F&M BANK CORP - Quarter Report: 2017 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
☒
Quarterly report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly
period ended June 30, 2017.
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File
Number: 000-13273
F
& M BANK CORP.
Virginia
|
|
54-1280811
|
(State or Other
Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
P. O. Box
1111
Timberville,
Virginia 22853
(Address of
Principal Executive Offices) (Zip Code)
(540) 896-8941
(Registrant's
Telephone Number, Including Area Code)
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
☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically and posted on its website,
if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files. Yes ☒ No
☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company or an emerging
growth company. See definition of “large accelerated
filer”, “accelerated filer”, “smaller
reporting company” and “an emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check
one)
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
Non-accelerated
filer
|
☐(Do not
check if a smaller reporting company)
|
Smaller reporting company
|
☒
|
|
|
Emerging growth
company
|
☐
|
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 ☒
State the number of
shares outstanding of each of the registrant’s classes of
common stock, as of the latest practicable date.
Class
|
Outstanding at August 11,
2017
|
Common Stock, par
value - $5
|
3,274,188
shares
|
F
& M BANK CORP.
Index
Page
Part
I
|
Financial
Information
|
3
|
|
|
|
Item
1.
|
Financial
Statements
|
3
|
|
|
|
|
Consolidated Balance Sheets – June 30, 2017 and December 31, 2016 |
3
|
|
|
|
|
Consolidated
Statements of Income – Three Months Ended June 30, 2017
and 2016
|
4
|
|
|
|
|
Consolidated
Statements of Income – Six Months Ended June 30, 2017
and 2016
|
5
|
|
|
|
|
Consolidated
Statements of Comprehensive Income – Three and Six Months
Ended June 30, 2017
and 2016
|
6
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity – Six
Months Ended June 30, 2017 and 2016
|
7
|
|
|
|
|
Consolidated
Statements of Cash Flows – Six Months Ended June 30, 2017
and 2016
|
8
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
9
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
34
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
48
|
|
|
|
Item
4.
|
Controls
and Procedures
|
48
|
|
|
|
Part
II
|
Other
Information
|
49
|
|
|
|
Item
1.
|
Legal
Proceedings
|
49
|
|
|
|
Item
1a.
|
Risk
Factors
|
49
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
49
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
49
|
|
|
|
Item
4.
|
Mine
Safety Disclosures
|
49
|
|
|
|
Item
5.
|
Other
Information
|
49
|
|
|
|
Item
6.
|
Exhibits
|
49
|
|
|
|
Signatures
|
50
|
|
|
|
|
Certifications
|
51
|
2
Part I Financial
Information
Item 1 Financial
Statements
F
& M BANK CORP.
Consolidated
Balance Sheets
(
dollars in thousands, except share and per share data)
|
June
30,
|
December
31,
|
|
2017
|
2016*
|
|
(Unaudited)
|
|
Assets
|
|
|
Cash and due from
banks
|
$7,876
|
$7,755
|
Money market
funds
|
614
|
674
|
Federal funds
sold
|
3,174
|
7,926
|
Cash and cash
equivalents
|
11,664
|
16,355
|
Securities:
|
|
|
Held to maturity –
fair value of $125 in 2017 and 2016
|
125
|
125
|
Available for
sale
|
24,708
|
24,783
|
Other
investments
|
14,274
|
14,567
|
Loans held for
sale
|
51,767
|
62,735
|
Loans held for
investment
|
603,435
|
591,636
|
Less: allowance for loan
losses
|
(7,216)
|
(7,543)
|
Net loans held for
investment
|
596,219
|
584,093
|
|
|
|
Other real estate
owned
|
2,008
|
2,076
|
Bank premises and
equipment, net
|
12,024
|
10,340
|
Interest
receivable
|
1,895
|
1,785
|
Goodwill
|
2,974
|
2,670
|
Bank owned life
insurance
|
13,731
|
13,513
|
Other
assets
|
12,874
|
11,847
|
Total assets
|
$744,263
|
$744,889
|
|
|
|
Liabilities
|
|
|
Deposits:
|
|
|
Noninterest
bearing
|
$147,133
|
$146,617
|
Interest
bearing
|
389,353
|
390,468
|
Total deposits
|
536,486
|
537,085
|
|
|
|
Short-term
debt
|
50,000
|
40,000
|
Accrued
liabilities
|
16,166
|
16,885
|
Long-term
debt
|
51,938
|
64,237
|
Total
liabilities
|
654,590
|
658,207
|
|
|
|
Stockholders’
Equity
|
|
|
Preferred Stock $5
par value, 400,000 shares authorized, 326,550 and
327,350
|
|
|
Issued
and outstanding for June 30, 2017 and December 31, 2016,
respectively
|
7,589
|
7,609
|
Common stock, $5
par value, 6,000,000 shares authorized,
|
|
|
3,274,057
and 3,270,315 shares issued and outstanding
|
|
|
for
June 30, 2017 and December 31, 2016, respectively
|
16,370
|
16,352
|
Additional paid in
capital – common stock
|
10,766
|
10,684
|
Retained
earnings
|
57,540
|
54,509
|
Noncontrolling
interest in consolidated subsidiaries
|
574
|
693
|
Accumulated other
comprehensive loss
|
(3,166)
|
(3,165)
|
Total stockholders’
equity
|
89,673
|
86,682
|
Total liabilities and
stockholders’ equity
|
$744,263
|
$744,889
|
*2016
Derived from audited consolidated financial
statements.
See notes to unaudited consolidated financial
statements
3
F
& M BANK CORP.
Consolidated
Statements of Income
(dollars
in thousands)
(Unaudited)
|
Three Months
Ended
|
|
|
June
30,
|
|
Interest and Dividend income
|
2017
|
2016
|
Interest and fees on loans
held for investment
|
$7,906
|
7,330
|
Interest and fees on loans
held for sale
|
271
|
530
|
Interest from money market
funds and federal funds sold
|
18
|
6
|
Interest on debt securities
– taxable
|
61
|
71
|
Total interest and
dividend income
|
8,256
|
7,937
|
|
|
|
Interest expense
|
|
|
Total
interest on deposits
|
633
|
591
|
Interest
from short-term debt
|
24
|
8
|
Interest
from long-term debt
|
268
|
263
|
Total interest
expense
|
925
|
862
|
|
|
|
Net interest income
|
7,331
|
7,075
|
|
|
|
Provision for Loan Losses
|
-
|
-
|
Net Interest
Income After Provision for Loan Losses
|
7,331
|
7,075
|
|
|
|
Noninterest income
|
|
|
Service charges on deposit
accounts
|
335
|
272
|
Investment services and
insurance income (loss), net
|
187
|
(29)
|
Mortgage
banking income, net
|
613
|
752
|
Title
insurance income
|
355
|
-
|
Income on bank owned life
insurance
|
112
|
118
|
Low
income housing partnership losses
|
(201)
|
(183)
|
ATM
and check card fees
|
351
|
318
|
Other
operating income
|
130
|
130
|
Total noninterest
income
|
1,882
|
1,378
|
|
|
|
Noninterest expense
|
|
|
Salaries
|
2,628
|
2,133
|
Employee
benefits
|
852
|
661
|
Occupancy
expense
|
254
|
210
|
Equipment
expense
|
207
|
230
|
FDIC insurance
assessment
|
90
|
113
|
Other
real estate owned, net
|
12
|
35
|
Marketing
expense
|
122
|
131
|
Legal
and professional fees
|
79
|
105
|
ATM
and check card fees
|
178
|
172
|
Telecommunication
and data processing expense
|
352
|
289
|
Directors
fees
|
116
|
100
|
Bank
franchise tax
|
164
|
163
|
Other
operating expenses
|
963
|
828
|
Total noninterest
expense
|
6,017
|
5,170
|
|
|
|
Income before income taxes
|
3,196
|
3,283
|
Income tax
expense
|
809
|
839
|
Net Income
|
2,387
|
2,444
|
Net
income (loss) attributable to noncontrolling interest
|
59
|
86
|
Net Income attributable to F & M Bank Corp.
|
$2,328
|
$2,358
|
Dividends
paid/accumulated on preferred stock
|
105
|
127
|
Net income available to common stockholders
|
$2,223
|
$2,231
|
|
|
|
Per Common Share Data
|
|
|
Net income –
basic
|
$.68
|
$.68
|
Net income –
diluted
|
.64
|
$.63
|
Cash dividends on common
stock
|
$.23
|
$.20
|
Weighted average common
shares outstanding – basic
|
3,272,352
|
3,286,459
|
Weighted average
common shares outstanding – diluted
|
3,637,030
|
3,730,859
|
See notes to unaudited consolidated financial
statements
4
F
& M BANK CORP.
Consolidated
Statements of Income
(dollars
in thousands)
(Unaudited)
|
Six Months
Ended
|
|
|
June
30,
|
|
Interest and Dividend income
|
2017
|
2016
|
Interest and fees on loans
held for investment
|
$15,609
|
$14,522
|
Interest and fees on loans
held for sale
|
445
|
902
|
Interest from money market
funds and federal funds sold
|
75
|
14
|
Interest on debt securities
– taxable
|
137
|
140
|
Total interest and
dividend income
|
16,266
|
15,578
|
|
|
|
Interest expense
|
|
|
Total
interest on deposits
|
1,249
|
1,149
|
Interest
from short-term debt
|
32
|
26
|
Interest
from long-term debt
|
550
|
500
|
Total interest
expense
|
1,831
|
1,675
|
|
|
|
Net interest income
|
14,435
|
13,903
|
|
|
|
Provision for Loan Losses
|
-
|
-
|
Net Interest
Income After Provision for Loan Losses
|
14,435
|
13,903
|
|
|
|
Noninterest income
|
|
|
Service charges on deposit
accounts
|
651
|
506
|
Investment services and
insurance income
|
361
|
65
|
Mortgage
banking income, net
|
1,113
|
1,196
|
Title
insurance income
|
554
|
-
|
Income on bank owned life
insurance
|
224
|
237
|
Low
income housing partnership losses
|
(386)
|
(365)
|
ATM
and check card fees
|
681
|
692
|
Gain
on prepayment of long-term debt
|
504
|
-
|
Loss
on sale of other investments
|
(42)
|
-
|
Other
operating income
|
268
|
250
|
Total noninterest
income
|
3,928
|
2,581
|
|
|
|
Noninterest expense
|
|
|
Salaries
|
5,362
|
4,543
|
Employee
benefits
|
1,805
|
1,414
|
Occupancy
expense
|
503
|
428
|
Equipment
expense
|
393
|
422
|
FDIC insurance
assessment
|
180
|
225
|
Other
real estate owned, net
|
26
|
53
|
Marketing
expense
|
257
|
268
|
Legal
and professional fees
|
175
|
193
|
ATM
and check card fees
|
346
|
333
|
Telecommunication
and data processing expense
|
675
|
552
|
Directors
fees
|
243
|
208
|
Bank
franchise tax
|
324
|
310
|
Other
operating expenses
|
1,683
|
1,464
|
Total noninterest
expense
|
11,972
|
10,413
|
|
|
|
Income before income taxes
|
6,391
|
6,071
|
Income tax
expense
|
1,686
|
1,533
|
Net Income
|
4,705
|
4,538
|
Net
income (loss) attributable to noncontrolling interest
|
32
|
90
|
Net Income attributable to F & M Bank Corp.
|
$4,673
|
$4,448
|
Dividends
paid/accumulated on preferred stock
|
209
|
255
|
Net income available to common stockholders
|
$4,464
|
$4,193
|
|
|
|
Per Common Share Data
|
|
|
Net income –
basic
|
$1.36
|
$1.28
|
Net income –
diluted
|
1.29
|
$1.19
|
Cash dividends on common
stock
|
$.45
|
$.39
|
Weighted average common
shares outstanding – basic
|
3,272,318
|
3,285,867
|
Weighted average
common shares outstanding – diluted
|
3,635,999
|
3,730,267
|
See notes to unaudited consolidated financial
statements
5
F
& M BANK CORP.
Consolidated
Statements of Comprehensive Income
(dollars
in thousands)
(Unaudited)
|
Six Months
Ended
|
Three Months
Ended
|
||
|
June
30,
|
June
30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Net
Income:
|
|
|
|
|
Net
Income – F & M Bank Corp
|
$4,673
|
$4,448
|
$2,328
|
$2,358
|
Net
income (loss) attributable to noncontrolling interest
|
32
|
90
|
59
|
86
|
Total Net
Income:
|
4,705
|
4,538
|
2,387
|
2,444
|
|
|
|
|
|
Unrealized holding
gains (losses) on available-for-sale securities
|
(2)
|
37
|
(1)
|
8
|
Tax
Effect
|
1
|
( 12)
|
-
|
( 3)
|
Unrealized
holding gain (loss), net of tax
|
(1)
|
25
|
(1)
|
5
|
Total other
comprehensive income
|
(1)
|
25
|
(1)
|
5
|
|
|
|
|
|
Comprehensive
income
|
$4,704
|
$4,563
|
$2,386
|
$2,449
|
See notes to unaudited consolidated financial
statements
6
F
& M BANK CORP.
Condensed
Consolidated Statements of Changes in Stockholders’
Equity
(dollars
in thousands)
(Unaudited)
|
Six Months
Ended
|
|
|
June
30,
|
|
|
2017
|
2016
|
|
|
|
Balance, beginning of period
|
$86,682
|
$82,950
|
|
|
|
Comprehensive
income
|
|
|
Net income –
F & M Bank Corp
|
4,673
|
4,448
|
Net income (loss)
attributable to noncontrolling interest
|
32
|
90
|
Other comprehensive
income (loss)
|
(1)
|
25
|
Total comprehensive
income
|
4,704
|
4,563
|
|
|
|
Minority interest
capital distributions
|
(150)
|
(74)
|
Issuance of common
stock
|
105
|
81
|
Repurchase of
common stock
|
-
|
(32)
|
Repurchase of
preferred stock
|
(24)
|
-
|
Dividends
paid
|
(1,644)
|
(1,506)
|
Balance, end of period
|
$89,673
|
$85,982
|
See notes to unaudited consolidated financial
statements
7
F
& M BANK CORP.
Consolidated
Statements of Cash Flows
(dollars
in thousands)
(Unaudited)
|
Six Months Ended
June 30,
|
|
|
2017
|
2016
|
Cash flows from operating activities
|
|
|
Net
income
|
$4,673
|
$4,448
|
Reconcile net
income to net cash provided by (used in) operating
activities:
|
|
|
Depreciation
|
430
|
401
|
Amortization of
securities
|
2
|
78
|
Proceeds from loans
held for sale originated
|
38,767
|
38,596
|
Loans held for sale
originated
|
(37,445)
|
(42,630)
|
Gain on sale of
loans held for sale originated
|
(1,138)
|
(1,320)
|
Gain on prepayment
of long-term debt
|
(504)
|
-
|
Increase in
interest receivable
|
(110)
|
(142)
|
Increase in other
assets
|
(435)
|
(423)
|
Decrease in accrued
liabilities
|
(1,421)
|
(965)
|
Amortization of
limited partnership investments
|
386
|
365
|
Income from life
insurance investment
|
(224)
|
(237)
|
Loss on sale of
investments
|
42
|
-
|
Loss on sale and
valuation adjustments for other real estate owned
|
-
|
13
|
Net cash provided
by (used in) operating activities
|
3,023
|
(1,816)
|
|
|
|
Cash flows from investing activities
|
|
|
Purchase of
investments available for sale and other investments
|
(41,436)
|
(4,109)
|
Purchase of title
insurance company
|
(304)
|
-
|
Proceeds from
maturity of investments available for sale
|
41,316
|
4,081
|
Proceeds from the
sale of investments
|
55
|
-
|
Net increase in
loans held for investment
|
(12,132)
|
(23,250)
|
Net decrease
(increase) in loans held for sale participations
|
10,784
|
(34,051)
|
Proceeds from the
sale of other real estate owned
|
74
|
207
|
Net purchase of
property and equipment
|
(2,114)
|
(2,073)
|
Net cash used in
investing activities
|
(3,757)
|
(59,195)
|
|
|
|
Cash flows from financing activities
|
|
|
Net change in
deposits
|
(599)
|
10,041
|
Net change in
short-term debt
|
10,000
|
34,463
|
Dividends paid in
cash
|
(1,644)
|
(1,506)
|
Proceeds from
issuance of common stock
|
105
|
81
|
Proceeds from
issuance of long-term debt
|
-
|
20,000
|
Repurchase of
preferred stock
|
(24)
|
-
|
Repurchase of
common stock
|
-
|
(32)
|
Repayments of
long-term debt
|
(11,795)
|
(1,964)
|
Net cash (used in)
provided by financing activities
|
(3,957)
|
61,083
|
|
|
|
Net (decrease) increase in Cash and Cash Equivalents
|
(4,691)
|
72
|
Cash and cash equivalents, beginning of period
|
16,355
|
8,519
|
Cash and cash equivalents, end of period
|
$11,664
|
$8,591
|
Supplemental Cash Flow information:
|
|
|
Cash paid for:
|
|
|
Interest
|
$1,836
|
$1,675
|
Taxes
|
2,530
|
1,300
|
Supplemental non-cash disclosures:
|
|
|
Transfer from loans
to other real estate owned
|
6
|
592
|
Loans originated
for the sale of other real estate owned
|
-
|
-
|
Change in
unrealized gain (loss) on securities available for
sale
|
(2)
|
-
|
See notes to unaudited consolidated financial
statements
8
Note
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying
unaudited consolidated financial statements including the accounts
of Farmers & Merchants Bank, TEB Life Insurance Company,
Farmers & Merchants Financial Services, Inc., VBS Mortgage,
LLC, (net of noncontrolling interest) and VSTitle, LLC (net of
noncontrolling interest) and in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”) for the interim financial information and
with the instructions to Form 10-Q adopted by the Securities and
Exchange Commission (“SEC”). Accordingly,
these financial statements do not include all of the information
and footnotes required by U. S. GAAP for complete financial
statements. Operating results for the three and six
months ended June 30, 2017 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2017. These interim consolidated financial statements
should be red in conjunction with the audited consolidated
financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016 (the “2016 Form 10-K”).
The accompanying
unaudited consolidated financial statements include the accounts of
the Company, the Bank and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
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 primarily located in
Rockingham, Shenandoah, Page and Augusta Counties in
Virginia. Services are provided at thirteen branch
offices and a Dealer Finance Division. The Company
offers insurance, mortgage lending, title insurance and financial
services through its subsidiaries, TEB Life Insurance, Inc.,
Farmers & Merchants Financial Services, Inc (FMFS), VBS
Mortgage, LLC (VBS), and VSTitle, LLC (VST). The Company
purchased a majority interest VSTitle, a title company
headquartered in Harrisonburg, VA with offices in Harrisonburg,
Fishersville and Charlottesville, VA on January 1,
2017.
Basis of Presentation
The preparation of
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that effect 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, other than temporary impairment, the valuation of
deferred tax assets and liabilities, pension accounting and the
valuation of foreclosed real estate.
Reclassification
Certain
reclassifications have been made to prior period amounts to conform
to current period presentation. None of these
reclassifications are considered material and have no impact on net
income.
9
Note
1. Summary of Significant Accounting Policies,
continued
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 shareholders
by the weighted average number of common shares
outstanding. In calculating diluted EPS net income is
used as the numerator and 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 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:
(dollars
in thousands)
|
For the Six
months ended
|
For the Quarter
ended
|
For the Six
months ended
|
For the Quarter
ended
|
|
June 30,
2017
|
June 30,
2017
|
June 30,
2016
|
June 30,
2016
|
Earnings available
to common stockholders:
|
|
|
|
|
Net
income
|
$4,705
|
$2,387
|
$4,538
|
$2,444
|
Noncontrolling
interest income (loss)
|
32
|
59
|
90
|
86
|
Preferred stock
dividends
|
209
|
105
|
255
|
127
|
Net income
available to common stockholders
|
$4,464
|
$2,223
|
$4,193
|
$2,231
|
The following table
shows the effect of dilutive preferred stock conversion on the
Company's earnings per share for the periods
indicated:
|
Six months ended
June 30, 2017
|
Six months ended
June 30, 2016
|
||||
|
Income
|
Shares
|
Per Share
Amounts
|
Income
|
Shares
|
Per Share
Amounts
|
Basic
EPS
|
$4,464,479
|
3,272,318
|
$1.36
|
$4,192,677
|
3,285,867
|
$1.28
|
Effect of Dilutive
Securities:
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
208,686
|
363,681
|
(0.07)
|
255,000
|
444,400
|
(0.09)
|
Diluted
EPS
|
$4,673,165
|
3,635,999
|
$1.29
|
$4,447,677
|
3,730,267
|
$1.19
|
|
Three months
ended June 30, 2017
|
Three months
ended June 30, 2016
|
||||
|
Income
|
Shares
|
Per Share
Amounts
|
Income
|
Shares
|
Per Share
Amounts
|
Basic
EPS
|
$2,223,885
|
3,273,352
|
$.68
|
$2,230,626
|
3,286,459
|
$.68
|
Effect of Dilutive
Securities:
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
104,343
|
363,678
|
(0.04)
|
127,500
|
444,400
|
(0.04)
|
Diluted
EPS
|
$2,328,228
|
3,637,030
|
$.64
|
$2,358,126
|
3,730,859
|
$.63
|
10
Note
2. Investment Securities
Investment
securities available for sale are carried in the consolidated
balance sheets at their approximate fair
value. Investment securities held to maturity are
carried in the consolidated balance sheets at their amortized cost
at June 30, 2017 and December 31, 2016 are as follows:
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Cost
|
Gains
|
Losses
|
Value
|
June 30, 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
|
June 30, 2017
|
|
|
|
|
U. S.
Treasuries
|
$24,001
|
$-
|
$1
|
$24,000
|
U. S. Government
sponsored enterprises
|
-
|
-
|
-
|
-
|
Mortgage-backed
obligations of federal agencies
|
566
|
7
|
-
|
573
|
Equity
securities
|
135
|
-
|
-
|
135
|
Total Securities
Available for Sale
|
$24,702
|
$7
|
$1
|
$24,708
|
|
|
|
|
|
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
|
11
Note
2. Investment Securities, continued
The amortized cost
and fair value of securities at June 30, 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
|
Fair
|
Amortized
|
Fair
|
(dollars
in thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Due in one year or
less
|
$-
|
$-
|
$24,001
|
$24,000
|
Due after one year
through five years
|
125
|
125
|
-
|
-
|
Due after five
years
|
-
|
-
|
566
|
573
|
Due after ten
years
|
-
|
-
|
135
|
135
|
Total
|
$125
|
$125
|
$24,702
|
$24,708
|
There were no gains
or losses on sales of available for sale securities in the three
month or six month periods ended June 30, 2017 or
2016. There were also no securities with other than
temporary impairment.
In the three months ended June 30,
2017, the treasury securities were in an unrealized loss position.
At March, 2017 and December 31, 2016, there were no securities in
an unrealized loss position.
Other investments
consist of investments in nineteen low-income housing and historic
equity partnerships (carrying basis of $7,808,011), stock in the
Federal Home Loan Bank (carrying basis $4,995,800) and various
other investments (carrying basis $1,469,572). The
interests in low-income housing and historic equity partnerships
have limited transferability and the interests in the other stocks
are restricted as to sales. The fair values of these
securities are estimated to approximate their carrying value as of
June 30, 2017. At June 30, 2017, the Company was
committed to invest an additional $4,429,838 in nine 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
consolidated balance sheet. During the first quarter of
2017, both Farmers & Merchants Financial Services and VBS
Mortgage ended their relationship with Bankers Title Virginia
resulting in a consolidated loss of $41,914.
Note
3. Loans
Loans held for
investment outstanding at June 30, 2017 and December 31, 2016 are
summarized as follows:
(dollars
in thousands)
|
2017
|
2016
|
Construction/Land
Development
|
$73,184
|
$76,172
|
Farmland
|
15,024
|
12,901
|
Real
Estate
|
174,179
|
172,758
|
Multi-Family
|
8,607
|
7,605
|
Commercial Real
Estate
|
149,635
|
150,061
|
Home Equity –
closed end
|
11,392
|
11,453
|
Home Equity –
open end
|
54,345
|
54,420
|
Commercial &
Industrial – Non-Real Estate
|
35,708
|
31,306
|
Consumer
|
7,387
|
6,643
|
Dealer
Finance
|
71,221
|
65,495
|
Credit
Cards
|
2,753
|
2,822
|
Total
|
$603,435
|
$591,636
|
The Company has
pledged loans held for investment as collateral for borrowings with
the Federal Home Loan Bank of Atlanta totaling $204,135,000 and
$199,401,000 as of June 30, 2017 and December 31, 2016,
respectively. The Company maintains a blanket lien on
its entire residential real estate portfolio and certain commercial
and home equity loans.
12
Note
3. Loans, continued
The following is a
summary of information pertaining to impaired loans (dollars in
thousand):
|
June 30,
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
|
$5,331
|
$5,688
|
$-
|
$3,296
|
$3,652
|
$-
|
Farmland
|
1,858
|
1,858
|
-
|
-
|
-
|
-
|
Real
Estate
|
747
|
747
|
-
|
768
|
768
|
-
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
-
|
Commercial
Real Estate
|
100
|
100
|
-
|
1,958
|
1,958
|
-
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
-
|
-
|
Home
Equity – open end
|
-
|
346
|
-
|
-
|
347
|
-
|
Commercial
& Industrial – Non-Real Estate
|
165
|
165
|
-
|
170
|
170
|
-
|
Consumer
|
11
|
11
|
-
|
13
|
13
|
-
|
Credit
cards
|
-
|
-
|
-
|
-
|
-
|
-
|
Dealer
Finance
|
21
|
21
|
-
|
-
|
-
|
-
|
|
8,233
|
8,936
|
|
6,205
|
6,908
|
|
Impaired loans with
a valuation allowance
|
|
|
|
|
|
|
Construction/Land
Development
|
5,662
|
5,662
|
1,981
|
6,592
|
6,592
|
1,853
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
-
|
Real
Estate
|
1,196
|
1,196
|
218
|
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
|
69
|
69
|
18
|
87
|
87
|
20
|
|
6,927
|
6,927
|
2,217
|
8,837
|
8,837
|
2,154
|
Total impaired
loans
|
$15,160
|
$15,863
|
$2,217
|
$15,042
|
$15,745
|
$2,154
|
The Recorded
Investment is defined as the original principal balance less
principal payments, charge-offs and nonaccrual payments applied to
principal.
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 June 30, 2017 and December 31, 2016 were
$51,766,953 and $62,734,803, respectively.
13
Note
3. Loans Held for Investment, continued
The following is a
summary of the average investment and interest income recognized
for impaired loans (dollars in thousands):
|
Three Months
Ended June 30,
|
Six Months Ended
June 30,
|
||||||
|
2017
|
2016
|
2017
|
2016
|
||||
|
Average
Recorded
|
Interest
Income
|
Average
Recorded
|
Interest
Income
|
Average
Recorded
|
Interest
Income
|
Average
Recorded
|
Interest
Income
|
|
Investment
|
Recognized
|
Investment
|
Recognized
|
Investment
|
Recognized
|
Investment
|
Recognized
|
Impaired loans
without a valuation allowance:
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$4,734
|
$47
|
$1,164
|
$(7)
|
$4,374
|
$50
|
$1,295
|
$17
|
Farmland
|
1,858
|
-
|
-
|
-
|
1,239
|
-
|
-
|
-
|
Real
Estate
|
750
|
14
|
784
|
9
|
756
|
17
|
939
|
20
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Commercial
Real Estate
|
100
|
2
|
203
|
-
|
719
|
3
|
153
|
2
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Home
Equity – open end
|
347
|
6
|
1,582
|
-
|
347
|
-
|
1,370
|
35
|
Commercial
& Industrial – Non-Real Estate
|
166
|
-
|
177
|
3
|
167
|
6
|
178
|
6
|
Consumer
and credit cards
|
11
|
-
|
9
|
-
|
12
|
-
|
9
|
-
|
Dealer
Finance
|
20
|
1
|
16
|
1
|
13
|
1
|
15
|
2
|
|
7,986
|
70
|
3,935
|
6
|
7,627
|
77
|
3,959
|
82
|
Impaired loans with
a valuation allowance:
|
|
|
|
|
|
|
|
|
Construction/Land
Development
|
6,512
|
97
|
10,337
|
47
|
$6,539
|
$140
|
$10,778
|
$100
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Real
Estate
|
1,199
|
31
|
1,221
|
10
|
1,201
|
31
|
771
|
26
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Commercial
Real Estate
|
-
|
-
|
965
|
14
|
317
|
-
|
926
|
28
|
Home
Equity – closed end
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Home
Equity – open end
|
-
|
-
|
1,407
|
9
|
-
|
-
|
1,411
|
19
|
Commercial
& Industrial – Non-Real Estate
|
-
|
-
|
27
|
1
|
-
|
-
|
13
|
1
|
Consumer
and credit card
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Dealer
Finance
|
65
|
-
|
82
|
1
|
72
|
1
|
77
|
3
|
|
7,776
|
128
|
14,039
|
82
|
8,129
|
172
|
13,976
|
177
|
Total Impaired
Loans
|
$15,762
|
$198
|
$17,974
|
$88
|
$15,756
|
$249
|
$17,935
|
$259
|
14
Note
3. Loans, continued
The following table
presents the aging of the recorded investment of past due loans
(dollars in thousands) as of June 30, 2017 and December 31,
2016:
|
30-59 Days Past
due
|
60-89 Days Past
Due
|
Greater than 90
Days (excluding non-accrual)
|
Non-Accrual
Loans
|
Total Past
Due
|
Current
|
Total Loan
Receivable
|
June
30, 2017
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$632
|
$88
|
$-
|
$3,162
|
$3,882
|
$69,302
|
$73,184
|
Farmland
|
1,912
|
-
|
-
|
-
|
1,912
|
13,112
|
15,024
|
Real
Estate
|
2,159
|
621
|
159
|
1,386
|
4,325
|
169,854
|
174,179
|
Multi-Family
|
-
|
-
|
-
|
-
|
-
|
8,607
|
8,607
|
Commercial Real
Estate
|
2,609
|
135
|
-
|
350
|
3,094
|
146,541
|
149,635
|
Home Equity –
closed end
|
-
|
-
|
-
|
-
|
-
|
11,392
|
11,392
|
Home Equity –
open end
|
105
|
25
|
-
|
382
|
512
|
53,833
|
54,345
|
Commercial &
Industrial – Non- Real Estate
|
31
|
18
|
-
|
-
|
49
|
35,659
|
35,708
|
Consumer
|
50
|
12
|
-
|
-
|
62
|
7,325
|
7,387
|
Dealer
Finance
|
485
|
187
|
|
237
|
909
|
70,312
|
71,221
|
Credit
Cards
|
46
|
5
|
1
|
-
|
52
|
2,701
|
2,753
|
Total
|
$8,029
|
$1,091
|
$160
|
$5,517
|
$14,797
|
$588,638
|
$603,435
|
|
30-59 Days Past
due
|
60-89 Days Past
Due
|
Greater than 90
Days (excluding non-accrual)
|
Non-Accrual
Loans
|
Total Past
Due
|
Current
|
Total Loan
Receivable
|
December
31, 2016
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$73
|
$101
|
$-
|
$2,805
|
$2,979
|
$73,193
|
$76,172
|
Farmland
|
-
|
-
|
-
|
-
|
-
|
12,901
|
12,901
|
Real
Estate
|
2,114
|
340
|
81
|
1,399
|
3,934
|
168,824
|
172,758
|
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
|
Home Equity –
open end
|
309
|
-
|
-
|
279
|
588
|
53,832
|
54,420
|
Commercial &
Industrial – Non- Real Estate
|
313
|
5
|
-
|
70
|
388
|
30,918
|
31,306
|
Consumer
|
35
|
4
|
-
|
-
|
39
|
6,604
|
6,643
|
Dealer
Finance
|
790
|
187
|
26
|
178
|
1,181
|
64,314
|
65,495
|
Credit
Cards
|
18
|
4
|
-
|
-
|
22
|
2,800
|
2,822
|
Total
|
$3,892
|
$641
|
$107
|
$4,763
|
$9,403
|
$582,233
|
$591,636
|
At June 30, 2017
and December 31, 2016, other real estate owned included $571,000
and $565,000 of foreclosed residential real estate. The
Company has $256,000 of consumer mortgages for which foreclosure is
in process at June 30, 2017 and $40,000 at December 31,
2016.
Nonaccrual loans at
June 30, 2017 and June 30, 2016, would have earned approximately
$60,000 and $28,000, respectively, in interest income had they been
accruing loans.
15
Note
4. Allowance for Loan Losses
A summary of
changes in the allowance for loan losses (dollars in thousands) for
June 30, 2017 and December 31, 2016 is as follows:
June 30, 2017
|
Beginning
Balance
|
Charge-offs
|
Recoveries
|
Provision
|
Ending
Balance
|
Individually
Evaluated for Impairment
|
Collectively
Evaluated for Impairment
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
Construction/Land
Development
|
$3,381
|
$-
|
$-
|
$(134)
|
$3,247
|
$1,981
|
$1,266
|
Farmland
|
34
|
-
|
-
|
(7)
|
27
|
-
|
27
|
Real
Estate
|
843
|
-
|
2
|
(73)
|
772
|
218
|
554
|
Multi-Family
|
23
|
-
|
-
|
(7)
|
16
|
-
|
16
|
Commercial Real
Estate
|
705
|
-
|
8
|
(72)
|
641
|
-
|
641
|
Home Equity –
closed end
|
75
|
6
|
-
|
4
|
73
|
-
|
73
|
Home Equity –
open end
|
470
|
1
|
-
|
(92)
|
377
|
-
|
377
|
Commercial
& Industrial – Non-Real Estate
|
586
|
31
|
54
|
(201)
|
408
|
-
|
408
|
Consumer
|
78
|
23
|
5
|
46
|
106
|
-
|
106
|
Dealer
Finance
|
1,289
|
941
|
618
|
525
|
1,491
|
18
|
1,473
|
Credit
Cards
|
59
|
28
|
16
|
11
|
58
|
-
|
58
|
Total
|
$7,543
|
$1,030
|
$703
|
$-
|
$7,216
|
$2,217
|
$4,999
|
December 31, 2016
|
Beginning
Balance
|
Charge-offs
|
Recoveries
|
Provision
|
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
|
16
Note
4. Allowance for Loan Losses, continued
The following table
presents the recorded investment in loans (dollars in thousands)
based on impairment method as of June 30, 2017 and December 31,
2016:
June
30, 2017
|
Loan
Receivable
|
Individually
Evaluated for Impairment
|
Collectively
Evaluated for Impairment
|
Construction/Land
Development
|
$73,184
|
$10,993
|
$62,191
|
Farmland
|
15,024
|
1,858
|
13,166
|
Real
Estate
|
174,179
|
1,943
|
172,236
|
Multi-Family
|
8,607
|
-
|
8,607
|
Commercial Real
Estate
|
149,635
|
100
|
149,535
|
Home Equity –
closed end
|
11,392
|
-
|
11,392
|
Home Equity
–open end
|
54,345
|
-
|
54,345
|
Commercial &
Industrial – Non-Real Estate
|
35,708
|
165
|
35,543
|
Consumer
|
7,387
|
11
|
7,376
|
Dealer
Finance
|
71,221
|
90
|
71,131
|
Credit
Cards
|
2,753
|
-
|
2,753
|
|
$603,435
|
$15,160
|
$588,275
|
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
|
Total
|
|
|
|
17
Note
4. Allowance for Loan Losses, continued
The following table
shows the Company’s loan portfolio broken down by internal
loan grade (dollars in thousands) as of June 30, 2107 and December
31, 2016:
June
30, 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
|
$-
|
$602
|
$13,683
|
$34,210
|
$9,709
|
$5,588
|
$9,392
|
$-
|
$73,184
|
Farmland
|
64
|
333
|
3,146
|
4,336
|
3,440
|
1,847
|
1,858
|
-
|
15,024
|
Real
Estate
|
-
|
1,104
|
53,276
|
91,305
|
20,840
|
5,162
|
2,492
|
-
|
174,179
|
Multi-Family
|
-
|
270
|
4,935
|
3,221
|
181
|
-
|
-
|
-
|
8,607
|
Commercial Real
Estate
|
-
|
2,771
|
38,935
|
95,832
|
10,241
|
1,265
|
591
|
-
|
149,635
|
Home Equity –
closed end
|
-
|
283
|
3,883
|
4,335
|
1,457
|
1,428
|
6
|
-
|
11,392
|
Home Equity –
open end
|
84
|
1,962
|
16,294
|
31,336
|
4,046
|
173
|
450
|
-
|
54,345
|
Commercial &
Industrial (Non-Real Estate)
|
293
|
840
|
13,218
|
19,125
|
1,485
|
735
|
12
|
-
|
35,708
|
Consumer (excluding
dealer)
|
55
|
315
|
2,497
|
795
|
1,235
|
2,031
|
459
|
-
|
7,387
|
Total
|
$496
|
$8,480
|
$149,867
|
$284,495
|
$52,634
|
$18,229
|
$15,260
|
$-
|
$529,461
|
|
Credit
Cards
|
Dealer
Finance
|
Performing
|
$2,752
|
$70,984
|
Non
performing
|
1
|
237
|
Total
|
$2,753
|
$71,221
|
18
Note 4. 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 be 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.
19
Note
4. Allowance for Loan Losses, continued
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
dues, paid or disputed
collections and judgments, but does not include borrowers that are
currently past due on obligations or with unpaid, undisputed
judgments.
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: The loan has 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.
20
Note
5. Employee Benefit Plan
The Bank has a
qualified noncontributory defined benefit pension plan which covers
substantially all of its full-time employees hired before April 1,
2012. The benefits are primarily based on years of
service and earnings. The Company uses December
31st as
the measurement date for the defined benefit pension
plan. The Bank does not expect to contribute to the
pension plan in 2017.
The following is a
summary of net periodic pension costs for the three and six month
periods ended June 30, 2017 and 2016:
|
Six Months
Ended
|
Three Months
Ended
|
||
|
June 30,
2017
|
June 30,
2016
|
June 30,
2017
|
June 30,
2016
|
|
|
|
|
|
Service
cost
|
$347,922
|
$315,936
|
$173,961
|
$157,968
|
Interest
cost
|
243,604
|
226,448
|
121,802
|
113,224
|
Expected return on
plan assets
|
(425,548)
|
(427,208)
|
(212,774)
|
(213,604)
|
Amortization of
prior service cost
|
(7,618)
|
(7,618)
|
(3,809)
|
(3,809)
|
Amortization of net
(gain) or loss
|
142,048
|
111,572
|
71,024
|
55,786
|
Net periodic pension
cost
|
$300,408
|
$219,130
|
$150,204
|
$109,565
|
Note
6. Fair Value
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.
|
21
Note
6. Fair Value, continued
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. 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.
The following
tables present the balances of financial assets measured at fair
value on a recurring basis as of June 30, 2017 and December 31,
2016 (dollars in thousands):
June 30,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
U. S.
Treasuries
|
$24,000
|
$24,000
|
$-
|
$-
|
Mortgage-backed
obligations of federal agencies
|
573
|
-
|
573
|
-
|
Equity
securities
|
135
|
-
|
135
|
-
|
Total securities
available for sale
|
$24,708
|
$24,000
|
$708
|
-
|
|
|
|
|
|
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 June 30, 2017 or December 31, 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 June 30, 2017 and December 31, 2016.
22
Note
6. Fair Value, continued
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.
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. 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 June 30, 2017
and December 31, 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):
June 30,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
Construction/Land
Development
|
$3,681
|
-
|
-
|
$3,681
|
Real
Estate
|
978
|
-
|
-
|
978
|
Dealer
Finance
|
51
|
-
|
-
|
51
|
Impaired
loans
|
$4,710
|
-
|
-
|
$4,710
|
|
|
|
|
|
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
|
23
Note
6. Fair Value, continued
The following table
presents information about Level 3 Fair Value Measurements for June
30, 2017:
|
Fair Value
at
June 30,
2017
|
Valuation
Technique
|
|
Significant
Unobservable Inputs
|
|
Range
|
(dollars in
thousands)
|
||||||
Impaired
Loans
|
$4,710
|
Discounted
appraised value
|
|
Discount for
selling costs and marketability
|
|
2%-50% (Average
4.7%)
|
The following table
presents information about Level 3 Fair Value Measurements for
December 31, 2016:
|
Fair Value
at
December 31,
2016
|
Valuation
Technique
|
|
Significant
Unobservable Inputs
|
|
Range
|
(dollars in
thousands)
|
||||||
Impaired
Loans
|
$6,683
|
Discounted
appraised value
|
|
Discount for
selling costs and marketability
|
|
2%-50% (Average
4.7%)
|
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 two
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 as of June 30, 2017
and December 31, 2016 (dollars in thousands).
June 30,
2017
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
Other real estate
owned
|
$2,008
|
-
|
-
|
$2,008
|
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 June 30, 2017:
|
Fair Value
at
June 30,
2017
|
Valuation
Technique
|
|
Significant
Unobservable Inputs
|
|
Range
|
(dollars in thousands)
|
|
|
|
|
|
|
Other real estate
owned
|
$2,008
|
Discounted
appraised value
|
|
Discount for
selling costs
|
|
5%-15% (Average
8%)
|
The
following table presents information about Level 3 Fair Value
Measurements for December 31, 2016:
|
Fair Value
at
December 31,
2016
|
Valuation
Technique
|
|
Significant
Unobservable Inputs
|
|
Range
|
(dollars in thousands)
|
|
|
|
|
|
|
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 Cash Equivalents
The carrying amounts
approximate fair value.
24
Note
6. Fair Value, continued
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.
Loans Held for Investment
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 certain 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.
25
Note
7. Disclosures About Fair Value of Financial
Instruments
The estimated fair
values, and related carrying amounts (dollars in thousands), of the
Company’s financial instruments are as
follows:
|
|
Fair Value
Measurements at June 30, 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
June 30, 2017
|
Assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
$11,664
|
$11,664
|
$-
|
$-
|
$11,664
|
Securities
|
24,833
|
-
|
24,833
|
-
|
24,833
|
Loans held for
sale
|
51,767
|
-
|
51,767
|
-
|
51,767
|
Loans held for
investment, net
|
596,219
|
-
|
-
|
622,449
|
622,449
|
Interest
receivable
|
1,895
|
-
|
1,895
|
-
|
1,895
|
Bank owned life
insurance
|
13,731
|
-
|
13,731
|
-
|
13,731
|
Total
|
$700,109
|
$11,664
|
$92,226
|
$622,449
|
$726,339
|
Liabilities:
|
|
|
|
|
|
Deposits
|
$536,486
|
$-
|
$377,661
|
$159,669
|
$537,330
|
Short-term
debt
|
50,000
|
-
|
50,000
|
-
|
50,000
|
Long-term
debt
|
51,938
|
-
|
-
|
52,048
|
52,048
|
Interest
payable
|
223
|
-
|
223
|
-
|
223
|
Total
|
$638,647
|
$-
|
$427,884
|
$211,717
|
$639,601
|
|
|
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
|
-
|
24,908
|
-
|
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
|
$16,355
|
$102,941
|
$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
|
26
Note
8. 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. Defaults resulting in charge-offs affect the historical
loss experience ratios which are a component of the allowance for
loan loss methodology. Additionally, specific reserves may be
established on restructured loans which are evaluated individually
for impairment.
During the six
months ended June 30, 2017, there was one loan modification that
was considered to be troubled debt restructuring. This loan was
modified during the three months ended June 30, 2017, there were no
loan modifications that would be considered a troubled debt
restructuring during the first quarter of 2017. Modifications may
have 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.
|
June 30,
2017
|
||
|
|
Pre-Modification
|
Post-Modification
|
(dollars in
thousands)
|
|
Outstanding
|
Outstanding
|
Troubled Debt
Restructurings
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
|
|
|
|
Consumer
|
1
|
$20
|
$20
|
Total
|
1
|
$20
|
$20
|
At June 30,
2017, there was one loan restructured in the previous 12 months in
default or on nonaccrual status. A restructured loan is
considered in default when it becomes 90 days past
due.
|
June 30,
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
|
Total
|
1
|
$67
|
$67
|
During the six
months ended June 30, 2016, there were six loan modifications that
were considered to be troubled debt restructurings.
|
Six Months ended
June 30, 2016
|
||
|
|
Pre-Modification
|
Post-Modification
|
(dollars in
thousands)
|
|
Outstanding
|
Outstanding
|
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
Troubled Debt
Restructurings
|
|
|
|
Commercial
|
1
|
$27
|
$27
|
Real
Estate
|
2
|
143
|
143
|
Consumer
|
3
|
36
|
36
|
Total
|
6
|
$206
|
$206
|
During the quarter
ended June 30, 2016, there were five loans modifications that were
considered to be troubled debt restructurings.
|
Three Months
ended June 30, 2016
|
||
|
|
Pre-Modification
|
Post-Modification
|
(dollars in
thousands)
|
|
Outstanding
|
Outstanding
|
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
Troubled Debt
Restructurings
|
|
|
|
Commercial
|
1
|
$27
|
$27
|
Real
Estate
|
2
|
143
|
143
|
Consumer
|
2
|
19
|
19
|
Total
|
5
|
$189
|
$189
|
27
Note
8. Troubled Debt Restructuring, continued
At June 30, 2016,
six loans that had been restructured in the previous 12 months,
were in default or were on nonaccrual status. A
restructured loan is considered in default when it becomes 90 days
past due.
|
June 30,
2016
|
||
|
|
Pre-Modification
|
Post-Modification
|
|
|
Outstanding
|
Outstanding
|
|
Number of
Contracts
|
Recorded
Investment
|
Recorded
Investment
|
Troubled Debt
Restructurings
|
|
|
|
Real
Estate
|
5
|
$1,528
|
$1,528
|
Consumer
|
1
|
16
|
16
|
Total
|
6
|
$1,544
|
$1,544
|
Note
9. Accumulated
Other Comprehensive Loss
The balances in
accumulated other comprehensive loss are shown in the following
tables for June 30, 2017 and 2016:
(dollars
in thousands)
|
Unrealized
Securities Gains (Losses)
|
Adjustments
Related to Pension Plan
|
Accumulated
Other Comprehensive Loss
|
Balance at December
31, 2016
|
$6
|
$(3,171)
|
$(3,165)
|
Change
in unrealized securities gains (losses), net of tax
|
(1)
|
-
|
(1)
|
Change
in unfunded pension liability, net of tax
|
-
|
-
|
-
|
Balance at June 30,
2017
|
$5
|
$(3,171)
|
$(3,166)
|
(dollars
in thousands)
|
Unrealized
Securities Gains (Losses)
|
Adjustments
Related to Pension Plan
|
Accumulated
Other Comprehensive Loss
|
Balance at December
31, 2015
|
$3
|
$(2,683)
|
$(2,680)
|
Change
in unrealized securities gains (losses), net of tax
|
25
|
-
|
25
|
Change
in unfunded pension liability, net of tax
|
-
|
-
|
-
|
Balance at June 30,
2016
|
$28
|
$(2,683)
|
$(2,655)
|
There were no
reclassifications adjustments reported on the consolidated
statements of income during the three or six months periods ended
June 30, 2017 or 2016.
Note
10. Business Segments
The Company
utilizes its subsidiaries to provide multiple business segments
including retail banking, mortgage banking, title insurance
services, investment services and credit life and accident and
health insurance products related to lending. Revenues
from retail banking operations consist primarily of interest earned
on loans and investment securities and service charges on deposit
accounts. Mortgage Banking operating revenues consist principally
of gains on sales of loans in the secondary market, loan
origination fee income and interest earned on mortgage loans held
for sale. Revenues from title insurance services, investment
services and insurance products consist of commissions on products
provided. The following tables represent revenues and
expenses by segment for the three and six months ended June 30,
2017 and June 30, 2016.
28
Note
10. Business Segments, continued
|
Six Months Ended
June 30, 2017
|
||||||
|
F&M
Bank
|
VBS
Mortgage
|
TEB
Life/FMFS
|
VS
Title
|
Parent
Only
|
Eliminations
|
F&M Bank
Corp. Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Interest
Income
|
$16,170,387
|
$65,347
|
$74,993
|
$-
|
$13
|
$(44,763)
|
$16,265,977
|
Service charges on
deposits
|
650,718
|
-
|
-
|
-
|
-
|
-
|
650,718
|
Investment services
and insurance income
|
585
|
-
|
360,416
|
-
|
-
|
-
|
361,001
|
Mortgage banking
income, net
|
-
|
1,112, 521
|
-
|
-
|
-
|
-
|
1,112,521
|
Title insurance
income
|
-
|
-
|
-
|
553,897
|
-
|
-
|
553,897
|
Income from bank
owned life insurance
|
223,711
|
-
|
-
|
-
|
-
|
-
|
223,771
|
Low income housing
partnership losses
|
(386,142)
|
-
|
-
|
-
|
-
|
-
|
(386,142)
|
ATM and check card
fees
|
681,448
|
-
|
-
|
-
|
-
|
-
|
681,448
|
Gain on prepayment
of long-term debt
|
503,830
|
-
|
-
|
-
|
-
|
-
|
503,830
|
Loss on
investments
|
-
|
(39,474)
|
(2,440)
|
-
|
-
|
-
|
(41,914)
|
Other operating
income
|
268,370
|
-
|
-
|
-
|
-
|
-
|
268,370
|
Total
income
|
18,112,967
|
1,138,394
|
432,969
|
553,897
|
13
|
(44,763)
|
20,193,477
|
Expenses:
|
|
|
|
|
|
|
|
Interest
Expense
|
1,834,272
|
41,268
|
-
|
-
|
-
|
(44,763)
|
1,830,777
|
Provision for loan
losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Salary
expense
|
4,453,744
|
449,5 73
|
234,209
|
224,572
|
-
|
-
|
5,362,098
|
Employee benefit
expense
|
1,523,051
|
166,785
|
-
|
114,808
|
-
|
-
|
1,804,644
|
Occupancy
expense
|
403,120
|
66,596
|
-
|
33,505
|
-
|
-
|
503,221
|
Equipment
expense
|
359,175
|
18,903
|
-
|
15,039
|
-
|
-
|
393,117
|
FDIC insurance
assessment
|
180,000
|
-
|
-
|
-
|
-
|
-
|
180,000
|
Other real estate
owned, net
|
25,608
|
-
|
-
|
-
|
-
|
-
|
25,608
|
Marketing
expense
|
216,205
|
33,850
|
4,315
|
2,536
|
-
|
-
|
256,906
|
Legal and
professional fees
|
170,299
|
4,725
|
-
|
-
|
-
|
-
|
175,024
|
ATM and check card
fees
|
344,257
|
1,923
|
-
|
-
|
-
|
-
|
346,180
|
Telecom and data
processing expense
|
624,886
|
50,513
|
-
|
-
|
-
|
-
|
675,399
|
Directors
fees
|
210,000
|
33,334
|
-
|
-
|
-
|
-
|
243,334
|
Bank franchise
Tax
|
324,255
|
-
|
-
|
-
|
-
|
-
|
324,255
|
Other operating
expenses
|
1,360,275
|
260,440
|
12,844
|
44,099
|
3,825
|
-
|
1,681,483
|
Total
expense
|
12,029,147
|
1,127,910
|
251,368
|
434,559
|
3,825
|
(44,763)
|
13,802,046
|
Income tax
expense
|
1,669,606
|
-
|
52,842
|
-
|
(35,968)
|
-
|
1,686,480
|
Net income
(loss)
|
$4,414,214
|
$10,484
|
$128,759
|
$119,338
|
$32,156
|
$-
|
$4,704,951
|
Net income (loss)
attributable to noncontrolling interest
|
-
|
3,145
|
-
|
28,641
|
-
|
-
|
31,786
|
Net Income
attributable to F & M Bank Corp.
|
$4,414,214
|
$7,339
|
$128,759
|
$90,697
|
$32,156
|
$-
|
$4,673,165
|
Total
Assets
|
$746,193,130
|
$6,027,200
|
$6,630,313
|
$274,400
|
$89,908,521
|
$(104,770,806)
|
$744,262,758
|
Goodwill
|
$2,669,517
|
$-
|
$-
|
$-
|
$304,000
|
$-
|
$2,973,517
|
29
Note
10. Business
Segments, continued
|
Three months
ended June 30, 2017
|
||||||
|
F&M
Bank
|
VBS
Mortgage
|
TEB
Life/FMFS
|
VS
Title
|
Parent
Only
|
Eliminations
|
F&M Bank
Corp. Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Interest
Income
|
$8,209,919
|
$30,051
|
$37,719
|
$-
|
$-
|
$(22,052)
|
$8,255,637
|
Service charges on
deposits
|
335,382
|
-
|
-
|
-
|
-
|
-
|
335,382
|
Investment services
and insurance income
|
489
|
-
|
186,625
|
-
|
-
|
-
|
187,114
|
Mortgage banking
income, net
|
-
|
612,594
|
-
|
-
|
-
|
-
|
612,594
|
Title insurance
income
|
-
|
-
|
-
|
355,351
|
-
|
-
|
355,351
|
Income from bank
owned life insurance
|
111,455
|
-
|
-
|
-
|
-
|
-
|
111,455
|
Low income housing
partnership losses
|
(200,813)
|
-
|
-
|
-
|
-
|
-
|
(200,813)
|
ATM and check card
fees
|
351,505
|
-
|
-
|
-
|
-
|
-
|
351,505
|
Gain on prepayment
of long-term debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Loss on
investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Other operating
income
|
129,815
|
-
|
-
|
-
|
-
|
-
|
129,815
|
Total
income
|
8,937,752
|
642,645
|
224,344
|
355,351
|
-
|
(22,052)
|
10,138,040
|
Expenses:
|
|
|
|
|
|
|
|
Interest
Expense
|
926,890
|
20,123
|
-
|
-
|
-
|
(22,052)
|
924,961
|
Provision for loan
losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Salary
expense
|
2,260,954
|
129,586
|
118,650
|
118,846
|
-
|
-
|
2,628,036
|
Employee benefit
expense
|
707,438
|
81,160
|
-
|
63,226
|
-
|
-
|
851,824
|
Occupancy
expense
|
202,205
|
36,398
|
-
|
15,645
|
-
|
-
|
254,248
|
Equipment
expense
|
189,060
|
9,587
|
-
|
8,353
|
-
|
-
|
207,000
|
FDIC insurance
assessment
|
90,000
|
-
|
-
|
-
|
-
|
-
|
90,000
|
Other real estate
owned, net
|
11,843
|
-
|
-
|
-
|
-
|
-
|
11,843
|
Marketing
expense
|
99,963
|
17,339
|
3,910
|
791
|
-
|
-
|
122,003
|
Legal and
professional fees
|
76,663
|
2,475
|
-
|
-
|
-
|
-
|
79,138
|
ATM and check card
fees
|
176,934
|
990
|
-
|
-
|
-
|
-
|
177,924
|
Telecom and data
processing expense
|
325,679
|
26,345
|
-
|
-
|
-
|
-
|
352,024
|
Directors
fees
|
105,000
|
11,334
|
-
|
-
|
-
|
-
|
116,334
|
Bank franchise
Tax
|
164,249
|
-
|
-
|
-
|
-
|
-
|
164,249
|
Other operating
expenses
|
717,539
|
215,934
|
9,453
|
18,064
|
1,125
|
-
|
962,115
|
Total
expense
|
6,054,417
|
551,271
|
132,013
|
224,925
|
1,125
|
(22,052)
|
6,941,699
|
Income tax
expense
|
800,944
|
-
|
26,172
|
-
|
(17,717)
|
-
|
809,399
|
Net income
(loss)
|
$2,082,391
|
$91,374
|
$66,159
|
$130,426
|
$16,592
|
$-
|
$2,386,942
|
Net income (loss)
attributable to noncontrolling interest
|
-
|
27,412
|
-
|
31,302
|
-
|
-
|
58,714
|
Net Income
attributable to F & M Bank Corp.
|
$2,082,391
|
$63,982
|
$66,159
|
$99,124
|
$16,592
|
$-
|
$2,328,228
|
30
Note
10. Business
Segments, continued
|
Six Months Ended
June 30, 2016
|
||||||
|
F&M
Bank
|
VBS
Mortgage
|
TEB
Life/FMFS
|
VS
Title
|
Parent
Only
|
Eliminations
|
F&M Bank
Corp. Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Interest
Income
|
$15,492,768
|
$13,213
|
$75,030
|
$-
|
$-
|
$(3,037)
|
$15,577,974
|
Service charges on
deposits
|
506,028
|
-
|
-
|
-
|
-
|
-
|
506,028
|
Investment services
and insurance income
|
508
|
-
|
64,830
|
-
|
-
|
-
|
65,338
|
Mortgage banking
income, net
|
-
|
1,196,444
|
-
|
-
|
-
|
-
|
1,196,444
|
Title insurance
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Income from bank
owned life insurance
|
236,652
|
-
|
-
|
-
|
-
|
-
|
236,652
|
Low income housing
partnership losses
|
(365,387)
|
-
|
-
|
-
|
-
|
-
|
(365,387)
|
ATM and check card
fees
|
692,194
|
-
|
-
|
-
|
-
|
-
|
692,194
|
Gain on prepayment
of long-term debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Loss on
investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Other operating
income
|
249,751
|
-
|
-
|
-
|
-
|
-
|
249,751
|
Total
income
|
16,812,514
|
1,209,657
|
139,860
|
-
|
-
|
(3,037)
|
18,158,994
|
Expenses:
|
|
|
|
|
|
|
|
Interest
Expense
|
1,678,349
|
-
|
-
|
-
|
-
|
(3,037)
|
1,675,312
|
Provision for loan
losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Salary
expense
|
4,023,139
|
380,298
|
139,463
|
-
|
-
|
-
|
4,542,900
|
Employee benefit
expense
|
1,299,406
|
114,529
|
-
|
-
|
-
|
-
|
1,413,935
|
Occupancy
expense
|
367,578
|
60,471
|
-
|
-
|
-
|
-
|
428,049
|
Equipment
expense
|
354,155
|
68,137
|
-
|
-
|
-
|
-
|
422,292
|
FDIC insurance
assessment
|
225,000
|
-
|
-
|
-
|
-
|
-
|
225,000
|
Other real estate
owned, net
|
52,841
|
-
|
-
|
-
|
-
|
-
|
52,841
|
Marketing
expense
|
234,904
|
32,593
|
549
|
-
|
-
|
-
|
268,046
|
Legal and
professional fees
|
188,310
|
5,049
|
-
|
-
|
-
|
-
|
193,359
|
ATM and check card
fees
|
330,966
|
2,155
|
-
|
-
|
-
|
-
|
333,121
|
Telecom and data
processing expense
|
509,256
|
42,828
|
-
|
-
|
-
|
-
|
552,084
|
Directors
fees
|
192,000
|
15,500
|
-
|
-
|
-
|
-
|
207,500
|
Bank franchise
Tax
|
310,303
|
-
|
-
|
-
|
-
|
-
|
310,303
|
Other operating
expenses
|
1,254,784
|
187,519
|
21,051
|
-
|
400
|
-
|
1,463,754
|
Total
expense
|
11,020,991
|
909,079
|
161,063
|
-
|
400
|
(3,037)
|
12,088,496
|
Income tax
expense
|
1,582,813
|
-
|
31,828
|
-
|
(81,993)
|
-
|
1,532,648
|
Net income
(loss)
|
$4,208,710
|
$300,578
|
$(53,031)
|
$-
|
$81,593
|
$-
|
$4,537,850
|
Net income (loss)
attributable to noncontrolling interest
|
-
|
90,173
|
-
|
-
|
-
|
-
|
90,173
|
Net Income
attributable to F & M Bank Corp.
|
$4,208,710
|
$210,405
|
$(53,031)
|
$-
|
$81,593
|
$-
|
$4,447,677
|
Total
Assets
|
$733,417,958
|
$2,296,877
|
$6,328,376
|
$-
|
$86,082,770
|
$(98,088,075)
|
$730,037,906
|
Goodwill
|
$2,669,517
|
$-
|
$-
|
$-
|
$-
|
$-
|
$2,669,517
|
31
Note
10. Business
Segments, continued
|
Three Months
Ended June 30, 2016
|
||||||
|
F&M
Bank
|
VBS
Mortgage
|
TEB
Life/FMFS
|
VS
Title
|
Parent
Only
|
Eliminations
|
F&M Bank
Corp. Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Interest
Income
|
$7,893,961
|
$6,885
|
$37,914
|
$-
|
$-
|
$(1,550)
|
$7,937,210
|
Service charges on
deposits
|
272,329
|
-
|
-
|
-
|
-
|
-
|
272,329
|
Investment services
and insurance income
|
163
|
-
|
(29,057)
|
-
|
-
|
-
|
(28,894)
|
Mortgage banking
income, net
|
-
|
751,388
|
-
|
-
|
-
|
-
|
751,388
|
Title insurance
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Income from bank
owned life insurance
|
118,068
|
-
|
-
|
-
|
-
|
-
|
118,068
|
Low income housing
partnership losses
|
(182,694)
|
-
|
-
|
-
|
-
|
-
|
(182,694)
|
ATM and check card
fees
|
318,287
|
-
|
-
|
-
|
-
|
-
|
318,287
|
Gain on prepayment
of long-term debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Loss on
investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Other operating
income
|
129,743
|
-
|
-
|
-
|
-
|
-
|
129,743
|
Total
income
|
8,549,857
|
758,273
|
8,857
|
-
|
-
|
(1,550)
|
9,315,437
|
Expenses:
|
|
|
|
|
|
|
|
Interest
Expense
|
863,306
|
-
|
-
|
-
|
-
|
(1,550)
|
861,756
|
Provision for loan
losses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Salary
expense
|
1,940,505
|
117,122
|
75,767
|
-
|
-
|
-
|
2,133,394
|
Employee benefit
expense
|
602,158
|
58,833
|
-
|
-
|
-
|
-
|
660,991
|
Occupancy
expense
|
179,648
|
30,150
|
-
|
-
|
-
|
-
|
209,798
|
Equipment
expense
|
170,651
|
59,690
|
-
|
-
|
-
|
-
|
230,341
|
FDIC insurance
assessment
|
112,500
|
-
|
-
|
-
|
-
|
-
|
112,500
|
Other real estate
owned, net
|
35,142
|
-
|
-
|
-
|
-
|
-
|
35,142
|
Marketing
expense
|
118,924
|
12,169
|
198
|
-
|
-
|
-
|
131,291
|
Legal and
professional fees
|
102,037
|
2,574
|
-
|
-
|
-
|
-
|
104,611
|
ATM and check card
fees
|
170,791
|
1,571
|
-
|
-
|
-
|
-
|
172,362
|
Telecom and data
processing expense
|
266,194
|
22,537
|
-
|
-
|
-
|
-
|
288,731
|
Directors
fees
|
96,000
|
3,500
|
-
|
-
|
-
|
-
|
99,500
|
Bank franchise
Tax
|
162,643
|
-
|
-
|
-
|
-
|
-
|
162,643
|
Other operating
expenses
|
655,378
|
154,862
|
18,456
|
-
|
200
|
-
|
828,896
|
Total
expense
|
5,475,877
|
463,008
|
94,421
|
-
|
200
|
(1,550)
|
6,031,956
|
Income tax
expense
|
878,180
|
-
|
12,321
|
-
|
(51,556)
|
-
|
838,945
|
Net income
(loss)
|
$2,195,800
|
$295,265
|
$(97,885)
|
$-
|
$51,356
|
$-
|
$2,444,536
|
Net income (loss)
attributable to noncontrolling interest
|
-
|
86,410
|
-
|
-
|
-
|
-
|
86,410
|
Net Income
attributable to F & M Bank Corp.
|
$2,195,800
|
$208,855
|
$(97,885)
|
$-
|
$51,356
|
$-
|
$2,358,126
|
32
Note
11. Debt
Short-term Debt
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. Short-term debt totaled $50 million at June 30,
2017 and has decreased $10 million from $40 million at December 31,
2016 due to the cyclical decline in the loans held for sale
participation program.
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 June 30, 2017
and December 31, 2016, respectively. The balance of
these obligations at June 30, 2017 and December 31, 2016 were
$51,768,000 and $63,982,000 respectively. The Company
recognized a gain of $504,000 on prepayment of two FHLB advances
totaling $10,000,000 during the first quarter of 2017 and there
were no additional borrowings in 2017. FHLB advances
include a $5,000,000 line of credit at FHLB that is pledged to the
Commonwealth of Virginia to secure public funds.
In addition, the
Company has a note payable to purchase a lot adjacent to one of the
Bank branches for $170,000 at June 30, 2017 that is payable in two
annual payments on January 1, 2018 and 2019. There was
$255,000 outstanding on this note at December 31,
2016.
33
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
F & M Bank
Corp. (Company), incorporated in Virginia in 1983, is a financial
holding company pursuant to section 3(a)(1) of the Bank Holding
Company Act of 1956, which provides financial services through its
wholly-owned subsidiary Farmers & Merchants Bank (Bank), TEB
Life Insurance Company (TEB) and Farmers & Merchants Financial
Services (FMFS) are wholly-owned subsidiaries of the Bank. The Bank
also holds a majority ownership in VBS Mortgage LLC (VBS) and F
& M Bank Corp. holds a majority ownership in VS Title LLC
(VST).
The Bank is a full
service commercial bank offering a wide range of banking and
financial services through its thirteen branch offices as well as
its loan production office located in Penn Laird, VA (which
specializes in providing automobile financing through a network of
automobile dealers). TEB reinsures credit life and
accident and health insurance sold by the Bank in connection with
its lending activities. FMFS provides, brokerage services and
property/casualty insurance to customers of the Bank. VBS
originates conventional and government sponsored mortgages through
their offices in Harrisonburg and Woodstock, VA. VS
Title provides title insurance services through their offices in
Harrisonburg, Fishersville, and Charlottesville, VA.
The Company’s
primary trade area services customers in Rockingham County,
Shenandoah County, Page County and Augusta County.
Management’s
discussion and analysis is presented to assist the reader in
understanding and evaluating the financial condition and results of
operations of the Company. The analysis focuses on the
consolidated financial statements, footnotes, and other financial
data presented. The discussion highlights material
changes from prior reporting periods and any identifiable trends
which may affect the Company. Amounts have been rounded
for presentation purposes. 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 1, Part 1 of this Form 10-Q and in conjunction with the
audited Consolidated Financial Statements included in the
Company’s December 31, 2016 Form 10-K.
Forward-Looking
Statements
Certain statements
in this report may constitute “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are
statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often
characterized by the use of qualified words (and their derivatives)
such as “expect,” “believe,”
“estimate,” “plan,” “project,”
or other statements concerning opinions or judgment of the Company
and its management about future events.
Although the
Company believes that its expectations with respect to certain
forward-looking statements are based upon reasonable assumptions
within the bounds of its existing knowledge of its business and
operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ
materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual
future results and trends may differ materially from historical
results or those anticipated depending on a variety of factors,
including, but not limited to, the effects of and changes in:
general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new
products and delivery systems, inflation, changes in the stock and
bond markets, technology, and consumer spending and savings
habits.
We do not update
any forward-looking statements that may be made from time to time
by or on behalf of the Company.
34
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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. A variety of factors could
affect the ultimate value that is obtained either when earning
income, recognizing an expense, recovering an asset or relieving a
liability. The Company uses historical loss factors as one factor
in determining the inherent loss that may be present in its loan
portfolio. Actual losses could differ significantly from the
historical factors that are used. The fair value of the investment
portfolio is based on period end valuations but changes daily with
the market. 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.
Allowance
for Loan Losses
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. For further discussion
refer to page 40 in the Management Discussion and
Analysis.
Goodwill
and Intangibles
ASC 805
“Business Combinations” and ASC 350
“Intangibles” require that the acquisition method of
accounting be used for all business combinations initiated after
June 30, 2001. Additionally, it further clarifies the criteria for
the initial recognition and measurement of intangible assets
separate from goodwill. ASC 350 prescribes the accounting for
goodwill and intangible assets subsequent to initial recognition.
The provisions of ASC 350 discontinue the amortization of goodwill
and intangible assets with indefinite lives. Instead, these assets
will be subject to at least 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.
At June 30, 2017,
preliminary goodwill of $304,000 was reported for the purchase of
VSTitle, LLC. This amount is subject to change after
expert evaluation.
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.
35
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Critical
Accounting Policies (continued)
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.
Securities
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. 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.
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.
Overview
Net income for the
six months ended June 30, 2017 was $4,673,000 or $1.29 per diluted
share, compared to $4,448,000 or $1.19 in the same period in 2016,
an increase of 5.06%. During the six months ended June 30, 2017,
noninterest income increased 52.19% and noninterest expense
increased 14.97% during the same period. Net income from
Bank operations adjusted for income from Parent activities is as
follows:
In
thousands
|
2017
|
2016
|
Net Income from
Bank Operations
|
$4,550
|
$4,366
|
Income from Parent
Company Activities (2017 includes VSTitle)
|
123
|
82
|
Net Income for the
six months ended June 30
|
$4,673
|
$4,448
|
During the three
months ended June 30, 2017, net income was $2,328,000 or $.64 per
diluted share, compared to $2,358,000 or $.63 in the same period in
2016, a decrease of 1.27%. In the three months ended
June 30, 2017, noninterest income increased 36.57% and noninterest
expense increased 16.38%.
In
thousands
|
2017
|
2016
|
Net Income from
Bank Operations
|
$2,213
|
$2,307
|
Income from Parent
Company Activities (2017 includes VSTitle)
|
115
|
51
|
Net Income for the
three months ended June 30
|
$2,328
|
$2,358
|
36
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Results of
Operations
As shown in Table I
on page 46, the 2017 year to date tax equivalent net interest
income increased $551,000 or 3.95% compared to the same period in
2016. The tax equivalent adjustment to net interest
income totaled $70,000 for the first six months of
2017. The yield on earning assets increased .11%, while
the cost of funds increased .03% compared to the same period in
2016.
The three months
ended June 30, 2017 tax equivalent net interest income increased
$265,000 or 3.73% compared to the same period in
2016. The tax equivalent adjustment to net interest
income totaled $36,000 for the three months.
Year to date, the
combination of the increase in yield on assets and the increase in
cost of funds coupled with changes in balance sheet leverage has
resulted in the net interest margin increasing to 4.46% at June 30,
2017, an increase of 7 basis points when compared to the same
period in 2016. A schedule of the net interest margin
for the three and six month periods ended June 30, 2017 and 2016
can be found in Table I on page 46.
The following table
provides detail on the components of tax equivalent net interest
income:
GAAP
Financial Measurements:
(Dollars in
thousands).
|
June 30,
2017
|
June 30,
2016
|
||
|
Six
Months
|
Three
Months
|
Six
Months
|
Three
Months
|
Interest
Income – Loans
|
$16,054
|
$8,177
|
$15,424
|
$7,860
|
Interest Income -
Securities and Other Interest-Earnings Assets
|
212
|
79
|
154
|
77
|
Interest
Expense – Deposits
|
1,249
|
633
|
1,149
|
591
|
Interest
Expense - Other Borrowings
|
582
|
292
|
526
|
271
|
Total
Net Interest Income
|
14,435
|
7,331
|
13,903
|
7,075
|
|
|
|
|
|
Non-GAAP
Financial Measurements:
|
|
|
|
|
Add: Tax Benefit on
Tax-Exempt Interest Income – Loans
|
70
|
36
|
51
|
27
|
Total
Tax Benefit on Tax-Exempt Interest Income
|
70
|
36
|
51
|
27
|
Tax-Equivalent
Net Interest Income
|
$14,505
|
$7,367
|
$13,954
|
$7,102
|
The Interest
Sensitivity Analysis contained in Table II on page 47 indicates the
Company is in an asset sensitive position in the one year time
horizon. 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. Approximately 44.21% of rate
sensitive assets and 35.73% of rate sensitive liabilities are
subject to repricing within one year. Due to the
relatively flat yield curve, management has kept deposit rates low.
The growth in earning assets and the growth in noninterest bearing
accounts has resulted in the decrease in the positive GAP position
in the one year time period.
The increase in
noninterest income of $1,347,000 for the six-month period and
$504,000 for the three-month period ended June 30, 2017 is
primarily due to the gain on prepayment of FHLB debt of $504,000
(first quarter) and the acquisition of VS Title LLC which
contributed $554,000 in 2017. Exclusive of the FHLB debt
gain, noninterest income increased 32.66%. Other areas
of increase are service charges on deposits ($145,000) and
investment services and insurance ($296,000). For the
three months ended June 30, 2017 noninterest income increased
36.57%.
Noninterest expense
for the six months ended June 30, 2017 increased $1,559,000 as
compared to 2016. For the three months ended June 30,
2017 noninterest expense increased $847,000. Expenses
increased in the areas of salaries and benefits ($1,210,000),
occupancy expense ($75,000) and telecommunications and data
processing ($123,000) for the six months ended June 30,
2017. During the three months ended June 30, 2017 areas
of increase were salary and benfits ($686,000) and
telecommunications and data processing
($63,000). Increases in salaries and benefits relate to
normal salary increases, additional staff to support new branch
locations and growth at VBS Mortgage, increased cost of insurance
and the acquisition of VSTitle. Occupancy and
telecommunications and data processing also increased as a result
of branching activities.
37
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Balance Sheet
Federal
Funds Sold and Interest Bearing Bank Deposits
The Company’s
subsidiary bank invests a portion of its excess liquidity in either
federal funds sold or interest bearing bank deposits. Federal funds
sold offer daily liquidity and pay market rates of interest that at
quarter end were benchmarked at 1.00% to 1.25% by the Federal
Reserve. Actual rates received vary slightly based upon money
supply and demand among banks. Interest bearing bank deposits are
held either in money market accounts or as short-term certificates
of deposits. Balances in federal funds sold have decreased and
interest bearing bank deposits have remained flat since year end
due to changes in the composition of the balances sheet.
Securities
The Company’s
securities portfolio serves to assist the Company with asset
liability management and to provide tax benefits.
The securities
portfolio consists of investment securities commonly referred to as
securities held to maturity and securities available for
sale. Securities are classified as Held to Maturity
investment securities when management has the intent and ability to
hold the securities to maturity. Held to Maturity
Investment securities are carried at amortized
cost. Securities available for sale include securities
that may be sold in response to general market fluctuations,
liquidity needs and other similar factors. Securities
available for sale are recorded at fair
value. Unrealized holding gains and losses on available
for sale securities are excluded from earnings and reported (net of
deferred income taxes) as a separate component of
stockholders’ equity. The low income housing
projects included in other investments are held for the tax losses
and credits that they provide.
As of June 30,
2017, the fair value of securities available for sale exceeded
their cost by $6,000. The portfolio is made up of primarily agency
securities with an average portfolio life of just over three years.
This short average life results in less portfolio volatility and
positions the Bank to redeploy assets in response to rising rates.
There are $24,000,000 in securities that will mature in
2017.
In reviewing
investments as of June 30, 2017 and December 31, 2016, there were
no securities which met the definition for other than temporary
impairment. Management continues to re-evaluate the
portfolio for impairment on a quarterly basis.
Loan
Portfolio
The Company
operates in a predominately rural area that includes the counties
of Rockingham, Page, Shenandoah and Augusta in the western portion
of Virginia. The local economy benefits from a variety of
businesses including agri-business, manufacturing, service
businesses and several universities and colleges. The
Bank is an active residential mortgage and residential construction
lender and generally makes commercial loans to small and mid-size
businesses and farms within its primary service area.
Lending is
geographically diversified within the service area. The
Company has loan concentrations within the portfolio in
construction and development lending. Management and the
Board of Directors review this concentration and other potential
areas of concentration quarterly.
Loans Held for
Investment of $603,435,000 increased $11,799,000 at June 30, 2017
compared to December 31, 2016. The following
categories experienced growth: farmland, real
estate, multi-family, commercial and industrial, consumer and
dealer finance.
Loans Held for Sale
totaled $51,767,000 at June 30, 2017, a decrease of $10,968,000
compared to December 31, 2016. The Northpointe
participation loan program is typically subject to seasonal
fluctuations in the early part of the year which is reflected in
the decrease.
38
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Loan
Portfolio (continued)
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. Nonperforming loans totaled $5,677,000 at
June 30, 2017 compared to $4,870,000 at December 31,
2016. Loans added to nonaccrual since December 31, 2016
were past due and were not specifically reviewed for impairment as
they were below the impairment review
threshold. Although the potential exists for loan
losses, management believes the bank is generally well secured and
continues to actively work with its customers to effect
payment. As of June 30, 2017 and December 31, 2016, the
Company held $2,008,000 and $2,076,000 of real estate which was
acquired through foreclosure, respectively.
The following is a
summary of information pertaining to risk elements and
nonperforming loans (in thousands):
|
June 30,
2017
|
December 31,
2016
|
|
|
|
Nonaccrual Loans
|
|
|
Real
Estate
|
$4,548
|
$4,204
|
Commercial
|
350
|
70
|
Home
Equity
|
382
|
311
|
Other
|
237
|
178
|
|
5,517
|
4,763
|
|
|
|
Loans past due 90 days or more (excluding nonaccrual)
|
|
|
Real
Estate
|
159
|
81
|
Commercial
|
-
|
-
|
Home
Equity
|
-
|
-
|
Other
|
1
|
26
|
|
160
|
107
|
|
|
|
Total Nonperforming
loans
|
$5,677
|
$4,870
|
|
|
|
Restructured Loans
current and performing:
|
|
|
Real
Estate
|
4,190
|
8,641
|
Commercial
|
165
|
1,121
|
Home
Equity
|
-
|
-
|
Other
|
81
|
76
|
|
|
|
Nonperforming loans
as a percentage of loans held for investment
|
.94%
|
.82%
|
|
|
|
Net charge offs to
total loans held for investment
|
.05%
|
.21%
|
|
|
|
Allowance for loan
and lease losses to nonperforming loans
|
127.11%
|
154.89%
|
39
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Allowance
for Loan Losses
The allowance for
loan losses provides for the risk that borrowers will be unable to
repay their obligations. The risk associated with real
estate and installment notes to individuals is based upon
employment, the local and national economies and consumer
confidence. All of these affect the ability of borrowers
to repay indebtedness. The risk associated with
commercial lending is substantially based on the strength of the
local and national economies.
Management
evaluates the allowance for loan losses on a quarterly basis in
light of national and local economic trends, changes in the nature
and volume of the loan portfolio and trends in past due and
criticized loans. Specific factors evaluated include
internally generated loan review reports, past due reports,
historical loan loss experience and changes in the financial
strength of individual borrowers that have been included on the
Bank’s watch list or schedule of classified
loans.
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 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.
With the exception
of Dealer finance loans, loans that are not impaired are
categorized by call report code and an estimate is calculated based
on actual loss experience over the last five years. Due
to the rapid turnover in the Dealer finance portfolio, a two-year
loss rate is utilized in that category as management feels this
lookback period properly reflects the losses currently inherent in
the portfolio. The Company monitors the net losses for
this division and adjusts based on how the portfolio performs since
the department was established in 2012. A general allowance for
inherent losses has been established to reflect other unidentified
losses within the portfolio. The general allowance is calculated
using the 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 provision for each quarter based
on this evaluation.
The allowance for
loan losses of $7,216,000 at June 30, 2017 is equal to 1.20% of
loans held for investment. This compares to an allowance of
$7,543,000 (1.27%) at December 31, 2016. The company has
experienced a decline in historical losses and improvements in the
qualitative factors since year end. There has been an
increase in past dues this quarter however a large amount of those
were brought current just after quarter end. Increases
to nonaccrual have been minimal with a majority of the increase
coming from cyclical increases on a development
property. Due to these factors, management did not fund
the allowance in the first six months of 2017.
Net charge-offs at
June 30, 2017 totaled $327,000 which is equivalent to .05% of total
loans outstanding. At December 31, 2016, net charge-offs
totaled $1,238,000 or .21% of total loans outstanding.
40
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Deposits
and Other Borrowings
The Company's main
source of funding is comprised of deposits received from
individuals, governmental entities and businesses located within
the Company's service area. Deposit accounts include
demand deposits, savings, money market and certificates of
deposit. Total deposits at June 30, 2017 have decreased
$599,000 since December 31, 2016. Noninterest
bearing deposits increased $516,000 while interest bearing
decreased $1,115,000. The decrease in deposits is
consistent with the first half of 2016, after which deposits grew
substantially. The decrease is not attributable to any
one customer or geographic location within the bank. The
Bank also participates in the CDARS program. CDARS
(Certificate of Deposit Account Registry Service) is a program that
allows the bank to accept customer deposits in excess of FDIC
limits and through reciprocal agreements with other network
participating banks by offering FDIC insurance up to as much as $50
million in deposits. The CDARS program also allows the Bank to
purchase funds through its One-Way Buy program. At June 30, 2017
and December 31, 2016, the Company had a total of $1.3
million in CDARS funding.
Short-term
borrowings
Short-term debt
consists of federal funds purchased, daily rate credit obtained
from the Federal Home Loan Bank (FHLB), and short-term fixed rate
FHLB borrowings. Federal funds purchased are overnight
borrowings obtained from the Bank’s primary correspondent
bank to manage short-term liquidity needs. Borrowings from the FHLB
have been used to finance loans held for sale and also to finance
the increase in short-term residential and commercial construction
loans. As of June 30, 2017, short-term debt consisted
of $50,000,000 in FHLB short-term
borrowings. This compared to FHLB short-term borrowings
of $40,000,000 at December 31, 2016. There were no
balances in Federal funds purchased or daily rate credit at June
30, 2017 or December 31, 2016.
Long-term
borrowings
Borrowings from the
FHLB continue to be an important source of funding. The
Company’s subsidiary bank borrows funds on a fixed rate
basis. These borrowings are used to fund loan growth and
also assist the Bank in matching the maturity of its fixed rate
real estate loan portfolio with the maturity of its debt and thus
reduce its exposure to interest rate changes. During the
first quarter of 2017, the Company recognized a $504,000 gain on
prepayment of two FHLB long term advances and there were no new
borrowings.
41
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Capital
The Company seeks
to maintain a strong capital base to expand facilities, promote
public confidence, support current operations and grow at a
manageable level.
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 June 30, 2017, the Bank had Common Equity
Tier I capital of 14.10%, Tier I capital of 14.10% of risk
weighted assets and combined Tier I and II capital of 15.25% of
risk weighted assets. Regulatory minimums at this date
were 4.5%, 6% and 8%, respectively. At December 30,
2016, the Bank had Common Equity Tier I capital of 13.86%,
Tier I capital of 13.86% of risk weighted assets and combined
Tier I and II capital of 15.08% 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 June 30, 2017 and December 31,
2016, the Bank reported a leverage ratio of 12.49% and 11.83%,
respectively, which was also substantially above the minimum. The
Bank also reported a capital conservation buffer of 7.25% at June
30, 2017 and 7.08% at December 31, 2016. 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%.
Liquidity
Liquidity is the
ability to meet present and future financial obligations through
either the sale or maturity of existing assets or the acquisition
of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds
sold, investments and loans maturing within one
year. The Company's ability to obtain deposits and
purchase funds at favorable rates determines its liquidity
exposure. As a result of the Company's management of
liquid assets and the ability to generate liquidity through
liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
Additional sources
of liquidity available to the Company include, but are not limited
to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal
funds. To further meet its liquidity needs, the
Company’s subsidiary bank also maintains a line of credit
with its primary correspondent financial institution and with Zions
Bank. The Bank also has a line of credit with the
Federal Home Loan Bank of Atlanta that allows for secured
borrowings.
Interest
Rate Sensitivity
In conjunction with
maintaining a satisfactory level of liquidity, management must also
control the degree of interest rate risk assumed on the balance
sheet. Managing this risk involves regular monitoring of
interest sensitive assets relative to interest sensitive
liabilities over specific time intervals. The Company monitors its
interest rate sensitivity periodically and makes adjustments as
needed. There are no off balance sheet items that will impair
future liquidity.
As of June 30,
2017, the Company had a cumulative Gap Rate Sensitivity Ratio of
18.54% for the one year repricing period. This generally indicates
that earnings would increase in an increasing interest rate
environment as assets reprice more quickly than liabilities.
However, in actual practice, this may not be the case as balance
sheet leverage, funding needs and competitive factors within the
market could dictate the need to raise deposit rates more
quickly. Management constantly monitors the
Company’s interest rate risk and has decided the current
position is acceptable for a well-capitalized community
bank.
A summary of asset
and liability repricing opportunities is shown in Table II, on page
47.
42
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Effect
of Newly Issued Accounting Standards
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 ASU
2016-01 will have on its consolidated financial
statements.
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.
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. The Company is currently
assessing the impact that ASU 2016-13 will have on its consolidated
financial statements.
43
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Effect
of Newly Issued Accounting Standards, continued
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.
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.
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.
44
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Effect
of Newly Issued Accounting Standards, continued
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.
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. The Company is currently assessing the impact that ASU
2017‐08 will have 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 all entities 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.
The Company is currently assessing the impact that ASU
2017‐08 will have on its consolidated financial
statements.
Other accounting
standards that have been issued by the FASB or other
standards-setting bodies are not expected to have a material effect
on the Company’s financial position, result of operations or
cash flows.
Existence
of Securities and Exchange Commission Web Site
The Securities and
Exchange Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the Commission, including
F & M Bank Corp. and the address is (http:
//www.sec.gov).
45
TABLE I
F
& M BANK CORP.
Net
Interest Margin Analysis
(on
a fully taxable equivalent basis)
(Dollar
Amounts in Thousands)
|
Six Months
Ended
|
Six Months
Ended
|
Three Months
Ended
|
Three Months
Ended
|
||||||||
|
June 30,
2017
|
June 30,
2016
|
June 30,
2017
|
June 30,
2016
|
||||||||
Average
|
|
Income/
|
Average
|
|
Income/
|
Average
|
|
Income/
|
Average
|
|
Income/
|
Average
|
|
Balance2,4
|
Expense
|
Rates
|
Balance2,4
|
Expense
|
Rates
|
Balance2,4
|
Expense
|
Rates
|
Balance2,4
|
Expense
|
Rates
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for investment1,2
|
$592,729
|
$15,679
|
5.33%
|
$555,532
|
$14,587
|
5.28%
|
$597,126
|
$7,942
|
5.33%
|
$560,509
|
$7,370
|
5.27%
|
Loans
held for sale
|
32,145
|
445
|
2.79%
|
59,210
|
890
|
3.02%
|
38,193
|
271
|
2.85%
|
68,511
|
518
|
3.03%
|
Federal
funds sold
|
18,143
|
71
|
.79%
|
5,159
|
12
|
.47%
|
7,695
|
17
|
.89%
|
4,070
|
5
|
.49%
|
Interest
bearing deposits
|
1,098
|
4
|
.73%
|
872
|
2
|
.46%
|
670
|
1
|
.60%
|
851
|
1
|
.47%
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable 3
|
11,194
|
137
|
2.47%
|
17,798
|
139
|
1.57%
|
11,022
|
61
|
2.22%
|
17,434
|
70
|
1.61%
|
Partially
taxable
|
125
|
-
|
-
|
125
|
-
|
-
|
125
|
-
|
-
|
125
|
-
|
-
|
Total
earning assets
|
$655,434
|
$16,336
|
5.03%
|
$638,696
|
$15,630
|
4.92%
|
$654,831
|
$8,292
|
5.08%
|
$651,500
|
$7,964
|
4.90%
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
119,388
|
254
|
.43%
|
109,842
|
245
|
.45%
|
118,560
|
129
|
.43%
|
112,131
|
126
|
.45%
|
Savings
|
111,755
|
247
|
.45%
|
95,299
|
208
|
.44%
|
112,015
|
126
|
.45%
|
97,741
|
108
|
.44%
|
Time
deposits
|
155,593
|
748
|
.97%
|
162,265
|
695
|
.86%
|
154,971
|
378
|
.98%
|
162,894
|
356
|
.87%
|
Short-term
debt
|
15,982
|
32
|
.42%
|
36,133
|
26
|
.14%
|
18,688
|
24
|
.52%
|
42,941
|
8
|
.07%
|
Long-term
debt
|
71,373
|
550
|
1.55%
|
47,497
|
501
|
2.12%
|
70,999
|
268
|
1.52%
|
47,546
|
263
|
2.22%
|
Total
interest bearing liabilities
|
$474,091
|
$1,831
|
.78%
|
$451,036
|
$1,676
|
.75%
|
$475,233
|
$925
|
.78%
|
$463,253
|
$862
|
.75%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent net
interest income
|
|
$14,505
|
|
|
$13,954
|
|
|
$7,367
|
|
|
$7,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin
|
|
|
4.46%
|
|
|
4.39%
|
|
|
4.51%
|
|
|
4.37%
|
1 Interest
income on loans includes loan fees.
2 Loans
held for investment include nonaccrual loans.
3
An
incremental income tax rate of 34% was used to calculate the tax
equivalent income on nontaxable and partially taxable investments
and loans.
4 Average
balance information is reflective of historical cost and has not
been adjusted for changes in market value annualized.
46
TABLE
II
F
& M BANK CORP.
Interest
Sensitivity Analysis
June
30, 2017
(Dollars
In Thousands)
The following table
presents the Company’s interest sensitivity.
|
0 –
3
|
4 –
12
|
1 –
5
|
Over
5
|
Not
|
|
|
Months
|
Months
|
Years
|
Years
|
Classified
|
Total
|
|
|
|
|
|
|
|
Uses of funds
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
Commercial
|
$31,164
|
$28,407
|
$122,411
|
$26,992
|
$-
|
$208,974
|
Installment
|
4,225
|
1,146
|
57,782
|
15,455
|
-
|
78,608
|
Real estate loans
for investments
|
99,407
|
55,506
|
153,465
|
4,722
|
-
|
313,100
|
Loans held for
sale
|
51,767
|
-
|
-
|
-
|
-
|
51,767
|
Credit
cards
|
2,753
|
-
|
-
|
-
|
-
|
2,753
|
Interest bearing
bank deposits
|
614
|
-
|
-
|
-
|
-
|
614
|
Federal funds
sold
|
3,174
|
|
|
|
|
3,174
|
Investment
securities
|
24,000
|
125
|
-
|
573
|
135
|
24,833
|
Total
|
$217,104
|
$85,184
|
$333,658
|
$47,742
|
$135
|
$683,823
|
|
|
|
|
|
|
|
Sources of funds
|
|
|
|
|
|
|
Interest bearing
demand deposits
|
$-
|
$32,215
|
$67,942
|
$17,864
|
$-
|
$118,021
|
Savings
deposits
|
-
|
22,502
|
67,504
|
22,501
|
-
|
112,507
|
Certificates of
deposit $100,000 and over
|
4,268
|
15,099
|
35,169
|
-
|
-
|
54,536
|
Other certificates
of deposit
|
12,615
|
34,315
|
57,359
|
-
|
-
|
104,289
|
Short-term
borrowings
|
50,000
|
-
|
-
|
-
|
-
|
50,000
|
Long-term
borrowings
|
1,108
|
3,406
|
36,121
|
11,303
|
-
|
51,938
|
Total
|
$67,991
|
$107,537
|
$264,095
|
$51,668
|
$-
|
$491,291
|
|
|
|
|
|
|
|
Discrete
Gap
|
$149,113
|
$(22,353)
|
$69,563
|
$(3,926)
|
$135
|
$192,532
|
|
|
|
|
|
|
|
Cumulative
Gap
|
$149,113
|
$126,760
|
$196,323
|
$192,397
|
$192,532
|
|
|
|
|
|
|
|
|
Ratio of Cumulative
Gap to Total Earning Assets
|
21.81%
|
18.54%
|
28.71%
|
28.14%
|
28.16%
|
|
Table II reflects the
earlier of the maturity or repricing dates for various assets and
liabilities as of June 30, 2017. In preparing the
above table, no assumptions were made with respect to loan
prepayments. Loan principal payments are included in the earliest
period in which the loan matures or can
reprice. Investment securities included in the table
consist of securities held to maturity and securities available for
sale. 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 of deposits, which have no stated maturity dates, were
derived from guidance contained in FDICIA 305.
47
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
Applicable
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As a result of the
enactment of the Sarbanes-Oxley Act of 2002, issuers such as F
& M Bank Corp. that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are required to include in those
reports certain information concerning the issuer's controls and
procedures for complying with the disclosure requirements of the
federal securities laws. These disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an
issuer in the reports it files or submits under the Act, is
recorded , processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s
rules and forms and is accumulated and communicated to the issuer's
management, including its principal executive officer or officers
and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure.
As required, we
will evaluate the effectiveness of these disclosure controls and
procedures on a quarterly basis, and most recently did so as of the
end of the period covered by this report.
The Company’s
Chief Executive Officer and Chief Financial Officer, based on their
evaluation as of the end of the period covered by this quarterly
report of the Company’s disclosure controls and procedures
(as defined in Rule 13(a)-15(e) of the Act), have concluded that
the Company’s disclosure controls and procedures are
effective for purposes of Rule 13(a)-15(b).
Changes
in Internal Controls
The findings of the
internal auditor are presented to management of the Bank and to the
Audit Committee of the Company. During the period
covered by this report, there were no changes to the internal
controls over financial reporting of the Company that have
materially affected, or are reasonably likely to materially affect,
the Company’s internal controls over financial
reporting.
48
Part
II Other Information
Item 1. Legal
Proceedings
There are no
material pending legal proceedings other than ordinary routine
litigation incidental to its business, to which the Company is a
party or of which the property of the Company is
subject.
Item 1a. Risk
Factors –
There have been no
material changes to the risk factors disclosed in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
–None
Item 3. Defaults
Upon Senior Securities – None
Mine Safety
Disclosures None
Item 5. Other
Information – None
Item 6.
Exhibits
(a) Exhibits
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a) (filed
herewith).
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
Certifications of
Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002 (filed herewith).
101
The following
materials from F&M Bank Corp.’s Quarterly Report on Form
10Q for the period ended June 30, 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
(filed herewith).
49
Signatures
Pursuant to the
requirements 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.
|
|
|
|
|
|
|
|
By:
|
/s/
Dean W.
Withers
|
|
|
|
Dean W.
Withers
|
|
|
|
President and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Carrie
A. Comer
|
|
|
|
Carrie A.
Comer
|
|
|
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Senior Vice
President and Chief Financial Officer
|
|
August 14,
2017
50
Exhibit
Index:
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a) (filed
herewith).
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
Certifications of
Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
101
The following
materials from F&M Bank Corp.’s Quarterly Report on Form
10Q for the period ended June 30, 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
(filed herewith).
51