Blueprint
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
[X]
Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2017.
 
[   ]   
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number: 000-13273
 
 
F & M BANK CORP.
 
Virginia
 
54-1280811
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
 
 
(540) 896-8941
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [X] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “an emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting Company [X]
 
Accelerated filer [ ]
(Do not check if a smaller reporting company)
Emerging growth Company [ ]
 
 
 
If and emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
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 May 8, 2017
Common Stock, par value - $5
 
3,272,661 shares


 
 
F & M BANK CORP.
 
Index
 
Page
 
Part I
Financial Information
3
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets – March 31, 2017 and December 31, 2016
3
 
 
 
 
Consolidated Statements of Income – Three Months Ended March 31, 2017 and 2016
4
 
 
 
 
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2017 and 2016
5
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2017 and 2016
5
 
 
 
 
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2017 and 2016
6
 
 
 
 
Notes to Consolidated Financial Statements
7
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
 
 
 
Item 4.
Controls and Procedures
42
 
 
 
Part II
Other Information
43
 
 
 
Item 1.
Legal Proceedings
43
 
 
 
Item 1a.
Risk Factors
43
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
 
 
 
Item 3.
Defaults Upon Senior Securities
43
 
 
 
Item 4.
Mine Safety Disclosures
43
 
 
 
Item 5.
Other Information
43
 
 
 
Item 6.
Exhibits
43
 
 
 
Signatures
44
 
 
 
Certifications
46
 
 
 
Part I Financial Information
Item 1 Financial Statements
 
F & M BANK CORP.
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
 
 
 
March 31,
 
 
December 31,
 
 
 
2017
 
 
2016*
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
Cash and due from banks
 $8,003 
 $7,755 
Money market funds
  1,091 
  674 
Federal funds sold
  3,019 
  7,926 
Cash and cash equivalents
  12,113 
  16,355 
Securities:
    
    
Held to maturity – fair value of $125 in 2017 and 2016
  125 
  125 
Available for sale
  24,739 
  24,783 
Other investments
  13,089 
  14,567 
Loans held for sale
  37,698 
  62,735 
Loans held for investment
  591,006 
  591,636 
Less: allowance for loan losses
  (7,317)
  (7,543)
Net loans held for investment
  583,689 
  584,093 
 
    
    
Other real estate owned
  2,076 
  2,076 
Bank premises and equipment, net
  11,352 
  10,340 
Interest receivable
  1,818 
  1,785 
Goodwill
  2,974 
  2,670 
Bank owned life insurance
  13,622 
  13,513 
Other assets
  11,591 
  11,847 
Total assets
 $714,886 
 $744,889 
 
    
    
Liabilities
    
    
Deposits:
    
    
Noninterest bearing
 $147,154 
 $146,617 
Interest bearing
  389,406 
  390,468 
Total deposits
  536,560 
  537,085 
 
    
    
Short-term debt
  20,000 
  40,000 
Accrued liabilities
  17,191 
  16,885 
Long-term debt
  53,045 
  64,237 
Total liabilities
  626,796 
  658,207 
 
    
    
Stockholders’ Equity
    
    
Preferred Stock $5 par value, 400,000 shares authorized, 327,350 issued and outstanding
    
    
      for March 31, 2017 and December 31, 2016, respectively
  7,609 
  7,609 
Common stock, $5 par value, 6,000,000 shares authorized,
    
    
     3,272,481 and 3,270,315 shares issued and outstanding
    
    
     for March 31, 2017 and December 31, 2016, respectively
  16,362 
  16,352 
Additional paid in capital – common stock
  10,734 
  10,684 
Retained earnings
  56,035 
  54,509 
Noncontrolling interest in consolidated subsidiaries
  516 
  693 
Accumulated other comprehensive loss
  (3,166)
  (3,165)
Total stockholders’ equity
  88,090 
  86,682 
Total liabilities and stockholders’ equity
 $714,886 
 $744,889 
 
*2016 Derived from audited consolidated financial statements.
 
See notes to unaudited consolidated financial statements
 
 
3
 
 
F & M BANK CORP.
Consolidated Statements of Income
(dollars in thousands)
(Unaudited)
 
 
Three Months Ended
 
 
 
March 31,
 
Interest and Dividend income
 
2017
 
 
2016
 
Interest and fees on loans held for investment
 $7,703 
  7,185 
Interest and fees on loans held for sale
  174 
  372 
Interest from money market funds and federal funds sold
  57 
  8 
Interest on debt securities – taxable
  76 
  69 
Total interest and dividend income
  8,010 
  7,634 
 
    
    
Interest expense
    
    
       Total interest on deposits
  616 
  558 
       Interest from short-term debt
  9 
  18 
       Interest from long-term debt
  281 
  238 
Total interest expense
  906 
  814 
 
    
    
Net interest income
  7,104 
  6,820 
 
    
    
Provision for Loan Losses
  - 
  - 
Net Interest Income After Provision for Loan Losses
  7,104 
  6,820 
 
    
    
Noninterest income
    
    
Service charges on deposit accounts
  315 
  234 
Investment services and insurance income
  174 
  94 
        Mortgage banking income, net
  500 
  451 
        Title insurance income
  199 
  - 
Income on bank owned life insurance
  112 
  119 
        Low income housing partnership losses
  (185)
  (183)
        ATM and check card fees
  330 
  374 
        Gain on prepayment of long-term debt
  504 
  - 
        Loss on sale of investments
  (42)
  - 
        Other operating income
  138 
  121 
Total noninterest income
  2,045 
  1,210 
 
    
    
Noninterest expense
    
    
Salaries
  2,642 
  2,410 
Employee benefits
  953 
  753 
Occupancy expense
  249 
  218 
Equipment expense
  186 
  192 
FDIC insurance assessment
  90 
  113 
       Other real estate owned, net
  14 
  18 
       Marketing expense
  135 
  137 
       Legal and professional fees
  96 
  89 
      ATM and check card fees
  168 
  161 
      Telecommunication and data processing expense
  323 
  263 
      Directors fees
  127 
  108 
      Bank franchise tax
  160 
  148 
       Other operating expenses
  811 
  633 
Total noninterest expense
  5,954 
  5,243 
 
    
    
Income before income taxes
  3,195 
  2,787 
Income tax expense
  877 
  693 
Net Income
  2,318 
  2,094 
        Net (income) loss attributable to noncontrolling interest
  (27)
  4 
Net Income attributable to F & M Bank Corp.
 $2,345 
 $2,090 
        Dividends paid/accumulated on preferred stock
  104 
  128 
Net income available to common stockholders
 $2,241 
 $1,962 
 
    
    
Per Common Share Data
 
 
 
 
 
 
Net income – basic
 $.68 
 $.60 
Net income – diluted
  .65 
  .56 
Cash dividends on common stock
 $.22 
 $.19 
Weighted average common shares outstanding – basic
  3,271,272 
  3,285,373 
Weighted average common shares outstanding – diluted
  3,634,958 
  3,729,674 
 
See notes to unaudited consolidated financial statements
 
 
4
 
 
F & M BANK CORP.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2017
 
 
2016
 
Net Income:
 
 
 
 
 
 
    Net Income – F & M Bank Corp
 $2,345 
 $2,090 
    Net income (loss) attributable to noncontrolling interest
  (27)
  4 
Total Net Income:
  2,318 
  2,094 
 
    
    
Unrealized holding gains (losses) on available-for-sale securities
  (2)
  30 
    Tax Effect
  1 
  ( 10)
    Unrealized holding gain (loss), net of tax
  (1)
  20 
Total other comprehensive income
  (1)
  20 
 
    
    
Comprehensive income
 $2,317 
 $2,114 
 

F & M BANK CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Balance, beginning of period
 $86,682 
 $82,950 
 
    
    
Comprehensive income
    
    
Net income – F & M Bank Corp
  2,345 
  2,090 
Net income (loss) attributable to noncontrolling interest
  (27)
  4 
Other comprehensive income (loss)
  (1)
  20 
Total comprehensive income
  2,317 
  2,114 
 
    
    
Minority interest capital distributions
  (150)
  (77)
Issuance of common stock
  61 
  33 
Repurchase of common stock
  - 
  (32)
Dividends paid
  (820)
  (754)
Balance, end of period
 $88,090 
 $84,234 
 
See notes to unaudited consolidated financial statements
 
 
5
 
 
F & M BANK CORP.
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
March 31,
 
 
 
2017
 
 
2016
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 $2,345 
 $2,090 
Reconcile net income to net cash provided by operating activities:
    
    
Depreciation
  202 
  204 
Amortization of securities
  2 
  38 
Proceeds from loans held for sale originated
 17,183
  15,831 
Loans held for sale originated
 (17,908)
  (14,697)
Gain on prepayment of long-term debt
  (504)
  - 
Increase in interest receivable
  (33)
  (6)
Decrease (increase) in other assets
 708
  551 
Increase in accrued liabilities
  (317)
  (614)
Amortization of limited partnership investments
  185 
  183 
Income from life insurance investment
  (112)
  (119)
Loss on sale of investments
  42 
  - 
Loss on sale and valuation adjustments for other real estate owned
  - 
  1 
Net cash provided by operating activities
 1,793
  3,462 
 
    
    
Cash flows from investing activities
    
    
Purchase of investments available for sale and other investments
  (20,053)
  (2,790)
Purchase of title insurance company 
 (304)
     - 
Proceeds from maturity of investments available for sale
  21,288 
  2,040 
Proceeds from the sale of investments
  55 
    
Net decrease (increase) in loans held for investment
  404 
  (9,797)
Net decrease (increase) in loans held for sale participations
  25,761
  (13,329)
Proceeds from the sale of other real estate owned
  - 
  124 
Net purchase of property and equipment
  (1,214)
  (896)
Net cash provided by (used in) investing activities
 25,937
  (24,648)
 
    
    
Cash flows from financing activities
    
    
Net change in deposits
  (525)
  1,033 
Net change in short-term debt
  (20,000)
  21,256 
Dividends paid in cash
  (820)
  (754)
Proceeds from issuance of common stock
  61 
  33 
        Repurchase of common stock
  - 
  (31)
Repayments of long-term debt
  (10,688)
  (982)
Net cash (used in) provided by financing activities
  (31,972)
  20,555 
 
    
    
Net decrease in Cash and Cash Equivalents
  (4,242)
  (631)
Cash and cash equivalents, beginning of period
  16,355 
  8,519 
Cash and cash equivalents, end of period
 $12,113 
 $7,888 
Supplemental Cash Flow information:
    
    
Cash paid for:
    
    
Interest
 $905 
 $800 
    Taxes
  1,980 
  - 
Supplemental non-cash disclosures:
    
    
Transfer from loans to other real estate owned
  - 
  442 
Loans originated for the sale of other real estate owned
  - 
  - 
Change in unrealized gain (loss) on securities available for sale
  (1)
  20 
 
See notes to unaudited consolidated financial statements
 
 
6
 
Note 1. 
Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC, (net of noncontrolling interest) and VSTitle, LLC (net of noncontrolling interest). Significant inter-company accounts and transactions have been eliminated.
 
Nature of Operations
 
F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily located in Rockingham, Shenandoah, Page and Augusta Counties in Virginia. Services are provided at thirteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc (FMFS), VBS Mortgage, LLC (VBS), and VSTitle, LLC (VST). The Company purchased VSTitle, a title company headquartered in Harrisonburg, VA with offices in Harrisonburg, Fishersville and Charlottesville, VA on January 1, 2017.
 
Basis of Presentation
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.
 
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.
 
 
7
 
 
Note 1. 
Summary of Significant Accounting Policies, continued
 
Earnings per Share
 
Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding.  Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per share calculation.
 
Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.
 
The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:  
 
 
 
For the quarter ended
 
 
 
March 31, 2017
 
 
March 31, 2016
 
Earnings available to common stockholders:
 
 
 
 
 
 
Net income
 $2,318,009 
 $2,093,314 
Noncontrolling interest income (loss)
  (26,928)
  3,763 
Preferred stock dividends
  104,343 
  127,500 
Net income available to common stockholders
 $2,240,594 
 $1,962,051 
 
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated:
 
 
 
Three months ended
 
 
 
March 31, 2017
 
 
March 31, 2016
 
 
 
Income
 
 
 Shares
 
 
Per Share Amounts
 
 
 Income
 
 
 Shares
 
 
Per Share Amounts
 
Basic EPS
 $2,240,594 
  3,271,272 
 $0.68 
 $1,962,051 
  3,285,274 
 $0.60 
Effect of Dilutive Securities:
    
    
    
    
    
    
     Convertible Preferred Stock
  104,343 
  (363,686)
  (0.03)
  127,500 
  (444,400)
  (0.04)
Diluted EPS
 $2,344,937 
  3,634,958 
 $0.65 
 $2,089,551 
  3,729,674 
 $0.56 
 
 
8
 
 
Note 2. 
Investment Securities
 
Investment securities available for sale are carried in the consolidated balance sheets at their approximate market value. Investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost at March 31, 2017 and December 31, 2016 are as follows:
 
 
 
 
 
 
Gross
 
 
Gross
 
 
 
 
 
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $125 
 $- 
 $- 
 $125 
December 31, 2016
    
    
    
    
U. S. Treasuries
 $125 
 $- 
 $- 
 $125 
 
The amortized cost and fair value of securities available for sale are as follows:
 
 
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $4,003,871 
 $4,009 
 $- 
 $4,007,880 
U. S. Government sponsored enterprises
  19,998,289 
  - 
  - 
  19,998,289 
Mortgage-backed obligations of federal agencies
  594,812 
  2,549 
  - 
  597,361 
Equity securities
  135,000 
  - 
  - 
  135,000 
Total Securities Available for Sale
 $24,731,972 
 $6,558 
 $- 
 $24,738,530 
 
    
    
    
    
December 31, 2016
    
    
    
    
U. S. Treasuries
 $24,004,705 
 $8,668 
 $- 
 $24,013,373 
Mortgage-backed obligations of federal agencies
  634,009 
  123 
  - 
  634,132 
Equity securities
  135,000 
  - 
  - 
  135,000 
Total Securities Available for Sale
 $24,773,714 
 $8,791 
 $- 
 $24,782,505 
 
 
9
 
Note 2.   
Investment Securities, continued
 
The amortized cost and fair value of securities at March 31, 2017, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
Securities Held to Maturity
 
 
Securities Available for Sale
 
 
 
Amortized
 
 
Fair
 
 
Amortized
 
 
Fair
 
(dollars in thousands)
 
Cost
 
 
Value
 
 
Cost
 
 
Value
 
Due in one year or less
 $- 
 $- 
 $24,002 
 $24,006 
Due after one year through five years
  125 
  125 
  - 
  - 
Due after five years
  - 
  - 
  595 
  598 
Due after ten years
  - 
  - 
  135 
  135 
Total
 $125 
 $125 
 $24,732 
 $24,739 
 
There were no gains and losses on sales of available for sale securities in the first quarter of 2017 or 2016. There were also no securities with other than temporary impairment.
 
As of March 31, 2017 and December 31, 2016, there were no securities in an unrealized loss position.
 
Other investments, which consist of investments in eighteen low-income housing and historic equity partnerships (carrying basis of $7,851,527), stock in the Federal Home Loan Bank (carrying basis $3,767,800) and various other investments (carrying basis $1,469,572). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The market values of these securities are estimated to approximate their carrying value as of March 31, 2017. At March 31, 2017, the Company was committed to invest an additional $4,795,251 in eight low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in accrued liabilities on the balance sheet. During the first quarter of 2017, both Farmers & Merchants Financial Services and VBS Mortgage ended their relationship with Bankers Title Virginia resulting in a consolidated loss of $41,914.
 
Note 3.  
Loans
 
Loans held for investment outstanding at March 31, 2017 and December 31, 2016 are summarized as follows:
 
(dollars in thousands)
 
2017
 
 
2016
 
Construction/Land Development
 $73,874 
 $76,172 
Farmland
  15,034 
  12,901 
Real Estate
  169,664 
  172,758 
Multi-Family
  6,714 
  7,605 
Commercial Real Estate
  148,724 
  150,061 
Home Equity – closed end
  11,172 
  11,453 
Home Equity – open end
  54,607 
  54,420 
Commercial & Industrial – Non-Real Estate
  32,847 
  31,306 
Consumer
  7,530 
  6,643 
Dealer Finance
  68,135 
  65,495 
Credit Cards
  2,705 
  2,822 
Total
 $591,006 
 $591,636 
 
The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $200,241,000 and $199,401,000 as of March 31, 2017 and December 31, 2016, respectively. The Company maintains a blanket lien on its entire residential real estate portfolio and certain commercial and home equity loans.
 
 
10
 
Note 3. 
Loans, continued
 
The following is a summary of information pertaining to impaired loans (in thousands):
 
 
 
 
 
 
Unpaid
 
 
 
 
 
Average
 
 
Interest
 
  March 31, 2017
 
Recorded
 
 
Principal
 
 
Related
 
 
Recorded
 
 
Income
 
 
 
Investment
 
 
Balance
 
 
Allowance
 
 
Investment
 
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $3,425 
 $3,781 
 $- 
 $3,094 
 $3 
     Farmland
  1,858 
  1,858 
  - 
  464 
  - 
     Real Estate
  752 
  752 
  - 
  769 
  3 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  100 
  100 
  - 
  1,011 
  1 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  347 
  - 
  569 
  - 
     Commercial & Industrial – Non-Real Estate
  167 
  167 
  - 
  171 
  - 
     Consumer
  12 
  12 
  - 
  10 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  19 
  19 
  - 
  17 
  - 
 
  6,333 
  7,036 
    
  6,105 
  7 
 
    
    
    
    
    
Impaired loans with a valuation allowance
    
    
    
    
    
     Construction/Land Development
  7,363 
  7,363 
  1,951 
  7,703 
  43 
     Farmland
  - 
  - 
  - 
  - 
  - 
     Real Estate
  1,201 
  1,201 
  216 
  1,209 
  - 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  - 
  - 
  - 
  717 
  - 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  617 
  - 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  7 
  - 
     Consumer
  - 
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  59 
  59 
  15 
  72 
  1 
 
  8,623 
  8,623 
  2,182 
  10,325 
  44 
 
    
    
    
    
    
Total impaired loans
 $14,956 
 $15,659 
 $2,182 
 $16,430 
 $51 
 
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
 
 
11
 
Note 3.
Loans, continued
 
 
 
 
 
 
Unpaid
 
 
 
 
 
Average
 
 
Interest
 
  December 31, 2016
 
Recorded
 
 
Principal
 
 
Related
 
 
Recorded
 
 
Income
 
 
 
Investment
 
 
Balance
 
 
Allowance
 
 
Investment
 
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $3,296 
 $3,652 
 $- 
 $2,547 
 $10 
     Farmland
  - 
  - 
  - 
  - 
  - 
     Real Estate
  768 
  768 
  - 
  778 
  10 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  1,958 
  1,958 
  - 
  1,087 
  114 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  347 
  - 
  964 
  2 
     Commercial & Industrial – Non-Real Estate
  170 
  170 
  - 
  174 
  2 
     Consumer
  13 
  13 
  - 
  11 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  - 
  - 
  - 
  14 
  1 
 
  6,205 
  6,908 
    
  5,575 
  139 
 
    
    
    
    
    
Impaired loans with a valuation allowance
    
    
    
    
    
     Construction/Land Development
  6,592 
  6,592 
  1,853 
  8,525 
  291 
     Farmland
  - 
  - 
  - 
  - 
  - 
     Real Estate
  1,206 
  1,206 
  221 
  1,215 
  10 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  952 
  952 
  60 
  959 
  57 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  969 
  - 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  14 
  - 
     Consumer
  - 
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  87 
  87 
  20 
  77 
  1 
 
  8,837 
  8,837 
  2,154 
  11,759 
  359 
 
    
    
    
    
    
Total impaired loans
 $15,042 
 $15,745 
 $2,154 
 $17,334 
 $498 
 
Loans held for sale consists of loans originated by VBS Mortgage for sale in the secondary market, and the Bank’s commitment to purchase residential mortgage loan Participations from Northpointe Bank. The volume of loans purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of March 31, 2017 and December 31, 2016 were $37,698,696 and $62,734,803, respectively.
 
 
12
 
Note 3.  
Loans, continued
 
The following table presents the aging of the recorded investment of past due loans (in thousands) as of March 31, 2017 and December 31, 2016:
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days (excluding non-accrual)
 
 
Non-Accrual Loans
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $463 
 $- 
 $- 
 $2,761 
 $3,224 
 $70,650 
 $73,874 
Farmland
  - 
  - 
  - 
  - 
  - 
  15,034 
  15,034 
Real Estate
  1,937 
  242 
  64 
  1,826 
  4,069 
  165,595 
  169,664 
Multi-Family
  - 
  - 
  - 
  - 
  - 
  6,714 
  6,714 
Commercial Real Estate
  852 
  - 
  - 
  - 
  852 
  147,872 
  148,724 
Home Equity – closed end
  - 
  - 
  6 
  31 
  37 
  11,135 
  11,172 
Home Equity – open end
  104 
  100 
  - 
  222 
  426 
  54,181 
  54,607 
Commercial & Industrial – Non- Real Estate
  209 
  29 
  - 
  - 
  238 
  32,609 
  32,847 
Consumer
 235
 153
  - 
  3 
 391
  7,139
  7,530 
Dealer Finance
 404
    86
    
  178 
 668
  67,467
  68,135 
Credit Cards
  15 
  13 
  - 
  - 
  28 
  2,677 
  2,705 
Total
 $4,219 
 $623 
 $70 
 $5,021 
 $9,933 
 $581,073 
 $591,006 
 
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days (excluding non-accrual)
 
 
Non-Accrual Loans
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $73 
 $101 
 $- 
 $2,805 
 $2,979 
 $73,193 
 $76,172 
Farmland
  - 
  - 
  - 
  - 
  - 
  12,901 
  12,901 
Real Estate
  2,114 
  340 
  81 
  1,399 
  3,934 
  168,824 
  172,758 
Multi-Family
  - 
  - 
  - 
  - 
  - 
  7,605 
  7,605 
Commercial Real Estate
  139 
  - 
  - 
  - 
  139 
  149,922 
  150,061 
Home Equity – closed end
  101 
  - 
  - 
  32 
  133 
  11,320 
  11,453 
Home Equity – open end
  309 
  - 
  - 
  279 
  588 
  53,832 
  54,420 
Commercial & Industrial – Non- Real Estate
  313 
  5 
  - 
  70 
  388 
  30,918 
  31,306 
Consumer
  35 
  4 
  - 
  - 
  39 
  6,604 
  6,643 
Dealer Finance
  790 
  187 
  26 
  178 
  1,181 
  64,314 
  65,495 
Credit Cards
  18 
  4 
  - 
  - 
  22 
  2,800 
  2,822 
Total
 $3,892 
 $641 
 $107 
 $4,763 
 $9,403 
 $582,233 
 $591,636 
 
At March 31, 2017 and December 31, 2016, other real estate owned included $565,000 of foreclosed residential real estate. The Company has $256,000 of consumer mortgages for which foreclosure is in process at March 31, 2017.
 
Nonaccrual loans at March 31, 2017 would have earned approximately $24,000 in interest income had they been accruing loans.
 
 
13
 
 
Note 4. 
Allowance for Loan Losses
 
A summary of changes in the allowance for loan losses (in thousands) for March 31, 2017 and December 31, 2016 is as follows:
 
March 31, 2017
 
Beginning Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
Ending Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $3,381 
 $- 
 $- 
 $(70)
 $3,311 
 $1,951 
 $1,360 
Farmland
  34 
  - 
  - 
  (6)
  28 
  - 
  28 
Real Estate
  843 
  - 
  2 
  (67)
  778 
  216 
  562 
Multi-Family
  23 
  - 
  - 
  (5)
  18 
  - 
  18 
Commercial Real Estate
  705 
  - 
  5 
  (54)
  656 
  - 
  656 
Home Equity – closed end
  75 
  5 
  - 
  3 
  73 
  - 
  73 
Home Equity – open end
  470 
  1 
  - 
  (77)
  392 
  - 
  392 
 Commercial & Industrial – Non-Real Estate
  586 
  29 
  26 
  (109)
  474 
  - 
  474 
 Consumer
  78 
  1 
  1 
  7 
  85 
  - 
  85 
Dealer Finance
  1,289 
  405 
  184 
  378 
  1,446 
  15 
  1,431 
Credit Cards
  59 
  12 
  9 
  - 
  56 
  - 
  56 
Total
 $7,543 
 $453 
 $227 
 $- 
 $7,317 
 $2,182 
 $5,135 
 
December 31, 2016
 
Beginning Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
Ending Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $4,442 
 $356 
 $7 
 $(712)
 $3,381 
 $1,853 
 $1,528 
Farmland
  95 
  - 
  - 
  (61)
  34 
  - 
  34 
Real Estate
  806 
  23 
  4 
  56 
  843 
  221 
  622 
Multi-Family
  71 
  - 
  - 
  (48)
  23 
  - 
  23 
Commercial Real Estate
  445 
  19 
  135 
  144 
  705 
  - 
  705 
Home Equity – closed end
  174 
  8 
  - 
  (91)
  75 
  - 
  75 
Home Equity – open end
  634 
  370 
  120 
  86 
  470 
  60 
  410 
 Commercial & Industrial – Non-Real Estate
  1,055 
  293 
  267 
  (443)
  586 
  - 
  586 
 Consumer
  108 
  37 
  19 
  (12)
  78 
  - 
  78 
Dealer Finance
  836 
  1,081 
  417 
  1,117 
  1,289 
  20 
  1,269 
Credit Cards
  115 
  74 
  54 
  (36)
  59 
  - 
  59 
Total
 $8,781 
 $2,261 
 $1,023 
 $- 
 $7,543 
 $2,154 
 $5,389 
 
 
14
 
Note 4. 
Allowance for Loan Losses, continued
 
March 31, 2017
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $73,874 
 $10,788 
 $63,086 
Farmland
  15,034 
  1,858 
  13,176 
Real Estate
  169,664 
  1,953 
  167,711 
Multi-Family
  6,714 
  - 
  6,714 
Commercial Real Estate
  148,724 
  100 
  148,624 
Home Equity – closed end
  11,172 
  - 
  11,172 
Home Equity –open end
  54,607 
  - 
  54,607 
Commercial & Industrial – Non-Real Estate
  32,847 
  167 
  32,680 
Consumer
  7,530 
  12 
  7,518 
Dealer Finance
  68,135 
  78 
  68,057 
Credit Cards
  2,705 
  - 
  2,705 
 
 $591,006 
 $14,956 
 $576,050 
Total
    
    
    
 
The following table presents the recorded investment in loans (in thousands) based on impairment method as of March 31, 2017 and December 31, 2016:
 
December 31, 2016
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $76,172 
 $9,888 
 $66,284 
Farmland
  12,901 
  - 
  12,901 
Real Estate
  172,758 
  1,974 
  170,784 
Multi-Family
  7,605 
  - 
  7,605 
Commercial Real Estate
  150,061 
  2,910 
  147,151 
Home Equity – closed end
  11,453 
  - 
  11,453 
Home Equity –open end
  54,420 
  - 
  54,420 
Commercial & Industrial – Non-Real Estate
  31,306 
  170 
  31,136 
Consumer
  6,643 
  13 
  6,630 
Dealer Finance
  65,495 
  87 
  65,408 
Credit Cards
  2,822 
  - 
  2,822 
 
 $591,636 
 $15,042 
 $576,594 
Total
    
    
    
 
 
15
 
 
Note 4.
Allowance for Loan Losses, continued
 
The following table shows the Company’s loan portfolio broken down by internal loan grade (in thousands) as of March 31, 2107 and December 31, 2016:
 
March 31, 2017
 
Grade 1
Minimal Risk
 
 
Grade 2
Modest Risk
 
 
Grade 3
Average Risk
 
 
Grade 4 Acceptable Risk
 
 
Grade 5 Marginally Acceptable
 
 
Grade 6
Watch
 
 
Grade 7 Substandard
 
 
Grade 8
Doubtful
 
 
Total
 
Construction/Land Development
 $- 
 $962 
 $12,962 
 $39,234 
 $8,281 
 $3,396 
 $9,039 
 $- 
 $73,874 
Farmland
  64 
  200 
  3,546 
  3,100 
  4,413 
  1,853 
  1,858 
  - 
  15,034 
Real Estate
  - 
  1,127 
  54,843 
  77,826 
  28,301 
  4,850 
  2,717 
  - 
  169,664 
Multi-Family
  - 
  291 
  2,975 
  3,265 
  183 
  - 
  - 
  - 
  6,714 
Commercial Real Estate
  - 
  2,684 
  35,662 
  90,296 
  18,611 
  1,228 
  243 
  - 
  148,724 
Home Equity – closed end
  - 
  150 
  3,876 
  3,987 
  1,717 
  1,405 
  37 
  - 
  11,172 
Home Equity – open end
  124 
  1,550 
  16,210 
  31,515 
  4,545 
  125 
  538 
  - 
  54,607 
Commercial & Industrial (Non-Real Estate)
  311 
  768 
  10,643 
  19,107 
  1,875 
  143 
  - 
  - 
  32,847 
Consumer (excluding dealer)
  62 
  280 
  2,033 
  1,317 
  1,227 
  2,158 
  453 
  - 
  7,530 
Total
 $561 
 $8,012 
 $142,750 
 $269,647 
 $69,153 
 $15,158 
 $14,885 
 $- 
 $520,166 
 
    
    
    
    
    
    
    
    
    
 
 
 
Credit Cards
 
 
Dealer Finance
 
Performing
 $2,705 
 $67,957 
Non performing
  - 
  178 
Total
 $2,705 
 $68,135 
 
 
16
 
Note 4. Allowance for Loan Losses, continued
 
 December 31, 2016
 
Grade 1
Minimal Risk
 
 
Grade 2
Modest Risk
 
 
Grade 3
Average Risk
 
 
Grade 4
Acceptable Risk
 
 
Grade 5 Marginally Acceptable
 
 
Grade 6 Watch
 
 
Grade 7
Substandard
 
 
Grade 8 Doubtful
 
 
Total
 
Construction/Land Development
 $- 
 $1,478 
 $10,870 
 $43,863 
 $8,399 
 $2,473 
 $9,089 
 $- 
 $76,172 
Farmland
  65 
  - 
  3,073 
  3,456 
  4,446 
  1,861 
  - 
  - 
  12,901 
Real Estate
  - 
  1,149 
  62,168 
  74,242 
  28,266 
  4,680 
  2,253 
  - 
  172,758 
Multi-Family
  - 
  311 
  3,009 
  4,099 
  186 
  - 
  - 
  - 
  7,605 
Commercial Real Estate
  - 
  2,793 
  32,986 
  91,157 
  19,181 
  1,840 
  2,104 
  - 
  150,061 
Home Equity – closed end
  - 
  150 
  3,966 
  4,139 
  1,746 
  1,414 
  38 
  - 
  11,453 
Home Equity – open end
  124 
  1,724 
  16,415 
  30,974 
  4,547 
  125 
  511 
  - 
  54,420 
Commercial & Industrial (Non-Real Estate)
  1,375 
  1,267 
  6,827 
  19,530 
  2,198 
  39 
  70 
  - 
  31,306 
Consumer (excluding dealer)
  67 
  174 
  1,837 
  607 
  1,242 
  2,252 
  466 
  - 
  6,643 
Total
 $1,631 
 $9,046 
 $141,151 
 $272,065 
 $70,211 
 $14,684 
 $14,531 
 $- 
 $523,319 
 
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
 
Credit Cards
 
 
Dealer Finance
 
    
Performing
    
    
    
    
    
    
 $2,822 
 $65,291 
    
Non performing
    
    
    
    
    
    
  - 
  204 
    
Total
    
    
    
    
    
    
 $2,822 
 $65,495 
    
 
Description of internal loan grades:
 
Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.
 
Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.
 
Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.
 
Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must 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.
 
 
17
 
 
Note 4.
Allowance for Loan Losses, continued
 
Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.
 
Grade 6 – Watch: Loans are currently protected, but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.
 
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.
 
Grade 8 – Doubtful: The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.
 
Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming when payments of principal and interest are past due 90 days or more.
 
18
 
Note 5. 
Employee Benefit Plan
 
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31st as the measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in 2017.
 
  The following is a summary of net periodic pension costs for the three-month periods ended March 31, 2017 and 2016:
 
 
 
Three Months Ended
 
 
 
March 31, 2017
 
 
March 31, 2016
 
 
 
 
 
 
 
 
Service cost
 $173,961 
 $157,968 
Interest cost
  121,802 
  113,224 
Expected return on plan assets
  (212,774)
  (213,604)
Amortization of prior service cost
  (3,809)
  (3,809)
Amortization of net loss
  71,024 
  55,786 
Net periodic pension cost
 $150,204 
 $109,565 
 
Note 6.
Fair Value
 
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
 
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
 
The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.
 
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
 
 
Level 1 –
Valuation is based on quoted prices in active markets for identical assets and liabilities.
 
Level 2 –
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
 
Level 3 –
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
 
19
 
Note 6.
Fair Value, continued
 
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
 
Securities
 
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.
 
Derivatives
 
The Company’s derivatives are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs.
 
The following tables present the balances of financial assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31, 2017
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $4,008 
 $- 
 $4,008 
 $- 
U. S. Government sponsored enterprises
  19,998 
    
  19,998 
    
Mortgage-backed obligations of federal agencies
  598 
  - 
  598 
  - 
Equity securities
  135 
  - 
  135 
  - 
Total securities available for sale
 $24,739 
  - 
 $24,739 
  - 
December 31, 2016
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
    
    
    
    
U. S. Treasuries
 $24,014 
 $- 
 $24,014 
 $- 
Mortgage-backed obligations of federal agencies
  634 
  - 
  634 
  - 
Equity securities
  135 
  - 
  135 
  - 
Total securities available for sale
 $24,783 
  - 
 $24,783 
  - 
 
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
 
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
 
Loans Held for Sale
 
Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan and loans originated by VBS for sale in the secondary market. Loan participations are generally repurchased within 15 days.  Loans originated for sale by VBS are recorded at lower of cost or market. No market adjustments were required at March 31, 2017 or December 31, 2016; therefore, loans held for sale were carried at cost. Because of the short-term nature and fixed repurchased price, the book value of these loans approximates fair value at March 31, 2017 and December 31, 2016.
 
20
 
 
Note 6.
Fair Value, continued
 
Impaired Loans
 
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
 
The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.
 
Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations.
 
The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation approach.  Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
 
As of March 31, 2017 and December 31, 2016, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.
 
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):
 
March 31, 2017
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $5,412 
  - 
  - 
 $5,412 
     Real Estate
  985 
  - 
  - 
  985 
     Dealer Finance
  44 
  - 
  - 
  44 
Impaired loans
 $6,441 
  - 
  - 
 $6,441 
December 31, 2016
Total
  Level 1
  Level 2 
  Level 3 
 
    
    
    
    
     Construction/Land Development
 $4,739 
  - 
  - 
 $4,739 
     Real Estate
  985 
  - 
  - 
  985 
     Commercial Real Estate
  892 
  - 
  - 
  892 
     Dealer Finance
  67 
  - 
  - 
  67 
Impaired loans
 $6,683 
  - 
  - 
 $6,683 
 
 
21
 
 
Note 6. 
Fair Value, continued
 
The following table presents information about Level 3 Fair Value Measurements for March 31, 2017:
 
 
 
Fair Value at March 31, 2017
 
Valuation Technique
Significant Unobservable Inputs
Range
 
 
 
 
 
 
 
Impaired Loans
 $6,441 
Discounted appraised value
Discount for selling costs and marketability
2%-50% (Average 4.7%)
 
Other Real Estate Owned
 
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
 
The Company markets other real estate owned both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.
 
The following table summarizes the Company’s other real estate owned that were measured at fair value on a nonrecurring basis during the period.
 
March 31, 2017
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 $2,076 
  - 
  - 
 $2,076 
 
December 31, 2016
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 $2,076 
  - 
  - 
 $2,076 
 
The following table presents information about Level 3 Fair Value Measurements for March 31, 2017:
 
 
 
Fair Value at March 31, 2017
 
Valuation Technique
Significant Unobservable Inputs
Range
 
 
 
 
 
 
 
Other real estate owned
 $2,076 
Discounted appraised value
Discount for selling costs
5%-15% (Average 8%)
 
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
 
Cash and Due from Bank, and Interest-Bearing Deposits
 
The carrying amounts approximate fair value.
 
Securities
 
The fair values of securities, excluding restricted stock, are determined by quoted market prices or dealer quotes. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments adjusted for differences between the quoted instruments and the instruments being valued. The carrying value of restricted securities and other investments approximates fair value and are therefore excluded from the following table.
 
Loans Held for Sale
 
Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.
 
 
22
 
Note 6. 
Fair Value, continued
 
Loans
 
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate – commercial, real estate – construction, real estate – mortgage, credit card and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
 
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, as well as estimates for prepayments. The estimate of maturity is based on the Company’s historical experience with repayments for loan classification, modified, as required, by an estimate of the effect of economic conditions on lending.
 
Fair value for significant nonperforming loans is based on estimated cash flows which are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are determined within management’s judgment, using available market information and specific borrower information.
 
Bank-Owned Life Insurance
 
Bank-owned life insurance represents insurance policies on certain officers of the Company. The cash values of the policies are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates fair value.
 
Deposits
 
The fair value of demand and savings deposits is the amount payable on demand. The fair value of fixed maturity term deposits and certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities.
 
Short-Term Debt
 
The carrying amounts of short-term debt maturing within 90 days approximate their fair values. Fair values of any other short-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of debt.
 
Long-Term Debt
 
The fair value of the Company’s long-term debt is estimated using discounted cash flow analyses based on the Company’s incremental borrowing rates for similar types of debt arrangements.
 
Accrued Interest
 
The carrying amounts of accrued interest approximate fair value.
 
 
23
 
 
Note 7. Disclosures About Fair Value of Financial Instruments
 
The estimated fair values, and related carrying amounts (in thousands), of the Company’s financial instruments are as follows:
 
 
 
 
 
 
Fair Value Measurements at March 31, 2017 Using
 
(dollars in thousands)
 
Carrying Amount
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Significant Other Observable Inputs (Level 2)
 
 
Significant Unobservable Inputs (Level 3)
 
 
Fair Value at March 31, 2017
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $12,113 
 $12,113 
 $- 
 $- 
 $12,113 
Securities
  24,864 
  - 
  24,864 
  - 
  24,864 
Loans held for sale
  37,698 
  - 
  37,698 
  - 
  37,698 
Loans held for investment, net
  583,689 
  - 
  - 
  596,575 
  596,575 
Interest receivable
  1,818 
  - 
  1,818 
  - 
  1,818 
Bank owned life insurance
  13,622 
  - 
  13,622 
  - 
  13,622 
Total
 $673,804 
 $12,113 
 $78,002 
 $596,575 
 $686,690 
Liabilities:
    
    
    
    
    
Deposits
 $536,560 
 $- 
 $381,595 
 $155,779 
 $537,374 
Short-term debt
  20,000 
  - 
  20,000 
  - 
  20,000 
Long-term debt
  53,045 
  - 
  - 
  53,105 
  53,105 
Interest payable
  229 
  - 
  229 
  - 
  229 
Total
 $609,834 
 $- 
 $401,824 
 $208,884 
 $610,708 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2016 Using
 
(dollars in thousands)
 
Carrying Amount
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Significant Other Observable Inputs (Level 2)
 
 
Significant Unobservable Inputs (Level 3)
 
 
Fair Value at December 31, 2016
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $16,355 
 $16,355 
 $- 
 $- 
 $16,355 
Securities
  24,908 
  - 
  24,908 
  - 
  24,908 
Loans held for sale
  62,735 
  - 
  62,735 
  - 
  62,735 
Loans held for investment, net
  584,093 
  - 
  - 
  598,991 
  598,991 
Interest receivable
  1,785 
  - 
  1,785 
  - 
  1,785 
Bank owned life insurance
  13,513 
  - 
  13,513 
  - 
  13,513 
Total
 $703,389 
 $16,355 
 $102,941 
 $598,991 
 $718,287 
Liabilities:
    
    
    
    
    
Deposits
 $537,085 
 $- 
 $379,857 
 $158,073 
 $537,930 
Short-term debt
  40,000 
  - 
  40,000 
  - 
  40,000 
Long-term debt
  64,237 
  - 
  - 
  63,945 
  63,945 
Interest payable
  228 
  - 
  228 
  - 
  228 
Total
 $641,550 
 $- 
 $420,085 
 $222,018 
 $642,103 
 
 
24
 
 
Note 8. 
Troubled Debt Restructuring
 
In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans which are evaluated individually for impairment.
 
During the three months ended March 31, 2017, there were no loan modifications that were considered to be troubled debt restructurings. At March 31, 2017, there were also no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
During the three months ended March 31, 2016, there was one loan modifications that was considered to be a troubled debt restructurings. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.
 
 
 
March 31, 2016
 
 
 
 
 
 
Pre-Modification
 
 
Post-Modification
 
(in thousands)
 
 
 
 
Outstanding
 
 
Outstanding
 
Troubled Debt Restructurings
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
 
 
 
 
 
 
 
 
 
 
Consumer
  1 
 $17 
 $17 
Total
  1 
 $17 
 $17 
 
 During the quarter ended March 31, 2016, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
Note 9. 
Accumulated Other Comprehensive Loss
 
The balances in accumulated other comprehensive loss are shown in the following table:
 
(dollars in thousands)
 
Unrealized Securities Gains (Losses)
 
 
Adjustments Related to Pension Plan
 
 
Accumulated Other Comprehensive Loss
 
Balance at December 31, 2016
 $6 
 $(3,171)
 $(3,165)
  Change in unrealized securities gains (losses), net of tax
  (1)
  - 
  (1)
  Change in unfunded pension liability, net of tax
  - 
  - 
  - 
Balance at March 31, 2017
 $5 
 $(3,171)
 $(3,166)
 
There were no reclassifications adjustments reported on the consolidated statements of income during 2016 or 2017.
 
 
25
 
 
Note 10. 
Business Segments
 
The Company utilizes its subsidiaries to provide multiple business segments including retail banking, mortgage banking, title insurance services, investment services and credit life and accident and health insurance products related to lending. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage Banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from title insurance services, investment services and insurance products consist of commissions on products provided.  
 
 
 
Three Months Ended March 31, 2017
 
 
 
F&M Bank
 
 
VBS Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $7,960,468 
 $35,296 
 $37,274 
 $- 
 $13 
 $(22,711)
 $8,010,340 
Service charges on deposits
  315,336 
  - 
  - 
  - 
  - 
  - 
  315,336 
Investment services and insurance income
  96 
  - 
  173,791 
  - 
  - 
  - 
  173,887 
Mortgage banking income, net
  - 
  499,927 
  - 
  - 
  - 
  - 
  499,927 
Title insurance income
  - 
  - 
  - 
  198,546 
  - 
  - 
  198,546 
Income from bank owned life insurance
  112,316 
  - 
  - 
  - 
  - 
  - 
  112,316 
Low income housing partnership losses
  (185,329)
  - 
  - 
  - 
  - 
  - 
  (185,329)
ATM and check card fees
  329,943 
  - 
  - 
  - 
  - 
  - 
  329,943 
Gain on prepayment of long-term debt
  503,830 
  - 
  - 
  - 
  - 
  - 
  503,830 
Loss on investments
  - 
  (39,474)
  (2,440)
  - 
  - 
  - 
  (41,914)
Other operating income
  138,555 
  - 
  - 
  - 
  - 
  - 
  138,555 
Total income
  9,175,215 
  495,749 
  208,625 
  198,546 
  13 
  (22,711)
  10,055,437 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  907,382 
  21,145 
  - 
  111 
  - 
  (22,711)
  905,927 
Provision for loan losses
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Salary expense
  2,192,790 
  319,987 
  115,559 
  105,726 
  - 
  - 
  2,734,062 
Employee benefit expense
  815,613 
  85,625 
  - 
  51,582 
  - 
  - 
  952,820 
Occupancy expense
  200,915 
  30,198 
  - 
  17,860 
  - 
  - 
  248,973 
Equipment expense
  170,115 
  9,316 
  - 
  6,686 
  - 
  - 
  186,117 
FDIC insurance assessment
  90,000 
  - 
  - 
  - 
  - 
  - 
  90,000 
Other real estate owned, net
  13,765 
  - 
  - 
  - 
  - 
  - 
  13,765 
Marketing expense
  116,242 
  16,511 
  405 
  1,745 
  - 
  - 
  134,903 
Legal and professional fees
  93,636 
  2,250 
  - 
  - 
  - 
  - 
  95,886 
ATM and check card fees
  167,323 
  933 
  - 
  - 
  - 
  - 
  168,256 
Telecom and data processing expense
  299,207 
  24,168 
  - 
  - 
  - 
  - 
  323,375 
Directors fees
  105,000 
  22,000 
  - 
  - 
  - 
  - 
  127,000 
Bank franchise Tax
  160,006 
  - 
  - 
  - 
  - 
  - 
  160,006 
Other operating expenses
  642,736 
  44,506 
  3,391 
  25,924 
  2,700 
  - 
  719,257 
Total expense
  5,974,730 
  576,639 
  119,355 
  209,634 
  2,700 
  (22,711)
  6,860,347 
Income tax expense
  868,662 
  - 
  26,670 
  - 
  (18,251)
  - 
  877,081 
Net income (loss)
 $2,331,823 
 $(80,890)
 $62,600 
 $(11,088)
 $15,564 
 $- 
 $2,318,009 
 
    
    
    
    
    
    
    
Total Assets
 $717,577,893 
 $3,822,418 
 $6,670,204 
 $499,512 
 $88,990,839 
 $(102,675,187)
 $714,885,679 
Goodwill
 $2,669,517 
 $- 
 $- 
 $- 
 $304,000 
 $- 
 $2,973,517 
 
 
26
 
 
Note 10. 
Business Segments, continued
 
 
 
Three months ended March 31, 2016
 
 
 
F&M Bank
 
 
VBS Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $7,598,807 
 $6,328 
 $37,116 
 $- 
 $- 
 $(1,487)
 $7,640,764 
Service charges on deposits
  233,699 
  - 
  - 
  - 
  - 
  - 
  233,699 
Investment services and insurance income
  345 
  - 
  93,887 
  - 
  - 
  - 
  94,232 
Mortgage banking income, net
  - 
  445,056 
  - 
  - 
  - 
  - 
  445,056 
Title insurance income
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Income from bank owned life insurance
  118,584 
  - 
  - 
  - 
  - 
  - 
  118,584 
Low income housing partnership losses
  (182,693)
  - 
  - 
  - 
  - 
  - 
  (182,693)
ATM and check card fees
  373,907 
  - 
  - 
  - 
  - 
  - 
  373,907 
Gain on prepayment of long-term debt
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Loss on investments
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Other operating income
  120,008 
  - 
  - 
  - 
  - 
  - 
  120,008 
Total income
  8,262,657 
  451,384 
  131,003 
  - 
  - 
  (1,487)
  8,843,557 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  815,043 
  - 
  - 
  - 
  - 
  (1,487)
  813,556 
Provision for loan losses
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Salary expense
  2,082,634 
  263,176 
  63,696 
  - 
  - 
  - 
  2,409,506 
Employee benefit expense
  697,248 
  55,696 
  - 
  - 
  - 
  - 
  752,944 
Occupancy expense
  187,930 
  30,321 
  - 
  - 
  - 
  - 
  218,251 
Equipment expense
  183,504 
  8,447 
  - 
  - 
  - 
  - 
  191,951 
FDIC insurance assessment
  112,500 
  - 
  - 
  - 
  - 
  - 
  112,500 
Other real estate owned, net
  17,699 
  - 
  - 
  - 
  - 
  - 
  17,699 
Marketing expense
  115,980 
  20,424 
  351 
  - 
  - 
  - 
  136,755 
Legal and professional fees
  86,273 
  2,475 
  - 
  - 
  - 
  - 
  88,748 
ATM and check card fees
  160,175 
  584 
  - 
  - 
  - 
  - 
  160,759 
Telecom and data processing expense
  243,062 
  20,291 
  - 
  - 
  - 
  - 
  263,353 
Directors fees
  96,000 
  12,000 
  - 
  - 
  - 
  - 
  108,000 
Bank franchise Tax
  147,660 
  - 
  - 
  - 
  - 
  - 
  147,660 
Other operating expenses
  599,406 
  32,657 
  2,595 
  - 
  200 
  - 
  634,858 
Total expense
  5,545,114 
  446,071 
  66,642 
  - 
  200 
  (1,487)
  6,056,540 
Income tax expense
  704,633 
  - 
  19,507 
    
  (30,437)
    
  693,703 
Net income (loss)
 $2,012,910 
 $5,313 
 $44,854 
 $- 
 $30,237 
 $- 
 $2,093,314 
 
    
    
    
    
    
    
    
Total Assets
 $691,877,477 
 $1,357,279 
 $6,275,637 
 $- 
 $85,034,348 
 $(96,921,832)
 $687,622,909 
Goodwill
 $2,669,517 
 $- 
 $- 
 $- 
 $- 
 $- 
 $2,669,517 
 
 
 
27
 
 
Note 11. 
Debt
 
Short-term Debt
 
The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (FHLB) short term borrowings to support the loans held for sale participation program and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. Short-term debt totaled $20 million and has decreased $20 million from $40 million at December 31, 2016 due to the cyclical decline in the loans held for sale participation program.
 
Long-term Debt
 
The Company utilizes the FHLB advance program to fund loan growth and provide liquidity. The interest rates on long-term debt are fixed at the time of the advance and range from 1.16% to 2.27%; the weighted average interest rate was 1.86% and 1.80% at March 31, 2017 and December 31, 2016, respectively. The balance of these obligations at March 31, 2017 and December 31, 2016 were $52,875,000 and $63,982,000 respectively. The Company recognized a gain of $504,000 on prepayment of two FHLB advances totaling $10,000,000 during the first quarter of 2017 and there were no additional borrowings in 2017. Total advances include a $5,000,000 line of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.
 
In addition, the Company has a note payable to purchase a lot adjacent to one of the Bank branches for $170,000 at March 31, 2017 that is payable in two annual payments on January 1, 2018 and 2019. There was $255,000 outstanding on this note at December 31, 2016.
 
 
28
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
F & M Bank Corp. (Company), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank), TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly-owned subsidiaries of the Bank. The Bank also holds a majority ownership in VBS Mortgage LLC (VBS) and VS Title LLC (VST).
 
The Bank is a full service commercial bank offering a wide range of banking and financial services through its thirteen branch offices as well as its loan production office located in Penn Laird, VA (which specializes in providing automobile financing through a network of automobile dealers). TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides, brokerage services and property/casualty insurance to customers of the Bank. VBS originates conventional and government sponsored mortgages through their offices in Harrisonburg and Woodstock, VA. VS Title provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, VA.
 
The Company’s primary trade area services customers in Rockingham County, Shenandoah County, Page County and Augusta County.
 
Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s December 31, 2016 Form 10-K.
 
Forward-Looking Statements
 
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. 
 
Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits.
 
We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
 
 
29
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Critical Accounting Policies
 
General
 
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.
 
Allowance for Loan Losses
 
The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. For further discussion refer to page 34 in the Management Discussion and Analysis.
 
Goodwill and Intangibles
 
ASC 805 “Business Combinations” and ASC 350 “Intangibles” require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
 
At March 31, 2017, a preliminary goodwill of $304,000 was reported for the purchase of VSTitle, LLC. This amount is subject to change after expert evaluation.
 
Overview
 
Net income for the three months ended March 31, 2017 was $2,345,000 or $.68 per share, compared to $2,090,000 or $.60 in the same period in 2016, an increase of 12.20%. During the three months ended March 31, 2017, noninterest income increased 69.01% and noninterest expense increased 13.56% during the same period. Net income from Bank operations adjusted for income from Parent activities is as follows:
 
In thousands
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Net Income from Bank Operations
 $2,338 
 $2,059 
Income from Parent Company Activities
  7 
  31 
Net Income for the three months ended March 31
 $2,345 
 $2,090 
 
 
30
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
 
Results of Operations
 
As shown in Table I on page 40, the 2017 year to date tax equivalent net interest income increased $286,000 or 4.16% compared to the same period in 2016. The tax equivalent adjustment to net interest income totaled $34,000 for the first quarter of 2017. The yield on earning assets increased .02%, while the cost of funds increased ..05% compared to the same period in 2016.
 
Year to date, the combination of the increase in yield on assets and the increase in cost of funds coupled with changes in balance sheet leverage has resulted in the net interest margin decreasing to 4.42% at March 31, 2017, an increase of 3 basis points when compared to the same period in 2016. A schedule of the net interest margin for the three month periods ended March 31, 2017 and 2016 can be found in Table I on page 41.
 
The following table provides detail on the components of tax equivalent net interest income:
 
GAAP Financial Measurements:
(Dollars in thousands).
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Interest Income – Loans
 $7,877 
 $7,557 
Interest Income - Securities and Other Interest-Earnings Assets
  133 
  77 
Interest Expense – Deposits
  616 
  558 
Interest Expense - Other Borrowings
  290 
  256 
Total Net Interest Income
  7,104 
  6,820 
 
    
    
Non-GAAP Financial Measurements:
    
    
Add: Tax Benefit on Tax-Exempt Interest Income – Loans
  34 
  32 
Total Tax Benefit on Tax-Exempt Interest Income
  34 
  32 
Tax-Equivalent Net Interest Income
 $7,138 
 $6,852 
 
The Interest Sensitivity Analysis contained in Table II on page 42 indicates the Company is in an asset sensitive position in the one year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 43.40% of rate sensitive assets and 30.53% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has kept deposit rates low. The growth in earning assets and the growth in noninterest bearing accounts has resulted in the decrease in the positive GAP position in the one year time period.
 
Noninterest income as of March 31, 2017 increased $835,000 or 69.01% over the same time period in 2016. The increase is primarily due to the gain on prepayment of FHLB debt of $504,000 and the purchase of VS Title LLC which contributed $199,000 for the first quarter of 2017. Exclusive of the FHLB debt gain, noninterest income increased 27.36%. Other areas of increase are service charges on deposits ($81,000) and investment services and insurance ($80,000).
 
Noninterest expense at March 31, 2017 increased $711,000 as compared to 2016. Expenses increased in the areas of salaries and benefits ($524,000), occupancy expense ($31,000) and telecommunications and data processing ($60,000). Increases in salaries and benefits relate to normal salary increases, additional staff to support new branch locations and increased cost of insurance. Occupancy and telecommunications and data processing also increased as a result of branching activities.
 
 
31
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Balance Sheet
 
Federal Funds Sold and Interest Bearing Bank Deposits
 
The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at .75% to 1.00% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Balances in fed funds sold have decreased and interest bearing bank deposits have increased since year end due to changes in the composition of the balances sheet.
 
Securities
 
The Company’s securities portfolio serves to assist the Company with asset liability management.
 
The securities portfolio consists of investment securities commonly referred to as securities held to maturity and securities available for sale. Securities are classified as Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders’ equity.
 
As of March 31, 2017, the market value of securities available for sale exceeded their cost by $7,000. The portfolio is made up of primarily agency securities with an average portfolio life of just over three years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. There are $24,006,000 in securities that will mature in 2017.
 
In reviewing investments as of March 31, 2017, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.
 
Loan Portfolio
 
The Company operates in a predominately rural area that includes the counties of Rockingham, Page, Shenandoah and Augusta in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area.
 
Lending is geographically diversified within the service area. The Company has loan concentrations within the portfolio in construction and development lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.
 
 
32
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Loans Held for Investment of $591,006,000 decreased $630,000 at March 31, 2017 compared to December 31, 2016. Despite the slight decline in loan growth, the following categories experienced growth: farmland, open end home equities, commercial and industrial, consumer and dealer finance.
 
Loans Held for Sale totaled $37,698,000 at March 31, 2017, a decrease of $25,037,000 compared to December 31, 2016. The NorthPointe participation loan program is typically subject to seasonal fluctuations in the early part of the year which is reflected in the decrease.
 
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $5,091,000 at March 31, 2017 compared to $4,870,000 at December 31, 2016. Loans added to nonaccrual since December 31, 2016 were past due and were not specifically reviewed for impairment. Although the potential exists for loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of March 31, 2017 and December 31, 2016, the Company held $2,076,000 of real estate which was acquired through foreclosure.
 
The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):
 
 
 
 March 31, 2017
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Nonaccrual Loans
 
 
 
 
 
 
     Real Estate
 $4,587 
 $4,204 
     Commercial
  - 
  70 
     Home Equity
  253 
  311 
     Other
  181 
  178 
 
  5,021 
  4,763 
 
    
    
Loans past due 90 days or more (excluding nonaccrual)
    
    
     Real Estate
  64 
  81 
     Commercial
  - 
  - 
     Home Equity
  6 
  - 
     Other
  - 
  26 
 
  70 
  107 
 
    
    
Total Nonperforming loans
 $5,091 
 $4,870 
 
    
    
Restructured Loans current and performing:
    
    
      Real Estate
  8,634 
  8,641 
      Commercial
  1,108 
  1,121 
      Home Equity
  - 
  - 
       Other
  90 
  76 
 
    
    
Nonperforming loans as a percentage of loans held for investment
  .86%
  .82%
 
    
    
Net charge offs to total loans held for investment
  .04%
  .21%
 
    
    
Allowance for loan and lease losses to nonperforming loans
  143.72%
  154.89%
 
 
33
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Allowance for Loan Losses
 
The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
 
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.
 
In evaluating the portfolio, loans are segregated into loans with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors.
 
With the exception of Dealer finance loans, loans that are not impaired are categorized by call report code and an estimate is calculated based on actual loss experience over the last five years. Due to the rapid turnover in the Dealer finance portfolio, a two-year loss rate is utilized in that category as management feels this lookback period properly reflects the losses currently inherent in the portfolio. The Company monitors the net losses for this division and adjusts based on how the portfolio performs since the department was established in 2012. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the provision for each quarter based on this evaluation.
 
The allowance for loan losses of $7,317,000 at March 31, 2017 is equal to 1.24% of loans held for investment. This compares to an allowance of $7,543,000 (1.27%) at December 31, 2016. Continued decline in historical losses and improvements in the qualitative factors as well as principal decreases in specific impairments has led management to not fund the allowance in the first three months of 2017.
 
Net charge-offs year to date totaled $226,000 which is equivalent to ..04% of total loans outstanding.
 
 
 
34
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Deposits and Other Borrowings
 
The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits at March 31, 2017 have decreased $525,000 since December 31, 2016. Noninterest bearing deposits increased $537,000 while interest bearing decreased $1,062,000. The decrease in deposits is consistent with the first quarter of 2016, after which deposits grew substantially. The Bank also participates in the CDARS program. CDARS (Certificate of Deposit Account Registry Service) is a program that allows the bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. The CDARS program also allows the Bank to purchase funds through its One-Way Buy program. At March 31, 2017 and December 31, 2016, the Company had a total of $1.3 million in CDARS funding.
 
Short-term borrowings
 
Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), and short-term fixed rate FHLB borrowings. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. As of March 31, 2017, short-term debt consisted of $20,000,000 in FHLB short-term borrowings. This compared to FHLB short-term borrowings of $40,000,000 at December 31, 2016. There were no balances in Federal funds purchased or daily rate credit at March 31, 2017 or December 31, 2016.
 
Long-term borrowings
 
Borrowings from the FHLB continue to be an important source of funding. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes. During the first quarter of 2017, the Company recognized a $504,000 gain on prepayment of two FHLB long term advances and there were no new borrowings.
 
 
35
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Capital
 
The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.
 
In March 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At March 31, 2017, the Bank had Common Equity Tier I capital of 14.49%, Tier I capital of 14.49% of risk weighted assets and combined Tier I and II capital of 15.71% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital.
 
In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio, but can increase the minimum requirement based upon an institution's overall financial condition. At March 31, 2017, the Bank reported a leverage ratio of 12.38%. The Bank's leverage ratio was also substantially above the minimum. The Bank also reported a capital conservation buffer of 7.71% at March 31, 2017.
 
Liquidity
 
Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs.
 
Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution and with Zions Bank. The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.
 
Interest Rate Sensitivity
 
In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.
 
As of March 31, 2017, the Company had a cumulative Gap Rate Sensitivity Ratio of 21.94% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.
 
A summary of asset and liability repricing opportunities is shown in Table II, on page 42.
 
 
 
36
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards
 
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
 
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
 
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
 
 
37
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards, continued
 
During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
 
During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
 
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
 
 
38
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards, continued
 
During March 2017, the FASB issued ASU 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.
 
During March 2017, the FASB issued ASU 201708, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 31020), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 201708 will have on its consolidated financial statements.
 
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.
 
Existence of Securities and Exchange Commission Web Site
 
The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov).
 
 
 
39
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
TABLE I
F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)
(Dollar Amounts in Thousands)
 
 
 
Three Months Ended
 
 
Three Months Ended
 
 
 
March 31, 2017
 
 
March 31, 2016
 
Average
 
 
 
 
Income/
 
 
Average
 
 
 
 
 
Income/
 
 
Average
 
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Loans held for investment1,2
 $587,484 
 $7,737 
  5.34%
 $549,138 
 $7,217 
  5.27%
     Loans held for sale
  25,168 
  174 
  2.80%
  51,112 
  372 
  2.92%
     Federal funds sold
  28,707 
  54 
  .76%
  6,247 
  7 
  .45%
     Interest bearing deposits
  1,532 
  3 
  .79%
  892 
  1 
  .45%
     Investments
    
    
    
    
    
    
Taxable 3
  11,287 
  76 
  2.73%
  18,161 
  69 
  1.52%
Partially taxable
  125 
  - 
  - 
  125 
  - 
  - 
     Total earning assets
 $654,303 
 $8,044 
  4.99%
 $625,675 
 $7,666 
  4.91%
Interest Expense
    
    
    
    
    
    
     Demand deposits
  120,259 
  125 
  .42%
  107,450 
  119 
  .44%
     Savings
  111,494 
  121 
  .44%
  92,858 
  100 
  .43%
     Time deposits
  156,222 
  370 
  .96%
  161,637 
  339 
  .85%
     Short-term debt
  13,246 
  9 
  .28%
  29,326 
  18 
  .25%
     Long-term debt
  58,504 
  281 
  1.95%
  47,448 
  238 
  2.01%
     Total interest bearing liabilities
 $459,725 
 $906 
  .80%
 $438,719 
 $814 
  .74%
 
    
    
    
    
    
    
Tax equivalent net interest income 1
    
 $7,138 
    
    
 $6,852 
    
 
    
    
    
    
    
    
Net interest margin
    
    
  4.42%
    
    
  4.39%
 
1 Interest income on loans includes loan fees.
2 Loans held for investment include nonaccrual loans.
3 An incremental income tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.
4 Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.
 
 
 
40
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
TABLE II
 
F & M BANK CORP.
Interest Sensitivity Analysis
March 31, 2017
(In Thousands of Dollars)
 
The following table presents the Company’s interest sensitivity.
 
 
  0 - 3 
  4 - 12 
  1 - 5 
 
Over 5
 
 
Not
 
 
 
 
 
  Months 
 
Months
 
 
  Years
 
 
Years
 
 
Classified
 
 
Total
 
 
    
    
    
 
 
 
 
 
 
 
 
 
Uses of funds
    
    
    
 
 
 
 
 
 
 
 
 
Loans
    
    
    
 
 
 
 
 
 
 
 
 
Commercial
 $29,608 
 $25,553 
 $120,099 
 $28,059 
 $- 
 $203,319 
Installment
  4,712 
  1,009 
  55,524 
  14,420 
  - 
  75,665 
Real estate loans for investments
  97,255 
  58,804 
  148,717 
  4,541 
  - 
  309,317 
Loans held for sale
  37,698 
  - 
  - 
  - 
  - 
  37,698 
Credit cards
  2,705 
  - 
  - 
  - 
  - 
  2,705 
Interest bearing bank deposits
  1,091 
  - 
  - 
  - 
  - 
  1,091 
Federal funds sold
  3,019 
    
    
    
    
  3,019 
Investment securities
  20,000 
  4,008 
  125 
  596 
  135 
  24,864 
Total
 $196,088 
 $89,374 
 $324,465 
 $47,616 
 $135 
 $657,678 
 
    
    
    
    
    
    
Sources of funds
    
    
    
    
    
    
Interest bearing demand deposits
 $- 
 $32,947 
 $69,982 
 $18,517 
 $- 
 $121,446 
Savings deposits
  - 
  22,599 
  67,797 
  22,599 
  - 
  112,995 
Certificates of deposit $100,000 and over
  4,213 
  13,366 
  32,496 
  - 
  - 
  50,075 
Other certificates of deposit
  8,327 
  35,203 
  61,361 
  - 
  - 
  104,891 
Short-term borrowings
  20,000 
  - 
  - 
  - 
  - 
  20,000 
Long-term borrowings
  1,108 
  3,406 
  36,549 
  11,982 
  - 
  53,045 
Total
 $33,648 
 $107,521 
 $268,185 
 $53,098 
 $- 
 $462,452 
 
    
    
    
    
    
    
Discrete Gap
 $162,440 
 $(18,147)
 $56,280 
 $(5,482)
 $135 
 $195,226 
 
    
    
    
    
    
    
Cumulative Gap
 $162,440 
 $144,293 
 $200,573 
 $195,091 
 $195,226 
    
 
    
    
    
    
    
    
Ratio of Cumulative Gap to Total Earning Assets
  24.70%
  21.94%
  30.50%
  29.66%
  29.68%
    
 
Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of March 31, 2017. In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.
 
 
41
F & M BANK CORP.
Notes to (unaudited) Consolidated Financial Statements
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
 
Not Applicable
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is recorded , processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.
 
The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) of the Act), have concluded that the Company’s disclosure controls and procedures are effective for purposes of Rule 13(a)-15(b).
 
Changes in Internal Controls
 
The findings of the internal auditor are presented to management of the Bank and to the Audit Committee of the Company. During the period covered by this report, there were no changes to the internal controls over financial reporting of the Company that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
 
 
42
 
 
Part II
Other Information
 
Item 1. 
Legal Proceedings
 
There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.
 
Item 1a.  Risk Factors –
 
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds –None
 
Item 3.
Defaults Upon Senior Securities – None
 
Item 4. 
Mine Safety Disclosures None
 
Item 5.
Other Information – None
 
Item 6.
Exhibits
 
(a)           
Exhibits
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
43
 
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/  Dean W. Withers
 
 
 
Dean W. Withers
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
/s/ Carrie A. Comer
 
 
 
Carrie A. Comer
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
May 15, 2017
 
 
 
44
 
Exhibit Index:
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
 
45