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F&M BANK CORP - Quarter Report: 2023 September (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 September 30, 2023

 

☐    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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

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 every Interactive Data File required to be submitted 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 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

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 November 3, 2023

Common Stock, par value ‑ $5 per share

 

3,482,373 shares

 

 

 

 

F & M BANK CORP.

 

Index

 

 

 

 

Page

 

 

 

 

 

 

Part I

Financial Information

 

3

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2023 and December 31, 2022

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income – Three Months Ended September 30, 2023 and 2022

 

4

 

 

 

 

 

 

 

Consolidated Statements of Income – Nine Months Ended September 30, 2023 and 2022

 

5

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2023 and 2022

 

6

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended September 30, 2023 and 2022

 

7

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2023 and 2022

 

8

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2023 and 2022

 

9

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

10

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

43

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

53

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

53

 

 

 

 

 

 

Part II

Other Information

 

54

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

54

 

 

 

 

 

 

Item 1a.

Risk Factors

 

54

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchase of Equity Securities

 

54

 

 

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

54

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

54

 

 

 

 

 

 

Item 5.

Other Information

 

54

 

 

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

 

 

Signatures

 

56

 

 

 

 

 

 

Certifications  

 

 

 

 
2

Table of Contents

 

Part I Financial Information

 

Item 1 Financial Statements

 

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022*

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$17,391

 

 

$17,926

 

Money market funds and interest-bearing deposits in other banks

 

 

184

 

 

 

687

 

Federal funds sold

 

 

4,583

 

 

 

16,340

 

Cash and cash equivalents

 

 

22,158

 

 

 

34,953

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

Held to maturity, at amortized cost – fair value of $113 and $112 in 2023 and 2022, respectively

 

 

125

 

 

 

125

 

Less: allowance for credit losses

 

 

-

 

 

 

-

 

Held to maturity, net

 

 

125

 

 

 

125

 

 

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

372,339

 

 

 

392,095

 

Other investments

 

 

11,038

 

 

 

11,317

 

Loans held for sale, at fair value

 

 

2,027

 

 

 

1,373

 

 

 

 

 

 

 

 

 

 

Loans held for investment, net of deferred fees and costs

 

 

805,602

 

 

 

743,604

 

Less: allowance for credit losses

 

 

(9,166)

 

 

(7,936)

Net loans held for investment

 

 

796,436

 

 

 

735,668

 

 

 

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

23,927

 

 

 

19,587

 

Interest receivable

 

 

4,645

 

 

 

3,995

 

Goodwill

 

 

3,082

 

 

 

3,082

 

Bank owned life insurance

 

 

22,705

 

 

 

23,554

 

Other assets

 

 

23,937

 

 

 

20,153

 

Total Assets

 

$1,282,419

 

 

$1,245,902

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest bearing

 

$277,219

 

 

$293,596

 

Interest bearing

 

 

856,691

 

 

 

789,781

 

Total deposits

 

 

1,133,910

 

 

 

1,083,377

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

 

60,000

 

 

 

70,000

 

Long-term debt

 

 

6,922

 

 

 

6,890

 

Other liabilities

 

 

14,567

 

 

 

14,843

 

Total liabilities

 

 

1,215,399

 

 

 

1,175,110

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $5 par value, 6,000,000 shares authorized, 200,000 designated, 3,482,217 and 3,456,237 shares issued and outstanding (32,957 and 26,456 unvested restricted shares)

 

 

17,246

 

 

 

17,149

 

Additional paid in capital

 

 

10,941

 

 

 

10,577

 

Retained earnings

 

 

81,481

 

 

 

83,078

 

Accumulated other comprehensive loss

 

 

(42,648)

 

 

(40,012)

Total shareholders’ equity

 

 

67,020

 

 

 

70,792

 

Total liabilities and shareholders’ equity

 

$1,282,419

 

 

$1,245,902

 

 

*2022 derived from audited consolidated financial statements.

 

See Notes to Consolidated Financial Statements

 

 
3

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Income

 (Dollars in thousands, except per share data)

 (Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

Interest and Dividend income

 

2023

 

 

2022

 

Interest and fees on loans held for investment

 

$12,525

 

 

$8,881

 

Interest and fees on loans held for sale

 

 

19

 

 

 

29

 

Interest from money market funds and federal funds sold

 

 

68

 

 

 

48

 

Interest on debt securities

 

 

2,005

 

 

 

2,054

 

Total interest and dividend income

 

 

14,617

 

 

 

11,012

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Total interest on deposits

 

 

5,811

 

 

 

1,378

 

Interest from short-term debt

 

 

702

 

 

 

158

 

Interest from long-term debt

 

 

115

 

 

 

345

 

Total interest expense

 

 

6,628

 

 

 

1,881

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

7,989

 

 

 

9,131

 

 

 

 

 

 

 

 

 

 

Provision for Credit Losses

 

 

620

 

 

 

-

 

Net Interest Income After Provision for Credit Losses

 

 

7,369

 

 

 

9,131

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

256

 

 

 

255

 

Investment services and insurance income

 

 

374

 

 

 

316

 

Mortgage banking income

 

 

536

 

 

 

666

 

Title insurance income

 

 

444

 

 

 

376

 

Income on bank owned life insurance

 

 

181

 

 

 

178

 

Low-income housing partnership losses

 

 

(205)

 

 

(205)

ATM and check card fees

 

 

672

 

 

 

628

 

Other operating income

 

 

269

 

 

 

68

 

Total noninterest income

 

 

2,527

 

 

 

2,282

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries

 

 

4,210

 

 

 

4,334

 

Employee benefits

 

 

907

 

 

 

1,184

 

Occupancy expense

 

 

371

 

 

 

342

 

Equipment expense

 

 

357

 

 

 

294

 

FDIC insurance assessment

 

 

225

 

 

 

215

 

OREO expenses

 

 

-

 

 

 

59

 

Advertising expense

 

 

259

 

 

 

193

 

Legal and professional fees

 

 

326

 

 

 

294

 

ATM and check card fees

 

 

349

 

 

 

321

 

Telecommunication and data processing expense

 

 

551

 

 

 

619

 

Directors fees

 

 

124

 

 

 

131

 

Bank franchise tax

 

 

129

 

 

 

124

 

Other operating expenses

 

 

1,114

 

 

 

762

 

Total noninterest expense

 

 

8,922

 

 

 

8,872

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

974

 

 

 

2,541

 

Income tax (benefit) expense

 

 

(44)

 

 

237

 

Net Income

 

$1,018

 

 

$2,304

 

Per Common Share Data

 

 

 

 

 

 

 

 

Net income

 

$0.29

 

 

$0.67

 

Cash dividends on common stock

 

 

0.26

 

 

 

0.26

 

Weighted average common shares outstanding

 

 

3,480,670

 

 

 

3,453,767

 

 

See Notes to Consolidated Financial Statements

 

 
4

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Income

 (Dollars in thousands, except per share data)

 (Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Interest and Dividend income

 

2023

 

 

2022

 

Interest and fees on loans held for investment

 

$34,896

 

 

$24,384

 

Interest and fees on loans held for sale

 

 

66

 

 

 

90

 

Interest from money market funds and federal funds sold

 

 

218

 

 

 

87

 

Interest on debt securities

 

 

6,034

 

 

 

5,521

 

Total interest and dividend income

 

 

41,214

 

 

 

30,082

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Total interest on deposits

 

 

15,069

 

 

 

3,060

 

Interest from short-term debt

 

 

2,217

 

 

 

204

 

Interest from long-term debt

 

 

343

 

 

 

628

 

Total interest expense

 

 

17,629

 

 

 

3,892

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

23,585

 

 

 

26,190

 

 

 

 

 

 

 

 

 

 

Provision for Credit Losses

 

 

1,159

 

 

 

150

 

Net Interest Income After Provision for Credit Losses

 

 

22,426

 

 

 

26,040

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

755

 

 

 

836

 

Investment services and insurance income

 

 

1,236

 

 

 

1,020

 

Mortgage banking income

 

 

1,619

 

 

 

2,647

 

Title insurance income

 

 

1,069

 

 

 

1,215

 

Income on bank owned life insurance

 

 

982

 

 

 

522

 

Low-income housing partnership losses

 

 

(616)

 

 

(613)

ATM and check card fees

 

 

1,971

 

 

 

1,823

 

Net investment securities losses

 

 

-

 

 

 

(97)

Other operating income

 

 

629

 

 

 

489

 

Total noninterest income

 

 

7,645

 

 

 

7,842

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries

 

 

13,571

 

 

 

12,690

 

Employee benefits

 

 

3,044

 

 

 

3,712

 

Occupancy expense

 

 

1,023

 

 

 

1,028

 

Equipment expense

 

 

1,138

 

 

 

918

 

FDIC insurance assessment

 

 

545

 

 

 

496

 

OREO expense

 

 

-

 

 

 

59

 

Advertising expense

 

 

753

 

 

 

599

 

Legal and professional fees

 

 

1,235

 

 

 

945

 

ATM and check card fees

 

 

944

 

 

 

954

 

Telecommunication and data processing expense

 

 

1,926

 

 

 

2,205

 

Directors fees

 

 

409

 

 

 

424

 

Bank franchise tax

 

 

449

 

 

 

456

 

Other operating expenses

 

 

3,246

 

 

 

2,495

 

Total noninterest expense

 

 

28,283

 

 

 

26,981

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,788

 

 

 

6,901

 

Income tax (benefit) expense

 

 

(526)

 

 

280

 

Net Income

 

$2,314

 

 

$6,621

 

 

 

 

 

 

 

 

 

 

Per Common Share Data

 

 

 

 

 

 

 

 

Net income

 

$0.67

 

 

$1.92

 

Cash dividends on common stock

 

 

0.78

 

 

 

0.78

 

Weighted average common shares outstanding

 

 

3,473,911

 

 

 

3,447,470

 

 

See Notes to Consolidated Financial Statements

 

 
5

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Comprehensive Loss

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$1,018

 

 

$2,304

 

 

$2,314

 

 

$6,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses on available-for sale securities

 

 

(6,865)

 

 

(9,879)

 

 

(3,337)

 

 

(49,606)

Tax effect

 

 

1,442

 

 

 

2,075

 

 

 

701

 

 

 

10,417

 

Unrealized holding losses, net of tax

 

 

(5,423)

 

 

(7,804)

 

 

(2,636)

 

 

(39,189)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications adjustment for losses included in net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

97

 

Tax effect

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20

 

Realized losses on sale of available-for sale securities, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

(5,423)

 

 

(7,804)

 

 

(2,636)

 

 

(39,112)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

$(4,405)

 

$(5,500)

 

$(322)

 

$(32,491)

 

See Notes to Consolidated Financial Statements

 

 
6

Table of Contents

 

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

 

Three Months Ended September 30, 2023 and 2022.

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance June 30, 2022

 

$17,121

 

 

$10,351

 

 

$80,878

 

 

$(36,400)

 

$71,950

 

Net income

 

 

-

 

 

 

-

 

 

 

2,304

 

 

 

-

 

 

 

2,304

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,804)

 

 

(7,804)

Dividends on common stock ($.26 per share)

 

 

-

 

 

 

-

 

 

 

(903)

 

 

-

 

 

 

(903)

Common stock issued

 

 

14

 

 

 

55

 

 

 

-

 

 

 

-

 

 

 

69

 

Stock-based compensation expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Balance, September 30, 2022

 

$17,135

 

 

$10,467

 

 

$82,279

 

 

$(44,204)

 

$65,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2023

 

$17,228

 

 

$10,822

 

 

$81,369

 

 

$(37,225)

 

$72,194

 

Net income

 

 

-

 

 

 

-

 

 

 

1,018

 

 

 

-

 

 

 

1,018

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,423)

 

 

(5,423)

Dividends on common stock ($.26 per share)

 

 

-

 

 

 

-

 

 

 

(906)

 

 

-

 

 

 

(906)

Common stock issued

 

 

18

 

 

 

58

 

 

 

-

 

 

 

-

 

 

 

76

 

Stock-based compensation expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Balance, September 30, 2023

 

$17,246

 

 

$10,941

 

 

$81,481

 

 

$(42,648)

 

$67,020

 

 

See Notes to Consolidated Financial Statements

 

 
7

Table of Contents

 

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

 

Nine Months Ended September 30, 2023 and 2022.

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$17,071

 

 

$10,127

 

 

$78,350

 

 

$(5,092)

 

$100,456

 

Net Income

 

 

-

 

 

 

-

 

 

 

6,621

 

 

 

-

 

 

 

6,621

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(39,112)

 

 

(39,112)

Dividends on common stock ($.78 per share)

 

 

-

 

 

 

-

 

 

 

(2,692)

 

 

-

 

 

 

(2,692)

Common stock issued

 

 

38

 

 

 

175

 

 

 

-

 

 

 

-

 

 

 

213

 

Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

 

 

26

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

56

 

Stock-based compensation expense

 

 

-

 

 

 

135

 

 

 

-

 

 

 

-

 

 

 

135

 

Balance, September 30, 2022

 

$17,135

 

 

$10,467

 

 

$82,279

 

 

$(44,204)

 

$65,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2022

 

$17,149

 

 

$10,577

 

 

$83,078

 

 

$(40,012)

 

$70,792

 

Net income

 

 

-

 

 

 

-

 

 

 

2,314

 

 

 

-

 

 

 

2,314

 

Cumulative effect adjustment due to the adoption of ASC 326, net of tax

 

 

-

 

 

 

-

 

 

 

(1,203)

 

 

-

 

 

 

(1,203)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,636)

 

 

(2,636)

Dividends on common stock ($.78 per share)

 

 

-

 

 

 

-

 

 

 

(2,708)

 

 

-

 

 

 

(2,708)

Common stock issued

 

 

57

 

 

 

182

 

 

 

-

 

 

 

-

 

 

 

239

 

Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

 

 

40

 

 

 

(12)

 

 

-

 

 

 

-

 

 

 

28

 

Stock-based compensation expense

 

 

-

 

 

 

194

 

 

 

-

 

 

 

-

 

 

 

194

 

Balance, September 30, 2023

 

$17,246

 

 

$10,941

 

 

$81,481

 

 

$(42,648)

 

$67,020

 

 

See Notes to Consolidated Financial Statements

 

 
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F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$2,314

 

 

$6,621

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

958

 

 

 

833

 

Amortization of intangibles

 

 

23

 

 

 

28

 

Amortization of securities

 

 

11,594

 

 

 

19,173

 

Proceeds from loans held for sale

 

 

93,872

 

 

 

116,448

 

Loans held for sale originated

 

 

(92,677)

 

 

(112,954)

Gain on sale of loans held for sale

 

 

(1,849)

 

 

(1,917)

Provision for credit losses

 

 

1,159

 

 

 

150

 

Increase in interest receivable

 

 

(650)

 

 

(543)

(Increase) decrease in deferred taxes

 

 

(1)

 

 

9,179

 

(Increase) decrease in other assets

 

 

(2,691)

 

 

1,039

 

Decrease in accrued expenses

 

 

(1,025)

 

 

(9,244)

Amortization of limited partnership investments

 

 

616

 

 

 

613

 

Amortization of debt issuance costs

 

 

32

 

 

 

107

 

Income from life insurance investment

 

 

(612)

 

 

(522)

Gain on life insurance investment

 

 

(370)

 

 

-

 

Loss on the sale of investment securities

 

 

-

 

 

 

97

 

Gain on the sale of fixed assets

 

 

(16)

 

 

(10)

Stock-based compensation expense

 

 

194

 

 

 

135

 

Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale

 

 

-

 

 

 

59

 

Net cash provided by operating activities

 

 

10,871

 

 

 

29,292

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of investments available for sale and other investments

 

 

-

 

 

 

(108,057)

Proceeds from maturity of investments available for sale

 

 

4,825

 

 

 

4,000

 

Proceeds from the sale of investments available for sale

 

 

-

 

 

 

8,699

 

Investment in restricted stock, net

 

 

(137)

 

 

(891)

Investment in limited partnership

 

 

(200)

 

 

(220)

Net increase in loans held for investment

 

 

(62,702)

 

 

(37,753)

Proceeds from life insurance investment

 

 

1,738

 

 

 

-

 

Proceeds from the sale of fixed assets

 

 

93

 

 

 

27

 

Net purchase of property and equipment

 

 

(5,375)

 

 

(2,720)

Proceeds from the sale of other real estate owned

 

 

-

 

 

 

138

 

Net cash (used in) investing activities

 

 

(61,758)

 

 

(136,777)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

50,533

 

 

 

37,099

 

Net change in short-term debt

 

 

(10,000)

 

 

30,000

 

Dividends paid in cash

 

 

(2,708)

 

 

(2,692)

Proceeds from issuance of common stock

 

 

267

 

 

 

269

 

Repayments of long-term debt

 

 

-

 

 

 

(15,000)

Net cash provided by financing activities

 

 

38,092

 

 

 

49,676

 

Net decrease in Cash and Cash Equivalents

 

 

(12,795)

 

 

(57,809)

Cash and cash equivalents, beginning of period

 

 

34,953

 

 

 

88,121

 

Cash and cash equivalents, end of period

 

$22,158

 

 

$30,312

 

Supplemental Cash Flow information:

 

 

 

 

 

 

 

 

Cash paid for: Interest

 

$16,709

 

 

$4,031

 

Taxes

 

 

360

 

 

 

-

 

Supplemental non-cash disclosures:

 

 

 

 

 

 

 

 

Change in unrealized loss on securities available for sale

 

$3,337

 

 

$(49,509)

Cumulative effect of the adoption of ASC 326

 

 

1,524

 

 

 

-

 

Transfer from loans to other real estate owned

 

 

-

 

 

 

197

 

 

See Notes to Consolidated Financial Statements

 

 
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Notes to the Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of F&M Bank Corp. (the “Company”), Farmers & Merchants Bank (the “Bank”), TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services, Inc. (“FMFS”), VBS Mortgage, LLC (dba “F&M Mortgage”), and VSTitle, LLC (“VST”), with all significant intercompany accounts and transactions eliminated.

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to accepted practices within the banking industry.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses.

 

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.

 

Nature of Operations

 

The Company, through its subsidiary Farmers & Merchants 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 Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank provides services to customers primarily in the counties of Rockingham, Shenandoah, Augusta, and Frederick, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in Virginia. Services are provided at fourteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., F&M Mortgage, and VSTitle, LLC.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits. Generally, federal funds are purchased and sold on an overnight basis.

 

Accounting Standards Adopted in 2023

 

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments “ASC 326”. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

 

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

 

 
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The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $777,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $747,000, which is recorded within Other Liabilities. The Company recorded a net decrease to retained earnings of $1.2 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

 

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined there was no allowance for credit losses on available for sale securities.

 

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

 

Allowance for Credit Losses – Held to Maturity Securities

 

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was immaterial at September 30, 2023 and was excluded from the estimate of credit losses.

 

The state and local governments securities held by the Company are highly rated by major rating agencies. As a result, no allowance for credit losses was recorded on held to maturity securities at September 30, 2023.

 

Allowance for Credit Losses – Available for Sale Securities

 

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

 

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

 

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to the available for sale portfolio.

 

Accrued interest receivable on available for sale debt securities totaled $1.4 million at September 30, 2023 and was excluded from the estimate of credit losses.

 

Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $3.2 million at September 30, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

 

 
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The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

 

All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

 

Allowance for Credit Losses – Loans

 

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

 

The Company utilizes a Qualitative Scorecard (“scorecard”) to adjust the historical loss information, as necessary, to reflect the Company’s expectations about the future. For each segment, the scorecard calculates the difference between the quantitative expected credit loss and the high watermark average remaining maturity loss rates. This difference is the maximum qualitative adjustment that can be applied to that segment. Due to the low number of losses in the Bank’s portfolio, in particular during the great financial crisis from 2008-2012, a number of pool sets will leverage peer data to calculate the overall loss rate. The Company believes that in order to provide a reasonable and supportable loss rate, data representative of losses during a financial downturn will provide a better representation of the perceived risk in the portfolio. In determining how to apply the weightings for the various qualitative factors, management assessed which factors would have the highest impact on potential loan losses. The economy and problem loan trends were determined to have the most significant effect on the estimated losses. The most influential factor on potential loan losses are economic conditions, with a weighting of 20%-25%. The Company will evaluate the weighting applied to each pool on an annual basis.

 

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a remaining life methodology:

 

1-4 family residential construction. Construction loans are subject to general risks from changing housing market trends and economic conditions that may impact demand for completed properties, availability of building materials, and the costs of completion. Changes in construction costs and interest rates may impact the borrower’s ability to service the debt. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to-value ratios for the collateral.

 

Other construction, land development and land. Construction and land development loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to-value ratios for the collateral.

 

Secured by farmland. Farmland loans are loans secured by agricultural property. These loans are subject to risks associated with the value of the underlying farmland and the cash flows of the borrower’s farming operations.

 

Home equity - open end. The home-equity loan portfolio carries risks associated with the creditworthiness of the borrower and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value at origination, experienced underwriting, and requiring standards for appraisers.

 

 
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Real estate. Real estate loans are for consumer residential 1-4 family real estate where the credit quality is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, and local housing market trends and interest rates. Risks specific to a borrower are determined by previous repayment history, loan-to-value ratios, and debt-to-income ratios.

 

Home equity - closed end. The home-equity closed-end loan portfolio carries risks associated with the creditworthiness of the borrower, changes in loan-to-value ratios, and subordinate lien positions. The Company manages these risks through policies and procedures such as limiting loan-to-value at origination, experienced underwriting, and requiring standards for appraisers.

 

Multifamily. Multifamily loans are loans secured by multi-unit residential property. These loans are subject to risks associated with the value of the underlying property, availability of rental units, as well as the successful operation and management of the property.

 

Owner-occupied commercial real estate. The commercial real estate segment includes loans secured by commercial real estate occupied by the owner/borrower. Loans in this segment are impacted by economic risks from changing commercial real estate markets, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.

 

Other commercial real estate. The other commercial real estate segment includes loans secured by commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for commercial buildings, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.

 

Agriculture loans. Agriculture loans are secured by agricultural equipment or are unsecured. Credit risk for these loans is subject to economic conditions, generally monitored by local agricultural/farming trends, interest rates, and borrower repayment ability and collateral value (if secured).

 

Commercial and industrial. Commercial and industrial loans are secured by collateral other than real estate or are unsecured. Credit risk for these loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, and borrower repayment ability and collateral value (if secured).

 

Credit cards. Credit card loan portfolios carry risks associated with the creditworthiness of the borrower and changes in the economic environment. The Company manages these risks through policies and procedures such as experienced underwriting, maximum debt-to-income ratios, and minimum borrower credit scores.

 

Automobile loans. Automobile loans generally carry certain risks associated with the values of the collateral and borrower’s ability to repay the loan. Lending on new and used vehicles is subject to the risk of changing values in the availability of vehicles and the resale value.

 

Other consumer loans. Other consumer loans may be secured or unsecured. Credit risk stems primarily from the borrower’s ability to repay. If the loan is secured, the Company analyzes loan-to-value ratios. All consumer non-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates.

 

Municipal loans. Municipal loans are unsecured loans generally made to local towns within the Bank’s trade area. Credit risk is based on the cash flow and management of the local town’s budgets.

 

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

 

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate.

 

 
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Table of Contents

 

Allowance for Credit Losses – Unfunded Commitments

 

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

 

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

 

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. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends.

 

Recent Accounting Pronouncements

 

Accounting Standards adopted in 2023:

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments, was $1.5 million. The adjustment net of tax recorded to shareholders’ equity totaled $1.2 million. See Note 1 for additional details of adoption of this standard.

 

In March 2022, the FASB issued Accounting Standards Update ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.

 

In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.

 

In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of ASU 2022-01 did not have a material impact on the Company’s consolidated financial statements.

 

 
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Table of Contents

 

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The adoption of ASU 2021-08 did not have a material impact on the Company’s consolidated financial statements.

 

Accounting Standards Pending Adoption:

 

In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

 

In August 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification® Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective on a prospective basis for all joint ventures with a formation date on or after January 1, 2025. Early adoption of ASU No. 2023-05 is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply ASU No. 2023-05 either prospectively or retrospectively. The Company does not expect the adoption of ASU 2023-05 to have a material impact on its consolidated financial statements.

 

In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

 

In March 2023, the FASB issued ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.

 

 
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In March 2023, the FASB issued ASU No. 2023-01, “Leases (Topic 842): Common Control Arrangements”. These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2023-01 to have a material impact on its consolidated financial statements.

 

In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of U.S. dollar LIBOR to June 30, 2023.

 

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company transitioned all loan agreements, other than SWAP loans, away from LIBOR during 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation of transition away from LIBOR by the swap holder.

 

In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

 

The Company transitioned all loan agreements, other than SWAP loans, away from LIBOR during 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation of transition away from LIBOR by the swap holder.

 

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.

 

 
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Note 2. Investment Securities

 

The amortized cost and estimated fair value of securities held to maturity along with gross unrealized gains and losses are summarized as follows (dollars in thousands):

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Treasury

 

$125

 

 

$-

 

 

$12

 

 

$113

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Treasury

 

$125

 

 

$-

 

 

$13

 

 

$112

 

 

There is no allowance for credit losses on held to maturity securities. At September 30, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the quarter ended September 30, 2023.

 

The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized as follows (dollars in thousands):

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$39,918

 

 

$-

 

 

$2,912

 

 

$37,006

 

U.S. Agency

 

 

143,484

 

 

 

-

 

 

 

11,870

 

 

 

131,614

 

Municipal bonds

 

 

41,382

 

 

 

-

 

 

 

5,059

 

 

 

36,323

 

Mortgage-backed securities

 

 

171,546

 

 

 

161

 

 

 

29,988

 

 

 

141,719

 

Corporate

 

 

30,550

 

 

 

-

 

 

 

4,873

 

 

 

25,677

 

Total Securities Available for Sale

 

$426,880

 

 

$161

 

 

$54,702

 

 

$372,339

 

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$39,902

 

 

$-

 

 

$3,259

 

 

$36,643

 

U.S. Agency

 

 

143,473

 

 

 

-

 

 

 

13,725

 

 

 

129,748

 

Municipal bonds

 

 

46,331

 

 

 

27

 

 

 

4,160

 

 

 

42,198

 

Mortgage-backed securities

 

 

183,044

 

 

 

77

 

 

 

26,246

 

 

 

156,875

 

Corporate

 

 

30,550

 

 

 

-

 

 

 

3,919

 

 

 

26,631

 

Total Securities Available for Sale

 

$443,300

 

 

$104

 

 

$51,309

 

 

$392,095

 

 

There was no allowance for credit losses on available for sale securities.

 

The amortized cost and fair value of securities at September 30, 2023, by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Securities Held to Maturity

 

 

Securities Available for Sale

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$125

 

 

$113

 

 

$25,491

 

 

$25,096

 

Due after one year through five years

 

 

-

 

 

 

-

 

 

 

186,744

 

 

 

171,180

 

Due after five years

 

 

-

 

 

 

-

 

 

 

71,573

 

 

 

60,115

 

Due after ten years

 

 

-

 

 

 

-

 

 

 

143,072

 

 

 

115,948

 

Total

 

$125

 

 

$113

 

 

$426,880

 

 

$372,339

 

 

 
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Table of Contents

 

The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):

 

 

 

Three Months

Ended

September 30,

2023

 

 

Nine Months

Ended

September 30,

2023

 

Realized gains (losses):

 

 

 

 

 

 

 Gross realized gains

 

$-

 

 

$-

 

 Gross realized losses

 

 

-

 

 

 

-

 

Net realized (losses)

 

$-

 

 

$-

 

Proceeds from sales of securities

 

$-

 

 

$-

 

 

 

 

Three Months

Ended

September 30,

2022

 

 

Nine Months

Ended

September 30,

2022

 

Realized gains (losses):

 

 

 

 

 

 

 Gross realized gains

 

$-

 

 

$-

 

 Gross realized (losses)

 

 

-

 

 

 

(97)

Net realized (losses)

 

$-

 

 

$(97)

Proceeds from sales of securities

 

$-

 

 

$8,699

 

 

The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position at September 30, 2023 (dollars in thousands):

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$-

 

 

$-

 

 

$37,006

 

 

$2,912

 

 

$37,006

 

 

$2,912

 

U.S. Agency

 

 

-

 

 

 

-

 

 

 

131,614

 

 

 

11,870

 

 

 

131,614

 

 

 

11,870

 

Municipal bonds

 

 

5,432

 

 

 

593

 

 

 

30,890

 

 

 

4,466

 

 

 

36,322

 

 

 

5,059

 

Mortgage-backed securities

 

 

-

 

 

 

-

 

 

 

136,523

 

 

 

29,988

 

 

 

136,523

 

 

 

29,988

 

Corporate

 

 

1,673

 

 

 

327

 

 

 

24,004

 

 

 

4,546

 

 

 

25,677

 

 

 

4,873

 

Total

 

$7,105

 

 

$920

 

 

$360,037

 

 

$53,782

 

 

$367,142

 

 

$54,702

 

 

Unrealized losses at September 30, 2023 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

 

The following table shows the gross unrealized losses and estimated fair value of available sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022 (dollars in thousands):

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$9,657

 

 

$362

 

 

$26,987

 

 

$2,897

 

 

$36,644

 

 

$3,259

 

U.S. Agency

 

 

13,914

 

 

 

1,083

 

 

 

115,835

 

 

 

12,642

 

 

 

129,749

 

 

 

13,725

 

Municipal bonds

 

 

21,805

 

 

 

1,426

 

 

 

18,710

 

 

 

2,734

 

 

 

40,515

 

 

 

4,160

 

Mortgage-backed securities

 

 

32,823

 

 

 

2,429

 

 

 

119,892

 

 

 

23,817

 

 

 

152,715

 

 

 

26,246

 

Corporate

 

 

16,252

 

 

 

2,198

 

 

 

10,379

 

 

 

1,721

 

 

 

26,631

 

 

 

3,919

 

Total

 

$94,451

 

 

$7,498

 

 

$291,803

 

 

$43,811

 

 

$386,254

 

 

$51,309

 

 

 
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Table of Contents

 

As of September 30, 2023, other investments consist of investments in twelve low-income housing and historic equity partnerships (carrying basis of $5.3 million), stock in the Federal Home Loan Bank of Atlanta (“FHLB’) (carrying basis $3.7 million) and various other investments (carrying basis $2.0 million). 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 September 30, 2023. At September 30, 2023, the Company was committed to invest an additional $625,000 in three 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 other liabilities on the consolidated balance sheet.

 

The Company has pledged securities with a par value of $222.5 million and market value of $190.2 million to the Federal Reserve Discount Window Bank Term Funding Program (“BTFP”) as of September 30, 2023. The BTFP was established in March 2023 to offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The Bank has not borrowed from the BTFP during 2023.

 

Note 3. Loans and Allowance for Credit Losses

 

Under adoption of ASC 326, there were changes to certain loan segments to better differentiate credit characteristics and align with our ACL model. Construction/land development was split into two segments: 1-4 family residential construction and other construction, land development and land. Commercial real estate was also split into two segments: owner-occupied commercial real estate and other commercial real estate. Commercial and industrial – non-real estate was divided into agricultural loans, commercial and industrial loans, and municipal loans. Dealer finance was consolidated with other automobile loans.

 

The following is a summary of the major categories of total loans outstanding at September 30, 2023 and December 31, 2022 (dollars in thousands):

 

September 30,

2023

 

1-4 Family residential construction

 

$34,320

 

Other construction, land development and land

 

 

46,027

 

Secured by farmland

 

 

80,502

 

Home equity – open end

 

 

46,351

 

Real estate

 

 

182,814

 

Home Equity – closed end

 

 

5,054

 

Multifamily

 

 

8,257

 

Owner-occupied commercial real estate

 

 

91,836

 

Other commercial real estate

 

 

102,216

 

Agricultural loans

 

 

13,299

 

Commercial and industrial

 

 

47,282

 

Credit Cards

 

 

3,316

 

Automobile loans

 

 

123,981

 

Other consumer loans

 

 

15,149

 

Municipal loans

 

 

5,844

 

Gross loans

 

 

806,248

 

Unamortized net deferred loan fees

 

 

(646)

Less allowance for credit losses

 

 

9,166

 

Net loans

 

$796,436

 

 

 
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Table of Contents

 

 

 

December 31,

2022

 

Construction/Land Development

 

$68,671

 

Farmland

 

 

74,322

 

Real Estate

 

 

153,281

 

Multi-Family

 

 

9,622

 

Commercial Real Estate

 

 

195,163

 

Home Equity – closed end

 

 

4,707

 

Home Equity – open end

 

 

46,928

 

Commercial & Industrial – Non-Real Estate

 

 

56,625

 

Consumer

 

 

6,488

 

Dealer Finance

 

 

125,125

 

Credit Cards

 

 

3,242

 

Gross loans

 

 

744,174

 

Unamortized net deferred loan fees

 

 

(570)

Less allowance for credit losses

 

 

7,936

 

Net loans

 

$735,668

 

 

The Company has pledged loans held for investment as collateral for borrowings with the FHLB totaling $271.5 million and $209.8 million as of September 30, 2023 and December 31, 2022, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial, agricultural farmland, and home equity portfolios.

 

Nonaccrual and Past Due Loans

 

The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2023 (dollars in thousands):

 

 

 

Accruing Loans 30-59 Days Past due

 

 

Accruing Loans 60-89 Days Past due

 

 

Accruing Loans 90 Days or More Past due

 

 

Nonaccrual

Loans

 

 

Accruing Current Loans

 

 

Total Loans

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family residential construction

 

$-

 

 

$-

 

 

$-

 

 

$723

 

 

$33,597

 

 

$34,320

 

Other construction, land development and land

 

 

-

 

 

 

-

 

 

 

-

 

 

 

545

 

 

 

45,482

 

 

 

46,027

 

Secured by farmland

 

 

-

 

 

 

-

 

 

 

-

 

 

 

977

 

 

 

79,525

 

 

 

80,502

 

Home equity – open end

 

 

494

 

 

 

-

 

 

 

-

 

 

 

225

 

 

 

45,632

 

 

 

46,351

 

Real estate

 

 

1,714

 

 

 

-

 

 

 

-

 

 

 

591

 

 

 

180,509

 

 

 

182,814

 

Home Equity – closed end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,054

 

 

 

5,054

 

Multifamily

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,257

 

 

 

8,257

 

Owner-occupied commercial real estate

 

 

1,328

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

90,508

 

 

 

91,836

 

Other commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

102,216

 

 

 

102,216

 

Agricultural loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73

 

 

 

13,226

 

 

 

13,299

 

Commercial and industrial

 

 

162

 

 

 

-

 

 

 

25

 

 

 

33

 

 

 

47,062

 

 

 

47,282

 

Credit Cards

 

 

59

 

 

 

19

 

 

 

4

 

 

 

-

 

 

 

3,234

 

 

 

3,316

 

Automobile loans

 

 

854

 

 

 

221

 

 

 

-

 

 

 

380

 

 

 

122,526

 

 

 

123,981

 

Other consumer loans

 

 

67

 

 

 

16

 

 

 

-

 

 

 

10

 

 

 

15,056

 

 

 

15,149

 

Municipal loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,844

 

 

 

5,844

 

Gross loans

 

 

4,678

 

 

 

256

 

 

 

29

 

 

 

3,557

 

 

 

797,728

 

 

 

806,248

 

Less: Unamortized net deferred loan fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(646)

 

 

(646)

Loans held for investment

 

$4,678

 

 

$256

 

 

$29

 

 

$3,557

 

 

$797,082

 

 

$805,602

 

 

 
20

Table of Contents

 

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2022 (dollars in thousands):

 

 

 

Accruing Loans 30-59 Days Past due

 

 

Accruing Loans 60-89 Days Past due

 

 

Accruing Loans 90 Days or More Past Due

 

 

Nonaccrual

Loans

 

 

Accruing Current Loans

 

 

Total Loans

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction/Land Development

 

$477

 

 

$539

 

 

$-

 

 

$21

 

 

$67,634

 

 

$68,671

 

Farmland

 

 

85

 

 

 

18

 

 

 

-

 

 

 

1,458

 

 

 

72,761

 

 

 

74,322

 

Real Estate

 

 

1,807

 

 

 

226

 

 

 

-

 

 

 

419

 

 

 

150,829

 

 

 

153,281

 

Multi-Family

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,622

 

 

 

9,622

 

Commercial Real Estate

 

 

234

 

 

 

82

 

 

 

-

 

 

 

-

 

 

 

194,847

 

 

 

195,163

 

Home Equity – closed end

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,704

 

 

 

4,707

 

Home Equity – open end

 

 

385

 

 

 

177

 

 

 

-

 

 

 

-

 

 

 

46,366

 

 

 

46,928

 

Commercial & Industrial – Non- Real Estate

 

 

104

 

 

 

-

 

 

 

31

 

 

 

101

 

 

 

56,389

 

 

 

56,625

 

Consumer

 

 

11

 

 

 

11

 

 

 

-

 

 

 

15

 

 

 

6,451

 

 

 

6,488

 

Dealer Finance

 

 

1,117

 

 

 

225

 

 

 

5

 

 

 

210

 

 

 

123,568

 

 

 

125,125

 

Credit Cards

 

 

51

 

 

 

9

 

 

 

2

 

 

 

-

 

 

 

3,180

 

 

 

3,242

 

Less: Unamortized net deferred loan fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(570)

 

 

(570)

Loans held for investment

 

$4,274

 

 

$1,287

 

 

$38

 

 

$2,224

 

 

$735,781

 

 

$743,604

 

 

There were $3.6 million and $2.2 million in nonaccrual loans at September 30, 2023 and December 31, 2022, respectively. The Company would have earned $162,000 in the first nine months of 2023 and $103,000 in the first nine months of 2022, if interest on the nonaccrual loans had been accrued.

 

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated (dollars in thousands). Information for September 30, 2023 is presented under CECL, while information for December 31, 2022 is presented in accordance with the previously applicable incurred loss methodology.

 

 

 

CECL

 

 

Incurred Loss

 

 

 

September 30,

2023

 

 

December 31,

2022

 

 

 

Nonaccrual loans with No Allowance

 

 

Nonaccrual Loans with an Allowance

 

 

Total Nonaccrual

Loans

 

 

Nonaccrual

Loans

 

1-4 Family residential construction

 

$723

 

 

$-

 

 

$723

 

 

$-

 

Other construction, land development and land

 

 

545

 

 

 

-

 

 

 

545

 

 

 

21

 

Secured by farmland

 

 

977

 

 

 

-

 

 

 

977

 

 

 

1,458

 

Home equity – open end

 

 

225

 

 

 

-

 

 

 

225

 

 

 

-

 

Real estate

 

 

591

 

 

 

-

 

 

 

591

 

 

 

419

 

Home Equity – closed end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Owner-occupied commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural loans

 

 

73

 

 

 

-

 

 

 

73

 

 

 

88

 

Commercial and industrial

 

 

33

 

 

 

-

 

 

 

33

 

 

 

13

 

Credit Cards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Automobile loans

 

 

380

 

 

 

-

 

 

 

380

 

 

 

210

 

Other consumer loans

 

 

10

 

 

 

-

 

 

 

10

 

 

 

15

 

Municipal loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total loans

 

$3,557

 

 

$-

 

 

$3,557

 

 

$2,224

 

 

 
21

Table of Contents

 

The following table represents the accrued interest receivables written off by reversing interest income during the three and nine months ended September 30, 2023 (dollars in thousands):

 

 

 

For the Three

Months Ended

September 30,

2023

 

 

For the Nine

Months Ended

September 30,

2023

 

1-4 Family residential construction

 

$10

 

 

$10

 

Other construction, land development and land

 

 

6

 

 

 

6

 

Secured by farmland

 

 

-

 

 

 

-

 

Home equity – open end

 

 

-

 

 

 

1

 

Real estate

 

 

1

 

 

 

3

 

Home Equity – closed end

 

 

-

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

Owner-occupied commercial real estate

 

 

-

 

 

 

-

 

Other commercial real estate

 

 

-

 

 

 

-

 

Agricultural loans

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

-

 

 

 

-

 

Credit Cards

 

 

-

 

 

 

-

 

Automobile loans

 

 

5

 

 

 

8

 

Other consumer loans

 

 

-

 

 

 

-

 

Municipal loans

 

 

-

 

 

 

-

 

Total loans

 

$22

 

 

$28

 

 

 
22

Table of Contents

 

Credit Quality Indicators

 

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023 (dollars in thousands):

 

 

 

Term Loans by Year of Origination

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

1-4 Family residential construction

 

Pass

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

$33,079

 

 

$33,079

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

518

 

 

 

518

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

723

 

 

 

723

 

Total 1-4 Family residential construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

34,320

 

 

 

34,320

 

Current period gross write-offs

 

 

-

 

 

 

70

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction, land development and land

Pass

 

 

4,343

 

 

 

3,903

 

 

 

5,753

 

 

 

1,862

 

 

 

2,883

 

 

 

4,957

 

 

 

21,339

 

 

 

45,040

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

261

 

 

 

181

 

 

 

442

 

Substandard

 

 

521

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24

 

 

 

-

 

 

 

545

 

Total Other construction, land development and land

 

 

4,864

 

 

 

3,903

 

 

 

5,753

 

 

 

1,862

 

 

 

2,883

 

 

 

5,242

 

 

 

21,520

 

 

 

46,027

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by farmland

Pass

 

 

6,395

 

 

 

15,174

 

 

 

14,149

 

 

 

27,475

 

 

 

2,533

 

 

 

6,530

 

 

 

5,553

 

 

 

77,809

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

790

 

 

 

910

 

 

 

-

 

 

 

1,700

 

Substandard

 

 

-

 

 

 

-

 

 

 

325

 

 

 

-

 

 

 

-

 

 

 

652

 

 

 

16

 

 

 

993

 

Total Secured by farmland

 

 

6,395

 

 

 

15,174

 

 

 

14,474

 

 

 

27,475

 

 

 

3,323

 

 

 

8,092

 

 

 

5,569

 

 

 

80,502

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity – open end

Pass

 

 

370

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

143

 

 

 

44,182

 

 

 

44,695

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,381

 

 

 

1,381

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

275

 

 

 

275

 

Total Home equity - open end

 

 

370

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

143

 

 

 

45,838

 

 

 

46,351

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

Pass

 

 

36,704

 

 

 

44,780

 

 

 

15,382

 

 

 

12,310

 

 

 

6,555

 

 

 

56,434

 

 

 

192

 

 

 

172,357

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

502

 

 

 

155

 

 

 

5,784

 

 

 

-

 

 

 

6,441

 

Substandard

 

 

-

 

 

 

90

 

 

 

542

 

 

 

-

 

 

 

1,218

 

 

 

2,166

 

 

 

-

 

 

 

4,016

 

Total Real estate

 

 

36,704

 

 

 

44,870

 

 

 

15,924

 

 

 

12,812

 

 

 

7,928

 

 

 

64,384

 

 

 

192

 

 

 

182,814

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity – closed end

Pass

 

 

1,059

 

 

 

391

 

 

 

121

 

 

 

1,067

 

 

 

473

 

 

 

1,560

 

 

 

-

 

 

 

4,671

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

371

 

 

 

-

 

 

 

371

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

-

 

 

 

-

 

 

 

12

 

Total Home Equity - closed end

 

 

1,059

 

 

 

391

 

 

 

121

 

 

 

1,067

 

 

 

485

 

 

 

1,931

 

 

 

-

 

 

 

5,054

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

Pass

 

 

-

 

 

 

2,730

 

 

 

1,414

 

 

 

916

 

 

 

-

 

 

 

1,590

 

 

 

1,504

 

 

 

8,154

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

103

 

 

 

-

 

 

 

103

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Multifamily

 

 

-

 

 

 

2,730

 

 

 

1,414

 

 

 

916

 

 

 

-

 

 

 

1,693

 

 

 

1,504

 

 

 

8,257

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-occupied commercial real estate

Pass

 

 

2,165

 

 

 

18,342

 

 

 

18,132

 

 

 

7,208

 

 

 

3,649

 

 

 

23,487

 

 

 

5,891

 

 

 

78,874

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40

 

 

 

2,108

 

 

 

-

 

 

 

2,148

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,323

 

 

 

1,193

 

 

 

3,298

 

 

 

10,814

 

Total Owner-occupied commercial real estate

 

 

2,165

 

 

 

18,342

 

 

 

18,132

 

 

 

7,208

 

 

 

10,012

 

 

 

26,788

 

 

 

9,189

 

 

 

91,836

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other commercial real estate

Pass

 

 

4,148

 

 

 

30,132

 

 

 

12,895

 

 

 

5,059

 

 

 

3,825

 

 

 

31,048

 

 

 

3,229

 

 

 

90,336

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,793

 

 

 

-

 

 

 

11,793

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

-

 

 

 

87

 

Total Other commercial real estate

 

 

4,148

 

 

 

30,132

 

 

 

12,895

 

 

 

5,059

 

 

 

3,825

 

 

 

42,928

 

 

 

3,229

 

 

 

102,216

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 
23

Table of Contents

 

 

 

Term Loans by Year of Origination

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

Agricultural loans

 

Pass

 

 

2,869

 

 

 

2,719

 

 

 

627

 

 

 

453

 

 

 

-

 

 

 

38

 

 

 

6,333

 

 

 

13,039

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37

 

 

 

-

 

 

 

-

 

 

 

150

 

 

 

187

 

Substandard

 

 

-

 

 

 

48

 

 

 

14

 

 

 

11

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73

 

Total Agricultural loans

 

 

2,869

 

 

 

2,767

 

 

 

641

 

 

 

501

 

 

 

-

 

 

 

38

 

 

 

6,483

 

 

 

13,299

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

Pass

 

 

4,971

 

 

 

8,901

 

 

 

5,790

 

 

 

1,914

 

 

 

806

 

 

 

369

 

 

 

16,571

 

 

 

39,322

 

Watch

 

 

-

 

 

 

48

 

 

 

57

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,167

 

 

 

7,272

 

Substandard

 

 

-

 

 

 

33

 

 

 

628

 

 

 

25

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

688

 

Total 1-4 Commercial and industrial

 

 

4,971

 

 

 

8,982

 

 

 

6,475

 

 

 

1,939

 

 

 

806

 

 

 

371

 

 

 

23,738

 

 

 

47,282

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Cards

Pass

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,312

 

 

 

3,312

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

4

 

Total Credit cards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,316

 

 

 

3,316

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automobile loans

Pass

 

 

46,565

 

 

 

42,147

 

 

 

21,824

 

 

 

8,772

 

 

 

2,755

 

 

 

1,019

 

 

 

-

 

 

 

123,082

 

Watch

 

 

199

 

 

 

130

 

 

 

48

 

 

 

43

 

 

 

53

 

 

 

46

 

 

 

-

 

 

 

519

 

Substandard

 

 

30

 

 

 

124

 

 

 

187

 

 

 

30

 

 

 

4

 

 

 

5

 

 

 

-

 

 

 

380

 

Total Automobile loans

 

 

46,794

 

 

 

42,401

 

 

 

22,059

 

 

 

8,845

 

 

 

2,812

 

 

 

1,070

 

 

 

-

 

 

 

123,981

 

Current period gross write-offs

 

 

88

 

 

 

424

 

 

 

386

 

 

 

105

 

 

 

32

 

 

 

25

 

 

 

-

 

 

 

1,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer loans

Pass

 

 

4,521

 

 

 

5,619

 

 

 

2,587

 

 

 

1,062

 

 

 

307

 

 

 

532

 

 

 

473

 

 

 

15,101

 

Watch

 

 

-

 

 

 

4

 

 

 

23

 

 

 

-

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

33

 

Substandard

 

 

-

 

 

 

10

 

 

 

-

 

 

 

-

 

 

 

5

 

 

 

-

 

 

 

-

 

 

 

15

 

Total Other consumer loans

 

 

4,521

 

 

 

5,633

 

 

 

2,610

 

 

 

1,062

 

 

 

314

 

 

 

535

 

 

 

474

 

 

 

15,149

 

Current period gross write-offs

 

 

-

 

 

 

56

 

 

 

1

 

 

 

2

 

 

 

6

 

 

 

2

 

 

 

-

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal loans

Pass

 

 

-

 

 

 

170

 

 

 

973

 

 

 

1,128

 

 

 

1,257

 

 

 

2,316

 

 

 

-

 

 

 

5,844

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Municipal loans

 

 

-

 

 

 

170

 

 

 

973

 

 

 

1,128

 

 

 

1,257

 

 

 

2,316

 

 

 

-

 

 

 

5,844

 

Current period gross write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$114,860

 

 

$175,495

 

 

$101,471

 

 

$69,874

 

 

$33,645

 

 

$155,531

 

 

$155,372

 

 

$806,248

 

Less: Unamortized net deferred loan fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(646)

Loans held for investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$805,602

 

Current period gross write-offs

 

$88

 

 

$550

 

 

$387

 

 

$107

 

 

$38

 

 

$48

 

 

$25

 

 

$1,243

 

 

Under the adoption of ASC 326, the Company consolidated its internal risk ratings 1 through 5 into a pass category. Doubtful loans are charged off; dealer finance loans utilize the updated credit quality indicators. Credit cards are classified as pass or substandard. The credit quality indicators for watch and substandard remain unchanged.

 

Description of the Company’s credit quality indicators under CECL:

 

Pass: Loans in all classes that are part of the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

 

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.

 

 
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Table of Contents

 

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.

 

Credit cards are classified as pass or substandard. A credit card is substandard when payments of principal and interest are past due 90 days or more.

 

The following table shows the Company’s loan portfolio broken down by internal loan grade as of December 31, 2022 (dollars in thousands):

 

December 31, 2022

 

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

 

$-

 

 

$4

 

 

$11,112

 

 

$42,684

 

 

$13,116

 

 

$1,213

 

 

$542

 

 

$-

 

 

$68,671

 

Farmland

 

 

155

 

 

 

269

 

 

 

11,373

 

 

 

38,051

 

 

 

22,069

 

 

 

947

 

 

 

1,458

 

 

 

-

 

 

 

74,322

 

Real Estate

 

 

-

 

 

 

553

 

 

 

27,003

 

 

 

86,269

 

 

 

28,560

 

 

 

6,950

 

 

 

3,946

 

 

 

-

 

 

 

153,281

 

Multi-Family

 

 

-

 

 

 

-

 

 

 

963

 

 

 

5,116

 

 

 

3,430

 

 

 

113

 

 

 

-

 

 

 

-

 

 

 

9,622

 

Commercial Real Estate

 

 

-

 

 

 

3,097

 

 

 

55,662

 

 

 

72,779

 

 

 

41,749

 

 

 

13,878

 

 

 

7,998

 

 

 

-

 

 

 

195,163

 

Home Equity – closed end

 

 

-

 

 

 

48

 

 

 

1,065

 

 

 

2,560

 

 

 

639

 

 

 

382

 

 

 

13

 

 

 

-

 

 

 

4,707

 

Home Equity – open end

 

 

27

 

 

 

1,272

 

 

 

18,671

 

 

 

23,207

 

 

 

2,091

 

 

 

1,611

 

 

 

49

 

 

 

-

 

 

 

46,928

 

Commercial & Industrial - Non-Real Estate

 

 

10

 

 

 

516

 

 

 

12,934

 

 

 

26,310

 

 

 

15,613

 

 

 

911

 

 

 

331

 

 

 

-

 

 

 

56,625

 

Consumer (excluding dealer)

 

 

33

 

 

 

286

 

 

 

2,965

 

 

 

3,105

 

 

 

68

 

 

 

16

 

 

 

15

 

 

 

-

 

 

 

6,488

 

Gross loans

 

$225

 

 

$6,045

 

 

$141,748

 

 

$300,081

 

 

$127,335

 

 

$26,021

 

 

$14,352

 

 

$-

 

 

$615,807

 

Less: Unamortized net deferred loan fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(570)

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$615,237

 

 

 

 

Credit Cards

 

 

Dealer Finance

 

Performing

 

$3,240

 

 

$124,910

 

Nonperforming

 

 

2

 

 

 

215

 

Total

 

$3,242

 

 

$125,125

 

 

Description of internal loan grades under Incurred Loss:

 

Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

 

Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

 

Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.

 

Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long-term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

 

 
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Table of Contents

 

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: Loans having all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.

 

Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming when payments of principal and interest are past due 90 days or more.

 

Collateral Dependent Disclosures

 

The collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

 

 
26

Table of Contents

 

The following table presents an analysis of collateral-dependent loans of the Company as of September 30, 2023 (dollars in thousands):

 

 

 

September 30, 2023

 

 

 

Real Estate

 

 

Business/

Other Assets

 

1-4 Family residential construction

 

$-

 

 

$-

 

Other construction, land development and land

 

 

521

 

 

 

-

 

Secured by farmland

 

 

-

 

 

 

-

 

Home equity – open end

 

 

-

 

 

 

-

 

Real estate

 

 

-

 

 

 

-

 

Home Equity – closed end

 

 

-

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

Owner-occupied commercial real estate

 

 

-

 

 

 

-

 

Other commercial real estate

 

 

-

 

 

 

-

 

Agricultural loans

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

-

 

 

 

-

 

Credit Cards

 

 

-

 

 

 

-

 

Automobile loans

 

 

-

 

 

 

-

 

Other consumer loans

 

 

-

 

 

 

-

 

Municipal loans

 

 

-

 

 

 

-

 

Total loans

 

$521

 

 

$-

 

 

Allowance for Credit Losses

 

The following tables summarize the activity related to the allowance for credit losses for the nine months ended September 30, 2023 under the CECL methodology (dollars in thousands).

 

ACL for Loans

 

 

 

December 31,

2022

 

 

Adjustment for adoption of ASU 2016-13

 

 

Charge-offs

 

 

Recoveries

 

 

Provision for loan credit losses

 

 

September 30,

2023

 

1-4 Family residential construction

 

$324

 

 

$109

 

 

$70

 

 

$1

 

 

$154

 

 

$518

 

Other construction, land development and land

 

 

694

 

 

 

602

 

 

 

-

 

 

 

-

 

 

 

148

 

 

 

1,444

 

Secured by farmland

 

 

571

 

 

 

311

 

 

 

-

 

 

 

-

 

 

 

67

 

 

 

949

 

Home equity – open end

 

 

446

 

 

 

(189)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

257

 

Real estate

 

 

1,389

 

 

 

(184)

 

 

19

 

 

 

-

 

 

 

68

 

 

 

1,254

 

Home Equity – closed end

 

 

39

 

 

 

96

 

 

 

-

 

 

 

-

 

 

 

14

 

 

 

149

 

Multifamily

 

 

71

 

 

 

182

 

 

 

-

 

 

 

-

 

 

 

(45)

 

 

208

 

Owner-occupied commercial real estate

 

 

992

 

 

 

280

 

 

 

-

 

 

 

-

 

 

 

(39)

 

 

1,233

 

Other commercial real estate

 

 

1,023

 

 

 

(582)

 

 

-

 

 

 

-

 

 

 

(5)

 

 

436

 

Agricultural loans

 

 

80

 

 

 

(58)

 

 

-

 

 

 

-

 

 

 

2

 

 

 

24

 

Commercial and industrial

 

 

368

 

 

 

338

 

 

 

2

 

 

 

1

 

 

 

67

 

 

 

772

 

Credit Cards

 

 

68

 

 

 

26

 

 

 

25

 

 

 

20

 

 

 

2

 

 

 

91

 

Automobile loans

 

 

1,790

 

 

 

(257)

 

 

1,060

 

 

 

475

 

 

 

535

 

 

 

1,483

 

Other consumer loans

 

 

81

 

 

 

103

 

 

 

67

 

 

 

42

 

 

 

189

 

 

 

348

 

Municipal loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total loans

 

$7,936

 

 

$777

 

 

$1,243

 

 

$539

 

 

$1,157

 

 

$9,166

 

 

 
27

Table of Contents

 

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods (dollars in thousands).

 

September 30, 2022

 

Beginning

Balance

 

 

Charge-offs

 

 

Recoveries

 

 

Provision

 

 

Ending

Balance

 

 

Individually Evaluated for Impairment

 

 

Collectively Evaluated for Impairment

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction/Land Development

 

$977

 

 

$-

 

 

$-

 

 

$77

 

 

$1,054

 

 

$228

 

 

$826

 

Farmland

 

 

448

 

 

 

-

 

 

 

-

 

 

 

77

 

 

 

525

 

 

 

-

 

 

 

525

 

Real Estate

 

 

1,162

 

 

 

17

 

 

 

-

 

 

 

(4)

 

 

1,141

 

 

 

99

 

 

 

1,042

 

Multi-Family

 

 

29

 

 

 

-

 

 

 

-

 

 

 

27

 

 

 

56

 

 

 

-

 

 

 

56

 

Commercial Real Estate

 

 

2,205

 

 

 

-

 

 

 

-

 

 

 

(398)

 

 

1,807

 

 

 

21

 

 

 

1,786

 

Home Equity – closed end

 

 

41

 

 

 

-

 

 

 

-

 

 

 

(7)

 

 

34

 

 

 

-

 

 

 

34

 

Home Equity – open end

 

 

407

 

 

 

-

 

 

 

130

 

 

 

(141)

 

 

396

 

 

 

-

 

 

 

396

 

Commercial & Industrial – Non-Real Estate

 

 

288

 

 

 

36

 

 

 

44

 

 

 

102

 

 

 

398

 

 

 

-

 

 

 

398

 

Consumer

 

 

520

 

 

 

147

 

 

 

21

 

 

 

(137)

 

 

257

 

 

 

-

 

 

 

257

 

Dealer Finance

 

 

1,601

 

 

 

794

 

 

 

445

 

 

 

518

 

 

 

1,770

 

 

 

13

 

 

 

1,757

 

Credit Cards

 

 

70

 

 

 

42

 

 

 

11

 

 

 

36

 

 

 

75

 

 

 

-

 

 

 

75

 

Total

 

$7,748

 

 

$1,036

 

 

$651

 

 

$150

 

 

$7,513

 

 

$361

 

 

$7,152

 

 

The following tables presents, as of September 30, 2023 and December 31, 2022 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above (dollars in thousands).

 

 

 

September 30, 2023

 

 

 

Loan Balances

 

 

Allowance for Credit Losses - Loans

 

 

 

Loans Individually Evaluated

 

 

Loans Collectively Evaluated

 

 

Total

 

 

Loans Individually Evaluated

 

 

Loans Collectively Evaluated

 

 

Total

 

1-4 Family residential construction

 

$-

 

 

$34,320

 

 

$34,320

 

 

$-

 

 

$518

 

 

$518

 

Other construction, land development and land

 

 

521

 

 

 

45,506

 

 

 

46,027

 

 

 

228

 

 

 

1,216

 

 

 

1,444

 

Secured by farmland

 

 

-

 

 

 

80,502

 

 

 

80,502

 

 

 

-

 

 

 

949

 

 

 

949

 

Home equity – open end

 

 

-

 

 

 

46,351

 

 

 

46,351

 

 

 

-

 

 

 

257

 

 

 

257

 

Real estate

 

 

-

 

 

 

182,814

 

 

 

182,814

 

 

 

-

 

 

 

1,254

 

 

 

1,254

 

Home Equity – closed end

 

 

-

 

 

 

5,054

 

 

 

5,054

 

 

 

-

 

 

 

149

 

 

 

149

 

Multifamily

 

 

-

 

 

 

8,257

 

 

 

8,257

 

 

 

-

 

 

 

208

 

 

 

208

 

Owner-occupied commercial real estate

 

 

-

 

 

 

91,836

 

 

 

91,836

 

 

 

-

 

 

 

1,233

 

 

 

1,233

 

Other commercial real estate

 

 

-

 

 

 

102,216

 

 

 

102,216

 

 

 

-

 

 

 

436

 

 

 

436

 

Agricultural loans

 

 

-

 

 

 

13,299

 

 

 

13,299

 

 

 

-

 

 

 

24

 

 

 

24

 

Commercial and industrial

 

 

-

 

 

 

47,282

 

 

 

47,282

 

 

 

-

 

 

 

772

 

 

 

772

 

Credit Cards

 

 

-

 

 

 

3,316

 

 

 

3,316

 

 

 

-

 

 

 

91

 

 

 

91

 

Automobile loans

 

 

-

 

 

 

123,981

 

 

 

123,981

 

 

 

-

 

 

 

1,483

 

 

 

1,483

 

Other consumer loans

 

 

-

 

 

 

15,149

 

 

 

15,149

 

 

 

-

 

 

 

348

 

 

 

348

 

Municipal loans

 

 

-

 

 

 

5,844

 

 

 

5,844

 

 

 

-

 

 

 

-

 

 

 

-

 

Total loans

 

$521

 

 

$805,727

 

 

$806,248

 

 

$228

 

 

$8,938

 

 

$9,166

 

 

 
28

Table of Contents

 

December 31, 2022

 

Loan

Receivable

 

 

Individually Evaluated for Impairment

 

 

Collectively Evaluated for Impairment

 

Construction/Land Development

 

$68,671

 

 

$853

 

 

$67,818

 

Farmland

 

 

74,322

 

 

 

2,079

 

 

 

72,243

 

Real Estate

 

 

153,281

 

 

 

3,260

 

 

 

150,021

 

Multi-Family

 

 

9,622

 

 

 

-

 

 

 

9,622

 

Commercial Real Estate

 

 

195,163

 

 

 

9,111

 

 

 

186,052

 

Home Equity – closed end

 

 

4,707

 

 

 

-

 

 

 

4,707

 

Home Equity –open end

 

 

46,928

 

 

 

-

 

 

 

46,928

 

Commercial & Industrial – Non-Real Estate

 

 

56,625

 

 

 

-

 

 

 

56,625

 

Consumer

 

 

6,488

 

 

 

-

 

 

 

6,488

 

Dealer Finance

 

 

125,125

 

 

 

62

 

 

 

125,063

 

Credit Cards

 

 

3,242

 

 

 

-

 

 

 

3,242

 

Gross Loans

 

 

744,174

 

 

 

15,365

 

 

 

728,809

 

Less: Unamortized net deferred loan fees

 

 

(570)

 

 

-

 

 

 

(570)

Total

 

$743,604

 

 

$15,365

 

 

$728,239

 

 

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all substandard loans greater than $500,000 and all troubled debt restructurings. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

 

 
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Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022 (dollars in thousands):

 

 

 

December 31, 2022

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

 

 

Recorded

 

 

Principal

 

 

Related

 

 

Recorded

 

 

 

Investment(1)

 

 

Balance

 

 

Allowance

 

 

Investment

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 Construction/Land Development

 

$332

 

 

$332

 

 

$-

 

 

$474

 

 Farmland

 

 

2,535

 

 

 

2,079

 

 

 

-

 

 

 

2,137

 

 Real Estate

 

 

1,882

 

 

 

1,882

 

 

 

-

 

 

 

2,107

 

 Multi-Family

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Commercial Real Estate

 

 

8,131

 

 

 

8,131

 

 

 

-

 

 

 

8,851

 

 Home Equity – closed end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Home Equity – open end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Commercial & Industrial – Non-Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Credit cards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Dealer Finance

 

 

7

 

 

 

7

 

 

 

-

 

 

 

11

 

 

 

 

12,887

 

 

 

12,431

 

 

 

-

 

 

 

13,580

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Construction/Land Development

 

 

521

 

 

 

521

 

 

 

228

 

 

 

261

 

 Farmland

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Real Estate

 

 

1,378

 

 

 

1,378

 

 

 

92

 

 

 

1,466

 

 Multi-Family

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Commercial Real Estate

 

 

980

 

 

 

980

 

 

 

11

 

 

 

1,935

 

 Home Equity – closed end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Home Equity – open end

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Commercial & Industrial – Non-Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Credit cards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Dealer Finance

 

 

55

 

 

 

55

 

 

 

13

 

 

 

62

 

 

 

 

2,934

 

 

 

2,934

 

 

 

344

 

 

 

3,724

 

 Total impaired loans

 

$15,821

 

 

$15,365

 

 

$344

 

 

$17,304

 

 

1The Recorded Investment is defined as the original principal balance less principal payments, charge-offs and nonaccrual payments applied to principal.

 

 
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The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the nine-month period ended September 30, 2022 (dollars in thousands):

 

 

 

Nine Months Ended

September, 30, 2022

 

 

 

Average Recorded

 

 

Interest Income

 

 

 

Investment

 

 

Recognized

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 Construction/Land Development

 

$552

 

 

$15

 

 Farmland

 

 

2,188

 

 

 

151

 

 Real Estate

 

 

2,290

 

 

 

75

 

 Multi-Family

 

 

-

 

 

 

-

 

 Commercial Real Estate

 

 

8,339

 

 

 

266

 

 Home Equity – closed end

 

 

74

 

 

 

-

 

 Home Equity – open end

 

 

-

 

 

 

-

 

 Commercial & Industrial – Non-Real Estate

 

 

-

 

 

 

-

 

 Consumer

 

 

3

 

 

 

-

 

 Credit Cards

 

 

-

 

 

 

-

 

 Dealer Finance

 

 

11

 

 

 

1

 

 

 

 

13,457

 

 

 

508

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

 

 Construction/Land Development

 

$261

 

 

$17

 

 Farmland

 

 

-

 

 

 

-

 

 Real Estate

 

 

1,309

 

 

 

49

 

 Multi-Family

 

 

-

 

 

 

-

 

 Commercial Real Estate

 

 

3,496

 

 

 

34

 

 Home Equity – closed end

 

 

-

 

 

 

-

 

 Home Equity – open end

 

 

-

 

 

 

-

 

 Commercial & Industrial – Non-Real Estate

 

 

-

 

 

 

-

 

 Consumer

 

 

-

 

 

 

-

 

 Credit Card

 

 

-

 

 

 

-

 

 Dealer Finance

 

 

81

 

 

 

5

 

 

 

 

5,147

 

 

 

105

 

Total Impaired Loans

 

$18,604

 

 

$613

 

 

Modifications Made to Borrowers Experiencing Financial Difficulty

 

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a remaining life model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

 

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 

 
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In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

 

There were no loans modified to a borrower experiencing financial difficulty in the three months ended September 30, 2023. There was one loan modified to a borrower experiencing financial difficulty in the nine months ended September 30, 2023 (see table below, dollars in thousands). There were no loans that had a payment default during the quarter that were modified in the previous 12 months.

 

 

 

Nine months ending

September 30, 2023

 

 

 

Term Extension

 

 

 

Amortized

Cost

 

 

Weighted Average Term Extension (Months)

 

Automobile loans

 

$21

 

 

 

3

 

Total loans

 

$21

 

 

 

3

 

 

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months (dollars in thousands):

 

 

 

Payment Status (Amortized Cost Basis)

 

 

 

Current

 

 

30-89 Days Past Due

 

 

90+ Days Past Due

 

1-4 Family residential construction

 

$-

 

 

$-

 

 

$-

 

Other construction, land development and land

 

 

-

 

 

 

-

 

 

 

-

 

Secured by farmland

 

 

-

 

 

 

-

 

 

 

-

 

Home equity – open end

 

 

-

 

 

 

-

 

 

 

-

 

Real estate

 

 

-

 

 

 

16

 

 

 

-

 

Home Equity – closed end

 

 

-

 

 

 

-

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

 

 

-

 

Owner-occupied commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

Other commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural loans

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

-

 

 

 

-

 

 

 

-

 

Credit Cards

 

 

-

 

 

 

-

 

 

 

-

 

Automobile loans

 

 

37

 

 

 

-

 

 

 

-

 

Other consumer loans

 

 

-

 

 

 

-

 

 

 

-

 

Municipal loans

 

 

-

 

 

 

-

 

 

 

-

 

Total loans

 

$37

 

 

$16

 

 

$-

 

 

The following table shows, by modification type, TDRs that occurred during 2022 (dollars in thousands):

 

 

 

December 31, 2022

 

 

 

Number of

Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification

Outstanding Recorded Investment

 

Extended maturity

 

 

3

 

 

$44

 

 

$44

 

Change in terms

 

 

1

 

 

 

162

 

 

 

162

 

Total

 

 

4

 

 

$206

 

 

$206

 

 

Unfunded Commitments

 

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans and are discussed above. The allowance for credit losses for unfunded loan commitments of $749,000 at September 30, 2023 is separately classified on the balance sheet within Other liabilities.

 

 
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Table of Contents

 

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the nine months ended September 30, 2023 (dollars in thousands).

 

 

 

Total Allowance for Credit Losses – Unfunded Commitments

 

Balance, December 31, 2022

 

$-

 

Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13

 

 

747

 

Provision for credit losses

 

 

2

 

Balance, September 30, 2023

 

$749

 

 

Note 4. Mortgage Banking and Derivatives

 

Loans Held for Sale

 

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company uses fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business totaled $2.0 million as of September 30, 2023 of which $2.0 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

 

Interest Rate Lock Commitments and Forward Sales Commitments

 

The Company, through F&M Mortgage, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (IRLCs). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment).

 

The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation. The Company determines the fair value of the IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate loan commitments will close.

 

The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2023, and totaled $21,000, with a notional amount of $13.3 million and total positions of 42. The fair value of the IRLCs were reported in the “Other liabilities” in the Consolidated Balance Sheet at December 31, 2022 and totaled $92,000, with a notional amount of $12.2 million and total positions of 38. Changes in fair value are recorded as a component of “Mortgage banking income” in the Consolidated Income Statement for the period ended September 30, 2023 and 2022. The Company’s IRLCs are classified as Level 2. At September 30, 2023 and December 31, 2022, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

 

The Company uses fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2023 and totaled $122,000, with a notional amount of $15.3 million and total positions of 48. The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at December 31, 2022 and totaled $186,000, with a notional amount of $13.6 million and total positions of 43.

 

 
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Table of Contents

 

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 plan was amended on February 15, 2023 to stop the accrual of future benefits. The following is a summary of net periodic pension costs for the three and nine month periods ended September 30, 2023 and 2022 (dollars in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2023

 

 

September 30,

2022

 

 

September 30,

2023

 

 

September 30,

2022

 

Service cost

 

$-

 

 

$190

 

 

$-

 

 

$570

 

Interest cost

 

 

92

 

 

 

104

 

 

 

276

 

 

 

312

 

Expected return on plan assets

 

 

(130)

 

 

-

 

 

 

(390)

 

 

-

 

Amortization of prior service cost

 

 

-

 

 

 

(195)

 

 

-

 

 

 

(585)

Amortization of net loss

 

 

-

 

 

 

58

 

 

 

-

 

 

 

174

 

 Net periodic pension cost

 

$(38)

 

$157

 

 

$(114)

 

$471

 

 

Note 6. Stock-Based Compensation

 

The Company granted stock awards to directors and employees under the Company’s 2020 Stock Incentive Plan. On March 7, 2023 the Bank’s Compensation Committee awarded 23,556 shares with a fair value of $526,000 to selected employees. These shares vest 25% over each of the next four years. The Committee also awarded 1,309 shares with a fair value of $29,000 to directors that vested upon issuance. There were 6,974 shares vested, less 96 shares netted for taxes, during the nine months ended September 30, 2023. There were 529 shares forfeited in the three months ended September 30, 2023. Unrecognized compensation expense related to the nonvested restricted stock as of September 30, 2023 totaled $638,000.

 

Note 7. 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.

 

 
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Table of Contents

 

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 of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

 

Loans Held for Sale

 

The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

 

Derivative assets – IRLCs

 

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2.

 

Derivative Asset/Liability – Forward Sale Commitments

 

The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.

 

 
35

Table of Contents

 

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (dollars in thousands):

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Balance at

September 30,

2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale, F&M Mortgage

 

$2,027

 

 

$-

 

 

$2,027

 

 

$-

 

U.S. Treasury

 

 

37,006

 

 

 

-

 

 

 

37,006

 

 

 

-

 

U.S. Agency

 

 

131,614

 

 

 

-

 

 

 

131,614

 

 

 

-

 

Municipal bonds

 

 

36,323

 

 

 

-

 

 

 

36,323

 

 

 

-

 

Mortgage-backed securities

 

 

141,719

 

 

 

-

 

 

 

141,719

 

 

 

-

 

Corporate

 

 

25,677

 

 

 

-

 

 

 

25,677

 

 

 

-

 

IRLC

 

 

122

 

 

 

-

 

 

 

122

 

 

 

-

 

Forward Sales Commitments

 

 

21

 

 

 

-

 

 

 

21

 

 

 

-

 

Assets at Fair Value

 

$374,509

 

 

$-

 

 

$374,509

 

 

$-

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Balance at

December 31,

2022

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale, F&M Mortgage

 

$1,373

 

 

$-

 

 

$1,373

 

 

$-

 

U.S. Treasury

 

 

36,643

 

 

 

-

 

 

 

36,643

 

 

 

-

 

U.S. Agency

 

 

129,748

 

 

 

-

 

 

 

129,748

 

 

 

-

 

Municipal bonds

 

 

42,198

 

 

 

-

 

 

 

42,198

 

 

 

-

 

Mortgage-backed securities

 

 

156,875

 

 

 

-

 

 

 

156,875

 

 

 

-

 

Corporate

 

 

26,631

 

 

 

-

 

 

 

26,631

 

 

 

-

 

Forward sales commitments

 

 

186

 

 

 

-

 

 

 

186

 

 

 

-

 

Assets at Fair Value

 

$393,654

 

 

$-

 

 

$393,654

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRLC

 

$92

 

 

$-

 

 

$92

 

 

$-

 

Liabilities at Fair Value

 

$92

 

 

$-

 

 

$92

 

 

$-

 

 

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:

 

Collateral Dependent Loans with an ACL

 

In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

 

 
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Table of Contents

 

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):

 

 

 

 

 

Fair Value Measurements Using:

 

Collateral dependent loans with an ACL

 

Balance at

September 30,

2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Other construction, land development and land

 

$293

 

 

$-

 

 

$-

 

 

$293

 

Total collateral dependent loans with an ACL

 

$293

 

 

$-

 

 

$-

 

 

$293

 

 

 

 

 

 

Fair Value Measurements Using:

 

Impaired Loans

 

Balance at

December 31,

2022

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Construction/Land Development

 

$293

 

 

$-

 

 

$-

 

 

$293

 

Real Estate

 

 

1,286

 

 

 

-

 

 

 

-

 

 

 

1,286

 

Commercial Real Estate

 

 

969

 

 

 

-

 

 

 

-

 

 

 

969

 

Dealer Finance

 

 

42

 

 

 

-

 

 

 

-

 

 

 

42

 

Total Impaired loans

 

$2,590

 

 

$-

 

 

$-

 

 

$2,590

 

 

The following table presents information about Level 3 Fair Value Measurements for September 30, 2023 and December 31, 2022 (dollars in thousands):

 

 

 

Fair Value at

September 30,

2023

 

 

Valuation Technique

 

Significant Unobservable Inputs

 

Range

 

Collateral Dependent Loans

 

$293

 

 

Discounted appraised value

 

Discount for selling costs and marketability

 

 

62%

 

 

 

Fair Value at

December 31,

2022

 

 

Valuation Technique

 

Significant Unobservable Inputs

 

Range

 

Impaired Loans

 

$2,590

 

 

Discounted appraised value

 

Discount for selling costs and marketability

 

10.00%-33.00% (Average 19.00%)

 

 

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 and assets held for sale 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 Company did not have any other real estate owned as of September 30, 2023 or December 31, 2022.

 

Note 8. Disclosures about Fair Value of Financial Instruments

 

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022. Fair values for September 30, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

 

 
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Table of Contents

 

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows (dollars in thousands):

 

 

 

 

 

 

Fair Value Measurements at September 30, 2023 Using

 

 

 

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

September 30,

2023

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$22,158

 

 

$22,158

 

 

$-

 

 

$-

 

 

$22,158

 

Securities available for sale

 

 

372,339

 

 

 

-

 

 

 

372,339

 

 

 

-

 

 

 

372,339

 

Securities held to maturity

 

 

125

 

 

 

-

 

 

 

113

 

 

 

-

 

 

 

113

 

Loans held for sale

 

 

2,027

 

 

 

-

 

 

 

2,027

 

 

 

-

 

 

 

2,027

 

Loans held for investment, net

 

 

805,602

 

 

 

-

 

 

 

-

 

 

 

773,821

 

 

 

773,821

 

Interest receivable

 

 

4,645

 

 

 

-

 

 

 

4,645

 

 

 

-

 

 

 

4,645

 

Bank owned life insurance

 

 

22,705

 

 

 

-

 

 

 

22,705

 

 

 

-

 

 

 

22,705

 

IRLC

 

 

122

 

 

 

-

 

 

 

122

 

 

 

-

 

 

 

122

 

Forward sales commitments

 

 

21

 

 

 

-

 

 

 

21

 

 

 

-

 

 

 

21

 

Total

 

$1,229,744

 

 

$22,158

 

 

$401,972

 

 

$773,821

 

 

$1,197,951

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$1,133,910

 

 

$-

 

 

$1,131,833

 

 

$-

 

 

$1,133,833

 

Short-term debt

 

 

60,000

 

 

 

-

 

 

 

-

 

 

 

60,000

 

 

 

60,000

 

Long-term debt

 

 

6,922

 

 

 

-

 

 

 

-

 

 

 

6,656

 

 

 

6,656

 

Interest payable

 

 

1,215

 

 

 

-

 

 

 

1,215

 

 

 

-

 

 

 

1,215

 

Total

 

$1,202,047

 

 

$-

 

 

$1,133,048

 

 

$66,656

 

 

$1,199,704

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2022 Using

 

 

 

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,

2022

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$34,953

 

 

$34,953

 

 

$-

 

 

$-

 

 

$34,953

 

Securities

 

 

392,220

 

 

 

-

 

 

 

392,220

 

 

 

-

 

 

 

392,220

 

Loans held for sale

 

 

1,373

 

 

 

-

 

 

 

1,373

 

 

 

-

 

 

 

1,373

 

Loans held for investment, net

 

 

743,604

 

 

 

-

 

 

 

-

 

 

 

720,806

 

 

 

720,806

 

Interest receivable

 

 

3,995

 

 

 

-

 

 

 

3,995

 

 

 

-

 

 

 

3,995

 

Bank owned life insurance

 

 

23,554

 

 

 

-

 

 

 

23,554

 

 

 

-

 

 

 

23,554

 

Forward sales commitments

 

 

186

 

 

 

-

 

 

 

186

 

 

 

-

 

 

 

186

 

Total

 

$1,199,885

 

 

$34,953

 

 

$421,328

 

 

$720,806

 

 

$1,177,087

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$1,083,377

 

 

$-

 

 

$1,080,909

 

 

$-

 

 

$1,080,909

 

Short-term debt

 

 

70,000

 

 

 

-

 

 

 

-

 

 

 

70,000

 

 

 

70,000

 

Long-term debt

 

 

6,890

 

 

 

-

 

 

 

-

 

 

 

6,778

 

 

 

6,778

 

IRLC

 

 

92

 

 

 

-

 

 

 

92

 

 

 

-

 

 

 

92

 

Interest payable

 

 

295

 

 

 

-

 

 

 

295

 

 

 

-

 

 

 

295

 

Total

 

$1,160,654

 

 

$-

 

 

$1,081,296

 

 

$76,778

 

 

$1,158,074

 

 

 
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Table of Contents

 

Note 9. Accumulated Other Comprehensive Loss

 

The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).

 

 

 

For the three months ended September 30, 2023

 

 

 

Unrealized Securities Gains (Losses)

 

 

Adjustments Related to Pension Plan

 

 

Accumulated Other Comprehensive Loss

 

Balance at June 30, 2023

 

$(37,664)

 

$439

 

 

$(37,225)

Change in unrealized securities gains (losses), net of tax benefit of $1,442

 

 

(5,423)

 

 

-

 

 

 

(5,423)

Balance at September 30, 2023

 

$(43,087)

 

$439

 

 

$(42,648)

 

 

 

For the three months ended September 30, 2022

 

 

 

Unrealized Securities Gains (Losses)

 

 

Adjustments Related to Pension Plan

 

 

Accumulated Other Comprehensive Loss

 

Balance at June 30, 2022

 

$(33,109)

 

$(3,291)

 

$(36,400)

Change in unrealized securities gains (losses), net of tax benefit of $2,075

 

 

(7,804)

 

 

-

 

 

 

(7,804)

Balance at September 30, 2022

 

$(40,913)

 

$(3,291)

 

$(44,204)

 

 

 

For the nine months ended September 30, 2023

 

 

 

Unrealized Securities Gains (Losses)

 

 

Adjustments Related to Pension Plan

 

 

Accumulated Other Comprehensive Loss

 

Balance at December 31, 2022

 

$(40,451)

 

$439

 

 

$(40,012)

Change in unrealized securities gains, net of tax expense of $701

 

 

(2,636)

 

 

-

 

 

 

(2,636)

Balance at September 30, 2023

 

$(43,087)

 

$439

 

 

$(42,648)

 

 

 

For the nine months ended September 30, 2022

 

 

 

Unrealized Securities Gains (Losses)

 

 

Adjustments Related to Pension Plan

 

 

Accumulated Other Comprehensive Loss

 

Balance at December 31, 2021

 

$(1,801)

 

$(3,291)

 

$(5,092)

Change in unrealized securities losses, net of tax benefit of $10,417

 

 

(39,189)

 

 

-

 

 

 

(39,189)

Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20

 

 

77

 

 

 

-

 

 

 

77

 

Balance at September 30, 2022

 

$(40,913)

 

$(3,291)

 

$(44,204)

 

There were no reclassifications adjustments reported on the consolidated statements of income during the three and nine months ended September 30, 2023.

 

Note 10. Debt

 

Short-term Debt

 

The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to support loans growth 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. There was $60.0 million in short-term debt at September 30, 2023 and $70.0 million in short-term debt at December 31, 2022.

 

 
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Table of Contents

 

Long-term Debt

 

On July 29, 2020, the Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated note due July 31, 2030. The note initially bears interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at September 30, 2023.

 

Note 11. Revenue Recognition

 

Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Substantially all the Company’s revenue is generated from contracts with customers. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the guidance. Noninterest revenue streams in-scope of Topic 606 are discussed below.

 

Service Charges on Deposit Accounts

 

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

 

Investment Services and Insurance Income

 

Investment services and insurance income primarily consists of commissions received on mutual funds and other investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.

 

Title Insurance Income

 

VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate transaction is completed.

 

ATM and Check Card Fees

 

ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

 

Other

 

Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, online payment fees, cashier’s checks, mobile banking fees and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

 

 
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Table of Contents

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands).

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

In-scope of Topic 606:

 

 

 

 

 

 

 

 

 

 

 

 

Service Charges on Deposits

 

$256

 

 

$255

 

 

$755

 

 

$836

 

Investment Services and Insurance Income

 

 

374

 

 

 

316

 

 

 

1,236

 

 

 

1,020

 

Title Insurance Income

 

 

444

 

 

 

376

 

 

 

1,069

 

 

 

1,215

 

ATM and check card fees

 

 

672

 

 

 

628

 

 

 

1,971

 

 

 

1,823

 

Other

 

 

268

 

 

 

173

 

 

 

628

 

 

 

668

 

Noninterest Income (in-scope of Topic 606)

 

 

2,014

 

 

 

1,748

 

 

 

5,659

 

 

 

5,562

 

Noninterest Income (out-of-scope of Topic 606)

 

 

513

 

 

 

534

 

 

 

1,986

 

 

 

2,280

 

Total Noninterest Income

 

$2,527

 

 

$2,282

 

 

$7,645

 

 

$7,842

 

 

Contract Balances

 

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2023 and December 31, 2022, the Company did not have any significant contract balances.

 

Contract Acquisition Costs

 

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

 

Note 12. Leases

 

The Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

 

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

 

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

 

 
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Table of Contents

 

The following tables present information about the Company’s leases (dollars in thousands):

 

 

 

September 30,

2023

 

Lease Liabilities

 

$773

 

Right-of-use assets

 

$755

 

Weighted average remaining lease term (years)

 

1.77 years

 

Weighted average discount rate

 

 

3.30%

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Operating lease cost

 

$40

 

 

$75

 

 

$123

 

 

$169

 

Total lease cost

 

$40

 

 

$75

 

 

$123

 

 

$169

 

Cash paid for amounts included in the measurement of lease liabilities

 

$44

 

 

$100

 

 

$149

 

 

$205

 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

 

 

 

September 30,

2023

 

Three months ending December 31, 2023

 

$44

 

Twelve months ending December 31, 2024

 

 

166

 

Twelve months ending December 31, 2025

 

 

122

 

Twelve months ending December 31, 2026

 

 

69

 

Twelve months ending December 31, 2027

 

 

56

 

Thereafter

 

 

462

 

Total undiscounted cash flows

 

$919

 

Discount

 

 

146

 

Lease liabilities

 

$773

 

 

Note 13. Subsequent Events

 

On October 23, 2023 the Bank filed documents for the dissolution of TEB Life Insurance Company with the Arizona Corporation Commission. TEB has made accommodations to extinguish all remaining insurance obligations and has no insurance obligations by direct writing. The Bank plans for the dissolution to be finalized by December 31, 2023.

 

On November 7, 2023 the Company announced they are offering an early retirement program to certain employees during the fourth quarter of 2023. The maximum potential one-time expense associated with this program is currently estimated to be $1,812,427. The Company cannot predict at this time how many employees will choose to participate or whether the expense associated with the program will be less than $1,812,427. The Company expects to recognize all expenses associated with the early retirement program during the fourth quarter ending December 31, 2023.

 

 
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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”), Farmers & Merchants Financial Services (“FMFS”) and VBS Mortgage LLC (dba “F&M Mortgage”) are wholly owned subsidiaries of the Bank. The Company held a majority ownership in VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage, until the Company purchased F&M Mortgage’s minority interest in VST on January 3, 2022.

 

The Bank is a full-service commercial bank offering a wide range of banking and financial services through its fourteen branch offices as well as its loan production office located in Penn Laird, Virginia (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. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, Woodstock, and Winchester, Virginia. VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, Virginia.

 

The Company’s primary trade area services customers in the counties of Rockingham, Shenandoah, Augusta and Frederick, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester.

 

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 Part 1, Item 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

 

Caution Regarding 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 judgments of the Company and its management about future events. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. 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, those described in described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, and the following:

 

 

·

Changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;

 

 

 

 

·

The strength of the economy in our market area, as well as general economic, market, or business conditions;

 

 

 

 

·

An insufficient allowance for credit losses as a result of inaccurate assumptions;

 

 

 

 

·

Our ability to maintain our “well-capitalized” regulatory status;

 

 

 

 

·

Changes in our competitive position, competitive actions by other financial institutions, financial technology firms and others, the competitive nature of the financial services industry and our ability to compete effectively in our banking markets;

 

 

 

 

·

Our ability to manage growth;

 

 

 

 

·

Our potential growth, including our entrance or expansion into new markets, the need for sufficient capital to support that growth, difficulties or disruptions expanding into new markets or integrating the operations of acquired branches or business, and the inability to obtain the expected benefits of such growth;

  

 
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·

Our exposure to operational risk;

 

 

 

 

·

Our ability to raise capital as needed by our business;

 

 

 

 

·

Changes in laws, regulations and the policies of federal or state regulators and agencies;

 

 

 

 

·

The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB, or other accounting standards setting bodies;

 

 

 

 

·

Geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;

 

 

 

 

·

Other factors identified in reports the Company files with the SEC from time to time; and

 

 

 

 

·

Other circumstances, many of which are beyond our control.

 

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

 

Critical Accounting Policies

 

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

 

The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of September 30, 2023 were unchanged from the policies disclosed in the 2022 Form 10-K within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for the adoption of ASC 326. See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.

 

Results of Operations

 

Third Quarter Income Statement Highlights

 

Net income for the current quarter was $1.0 million or $0.29 per share, an increase of $777,000 from the second quarter and a decrease of $1.3 million from the third quarter 2022. The increase from the second quarter was due to an increase in net interest income of $220,000 and a decrease in noninterest expense of $1.3 million, which included an accrual for a potential one-time severance payment to a former officer in the amount of $764,000 in the second quarter. The decrease from the third quarter of 2022 is attributable to a $1.1 million decrease in net interest income.

 

Net interest income for the current quarter was $8.0 million, an increase of $220,000 from the second quarter 2023 and a decrease of $1.1 million from third quarter 2022. Interest income for the three months ended September 30, 2023, was $14.6 million, an increase of $1.0 million from second quarter 2023 and $3.6 million over the prior year third quarter, due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $6.6 million from $5.9 million in the prior quarter and $1.9 million from the same period in 2022.

 

During third quarter 2023, the Bank recorded a $620,000 provision for credit losses due to loan growth of $29.3 million and $193,000 in net charge-offs. A provision for credit losses of $539,000 was recorded in second quarter 2023, compared to no provision for credit losses in third quarter 2022. At September 30, 2023, the Allowance for Credit Losses for loans (ACL) totaled $9.2 million or 1.14% of loans held for investment.

 

 
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Noninterest income totaled $2.5 million for the quarter, a decrease from the second quarter of $225,000 and an increase of $245,000 from the third quarter of 2022. The decrease from last quarter was due to a one time gain on bank owned life insurance of $363,000 in the second quarter, offset by increases of $67,000 in title insurance income, $19,000 in investment services and insurance income, and $154,000 in other operating income. The increase from third quarter 2022 is primarily due to increases in other operating income of $201,000, title insurance income of $68,000, investment services and insurance income of $58,000, and ATM and check card fees of $44,000. These increases were offset by a decrease of $130,000 in mortgage banking income. There were fewer mortgage loans sold on the secondary market as a result of an overall decrease in loan volume and a shift in production from the 30-year fixed rate product to variable rate products which were retained in the Bank’s loan portfolio.

 

Noninterest expense totaled $8.9 million in third quarter 2023, down $1.3 million from the linked quarter and up $50,000 from third quarter 2022. The decrease from second quarter 2023 was driven by reductions in salary expense of $809,000, employee benefits of $187,000, legal and professional fees of $212,000, and telecommunication expense of $117,000. There was little change from third quarter 2022 as decreases of $124,000 in salaries, $277,000 in employee benefits, and $68,000 in telecommunications were offset by increases of $352,000 in other operating expenses, $66,000 in advertising expenses, and $63,000 in equipment expenses.

 

Year-to-Date Income Statement Highlights

 

Year-to-date net income was $2.3 million or $0.67 per share compared to $6.6 million or $1.92 per share for the same period in 2022. The decrease is due to a decline in net interest income of $2.6 million, an increase in the provision for credit losses of $1.0 million, a decrease of $294,000 in noninterest income (excluding securities losses) and an increase in noninterest expense of $1.3 million. There were no securities gains or losses in the first nine months of 2023 compared to a $97,000 loss recorded in 2022.

 

Net interest income for the nine months ended September 30, 2023 was $23.6 million, a decrease of $2.6 million from the first nine months of 2022. Interest income was $41.2 million, an increase of $11.1 million from 2022 due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $17.6 million from $3.9 million.

 

In 2023, the Bank recorded a $1.2 million provision for credit losses. This is $1.0 million higher than the provision for loan losses recorded in the first nine months of 2022. The higher provision expense is due to loan growth and net charge-offs in the indirect auto portfolio.

 

Noninterest income totaled $7.6 million for the first nine months of 2023, which was a decrease of $197,000 from the first nine months of 2022. The primary reason for the decrease was a reduction of $1.0 million in mortgage banking income. Lower mortgage banking activity also negatively impacted title insurance income which declined by $146,000 from the first nine months of 2022 compared to the same period in 2023. Service charges on deposit accounts decreased by $81,000 due to a change that was made in August 2022 in the method used to charge insufficient funds and overdraft fees. Additionally, there was a $97,000 loss on investment securities in 2022 that was not repeated in 2023. These decreases were partially offset by increases of $216,000 in investment and insurance income, $460,000 in bank owned life insurance income (including the previously mentioned gain of $363,000), ATM and check card fees of $148,000, and $140,000 in other operating income.

 

Noninterest expenses totaled $28.3 million for the first nine months of 2023, compared to $27.0 million in 2022. The increase was primarily due to an increase in salary expense related to the previously mentioned accrual for a potential one-time severance payment. Other increases were spread over professional fees of $290,000, equipment expense of $220,000 for the installation of new ATMs, and other noninterest expenses of $751,000. These amounts were partially offset by a decrease in employee benefits of $668,000 and lower telecommunication and data processing expense of $279,000 resulting from the renegotiation of the contract with the Bank’s core system provider.

 

For the nine months ended September 30, 2023 and September 30, 2022, there was an income tax benefit of $526,000 and income tax expense of $280,000, respectively. The Company’s effective tax rate differs from the 21% federal statutory rate due to the impact of various permanent tax differences, including tax-exempt income from municipal securities, bank owned life insurance income, including gains, tax credits from low-income housing tax credit investments, and the vesting of other stock-based compensation.

 

 
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Net Interest Income and Net Interest Margin

 

For the first nine months of 2023, tax equivalent net interest income1 totaled $23.7 million, a decrease of $2.6 million from the first nine months of 2022, resulting in a decrease in our net interest margin by 0.35%. Interest income and fees on loans held for investment were $10.5 million higher due to higher rates on variable rate loans and growth of $92.3 million in average loans held for sale since September 30, 2022. Income from interest bearing deposits and securities was $665,000 higher due to increased interest rates.

 

Interest expense increased by $13.7 million in the first nine months of 2023 to $17.6 million at September 30, 2023, mostly due to higher market interest rates and increases in the average balances of deposits and short-term debt. Beginning in the fourth quarter of 2022 and continuing through the second quarter of 2023, rates paid on money market and time deposits increased significantly. The increase in market interest rates also caused a shift in the deposit mix to higher-cost accounts. Short-term borrowings were used to augment deposits to fund loan growth which increased short-term borrowings expense to $2.2 million from $204,000 last year.

 

The net interest margin was 2.67% and 3.11% for the three months ended September 30, 2023 and 2022, respectively. The lower net interest margin was due to higher cost of funds, partially offset by higher yields on interest-earning assets.

_____________ 

1 Tax equivalent net interest income is a non-GAAP financial measure. For more information, see “Non-GAAP Financial Measures” below.”

 

 
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Table of Contents

 

The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):

 

 

 

Nine Months Ended

September 30, 2023

 

 

Nine Months Ended

September 30, 2022

 

 

Three Months Ended

September 30, 2023

 

 

Three Months Ended

September 30, 2022

 

 

 

Average Balance 5

 

 

Income/

Expense

 

 

Average Rates1

 

 

Average Balance5

 

 

Income/

Expense

 

 

Average Rates1

 

 

Average Balance5

 

 

Income/ Expense

 

 

Average Rates1

 

 

Average Balance5

 

 

Income/ Expense

 

 

Average Rates1

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for investment2,3,4

 

$767,673

 

 

$34,930

 

 

 

6.08%

 

$675,420

 

 

$24,423

 

 

 

4.83%

 

$787,983

 

 

$12,537

 

 

 

6.31%

 

$696,539

 

 

$8,894

 

 

 

5.07%

Loans held for sale

 

 

1,700

 

 

 

66

 

 

 

5.19%

 

 

4,099

 

 

 

90

 

 

 

2.94%

 

 

1,454

 

 

 

19

 

 

 

5.18%

 

 

4,380

 

 

 

29

 

 

 

2.63%

Federal funds sold

 

 

5,031

 

 

 

187

 

 

 

4.97%

 

 

26,605

 

 

 

82

 

 

 

0.41%

 

 

4,390

 

 

 

54

 

 

 

4.88%

 

 

8,451

 

 

 

47

 

 

 

2.21%

Interest bearing deposits

 

 

758

 

 

 

31

 

 

 

5.47%

 

 

1,789

 

 

 

5

 

 

 

0.37%

 

 

811

 

 

 

13

 

 

 

6.36%

 

 

188

 

 

 

1

 

 

 

2.11%

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

391,589

 

 

 

5,718

 

 

 

1.95%

 

 

440,419

 

 

 

5,282

 

 

 

1.60%

 

 

385,734

 

 

 

1,900

 

 

 

1.95%

 

 

447,944

 

 

 

1,947

 

 

 

1.72%

Partially taxable 4

 

 

-

 

 

 

-

 

 

 

-

 

 

 

125

 

 

 

1

 

 

 

1.07%

 

 

-

 

 

 

-

 

 

 

-

 

 

 

125

 

 

 

-

 

 

 

-

 

Tax exempt 4

 

 

14,291

 

 

 

400

 

 

 

3.74%

 

 

12,081

 

 

 

301

 

 

 

3.33%

 

 

14,391

 

 

 

134

 

 

 

3.69%

 

 

12,917

 

 

 

134

 

 

 

4.12%

Total earning assets

 

$1,181,042

 

 

$41,332

 

 

 

4.68%

 

$1,160,538

 

 

$30,184

 

 

 

3.48%

 

$1,194,763

 

 

$14,657

 

 

 

4.87%

 

$1,170,544

 

 

$11,052

 

 

 

3.75%

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

172,077

 

 

 

2,414

 

 

 

1.88%

 

 

182,383

 

 

 

453

 

 

 

0.33%

 

 

168,159

 

 

 

864

 

 

 

2.04%

 

 

186,614

 

 

 

247

 

 

 

0.53%

Savings

 

 

506,190

 

 

 

9,921

 

 

 

2.62%

 

 

505,759

 

 

 

1,917

 

 

 

0.51%

 

 

509,642

 

 

 

3,526

 

 

 

2.74%

 

 

512,414

 

 

 

897

 

 

 

0.69%

Time deposits

 

 

151,338

 

 

 

2,734

 

 

 

2.42%

 

 

120,975

 

 

 

690

 

 

 

0.76%

 

 

180,400

 

 

 

1,421

 

 

 

3.13%

 

 

121,907

 

 

 

234

 

 

 

0.76%

Federal funds purchased

 

 

727

 

 

 

32

 

 

 

5.88%

 

 

-

 

 

 

-

 

 

 

-

 

 

 

961

 

 

 

15

 

 

 

6.19%

 

 

-

 

 

 

-

 

 

 

-

 

Short-term debt

 

 

57,901

 

 

 

2,185

 

 

 

5.05%

 

 

16,403

 

 

 

204

 

 

 

1.66%

 

 

50,250

 

 

 

687

 

 

 

5.42%

 

 

30,880

 

 

 

158

 

 

 

2.03%

Long-term debt

 

 

6,906

 

 

 

343

 

 

 

6.64%

 

 

15,772

 

 

 

628

 

 

 

5.32%

 

 

6,917

 

 

 

115

 

 

 

6.60%

 

 

9,334

 

 

 

345

 

 

 

14.66%

Total interest bearing liabilities

 

$895,139

 

 

$17,629

 

 

 

2.63%

 

$841,292

 

 

$3,892

 

 

 

0.62%

 

$916,329

 

 

$6,628

 

 

 

2.87%

 

$861,149

 

 

$1,881

 

 

 

0.87%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent net interest income

 

 

 

 

 

$23,703

 

 

 

 

 

 

 

 

 

 

$26,292

 

 

 

 

 

 

 

 

 

 

$8,029

 

 

 

 

 

 

 

 

 

 

$9,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.68%

 

 

 

 

 

 

 

 

 

 

3.03%

 

 

 

 

 

 

 

 

 

 

2.67%

 

 

 

 

 

 

 

 

 

 

3.11%

_____________________

1     Annualized.

2     Interest income on loans includes loan fees.

3     Loans held for investment includes nonaccrual loans.

4     Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.

5     Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

 

 
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Table of Contents

 

Non-GAAP Financial Measures

 

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow.

 

The following table reconciles tax equivalent net interest income, which is not a measurement under GAAP, to net interest income (dollars in thousands):

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Nine Months

 

 

Three Months

 

 

Nine Months

 

 

Three Months

 

Interest Income – Loans

 

$34,962

 

 

$12,544

 

 

$24,474

 

 

$8,910

 

Interest Income - Securities and Other Interest-Earnings Assets

 

 

6,252

 

 

 

2,073

 

 

 

5,608

 

 

 

2,102

 

Interest Expense – Deposits

 

 

15,069

 

 

 

5,811

 

 

 

3,060

 

 

 

1,378

 

Interest Expense - Other Borrowings

 

 

2,560

 

 

 

817

 

 

 

832

 

 

 

503

 

Total Net Interest Income

 

$23,585

 

 

$7,989

 

 

$26,190

 

 

$9,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Financial Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities

 

 

118

 

 

 

40

 

 

 

102

 

 

 

40

 

Total Tax Benefit on Tax-Exempt Interest Income

 

 

118

 

 

 

40

 

 

 

102

 

 

 

40

 

Tax-Equivalent Net Interest Income

 

$23,703

 

 

$8,029

 

 

$26,292

 

 

$9,171

 

 

During the first nine months of 2023, the unrealized loss on the bond portfolio increased by $3.3 million, decreasing the Company’s tangible common equity ratio from 5.13% at December 31, 2022, to 4.99% at September 30, 2023. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders' equity by consolidated total average assets, after reducing both amounts by average goodwill and other intangible assets. The TCE ratio is not required by GAAP or by bank regulations but is a metric used by management to evaluate the adequacy of the Company's capital levels. Since there is no authoritative requirement to calculated the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible average assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.

 

Balance Sheet Review

 

Overview

 

On September 30, 2023, assets totaled $1.28 billion, an increase of $36.5 million over December 31, 2022. Total loans increased by $62.0 million to $805.6 million, including increases primarily of $29.0 million in 1-to-4 family variable rate mortgage loans, $15.6 million in dealer financing loans, $7.7 million in owner-occupied commercial real estate loans, and $6.7 million in agricultural loans. Investment securities decreased by $19.8 million due to paydowns on U.S. Agency mortgage-backed securities and expected bond maturities.

 

Securities Available for Sale (“AFS”)

 

Our AFS securities portfolio is reported at fair value, which is determined based on market prices of similar instruments. The portfolio is made up of primarily U.S. Treasury, U.S Agency and mortgage-backed securities issued by federal agencies, as well as municipal bonds and corporate debt securities. Total securities available for sale were $372.3 million at September 30, 2023, compared to $392.1 million at December 31, 2022. This represents a decrease of $19.8 million or 5.04%. The average balance during the first nine months of 2023 was $405.9 million, compared to $452.6 million during the first nine months of 2022. The average AFS securities portfolio represented 34.4% and 39.0% of average earning assets in the first nine months of 2023 and 2022, respectively. The year-over-year decrease in average AFS securities is primarily due to maturities and normal paydowns of mortgage-backed securities and municipal bond maturities. There are $19.4 million of scheduled maturities and paydowns expected in the last quarter of 2023 and $93.7 million in 2024.

 

 
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Net unrealized losses related to the fair value of securities AFS increased $3.3 million in the first nine months of 2023 to $54.5 million, from $51.2 million at December 31, 2022 . The unrealized loss is driven by the increase in market interest rates, not credit quality. The average maturity of the portfolio is 4.74 years.

 

Loan Portfolio

 

The local economy that the Company operates in 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. The Bank also makes automobile and recreational vehicle loans through its Dealer Finance division.

 

Loans Held for Investment of $805.6 million increased $62.0 million during the nine months ended September 30, 2023 compared to $743.6 million at December 31, 2022. As a percentage of average earning assets, average loans were 65.0% for the nine months ended September 30, 2023, compared with 58.2% for the nine months ended September 30, 2022.

 

Loans Held for Sale totaled $2.0 million on September 30, 2023, an increase of $654,000 compared to $1.4 million at December 31, 2022. Loans Held for Sale consists of F&M Mortgage loans, which are subject to changes in interest rates, seasonal fluctuations, and refinance activity. All the mortgage loans held for sale have been precommitted to investors, which minimizes the interest rate risk.

 

Provision for Credit Losses

 

The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses and the reserve for unfunded commitments. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. The amount of the reserve for unfunded commitments considers the probability that those commitments will fund.

 

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.

 

The results of this process, in combination with conclusions of the Bank’s external loan review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 28 which reflects activity in the allowance for credit losses.

 

At September 30, 2023, the allowance for credit losses on loans (“ACLL”) reflected a day one CECL impact of $777,000 which was charged to retained earnings, $704,000 in net charge-offs, and a provision for credit losses on loans of $1.2 million. The provision was primarily due to loan growth of $62.0 million and charge-offs in the automobile portfolio. Additionally, the provision for credit losses was increased by $2,000 due to a provision for unfunded commitments, for a net provision of $1.2 million. The provision for credit losses was $150,000 for the first nine months of 2022.

 

Management evaluated the qualitative factors and adjusted the factor for changes in the value of underlying collateral for collateral dependent loans for the real estate, commercial and industrial, and automobile segments. The local real estate market is active, with housing prices continuing to increase and days on the market remaining less than a week. As a result, no additional qualitative factor adjustment is needed. Commercial and industrial loans have not experienced declines in collateral values; therefore, this segment does not need an additional qualitative factor adjustment. The used vehicle value index is expected to stabilize as a balance between buyers and sellers is achieved. As a result, the qualitative factor for automobile loans was reduced. No other adjustments to the qualitative factors were necessary.

 

 
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Nonperforming Assets

 

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 $3.6 million at September 30, 2023 compared to $2.3 million at December 31, 2022.

 

A summary of credit ratios for nonaccrual loans is as follows (dollars in thousands):

 

 

 

September 30,

2023

 

 

December 31,

2022

 

Allowance for credit losses on loans

 

$9,166

 

 

$7,936

 

Nonperforming loans

 

$3,586

 

 

$2,262

 

Total loans

 

$805,602

 

 

$743,604

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses to total loans

 

 

1.14%

 

 

1.07%

Nonperforming loans to total loans

 

 

0.45%

 

 

0.30%

Coverage ratio, allowance for credit losses to nonperforming loans

 

 

255.61%

 

 

350.84%

 

Deposits and Other Borrowings

 

The Company's main source of funding is 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 were $1.14 billion and $1.08 billion at September 30, 2023 and December 31, 2022, respectively. Noninterest bearing deposits decreased $16.4 million while interest bearing deposits increased $66.9 million. Total deposits increased $50.5 million from the end of 2022, as the Bank was able to attract deposits by offering higher rates on money market and time deposit accounts and opening insured cash sweep (“ICS”) accounts for new and existing customers.

 

The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow 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. At September 30, 2023 and December 31, 2022 the Company had a total of $258,000 and $241,000, respectively, in CDARS accounts; and, $96.3 million and $77.6 million in ICS accounts, respectively. At September 30, 2023, 12.32% of the Company’s total deposits were uninsured deposits, calculated per Bank Call Report instructions.

 

Short-term borrowings

 

The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to 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 needs of the Company. There were $60.0 million and $70.0 million of FHLB advances at September 30, 2023 and December 31, 2022, respectively. The increase in deposits allowed us to reduce the FHLB advances during the first nine months of 2023.

 

Long-term borrowings

 

On July 29, 2020, the Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated note due July 31, 2030. The note initially bears interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at September 30, 2023.

 

Capital

 

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

 
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Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

 

Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At September 30, 2023, the Bank is in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.

 

The Bank’s leverage ratio was 8.20%, its common equity Tier 1 and Tier 1 capital ratios were both 11.68%, its total capital ratio was 12.69% and the capital conservation buffer was 4.67% at September 30, 2023.

 

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected not to phase in the effect of CECL on regulatory capital.

 

Liquidity

 

Liquidity represents an institution’s 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. The Company’s most liquid assets are unrestricted cash and cash equivalents, federal funds sold, loans held for sale, and unpledged available for sale investment securities. Our primary source of funding is deposits. If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and brokered deposits, as well as loan and investment securities sales.

 

As of September 30, 2023, the Bank had total credit availability with the FHLB of $383.1 million, or 30% of total assets, and $170.9 million in lendable collateral. At September 30, 2023, we had $60.0 million in FHLB term borrowings and a $15.0 million letter of credit to provide collateral for our public deposits, which leaves $95.9 million in available lendable collateral.

 

In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) to provide any U.S. federally insured depository institution, including the Bank, with a line a credit equal to the par value of securities pledged to the BTFP. Advances from the BTFP may be requested by the Bank for up to one year until March 31, 2024. The Bank has securities pledged to the BTFP with a par value of $222.5 million at September 30, 2023; the Bank has not borrowed from the BTFP in 2023.

 

The Company’s on-balance sheet asset liquidity includes cash and cash equivalents, unpledged investment securities and loans held for sale, which totaled $206.4 million at September 30, 2023, down from $428.4 million at December 31, 2022. The decrease is due to pledging securities to the BTFP. Combining unused borrowing capacity through the FHLB of $95.9 million, through the BTFP of $222.5 million, and on-balance sheet liquidity of $206.4 million, produces readily available liquidity of approximately $524.8 million, with a coverage ratio of 372% to uninsured and uncollateralized deposits.

 

The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets. At September 30, 2023, total wholesale funding was $69.6 million or 5.43% of total assets.

 

 
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Interest Rate Sensitivity

 

Market risk is the sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, and equity prices. The Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority its assets. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets.

 

The Company manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

 

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.

 

The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:

 

Change in Prime Rate

 

% Change in Net

Interest Income

 

+ 400 basis points

 

 

-18.74%

+ 300 basis points

 

 

-12.59%

+ 200 basis points

 

 

-7.56%

+ 100 basis points

 

 

-3.26%

- 100 basis points

 

 

2.76%

- 200 basis points

 

 

6.22%

- 300 basis points

 

 

9.83%

- 400 basis points

 

 

13.08%

 

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net economic value is the market value of all assets minus the market value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.

 

The following table reflects the change in net economic value over different rate environments (dollars in thousands):

 

Change in Prime Rate

 

% Change in Net

Economic Value

 

+ 400 basis points

 

 

-13.60%

+ 300 basis points

 

 

-9.11%

+ 200 basis points

 

 

-5.32%

+ 100 basis points

 

 

-2.41%

- 100 basis points

 

 

1.43%

- 200 basis points

 

 

1.85%

- 300 basis points

 

 

-0.74%

- 400 basis points

 

 

-11.24%

 

Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance.

 

The Company uses a variety of traditional and on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the “gap” between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components.

 

 
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An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At September 30, 2023, the Company had $170.3 million more in liabilities repricing than assets subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
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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

 

 

For information regarding factors that could affect the Company's results of operations, financial condition, or liquidity, see the risk factors discussed in Part I, Item 1A, of the Company’s 2022 Form 10-K. See also "Forward-Looking Statements," included in Part I, Item 2, of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s 2022 Form 10-K. 

 

 

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 
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Item 6.

Exhibits

 

(a) Exhibits

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

32

 

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 10-Q for the period ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

104

 

The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in Inline XBRL (included with Exhibit 101)

 

 
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Signatures

 

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

 

 

F & M BANK CORP.

 

 

 

 

 

/s/ Aubrey M. Wilkerson

 

 

Aubrey M. Wilkerson

Chief Executive Officer

 

 

 

 

 

/s/ Lisa F. Campbell

 

 

Lisa F. Campbell

Executive Vice President and Chief Financial Officer

 

 

November 14, 2023

 

 
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