
|
33
|
164
|
|
|
|
197
|
|
Preferred stock
repurchased (3,200 shares)
|
(80
)
|
|
(21
)
|
|
|
|
(101
)
|
|
Stranded tax effect
of Tax Cuts and Jobs Act
|
|
|
|
682
|
|
(682
)
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
$
7,529
|
$
16,275
|
$
10,225
|
$
60,814
|
$
574
|
$
(4,142
)
|
$
91,275
|
See accompanying Notes to the Consolidated Financial
Statements.
46
F
& M Bank Corp. and Subsidiaries
For the years ended December 31, 2017, 2016 and 2015
|
|
2017
|
2016
|
2015
|
|
Cash Flows from Operating Activities
|
|
|
|
|
Net
income
|
$
9,010
|
$
9,568
|
$
8,417
|
|
Adjustments to
reconcile net income to net cash
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
Depreciation
|
930
|
827
|
727
|
|
Amortization of
intangibles
|
53
|
-
|
-
|
|
Amortization of
securities
|
-
|
109
|
147
|
|
Proceeds from sale
of loans held for sale originated
|
67,517
|
73,112
|
77,662
|
|
Gain on sale of
loans held for sale originated
|
(2,331
)
|
(2,778
)
|
(2,297
)
|
|
Loans held for sale
originated
|
(68,647
)
|
(66,779
)
|
(77,152
)
|
|
Provision for loan
losses
|
-
|
-
|
300
|
|
(Expense) benefit
for deferred taxes
|
(222
)
|
9
|
341
|
|
(Increase) in
interest receivable
|
(222
)
|
(76
)
|
(34
)
|
|
Increase in other
assets
|
(1,693
)
|
(444
)
|
(457
)
|
|
Increase in accrued
liabilities
|
1,498
|
1,690
|
1,480
|
|
Amortization of
limited partnership investments
|
625
|
731
|
627
|
|
Loss on sale of
investments
|
42
|
-
|
-
|
|
Loss on sale and
valuation adjustments of other real estate owned
|
44
|
19
|
489
|
|
Income from life
insurance investment
|
(449
)
|
(476
)
|
(473
)
|
|
Net
Cash Provided by Operating Activities
|
6,155
|
15,512
|
9,777
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Proceeds
from maturities of securities available for sale
|
86,741
|
32,218
|
8,243
|
|
Proceeds
from sales of other investments
|
55
|
-
|
-
|
|
Purchases
of securities available for sale and other investments
|
(89,428
)
|
(47,137
)
|
(12,040
)
|
|
Capital
improvements to other real estate owned
|
(2
)
|
(24
)
|
-
|
|
Net
increase in loans held for investment
|
(27, 068
)
|
(49,386
)
|
(25,892
)
|
|
Net
decrease (increase) in loans held for sale
participations
|
26 421
|
(8,483
)
|
(42,637
)
|
|
Net
purchase of property and equipment
|
(6,484
)
|
(3,553
)
|
(1,811
)
|
|
Proceeds
from sale of other real estate owned
|
281
|
623
|
688
|
|
Net Cash Used in
Investing Activities
|
(9,484
)
|
(75,742
)
|
(73,449
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
Net
change in deposits
|
32,092
|
42,415
|
3,165
|
|
Net
change in short-term debt
|
(14,704
)
|
15,046
|
10,596
|
|
Dividends
paid in cash
|
(3,387
)
|
(3,115
)
|
(2,915
)
|
|
Proceeds
from long-term debt
|
-
|
20,000
|
40,000
|
|
Proceeds
from issuance of common stock
|
197
|
183
|
147
|
|
Repurchase
of preferred stock
|
(712
)
|
(1,961
)
|
-
|
|
Repurchase
of common stock
|
(101
)
|
(578
)
|
(290
)
|
|
Repayments
of long-term debt
|
(14,504
)
|
(3,924
)
|
(1,714
)
|
|
Net Cash (Used in)
Provided by Financing Activities
|
(1,119
)
|
68,066
|
48,989
|
|
|
|
|
|
|
Net (Decrease)
Increase in Cash and Cash Equivalents
|
(4,448
)
|
7,836
)
|
(14,683
)
|
|
|
|
|
|
|
Cash and Cash
Equivalents, Beginning of Year
|
16,355
|
8,519
|
23,202
|
|
Cash and Cash
Equivalents, End of Year
|
$
11,907
|
$
16,355
|
$
8,519
|
|
|
|
|
|
|
Supplemental Cash
Flow information:
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Interest
|
$
3,866
|
$
3,573
|
$
2,854
|
|
Income
taxes
|
4,460
|
2,300
|
1,500
|
|
Supplemental
non-cash disclosures:
|
|
|
|
|
Transfers from loans to other real estate owned
|
231
|
566
|
125
|
|
Loans originated for the sale of other real estate
owned
|
-
|
-
|
(328
)
|
|
Unrealized
gain (loss) on securities available for sale
|
(26
)
|
2
|
1
|
|
Minimum
pension liability adjustment
|
(952
)
|
(487
)
|
(354
)
|
See accompanying Notes to the Consolidated Financial
Statements.
47
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
1
NATURE
OF OPERATIONS:
F &
M Bank Corp. (the “Company”), through its subsidiary
Farmers & Merchants Bank (the “Bank”), operates
under a charter issued by the Commonwealth of Virginia and provides
commercial banking services. As a state-chartered bank, the Bank is
subject to regulation by the Virginia Bureau of Financial
Institutions and the Federal Reserve Bank. The Bank provides
services to customers located mainly in Rockingham, Shenandoah,
Page and Augusta Counties in Virginia, and the adjacent county of
Hardy, West Virginia. Services are provided at thirteen branch
offices and a Dealer Finance Division loan production office. The
Company offers insurance, mortgage lending, title insurance and
financial services through its subsidiaries, TEB Life Insurance,
Inc., Farmers & Merchants Financial Services, Inc, VBS
Mortgage, LLC (VBS) and VS Title, LLC.
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
The
accounting and reporting policies of the Company and its
subsidiaries conform to generally accepted accounting principles
and to accepted practice within the banking industry. The following
is a summary of the more significant policies:
Principles
of Consolidation
The
consolidated financial statements include the accounts of Farmers
and Merchants Bank, TEB Life Insurance Company, Farmers &
Merchants Financial Services, Inc., VBS Mortgage, LLC, (net of
noncontrolling interest) and VS Title, LLC. Significant
inter-company accounts and transactions have been
eliminated.
Use
of Estimates in the Preparation of Financial
Statements
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses,
goodwill and intangibles, fair value, the valuation of deferred tax
assets and liabilities, pension accounting and the valuation of
foreclosed real estate.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand, money market funds whose
initial maturity is ninety days or less and Federal funds
sold.
Securities
Certain
debt securities that management has the positive intent and ability
to hold to maturity are classified as “held to
maturity” and recorded at amortized cost. Securities not
classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as
“available for sale” and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in
other comprehensive income. Purchase premiums and discounts are
recognized in interest income using the interest method over the
terms of the securities. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the
specific identification method. The Company has no securities
classified as trading.
The
Company follows the accounting guidance related to recognition and
presentation of other-than-temporary impairment. The guidance
specifies that if (a) an entity does not have the intent to sell a
debt security prior to recovery and (b) it is more likely than not
that the entity will not have to sell the debt security prior to
recovery, the security would not be considered
other-than-temporarily impaired, unless there is a credit loss.
When criteria (a) and (b) are met, the entity will recognize the
credit component of other-than-temporary impairment of a debt
security in earnings and the remaining portion in other
comprehensive income.
48
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Securities,
continued
For
held-to-maturity debt securities, the amount of
other-than-temporary impairment recorded in other comprehensive
income for the noncredit portion of a previous other-than-temporary
impairment is amortized prospectively over the remaining life of
the security on the basis of the timing of future estimated cash
flows of the security.
For
equity securities, when the Company has decided to sell an impaired
available-for-sale security and the Company does not expect the
fair value of the security to fully recover before the expected
time of sale, the security is deemed other-than-temporarily
impaired in the period in which the decision to sell is made. The
Company recognizes an impairment loss when the impairment is deemed
other than temporary even if a decision to sell has not been
made.
Other
Investments
The
Company periodically invests in low income housing partnerships
whose primary benefit is the distribution of federal income tax
credits to partners. The Company recognizes these benefits and the
cost of the investments over the life of the partnership (usually
15 years). In addition, state and federal historic rehabilitation
credits are generated from some of the partnerships. Amortization
of these investments is prorated based on the amount of benefits
received in each year to the total estimated benefits over the life
of the projects. The effective yield method is used to record the
income statement effects of these investments.
Other
Investment Securities
Due to
the nature and restrictions placed on the Company's investment in
common stock of the Federal Home Loan Bank of Atlanta ("FHLB") and
the Federal Reserve Bank of Richmond, these securities are
considered restricted and carried at cost.
Income
Taxes
Income
tax accounting guidance results in two components of income tax
expense: current and deferred. Current income tax expense reflects
taxes to be paid or refunded for the current period by applying the
provisions of the enacted tax law to the taxable income or excess
of deductions over revenues. The Company determines deferred income
taxes using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is based on the tax
effects of the differences between the book and tax bases of assets
and liabilities, and enacted changes in tax rates and laws are
recognized in the period in which they occur.
Deferred income tax
expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more
likely than not, based on the technical merits, that the tax
position will be realized or sustained upon examination. The term
more likely than not means a likelihood of more than 50 percent;
the terms examined and upon examination also include resolution of
the related appeals or litigation processes, if any. A tax position
that meets the more-likely-than-not recognition threshold is
initially and subsequently measured as the largest amount of tax
benefit that has a greater than 50 percent likelihood of being
realized upon settlement with a taxing authority that has full
knowledge of all relevant information. The determination of whether
or not a tax position has met the more-likely-than-not recognition
threshold considers the facts, circumstances, and information
available at the reporting date and is subject to
management’s judgment. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of evidence available,
it is more likely than not that some portion or all of a deferred
tax asset will not be realized.
The
results for the year ended December 31, 2017 include the effect of
the Tax Cuts and Jobs Act (the Tax Act), which was signed into law
on December 22, 2017. Among other things, the Tax Act permanently
lowers the federal corporate income tax rate to 21% from the
maximum rate prior to the passage of the Tax Act of 35%, effective
January 1, 2018. As a result of the reduction of the federal
corporate tax rate, U.S. GAAP requires companies to re-measure
their deferred tax assets and deferred tax liabilities, including
those accounted for in accumulated other comprehensive income
(loss), as of the date of the Tax Act’s enactment and record
the corresponding effects in income tax expense in the fourth
quarter of 2017. The Company recognized a $811 reduction in the
value of its net deferred tax asset and recorded a corresponding
incremental income tax expense in the Company’s consolidated
statement of income for 2017. The Company’s evaluation of the
effect of the Tax Act is considered a preliminary estimate and is
subject to refinement for up to one year. No material adjustment is
anticipated.
49
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income
Taxes, continued
The
Company recognizes interest and penalties on income taxes as a
component of income tax expense.
Loans Held for Investment
The
Company, through its banking subsidiary, provides mortgage,
commercial, and consumer loans to customers. A substantial portion
of the loan portfolio is represented by mortgage loans,
particularly commercial and residential mortgages. The ability of
the Company’s debtors to honor their contracts is largely
dependent upon the real estate and general economic conditions in
the Company’s market area.
Loans
that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, generally are
reported at their outstanding unpaid principal balance adjusted for
the allowance for loan losses, and any unearned income.
Interest income is accrued on the unpaid principal balance.
The accrual of interest on loans is generally discontinued at the
time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Loans are
typically charged off when the loan is 120 days past due, unless
secured and in process of collection. Loans are placed on
nonaccrual status or charged-off at an earlier date if collection
of principal or interest is considered doubtful.
The
Company’s loans are grouped into eleven segments:
construction/land development, farmland, real estate, multi-family,
commercial real estate, home equity – closed end, home equity
– open end, commercial & industrial – non-real
estate, consumer, credit cards and dealer finance. Each segment is
subject to certain risks that influence the establishment of
pricing, loan structures, approval requirements, reserves, and
ongoing credit management. The Company does not segregate the
portfolio further.
Construction and
land development loans are subject to general risks from changing
commercial building and housing market trends and economic
conditions that may impact demand for completed properties and the
costs of completion. Completed properties that do not sell or
become leased within originally expected timeframes may impact the
borrower’s ability to service the debt. These risks are
measured by market-area unemployment rates, bankruptcy rates,
housing and commercial building market trends, and interest rates.
Risks specific to the borrower are also evaluated, including
previous repayment history, debt service ability, and current and
projected loan-to value ratios for the collateral.
Farmland loans are
loans secured by agricultural property. These loans are subject to
risks associated with the value of the underlying farmland and the
cash flows of the borrower’s farming operations.
Multifamily loans
are loans secured by multi-unit residential property. These loans
are subject to risks associated with the value of the underlying
property as well as the successful operation and management of the
property.
Real
estate loans are for consumer residential real estate where the
credit quality is subject to risks associated with the
borrower’s repayment ability and collateral value, measured
generally by analyzing local unemployment and bankruptcy trends,
and local housing market trends and interest rates. Risks specific
to a borrower are determined by previous repayment history,
loan-to-value ratios, and debt-to-income ratios.
The
commercial real estate segment includes loans secured by commercial
real estate occupied by the owner/borrower, and commercial real
estate leased to non-owners. Loans in the commercial real estate
segment are impacted by economic risks from changing commercial
real estate markets, rental markets for commercial buildings,
business bankruptcy rates, local unemployment rates and interest
rate trends that would impact the businesses housed by the
commercial real estate.
The
Company’s home-equity loan portfolios (closed end and open
end) carry risks associated with the creditworthiness of the
borrower and changes in loan-to-value ratios. The Company manages
these risks through policies and procedures such as limiting
loan-to-value at origination, experienced underwriting, and
requiring standards for appraisers.
50
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans Held for Investment, continued
Commercial and
industrial non-real estate loans are secured by collateral other
than real estate or are unsecured. Credit risk for commercial
non-real estate loans is subject to economic conditions, generally
monitored by local business bankruptcy trends, interest rates, and
borrower repayment ability and collateral value (if
secured).
Consumer non-real
estate includes non-dealer financed automobile loans and other
consumer loans. Certain consumer loans are unsecured, while
collateral is obtained for automobile loans and other consumer
loans. Credit risk stems primarily from the borrower’s
ability to repay. If the loan is secured, the Company analyzes
loan-to-value ratios. All consumer non-real estate loans are
analyzed for debt-to-income ratios and previous credit history, as
well as for general risks for the portfolio, including local
unemployment rates, personal bankruptcy rates and interest
rates.
Credit
card loan portfolios carry risks associated with the
creditworthiness of the borrower and changes in the economic
environment. The Company manages these risks through policies and
procedures such as experienced underwriting, maximum debt to income
ratios, and minimum borrower credit scores.
Dealer
finance lending generally carries certain risks associated with the
values of the collateral and borrower’s ability to repay the
loan. The Company focuses its dealer finance lending on used
vehicles where substantial depreciation has already occurred
thereby minimizing the risk of significant loss of collateral
values in the future.
Interest accrued
but not collected for loans that are placed on nonaccrual status or
charged-off is reversed against interest income. The interest
on these loans is accounted for on the cash basis or cost recovery
method, until qualifying for return to accrual status. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
A loan
is considered past due when a payment of principal or interest or
both is due but not paid. Management closely monitors past
due loans in timeframes of 30-59 days, 60-89 days, and 90 or more
days past due.
These
policies apply to all loan portfolio segments.
A loan
is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on
a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's obtainable market
price, or the fair value of the collateral if the loan is
collateral dependent. Troubled debt restructurings are considered
impaired loans.
Loans
Held for Sale
These
loans consist of fixed rate loans made through the Company’s
subsidiary, VBS Mortgage, and loans purchased from Northpointe
Bank, Grand Rapids, MI.
51
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans
Held for Sale, continued
VBS
Mortgage originates conforming mortgage loans for sale in the
secondary market. These loans consist primarily of fixed-rate,
single-family residential mortgage loans which meet the
underwriting characteristics of the investors. VBS enters into
mortgage loan commitments whereby the interest rate on the loan is
determined prior to funding (rate lock commitments).
The
period of time between issuance of a loan commitment and sale of
the loan generally ranges from two to three weeks. VBS protects
itself from changes in interest rates through the use of best
efforts forward delivery contracts, by committing to sell a loan at
the time the borrower commits to an interest rate with the intent
that the buyer has assumed the interest rate risk on the
loan. As a result, the Company is not generally exposed to
significant losses nor will it realize significant gains related to
its rate lock commitments due to changes in interest rates.
The correlation between the rate lock commitments and the best
efforts contracts is very high due to their similarity. The market
value of rate lock commitments and best efforts contracts is not
readily ascertainable with precision because rate lock commitments
and best efforts contracts are not actively traded in stand-alone
markets. VBS determines the fair value of rate lock
commitments and best efforts contracts by measuring the change in
the estimated value of the underlying assets while taking into
consideration the probability that the loan will be funded. The
fair value of rate lock commitments and best efforts contracts was
considered immaterial at December 31, 2017 and 2016. The average
time on the line is two or three weeks. These loans are pre-sold
with servicing released and no interest is retained after the loans
are sold. Because of the short holding period, these loans are
carried at the lower of cost or market and no market adjustments
were deemed necessary in 2017, 2016, or 2015. Gains on sales of
loans and commission expense are recognized at the loan closing
date and are included in mortgage banking income, net on the
Company’s consolidated income statement.
The
Bank participates in a Mortgage Purchase Program with Northpointe
Bank (Northpointe), a Michigan banking corporation. Pursuant to the
terms of a participation agreement, the Bank purchases
participation interests in loans made by Northpointe related to
fully underwritten and pre-sold mortgage loans originated by
various prescreened mortgage loan originators located throughout
the United States. A takeout commitment is in place at the time the
loans are purchased. The Bank has participated in similar
arrangements since 2003 as a higher yielding alternative to federal
funds sold or investment securities. These loans are short-term,
residential real estate loans that have an average life in our
portfolio of approximately two weeks. The Bank holds these loans
during the period of time between loan closing and when the loan is
paid off by the ultimate secondary market purchaser. As of December
31, 2017, and 2016, there were $36,130 and $62,550 million of these
loans included in loans held for sale on the Company’s
consolidated balance sheet.
Troubled
Debt Restructuring
In
situations where, for economic or legal reasons related to a
borrower's financial condition, management may grant a concession
to the borrower that it would not otherwise consider, the related
loan is classified as a troubled debt restructuring ("TDR").
Management strives to identify borrowers in financial difficulty
early and work with them to modify their loan to more affordable
terms before their loan reaches nonaccrual status. These
modified terms may include rate reductions, principal forgiveness,
payment forbearance and other actions intended to minimize the
economic loss and to avoid foreclosure or repossession of the
collateral. In cases where borrowers are granted new terms
that provide for a reduction of either interest or principal,
management measures any impairment on the restructuring as noted
above for impaired loans. The Company has $7.8 million in
loans classified as TDRs that are current and performing as of
December 31, 2017, and $9.8 million as of December 31,
2016.
52
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Allowance
for Loan and Losses
The
allowance for loan losses represents management’s estimate of
probable losses inherent in the Company’s loan portfolio. A
provision for estimated losses is charged to earnings to establish
and maintain the allowance for loan losses at a level reflective of
the estimated credit risk. When management determines that a loan
balance or portion of a loan balance is not collectible, the loss
is charged against the allowance. Subsequent recoveries, if any,
are credited to the allowance.
Management’s
determination of the adequacy of the allowance is based on an
evaluation of the composition of the loan portfolio, the value and
adequacy of collateral, current economic conditions, historical
loan loss experience, and other risk factors. Management evaluates
the allowance each quarter through a methodology that estimates
losses on individual impaired loans and evaluates the effect of
numerous factors on the credit risk of each segment of
loans.
The
Company’s allowance for loan losses has two basic components:
the general allowance and the specific allowance. Each of these
components is determined based upon estimates and judgments. The
general allowance uses historical loss experience as an indicator
of future losses, along with various qualitative factors, including
levels and trends in delinquencies, nonaccrual loans, charge-offs
and recoveries, trends in volume and terms of loans, effects of
changes in underwriting standards, experience of lending staff,
economic conditions, and portfolio concentrations.
Except
for credit card and dealer finance loans, all loans are assigned an
internal risk rating based on certain credit quality indicators.
Credit card, consumer and dealer finance loans are monitored based
on payment activity. Loss rates are amplified for loans with
adverse risk ratings that are not considered impaired. In the
general allowance, the historical loss rate is combined with the
qualitative factors, resulting in an adjusted loss factor for each
segment of loans. The period-end balances for each loan
segment are multiplied by the adjusted loss factor. Historical loss
rates are combined with qualitative factors resulting in an
adjusted loss factor for each segment. Specific allowances are
established for individually-evaluated impaired loans based on the
excess of the loan balance relative to the fair value of the
collateral, if the loan is deemed collateral
dependent.
Management believes
that the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions, particularly those affecting real estate
values. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Company’s
allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about
information available to them at the time of their
examination.
Other
Real Estate Owned (OREO)
OREO is
held for sale and represents real estate acquired through or in
lieu of foreclosure. OREO is initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis.
Physical possession of residential real estate property
collateralizing a consumer mortgage loan occurs when legal title is
obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through
completion of a deed in lieu of foreclosure or through a similar
legal agreement. The Company’s policy is to carry OREO on its
balance sheet at the lower of cost or fair value less estimated
costs to sell. If fair value declines subsequent to foreclosure, a
valuation allowance is recorded through expense. Operating costs
after acquisition are expensed.
53
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Bank
Premises and Equipment
Land is
carried at cost and bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is charged to income
over the estimated useful lives of the assets on a combination of
the straight-line and accelerated methods. The ranges of the useful
lives of the premises and equipment are as follows:
|
|
Premises and
Improvements
|
10 - 40
years
|
|
|
Furniture and
Equipment
|
5 - 20
years
|
Maintenance,
repairs, and minor improvements are charged to operations as
incurred. Gains and losses on dispositions are reflected in other
income or expense.
Goodwill and Intangible Assets
The
Company accounts for goodwill and intangible assets under ASC 805,
“Business Combinations” and ASC 350,
“Intangibles”, respectively. Goodwill is subject to at
least an annual assessment for impairment by applying a fair
value-based test. Additionally, acquired intangible assets
are separately recognized if the benefit of the assets can be sold,
transferred, licensed, rented, or exchanged, and amortized over
their useful lives. The Company recorded goodwill and intangible
assets in 2017 related to the purchase of VS Title which was valued
by an independent third party. The Company records as goodwill the
excess of purchase price over the fair value of the identifiable
net assets acquired. Impairment testing is performed annually, as
well as when an event triggering impairment may have occurred. The
Company performs its annual analysis as of December 31 each fiscal
year. Accounting guidance permits preliminary assessment of
qualitative factors to determine whether a more substantial
impairment testing is required. The Company chose to bypass the
preliminary assessment and utilized a two-step process for
impairment testing of goodwill. The first step tests for
impairment, while the second step, if necessary, measures the
impairment. No indicators of impairment were identified
during the years ended December 31, 2017, 2016, and
2015.
Pension
Plans
The
Bank has a qualified noncontributory defined benefit pension plan
which covers all full-time employees hired prior to April 1, 2012.
The benefits are primarily based on years of service and earnings.
The Company complies with ASC 325-960 “Defined Benefit
Pension Plans” which requires recognition of the over-funded
or under-funded status of pension and other postretirement benefit
plans on the balance sheet. Under ASC 325-960, gains and losses,
prior service costs and credits, and any remaining transition
amounts that have not yet been recognized through net periodic
benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component
of net periodic cost.
Advertising Costs
The
Company follows the policy of charging the cost of advertising to
expense as incurred. Total advertising costs included in other
operating expenses for 2017, 2016, and 2015 were $507, $496, and
$452, respectively.
Bank
Owned Life Insurance
The
Company has purchased life insurance policies on certain employees.
Bank owned life insurance is recorded at the amount that can be
realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
54
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Transfers
of Financial Assets
Transfers of
financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets
is deemed to be surrendered when (1) the assets have been isolated
from the Company – put presumptively beyond reach of the
transferor and its creditors, even in bankruptcy or other
receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity or
the ability to unilaterally cause the holder to return specific
assets.
Comprehensive
Income
Comprehensive
income is shown in a two-statement approach, the first statement
presents total net income and its components followed by a second
statement that presents all the components of other comprehensive
income such as unrealized gains and losses on available for sale
securities and changes in the funded status of a defined benefit
pension plan.
In
February 2018, the FASB issued ASU 2018-02, “Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income
(“AOCI”). The Company early adopted this new standard
in the current year. ASU 2018-02 requires reclassification from
AOCI to retained earnings for stranded tax effects resulting from
the impact of the newly enacted federal corporate tax rate on items
included in AOCI. The amount of the reclassification in 2017 was
$682.
Derivative
Financial Instruments
Under
ASC 815, the gain or loss on a derivative designated and qualifying
as a fair value hedging instrument, as well as the offsetting gain
or loss on the hedging item attributable to the risk being hedged,
is recognized currently in earnings in the same accounting period.
The effective portion of the gain or loss on a derivative
designated and qualifying as a cash flow hedging instrument is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The
ineffective portion of the gain or loss on the derivative
instrument, if any, is recognized currently in
earnings.
Interest rate
derivative financial instruments receive hedge accounting treatment
only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising
from the assets and liabilities identified as exposing the Company
to risk. Those derivative financial instruments that do not meet
the hedging criteria discussed below would be classified as trading
activities and would be recorded at fair value with changes in fair
value recorded in income. Derivative hedge contracts must meet
specific effectiveness tests. Changes in fair value of the
derivative financial instruments must be effective at offsetting
changes in the fair value of the hedging items due to the
designated hedge risk during the term of the hedge. Further, if the
underlying financial instrument differs from the hedged asset or
liability, there must be a clear economic relationship between the
prices of the two financial instruments. If periodic assessment
indicates derivatives no longer provide an effective hedge, the
derivatives contracts would be closed out and settled or classified
as a trading activity.
Loss
Contingencies
Loss
contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable, and an amount or range of loss can
be reasonably estimated. Management does not believe there now are
such matters that will have a material effect on the consolidated
financial statements.
Fair
Value Measurements
The
Company follows the provisions of ASC Topic 820 “Fair Value
Measurements and Disclosures,” for financial assets and
financial liabilities. ASC 820 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements.
55
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Reclassifications
Certain
reclassifications have been made in prior years’ financial
statements to conform to classifications used in the current year.
The reclassification adjustments related to our consolidation of
VBS and the classification of individual line items in a manner
consistent with the rest of the Company on the income statement.
These reclassifications had no impact on net income or earnings per
share.
Earnings
per Share
Accounting guidance
specifies the computation, presentation and disclosure requirements
for earnings per share (“EPS”) for entities with
publicly held common stock or potential common stock such as
options, warrants, convertible securities or contingent stock
agreements if those securities trade in a public market. Basic EPS
is computed by dividing net income available to common stockholders
by the weighted average number of common shares
outstanding. Diluted EPS is similar to the computation
of basic EPS except that the denominator is increased to include
the number of additional common shares that would have been
outstanding if the dilutive common shares had been
issued. The dilutive effect of conversion of preferred
stock is reflected in the diluted earnings per common share
calculation.
Net
income available to common stockholders represents consolidated net
income adjusted for preferred dividends declared.
The
following table provides a reconciliation of net income to net
income available to common stockholders for the periods
presented:
|
|
For the year ended
|
||
|
Dollars
in thousands
|
December 31, 2017
|
December 31, 2016
|
December 31, 2015
|
|
Earnings
Available to Common Stockholders:
|
|
|
|
|
Net
Income
|
$
9,041
|
$
9,762
|
$
8,581
|
|
Minority
interest attributable to noncontrolling interest
|
31
|
194
|
164
|
|
Dividends
paid/accumulated on preferred stock
|
415
|
487
|
510
|
|
Net
Income Available to Common Stockholders
|
$
8,595
|
$
9,081
|
$
7,907
|
The
following table shows the effect of dilutive preferred stock
conversion on the Company's earnings per share for the periods
indicated:
|
|
Year ended
|
||||||||
|
|
December 31, 2017
|
December 31, 2016
|
December 31, 2015
|
||||||
|
Dollars in thousands
|
Net Income Available to Common Stockholders
|
Weighted Average Shares
|
Per Share Amounts
|
Net Income Available to Common Stockholders
|
Weighted Average Shares
|
Per Share Amounts
|
Net Income Available to Common Stockholders
|
Weighted Average Shares
|
Per Share Amounts
|
|
Basic
EPS
|
$
8,595
|
3,269,713
|
$
2.63
|
$
9,081
|
3,282,335
|
$
2.77
|
$
7,907
|
3,290,812
|
$
2.40
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
Stock
|
415
|
362,271
|
(0.15
)
|
487
|
434,256
|
(0.20
)
|
510
|
444,400
|
(0.15
)
|
|
Diluted EPS
|
$
9,010
|
3,631,984
|
$
2.48
|
$
9,568
|
3,716,591
|
$
2.57
|
$
8,417
|
3,735,212
|
$
2.25
|
56
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent
Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers: Topic
606
.” This ASU revised guidance for the recognition,
measurement, and disclosure of revenue from contracts with
customers. The original guidance has been amended through
subsequent accounting standard updates that resulted in technical
corrections, improvements, and a one-year deferral of the effective
date to January 1, 2018. The guidance, as amended, is applicable to
all entities and, once effective, will replace significant portions
of existing industry and transaction-specific revenue recognition
rules with a more principles-based recognition model. Most revenue
associated with financial instruments, including interest income,
loan origination fees, and credit card fees, is outside the scope
of the guidance. Gains and losses on investment securities,
derivatives, and sales of financial instruments are similarly
excluded from the scope. Entities can elect to adopt the guidance
either on a full or modified retrospective basis. Full
retrospective adoption will require a cumulative effect adjustment
to retained earnings as of the beginning of the earliest
comparative period presented. Modified retrospective adoption will
require a cumulative effect adjustment to retained earnings as of
the beginning of the reporting period in which the entity first
applies the new guidance. The Company plans to adopt this guidance
on the effective date, January 1, 2018 via the modified
retrospective approach. The Company is in the process of completing
its assessment the impact that adoption of ASU 2014-09 will have on
its consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01, “Financial
Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.”
The amendments in ASU 2016-01, among other things: 1) Requires
equity investments (except those accounted for under the equity
method of accounting, or those that result in consolidation of the
investee) to be measured at fair value with changes in fair value
recognized in net income. 2) Requires public business entities to
use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. 3) Requires separate
presentation of financial assets and financial liabilities by
measurement category and form of financial asset (i.e., securities
or loans and receivables). 4) Eliminates the requirement for public
business entities to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost. The
amendments in this ASU are effective for public companies for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company is currently
assessing the impact that adoption of ASU 2016-01 will have on its
consolidated financial statements by contracting with a third party
vendor.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842).” Among other things, in the amendments in ASU
2016-02, lessees will be required to recognize the following for
all leases (with the exception of short-term leases) at the
commencement date: (1) A lease liability, which is a lessee‘s
obligation to make lease payments arising from a lease, measured on
a discounted basis; and (2) A right-of-use asset, which is an asset
that represents the lessee’s right to use, or control the use
of, a specified asset for the lease term. Under the new guidance,
lessor accounting is largely unchanged. Certain targeted
improvements were made to align, where necessary, lessor accounting
with the lessee accounting model and Topic 606, Revenue from
Contracts with Customers. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early application is
permitted upon issuance. Lessees (for capital and operating leases)
and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements.
The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest
comparative period presented. Lessees and lessors may not apply a
full retrospective transition approach. The Company is currently
assessing the impact that ASU 2016-02 will have on its consolidated
financial statements by gathering data on current lease agreements
and analyzing the capital impact of expected right of use assets
that will be recorded. No changes are expected regarding total
lease expense.
During
March 2016, the FASB issued ASU No. 2016-05, “Derivatives and
Hedging (Topic 815): Effect of Derivative Contract Novations on
Existing Hedge Accounting Relationships.” The amendments in
this ASU clarify that a change in the counterparty to a derivative
instrument that has been designated as the hedging instrument does
not, in and of itself, require de-designation of that hedging
relationship provided that all other hedge accounting criteria
remain intact. The amendments in this ASU are effective for
financial statements issued for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim
period. The Company does not expect the adoption of ASU 2016-05 to
have a material impact on its consolidated financial
statements.
57
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent
Accounting Pronouncements, continued
In
March 2016, the FASB issued ASU No. 2016-07, “Investments
– Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting.” The
amendments in this ASU eliminate the requirement that when an
investment qualifies for use of the equity method as a result of an
increase in the level of ownership interest or degree of influence,
an investor must adjust the investment, results of operations, and
retained earnings retroactively on a step-by-step basis as if the
equity method had been in effect during all previous periods that
the investment had been held. The amendments require that the
equity method investor add the cost of acquiring the additional
interest in the investee to the current basis of the
investor’s previously held interest and adopt the equity
method of accounting as of the date the investment becomes
qualified for equity method accounting. Therefore, upon qualifying
for the equity method of accounting, no retroactive adjustment of
the investment is required. In addition, the amendments in this ASU
require that an entity that has an available-for-sale equity
security that becomes qualified for the equity method of accounting
recognize through earnings the unrealized holding gain or loss in
accumulated other comprehensive income at the date the investment
becomes qualified for use of the equity method. The amendments are
effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. The
amendments should be applied prospectively upon their effective
date to increases in the level of ownership interest or degree of
influence that result in the adoption of the equity method. Early
Adoption is permitted. The Company does not expect the adoption of
ASU 2016-07 to have a material impact on its consolidated financial
statements.
During
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” The amendments in
this ASU, among other things, require the measurement of all
expected credit losses for financial assets held at the reporting
date based on historical experience, current conditions, and
reasonable and supportable forecasts. Financial institutions and
other organizations will now use forward-looking information to
better inform their credit loss estimates. Many of the loss
estimation techniques applied today will still be permitted,
although the inputs to those techniques will change to reflect the
full amount of expected credit losses. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt
securities and purchased financial assets with credit
deterioration. The amendments in this ASU are effective for SEC
filers for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. For public companies that
are not SEC filers, the amendments in this ASU are effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. The Company is currently
assessing the impact that ASU 2016-13 will have on its consolidated
financial statements and has formed a Current Expected Credit
Losses steering committee that is researching methods and
models.
During
August 2016, the FASB issued ASU No. 2016-15, “Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments”, to address diversity in how certain cash
receipts and cash payments are presented and classified in the
statement of cash flows. The amendments are effective for public
business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. The amendments
should be applied using a retrospective transition method to each
period presented. If retrospective application is impractical for
some of the issues addressed by the update, the amendments for
those issues would be applied prospectively as of the earliest date
practicable.
Early
adoption is permitted, including adoption in an interim period. The
Company does not expect the adoption of ASU 2016-15 to have a
material impact on its consolidated financial
statements.
58
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent
Accounting Pronouncements, continued
During
January 2017, the FASB issued ASU No. 2017-01, “Business
Combinations (Topic 805): Clarifying the Definition of a
Business”. The amendments in this ASU clarify the definition
of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. Under
the current implementation guidance in Topic 805, there are three
elements of a business—inputs, processes, and outputs. While
an integrated set of assets and activities (collectively referred
to as a “set”) that is a business usually has outputs,
outputs are not required to be present. In addition, all the inputs
and processes that a seller uses in operating a set are not
required if market participants can acquire the set and continue to
produce outputs. The amendments in this ASU provide a screen to
determine when a set is not a business. If the screen is not met,
the amendments (1) require that to be considered a business, a set
must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create output
and (2) remove the evaluation of whether a market participant could
replace missing elements. The ASU provides a framework to assist
entities in evaluating whether both an input and a substantive
process are present. The amendments in this ASU are effective for
annual periods beginning after December 15, 2017, including interim
periods within those annual periods. The amendments in this ASU
should be applied prospectively on or after the effective date. No
disclosures are required at transition
.
The Company does not expect the
adoption of ASU 2017-01 to have a material impact on its
consolidated financial statements.
During
January 2017, the FASB issued ASU No. 2017-04, “Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment”. The amendments in this ASU simplify how
an entity is required to test goodwill for impairment by
eliminating Step 2 from the goodwill impairment test. Step 2
measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount
of that goodwill. Instead, under the amendments in this ASU, an
entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its
carrying amount. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. Public business entities
that are U.S. Securities and Exchange Commission (SEC) filers
should adopt the amendments in this ASU for annual or interim
goodwill impairment tests in fiscal years beginning after
December 15, 2019. Public business entities that are not SEC
filers should adopt the amendments in this ASU for annual or
interim goodwill impairment tests in fiscal years beginning after
December 15, 2020. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company does not expect the adoption of ASU
2017-04 to have a material impact on its consolidated financial
statements.
During
March 2017, the FASB issued ASU 2017-07, “Compensation
— Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost.” The amendments in this ASU require an employer
that offers defined benefit pension plans, other postretirement
benefit plans, or other types of benefits accounted for under Topic
715 to report the service cost component of net periodic benefit
cost in the same line item(s) as other compensation costs arising
from services rendered during the period. The other components of
net periodic benefit cost are required to be presented in the
income statement separately from the service cost component. If the
other components of net periodic benefit cost are not presented on
a separate line or lines, the line item(s) used in the income
statement must be disclosed. In addition, only the service cost
component will be eligible for capitalization as part of an asset,
when applicable. The amendments are effective for annual periods
beginning after December 15, 2017, including interim periods within
those annual periods. Early adoption is permitted. The Company does
not expect the adoption of ASU 2017-07 to have a material impact on
its consolidated financial statements.
59
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent
Accounting Pronouncements, continued
During
March 2017, the FASB issued ASU 2017
‐
08,
“Receivables—Nonrefundable Fees and Other Costs
(Subtopic 310
‐
20), Premium
Amortization on Purchased Callable Debt Securities.” The
amendments in this ASU shorten the amortization period for certain
callable debt securities purchased at a premium. Upon adoption of
the standard, premiums on these qualifying callable debt securities
will be amortized to the earliest call date. Discounts on purchased
debt securities will continue to be accreted to maturity. The
amendments are effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period.
Upon transition, entities should apply the guidance on a modified
retrospective basis, with a cumulative-effect adjustment to
retained earnings as of the beginning of the period of adoption and
provide the disclosures required for a change in accounting
principle. Given the composition of our securities portfolio, the
Company does not expect that adoption of ASU 2017
‐
08 will have a
material impact on its consolidated financial
statements.
During
May 2017, the FASB issued ASU 2017
‐
09,
“Compensation – Stock Compensation (Topic 718): Scope
of Modification Accounting.” The amendments provide guidance
on determining which changes to the terms and conditions of
share-based payment awards require an entity to apply modification
accounting under Topic 718. The amendments are effective for
annual periods, including interim periods within those annual
periods, beginning after December 15, 2017. Early adoption is
permitted, including adoption in any interim period, for reporting
periods for which financial statements have not yet been issued.
Given the Company historically has not issued stock based
compensation, the Company does not expect the adoption of ASU
2017
‐
09
will have a material impact on its consolidated financial
statements.
During
August 2017, the FASB issued ASU 2017-12, “Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities.” The amendments in this ASU modify the
designation and measurement guidance for hedge accounting as well
as provide for increased transparency regarding the presentation of
economic results on both the financial statements and related
footnotes. Certain aspects of hedge effectiveness assessments will
also be simplified upon implementation of this update. The
amendments are effective for annual periods, including interim
periods within those annual periods, beginning after December 15,
2018. Early adoption is permitted, including adoption in any
interim period
.
The Company
does not expect the adoption of ASU 2017-12 to have a material
impact on its consolidated financial statements.
During
February 2018, the FASB issued ASU 2018-02, “Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income.” The amendments provide financial
statement preparers with an option to reclassify stranded tax
effects within accumulated other comprehensive income to retained
earnings in each period in which the effect of the change in the
U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act
(or portion thereof) is recorded. The amendments are effective for
all organizations for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption
is permitted. Organizations should apply the proposed amendments
either in the period of adoption or retrospectively to each period
(or periods) in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is
recognized. The Company has elected to reclassify the stranded
income tax effects from the Tax Cuts and Jobs Act in the
consolidated financial statements for the period ending December
31, 2017. The amount of this reclassification in 2017 was
$811.
60
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
3
CASH
AND DUE FROM BANKS:
The
Bank is required to maintain average reserve balances based on a
percentage of deposits. Due to the deposit reclassification
procedures implemented by the Bank, there is no Federal Reserve
Bank reserve requirement for the years ended December 31, 2017 and
2016.
NOTE
4
SECURITIES:
The
amortized cost and fair value, with unrealized gains and losses, of
securities held to maturity were as follows:
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
|
December 31, 2017
|
|
|
|
|
|
U.
S. Treasuries
|
$
125
|
$
-
|
$
-
|
$
125
|
|
December 31, 2016
|
|
|
|
|
|
U.
S. Treasuries
|
$
125
|
$
-
|
$
-
|
$
125
|
The
amortized cost and fair value of securities available for sale are
as follows:
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
|
December 31, 2017
|
|
|
|
|
|
U.
S. Treasuries
|
$
19,998
|
$
-
|
$
-
|
$
19,998
|
|
U.
S. Government sponsored enterprises
|
7,999
|
-
|
19
|
7,980
|
|
Mortgage-backed
obligations of federal agencies
|
508
|
-
|
6
|
502
|
|
Equity
securities
|
135
|
-
|
-
|
135
|
|
Total
Securities Available for Sale
|
$
28,640
|
$
-
|
$
25
|
$
28,615
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
U.
S. Treasuries
|
$
24,005
|
$
9
|
$
-
|
$
24,014
|
|
Mortgage-backed
obligations of federal agencies
|
634
|
-
|
-
|
634
|
|
Equity
securities
|
135
|
-
|
-
|
135
|
|
Total
Securities Available for Sale
|
$
24,774
|
$
9
|
$
-
|
$
24,783
|
61
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
4
SECURITIES
(CONTINUED):
The
amortized cost and fair value of securities at December 31, 2017,
by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
|
|
Securities Held to Maturity
|
Securities Available for Sale
|
||
|
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
|
Due
in one year or less
|
$
125
|
$
125
|
$
19,998
|
$
19,998
|
|
Due
after one year through five years
|
-
|
-
|
7,999
|
7,980
|
|
Due
after five years through ten years
|
-
|
-
|
508
|
502
|
|
Due
after ten years
|
-
|
-
|
135
|
135
|
|
Total
|
$
125
|
$
125
|
$
28,640
|
$
28,615
|
There
were no sales of debt or equity securities during 2017, 2016 or
2015.
There
were no pledged securities at December 31, 2017 or
2016.
Other
investments consist of investments in twenty low-income housing and
historic equity partnerships (carrying basis of $7,406), stock in
the Federal Home Loan Bank (carrying basis of $3,627), and various
other investments (carrying basis of $1,470). The interests in the
low-income housing and historic equity partnerships have limited
transferability and the interests in the other stocks are
restricted as to sales. The market values of these securities are
estimated to approximate their carrying values as of December 31,
2017. At December 31, 2017, the Company was committed to invest an
additional $4,231 in six low-income housing limited partnerships.
These funds will be paid as requested by the general partner to
complete the projects. This additional investment has been
reflected in the above carrying basis and in accrued liabilities on
the balance sheet.
The
primary purpose of the investment portfolio is to generate income
and meet liquidity needs of the Company through readily saleable
financial instruments. The portfolio includes fixed rate bonds,
whose prices move inversely with rates and variable rate bonds. At
the end of any accounting period, the investment portfolio has
unrealized gains and losses. The Company monitors the portfolio,
which is subject to liquidity needs, market rate changes and credit
risk changes for other than temporary impairment. The primary
concern in a loss situation is the credit quality of the business
behind the instrument. Bonds deteriorate in value due to credit
quality of the individual issuer and changes in market
conditions.
A
summary of unrealized losses (in thousands) and the length of time
in a continuous loss position, by security type of December 31,
2017 were as follows:
|
|
Less than 12 Months
|
More than 12 Months
|
Total
|
|||
|
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|
December 31, 2017
|
|
|
|
|
|
|
|
U.
S. Government sponsored enterprises
|
$
3,981
|
$
(19
)
|
$
-
|
$
-
|
$
3,981
|
$
(19
)
|
|
Mortgage-backed
obligations of federal agencies
|
502
|
(6
)
|
-
|
-
|
502
|
(6
)
|
|
Total
|
$
4,483
|
$
(25
)
|
$
-
|
$
-
|
$
4,483
|
$
(25
)
|
As of
December 31, 2016, there were no securities in an unrealized loss
position.
62
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
4
SECURITIES
(CONTINUED):
Management
evaluates securities for other-than-temporary impairment on at
least a quarterly basis, and more frequently when economic or
market conditions warrant such evaluation. Consideration is given
to (1) the length of time and the extent to which the fair value
has been less than the cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery of fair
value. The Company does not intend to sell these securities and it
is more likely than not that the Company will not be required to
sell these securities before recovery of their amortized cost. As
of December 31, 2017, the Company had two agencies and a mortgage
backed security that were temporarily impaired due to rising
interest rates not the credit quality of the security. There were
no securities that had been in an unrealized loss position for more
than twelve months. The Company did not recognize any
other-than-temporary impairment losses in 2017, 2016 or
2015.
NOTE
5
LOANS:
Loans
held for investment as of December 31, 2017, and 2016 were as
follows:
|
|
2017
|
2016
|
|
Construction/Land
Development
|
$
71,620
|
$
76,172
|
|
Farmland
|
13,606
|
12,901
|
|
Real
Estate
|
184,546
|
172,758
|
|
Multi-Family
|
10,298
|
7,605
|
|
Commercial Real
Estate
|
148,906
|
150,061
|
|
Home Equity
– closed end
|
11,606
|
11,453
|
|
Home Equity
– open end
|
54,739
|
54,420
|
|
Commercial &
Industrial – Non-Real Estate
|
36,912
|
31,306
|
|
Consumer
|
6,633
|
6,643
|
|
Dealer
Finance
|
75,169
|
65,495
|
|
Credit
Cards
|
2,939
|
2,822
|
|
Total
|
$
616,974
|
$
591,636
|
The
Company has pledged loans held for investment as collateral for
borrowings with the Federal Home Loan Bank of Atlanta totaling
$218,323 and $199,401 as of December 31, 2017, and 2016,
respectively. The Company maintains a blanket lien on its entire
residential real estate portfolio and certain commercial and home
equity loans.
Loans
held for sale consists of loans originated by VBS Mortgage for sale
in the secondary market, and the Bank’s commitment to
purchase residential mortgage loan Participations from Northpointe
Bank. The volume of loans purchased from Northpointe fluctuates due
to a number of factors including changes in secondary market rates,
which affects demand for mortgage loans; the number of
participating banks involved in the program; the number of mortgage
loan originators selling loans to the lead bank and the funding
capabilities of the lead bank. Loans held for sale as of December
31, 2017, and 2016 were $39,775 and $62,735,
respectively.
63
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
5
LOANS
(CONTINUED):
The
following is a summary of information pertaining to impaired loans
(in thousands), as of December 31, 2017 and 2016:
|
|
December 31, 2017
|
December 31, 2016
|
||||
|
|
|
Unpaid
|
|
|
Unpaid
|
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
Principal
|
Related
|
|
|
Investment
|
Balance
|
Allowance
|
Investment
|
Balance
|
Allowance
|
|
Impaired
loans without a valuation allowance:
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
4,352
|
$
5,269
|
$
-
|
$
3,296
|
$
3,652
|
$
-
|
|
Farmland
|
1,984
|
1,984
|
-
|
-
|
-
|
-
|
|
Real
Estate
|
1,273
|
1,273
|
-
|
768
|
768
|
-
|
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
6,229
|
6,229
|
-
|
1,958
|
1,958
|
-
|
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Home
Equity – open end
|
-
|
347
|
-
|
-
|
347
|
-
|
|
Commercial
& Industrial – Non-Real Estate
|
-
|
-
|
-
|
170
|
170
|
-
|
|
Consumer
|
8
|
8
|
-
|
13
|
13
|
-
|
|
Credit
cards
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Dealer
Finance
|
31
|
31
|
-
|
-
|
-
|
-
|
|
|
13,877
|
15,141
|
-
|
6,205
|
6,908
|
-
|
|
Impaired
loans with a valuation allowance
|
|
|
|
|
|
|
|
Construction/Land
Development
|
4,998
|
4,998
|
1,661
|
6,592
|
6,592
|
1,853
|
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Real
Estate
|
1,188
|
1,188
|
209
|
1,206
|
1,206
|
221
|
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
-
|
-
|
-
|
952
|
952
|
60
|
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Home
Equity – open end
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
& Industrial – Non-Real Estate
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Consumer
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Credit
cards
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Dealer
Finance
|
47
|
47
|
12
|
87
|
87
|
20
|
|
|
6,233
|
6,233
|
1,882
|
8,837
|
8,837
|
2,154
|
|
Total
impaired loans
|
$
20,110
|
$
21,374
|
$
1,882
|
$
15,042
|
$
15,745
|
$
2,154
|
The
Recorded Investment is defined as the principal balance less
principal payments and charge-offs.
64
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
5
LOANS
(CONTINUED):
The
following is a summary of the average investment and interest
income recognized for impaired loans (dollars in
thousands):
|
|
December 31, 2017
|
December 31, 2016
|
||
|
|
Average
|
Interest
|
Average
|
Interest
|
|
|
Recorded
|
Income
|
Recorded
|
Income
|
|
|
Investment
|
Recognized
|
Investment
|
Recognized
|
|
Impaired
loans without a valuation allowance:
|
|
|
|
|
|
Construction/Land
Development
|
$
4,969
|
$
382
|
$
2,547
|
$
10
|
|
Farmland
|
1,921
|
62
|
-
|
-
|
|
Real
Estate
|
878
|
57
|
778
|
10
|
|
Multi-Family
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
1,682
|
44
|
1,087
|
114
|
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
|
Home
Equity – open end
|
347
|
-
|
964
|
2
|
|
Commercial
& Industrial – Non-Real Estate
|
124
|
-
|
174
|
2
|
|
Consumer
|
10
|
-
|
11
|
-
|
|
Credit
cards
|
-
|
-
|
-
|
-
|
|
Dealer
Finance
|
24
|
3
|
14
|
1
|
|
|
9,955
|
548
|
5,575
|
139
|
|
Impaired
loans with a valuation allowance
|
|
|
|
|
|
Construction/Land
Development
|
5,911
|
258
|
8,525
|
291
|
|
Farmland
|
-
|
-
|
-
|
-
|
|
Real
Estate
|
1,194
|
49
|
1,215
|
10
|
|
Multi-Family
|
-
|
-
|
-
|
-
|
|
Commercial
Real Estate
|
-
|
-
|
959
|
57
|
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
|
Home
Equity – open end
|
-
|
-
|
969
|
-
|
|
Commercial
& Industrial – Non-Real Estate
|
-
|
-
|
14
|
-
|
|
Consumer
|
-
|
-
|
-
|
-
|
|
Credit
cards
|
-
|
-
|
-
|
-
|
|
Dealer
Finance
|
56
|
3
|
77
|
1
|
|
|
7,161
|
310
|
11,759
|
359
|
|
Total
impaired loans
|
$
17,116
|
$
858
|
$
17,334
|
$
498
|
65
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
5
LOANS
(CONTINUED):
The
following table presents the aging of the recorded investment of
past due loans (in thousands) as of December 31, 2017 and
2016:
|
|
30-59 Days
Past due
|
60-89 Days
Past Due
|
Greater than
90 Days
|
Total Past
Due
|
Current
|
Total Loan
Receivable
|
Non-Accrual
Loans
|
Recorded
Investment >90 days & accruing
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
167
|
$
5,459
|
$
3,908
|
$
9,534
|
$
62,086
|
$
71,620
|
$
3,908
|
$
-
|
|
Farmland
|
-
|
-
|
-
|
-
|
13,606
|
13,606
|
-
|
-
|
|
Real
Estate
|
2,858
|
1,954
|
560
|
5,372
|
179,174
|
184,546
|
1,720
|
143
|
|
Multi-Family
|
179
|
-
|
-
|
179
|
10,119
|
10,298
|
-
|
-
|
|
Commercial Real
Estate
|
544
|
-
|
-
|
544
|
148,362
|
148,906
|
-
|
-
|
|
Home Equity
– closed end
|
-
|
25
|
-
|
25
|
11,581
|
11,606
|
3
|
-
|
|
Home Equity
– open end
|
454
|
165
|
268
|
887
|
53,852
|
54,739
|
448
|
-
|
|
Commercial &
Industrial – Non- Real Estate
|
108
|
36
|
595
|
739
|
36,173
|
36,912
|
599
|
-
|
|
Consumer
|
43
|
5
|
-
|
48
|
6,585
|
6,633
|
-
|
-
|
|
Dealer
Finance
|
1,300
|
252
|
189
|
1,741
|
73,428
|
75,169
|
226
|
54
|
|
Credit
Cards
|
30
|
8
|
1
|
39
|
2,900
|
2,939
|
-
|
1
|
|
Total
|
$
5,683
|
$
7,904
|
$
5,521
|
$
19,108
|
$
597,866
|
$
616,974
|
$
6,904
|
$
198
|
|
|
30-59 Days
Past due
|
60-89 Days
Past Due
|
Greater than
90 Days)
|
Total Past
Due
|
Current
|
Total Loan
Receivable
|
Non-Accrual
Loans
|
Recorded
Investment >90 days & accruing
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
73
|
$
101
|
$
2,175
|
$
2,349
|
$
73,823
|
$
76,172
|
$
2,805
|
$
-
|
|
Farmland
|
-
|
-
|
-
|
-
|
12,901
|
12,901
|
-
|
-
|
|
Real
Estate
|
2,135
|
746
|
774
|
3,655
|
169,103
|
172,758
|
1,399
|
81
|
|
Multi-Family
|
-
|
-
|
-
|
-
|
7,605
|
7,605
|
-
|
-
|
|
Commercial Real
Estate
|
139
|
-
|
-
|
139
|
149,922
|
150,061
|
-
|
-
|
|
Home Equity
– closed end
|
101
|
-
|
32
|
133
|
11,320
|
11,453
|
32
|
-
|
|
Home Equity
– open end
|
484
|
-
|
69
|
553
|
53,867
|
54,420
|
279
|
-
|
|
Commercial &
Industrial – Non- Real Estate
|
313
|
5
|
-
|
318
|
30,988
|
31,306
|
70
|
-
|
|
Consumer
|
35
|
4
|
6
|
45
|
6,598
|
6,643
|
-
|
-
|
|
Dealer
Finance
|
797
|
187
|
183
|
1,167
|
64,328
|
65,495
|
178
|
26
|
|
Credit
Cards
|
18
|
4
|
-
|
22
|
2,800
|
2,822
|
-
|
-
|
|
Total
|
$
4,095
|
$
1,047
|
$
3,239
|
$
8,381
|
$
583,255
|
$
591,636
|
$
4,763
|
$
107
|
66
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
6
ALLOWANCE
FOR LOAN LOSSES:
A
summary of changes in the allowance for loan losses (in thousands)
for the years ended December 31, 2017 and 2016 is as
follows:
|
December 31,
2017
|
Beginning
Balance
|
Charge-offs
|
Recoveries
|
Provision for
Loan Losses
|
Ending
Balance
|
Individually
Evaluated for Impairment
|
Collectively
Evaluated for Impairment
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
3,381
|
$
620
|
$
-
|
$
(214
)
|
$
2,547
|
$
1,661
|
$
886
|
|
Farmland
|
34
|
-
|
-
|
(9
)
|
25
|
-
|
25
|
|
Real
Estate
|
843
|
-
|
2
|
(126
)
|
719
|
209
|
510
|
|
Multi-Family
|
23
|
-
|
-
|
(6
)
|
19
|
-
|
19
|
|
Commercial Real
Estate
|
705
|
-
|
13
|
(236
)
|
482
|
-
|
482
|
|
Home Equity
– closed end
|
75
|
7
|
25
|
(27
)
|
66
|
-
|
66
|
|
Home Equity
– open end
|
470
|
26
|
53
|
(288
)
|
209
|
-
|
209
|
|
Commercial
& Industrial – Non-Real Estate
|
586
|
179
|
72
|
(142
)
|
337
|
-
|
337
|
|
Consumer
|
78
|
136
|
28
|
178
|
148
|
-
|
148
|
|
Dealer
Finance
|
1,289
|
1,806
|
1,143
|
814
|
1,440
|
12
|
1,428
|
|
Credit
Cards
|
59
|
98
|
37
|
54
|
52
|
-
|
52
|
|
Total
|
$
7,543
|
$
2,872
|
$
1,373
|
$
-
|
$
6,044
|
$
1,882
|
$
4,162
|
|
December 31,
2016
|
Beginning
Balance
|
Charge-offs
|
Recoveries
|
Provision for
Loan Losses
|
Ending
Balance
|
Individually
Evaluated for Impairment
|
Collectively
Evaluated for Impairment
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
4,442
|
$
356
|
$
7
|
$
(712
)
|
$
3,381
|
$
1,853
|
$
1,528
|
|
Farmland
|
95
|
-
|
-
|
(61
)
|
34
|
-
|
34
|
|
Real
Estate
|
806
|
23
|
4
|
56
|
843
|
221
|
622
|
|
Multi-Family
|
71
|
-
|
-
|
(48
)
|
23
|
-
|
23
|
|
Commercial Real
Estate
|
445
|
19
|
135
|
144
|
705
|
-
|
705
|
|
Home Equity
– closed end
|
174
|
8
|
-
|
(91
)
|
75
|
-
|
75
|
|
Home Equity
– open end
|
634
|
370
|
120
|
86
|
470
|
60
|
410
|
|
Commercial
& Industrial – Non-Real Estate
|
1,055
|
293
|
267
|
(443
)
|
586
|
-
|
586
|
|
Consumer
|
108
|
37
|
19
|
(12
)
|
78
|
-
|
78
|
|
Dealer
Finance
|
836
|
1,081
|
417
|
1,117
|
1,289
|
20
|
1,269
|
|
Credit
Cards
|
115
|
74
|
54
|
(36
)
|
59
|
-
|
59
|
|
Total
|
$
8,781
|
$
2,261
|
$
1,023
|
$
-
|
$
7,543
|
$
2,154
|
$
5,389
|
67
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
6
ALLOWANCE
FOR LOAN LOSSES (CONTINUED):
The
following table presents the recorded investment in loans (in
thousands) based on impairment method as of December 31, 2017 and
2016:
|
December 31,
2017
|
Loan
Receivable
|
Individually
Evaluated for Impairment
|
Collectively
Evaluated for Impairment
|
|
|
|
|
|
|
Construction/Land
Development
|
$
71,620
|
$
9,350
|
$
62,270
|
|
Farmland
|
13,606
|
1,984
|
11,622
|
|
Real
Estate
|
184,546
|
2,461
|
182,085
|
|
Multi-Family
|
10,298
|
-
|
10,298
|
|
Commercial Real
Estate
|
148,906
|
6,229
|
142,677
|
|
Home Equity
– closed end
|
11,606
|
-
|
11,606
|
|
Home Equity
–open end
|
54,739
|
-
|
54,739
|
|
Commercial &
Industrial – Non-Real Estate
|
36,912
|
-
|
36,912
|
|
Consumer
|
6,633
|
8
|
6,625
|
|
Dealer
Finance
|
75,169
|
78
|
75,091
|
|
Credit
Cards
|
2,939
|
-
|
2,939
|
|
|
$
616,974
|
$
20,110
|
$
596,864
|
|
Total
|
|
|
|
|
December 31,
2016
|
Loan
Receivable
|
Individually
Evaluated for Impairment
|
Collectively Evaluated for Impairment
|
|
|
|
|
|
|
Construction/Land
Development
|
$
76,172
|
$
9,888
|
$
66,284
|
|
Farmland
|
12,901
|
-
|
12,901
|
|
Real
Estate
|
172,758
|
1,974
|
170,784
|
|
Multi-Family
|
7,605
|
-
|
7,605
|
|
Commercial Real
Estate
|
150,061
|
2,910
|
147,151
|
|
Home Equity
– closed end
|
11,453
|
-
|
11,453
|
|
Home Equity
–open end
|
54,420
|
-
|
54,420
|
|
Commercial &
Industrial – Non-Real Estate
|
31,306
|
170
|
31,136
|
|
Consumer
|
6,643
|
13
|
6,630
|
|
Dealer
Finance
|
65,495
|
87
|
65,408
|
|
Credit
Cards
|
2,822
|
-
|
2,822
|
|
|
$
591,636
|
$
15,042
|
$
576,594
|
68
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
6
ALLOWANCE
FOR LOAN LOSSES (CONTINUED):
The
following table shows the Company’s loan portfolio broken
down by internal loan grade (in thousands) as of December 31, 2017
and 2016:
|
December 31,
2017
|
Grade 1 Minimal Risk
|
Grade 2 Modest Risk
|
Grade 3 Average Risk
|
Grade 4 Acceptable Risk
|
Grade 5 Marginally Acceptable
|
Grade 6 Watch
|
Grade 7 Substandard
|
Grade 8 Doubtful
|
Total
|
|
Construction/Land
Development
|
$
-
|
$
690
|
$
12,974
|
$
30,197
|
$
9,165
|
$
3,520
|
$
15,074
|
$
-
|
$
71,620
|
|
Farmland
|
63
|
-
|
3,153
|
4,120
|
3,793
|
494
|
1,983
|
-
|
13,606
|
|
Real
Estate
|
-
|
1,512
|
53,764
|
101,606
|
19,734
|
4,660
|
3,270
|
-
|
184,546
|
|
Multi-Family
|
-
|
228
|
4,780
|
5,111
|
179
|
-
|
-
|
-
|
10,298
|
|
Commercial
Real Estate
|
-
|
3,525
|
45,384
|
89,195
|
9,012
|
634
|
1,156
|
-
|
148,906
|
|
Home
Equity – closed end
|
-
|
-
|
3,535
|
5,410
|
1,279
|
1,379
|
3
|
-
|
11,606
|
|
Home
Equity – open end
|
235
|
1,598
|
17,383
|
30,888
|
3,945
|
176
|
514
|
-
|
54,739
|
|
Commercial
& Industrial (Non-Real Estate)
|
262
|
1,595
|
13,297
|
19,442
|
1,480
|
207
|
629
|
-
|
36,912
|
|
Consumer (excluding dealer)
|
34
|
490
|
2,226
|
88
|
1,065
|
2,254
|
476
|
-
|
6,633
|
|
Total
|
$
594
|
$
9,638
|
$
156,496
|
$
286,057
|
$
49,652
|
$
13,324
|
$
23,105
|
$
-
|
$
538,866
|
|
|
Credit Cards
|
Dealer Finance
|
|
Performing
|
$
2,938
|
$
75,116
|
|
Non
performing
|
1
|
53
|
|
Total
|
$
2,939
|
$
75,169
|
69
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
6
ALLOWANCE
FOR LOAN LOSSES (CONTINUED):
|
December 31,
2016
|
Grade 1 Minimal Risk
|
Grade 2 Modest Risk
|
Grade 3 Average Risk
|
Grade 4 Acceptable Risk
|
Grade 5 Marginally Acceptable
|
Grade 6 Watch
|
Grade 7 Substandard
|
Grade 8 Doubtful
|
Total
|
|
Construction/Land
Development
|
$
-
|
$
1,478
|
$
10,870
|
$
43,863
|
$
8,399
|
$
2,473
|
$
9,089
|
$
-
|
$
76,172
|
|
Farmland
|
65
|
-
|
3,073
|
3,456
|
4,446
|
1,861
|
-
|
-
|
12,901
|
|
Real
Estate
|
-
|
1,149
|
62,168
|
74,242
|
28,266
|
4,680
|
2,253
|
-
|
172,758
|
|
Multi-Family
|
-
|
311
|
3,009
|
4,099
|
186
|
-
|
-
|
-
|
7,605
|
|
Commercial
Real Estate
|
-
|
2,793
|
32,986
|
91,157
|
19,181
|
1,840
|
2,104
|
-
|
150,061
|
|
Home
Equity – closed end
|
-
|
150
|
3,966
|
4,139
|
1,746
|
1,414
|
38
|
-
|
11,453
|
|
Home
Equity – open end
|
124
|
1,724
|
16,415
|
30,974
|
4,547
|
125
|
511
|
-
|
54,420
|
|
Commercial
& Industrial (Non-Real Estate)
|
1,375
|
1,267
|
6,827
|
19,530
|
2,198
|
39
|
70
|
-
|
31,306
|
|
Consumer (excluding dealer)
|
67
|
174
|
1,837
|
607
|
1,242
|
2,252
|
466
|
-
|
6,643
|
|
Total
|
$
1,631
|
$
9,046
|
$
141,151
|
$
272,065
|
$
70,211
|
$
14,684
|
$
14,531
|
$
-
|
$
523,319
|
|
|
Credit Cards
|
Dealer Finance
|
|
Performing
|
$
2,822
|
$
65,291
|
|
Non
performing
|
-
|
204
|
|
Total
|
$
2,822
|
$
65,495
|
Description of internal loan grades:
Grade 1 – Minimal Risk
:
Excellent credit, superior asset quality, excellent debt capacity
and coverage, and recognized management capabilities.
Grade 2 – Modest Risk
:
Borrower consistently generates sufficient cash flow to fund debt
service, excellent credit, above average asset quality and
liquidity.
Grade 3 – Average Risk
:
Borrower generates sufficient cash flow to fund debt service.
Employment (or business) is stable with good future trends. Credit
is very good.
Grade 4 – Acceptable
Risk
: Borrower’s cash flow is adequate to cover debt
service; however, unusual expenses or capital expenses must by
covered through additional long term debt. Employment (or business)
stability is reasonable, but future trends may exhibit slight
weakness. Credit history is good. No unpaid judgments or collection
items appearing on credit report.
Grade 5 – Marginally
acceptable
: Credit to borrowers who may exhibit declining
earnings, may have leverage that is materially above industry
averages, liquidity may be marginally acceptable. Employment or
business stability may be weak or deteriorating. May be currently
performing as agreed, but would be adversely affected by developing
factors such as layoffs, illness, reduced hours or declining
business prospects. Credit history shows weaknesses, past
due
s
, paid or disputed
collections and judgments, but does not include borrowers that are
currently past due on obligations or with unpaid, undisputed
judgments.
70
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
6
ALLOWANCE
FOR LOAN LOSSES (CONTINUED):
Grade 6 – Watch
: Loans
are currently protected but are weak due to negative balance sheet
or income statement trends. There may be a lack of effective
control over collateral or the existence of documentation
deficiencies. These loans have potential weaknesses that deserve
management’s close attention. Other reasons supporting this
classification include adverse economic or market conditions,
pending litigation or any other material weakness. Existing loans
that become 60 or more days past due are placed in this category
pending a return to current status.
Grade 7 – Substandard
:
Loans having well-defined weaknesses where a payment default and or
loss is possible, but not yet probable. Cash flow is inadequate to
service the debt under the current payment, or terms, with
prospects that the condition is permanent. Loans classified as
substandard are inadequately protected by the current net worth and
paying capacity of the borrower and there is the likelihood that
collateral will have to be liquidated and/or guarantor(s) called
upon to repay the debt. Generally, the loan is considered
collectible as to both principal and interest, primarily because of
collateral coverage, however, if the deficiencies are not corrected
quickly; there is a probability of loss.
Grade 8 – Doubtful
: Loans
having all the characteristics of a substandard credit, but
available information indicates it is unlikely the loan will be
repaid in its entirety. Cash flow is insufficient to service the
debt. It may be difficult to project the exact amount of loss, but
the probability of some loss is great. Loans are to be placed on
non-accrual status when any portion is classified
doubtful.
Credit
card and dealer finance loans are classified as performing or
nonperforming. A loan is nonperforming when payments of principal
and interest are past due 90 days or more.
NOTE
7
TROUBLED
DEBT RESTRUCTURING:
In the
determination of the allowance for loan losses, management
considers troubled debt restructurings and subsequent defaults in
these restructurings by adjusting the loan grades of such loans,
which are considered in the qualitative factors within the
allowance for loan loss methodology. Defaults resulting in
charge-offs affect the historical loss experience ratios which are
a component of the allowance calculation. Additionally, specific
reserves may be established on restructured loans which are
evaluated individually for impairment.
During
the twelve months ended December 31, 2017, the Bank modified 3
loans that were considered to be troubled debt restructurings.
These modifications include rate adjustments, revisions to
amortization schedules, suspension of principal payments for a
temporary period, re-advancing funds to be applied as payments to
bring the loan(s) current, or any combination thereof.
|
|
December 31,
2017
|
||
|
|
|
Pre-Modification
|
Post-Modification
|
|
(dollars in
thousands)
|
|
Outstanding
|
Outstanding
|
|
Troubled Debt
Restructurings
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
|
|
|
|
|
|
Consumer
|
3
|
$
32
|
$
32
|
|
Total
|
3
|
$
32
|
$
32
|
As of
December 31, 2017, there were 3 loans restructured in the previous
twelve months, in default. A restructured loan is considered in
default when it becomes 90 days past due.
|
|
December 31,
2017
|
||
|
|
|
Pre-Modification
|
Post-Modification
|
|
(dollars in
thousands)
|
|
Outstanding
|
Outstanding
|
|
Troubled Debt
Restructurings
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
|
|
|
|
|
|
Real
Estate
|
1
|
$
67
|
$
67
|
|
Construction/Land
Development
|
2
|
1,502
|
1,502
|
|
Total
|
3
|
$
1,569
|
$
1,569
|
71
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
7
TROUBLED
DEBT RESTRUCTURING (CONTINUED):
During
the twelve months ended December 31, 2016, the Bank modified 6
loans that were considered to be troubled debt restructurings.
These modifications included rate adjustments, revisions to
amortization schedules, suspension of principal payments for a
temporary period, re-advancing funds to be applied as payments to
bring the loan(s) current, or any combination thereof.
|
|
December 31,
2016
|
||
|
|
|
Pre-Modification
|
Post-Modification
|
|
(in
thousands)
|
|
Outstanding
|
Outstanding
|
|
Troubled Debt
Restructurings
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
|
|
|
|
|
|
Real
Estate
|
2
|
$
141
|
$
141
|
|
Consumer
|
4
|
39
|
39
|
|
Total
|
6
|
$
180
|
$
180
|
As of
December 31, 2016, there were no loans restructured in the previous
twelve months, in default. A restructured loan is considered in
default when it becomes 90 days past due.
NOTE
8
BANK
PREMISES AND EQUIPMENT:
Bank
premises and equipment as of December 31 are summarized as
follows:
|
|
2017
|
2016
|
|
|
|
|
|
Land
|
$
3,883
|
$
3,091
|
|
Buildings and
improvements
|
12,384
|
7,877
|
|
Furniture and
equipment
|
9,454
|
8,257
|
|
|
25,721
|
19,225
|
|
Less -
accumulated depreciation
|
(9,827
)
|
(8,885
)
|
|
Net
|
$
15,894
|
$
10,340
|
Provisions for
depreciation of $930 in 2017, $827 in 2016, and $727 in 2015 were
charged to operations.
72
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
9
OTHER
REAL ESTATE OWNED:
The
table below reflects other real estate owned (OREO) activity for
2017 and 2016:
|
Other Real
Estate Owned
|
||
|
|
2017
|
2016
|
|
|
|
|
|
Balance as of
January 1
|
$
2,076
|
$
2,128
|
|
Loans transferred
to OREO
|
231
|
566
|
|
Capital
improvements
|
2
|
24
|
|
Sale of
OREO
|
(281
)
|
(623
)
|
|
Write down of
OREO or losses on sale
|
(44
)
|
(19
)
|
|
Balance as of
December 31
|
$
1,984
|
$
2,076
|
At
December 31, 2017, the balance of real estate owned includes $207
of foreclosed residential real estate properties recorded as a
result of obtaining physical possession of the property. At
December 31, 2017, the recorded investment of consumer mortgage
loans secured by residential real estate properties for which
formal foreclosure procedures are in process is $103.
Time
deposits that meet or exceed the FDIC insurance limit of $250 at
year end 2017 and 2016 were $13,637 and $7,841. At December 31,
2017, the scheduled maturities of time deposits are as
follows:
|
2018
|
$
66,749
|
|
2019
|
51,434
|
|
2020
|
30,151
|
|
2021
|
9,296
|
|
2022 and
after
|
7,640
|
|
Total
|
$
165,270
|
NOTE
11
Short-term debt,
all maturing within 12 months, as of December 31, 2017 and 2016 is
summarized as follows:
|
|
|
Outstanding
|
Average
|
|
|
|
Maximum
Outstanding
|
At
|
Balance
|
|
|
|
at any Month
End
|
Year
End
|
Outstanding
|
Yield
|
|
2017
|
|
|
|
|
|
Federal funds
purchased
|
$
8,964
|
$
5,296
|
$
97
|
.17
%
|
|
FHLB short
term
|
50,000
|
20,000
|
20,301
|
.30
%
|
|
Totals
|
|
$
25,296
|
$
20,398
|
.31
%
|
|
2016
|
|
|
|
|
|
Federal funds
purchased
|
$
11,421
|
$
-
|
$
637
|
.98
%
|
|
FHLB short
term
|
50,000
|
40,000
|
34,740
|
.12
%
|
|
Securities sold
under agreements to repurchase
|
4,272
|
-
|
2,133
|
.25
%
|
|
Totals
|
|
$
40,000
|
$
37,510
|
.15
%
|
73
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
11
SHORT-TERM
DEBT (CONTINUED)
The
Company utilizes short-term debt such as Federal funds purchased
and Federal Home Loan Bank of Atlanta (FHLB) short term borrowings
to support the loans held for sale participation program and
provide liquidity. Federal funds purchased are unsecured overnight
borrowings from other financial institutions. FHLB short term debt,
which is secured by the loan portfolio, can be a daily rate
variable loan that acts as a line of credit or a fixed rate
advance, depending on the need of the Company.
Securities sold
under repurchase agreements are secured transactions with customers
and generally mature the day following the date sold. This product
was discontinued in 2017.
As of
December 31, 2017, the Company had unsecured lines of credit with
correspondent banks totaling $41,000, which may be used in the
management of short-term liquidity, in which $5,296 was
outstanding.
NOTE
12
LONG-TERM
DEBT:
The
Company utilizes the FHLB advance program to fund loan growth and
provide liquidity. The interest rates on long-term debt are fixed
at the time of the advance and range from 1.16% to 2.56%; the
weighted average interest rate was 1.86% and 1.80% at December 31,
2017 and December 31, 2016, respectively. The balance of these
obligations at December 31, 2017 and 2016 were $49,554 and $63,982
respectively. The Company recognized a gain of $504 on prepayment
of two FHLB advances totaling $10,000 during the first quarter of
2017 and there were no additional borrowings in 2017. FHLB advances
include a $5,000 line of credit at FHLB that is pledged to the
Commonwealth of Virginia to secure public funds.
The
maturities of long-term Federal Home Loan Bank long term debt as of
December 31, 2017, were as follows:
|
2018
|
$
9,428
|
|
2019
|
6,929
|
|
2020
|
14,429
|
|
2021
|
5,929
|
|
2022
|
2,714
|
|
Thereafter
|
10,125
|
|
Total
|
$
49,554
|
In
addition, the Company has a note payable to purchase a lot adjacent
to one of the Bank branches for $170 at December 31, 2017 that is
payable in two remaining annual payments on January 1, 2018 and
2019. There was $255 outstanding on this note at December 31,
2016.
VS
Title, LLC has a note payable for vehicle purchases with a balance
of $9 at December 31, 2017.
NOTE
13
INCOME
TAX EXPENSE:
The
components of income tax expense were as follows:
|
|
2017
|
2016
|
2015
|
|
Current
expense
|
$
3,671
|
$
3,046
|
$
3,227
|
|
Deferred expense
(benefit)
|
(152
)
|
53
|
(341
)
|
|
Adjustments to
deferred tax asset due to change in federal tax rate
|
811
|
-
|
-
|
|
Total deferred
(benefit) expense
|
659
|
53
|
(341
)
|
|
Total Income Tax
Expense
|
$
4,330
|
$
3,099
|
$
2,886
|
|
|
|
|
|
74
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
13
INCOME
TAX EXPENSE (CONTINUED):
The
components of deferred taxes as of December 31, were as
follows:
|
|
2017
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
Allowance for
loan losses
|
$
1,265
|
$
2,354
|
|
Split Dollar Life
Insurance
|
3
|
4
|
|
Nonqualified
deferred compensation
|
546
|
856
|
|
Low income
housing partnerships losses
|
203
|
94
|
|
Core deposit
amortization
|
108
|
165
|
|
Other real estate
owned
|
173
|
280
|
|
Unfunded pension
benefit obligation
|
1,096
|
1,633
|
|
Total
Assets
|
$
3,394
|
$
5,386
|
|
|
2017
|
2016
|
|
Deferred Tax Liabilities:
|
|
|
|
Unearned low
income housing credits
|
$
180
|
$
307
|
|
Depreciation
|
340
|
437
|
|
Prepaid
pension
|
1,010
|
1,840
|
|
Goodwill tax
amortization
|
559
|
901
|
|
Net unrealized
gain (loss) on securities available for sale
|
(5
)
|
3
|
|
Total
Liabilities
|
2 084
|
3,488
|
|
Net Deferred Tax
Asset (included in Other Assets on Balance Sheet)
|
$
1,310
|
$
1,898
|
The
following table summarizes the differences between the actual
income tax expense and the amounts computed using the federal
statutory tax rates:
|
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Tax expense at
federal statutory rates
|
$
4,511
|
$
4,307
|
$
3,843
|
|
Increases
(decreases) in taxes resulting from:
|
|
|
|
|
State income
taxes, net of federal benefit
|
-
|
6
|
8
|
|
Partially
tax-exempt income
|
(59
)
|
(41
)
|
(46
)
|
|
Tax-exempt
income
|
(212
)
|
(217
)
|
(223
)
|
|
LIH and historic
credits
|
(633
)
|
(896
)
|
(701
)
|
|
Deferred Tax
Asset rate change
|
811
|
|
|
|
Other
|
(88
)
|
(60
)
|
5
|
|
Total Income Tax
Expense
|
$
4,330
|
$
3,099
|
$
2,886
|
The
Company has analyzed the tax positions taken or expected to be
taken in its tax returns and concluded it has no liability related
to uncertain tax positions in accordance with accounting guidance
related to income taxes.
The
Company and its subsidiaries file federal income tax returns and
state income tax returns. With few exceptions, the Company is no
longer subject to federal or state income tax examinations by tax
authorities for years before 2014.
75
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
14
EMPLOYEE
BENEFITS:
Defined
Benefit Pension Plan
The
Company has a qualified noncontributory defined benefit pension
plan which covers substantially all of its employees hired before
April 1, 2012. The benefits are primarily based on years of service
and earnings. The Company uses December 31
st
as the measurement
date for the defined benefit pension plan.
The
following table provides a reconciliation of the changes in the
benefit obligations and fair value of plan assets for 2017, 2016
and 2015:
|
|
2017
|
2016
|
2015
|
|
Change in Benefit Obligation
|
|
|
|
|
Benefit
obligation, beginning
|
$
12,475
|
$
10,944
|
$
10,777
|
|
Service
cost
|
696
|
632
|
648
|
|
Interest
cost
|
487
|
453
|
411
|
|
Actuarial (gain)
loss
|
1,620
|
872
|
(137
)
|
|
Benefits
paid
|
(175
)
|
(426
)
|
(754
)
|
|
Benefit
obligation, ending
|
$
15,103
|
$
12,475
|
$
10,945
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
Fair value of
plan assets, beginning
|
$
12,032
|
$
11,678
|
$
11,684
|
|
Actual return on
plan assets
|
1,788
|
780
|
(1
)
|
|
Employer
contribution
|
-
|
-
|
750
|
|
Benefits
paid
|
(175
)
|
(426
)
|
(755
)
|
|
Fair value of
plan assets, ending
|
$
13,645
|
$
12,032
|
$
11,678
|
|
Funded status at
the end of the year
|
$
(1,458
)
|
$
(443
)
|
$
733
|
The
fair value of plan assets is measured based on the fair value
hierarchy as discussed in Note 20, “Fair Value
Measurements” to the Consolidated Financial Statements. The
valuations are based on third party data received as of the balance
sheet date. All plan assets are considered Level 1 assets, as
quoted prices exist in active markets for identical
assets.
76
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
14
EMPLOYEE
BENEFITS (CONTINUED):
Defined
Benefit Pension Plan, continued
|
|
2017
|
2016
|
2015
|
|
Amount recognized in the Consolidated Balance Sheet
|
|
|
|
|
Prepaid benefit
cost
|
$
3,760
|
$
4,361
|
$
4,799
|
|
Unfunded pension
benefit obligation under ASC 325-960
|
(5,218
)
|
(4,804
)
|
(4,065
)
|
|
Deferred
taxes
|
1,096
|
1,633
|
1,382
|
|
|
|
|
|
|
Amount recognized in accumulated other
|
|
|
|
|
comprehensive income (loss)
|
|
|
|
|
Net
loss
|
$
(5,260
)
|
$
(4,861
)
|
$
(4,137
)
|
|
Prior service
cost
|
42
|
57
|
72
|
|
Amount
recognized
|
(5,218
)
|
(4,804
)
|
(4,065
)
|
|
Deferred
taxes
|
1,096
|
1,633
|
1,382
|
|
Amount recognized
in accumulated comprehensive income
|
$
(4,122
)
|
$
(3,171
)
|
$
(2,683
)
|
|
|
|
|
|
|
Prepaid benefit detail
|
|
|
|
|
Benefit
obligation
|
$
(15,103
)
|
$
(12,475
)
|
$
(10,945
)
|
|
Fair value of
assets
|
13,645
|
12,032
|
11,678
|
|
Unrecognized net
actuarial loss
|
5,260
|
4,861
|
4,138
|
|
Unrecognized prior
service cost
|
(42
)
|
(57
)
|
(72
)
|
|
Prepaid (accrued)
benefits
|
$
3,760
|
$
4,361
|
$
4,799
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
Service
cost
|
$
696
|
$
632
|
$
648
|
|
Interest
cost
|
487
|
452
|
411
|
|
Expected return on
plan assets
|
(851
)
|
(854
)
|
(839
)
|
|
Amortization of
prior service cost
|
(15
)
|
(15
)
|
(15
)
|
|
Recognized net
actuarial loss
|
284
|
223
|
181
|
|
Net periodic
benefit cost
|
$
601
|
$
438
|
$
386
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations
|
|
|
|
|
recognized in other comprehensive income
(loss)
|
|
|
|
|
Net
loss
|
$
399
|
$
724
|
$
522
|
|
Amortization of
prior service cost
|
15
|
15
|
15
|
|
Total recognized in
other comprehensive income
|
$
414
|
$
739
|
$
537
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and
other
|
|
|
|
|
comprehensive income (loss)
|
$
1,015
|
$
1,177
|
$
923
|
|
|
|
|
|
|
Additional disclosure information
|
|
|
|
|
Accumulated benefit
obligation
|
$
10,760
|
$
8,789
|
$
7,601
|
|
Vested benefit
obligation
|
$
10,750
|
$
8,780
|
$
7,539
|
|
Discount rate used
for net pension cost
|
4.00
%
|
4.25
%
|
4.00
%
|
|
Discount rate used
for disclosure
|
3.50
%
|
4.00
%
|
4.25
%
|
|
Expected return on
plan assets
|
7.25
%
|
7.50
%
|
7.50
%
|
|
Rate of
compensation increase
|
3.00
%
|
3.00
%
|
3.00
%
|
|
Average remaining
service (years)
|
12
|
13
|
13
|
77
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
NOTE
14
EMPLOYEE
BENEFITS (CONTINUED):
Funding Policy
Due to
the current funding status of the plan, the Company did not make a
contribution in 2017 or 2016. The Company’s contributions for
2015 was $750,000. The net periodic pension cost of the plan for
2018 will be approximately $629.
Long-Term Rate of Return
The
Company, as plan sponsor, selects the expected long-term rate of
return on assets assumption in consultation with investment
advisors and the plan actuary. This rate is intended to reflect the
average rate of earnings expected to be earned on the funds
invested or to be invested to provide plan benefits. Historical
performance is reviewed, especially with respect to real rates of
return (net of inflation) for the major asset classes held or
anticipated to be held by the trust. Undue weight is not given to
recent experience, which may not continue over the measurement
period, with higher significance placed on current forecasts of
future long-term economic conditions.
Because
assets are held in a qualified trust, anticipated returns are not
reduced for taxes. Further, and solely for this purpose, the plan
is assumed to continue in force and not terminate during the period
during which the assets are invested. However, consideration is
given to the potential impact of current and future investment
policy, cash flow into and out of the trust, and expenses (both
investment and non-investment) typically paid from plan assets (to
the extent such expenses are not explicitly estimated within
periodic cost).
Asset Allocation
The
trust fund is sufficiently diversified to maintain a reasonable
level of risk without imprudently sacrificing return, with a
targeted asset allocation of 39% fixed income and 61% equity. The
Investment Manager selects investment fund managers with
demonstrated experience and expertise, and funds with demonstrated
historical performance, for the implementation of the Plan’s
investment strategy. The Investment Manager will consider both
actively and passively managed investment strategies and will
allocate funds across the asset classes to develop an efficient
investment structure. The pension plan’s allocations as of
December 31, 2017, and 2016 were 61% equity and 39% fixed and 61%
equity and 39% fixed, respectively.
Estimated Future Benefit Payments, which reflect expected future
service, as appropriate, as of December 31, 2017, are as
follows:
|
2018
|
$
1,862
|
|
2019
|
698
|
|
2020
|
264
|
|
2021
|
179
|
|
2022
|
2,867
|
|
2023-2027
|
7,151
|
|
|
$
13,021
|
Employee
Stock Ownership Plan (ESOP)
The
Company sponsors an ESOP which provides stock ownership to
substantially all employees of the Company. The Plan provides total
vesting upon the attainment of five years of service. Contributions
to the plan are made at the discretion of the Board of Directors
and are allocated based on the compensation of each employee
relative to total compensation paid by the Company. All shares
issued and held by the Plan are considered outstanding in the
computation of earnings per share. Dividends on Company stock are
allocated and paid to participants at least annually. Shares of
Company stock, when distributed, have restrictions on
transferability. For the plan year ending September 30, 2017 the
Company contributed $430 in 2017, $407 in 2016, and $270 in 2015 to
the Plan and charged this expense to operations. The shares held by
the ESOP totaled 194,018 and 190,271 at December 31, 2017 and 2016,
respectively.
78
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2016 and 2015
NOTE
14
EMPLOYEE
BENEFITS (CONTINUED):
401(K)
Plan
The
Company sponsors a 401(k) savings plan under which eligible
employees may choose to save up to 20 percent of their salary on a
pretax basis, subject to certain IRS limits. Under the Federal Safe
Harbor rules employees are automatically enrolled at 3% (in the
third year this increases by 1% per year up to 6%) of their salary
unless elected otherwise. The Company matches one hundred percent
of the first 1% contributed by the employee and fifty percent from
2% to 6% of employee contributions. Vesting in the contributions
made by the Company is 100% after two years of service.
Contributions under the plan amounted to $263, $242 and $212 in
2017, 2016 and 2015, respectively.
Deferred
Compensation Plan
The
Company has a nonqualified deferred compensation plan for several
of its key employees and directors. The Company may make annual
contributions to the plan, and the employee or director has the
option to defer a portion of their salary or bonus based on
qualifying annual elections. Contributions to the plan totaled $125
in 2017, $125 in 2016 and $110 in 2015. A liability is accrued for
the obligation under the plan and totaled $3,377 and $2,767 at
December 31, 2017 and 2016, respectively.
Investments
in Life Insurance Contracts
The
Bank currently offers a variety of benefit plans to all full-time
employees. While the costs of these plans are generally tax
deductible to the Bank, the cost has been escalating greatly in
recent years. To help offset escalating benefit costs and to
attract and retain qualified employees, the Bank purchased Bank
Owned Life Insurance (BOLI) contracts that will provide benefits to
employees during their lifetime. Dividends received on these
policies are tax-deferred and the death benefits under the policies
are tax exempt. Rates of return on a tax-equivalent basis are very
favorable when compared to other long-term investments which the
Bank might make. The accrued liability related to the BOLI
contracts was $443 and $412 for December 31, 2017 and 2016,
respectively.
NOTE
15
CONCENTRATIONS
OF CREDIT:
The
Company had cash deposits in other commercial banks in excess of
FDIC insurance limits totaling $1,798 and $680 at December 31, 2017
and 2016, respectively.
The
Company grants commercial, residential real estate and consumer
loans to customers located primarily in the northwestern portion of
the State of Virginia. There were no loan concentration areas
greater than 25% of capital. Collateral required by the Company is
determined on an individual basis depending on the purpose of the
loan and the financial condition of the borrower. As of December
31, 2017, approximately 80% of the loan portfolio was secured by
real estate.
NOTE
16
COMMITMENTS:
The
Company makes commitments to extend credit in the normal course of
business and issues standby letters of credit to meet the financing
needs of its customers. The amount of the commitments represents
the Company's exposure to credit loss that is not included in the
consolidated balance sheet. As of the December 31, 2017 and 2016,
the Company had the following commitments outstanding:
|
|
2017
|
2016
|
|
Commitments to
extend credit
|
$
170,798
|
$
148,060
|
|
Standby letters
of credit
|
1,533
|
1,089
|
The
Company uses the same credit policies in making commitments to
extend credit and issue standby letters of credit as it does for
the loans reflected in the consolidated balance sheet.
79
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
16
COMMITMENTS
(CONTINUED):
Commitments to
extend credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Collateral required, if
any, upon extension of credit is based on management's credit
evaluation of the borrower’s ability to pay. Collateral held
varies but may include accounts receivable, inventory, property,
plant and equipment.
The
Bank leases four of its branch offices and its loan production
office under long term lease arrangements which had initial terms
of either three, five or ten years. VBS leased its building until
December of 2017 and therefore recorded lease expense in 2017, 2016
and 2015. VST leases three of its offices, the lease expense is
included in the following disclosure as well as future lease
payments. The North Augusta Branch and the Dealer Finance division
office are leases with related parties. The Company considers these
lease agreements to be arm's length
transactions.
Lease
expense was $355, $291 and $281 for 2017, 2016 and 2015,
respectively. As of December 31, 2017, the required lease payments
for the next five years were as follows:
|
2018
|
$
177
|
|
2019
|
150
|
|
2020
|
128
|
|
2021
|
110
|
|
2022
|
105
|
NOTE
17
ON
BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES:
Derivative Financial Instruments
The
Company has stand alone derivative financial instruments in the
form of forward option contracts. These transactions involve both
credit and market risk. The notional amounts are amounts on which
calculations, payments, and the value of the derivative are based.
Notional amounts do not represent direct credit exposures. Direct
credit exposure is limited to the net difference between the
calculated amounts to be received and paid, if any. Such
difference, which represents the fair value of the derivative
instruments, is reflected on the Company’s balance sheet as
derivative assets and derivative liabilities.
The
Company is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements. The
Company controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures, and does not
expect any counterparties to fail their obligations. The Company
deals only with primary dealers.
Derivative
instruments are generally either negotiated Over-the-Counter (OTC)
contracts or standardized contracts executed on a recognized
exchange. Negotiated OTC derivative contracts are generally entered
into between two counterparties that negotiate specific agreement
terms, including the underlying instrument, amount, exercise prices
and maturity.
The
Company issues to customer’s certificates of deposit with an
interest rate that is derived from the rate of return on the stock
of the companies that comprise The Dow Jones Industrial Average. In
order to manage the interest rate risk associated with this deposit
product, the Company has purchased a series of forward option
contracts. These contracts provide the Company with a rate of
return commensurate with the return of The Dow Jones Industrial
Average from the time of the contract until maturity of the related
certificates of deposit. These contracts are accounted for as fair
value hedges. Because the certificates of deposit can be redeemed
by the customer at any time and the related forward options
contracts cannot be cancelled by the Company, the hedge is not
considered effective. The ineffective portion of the gain or loss
on the derivative instrument, if any, is recognized currently in
earnings. There was no ineffective portion included in the
consolidated income statement for the years ended December 31,
2017, 2016 and 2015.
80
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
17
ON
BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
(CONTINUED):
At
December 31, the information pertaining to the forward option
contracts, included in other assets and other liabilities on the
balance sheet, is as follows:
|
|
2017
|
2016
|
|
|
|
|
|
Notional
amount
|
$
184
|
$
190
|
|
Fair value of
contracts, included in other assets
|
59
|
26
|
|
|
|
|
Mortgage Banking Derivatives
Commitments to fund
certain mortgage loans originated by VBS (rate lock commitments) to
be sold into the secondary market and best efforts commitments for
the future delivery of mortgage loans to third party investors are
considered derivatives. It is the practice of VBS to enter into
best efforts commitments for the future delivery of residential
mortgage loans when interest rate lock commitments are entered into
in order to economically hedge the effect of changes in interest
rates resulting from its commitments to fund the loans. These
mortgage banking derivatives are not designated hedge
relationships. The fair value of the mortgage banking derivatives
were estimated based on changes in interest rates from the date of
the commitments and were considered immaterial at December 31, 2017
and 2016, and were not recorded on the Company’s balance
sheet.
NOTE
18
TRANSACTIONS
WITH RELATED PARTIES:
During
the year, executive officers and directors (and companies
controlled by them) were customers of and had transactions with the
Company in the normal course of business. Management believes these
transactions were made on substantially the same terms as those
prevailing for other customers and did not involve any abnormal
risk.
Loan
transactions with related parties are shown in the following
schedule:
|
|
2017
|
2016
|
|
|
|
|
|
Total loans,
beginning of year
|
$
7,486
|
$
7,180
|
|
New
loans
|
6,803
|
4,701
|
|
Relationship
change
|
10,403
|
611
|
|
Repayments
|
(4,315
)
|
(5,006
)
|
|
Total loans, end of
year
|
$
20,377
|
$
7,486
|
Deposit
of executive officers and directors and their affiliates were
$7,757 and $4,524 on December 31, 2017 and 2016 respectively.
Management believes these deposits were made under the same terms
available to other customers of the bank.
NOTE
19
DIVIDEND
LIMITATIONS ON SUBSIDIARY BANK:
The
principal source of funds of F & M Bank Corp. is dividends paid
by the Farmers & Merchants Bank. The Federal Reserve Act
restricts the amount of dividends the Bank may pay. Approval by the
Board of Governors of the Federal Reserve System is required if the
dividends declared by a state member bank, in any year, exceed the
sum of (1) net income of the current year and (2) income net of
dividends for the preceding two years. As of January 1, 2018,
approximately $13,705 was available for dividend distribution
without permission of the Board of Governors. Dividends paid by the
Bank to the Company totaled $5,000 in 2017, $5,000 in 2016 and
$2,500 in 2015.
81
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
20
FAIR
VALUE MEASUREMENTS:
The
fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market
prices. However, in many instances, there are no quoted market
prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation
techniques.
Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. Accounting guidance for
fair value excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the
Company.
The
Company records fair value adjustments to certain assets and
liabilities and determines fair value disclosures utilizing a
definition of fair value of assets and liabilities that states that
fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Additional
considerations are involved to determine the fair value of
financial assets in markets that are not active.
The
Company uses a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. The three levels of the fair
value hierarchy based on these two types of inputs are as
follows:
|
|
Level
1 –
|
|
Valuation
is based on quoted prices in active markets for identical assets
and liabilities.
|
|
|
Level
2 –
|
|
Valuation
is based on observable inputs including quoted prices in active
markets for similar assets and liabilities, quoted prices for
identical or similar assets and liabilities in less active markets,
and model-based valuation techniques for which significant
assumptions can be derived primarily from or corroborated by
observable data in the market.
|
|
|
Level
3 –
|
|
Valuation
is based on model-based techniques that use one or more significant
inputs or assumptions that are unobservable in the
market.
|
The
following describes the valuation techniques used by the Company to
measure certain financial assets and liabilities recorded at fair
value on a recurring basis in the financial
statements:
Securities
Where
quoted prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1
securities would include highly liquid government bonds, mortgage
products and exchange traded equities, such as U. S. Treasuries. If
quoted market prices are not available, then fair values are
estimated by using pricing models, quoted prices of securities with
similar characteristics, or discounted cash flow. Level 2
securities would include U.S. agency securities, mortgage-backed
agency securities, obligations of states and political subdivisions
and certain corporate, asset backed and other securities. In
certain cases where there is limited activity or less transparency
around inputs to the valuation, securities are classified within
Level 3 of the valuation hierarchy. The carrying value of
restricted Federal Reserve Bank and Federal Home Loan Bank stock
approximates fair value based upon the redemption provisions of
each entity and is therefore excluded from the following
table.
Derivatives
The
Company’s derivatives are recorded at fair value based on
third party vendor supplied information using discounted cash flow
analysis from observable-market based inputs, which are considered
Level 2 inputs.
82
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
20
FAIR
VALUE MEASUREMENTS (CONTINUED):
The
following tables present the balances of financial assets measured
at fair value on a recurring basis as of December 31, 2017, and
2016 (dollars in thousands):
|
December 31,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
U. S.
Treasuries
|
$
19,998
|
$
19,998
|
$
-
|
$
-
|
|
U.S. Government
sponsored enterprises
|
7,980
|
-
|
7,980
|
-
|
|
Mortgage-backed
obligations of federal agencies
|
502
|
-
|
502
|
-
|
|
Equity
securities
|
135
|
-
|
135
|
-
|
|
Total securities
available for sale
|
$
28,615
|
$
19,998
|
$
8,617
|
-
|
|
|
|
|
|
|
|
December 31,
2016
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
U. S.
Treasuries
|
$
24,014
|
$
24,014
|
$
-
|
$
-
|
|
Mortgage-backed
obligations of federal agencies
|
634
|
-
|
634
|
-
|
|
Equity
securities
|
135
|
-
|
135
|
-
|
|
Total securities
available for sale
|
$
24,783
|
$
24,014
|
$
769
|
-
|
Certain
financial assets are measured at fair value on a nonrecurring basis
in accordance with GAAP. Adjustments to the fair value of these
assets usually result from the application of
lower-of-cost-or-market accounting or write-downs of individual
assets.
The
following describes the valuation techniques used by the Company to
measure certain financial assets recorded at fair value on a
nonrecurring basis in the financial statements:
Loans Held for Sale
Loans
held for sale are short-term loans purchased at par for resale to
investors at the par value of the loan and loans originated by VBS
for sale in the secondary market. Loan participations are generally
repurchased within 15 days. Loans originated for sale by VBS
are recorded at lower of cost or market. No market adjustments were
required at December 31, 2017 or 2016; therefore, loans held for
sale were carried at cost. Because of the short-term nature and
fixed repurchase price, the book value of these loans approximates
fair value at December 31, 2017, and 2016.
Impaired Loans
Loans
are designated as impaired when, in the judgment of management
based on current information and events, it is probable that all
amounts due will not be collected according to the contractual
terms of the loan agreement. Troubled debt restructurings are
impaired loans. Impaired loans are measured at fair value on a
nonrecurring basis. If an individually-evaluated impaired
loan’s balance exceeds fair value, the amount is allocated to
the allowance for loan losses. Any fair value adjustments are
recorded in the period incurred as provision for loan losses on the
Consolidated Statements of Income.
The
fair value of an impaired loan and measurement of associated loss
is based on one of three methods: the observable market price of
the loan, the present value of projected cash flows, or the fair
value of the collateral. The observable market price of a loan is
categorized as a Level 1 input. The present value of projected cash
flows method results in a Level 3 categorization because the
calculation relies on the Company’s judgment to determine
projected cash flows, which are then discounted at the current rate
of the loan, or the rate prior to modification if the loan is a
troubled debt restructure.
83
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
20
FAIR VALUE MEASUREMENTS (CONTINUED):
Loans measured using the fair value of collateral
method are categorized in Level 3. Collateral may be in the form of
real estate or business assets including equipment, inventory, and
accounts receivable. Most collateral is real estate.
The
Company bases collateral method fair valuation upon the
“as-is” value of independent appraisals or
evaluations.
The
value of real estate collateral is determined by an independent
appraisal utilizing an income or market valuation approach.
The Company discounts appraised value by estimated selling costs to
arrive at net fair value. Appraisals conducted by an independent,
licensed appraiser outside of the Company using observable market
data is categorized as Level 3. The value of business equipment is
based upon an outside appraisal (Level 3) if deemed significant, or
the net book value on the applicable business’ financial
statements (Level 3) if not considered significant. Likewise,
values for inventory and accounts receivables collateral are based
on financial statement balances or aging reports (Level
3).
As of
December 31, 2017, and 2016, the fair value measurements for
impaired loans with specific allocations were primarily based upon
the fair value of the collateral.
The
following table summarizes the Company’s financial assets
that were measured at fair value on a nonrecurring basis during the
period (dollars in thousands):
|
December 31,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
3,337
|
-
|
-
|
$
3,337
|
|
Real
Estate
|
979
|
-
|
-
|
979
|
|
Dealer
Finance
|
35
|
-
|
-
|
35
|
|
Impaired
loans
|
$
4,351
|
-
|
-
|
$
4,351
|
|
December 31,
2016
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$
4,739
|
-
|
-
|
$
4,739
|
|
Real
Estate
|
985
|
-
|
-
|
985
|
|
Commercial
Real Estate
|
892
|
-
|
-
|
892
|
|
Dealer
Finance
|
67
|
-
|
-
|
67
|
|
Impaired
loans
|
$
6,683
|
-
|
-
|
$
6,683
|
The
following table presents information about Level 3 Fair Value
Measurements for December 31, 2017 and 2016:
|
|
Fair Value at
December 31, 2017
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
Range
|
|
|
|
|
|
|
|
Impaired
Loans
|
$
4,351
|
Discounted
appraised value
|
Discount for
selling costs and marketability
|
3%-19% (Average
5.5%)
|
|
|
Fair Value at
December 31, 2016
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
Range
|
|
|
|
|
|
|
|
Impaired
Loans
|
$
6,683
|
Discounted
appraised value
|
Discount for
selling costs and marketability
|
2%-50% (Average
4.7%)
|
84
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
20
FAIR VALUE MEASUREMENTS (CONTINUED):
Other Real Estate Owned
Certain
assets such as other real estate owned (OREO) are measured at fair
value less cost to sell. Valuation of other real estate owned is
determined using current appraisals from independent parties, a
level three input. If current appraisals cannot be obtained prior
to reporting dates, or if declines in value are identified after a
recent appraisal is received, appraisal values are discounted,
resulting in Level 3 estimates. If the Company markets the property
with a realtor, estimated selling costs reduce the fair value,
resulting in a valuation based on Level 3 inputs.
The
Company markets other real estate owned both independently and with
local realtors. Properties marketed by realtors are discounted by
selling costs. Properties that the Company markets independently
are not discounted by selling costs.
The
following table summarizes the Company’s other real estate
owned that were measured at fair value on a nonrecurring basis
during the period.
|
December 31,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
Other real estate
owned
|
$
1,984
|
-
|
-
|
$
1,984
|
|
December 31,
2016
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
Other real estate
owned
|
$
2,076
|
-
|
-
|
$
2,076
|
The
following table presents information about Level 3 Fair Value
Measurements for December 31, 2017 and 2016:
|
|
Fair Value at
December 31, 2017
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
Range
|
|
|
|
|
|
|
|
Other real estate
owned
|
$
1,984
|
Discounted
appraised value
|
Discount for
selling costs
|
5%-15% (Average
8%)
|
|
|
Fair Value at
December 31, 2016
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
Range
|
|
|
|
|
|
|
|
Other real estate
owned
|
$
2,076
|
Discounted
appraised value
|
Discount for
selling costs
|
5%-15% (Average
8%)
|
The
following methods and assumptions were used by the Company in
estimating fair value disclosures for financial
instruments:
Cash and Due from Bank, and Interest-Bearing Deposits
The
carrying amounts approximate fair value.
Securities
The
fair values of securities, excluding restricted stock, are
determined by quoted market prices or dealer quotes. The fair value
of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments
adjusted for differences between the quoted instruments and the
instruments being valued. The carrying value of restricted
securities and other investments approximates fair value and are
therefore excluded from the following table.
Loans Held for Sale
Fair
values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
85
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
20
FAIR VALUE MEASUREMENTS (CONTINUED):
Loans
Fair
values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
real estate – commercial, real estate – construction,
real estate – mortgage, credit card and other consumer loans.
Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming
categories.
The
fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate
risk inherent in the loan, as well as estimates for prepayments.
The estimate of maturity is based on the Company’s historical
experience with repayments for loan classification, modified, as
required, by an estimate of the effect of economic conditions on
lending.
Fair
value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the
risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows and discount rates are determined
within management’s judgment, using available market
information and specific borrower information.
Bank-Owned Life Insurance
Bank-owned life
insurance represents insurance policies on officers of the Company.
The cash values of the policies are estimates using information
provided by insurance carriers. These policies are carried at their
cash surrender value, which approximates fair value.
Deposits
The
fair value of demand and savings deposits is the amount payable on
demand. The fair value of fixed maturity term deposits and
certificates of deposit is estimated using the rates currently
offered for deposits with similar remaining
maturities.
Short-Term Debt
The
carrying amounts of short-term debt maturing within 90 days
approximate their fair values. Fair values of any other short-term
debt are estimated using discounted cash flow analyses based on the
current incremental borrowing rates for similar types of
debt.
Long-Term Debt
The
fair value of the Company’s long-term debt is estimated using
discounted cash flow analyses based on the Company’s
incremental borrowing rates for similar types of debt
arrangements.
Accrued Interest
The
carrying amounts of accrued interest approximate fair
value.
86
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
|
|
|
Fair Value
Measurements at December 31, 2017 Using
|
|||
|
(dollars in
thousands)
|
Carrying
Amount
|
Quoted Prices
in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Fair Value at
December 31, 2016
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
11,907
|
$
11,907
|
$
-
|
$
-
|
$
11,907
|
|
Securities
|
28,740
|
19,998
|
8,742
|
-
|
28,740
|
|
Loans held for
sale
|
39,775
|
-
|
39,775
|
-
|
39,775
|
|
Loans held for
investment, net
|
610,930
|
-
|
-
|
646,703
|
646,703
|
|
Interest
receivable
|
2,007
|
-
|
2,007
|
-
|
2,007
|
|
Bank owned life
insurance
|
13,950
|
-
|
13,950
|
-
|
13,950
|
|
Total
|
$
707,309
|
$
31,905
|
$
64,474
|
$
646,703
|
$
743,082
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
569,177
|
$
-
|
$
403,907
|
$
167,210
|
$
571,117
|
|
Short-term
debt
|
25,296
|
-
|
25,296
|
-
|
25,296
|
|
Long-term
debt
|
49,733
|
-
|
-
|
49,869
|
49, 869
|
|
Interest
payable
|
260
|
-
|
260
|
-
|
260
|
|
Total
|
$
644,466
|
$
-
|
$
429,463
|
$
217,079
|
$
646,542
|
The
estimated fair values, and related carrying amounts (in thousands),
of the Company’s financial instruments are as
follows:
|
|
|
Fair Value
Measurements at December 31, 2016 Using
|
|||
|
(dollars in
thousands)
|
Carrying
Amount
|
Quoted Prices
in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Fair Value at
December 31, 2016
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
16,355
|
$
16,355
|
$
-
|
$
-
|
$
16,355
|
|
Securities
|
24,908
|
24,014
|
894
|
-
|
24,908
|
|
Loans held for
sale
|
62,735
|
-
|
62,735
|
-
|
62,735
|
|
Loans held for
investment, net
|
584,093
|
-
|
-
|
598,991
|
598,991
|
|
Interest
receivable
|
1,785
|
-
|
1,785
|
-
|
1,785
|
|
Bank owned life
insurance
|
13,513
|
-
|
13,513
|
-
|
13,513
|
|
Total
|
$
703,389
|
$
40,369
|
$
78,927
|
$
598,991
|
$
718,287
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
537,085
|
$
-
|
$
379,857
|
$
158,073
|
$
537,930
|
|
Short-term
debt
|
40,000
|
-
|
40,000
|
-
|
40,000
|
|
Long-term
debt
|
64,237
|
-
|
-
|
63,945
|
63,945
|
|
Interest
payable
|
228
|
-
|
228
|
-
|
228
|
|
Total
|
$
641,550
|
$
-
|
$
420,085
|
$
222,018
|
$
642,103
|
87
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
21
REGULATORY
MATTERS
The
Company meets the eligibility criteria of a small bank holding
company in accordance with the Federal Reserve’s Small Bank
Holding Company Policy Statement issued in February 2015 and is no
longer obligated to report consolidated regulatory capital. The
Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank’s
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank’s assets, liabilities, and certain off
balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The
final rules implementing the Basel Committee on Banking
Supervision’s capital guidelines for U.S. Banks (Basel III
rules) became effective January 1, 2015, with full compliance of
all the requirements being phased in over a multi-year schedule and
becoming fully phased in by January 1, 2019. Under the Basel III
rules, the Company must hold a capital conservation buffer above
the adequately capitalized risk-based capital ratios. The capital
conservation buffer is being phased in from 0.0% for 2015 to 2.50%
by 2019. The capital conservation buffer for 2017 was 1.25% and for
2016 was 0.625%. The net unrealized gain on securities available
for sale and the unfunded pension liability are not included in
computing regulatory capital.
Quantitative
measures established by regulation, to ensure capital adequacy,
require the Bank to maintain minimum amounts and ratios. These
ratios are defined in the regulations and the amounts are set forth
in the table below. Management believes, as of December 31, 2017
and 2016, that the Bank meets all capital adequacy requirements to
which they are subject.
As of
the most recent notification from the Federal Reserve Bank Report
of Examination, the subsidiary bank was categorized as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must
maintain minimum total risk based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have
changed the institution’s category.
The
actual capital ratios for the Bank are presented in the following
table (dollars in thousands):
|
|
Actual
|
Minimum
Capital Requirement
|
Minimum to be
Well Capitalized Under Prompt Corrective Action
Provisions
|
|||
|
December 31, 2017
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
Total risk-based
ratio
|
$
95,563
|
15.41
%
|
$
49,614
|
8.00
%
|
$
62,018
|
10.00
%
|
|
Tier 1 risk-based
ratio
|
89,519
|
14.43
%
|
37,211
|
6.00
%
|
49,614
|
8.00
%
|
|
Common equity
tier 1
|
89,519
|
14.43
%
|
27,908
|
4.50
%
|
40,312
|
6.50
%
|
|
Total assets
leverage ratio
|
89,519
|
12.07
%
|
29,656
|
4.00
%
|
37,070
|
5.00
%
|
|
|
Actual
|
Minimum
Capital Requirement
|
Minimum to be
Well Capitalized Under Prompt Corrective Action
Provisions
|
|||
|
December 31,
2016
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
Total risk-based
ratio
|
$
93,519
|
15.08
%
|
$
49,615
|
8.00
%
|
$
62,019
|
10.00
%
|
|
Tier 1 risk-based
ratio
|
85,976
|
13.86
%
|
37,212
|
6.00
%
|
49,615
|
8.00
%
|
|
Common equity
tier 1
|
85,976
|
13.86
%
|
27,909
|
4.50
%
|
40,312
|
6.50
%
|
|
Total assets
leverage ratio
|
85,976
|
11.83
%
|
29,065
|
4.00
%
|
36,331
|
5.00
%
|
88
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
22
BUSINESS
SEGMENTS:
|
|
December 31, 2017
|
||||||
|
|
F&M Bank
|
VBS Mortgage
|
TEB Life/FMFS
|
VS Title
|
Parent Only
|
Eliminations
|
F&M Bank Corp. Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Interest
Income
|
$
33,904
|
$
125
|
$
148
|
$
-
|
$
-
|
$
(82
)
|
$
34,095
|
|
Service
charges on deposits
|
1,360
|
-
|
-
|
-
|
-
|
-
|
1,360
|
|
Investment
services and insurance income
|
1
|
-
|
772
|
-
|
-
|
(18
)
|
755
|
|
Mortgage
banking income, net
|
-
|
2,220
|
-
|
-
|
-
|
-
|
2,220
|
|
Title
insurance income
|
-
|
279
|
-
|
883
|
-
|
-
|
1,162
|
|
Gain
on prepayment of long-term debt
|
504
|
-
|
-
|
-
|
-
|
-
|
504
|
|
Loss
on sale of investments
|
-
|
(40
)
|
(2
)
|
-
|
-
|
-
|
(42
)
|
|
Other
operating income
|
2,128
|
-
|
-
|
-
|
162
|
(357
)
|
1,933
|
|
Total
income
|
37,897
|
2,584
|
918
|
883
|
162
|
(457
)
|
41,987
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest
Expense
|
3,904
|
75
|
-
|
-
|
-
|
(82
)
|
3,897
|
|
Provision
for loan losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Salaries
and benefits
|
12,092
|
1,733
|
474
|
555
|
-
|
-
|
14,854
|
|
Other
operating expenses
|
8,942
|
672
|
51
|
172
|
46
|
(18
)
|
9,865
|
|
Total
expense
|
24,938
|
2,480
|
525
|
727
|
46
|
(100
)
|
28,616
|
|
Income
before income taxes
|
12,959
|
104
|
393
|
156
|
116
|
(357
)
|
13,371
|
|
Income
tax expense (benefit)
|
4,316
|
-
|
109
|
-
|
(95
)
|
-
|
4,330
|
|
Net
income
|
$
8,643
|
$
104
|
$
284
|
$
156
|
$
211
|
$
(357
)
|
$
9,041
|
|
Net
income attributable to noncontrolling interest
|
-
|
31
|
-
|
-
|
-
|
-
|
31
|
|
Net
Income attributable to F & M Bank Corp.
|
$
8,643
|
$
73
|
$
284
|
$
156
|
$
211
|
$
(357
)
|
$
9,010
|
|
Total Assets
|
$
754,375
|
$
7,018
|
$
6,749
|
$
811
|
$
90,964
|
$
(106,647
)
|
$
753,270
|
|
Goodwill
|
$
2,670
|
$
47
|
$
-
|
$
-
|
$
164
|
$
-
|
$
2,881
|
89
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
22
BUSINESS
SEGMENTS CONTINUED:
|
|
December 31, 2016
|
||||||
|
|
F&M Bank
|
VBS Mortgage
|
TEB Life/FMFS
|
VS Title
|
Parent Only
|
Eliminations
|
F&M Bank Corp. Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Interest
Income
|
$
31,949
|
$
55
|
$
152
|
$
-
|
$
-
|
$
(6
)
|
$
32,150
|
|
Service
charges on deposits
|
1,174
|
-
|
-
|
-
|
-
|
-
|
1,174
|
|
Investment
services and insurance income
|
1
|
-
|
470
|
-
|
-
|
(30
)
|
441
|
|
Mortgage
banking income, net
|
-
|
2,565
|
-
|
-
|
-
|
-
|
2,565
|
|
Title
insurance income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Gain
on prepayment of long-term debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Loss
on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Other
operating income
|
2,353
|
-
|
-
|
-
|
-
|
(951
)
|
1,402
|
|
Total
income
|
35,477
|
2,620
|
622
|
-
|
-
|
(987
)
|
37,732
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest
Expense
|
3,605
|
-
|
-
|
-
|
-
|
(6
)
|
3,599
|
|
Provision
for loan losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Salaries
and benefits
|
11,123
|
1,387
|
290
|
-
|
-
|
-
|
12,800
|
|
Other
operating expenses
|
8,139
|
586
|
66
|
-
|
1
|
(320
)
|
8,472
|
|
Total
expense
|
22,867
|
1,973
|
356
|
-
|
1
|
(326
)
|
24,871
|
|
Income
before income taxes
|
12,610
|
647
|
266
|
-
|
(1
)
|
(661
)
|
12,861
|
|
Income
tax expense (benefit)
|
3,290
|
-
|
58
|
-
|
(249
)
|
-
|
3,099
|
|
Net
income
|
$
9,320
|
$
647
|
$
208
|
$
-
|
$
248
|
$
(661
)
|
$
9,762
|
|
Net
income attributable to noncontrolling interest
|
-
|
194
|
-
|
-
|
-
|
-
|
194
|
|
Net
Income attributable to F & M Bank Corp.
|
$
9,320
|
$
453
|
$
208
|
$
-
|
$
248
|
$
(661
)
|
$
9,568
|
|
Total Assets
|
$
748,273
|
$
7,487
|
$
6,476
|
$
-
|
$
87,449
|
$
(104,796
)
|
$
744,889
|
|
Goodwill
|
$
2,670
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
$
2,670
|
90
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
22
BUSINESS
SEGMENTS CONTINUED:
|
|
December 31, 2015
|
||||||
|
|
F&M Bank
|
VBS Mortgage
|
TEB Life/FMFS
|
VS Title
|
Parent Only
|
Eliminations
|
F&M Bank Corp. Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Interest
Income
|
$
29,206
|
$
51
|
$
152
|
$
-
|
$
-
|
$
(5
)
|
$
29,404
|
|
Service
charges on deposits
|
963
|
-
|
-
|
-
|
-
|
-
|
963
|
|
Investment
services and insurance income
|
2
|
-
|
522
|
-
|
-
|
(14
)
|
510
|
|
Mortgage
banking income, net
|
-
|
2,066
|
-
|
-
|
-
|
-
|
2,066
|
|
Title
insurance income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Gain
on prepayment of long-term debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Loss
on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Other
operating income
|
2,142
|
-
|
-
|
-
|
5
|
(893
)
|
1,254
|
|
Total
income
|
32,313
|
2,117
|
674
|
-
|
5
|
(912
)
|
34,197
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest
Expense
|
2,881
|
-
|
-
|
-
|
-
|
(5
)
|
2,876
|
|
Provision
for loan losses
|
300
|
-
|
-
|
-
|
-
|
-
|
300
|
|
Salaries
and benefits
|
10,056
|
1,103
|
298
|
-
|
-
|
-
|
11,457
|
|
Other
operating expenses
|
7,887
|
466
|
35
|
-
|
21
|
(312
)
|
8,097
|
|
Total
expense
|
21,124
|
1,569
|
333
|
-
|
21
|
(317
)
|
22,730
|
|
Income
before income taxes
|
11,189
|
548
|
341
|
-
|
(16
)
|
(595
)
|
11,467
|
|
Income
tax expense (benefit)
|
2,948
|
-
|
129
|
-
|
(191
)
|
-
|
2,886
|
|
Net
income
|
$
8,241
|
$
548
|
$
212
|
$
-
|
$
175
|
$
(595
)
|
$
8,581
|
|
Net
income attributable to noncontrolling interest
|
-
|
164
|
-
|
-
|
-
|
-
|
164
|
|
Net
Income attributable to F & M Bank Corp.
|
$
8,241
|
$
384
|
$
212
|
$
-
|
$
175
|
$
(595
)
|
$
8,417
|
|
Total Assets
|
$
669,968
|
$
2,180
|
$
6,269
|
$
-
|
$
84,897
|
$
(97,957
)
|
$
665,357
|
|
Goodwill
|
$
2,670
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
$
2,670
|
91
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
Balance Sheets
December 31, 2017 and 2016
|
|
2017
|
2016
|
|
Assets
|
|
|
|
Cash and cash
equivalents
|
$
917
|
$
1,155
|
|
Investment in
subsidiaries
|
88,967
|
85,481
|
|
Securities
available for sale
|
135
|
135
|
|
Income tax
receivable (including due from subsidiary)
|
565
|
-
|
|
Goodwill and
intangibles
|
380
|
-
|
|
Total
Assets
|
$
90,964
|
$
86,771
|
|
|
|
|
|
Liabilities
|
|
|
|
Income tax payable
(including due from subsidiary)
|
$
-
|
$
313
|
|
Deferred income
taxes
|
177
|
307
|
|
Accrued
expenses
|
86
|
-
|
|
Demand obligations
for low income housing investment
|
-
|
162
|
|
Total
Liabilities
|
$
263
|
$
782
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Preferred stock par
value $5 per share, 400,000 shares authorized, 324,150 and 327,350
issued and outstanding at December 31, 2017 and 2016,
respectively.
|
$
7,529
|
$
7,609
|
|
Common stock par
value $5 per share, 6,000,000 shares authorized, 3,255,036 and
3,270,315 shares issued and outstanding for 2016 and 2015,
respectively
|
16,275
|
16,352
|
|
Additional paid in
capital
|
10,225
|
10,684
|
|
Retained
earnings
|
60,814
|
54,509
|
|
Accumulated other
comprehensive income (loss)
|
(4,142
)
|
(3,165
)
|
|
Total Stockholders'
Equity
|
90,701
|
85,989
|
|
Total Liabilities
and Stockholders' Equity
|
$
90,964
|
$
86,771
|
Statements of Income
For the years ended December 31, 2017, 2016 and 2015
|
|
2017
|
2016
|
2015
|
|
Income
|
|
|
|
|
Dividends from
affiliate
|
$
5,000
|
$
5,000
|
$
2,500
|
|
Net limited
partnership income (loss)
|
162
|
-
|
5
|
|
Total
Income
|
5,162
|
5,000
|
2,505
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Total
Expenses
|
47
|
1
|
21
|
|
|
|
|
|
|
Net income before
income tax expense (benefit)
|
|
|
|
|
and undistributed
subsidiary net income
|
5,115
|
4,999
|
2,484
|
|
|
|
|
|
|
Income Tax Expense
(Benefit)
|
(95
)
|
(249
)
|
(191
)
|
|
|
|
|
|
|
Income before
undistributed subsidiary
|
|
|
|
|
net
income
|
5,210
|
5,248
|
2,675
|
|
|
|
|
|
|
Undistributed
subsidiary net income
|
3,800
|
4,320
|
5,742
|
|
|
|
|
|
|
Net Income F&M
Bank Corp.
|
$
9,010
|
$
9,568
|
$
8,417
|
92
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
23
PARENT
COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED):
Statements of Cash Flows
For the years ended December 31, 2017, 2016 and 2015
|
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
Net
income
|
$
9,010
|
$
9,568
|
$
8,417
|
|
Adjustments to
reconcile net income to net
|
|
|
|
|
cash provided by
operating activities:
|
|
|
|
|
Undistributed
subsidiary income
|
(3,800
)
|
(4,320
)
|
(5,742
)
|
|
Deferred tax
(benefit) expense
|
(112
)
|
5
|
(81
)
|
|
Decrease (increase)
in other assets
|
(1,256
)
|
-
|
1,300
|
|
Increase (decrease)
in other liabilities
|
(77
)
|
(535
)
|
(143
)
|
|
Net Cash Provided
by Operating Activities
|
3,765
|
4,718
|
3,751
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Net Cash Used in
Investing Activities
|
-
|
-
|
-
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
Repurchase of
preferred stock
|
(101
)
|
(1,961
)
|
|
|
Repurchase of
common stock
|
(712
)
|
(577
)
|
(289
)
|
|
Proceeds from
issuance of common stock
|
197
|
183
|
146
|
|
Dividends paid in
cash
|
(3,387
)
|
(3,115
)
|
(2,915
)
|
|
Net Cash Used in
Financing Activities
|
(4,003
)
|
(5,470
)
|
(3,058
)
|
|
|
|
|
|
|
Net (Decrease)
increase in Cash and Cash Equivalents
|
(238
)
|
(752
)
|
693
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Year
|
1,155
|
1,907
|
1,214
|
|
Cash and Cash Equivalents, End of Year
|
$
917
|
$
1,155
|
$
1,907
|
NOTE
24
INVESTMENT
IN VBS MORTGAGE, LLC
On
November 3, 2008, the Bank acquired a 70% ownership interest in VBS
Mortgage, LLC (formerly Valley Broker Services, DBA VBS Mortgage).
VBS originates both conventional and government sponsored mortgages
for sale in the secondary market. Accordingly, the Company
consolidated the assets, liabilities, revenues and expenses of VBS
Mortgage, LLC and reflected the issued and outstanding interest not
held by the Company in its consolidated financial statements as
noncontrolling interest.
93
F
& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in
thousands)
December 31, 2017 and 2016
NOTE
25
INVESTMENT
IN VS TITLE, LLC
On
January 1, 2017, the Bank acquired a 76% ownership interest in VS
Title, LLC (VST). VST provides title insurance services to the
customers in our market area, including VBS Mortgage and the Bank.
VBS Mortgage is the minority owner in VST and accordingly, the
Company consolidated the assets, liabilities, revenues and expenses
of VST, however there is no noncontrolling interest reflected as
the 24% is included in VBS Mortgage’s income.
The
balances in accumulated other comprehensive loss are shown in the
following table:
|
dollars in
thousands
|
Unrealized
Securities Gains (Losses)
|
Adjustments
Related to Pension Plan
|
Accumulated
Other Comprehensive Loss
|
|
Balance at
December, 31, 2014
|
3
|
(2,330
)
|
(2,327
)
|
|
Change
in unrealized securities gains (losses), net of tax
|
1
|
-
|
1
|
|
Change
in unfunded pension liability, net of tax
|
-
|
(354
)
|
(354
)
|
|
Balance at
December, 31, 2015
|
4
|
(2,684
)
|
(2,680
)
|
|
Change
in unrealized securities gains (losses), net of tax
|
2
|
-
|
2
|
|
Change
in unfunded pension liability, net of tax
|
-
|
(487
)
|
(487
)
|
|
Balance at
December, 31, 2016
|
$
6
|
$
(3,171
)
|
$
(3,165
)
|
|
Change
in unrealized securities gains (losses), net of tax
|
(26
)
|
-
|
(26
)
|
|
Change
in unfunded pension liability, net of tax
|
-
|
(951
)
|
(951
)
|
|
Balance at
December, 31, 2017
|
$
(20
)
|
$
(4,122
)
|
$
(4,142
)
|
There
were no reclassifications adjustments reported on the consolidated
statements of income during 2015, 2016 or 2017.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders
F&M
Bank Corp.
Timberville,
Virginia
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of F&M
Bank Corp. and subsidiaries (the Company) as of December 31, 2017
and 2016, the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for
the years then ended, and the related notes to the consolidated
financial statements (collectively, the financial statements). In
our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of
December 31, 2017, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013, and our report
dated March 16, 2018 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over
financial reporting.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Yount, Hyde & Barbour, P.C.
We have
served as the Company’s auditor since 2016.
Winchester,
Virginia
March
16, 2018
95
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
F&M
Bank Corp.
Timberville,
Virginia
Opinion on the Internal Control over Financial
Reporting
We have audited F&M Bank Corp. and
subsidiaries' (the Company) internal control over financial
reporting as of December 31, 2017, based on criteria established
in
Internal
Control — Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. In our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017,
based on criteria established in
Internal Control —
Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
We
have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets as of December 31, 2017 and 2016, and
the related consolidated statements of income, comprehensive
income, shareholders’ equity and cash flows for the years
then ended of the Company and our report dated March 16, 2018
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for
maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over
financial reporting in the accompanying
Report of Management’s
Assessment of Internal Control over Financial
Reporting
. Our responsibility
is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the
PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over
financialreporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance
thattransactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/
Yount, Hyde & Barbour, P.C., Winchester, Virginia
March
16, 2018
96
Report of Independent Registered Public Accounting
Firm
To
the Board of Directors and Stockholders
F
& M Bank Corp. and Subsidiaries
Timberville,
Virginia
We have
audited the accompanying consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and
cash flows of F&M Bank Corp. and Subsidiaries (the
“Company”) for the year ended December 31, 2015.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of F&M
Bank Corp. and Subsidiaries’ results of operations and cash
flows for the year ended December 31, 2015, in conformity with
generally accepted accounting principles in the United States of
America.
/s/
Elliott Davis, PLLC
Raleigh,
North Carolina
March
29, 2016
97
None.
Disclosure Controls and Procedures.
The
Company, under the supervision and with the participation of
management, including the Company’s Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as
of the end of the period covered by this Annual Report on Form
10-K. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were effective as of December
31, 2017 to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms and is accumulated and
communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial
Reporting.
There were no changes in the Company’s
internal control over financial reporting during the
Company’s quarter ended December 31, 2017 that have
materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Because of the inherent limitations in all control systems, the
Company believes that no system of controls, no matter how well
designed and operated, can provide absolute assurance that all
control issues have been detected.
Management’s Report on Internal Control
over Financial Reporting.
Management is responsible for the
preparation and fair presentation of the financial statements
included in the annual report. The financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America and reflect
management’s judgements and estimates concerning effects of
events and transactions that are accounted for or
disclosed.
Management
is also responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal
control over financial reporting includes those policies and
procedures that pertain to the Company's ability to record,
process, summarize and report reliable financial data. Management
recognizes that there are inherent limitations in the effectiveness
of any internal control over financial reporting, including the
possibility of human error and the circumvention or overriding of
internal control. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance with
respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control over
financial reporting may vary over time.
In
order to ensure that the Company's internal control over financial
reporting is effective, management regularly assesses such controls
and did so most recently for its financial reporting as of December
31, 2017. This assessment was based on criteria for effective
internal control over financial reporting described in Internal
Control Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO, 2013) of the Treadway Commission. Based on
this assessment, management believes the Company maintained
effective internal control over financial reporting as of December
31, 2017.
The
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017 has been audited by
Yount, Hyde & Barbour, P.C., the independent registered public
accounting firm which also audited the Company’s consolidated
financial statements included in this Annual Report on Form 10-K.
Yount, Hyde & Barbour’s attestation report on the
Company’s internal control over financial reporting is
included in Item 8 “Financial Statements and Supplemental
Data” on this Form 10-K.
98
The
Board of Directors, acting through its Audit Committee, is
responsible for the oversight of the Company's accounting
policies, financial reporting and internal control. The Audit
Committee of the Board of Directors is comprised entirely of
outside directors who are independent of management. The Audit
Committee is responsible for the appointment and compensation of
the independent registered public accounting firm and approves
decisions regarding the appointment or removal of the Company
Auditor. It meets periodically with management, the independent
registered public accounting firm and the internal auditors to
ensure that they are carrying out their responsibilities. The Audit
Committee is also responsible for performing an oversight role by
reviewing and monitoring the financial, accounting and auditing
procedures of the Company in addition to reviewing the Company's
financial reports. The independent registered public accounting
firm and the internal auditors have full and unlimited access to
the Audit Committee, with or without management, to discuss the
adequacy of internal control over financial reporting, and any
other matter which they believe should be brought to the attention
of the Audit Committee. The Company's independent registered public
accounting firm has also issued an attestation report on the
effectiveness of internal control over financial
reporting.
None.
Information
regarding directors, executive officers and the audit committee
financial expert is incorporated by reference from the
Company’s definitive proxy statement for the Company’s
2018 Annual Meeting of Shareholders to be held May 12, 2018
(“Proxy Statement”), under the captions “Election
of Directors,” “Board of Directors and
Committees,” and “Executive
Officers.”
Information on
Section 16(a) beneficial ownership reporting compliance for the
directors and executive officers of the Company is incorporated by
reference from the Proxy Statement under the caption “Section
16(a) Beneficial Ownership Reporting
Compliance.”
The
Company has adopted a broad based code of ethics for all employees
and directors. The Company has also adopted a code of ethics
tailored to senior officers who have financial responsibilities. A
copy of the codes may be obtained without charge by request from
the corporate secretary.
This
information is incorporated by reference from the Proxy Statement
under the caption “Executive
Compensation.”
This
information is incorporated by reference from the Proxy Statement
under the caption “Ownership of Company Common Stock”
and “Executive Compensation” and from Item 5 of this
10-K.
This
information is incorporated by reference from the Proxy Statement
under the caption “Interest of Directors and Officers in
Certain Transactions.”
This
information is incorporated by reference from the Proxy Statement
under the caption “Principal Accounting
Fees.”
99
PART
IV
The
following financial statements are filed as a part of this
report:
(a)(1)
Financial Statements
The
following consolidated financial statements and reports of
independent auditors of the Company are in Part II, Item 8 on pages
38 thru 89:
|
Consolidated
Balance Sheets - December 31, 2017 and 2016
|
43
|
|
Consolidated
Statements of Income - Years ended December 31, 2017, 2016 and
2015
|
44
|
|
Consolidated
Statements of Comprehensive Income - Years ended December 31, 2017,
2016 and 2015
|
45
|
|
Consolidated
Statements of Changes in Stockholders’ Equity – Years
ended December 31, 2017, 2016 and 2015
|
46
|
|
Consolidated
Statements of Cash Flows - Years ended December 31, 2017, 2016 and
2015
|
47
|
|
Notes to the
Consolidated Financial Statements
|
48
|
|
Reports of
Independent Registered Public Accounting Firms
|
95
|
(a)(2)
Financial Statement Schedules
All
schedules are omitted since they are not required, are not
applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3)
Exhibits
The
following exhibits are filed as a part of this form
10-K:
Exhibit
No.
Restated Articles
of Incorporation of F & M Bank Corp., incorporated herein by
reference from F & M Bank Corp.’s, Quarterly Report on
Form 10-Q, filed November 14, 2013.
Articles of
Amendment to the Articles of Incorporation of F&M Bank Corp.
designating the Series A Preferred Stock incorporated herein by
reference from F&M Bank Corp,’s current report on Form
8-K filed December 4, 2014.
Amended and
Restated Bylaws of F & M Bank Corp., incorporated herein by
reference from F & M Bank Corp.’s, Annual Report on Form
10-K, filed March 8, 2002.
Change in Control
Severance Plan, incorporated herein by reference from Exhibit 10.1
to F&M Bank Corp.’s Registration Statement on Form S-1,
filed December 22, 2010.
VBA Executives
Deferred Compensation Plan for Farmers & Merchants Bank,
incorporated herein by reference from F & M Bank Corp.’s
Annual Report on Form 10-K, filed March 28, 2014.
VBA Directors
Non-Qualified Deferred Compensation Plan for Farmers &
Merchants Bank, incorporated herein by reference from F & M
Bank Corp.’s Annual Report on Form 10-K, filed March 28,
2014.
Subsidiaries of the
Registrant
Consent of Yount,
Hyde & Barbour, P.C.
Consent of Elliott
Davis, PLLC
Certification of
Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of
Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following
materials from F&M Bank Corp.’s Annual Report on Form
10-K for the year ended December 31, 2017, formatted in Extensible
Business Reporting Language (XBRL), include: (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Income, (iii)
Consolidated Statements of Comprehensive Income, (iv) Consolidated
Statements of Changes in Stockholders’ Equity,
(v) Consolidated Statements of Cash Flows and (vi) related
notes (furnished herewith).
100
Not
Required
Shareholders
may obtain, free of charge, a copy of the exhibits to this Report
on Form 10-K by writing Larry A. Caplinger, Corporate Secretary, at
F & M Bank Corp., P.O. Box 1111, Timberville, VA 22853 or our
website at www.fmbankva.com.
101
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
F & M Bank
Corp.
(Registrant)
|
By:
|
/s/ Dean W.
Withers
|
|
March 16,
2018
|
|
|
|
|
Dean W.
Withers
|
|
Date
|
|
|
|
|
Director and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Carrie A.
Comer
|
|
March 16,
2018
|
|
|
|
|
Carrie A.
Comer
|
|
Date
|
|
|
|
|
Executive Vice
President and Chief Financial Officer
|
|
|
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Larry A.
Caplinger
|
|
Director
|
|
March 16,
2018
|
|
Larry A.
Caplinger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John N.
Crist
|
|
Director
|
|
March 16,
2018
|
|
John N.
Crist
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ellen R.
Fitzwater
|
|
Director,
Chair
|
|
March 16,
2018
|
|
Ellen R.
Fitzwater
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Daniel J.
Harshman
|
|
Director
|
|
March 16,
2018
|
|
Daniel J.
Harshman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard S.
Myers
|
|
Director
|
|
March 16,
2018
|
|
Richard S.
Myers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Michael W.
Pugh
|
|
Director
|
|
March 16,
2018
|
|
Michael W.
Pugh
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/s/ Christopher S.
Runion
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Director
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March 16,
2018
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Christopher S.
Runion
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/s/ Ronald E.
Wampler
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Director
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March 16,
2018
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Ronald E.
Wampler
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/s/ E. Ray
Burkholder
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Director
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March 16,
2018
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E. Ray
Burkholder
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/s/ Peter H.
Wray
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Director
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March 16,
2018
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Peter H.
Wray
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102
TABLE OF CONTENTS
Part I, ContinuedItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5 . Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesPart Ii, ContinuedItem 5 . Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities, ContinuedItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations, ContinuedItem 7A Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Operations:Note 2 Summary Of Significant Accounting Policies:Note 2 Summary Of Significant Accounting Policies (continued):Note 3 Cash and Due From Banks:Note 4 Securities:Note 4 Securities (continued):Note 5 Loans:Note 5 Loans (continued):Note 6 Allowance For Loan Losses:Note 6 Allowance For Loan Losses (continued):Note 7 Troubled Debt Restructuring:Note 7 Troubled Debt Restructuring (continued):Note 8 Bank Premises and Equipment:Note 9 Other Real Estate Owned:Note 10 Deposits:Note 11 Short-term Debt:Note 11 Short-term Debt (continued)Note 12 Long-term Debt:Note 13 Income Tax Expense:Note 13 Income Tax Expense (continued):Note 14 Employee Benefits:Note 14 Employee Benefits (continued):Note 15 Concentrations Of Credit:Note 16 Commitments:Note 16 Commitments (continued):Note 17 on Balance Sheet Derivative Instruments and Hedging Activities:Note 17 on Balance Sheet Derivative Instruments and Hedging Activities (continued):Note 18 Transactions with Related Parties:Note 19 Dividend Limitations on Subsidiary Bank:Note 20 Fair Value Measurements:Note 20 Fair Value Measurements (continued):Note 21 Regulatory MattersNote 22 Business Segments:Note 22 Business Segments Continued:Note 23parent Company Only Financial Statements:Note 23 Parent Company Only Financial Statements (continued):Note 24 Investment in Vbs Mortgage, LlcNote 25 Investment in Vs Title, LlcNote 26 Accumulated Other Comprehensive LossItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9A. Controls and Procedures, ContinuedItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Directors IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16 Form 10-k Summary