The registrant’s Common Stock is traded Over-the-Counter under the symbol FMBM. The aggregate market value of the 2,949,9382,949,418 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 20142015 was approximately $52,213,903$66,066,952 based on the closing sales price of $17.70$22.40 per share on that date. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant.
As of the close of business on March 20, 2015,21, 2016, there were 3,293,9093,298,983 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 201514, 2016 (the “Proxy Statement”).
Table of Contents
| Page | ||
| PART I | ||
| Item 1 | Business | 2 |
| Item 1A | Risk Factors | |
| Item 1B | Unresolved Staff Comments | 11 |
| Item 2 | Properties | 12 |
| Item 3 | Legal Proceedings | 12 |
| Item 4 | Mine Safety Disclosures | 12 |
| PART II | ||
| Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13 |
| Item 6 | Selected Financial Data | 15 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 8 | Financial Statements and Supplementary Data | 38 |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 81 |
| Item 9A | Controls and Procedures | |
| Item 9B | Other Information | |
| | ||
| PART III | ||
| Item 10 | Directors, Executive Officers and Corporate Governance | |
| Item 11 | Executive Compensation | |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 81 |
| Item 13 | Certain Relationships and Related Transactions and Director Independence | |
| Item 14 | Principal Accounting Fees and Services | |
| PART IV | ||
| Item 15 | Exhibits and Financial Statement Schedules | |
| Signatures | ||
PART I
Item 1. Business
General
F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and owns 100% of the outstanding stock of its affiliate, Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services, Inc. (FMFS) are wholly owned subsidiaries of Farmers & Merchants Bank. Farmers & Merchants Bank also holds a majority ownership in VBS Mortgage LLC, (VBS).
Farmers & Merchants Bank was chartered on April 15, 1908, as a state chartered bank under the laws of the Commonwealth of Virginia. TEB was incorporated on January 27, 1988, as a captive life insurance company under the laws of the State of Arizona. FMFS is a Virginia chartered corporation and was incorporated on February 25, 1993. VBS (formerly Valley Broker Services, Inc.) was incorporated on May 11, 1999. The Bank purchased a majority interest in VBS on November 3, 2008.
As a commercial bank, the Bank offers alla wide range of banking services normally offered by a full-service commercial bank, including commercial and individual demand and time deposit accounts, repurchase agreements for commercial customers, commercial and individual loans, internet and mobile banking, drive-in banking services, ATMs at all branch locations and several off-site locations, as well as a courier service for its commercial banking customers. TEB was organized to re-insure credit life and accident and health insurance currently being sold by the Bank in connection with its lending activities. FMFS was organized to write title insurance but now provides brokerage services, commercial and personal lines of insurance to customers of the Bank. VBS originates conventional and government sponsored mortgages through their offices in Harrisonburg, Woodstock and Woodstock.Fishersville.
The Bank makes various types of commercial and consumer loans and has a large portfolio of residential mortgages and a concentration in development lending. The local economy is relatively diverse with strong employment in the agricultural, manufacturing, service and governmental sectors.
The Company’s and the Bank’s principal executive office is at 205 South Main Street, Timberville, VA 22853, and its phone number is (540) 896-8941.
Filings with the SEC
The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”). These reports are posted and are available at no cost on the Company’s website, www.FMBankVA.com, as soon as reasonably practicable after the Company files such documents with the SEC. The Company’s filings are also available through the SEC’s website at www.sec.gov.
Employees
On December 31, 2014,2015, the Bank had 156168 full-time and part-time employees; including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers their employee relations to be excellent. No one employee devotes full-time services to F & M Bank Corp.
Competition
The Bank's offices face strong competition from numerous other financial institutions. These other institutions include large national and regional banks, other community banks, nationally chartered savings banks, credit unions, consumer finance companies, mortgage companies, loan production offices, mutual funds and life insurance companies. Competition for loans and deposits is affected by a variety of factors including interest rates, types of products offered, the number and location of branch offices, marketing strategies and the reputation of the Bank within the communities served.
2
PART I, Continuedcontinued
Item 1. Business, continued
Regulation and Supervision
General. The operations of F & M Bank Corp. and the Bank are subject to federal and state statutes, which apply to bank holding companies and state member banks of the Federal Reserve System. The common stock of F & M Bank Corp. is registered pursuant to and subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). These include, but are not limited to, the filing of annual, quarterly and other current reports with the Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Company is directly affected by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which is aimed at improving corporate governance and reporting procedures. The Company believes it is in compliance with SEC and other rules and regulations implemented pursuant to Sarbanes-Oxley and intends to comply with any applicable rules and regulations implemented in the future.
F & M Bank Corp., as a bank holding company, is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Act") and is supervised by the Board of Governors of the Federal Reserve Board.System (the “Federal Reserve Board”). The Act requires F & M Bank Corp. to secure the prior approval of the Federal Reserve Board before F & M Bank Corp. acquires ownership or control of more than 5% of the voting shares or substantially all of the assets of any institution, including another bank.
As a bank holding company, F & M Bank Corp. is required to file with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”)Board an annual report and such additional information as it may require pursuant to the Act. The Federal Reserve Board may also conduct examinations of F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the 1970 Amendments to the Act and the regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, provision of credit, sale or lease of property or furnishing of services.
Federal Reserve Board regulations limit activities of bank holding companies to managing or controlling banks or non-banking activities closely related to banking. These activities include the making or servicing of loans, performing certain data processing services, and certain leasing and insurance agency activities. Since 1994, the Company has entered into agreements with the Virginia Community Development Corporation to purchase equity positions in several Low Income Housing Funds; these funds provide housing for low-income individuals throughout Virginia. Approval of the Federal Reserve Board is necessary to engage in any of the activities described above or to acquire interests engaging in these activities.
The Bank as a state member bank is supervised and regularly examined by the Virginia Bureau of Financial Institutions and the Federal Reserve Board. Such supervision and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Board is intended primarily for the protection of depositors and not the stockholders of F & M Bank Corp.
Payment of Dividends. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company. Under the current regulatory guidelines, prior approval from the Federal Reserve Board is required if cash dividends declared in any given year exceed net income for that year, plus retained net profits of the two preceding years. A bank also may not declare a dividend out of or in excess of its net undivided profits without regulatory approval. The payment of dividends by the Bank or the Company may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines.
Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting their businesses. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice. Based on the Bank’s current financial condition, the Company does not expect that any of these laws will have any impact on its ability to obtain dividends from the Bank.
The Company also is subject to regulatory restrictions on dividends to its shareholders. Regulators have indicated that bank holding companies should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Further, a bank holding company should inform and consult with the Federal Reserve Board prior to declaring a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure.
3
PART I, Continuedcontinued
Item 1. Business, continued
Regulation and Supervision, continued
Capital Requirements. The Federal Reserve has issued risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements, the Company and Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be “Tier 1 capital”, which consists principally of common and certain qualifying preferred stockholders’ equity (including Trust Preferred Securities), less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2014 were 16.09% and 17.35%, respectively, significantly above the minimum requirements.
In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that will substantially amendamends the regulatory risk-based capital rules applicable to us. The final rule implements the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.Act (see definition below). The final rule includes new minimum risk-based capital and leverage ratios which was effective for us on January 1, 2015, and refines the definition of what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements will be:are: (i) a new common equity Tier 1 ("CET1") capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the currentprevious rules; and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a "capital conservation buffer" of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activitiesactivities.
The CETI and Tier 1 leverage ratio of the Company as of December 31, 2015, were 12.46% and 12.18%, respectively, which are significantly above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The Gramm-Leach-Bliley Act. Effective on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB Act”) allows a bank holding company or other company to certify status as a financial holding company, which will allow such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker; dealing in or making markets in securities; and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Northern Virginia which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Community Reinvestment Act. The requirements of the Community Reinvestment Act are also applicable to the Bank. The act imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.
4
PART I, continued
Item 1. Business, continued
Regulation and Supervision, continued
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impact the Company is the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to write rules forimplement, examine and enforce complaints with federal consumer protections governingprotection laws, which govern all financial institutions. All consumer protection responsibility formerly handled by other banking regulators is consolidated in the CFPB. It will also oversee the enforcement of all federal laws intended to ensure fair access to credit. For smaller financial institutions such as the Company and the Bank, the CFPBtheir primary regulators will coordinatecontinue to conduct its examination activities through their primary regulators.activities.
The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. In addition, the Federal Reserve has issued new rules that have the effect of limiting the fees charged to merchants for debit card transactions. The result of these rules will be to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.
Although the Dodd-Frank Act provisions themselves are extensive, the ultimate impact on the Company of this massive legislation is unknown. The Act provides that several federal agencies, including the Federal Reserve and the Securities and Exchange Commission, shall issue regulations implementing major portions of the legislation, and this process is ongoing.
Mortgage Lending. In 2013, the CFPB adopted a rule, effective in January 2014, to implement certain sections of the Dodd-Frank Act requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay any closed-end consumer credit transaction secured by a 1-4 family dwelling. The rule also establishes certain protections from liability under this requirement to ensure a borrower’s ability to repay for loans that meet the definition of “qualified mortgage.” Loans that satisfy this “qualified mortgage” safe harbor will be presumed to have complied with the new ability-to-repay standard.
Forward-Looking Statements
Certain information contained in this report may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to:
| ● | Changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual borrowers or issuers; |
● | The strength of the economy in our target market area, as well as general economic, market, or business conditions; |
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● | Changes in our competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets; |
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● | Our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth; |
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5
PART I, continued
Item 1. Business, continued
Forward looking statements, continued
Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Item 1A. Risk Factors
General economic conditions in our market area could adversely affect us.
We are affected by the general economic conditions in the local markets in which we operate. Since the recession began in 2008, our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. Although economic conditions have improved, many businesses and individuals are still experiencing difficulty as a result of the recent economic downturn and protracted recovery. If economic conditions in our market do not improve,deteriorate from current conditions, we could experience further adverse consequences, including a decline in demand for our products and services and an increase in problem assets, forecloses and loan losses. Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation, any of which could negatively affect our performance and financial condition.
Our allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.
Like all financial institutions, we maintain an allowance for loan losses to provide for loans that our borrowers may not repay in their entirety. We believe that we maintain an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. At December 31, 2014,2015, our non-performing loans were $6.9$6.5 million, compared to $12.6$6.9 million at December 31, 2013.2014. Our provision for loan losses was $2.3$.3 million for the year ended December 31, 2014,2015, and our loan loss allowance was $8.7$8.8 million, or 1.68%1.61% of total loans held for investment at December 31, 2014.2015.
The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot fully predict such losses or that the loss allowance will be adequate in the future. While the risk of nonpayment is inherent in banking, we could experience greater nonpayment levels than we anticipate. In addition, we have loan participation arrangements with several other banks within the region and may not be able to exercise control of negotiations with borrowers in the event these loans do not perform. Additional problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase further, which could adversely affect our results of operations and financial condition.
Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the amount of the provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.
6
PART I, Continued
continuedItem 1A. Risk Factors, Continuedcontinued
Our loan concentrations could, as a result of adverse market conditions, increase credit losses which could adversely impact earnings.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area, which could result in adverse consequences to us in the event of a prolonged economic downturn in our market. As of December 31, 2014,2015, approximately 84%83% of our loans had real estate as a primary or secondary component of collateral. A further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished. In addition, our consumer loans (such as automobile loans) are collateralized, if at all, with assets that may not provide an adequate source of repayment of the loan due to depreciation, damage or loss.
In addition, we have a large portfolio of residential mortgages and a concentration in development lending, both of which could be adversely affected by a decline in the real estate markets. Construction and development lending entails significant additional risks, because these loans, which often involve larger loan balances concentrated with single borrowers or groups of related borrowers, are dependent on the successful completion of real estate projects. Loan funds for construction and development loans often are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. The deterioration of one or a few of these loans could cause a significant increase in the percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition.
Our small-to-medium sized business target market may have fewer financial resources to weather continued downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.
Our inability to maintain adequate sources of funding and liquidity may negatively impact our current financial condition or our ability to grow.
Our access to funding and liquidity sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. In managing our balance sheet, a primary source of funding asset growth and liquidity historically has been deposits, including both local customer deposits and brokered deposits. If the level of deposits were to materially decrease, we would have to raise additional funds by increasing the interest that we pay on certificates of deposit or other depository accounts, seek other debt or equity financing, or draw upon our available lines of credit. Our access to these funding and liquidity sources could be detrimentally impacted by a number of factors, including operating losses, rising levels of non-performing assets, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or regulatory restrictions. In addition, our ability to continue to attract deposits and other funding or liquidity sources is subject to variability based upon additional factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. We do not maintain significant additional sources of liquidity through potential sales in our investment portfolio or liquid assets at the holding company level. Our potential inability to maintain adequate sources of funding or liquidity may, among other things, inhibit our ability to fund asset growth or negatively impact our financial condition, including our ability to pay dividends or satisfy our obligations.
7
PART I, Continued
continuedItem 1A. Risk Factors, Continuedcontinued
If we do not maintain our capital requirements and our status as a “well-capitalized” bank, there could an adverse effect on our liquidity and our ability to fund our loan portfolio.
We are subject to regulatory capital adequacy guidelines. If we fail to meet the capital adequacy guidelines for a “well-capitalized” bank, it could increase the regulatory scrutiny for the Bank and the Company. In addition, if we failed to be “well capitalized” for regulatory capital purposes, we would not be able to renew or accept brokered deposits without prior regulatory approval and we would not be able to offer interest rates on our deposit accounts that are significantly higher than the average rates in our market area. As a result, it would be more difficult for us to attract new deposits as our existing brokered deposits mature and do not roll over and to retain or increase existing, non-brokered deposits. If we are prohibited from renewing or accepting brokered deposits and are unable to attract new deposits, our liquidity and our ability to fund our loan portfolio may be adversely affected. In addition, we would be required to pay higher insurance premiums to the FDIC, which would reduce our earnings.
We may beare subject to more stringent capital requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act which could adversely affect our results of operations and future growth.
In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that will substantially amendamends the regulatory risk-based capital rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Financial ReformDodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios which was effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be:are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the currentprevious rules; and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. In addition, the final rule provides for a number of new deductions from and adjustments to capital and prescribes a revised approach for risk weightings that could result in higher risk weights for a variety of asset categories.
The application of these more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, adversely affect our future growth opportunities, and result in regulatory actions such as a prohibition on the payment of dividends or on the repurchase shares if we wereare unable to comply with such requirements.
New regulations could adversely impact our earnings due to, among other things, increased compliance costs or costs due to noncompliance.
The Consumer Financial Protection Bureau has issued a rule, effective as of January 14, 2014, designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including but not limited to:
| excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans); |
| interest-only payments; |
| negative-amortization; and |
| terms longer than 30 years. |
8
PART I, Continuedcontinued
Item 1A. Risk Factors, Continuedcontinued
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our growth or profitability.
Additionally, on December 10, 2013, five financial regulatory agencies, including our primary federal regulator, the Federal Reserve, adopted final rules implementing a provision of the Dodd-Frank Act, commonly referred to as the Volcker Rule. The Final Rules prohibit banking entities from, among other things, engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; or owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” On January 14, 2014, the five financial regulatory agencies, approved an adjustment to the final rule by allowing banks to keep certain collateralized debt obligations (“CDOs”) acquired the bank before the Volcker Rule was finalized, if the CDO was established before May 2010 and is backed primarily by trust preferred securities issued by banks with less than $15 billion in assets established. The rules were effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. We are currently evaluatingThis will not have an impact on the Volcker Rule; if we are required to divest any securities in our portfolio as a result of the Volcker Rule, it could result in impairments that could adversely impact our financial condition and results of operations.
Our future success is dependent on our ability to effectively compete in the face of substantial competition from other financial institutions in our primary markets.
We encounter significant competition for deposits, loans and other financial services from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions in our market area. A number of these banks and other financial institutions are significantly larger than us and have substantially greater access to capital and other resources, larger lending limits, more extensive branch systems, and may offer a wider array of banking services. To a limited extent, we compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations any of which may offer more favorable financing rates and terms than us. MostMany of these non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors may have advantages in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
Our exposure to operational risk may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
9
PART I, Continuedcontinued
Item 1A. Risk Factors, Continuedcontinued
Changes in market interest rates could affect our cash flows and our ability to successfully manage our interest rate risk.
Our profitability and financial condition depend to a great extent on our ability to manage the net interest margin, which is the difference between the interest income earned on loans and investments and the interest expense paid for deposits and borrowings. The amounts of interest income and interest expense are principally driven by two factors; the market levels of interest rates, and the volumes of earning assets or interest bearing liabilities. The management of the net interest margin is accomplished by our Asset Liability Management Committee. Short term interest rates are highly sensitive to factors beyond our control and are effectively set and managed by the Federal Reserve, while longer term rates are generally determined by the market based on investors’ inflationary expectations. Thus, changes in monetary and or fiscal policy will affect both short term and long term interest rates which in turn will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if we do not effectively manage the relative sensitivity of our earning assets and interest bearing liabilities to changes in market interest rates. We generally attempt to maintain a neutral position in terms of the volume of earning assets and interest bearing liabilities that mature or can re-price within a one year period in order that we may maintain the maximum net interest margin; however, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and greatly influence this ability to maintain a neutral position.
Generally, our earnings will be more sensitive to fluctuations in interest rates the greater the difference between the volume of earning assets and interest bearing liabilities that mature or are subject to re-pricing in any period. The extent and duration of this sensitivity will depend on the cumulative difference over time, the velocity and direction of interest rate changes, and whether we are more asset sensitive or liability sensitive. Additionally, the Asset Liability Management Committee may desire to move our position to more asset sensitive or more liability sensitive depending upon their expectation of the direction and velocity of future changes in interest rates in an effort to maximize the net interest margin. Should we not be successful in maintaining the desired position, or should interest rates not move as anticipated, our net interest margin may be negatively impacted.
In December of 2015 the Federal Open Market Committee (FOMC) voted to raise the fed funds rate from .00-.25% to .25-.50% in a unanimous decision, with indication rates would increase again in 2016. As indicated above the Company analyzes their risk and is prepared for future changes in interest rates.
Our inability to successfully manage growth or implement our growth strategy may adversely affect our results of operations and financial condition.
We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future. Our ability to manage growth successfully also depends on whether we can maintain capital levels adequate to support our growth, maintain cost controls, asset quality and successfully integrate any businesses acquired into the organization.
As we continue to implement our growth strategy, we may incur increased personnel, occupancy and other operating expenses. We must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, our plans to branch could depress earnings in the short run, even if we efficiently execute a branching strategy leading to long-term financial benefits.
10
PART I, Continuedcontinued
Item 1A. Risk Factors, Continuedcontinued
Our operations rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service agreements. Although we maintain a system of comprehensive policies and a control framework designed to monitor vendor risks, the failure of an external vendor to perform in accordance with the contracted arrangements under service agreements could be disruptive to our operations, which could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Our operations may be adversely affected by cyber security risks.
In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and our business strategy. We have invested in accepted technologies and review processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to our reputation, which could adversely affect our business.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.
We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Additionally, actions by regulatory agencies or significant litigation against us could cause us to devote significant time and resources to defending ourselves and may lead to penalties that materially affect us. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse us and our shareholders.
Changes in accounting standards could impact reported earnings.
The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
The Company does not have any unresolved staff comments to report for the year ended December 31, 2014.2015.
11
PART I, Continuedcontinued
Item 2. Properties
The locations of F & M Bank Corp., Inc. and its subsidiaries are shown below.
| Timberville Branch and Administrative Offices | Elkton Branch |
| 205 South Main Street | 127 West Rockingham Street |
| Timberville, VA 22853 | Elkton, VA 22827 |
| Broadway Branch | Port Road Branch |
| 126 Timberway | 1085 Port Republic Road |
| Broadway, VA 22815 | Harrisonburg, VA 22801 |
| Bridgewater Branch | Edinburg Branch |
| 100 Plaza Drive | 120 South Main Street |
| Bridgewater, VA 22812 | Edinburg, VA 22824 |
| Woodstock Branch | Crossroads Branch |
| 161 South Main Street | 80 Cross Keys Road |
| Woodstock, VA 22664 | Harrisonburg, VA 22801 |
| Luray Branch | Dealer Finance Division |
| 700 East Main Street | 4759 Spotswood Trail |
| Luray, VA 22835 | Penn Laird, VA 22846 |
| Fishersville Loan Production Office | North Augusta Branch |
| 1842 Jefferson Hwy | 2813 North Augusta Street |
| Fishersville, VA 22939 | Staunton, VA 22401 |
| | |
| Craigsville Branch | |
| 125 W. Craig Street | |
| Craigsville, VA |
With the exception of the Edinburg Branch, Port Road Branch, Luray Branch, Dealer Finance Division, and the Fishersville Loan Production Office and the North Augusta Branch the remaining facilities are owned by Farmers & Merchants Bank. ATMs are available at all branch locations.
Through an agreement with Nationwide Money ATM Services,FCTI, Inc., the Bank also operates cash only ATMs at five Food Lion grocery stores, one in Mt. Jackson, VA and four in Harrisonburg, VA. The Bank also has an agreement with WelchCardTronics ATM to operate fivetwleve cash only ATMs in various Rite Aid Pharmacies, CVS Pharmacies and Target Stores in Rockingham and Augusta County,Counties of VA.
VBS’ offices are located at:
| Harrisonburg Office | Woodstock Office | Fishersville Loan Production Office |
| 2040 Deyerle Avenue | 161 South Main Street | 1842 Jefferson Hwy 161 |
| Suite 107 | Woodstock, VA 22664 | Fishersville, VA 22939 |
| Harrisonburg, VA 22801 | ||
Item 3. Legal Proceedings
In the normal course of business, the Company may become involved in litigation arising from banking, financial, or other activities of the Company. Management after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
Item 4. Mine Safety Disclosures
None.
12
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Listing
The Company’s Common Stock tradesis quoted under the symbol “FMBM” on the OTC QBOTCQX Market. The bid and askedask price ofis quoted at www.OTCMARKETS.com/Stock/FMBM/quote. With its inclusion on the Company’s stock is not published in any newspaper. AlthoughOTCQX Markets, there are now several firms in both Harrisonburg and Richmond, Virginia occasionally take positions in the Company stock, they typically only match buyers and sellers.active market makers for FMBM stock.
Transfer Agent and Registrar
Broadridge Financial Solutions
Stock Performance
The following graph compares the cumulative total return to the shareholders of the Company for the last five fiscal years with the total return of the Russell 2000 Index and the SNL Bank Index, as reported by SNL Financial, LC, assuming an investment of $100 in the Company’s common stock on December 31, 2009,2010, and the reinvestment of dividends.
| Period Ending | ||||||||||||||||||||||||||||||
| Period Ending | ||||||||||||||||||||||||||||||
| Index | 12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | ||||||||||||||||||
| F & M Bank Corp. | 100.00 | 65.53 | 64.26 | 74.50 | 94.04 | 102.84 | 100.00 | 98.06 | 113.68 | 143.51 | 156.93 | 189.07 | ||||||||||||||||||
| Russell 2000 | 100.00 | 126.86 | 121.56 | 141.43 | 196.34 | 205.95 | 100.00 | 95.82 | 111.49 | 154.78 | 162.35 | 155.18 | ||||||||||||||||||
| SNL Bank | 100.00 | 112.05 | 86.78 | 117.11 | 160.79 | 179.74 | 100.00 | 77.44 | 104.51 | 143.49 | 160.40 | 163.14 | ||||||||||||||||||
13
PART II, Continuedcontinued
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Continuedcontinued
Recent Stock Prices and Dividends
Dividends to common shareholders totaled $2,232,000$2,405,000 and $1,706,000$2,104,000 in 2015 and 2014, respectively. Preferred stock dividends were $510,000 and 2013,$128,000 in 2015 and 2014, respectively. Regular quarterly dividends have been declared for sixty four consecutive quarters.at least 23 years. The payment of dividends depends on the earnings of the Company and its subsidiaries, the financial condition of the Company and other factors including capital adequacy, regulatory requirements, general economic conditions and shareholder returns. The ratio of dividends per common share to net income per common share was 30.42% in 2015, compared to 37.36% in 2014, compared to 36.17% in 2013.2014.
Refer to Payment of Dividends in Item 1. Business, Regulation and Supervision section above for restrictions on dividends.
Stock Repurchases
As previously reported, on September 18, 2008, the Company’s Board of Directors approved an increase in the number of shares of common stock that the Company can repurchase under the share repurchase program from 150,000 to 200,000 shares. Shares repurchased through the end of 20142015 totaled 164,132177,409 shares; of this amount, none13,277 were repurchased in 2014.2015.
The number of common shareholders of record was approximately 1,8531,859 as of March 20, 2015.21, 2016. This amount includes all shareholders, whether titled individually or held by a brokerage firm or custodian in street name.
Quarterly Stock Information
These quotes include the terms of trades transacted through a broker. The terms of exchanges occurring between individual parties may not be known to the Company.
| 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||||||
Stock Price Range | Per Share | Stock Price Range | Per Share | Stock Price Range | Per Share | Stock Price Range | Per Share | |||||||||||||||||||||||||||||||||||||||||
| Quarter | Low | High | Dividends Declared | Low | High | Dividends Declared | Low | High | Dividends Declared | Low | High | Dividends Declared | ||||||||||||||||||||||||||||||||||||
1st | 17.21 | 18.00 | $ | .17 | 15.00 | 17.73 | $ | .17 | 19.30 | 20.95 | $ | .18 | 17.21 | 18.00 | $ | .17 | ||||||||||||||||||||||||||||||||
2nd | 17.27 | 19.90 | .17 | 17.00 | 18.25 | .17 | 20.00 | 24.50 | .18 | 17.27 | 19.90 | .17 | ||||||||||||||||||||||||||||||||||||
3rd | 17.70 | 19.08 | .17 | 16.98 | 18.15 | .17 | 20.98 | 22.45 | .18 | 17.70 | 19.08 | .17 | ||||||||||||||||||||||||||||||||||||
4th | 17.83 | 19.73 | .17 | 16.90 | 19.00 | .17 | 21.10 | 24.47 | .19 | 17.83 | 19.73 | .17 | ||||||||||||||||||||||||||||||||||||
Total | $ | .68 | $ | .68 | $ | .73 | $ | .68 | ||||||||||||||||||||||||||||||||||||||||
14
PART II, Continuedcontinued
Item 6. Selected Financial Data
Five Year Summary of Selected Financial Data
| (Dollars in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||
| Interest and Dividend Income | $ | 26,772 | $ | 25,966 | $ | 27,225 | $ | 27,680 | $ | 27,870 | $ | 29,353 | $ | 26,772 | $ | 25,966 | $ | 27,225 | $ | 27,680 | ||||||||||||||||||||
| Interest Expense | 3,648 | 4,773 | 6,294 | 7,719 | 9,005 | 2,876 | 3,648 | 4,773 | 6,294 | 7,719 | ||||||||||||||||||||||||||||||
| Net Interest Income | 23,124 | 21,193 | 20,931 | 19,961 | 18,865 | 26,477 | 23,124 | 21,193 | 20,931 | 19,961 | ||||||||||||||||||||||||||||||
| Provision for Loan Losses | 2,250 | 3,775 | 4,200 | 4,000 | 4,300 | 300 | 2,250 | 3,775 | 4,200 | 4,000 | ||||||||||||||||||||||||||||||
| Net Interest Income after Provision for Loan Losses | 20,874 | 17,418 | 16,731 | 15,961 | 14,565 | 26,177 | 20,874 | 17,418 | 16,731 | 15,961 | ||||||||||||||||||||||||||||||
| Noninterest Income | 3,485 | 3,925 | 3,627 | 3,118 | 3,249 | 3,732 | 3,485 | 3,925 | 3,627 | 3,118 | ||||||||||||||||||||||||||||||
| Low Income Housing Partnership Losses | (620 | ) | (608 | ) | (856 | ) | (621 | ) | (467 | ) | ||||||||||||||||||||||||||||||
| Securities Gains (Losses) | - | - | - | 1,024 | 349 | - | - | - | - | 1,024 | ||||||||||||||||||||||||||||||
| Noninterest Expenses | 15,656 | 14,720 | 13,362 | 12,892 | 12,741 | 17,986 | 15,656 | 14,720 | 13,362 | 12,892 | ||||||||||||||||||||||||||||||
| Income before Income Taxes | 8,703 | 6,623 | 6,996 | 7,211 | 5,422 | 11,303 | 8,095 | 5,767 | 6,375 | 6,744 | ||||||||||||||||||||||||||||||
| Income Tax Expense | 2,901 | 1,907 | 2,095 | 2,523 | 1,681 | 2,886 | 2,293 | 1,051 | 1,474 | 2,056 | ||||||||||||||||||||||||||||||
| Net Income | $ | 5,802 | $ | 4,716 | $ | 4,901 | $ | 4,688 | $ | 3,741 | $ | 8,417 | $ | 5,802 | $ | 4,716 | $ | 4,901 | $ | 4,688 | ||||||||||||||||||||
| Per Share Data: | ||||||||||||||||||||||||||||||||||||||||
| Net Income – basic | $ | 1.82 | $ | 1.88 | $ | 1.96 | $ | 1.91 | $ | 1.63 | $ | 2.40 | $ | 1.82 | $ | 1.88 | $ | 1.96 | $ | 1.91 | ||||||||||||||||||||
| Net Income - diluted | $ | 1.80 | $ | - | $ | - | $ | - | $ | - | $ | 2.25 | $ | 1.80 | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Dividends Declared | .68 | .68 | .64 | .60 | .60 | .73 | .68 | .68 | .64 | .60 | ||||||||||||||||||||||||||||||
| Book Value | 21.20 | 21.56 | 19.76 | 18.53 | 18.31 | |||||||||||||||||||||||||||||||||||
| Book Value per Common Share | 22.38 | 20.77 | 21.56 | 19.76 | 18.53 | |||||||||||||||||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||
| Assets | $ | 605,308 | $ | 552,788 | $ | 596,904 | $ | 566,734 | $ | 538,855 | $ | 665,357 | $ | 605,308 | $ | 552,788 | $ | 596,904 | $ | 566,734 | ||||||||||||||||||||
| Loans Held for Investment | 518,202 | 478,453 | 465,819 | 451,570 | 445,147 | 544,053 | 518,202 | 478,453 | 465,819 | 451,570 | ||||||||||||||||||||||||||||||
| Loans Held for Sale | 13,382 | 3,804 | 77,207 | 60,543 | 23,764 | 57,806 | 13,382 | 3,804 | 77,207 | 60,543 | ||||||||||||||||||||||||||||||
| Securities | 22,305 | 38,486 | 18,807 | 22,108 | 24,144 | 25,329 | 22,305 | 38,486 | 18,807 | 22,108 | ||||||||||||||||||||||||||||||
| Deposits | 491,505 | 464,149 | 453,796 | 435,947 | 425,051 | 494,670 | 491,505 | 464,149 | 453,796 | 435,947 | ||||||||||||||||||||||||||||||
| Short-Term Debt | 14,358 | 3,423 | 34,597 | 18,539 | 5,355 | 24,954 | 14,358 | 3,423 | 34,597 | 18,539 | ||||||||||||||||||||||||||||||
| Long-Term Debt | 9,875 | 21,691 | 47,905 | 57,298 | 58,979 | 48,161 | 9,875 | 21,691 | 47,905 | 57,298 | ||||||||||||||||||||||||||||||
| Stockholders’ Equity | 77,798 | 54,141 | 49,384 | 46,180 | 42,229 | 82,950 | 77,798 | 54,141 | 49,384 | 46,180 | ||||||||||||||||||||||||||||||
| Average Common Shares Outstanding – basic | 3,119 | 2,504 | 2,496 | 2,450 | 2,299 | 3,291 | 3,119 | 2,504 | 2,496 | 2,450 | ||||||||||||||||||||||||||||||
| Average Common Shares Outstanding – diluted | 3,230 | - | - | - | - | 3,735 | 3,230 | - | - | - | ||||||||||||||||||||||||||||||
| Financial Ratios: | ||||||||||||||||||||||||||||||||||||||||
Return on Average Assets1 | 1.00 | % | .82 | % | .86 | % | .84 | % | .69 | % | 1.31 | % | 1.00 | % | .82 | % | .86 | % | .84 | % | ||||||||||||||||||||
Return on Average Equity1 | 8.65 | % | 9.11 | % | 10.26 | % | 10.41 | % | 9.22 | % | 10.46 | % | 8.65 | % | 9.11 | % | 10.26 | % | 10.41 | % | ||||||||||||||||||||
| Net Interest Margin | 4.30 | % | 4.02 | % | 3.95 | % | 3.87 | % | 3.77 | % | 4.43 | % | 4.30 | % | 4.02 | % | 3.95 | % | 3.87 | % | ||||||||||||||||||||
Efficiency Ratio 2 | 58.51 | % | 58.15 | % | 54.03 | % | 55.43 | % | 57.23 | % | 58.96 | % | 58.51 | % | 58.15 | % | 54.03 | % | 55.43 | % | ||||||||||||||||||||
| Dividend Payout Ratio | 37.36 | % | 36.17 | % | 32.65 | % | 31.41 | % | 36.81 | % | ||||||||||||||||||||||||||||||
Dividend Payout Ratio - Common | 30.42 | % | 37.36 | % | 36.17 | % | 32.65 | % | 31.41 | % | ||||||||||||||||||||||||||||||
| Capital and Credit Quality Ratios: | ||||||||||||||||||||||||||||||||||||||||
Average Equity to Average Assets1 | 11.59 | % | 9.00 | % | 8.35 | % | 8.14 | % | 7.46 | % | 12.49 | % | 11.59 | % | 9.00 | % | 8.35 | % | 8.14 | % | ||||||||||||||||||||
Allowance for Loan Losses to Loans3 | 1.68 | % | 1.71 | % | 1.75 | % | 1.54 | % | 1.30 | % | 1.61 | % | 1.68 | % | 1.71 | % | 1.75 | % | 1.54 | % | ||||||||||||||||||||
Nonperforming Loans to Total Assets4 | 1.15 | % | 2.28 | % | 2.24 | % | 2.61 | % | 2.94 | % | .98 | % | 1.15 | % | 2.28 | % | 2.24 | % | 2.61 | % | ||||||||||||||||||||
Nonperforming Assets to Total Assets5 | 1.73 | % | 2.75 | % | 2.73 | % | 3.15 | % | 3.22 | % | 1.34 | % | 1.73 | % | 2.75 | % | 2.73 | % | 3.15 | % | ||||||||||||||||||||
Net Charge-offs to Total Loans3 | .33 | % | .78 | % | .64 | % | .63 | % | .53 | % | .04 | % | .33 | % | .78 | % | .64 | % | .63 | % | ||||||||||||||||||||
| 1 | Ratios are primarily based on daily average balances. |
| 2 | The Efficiency Ratio equals noninterest expenses divided by the sum of tax equivalent net interest income and noninterest income. Noninterest expenses exclude intangible asset amortization. Noninterest income excludes gains (losses) on securities transactions and LIH Partnership losses. |
| 3 | Calculated based on Loans Held for Investment, excludes Loans Held for Sale. |
| 4 | Calculated based on 90 day past due and non-accrual to Total Assets. |
| 5 | Calculated based on 90 day past due, non-accrual and OREO to Total Assets |
15
PART II, Continuedcontinued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of F & M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.
Capital Activities
The Company raised an additional $12 million inthrough the sale of common equitystock in a private placement offering in March of 2014. In addition theythe Company raised $9.4 million through the sale of Series A preferred stock in a new preferred stockpublic offering in December 2014. Both amounts are net of fees related to the offering.
Lending Activities
Credit Policies
The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions. In an effort to manage the risk, our loan policy gives loan amount approval limits to individual loan officers based on their position and level of experience and to our loan committees based on the size of the lending relationship. The risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.
We have written policies and procedures to help manage credit risk. We have a loan review policy that includes regular portfolio reviews to establish loss exposure and to ascertain compliance with our loan policy.
We use a management loan committee and a directors’ loan committee to approve loans. The management loan committee is comprised of members of senior management, and the directors’ loan committee is composed of any four directors, of which at least three are independentsix directors. Both committees approve new, renewed and or modified loans that exceed officer loan authorities. The directors’ loan committee also reviews any changes to our lending policies, which are then approved by our board of directors.
Construction and Development Lending
We make construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest changes. The majority of the interest rates charged on these loans float with the market. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, we generally limit loan amounts to 75% to 90% of appraised value, in addition to analyzing the creditworthiness of our borrowers. We also obtain a first lien on the property as security for our construction loans and typically require personal guarantees from the borrower’s principal owners.
16
PART II, Continuedcontinued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in our market area, including multi-family residential buildings, commercial buildings and offices, shopping centers and churches. Commercial real estate lending entails significant additional risks, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy in general. Our commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and reputation. We also evaluate the location of the security property and typically require personal guarantees or endorsements of the borrower’s principal owners.
Business Lending
Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of our business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from his employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
We offer various consumer loans, including personal loans and lines of credit, automobile loans, deposit account loans, installment and demand loans, and home equity lines of credit and loans. Such loans are generally made to clients with whom we have a pre-existing relationship. We currently originate all of our consumer loans in our geographic market area.
The underwriting standards employed by us for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount. For home equity lines of credit and loans, our primary consumer loan category, we require title insurance, hazard insurance and, if required, flood insurance.
Residential Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan to value limits ranging between 80 and 90% depending on the age of the property, borrower’s income and credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates that can change every three to five years, based on amortization periods of twenty to thirty years.
17
PART II, Continuedcontinued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary VBS Mortgage. These loans are typically on the Bank’s books for two to three weeks prior to being sold to investors in the secondary market. Similarly, the Bank also has a relationship with Gateway Savings Bank in Oakland, CA and NorthPointeNorthpointe Bank in Grand Rapids, MI wherewhereby it purchases fixed rate conforming 1-4 family mortgage loans for short periods of time pending those loans being sold to investors in the secondary market. These loans have an average lifeduration of ten days to two weeks, but occasionally remain on the Bank’s books for up to 60 days. The Bank has maintained a relationship with Gateway Bank since 2003 and began its relationship with NorthPointeNorthpointe Bank in 2014. This relationship allows the Bank to achieve a higher rate of return than it wouldis available on other short term investment opportunities.
Dealer Finance Division
On September 25, 2012, the Bank began operations of a loan production office in Penn Laird, VA which specializes in providing automobile financing through a network of automobile dealers. The new Dealer Finance Division was staffed with three officers that have extensive experience in Dealer Finance. This office is serving the automobile finance needs for customers of dealers throughout the existing geographic footprint of the Bank. Approximately forty dealers have signed contracts to originate loans on behalf of the Bank.
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.
In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 (formerly SFAS No. 5) “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 (formerly SFAS No. 114), “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company’s allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management’s estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.
18
PART II, Continuedcontinued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continuedcontinued
Allowance for Loan Losses, continued
Allowances for loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the loan portfolio. Specific allowances are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.
While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued ASC 805 (formerly SFAS No. 141), Business Combinations and ASC 350 (formerly SFAS No. 142), Intangibles. ASC 805 requires 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 was effective for fiscal years beginning after December 15, 2001 and 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 are subject to an annual impairment review and more frequently if certain impairment indicators are in evidence. ASC 350 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
The Company adopted ASC 350 on January 1, 2002. Goodwill totaled $2,639,000 at January 1, 2002. As of December 31, 2008, the Company recognized $30,000 in additional goodwill related to the purchase of 70% ownership in VBS Mortgage. The goodwill is not amortized but is tested for impairment at least annually. Based on this testing, there were no impairment charges for 2015, 2014 2013 or 2012.2013. Application of the non-amortization provisions of the Statement resulted in additional net income of $120,000 for each of the years ended December 31, 2015, 2014 2013 and 2012.2013.
Core deposit intangibles are amortized on a straight-line basis over a ten year life. The Company adopted ASC 350 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over its estimated useful life. The core deposit intangible was fully amortized during 2011.
The determination of income taxes represents results in income and expense being recognized in different periods for financial reporting purposes versus for the purpose of computing income taxes currently payable. Deferred taxes are provided on such temporary differences and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Further, the Company followsseeks strategies that minimize the guidance in ASC 320-10 and SAB Topic 5M, Other Than Temporary Impairment in evaluating if security impairments are temporary or other than temporary in nature. This determination is made on an investment by investment basis and includes all available evidence attax effect of implementing its business strategies. Management makes judgements regarding the timeultimate consequence of the determinationlong-term tax planning strategies, including the following:likelihood of future recognition of deferred tax benefits. As a result, it is considered a significant estimate.
19
PART II, Continuedcontinued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continuedcontinued
Fair Value
The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management’s judgment is necessary to estimate fair value possibly including estimates that incorporate estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.
Pension Plan Accounting
The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated obligation include discount rates, expected return on assets, mortality rates, health care cost trend rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company’s financial condition and results of operations. As a result, accounting for the Company’s pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.
20
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Overview
The Company’s net income for 20142015 totaled $5,802,000$8,417,000 or $1.82$2.40 per common share, an increase of 23.03%45.07% from $4,716,000$5,802,000 or $1.88$1.82 a share in 2013.2014. Return on average equity decreasedincreased in 2015 to 10.46% versus 8.65% in 2014, to 8.65% versus 9.11% in 2013, whileand the return on average assets increased from .82%1.00% to 1.00%1.31%. The decrease in earnings per share and return on average equity resulted from the increase in shares outstanding following the issuance of additional common stock in March 2014.
See page 1116 for a five-year summary of selected financial data.
Changes in Net Income per Common Share
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| to 2013 | to 2012 | to 2014 | to 2013 | |||||||||||||
| Prior Year Net Income Per Common Share | $ | 1.88 | $ | 1.96 | $ | 1.82 | $ | 1.88 | ||||||||
| Change from differences in: | ||||||||||||||||
| Net interest income | .77 | .10 | 1.02 | .77 | ||||||||||||
| Provision for credit losses | .61 | .17 | .59 | .61 | ||||||||||||
| Noninterest income, excluding securities gains | (.18 | ) | .12 | .08 | (.18 | ) | ||||||||||
| Securities gains | - | - | ||||||||||||||
| Noninterest expenses | (.37 | ) | (.54 | ) | (.71 | ) | (.37 | ) | ||||||||
| Income taxes | (.40 | ) | .07 | (.18 | ) | (.40 | ) | |||||||||
| Effect of common stock raise | (.49 | ) | - | - | (.49 | ) | ||||||||||
| Effect of preferred stock dividend | (.12 | ) | - | |||||||||||||
| Effect of increase in average shares outstanding | (.10 | ) | - | |||||||||||||
| Total Change | (.06 | ) | (.08 | ) | .58 | (.06 | ) | |||||||||
| Net Income Per Common Share | $ | 1.82 | $ | 1.88 | $ | 2.40 | $ | 1.82 | ||||||||
Net Interest Income
The largest source of operating revenue for the Company is net interest income, which is calculated as the difference between the interest earned on earning assets and the interest expense paid on interest bearing liabilities. The net interest margin is the net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and interest bearing liabilities, along with their yields and rates, have a significant impact on the level of net interest income. Net interest income for 20142015 was $23,124,000$26,477,000 representing an increase of $1,931,000$3,353,000 or 9.11%14.50% over the prior year. A 1.25%9.11% increase in 20132014 versus 20122013 resulted in total net interest income of $21,193,000.$23,124,000.
In this discussion and in the tabular analysis of net interest income performance, entitled “Consolidated Average Balances, Yields and Rates,” (found on page 21)23), the interest earned on tax exempt loans and investment securities has been adjusted to reflect the amount that would have been earned had these investments been subject to normal income taxation. This is referred to as tax equivalent net interest income. For a reconciliation of tax equivalent net interest income to GAAP measures, see the table on page 23.25.
Tax equivalent income on earning assets increased $818,000.$2,610,000. Loans held for investment, expressed as a percentage of total earning assets, increaseddecreased in 20142015 to 91.84%88.60% as compared to 89.17%91.84% in 2013.2014. During 2014,2015, yields on earning assets increased 5decreased 6 basis points (BP), primarily due to a 47BP increase72BP decrease in the yield on installment loans.loans held for sale. This increasedecrease is due to the growth in the Dealer Finance division, which is a higher yielding portfolio.short term participation program with Northpointe Bank. The average cost of interest bearing liabilities decreased 24BP23BP in 2014,2015, following a decrease of 25BP24BP in 2013.2014. The decrease in average cost resulted from maturing liabilities repricingis due to the redemption of subordinated debt agreements at lower rates. Following the recessionend of 2008/20092014 and the Federal Reserve’s Federal Open Market Committee (FOMC) has continued its accommodative monetary policy.low rate environment.
The analysis on the next page reveals an increase in the net interest margin to 4.30%4.43% in 20142015 primarily due to changes in balance sheet leverage as higher rate borrowings decreased, the increase in noninterest bearing deposit accounts and the growth in the Dealer Finance division produced higher yields.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Consolidated Average Balances, Yields and Rates1
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 164,666 | $ | 7,810 | 4.74 | % | $ | 169,431 | $ | 7,896 | 4.66 | % | $ | 168,135 | $ | 8,204 | 4.88 | % | $ | 170,272 | $ | 8,103 | 4.76 | % | $ | 164,666 | $ | 7,810 | 4.74 | % | $ | 169,431 | $ | 7,896 | 4.66 | % | ||||||||||||||||||||||||||||||||||||
| Real estate | 281,052 | 14,542 | 5.17 | % | 268,902 | 14,796 | 5.50 | % | 264,400 | 15,122 | 5.72 | % | 295,892 | 14,976 | 5.06 | % | 281,052 | 14,542 | 5.17 | % | 268,902 | 14,796 | 5.50 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Installment | 50,695 | 3,960 | 7.81 | % | 33,625 | 2,467 | 7.34 | % | 23,560 | 2,019 | 8.57 | % | 65,870 | 4,981 | 7.56 | % | 50,695 | 3,960 | 7.81 | % | 33,625 | 2,467 | 7.34 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans held for investment4 | 496,413 | 26,312 | 5.30 | % | 471,958 | 25,159 | 5.33 | % | 456,095 | 25,345 | 5.56 | % | 532,034 | 28,060 | 5.27 | % | 496,413 | 26,312 | 5.30 | % | 471,958 | 25,159 | 5.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for sale | 9,072 | 312 | 3.44 | % | 21,298 | 648 | 3.04 | % | 50,814 | 1,736 | 3.42 | % | 40,450 | 1,099 | 2.72 | % | 9,072 | 312 | 3.44 | % | 21,298 | 648 | 3.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fully taxable | 13,392 | 205 | 1.53 | % | 11,718 | 194 | 1.66 | % | 16,424 | 209 | 1.27 | % | 17,372 | 303 | 1.74 | % | 13,392 | 205 | 1.53 | % | 11,718 | 194 | 1.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Partially taxable | 116 | - | .- | 107 | - | .- | 108 | 1 | .93 | % | 125 | - | .- | 116 | - | .- | 107 | - | .- | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax exempt | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total investment securities | 13,508 | 205 | 1.53 | % | 11,825 | 194 | 1.66 | % | 16,532 | 210 | 1.27 | % | 17,497 | 303 | 1.74 | % | 13,508 | 205 | 1.53 | % | 11,825 | 194 | 1.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits in banks | 896 | - | - | 1,084 | 4 | .37 | % | 1,334 | 5 | .37 | % | 1,223 | - | - | 896 | - | - | 1,084 | 4 | .37 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold | 20,602 | 44 | .21 | % | 23,094 | 50 | .22 | % | 11,463 | 25 | .22 | % | 9,310 | 21 | .23 | % | 20,602 | 44 | .21 | % | 23,094 | 50 | .22 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Earning Assets | 540,491 | 26,873 | 4.97 | % | 529,259 | 26,055 | 4.92 | % | 536,238 | 27,321 | 5.09 | % | 600,514 | 29,483 | 4.91 | % | 540,491 | 26,873 | 4.97 | % | 529,259 | 26,055 | 4.92 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (8,476 | ) | (8,384 | ) | (7,711 | ) | (8,933 | ) | (8,476 | ) | (8,384 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nonearning assets | 47,036 | 48,565 | 44,002 | 52,378 | 47,036 | 48,565 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 579,051 | $ | 569,440 | $ | 572,529 | $ | 643,959 | $ | 579,051 | $ | 569,440 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand –interest bearing | $ | 117,396 | $ | 664 | .57 | % | $ | 120,482 | $ | 792 | .66 | % | $ | 121,209 | $ | 1,195 | .99 | % | $ | 112,334 | $ | 539 | .48 | % | $ | 117,396 | $ | 664 | .57 | % | $ | 120,482 | $ | 792 | .66 | % | ||||||||||||||||||||||||||||||||||||
| Savings | 60,460 | 122 | .20 | % | 52,714 | 119 | .23 | % | 45,120 | 182 | .40 | % | 76,491 | 212 | .28 | % | 60,460 | 122 | .20 | % | 52,714 | 119 | .23 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 195,933 | 1,704 | .87 | % | 198,786 | 2,331 | 1.17 | % | 214,145 | 2,944 | 1.83 | % | 171,829 | 1,402 | .82 | % | 195,933 | 1,704 | .87 | % | 198,786 | 2,331 | 1.17 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing deposits | 373,789 | 2,490 | .67 | % | 371,982 | 3,242 | �� | .87 | % | 380,474 | 4,321 | 1.14 | % | 360,654 | 2,153 | .60 | % | 373,789 | 2,490 | .67 | % | 371,982 | 3,242 | .87 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Short-term debt | 3,872 | 9 | .23 | % | 6,171 | 24 | .39 | % | 12,816 | 52 | .41 | % | 32,017 | 69 | .22 | % | 3,872 | 9 | .23 | % | 6,171 | 24 | .39 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 21,501 | 1,149 | 5.34 | % | 36,280 | 1,507 | 4.15 | % | 55,275 | 1,921 | 3.48 | % | 31,856 | 654 | 2.05 | % | 21,501 | 1,149 | 5.34 | % | 36,280 | 1,507 | 4.15 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 399,162 | 3,648 | .91 | % | 414,433 | 4,773 | 1.15 | % | 448,565 | 6,294 | 1.40 | % | 424,527 | 2,876 | .68 | % | 399,162 | 3,648 | .91 | % | 414,433 | 4,773 | 1.15 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | 107,647 | 90,170 | 75,983 | 125,665 | 107,647 | 90,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 5,134 | 13,074 | 199 | 13,318 | 5,134 | 13,074 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 511,943 | 517,677 | 524,747 | 563,510 | 511,943 | 517,677 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 67,108 | 51,763 | 47,782 | 80,449 | 67,108 | 51,763 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 579,051 | $ | 569,440 | $ | 572,529 | $ | 643,959 | $ | 579,051 | $ | 569,440 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 17,508 | $ | 17,508 | $ | 17,508 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest earnings | $ | 23,225 | $ | 21,282 | $ | 21,027 | $ | 26,607 | $ | 23,225 | $ | 21,282 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net yield on interest earning assets (NIM) | 4.30 | % | 4.02 | % | 3.92 | % | 4.43 | % | 4.30 | % | 4.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate. |
| 2 | Interest income on loans includes loan fees. |
| 3 | Average balance information is reflective of historical cost and has not been adjusted for changes in market value. |
| 4 | Includes nonaccrual loans. |
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
The following table illustrates the effect of changes in volumes and rates.
| 2014 Compared to 2013 | 2013 Compared to 2012 | 2015 Compared to 2014 | 2014 Compared to 2013 | |||||||||||||||||||||||||||||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
| Due to Change | Increase | Due to Change | Increase | Due to Change | Increase | Due to Change | Increase | |||||||||||||||||||||||||||||||||||||||||
| in Average: | Or | in Average: | or | in Average: | Or | in Average: | or | |||||||||||||||||||||||||||||||||||||||||
| Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |||||||||||||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | $ | 1,303 | $ | (150 | ) | $ | 1,153 | $ | 882 | $ | (1,068 | ) | $ | (186 | ) | $ | 1,888 | $ | (140 | ) | $ | 1,748 | $ | 1,303 | $ | (150 | ) | $ | 1,153 | |||||||||||||||||||
| Loans held for sale | (372 | ) | 36 | (336 | ) | (1,009 | ) | (79 | ) | (1,088 | ) | 1,079 | (292 | ) | 787 | (372 | ) | 36 | (336 | ) | ||||||||||||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 28 | (17 | ) | 11 | (60 | ) | 45 | (15 | ) | 61 | 37 | 98 | 28 | (17 | ) | 11 | ||||||||||||||||||||||||||||||||
| Partially taxable | - | - | - | - | (1 | ) | (1 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Tax exempt | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Interest bearing deposits in banks | (1 | ) | (3 | ) | (4 | ) | (1 | ) | - | (1 | ) | - | - | - | (1 | ) | (3 | ) | (4 | ) | ||||||||||||||||||||||||||||
| Federal funds sold | (5 | ) | (1 | ) | (6 | ) | 25 | - | 25 | (24 | ) | 1 | (23 | ) | (5 | ) | (1 | ) | (6 | ) | ||||||||||||||||||||||||||||
| Total Interest Income | 953 | (135 | ) | 818 | (163 | ) | (1,103 | ) | (1,266 | ) | 3,004 | (394 | ) | 2,610 | 953 | (135 | ) | 818 | ||||||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||
| Demand | (20 | ) | (108 | ) | (128 | ) | (7 | ) | (396 | ) | (403 | ) | (29 | ) | (96 | ) | (125 | ) | (20 | ) | (108 | ) | (128 | ) | ||||||||||||||||||||||||
| Savings | 18 | (15 | ) | 3 | 30 | (93 | ) | (63 | ) | 32 | 58 | 90 | 18 | (15 | ) | 3 | ||||||||||||||||||||||||||||||||
| Time deposits | (33 | ) | (594 | ) | (627 | ) | (281 | ) | (332 | ) | (613 | ) | (210 | ) | (92 | ) | (302 | ) | (33 | ) | (594 | ) | (627 | ) | ||||||||||||||||||||||||
| Short-term debt | (9 | ) | (6 | ) | (15 | ) | (27 | ) | (1 | ) | (28 | ) | 65 | (5 | ) | 60 | (9 | ) | (6 | ) | (15 | ) | ||||||||||||||||||||||||||
| Long-term debt | (613 | ) | 255 | (358 | ) | (661 | ) | 247 | (414 | ) | 553 | (1,048 | ) | (495 | ) | (613 | ) | 255 | (358 | ) | ||||||||||||||||||||||||||||
| Total Interest Expense | (657 | ) | (468 | ) | (1,125 | ) | (946 | ) | (575 | ) | (1,521 | ) | 411 | (1,183 | ) | (772 | ) | (657 | ) | (468 | ) | (1,125 | ) | |||||||||||||||||||||||||
| Net Interest Income | $ | 1 ,610 | $ | 333 | $ | 1,943 | $ | 783 | $ | (528 | ) | $ | 255 | $ | 2,593 | $ | 789 | $ | 3,382 | $ | 1 ,610 | $ | 333 | $ | 1,943 | |||||||||||||||||||||||
Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change.
Interest Income
Tax equivalent interest income increased $2,610,000 or 9.71% in 2015, after increasing 3.14% or $818,000 or 3.14% in 2014, after decreasing 4.63% or $1,266,000 in 2013.2014. Overall, the yield on earning assets increased .05%decreased .06%, from 4.92%4.97% to 4.97%4.91%. Average loans held for investment grew during 2014,2015, with average loans outstanding increasing $24,455,000$35,621,000 to $496,413,000.$532,034,000. Real estate loans increased 4.52%5.28%, commercial loans decreased 2.81%increased 3.40% and consumer loans increased 50.77%29.93%. The increase in consumer loans is result of the growth in our Dealer Finance division which opened at the end of 2012. As you can see, theThe increase in tax equivalent interest income is primarily due to the growth in the Dealer Finance division which is a higher yielding portfolio.as well as the volume in the short term loan participation program with Northpointe Bank. .
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
The following table provides detail on the components of tax equivalent net interest income:
GAAP Financial Measurements: (Dollars in thousands). | 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | ||||||||||||||||||
| Interest Income – Loans | $ | 26,522 | $ | 25,718 | $ | 26,984 | $ | 29,029 | $ | 26,522 | $ | 25,718 | ||||||||||||
| Interest Income - Securities and Other Interest-Earnings Assets | 249 | 248 | 240 | 324 | 249 | 248 | ||||||||||||||||||
| Interest Expense – Deposits | 2,490 | 3,242 | 4,321 | 2,153 | 2,490 | 3,242 | ||||||||||||||||||
| Interest Expense - Other Borrowings | 1,158 | 1,531 | 1,973 | 723 | 1,158 | 1,531 | ||||||||||||||||||
| Total Net Interest Income | 23,123 | 21,193 | 20,930 | 26,477 | 23,123 | 21,193 | ||||||||||||||||||
| Non-GAAP Financial Measurements: | ||||||||||||||||||||||||
| Add: Tax Benefit on Tax-Exempt Interest Income – Loans | 102 | 89 | 97 | 130 | 102 | 89 | ||||||||||||||||||
Add: Tax Benefit on Tax-Exempt Interest Income - Securities and Other Interest-Earnings Assets | - | - | - | - | - | - | ||||||||||||||||||
| Total Tax Benefit on Tax-Exempt Interest Income | 102 | 89 | 97 | 130 | 102 | 89 | ||||||||||||||||||
| Tax-Equivalent Net Interest Income | $ | 23,225 | $ | 21,282 | $ | 21,027 | $ | 26,607 | $ | 23,225 | $ | 21,282 | ||||||||||||
Interest Expense
Interest expense decreased $1,125,000$772,000 or 23.57%21.16% during 2014,2015, which followed a 24.17%23.57% decrease or $1,521,000$1,125,000 in 2013.2014. The average cost of funds of .91%.68% decreased .24%.23% compared to 2013.2014. Average interest bearing liabilities decreased $15,271,000increased $25,365,000 in 20142015 following decrease of $34,132,000$15,271,000 in 2013.2014. The decreaseincrease in interest bearing liabilities was the result of a decreasean increase in short and long term debt and migration from interest bearing depositsFHLB borrowings to noninterest bearing accounts. Long term debt decreased with the subordinated debt redemption and/or conversion to Preferred Stock.support loan growth. Due to declining rates and the migration into noninterest bearing accounts the expense associated with time deposits decreased $627,000 (26.90%$302,000 (17.72%) in 2014.2015. Changes in the cost of funds attributable to rate and volume variances can be found in the table at the top of page 22.24.
Noninterest Income
Noninterest income continues to be an increasingly important factor in maintaining and growing profitability. Management is conscious of the need to constantly review fee income and develop additional sources of complementary revenue.
Non-interest income decreased 12.45%increased 8.17% ($502,000)235,000) in 20142015 following an increasea decrease of 6.87%6.26% in 2013.2014. The majority of the decreaseincrease is from decreased income fromrecord earnings at VBS mortgage ($384,000), due to increased volume in our mortgagelow interest rate environment and investment subsidiaries ($233,000). Other areasslight economic improvement. Areas of decrease were service charges on deposit accounts ($84,000) and bank owned life insurance ($42,000).71,000), which has experience a steady decline over the past few years with regulatory changes.
There were no security transactions in 2015, 2014 2013 or 20122013 which resulted in a gain or loss.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Noninterest Expense
Noninterest expenses increased from $14,720,000 in 2013 to $15,656,000 in 2014 to $17,986,000 in 2015, a 6.36%14.88% increase. Salary and benefits increased 1.60%14.14% to $8,810,000$10,055,000 in 2014,2015, following an 11.22%a 1.60% increase in 2013.2014. This increase was the result of normal salary increases, additions to staff for new branches and administrative positions as well as increasing benefit costs (primarily(including health insurance)care cost, pension expense and profit sharing expenses). This year the pension expense declined which resulted in a smaller increase than 2013.increased by $185,000 over 2014. Other real estate owned expenses increased $192,000$159,000 or 8.96%3.90% due to costs associated with maintaining the properties and losses from sales or write-downs of property. Other operating expenses increased $562,000$910,000 in 2014,2015, following a $523,000$562,000 increase in 2013.2014. Increases were in advertising and employee appreciation ($38,000)114,000), data processingtechnology expense ($200,000)148,000), Franchise tax expense ($203,000) and supplies and stationarychecking account program expenses ($92,000)103,000). Noninterest expenses continue to be substantially lower than peer group averages. Total noninterest expense as a percentage of average assets totaled 2.61%2.79%, 2.70%, and 2.58%, in 2015, 2014 and 2.33%, in 2014, 2013, and 2012, respectively. Peer group averages (as reported in the most recent Uniform Bank Performance Report) have ranged between 2.89%2.86%, 2.93%2.89% and 2.93% over the same time period.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and volume of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance for loan losses include internally generated loan review reports, past due reports and historical loan loss experience. This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates nonperforming loans relative to their collateral value and makes the appropriate adjustments to the allowance for loan losses when needed. Based on the factors outlined above, the current year provision for loan losses decreased from $3,775,000 in 2013 to $2,250,000 in 2014.2014 to $300,000 in 2015. The decrease in the provision for loan losses and the current levels of the allowance for loan losses reflect specific reserves related to nonperforming loans, changes in risk rating on loans, net charge-off activity, loan growth, delinquency trends and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses.
Actual net loan charge-offs were $244,000 in 2015 and $1,709,000 in 2014 and $3,745,000 in 2013.2014. Loan losses as a percentage of average loans held for investment totaled .04% and .33% in 2015 and .78% in 2014, and 2013, respectively. As stated in the most recently available Bank Holding Company Performance Report (BHCPR), peer group loss averages were .12% in 2015 and .18% in 2014 and .32% in 2013.2014.
Balance Sheet
Total assets increased 9.50%9.92% during the year to $605,308,000,$665,357,000, an increase of $52,520,000$60,049,000 from $552,788,000$605,308,000 in 2013.2014. Average earning assets increased 2.12%11.10% or $11,232,000$60,023,000 to $540,491,000$600,514,000 at December 31, 2014.2015. The increase in earning assets is due largely to the growth in the short term loan participation program with Northpointe Bank and in the Dealer Finance division in installment loans. Average interest bearing deposits increased $1,807,000decreased $13,135,000 for 20142015 or .49%3.51%, with all thedecreases in both time deposits and interest bearing demand accounts, there was $16,031,000 in growth resulting from an increase in the savings category. The Company continues to utilize its assets well with 90.00%93.25% of average assets consisting of earning assets.
Investment Securities
Average balances in investment securities increased 14.23%29.53% in 20142015 to $13,508,000.$17,497,000. At year end, 2.50%2.91% of average earning assets of the Company were held as investment securities to provide security for public deposits and to secure repurchase agreements. Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 1.74% for 2015, up from 1.53% for 2014, down from 1.66% in 2013.2014.
There were no security gains or losses and no Other Than Temporary Impairment (OTTI) write-downs in 2015, 2014 2013 or 2012. Additional information on the securities impairment write-downs can be found on page 19 under the caption “Securities Impairment”.2013.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Investment Securities, continued
The composition of securities at December 31 was:
| (Dollars in thousands) | 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | ||||||||||||||||||
Available for Sale1 | ||||||||||||||||||||||||
U.S. Treasury, Agency and Government Sponsored Enterprises (GSE) | $ | 12,058 | $ | 29,065 | $ | 7,031 | $ | 12,095 | $ | 12,058 | $ | 29,065 | ||||||||||||
Mortgage-backed2 | 1,022 | 1,201 | 1,647 | 817 | 1,022 | 1,201 | ||||||||||||||||||
| Marketable equity securities | 135 | - | - | 135 | 135 | - | ||||||||||||||||||
| Total | 13,215 | 30,266 | 8,678 | 13,047 | 13,215 | 30,266 | ||||||||||||||||||
| Held to Maturity | ||||||||||||||||||||||||
| U.S. Treasury and Agency | 125 | 106 | 107 | 125 | 125 | 106 | ||||||||||||||||||
| Total | 125 | 106 | 107 | 125 | 125 | 106 | ||||||||||||||||||
| Other Equity Investments | 8,965 | 8,114 | 10,022 | 12,157 | 8,965 | 8,114 | ||||||||||||||||||
| Total Securities | $ | 22,305 | $ | 38,486 | $ | 18,807 | $ | 25,329 | $ | 22,305 | $ | c38,486 | ||||||||||||
1 At estimated fair value. See Note 4 to the Consolidated Financial Statements for amortized cost.
2 Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral.
Maturities and weighted average yields of debt securities at December 31, 20142015 are presented in the table below. Amounts are shown by contractual maturity; expected maturities will differ as issuers may have the right to call or prepay obligations. Maturities of Other Investments are not readily determinable due to the nature of the investment; see Note 4 to the Consolidated Financial Statements for a description of these investments.
| Less | One to | Five to | Over | Less | One to | Five to | Over | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Than one Year | Five Years | Ten Years | Ten Years | Than one Year | Five Years | Ten Years | Ten Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Total | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Total | Yield | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities Available for Sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury, Agency & GSE | $ | 2,000 | .05 | % | $ | 10,058 | .94 | % | $ | - | $ | - | $ | 12,058 | .79 | % | $ | 4,075 | .99 | % | $ | 8,020 | .78 | % | $ | - | $ | - | $ | 12,095 | .85 | % | |||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed | 1,022 | 2.29 | % | 1,022 | 2.29 | % | 817 | 2.35 | % | 817 | 2.35 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketable equities | - | - | - | 135 | 135 | - | - | - | 135 | 135 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,000 | .05 | % | $ | 10,058 | .94 | % | $ | - | $ | 1,157 | 2.29 | % | $ | 13,215 | .90 | % | $ | 4,075 | .99 | % | $ | 8,020 | .78 | % | $ | - | $ | 952 | 2.29 | % | $ | 13,047 | .94 | % | |||||||||||||||||||||||||||||||||||||
| Debt Securities Held to Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury & Agency | $ | 125 | .38 | % | $ | 125 | .38 | % | $ | 125 | .28 | % | $ | 125 | .28 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 125 | .38 | % | $ | 125 | .38 | % | $ | 125 | .28 | % | $ | 125 | .28 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Analysis of Loan Portfolio
The Company’s market area has a relatively stable economy which tends to be less cyclical than the national economy. Major industries in the market area include agricultural production and processing, higher education, retail sales, services and light manufacturing.
The Company’s portfolio of loans held for investment totaled $518,202,000$544,053,000 at December 31, 20142015 compared with $478,453,000$518,202,000 at the beginning of the year. The Company’s policy has been to make conservative loans that are held for future interest income. Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Commercial loans, including agricultural and multifamily loans, increased 6.62%1.24% during 20142015 to $174,748,000.$176,922,000. Real estate mortgages increased $11,194,000 (5.26%$8,407,000 (3.76%). Growth has included a variety of loan and collateral types including owner occupied residential real estate and residential rental properties.
Construction loans decreased $1,332,000increased $2,579,000 or 1.94%3.84%. The declineincrease in construction loans resulted fromlending is a result of improvement in the slower economy which reduced construction withinin the Bank’s primary market area. The Bank also has loan participation arrangements with several other banks within the region to aid in diversification of the loan portfolio geographically, by collateral type and by borrower.
Consumer installment loans increased $18,972,000$12,624,000 or 61.91%25.44%. This category includes personal loans, auto loans and other loans to individuals. This category began increasing during the fourth quarter of 2012 due to the opening of the Dealer Finance Division in Penn Laird, Virginia; at year end this Division had a loan portfolio of $40,634,000.$54,086,000. Credit card balances increased $25,000$40,000 to $2,705,000$2,745,000 but are a minor component of the loan portfolio. The following table presents the changes in the loan portfolio over the previous five years.
| December 31 | December 31 | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | $ | 223,824 | $ | 212,630 | $ | 204,812 | $ | 193,280 | $ | 190,162 | $ | 232,321 | $ | 223,824 | $ | 212,630 | $ | 204,812 | $ | 193,280 | ||||||||||||||||||||
| Real estate – construction | 67,180 | 68,512 | 71,251 | 72,224 | 79,337 | 69,759 | 67,180 | 68,512 | 71,251 | 72,224 | ||||||||||||||||||||||||||||||
| Consumer installment | 49,615 | 30,643 | 15,753 | 13,015 | 19,043 | 62,239 | 49,615 | 30,643 | 15,753 | 13,015 | ||||||||||||||||||||||||||||||
| Commercial | 147,599 | 135,835 | 147,089 | 141,014 | 121,490 | 153,691 | 147,599 | 135,835 | 147,089 | 141,014 | ||||||||||||||||||||||||||||||
| Agricultural | 15,374 | 16,265 | 14,099 | 15,985 | 19,761 | 15,672 | 15,374 | 16,265 | 14,099 | 15,985 | ||||||||||||||||||||||||||||||
| Multi-family residential | 11,775 | 11,797 | 9,357 | 13,157 | 12,259 | 7,559 | 11,775 | 11,797 | 9,357 | 13,157 | ||||||||||||||||||||||||||||||
| Credit cards | 2,705 | 2,680 | 2,788 | 2,812 | 2,771 | 2,745 | 2,705 | 2,680 | 2,788 | 2,812 | ||||||||||||||||||||||||||||||
| Other | 130 | 91 | 670 | 83 | 324 | 67 | 130 | 91 | 670 | 83 | ||||||||||||||||||||||||||||||
| Total Loans | $ | 518,202 | $ | 478,453 | $ | 465,819 | $ | 451,570 | $ | 445,147 | $ | 544,053 | $ | 518,202 | $ | 478,453 | $ | 465,819 | $ | 451,570 | ||||||||||||||||||||
The following table shows the Company’s loan maturity and interest rate sensitivity as of December 31, 2014:2015:
| Less Than | 1-5 | Over | Less Than | 1-5 | Over | |||||||||||||||||||||||||||
| (Dollars in thousands) | 1 Year | Years | 5 Years | Total | 1 Year | Years | 5 Years | Total | ||||||||||||||||||||||||
| Commercial and | ||||||||||||||||||||||||||||||||
| agricultural loans | $ | 53,878 | $ | 104,035 | $ | 5,060 | $ | 162,973 | $ | 42,132 | $ | 113,729 | $ | 13,503 | $ | 169,364 | ||||||||||||||||
| Multi-family residential | 2,296 | 8,838 | 641 | 11,775 | 2,078 | 4,883 | 597 | 7,558 | ||||||||||||||||||||||||
| Real Estate – mortgage | 90,887 | 132,689 | 248 | 223,824 | 84,888 | 147,124 | 309 | 232,321 | ||||||||||||||||||||||||
| Real Estate – construction | 56,789 | 9,941 | 450 | 67,180 | 53,860 | 15,479 | 420 | 69,759 | ||||||||||||||||||||||||
| Consumer – installment/other | 7,314 | 45,092 | 44 | 52,450 | 7,519 | 45,811 | 11,721 | 65,051 | ||||||||||||||||||||||||
| Total | $ | 211,164 | $ | 300,595 | $ | 6,443 | $ | 518,202 | $ | 190,477 | $ | 327,026 | $ | 26,550 | $ | 544,053 | ||||||||||||||||
| Loans with predetermined rates | $ | 21,555 | $ | 64,465 | $ | 3,764 | $ | 89,784 | $ | 28,667 | $ | 60,484 | $ | 15,062 | $ | 104,213 | ||||||||||||||||
| Loans with variable or | ||||||||||||||||||||||||||||||||
| adjustable rates | 189,609 | 236,130 | 2,679 | 428,418 | 161,810 | 266,542 | 11,488 | 439,840 | ||||||||||||||||||||||||
| Total | $ | 211,164 | $ | 300,595 | $ | 6,443 | $ | 518,202 | $ | 190,477 | $ | 327,026 | $ | 26,550 | $ | 544,053 | ||||||||||||||||
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Analysis of Loan Portfolio, continued
Residential real estate loans are generally made for a period not to exceed 25 years and are secured by a first deed of trust which normally does not exceed 90% of the appraised value. If the loan to value ratio exceeds 90%, the Company requires additional collateral, guarantees or mortgage insurance. On approximately 94% of the real estate loans, interest is adjustable after each one, three or five year period. The remainder of the portfolio is comprised of fixed rate loans that are generally made for a fifteen-year or a twenty-year period with an interest rate adjustment after ten years.
Since 1992, fixed rate real estate loans have been funded with fixed rate borrowings from the Federal Home Loan Bank, which allows the Company to control its interest rate risk. In addition, the Company makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 90% of the appraised value. Home equity loans are made for three, five or ten year periods at a fixed rate or as a revolving line of credit.
Construction loans may be made to individuals, who have arranged with a contractor for the construction of a residence, or to contractors that are involved in building pre-sold, spec-homes or subdivisions. The majority of commercial loans are made to small retail, manufacturing and service businesses. Consumer loans are made for a variety of reasons; however, approximately 81% of the loans are secured by automobiles and trucks.
Prior to the recession, real estate values in the Company’s market area for commercial, agricultural and residential property increased, on the average, between 5% and 8% annually depending on the location and type of property. However, due to the slowing economy and declining real estate sales it is estimated that values peaked in 2007 or 2008. Depending on a number of factors, including property type, location and price point, the decline in value ranges from relatively modest, perhaps 10%, to more severe, up to 30%. Values appear to have bottomed out in 2011, with modest increases in both 20132014 and 2014.2015. Approximately 84%83% of the Company’s loans are secured by real estate; however, policies relating to appraisals and loan to value ratios are adequate to control the related risk. Unemployment rates in the Company’s market area continue to be below both the national and state averages.
The Bank has identified loan concentrations of greater than 25% of capital in the real estate development category. While the Bank has not developed a formal policy limiting the concentration level to any particular loan type or industry segment, it has established target limits on both a nominal and percentage of capital basis. Concentrations are monitored and reported to the board of directors quarterly. Concentration levels have been used by management to determine how aggressively they may price or pursue new loan requests. At December 31, 2014,2015, there are no industry categories of loans that exceed 10% of total loans.
Nonaccrual and Past Due Loans
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. The Company would have earned approximately $361,000$267,000 in additional interest income had the loans on nonaccrual status been current and performing. Nonperforming loans totaled $6,526,000 at December 31, 2015 compared to $6,975,000 at December 31, 2014 compared to $12,582,000 at December 31, 2013.2014. At December 31, 2014 $1,0002015 $570,000 of loans (credit cards) 90 days or more past due were not on nonaccrual status. Approximately 97%91% of these nonperforming loans are secured by real estate. Although management expects that there may be additional loan losses, the bank is generally well secured and continues to actively work with its customers to effect payment. As of December 31, 2014,2015, the Company holds $3,507,000$2,128,000 of real estate which was acquired through foreclosure, of which $475,000$125,000 was under contract pending sale in the first quarter of 2015.2016.
Nonperforming loans have decreased approximately $5,607,000$449,000 since December 31, 2013.2014.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Nonaccrual and Past Due Loans, continued
The following is a summary of information pertaining to risk elements and impaired loans:
| (Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
| Nonaccrual Loans: | ||||||||||||||||||||||||||||||||||||||||
| Real Estate - 2011 includes $1,040 of restructured loans | $ | 5,481 | $ | 9,963 | $ | 9,611 | $ | 7,671 | $ | 5,189 | $ | 5,698 | $ | 5,481 | $ | 9,963 | $ | 9,611 | $ | 7,671 | ||||||||||||||||||||
| Commercial - 2011 includes $309 of restructured loans | 1,179 | 1,890 | 2,914 | 5,888 | 1,656 | 109 | 1,179 | 1,890 | 2,914 | 5,888 | ||||||||||||||||||||||||||||||
| Home Equity | 153 | 402 | 740 | 266 | 715 | 40 | 153 | 402 | 740 | 266 | ||||||||||||||||||||||||||||||
| Other | 161 | - | 121 | 39 | 30 | 108 | 161 | - | 121 | 39 | ||||||||||||||||||||||||||||||
| Loans past due 90 days or more: | ||||||||||||||||||||||||||||||||||||||||
| Real Estate | 0 | 246 | - | 646 | 3021 | 272 | 0 | 246 | - | 646 | ||||||||||||||||||||||||||||||
| Commercial | 0 | 4 | - | - | 4581 | 25 | 0 | 4 | - | - | ||||||||||||||||||||||||||||||
| Home Equity | 0 | 61 | - | 260 | 588 | 107 | 0 | 61 | - | 260 | ||||||||||||||||||||||||||||||
| Other | 1 | 16 | - | 6 | 54 | 167 | 1 | 16 | - | 6 | ||||||||||||||||||||||||||||||
| Total Nonperforming loans | $ | 6,975 | $ | 12,582 | $ | 13,386 | $ | 14,776 | $ | 15,834 | $ | 6,526 | $ | 6,975 | $ | 12,582 | $ | 13,386 | $ | 14,776 | ||||||||||||||||||||
| Restructured Loans: | ||||||||||||||||||||||||||||||||||||||||
| Restructured Loans current and performing: | ||||||||||||||||||||||||||||||||||||||||
| Real Estate | 179 | 50 | 147 | 4,786 | 267 | 8,713 | 3,913 | 7,484 | 6,572 | 4,335 | ||||||||||||||||||||||||||||||
| Commercial | 22 | 1,450 | 4,628 | 1,292 | 385 | 1,463 | 518 | 3,989 | 3,753 | 1,292 | ||||||||||||||||||||||||||||||
| Home Equity | 1,414 | 290 | 727 | 450 | 451 | |||||||||||||||||||||||||||||||||||
| Other | 91 | 22 | - | - | - | |||||||||||||||||||||||||||||||||||
| Nonperforming loans as a percentage of loans held for investment | 1.35 | % | 2.63 | % | 2.87 | % | 3.27 | % | 3.56 | % | 1.20 | % | 1.35 | % | 2.63 | % | 2.87 | % | 3.27 | % | ||||||||||||||||||||
Net Charge Offs to Total Loans Held for Investment(1) | 0.33 | % | 0.78 | % | 0.64 | % | 0.63 | % | 0.53 | % | 0.04 | % | 0.33 | % | 0.78 | % | 0.64 | % | 0.63 | % | ||||||||||||||||||||
| Allowance for loan and lease losses to nonperforming loans | 125.09 | % | 65.04 | % | 60.91 | % | 46.95 | % | 36.54 | % | 134.55 | % | 125.09 | % | 65.04 | % | 60.91 | % | 46.95 | % | ||||||||||||||||||||
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Nor do they represent material credits about which management is aware of any information which causes it to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of December 31, 2014,2015, management is not aware of any potential problem loans which are not already classified for regulatory purposes or on the watch list as part of the Bank’s internal grading system.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with identified potential losses, pools of loans by type, with separate weighting for past dues and 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 Restructuring are reviewed individually for impairment under ASC 310. A variety of factors are taken into account when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loan relationships that are determined to have no impairment are placed back into the appropriate loan pool and reviewed under ASC 450.
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 amount of loan losses in the past two years.years, the Company felt the two year lost history utilized in 2014 and prior would not be indicative of the amount of losses that could occur in our current economic cycle, therefore for 2015 the loss history was expanded to five years to capture a more representative loss history. Dealer finance loans utilize athe highest year within the five year loss history. The Company will monitor the net losses for this division and adjust 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 eightsix (past dues are now segregated as their own pool) environmental factors (loan growth, unemployment, past due/criticized loans, interest rates, changes in underwriting practices, local real estate industry conditions, and experience of lending staff) with a range for worst and best case.. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, past dues or in the homogeneous pools based on twofive year loss histories. The Board approves the loan loss provision for each quarter based on this evaluation. An effort is made to keep the actual allowance at or above the midpoint of the range established by the evaluation process.
The allowance for loan losses of $8,725,000$8,781,000 at December 31, 20142015 is equal to 1.68%1.61% of total loans held for investment. This compares to an allowance of $8,184,000 (1.71%$8,725,000 (1.68%) at December 31, 20132014 and 1.75%1.71% at December 31, 2012.2013. Management and the Board of Directors have made a concentrated effort at increasing the allowance during the recent recession to reflect the increased risks within the portfolio. The overall level of the allowance is comparable withabove peer group averages and management feels the current reserve level is appropriate. Management has reached this conclusion based on historical losses, delinquency rates, collateral values of delinquent loans and a thorough review of the loan portfolio.
Loan losses, net of recoveries, totaled $1,709,000$244,000 in 20142015 which is equivalent to .33%.04% of total loans outstanding. Over the preceding three years, the Company has had an average loss rate of .58%.38%, compared to a .33%.20% loss rate for its peer group.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses, continued
A summary of the activity in the allowance for loan losses follows:
| (Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 8,184 | $ | 8,154 | $ | 6,937 | $ | 5,786 | $ | 3,836 | $ | 8,725 | $ | 8,184 | $ | 8,154 | $ | 6,937 | $ | 5,786 | ||||||||||||||||||||
| Provision charged to expenses | 2,250 | 3,775 | 4,200 | 4,000 | 4,300 | 300 | 2,250 | 3,775 | 4,200 | 4,000 | ||||||||||||||||||||||||||||||
| Loan losses: | ||||||||||||||||||||||||||||||||||||||||
| Construction/land development | 1,611 | 2,127 | 1,480 | 1,263 | 249 | 156 | 1,611 | 2,127 | 1,480 | 1,263 | ||||||||||||||||||||||||||||||
| Farmland | - | - | - | - | 3 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Real Estate | 208 | 173 | 482 | 474 | 181 | 25 | 208 | 173 | 482 | 474 | ||||||||||||||||||||||||||||||
| Multi-family | - | - | - | - | 958 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Commercial Real Estate | - | 201 | 424 | 381 | 346 | - | - | 201 | 424 | 381 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | - | 159 | 69 | 222 | 200 | 26 | - | 159 | 69 | 222 | ||||||||||||||||||||||||||||||
| Home Equity – open end | 80 | 68 | - | 83 | - | 51 | 80 | 68 | - | 83 | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non Real Estate | 385 | 986 | 776 | 423 | 332 | - | 385 | 986 | 776 | 423 | ||||||||||||||||||||||||||||||
| Consumer | 33 | 173 | 45 | 90 | 117 | 32 | 33 | 173 | 45 | 90 | ||||||||||||||||||||||||||||||
| Dealer Finance | 107 | 17 | - | - | - | 251 | 107 | 17 | - | - | ||||||||||||||||||||||||||||||
| Credit Cards | 46 | 121 | 71 | 106 | 97 | 60 | 46 | 121 | 71 | 106 | ||||||||||||||||||||||||||||||
| Total loan losses | 2,470 | 4,025 | 3,347 | 3,042 | 2,483 | 601 | 2,470 | 4,025 | 3,347 | 3,042 | ||||||||||||||||||||||||||||||
| Recoveries: | ||||||||||||||||||||||||||||||||||||||||
| Construction/land development | 223 | 40 | 192 | - | - | 85 | 223 | 40 | 192 | - | ||||||||||||||||||||||||||||||
| Farmland | - | - | 3 | - | - | - | - | - | 3 | - | ||||||||||||||||||||||||||||||
| Real Estate | - | - | - | 8 | 2 | 37 | - | - | - | 8 | ||||||||||||||||||||||||||||||
| Multi-family | - | - | - | 48 | 52 | - | - | - | - | 48 | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 108 | 42 | 48 | 16 | 2 | 65 | 108 | 42 | 48 | 16 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | - | - | - | 3 | - | 6 | - | - | - | 3 | ||||||||||||||||||||||||||||||
| Home Equity – open end | - | 29 | - | 27 | - | - | - | 29 | - | 27 | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non Real Estate | 356 | 127 | 62 | 24 | - | 62 | 356 | 127 | 62 | 24 | ||||||||||||||||||||||||||||||
| Consumer | 33 | 14 | 27 | 42 | 56 | 32 | 33 | 14 | 27 | 42 | ||||||||||||||||||||||||||||||
| Dealer Finance | 6 | - | - | - | - | 24 | 6 | - | - | - | ||||||||||||||||||||||||||||||
| Credit Cards | 35 | 28 | 32 | 25 | 21 | 46 | 35 | 28 | 32 | 25 | ||||||||||||||||||||||||||||||
| Total recoveries | 761 | 280 | 364 | 193 | 133 | 357 | 761 | 280 | 364 | 193 | ||||||||||||||||||||||||||||||
| Net loan losses | (1,709 | ) | (3,745 | ) | (2,983 | ) | (2,849 | ) | (2,350 | ) | (244 | ) | (1,709 | ) | (3,745 | ) | (2,983 | ) | (2,849 | ) | ||||||||||||||||||||
| Balance at end of period | $ | 8,725 | $ | 8,184 | $ | 8,154 | $ | 6,937 | $ | 5,786 | $ | 8,781 | $ | 8,725 | $ | 8,184 | $ | 8,154 | $ | 6,937 | ||||||||||||||||||||
| Allowance for loan losses as a | ||||||||||||||||||||||||||||||||||||||||
| percentage of loans | 1.68 | % | 1.71 | % | 1.75 | % | 1.54 | % | 1.30 | % | 1.61 | % | 1.68 | % | 1.71 | % | 1.75 | % | 1.54 | % | ||||||||||||||||||||
| Net loan losses to loans outstanding | .33 | % | .78 | % | .64 | % | .63 | % | .53 | % | ||||||||||||||||||||||||||||||
| Net loan losses to loans held for investment | .04 | % | .33 | % | .78 | % | .64 | % | .63 | % | ||||||||||||||||||||||||||||||
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses, continued
| ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES | ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011* | 2010* | 2015 | 2014 | 2013 | 2012* | 2011* | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: (in thousands) | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | Balance | Percentage of Loans in Each Category | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | $ | 4,738 | 54.30 | % | $ | 4,007 | 45.93 | % | $ | 2,771 | 33.86 | % | $ | - | - | $ | - | - | $ | 4,442 | 50.59 | % | $ | 4,738 | 54.30 | % | $ | 4,007 | 45.93 | % | $ | 2,771 | 33.86 | % | $ | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Real Estate | 623 | 7.14 | % | 400 | 4.58 | % | 924 | 11.29 | % | - | - | - | - | 806 | 9.18 | % | 623 | 7.14 | % | 400 | 4.58 | % | 924 | 11.29 | % | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Financial and Agricultural | 1,337 | 15.33 | % | 2,239 | 25.66 | % | 3,187 | 38.94 | % | 2,984 | 36.60 | % | 2,653 | 38.24 | % | 1,666 | 18.97 | % | 1,337 | 15.33 | % | 2,239 | 25.66 | % | 3,187 | 38.94 | % | 2,984 | 36.60 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 1,685 | 19.31 | % | 905 | 10.37 | % | 253 | 3.09 | % | 298 | 3.65 | % | 270 | 3.89 | % | 1,059 | 12.06 | % | 1,685 | 19.31 | % | 905 | 10.37 | % | 253 | 3.09 | % | 298 | 3.65 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Home Equity | 342 | 3.92 | % | 633 | 7.26 | % | 1,019 | 12.45 | % | 920 | 11.28 | % | 578 | 8.33 | % | 808 | 9.20 | % | 342 | 3.92 | % | 633 | 7.26 | % | 1,019 | 12.45 | % | 920 | 11.28 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 8,725 | 100.00 | % | $ | 8,184 | 93.80 | % | $ | 8,154 | 99.63 | % | $ | 6,937 | 85.07 | % | $ | 5,785 | 83.39 | % | $ | 8,781 | 100.00 | % | $ | 8,725 | 100.00 | % | $ | 8,184 | 93.80 | % | $ | 8,154 | 99.63 | % | $ | 6,937 | 85.07 | % | |||||||||||||||||||||||||||||||||||||||||
| * Allocation detail for Construction/Land Development verses Real Estate is not easily available. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* Allocation detail for Construction/Land Development verses Real Estate is not readily available. | * Allocation detail for Construction/Land Development verses Real Estate is not readily available. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Deposits and Borrowings
The average deposit balances and average rates paid for 2015, 2014 2013 and 20122013 were as follows:
Average Deposits and Rates Paid (Dollars in thousands)
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||||||||
| Noninterest-bearing | $ | 119,203 | $ | 90,170 | $ | 75,983 | $ | 125,665 | $ | 107,647 | $ | 90,170 | ||||||||||||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest Checking | $ | 117,396 | .57 | % | $ | 120,482 | .66 | % | $ | 121,209 | .99 | % | $ | 112,334 | .48 | % | $ | 117,396 | .57 | % | $ | 120,482 | .66 | % | ||||||||||||||||||||||||
| Savings Accounts | 60,460 | .20 | % | 52,714 | .23 | % | 45,120 | .40 | % | 76,491 | .28 | % | 60,460 | .20 | % | 52,714 | .23 | % | ||||||||||||||||||||||||||||||
| Time Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
| CDARS | 19,771 | .21 | % | 8,581 | .53 | % | 10,339 | .69 | % | 11,247 | .18 | % | 19,771 | .21 | % | 8,581 | .53 | % | ||||||||||||||||||||||||||||||
| $100,000 or more | 74,743 | .61 | % | 69,130 | .87 | % | 67,562 | 1.01 | % | 66,719 | .55 | % | 74,743 | .61 | % | 69,130 | .87 | % | ||||||||||||||||||||||||||||||
| Less than $100,000 | 101,419 | 1.19 | % | 121,075 | 1.39 | % | 136,244 | 1.61 | % | 93,863 | 1.08 | % | 101,419 | 1.19 | % | 121,075 | 1.39 | % | ||||||||||||||||||||||||||||||
| Total Interest-bearing | 373,789 | .67 | % | 371,982 | .87 | % | 380,474 | 1.14 | % | 360,654 | .60 | % | 373,789 | .67 | % | 371,982 | .87 | % | ||||||||||||||||||||||||||||||
| Total deposits | $ | 492,992 | .51 | % | $ | 462,152 | .70 | % | $ | 456,457 | .95 | % | $ | 486,319 | .44 | % | $ | 481,436 | .52 | % | $ | 462,152 | .70 | % | ||||||||||||||||||||||||
Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $29,033,000$18,018,000 or 32.20%16.74% from $90,170,000$107,647,000 at December 31, 20132014 to $119,203,000$125,665,000 at December 31, 2014.2015. Interest-bearing deposits, which include interest checking accounts, money market accounts, regular savings accounts and time deposits, increased $1,807,000decreased $13,135,000 or .49%3.51% from $371,982,000 at December 31, 2013 to $373,789,000 at December 31, 2014.2014 to $360,654,000 at December 31, 2015. Total interest checking (including money market) account balances decreased $3,086,000$5,062,000 or 2.56%4.31% from $120,482,000 at December 31, 2013 to $117,396,000 at December 31, 2014.2014 to $112,334,000 at December 31, 2015. Total savings account balances increased $7,746,000$16,031,000 or 14.69%26.52% from $52,714,000 at December 31, 2013 to $60,460,000 at December 31, 2014.2014 to $76,491,000 at December 31, 2015.
Time deposits decreased $2,853,000$24,104,000 or 1.44%12.30% from $198,786,000 at December 31, 2013 to $195,933,000 at December 31, 2014.2014 to $171,829,000 at December 31, 2015. This is comprised of an increasedecrease in certificates of deposit of $100,000 and more of $5,613,000$8,024,000 or 8.12%10.74% from $69,130,000 at December 31, 2013 to $74,743,000 at December 31, 2014 to $66,719,000 at December 31, 2015, a decrease in certificates of deposit of less than $100,000 of $19,656,000$7,556,000 or 16.23%7.45% from $121,075,000 at December 31, 2013 to $101,419,000 at December 31, 2014 to $93,863,000 at December 31, 2015 and an increasedecrease in CDARs deposits of $11,190,000$8,524,000 or 130.40%43.11% from $8,581,000 at December 31, 2013 to $19,771,000 at December 31, 2014.2014 to $11,247,000 at December 31, 2015 The Bank joined the CDARS network in 2008, which allows it to offer over $50 million in FDIC insurance on a certificate of deposit.
The maturity distribution of certificates of deposit of $100,000 or more is as follows:
| (Actual Dollars in thousands) | 2014 | 2013 | 2015 | 2014 | ||||||||||||
| Less than 3 months | $ | 32,378 | $ | 14,360 | $ | 5,238 | $ | 32,378 | ||||||||
| 3 to 6 months | 6,915 | 5,485 | 12,478 | 6,915 | ||||||||||||
| 6 to 12 months | 7,439 | 15,219 | 8,008 | 7,439 | ||||||||||||
| 1 year to 5 years | 33,080 | 34,610 | 27,901 | 33,080 | ||||||||||||
| Total | $ | 79,812 | $ | 69,674 | $ | 53,625 | $ | 79,812 | ||||||||
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Deposits and Borrowings, continued
Non-deposit borrowings include repurchase agreements, federal funds purchased, and Federal Home Loan Bank (FHLB) borrowings, (both short term and long term) and subordinated debt.. Non-deposit borrowings are an important source of funding for the Bank. These sources assist in managing short and long term funding needs, often at rates that are more favorable than raising additional funds within the deposit portfolio.
Borrowings from the Federal Home Loan Bank are used to support the Bank’s lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various loan types in the4the loan portfolio. The Company borrowed $10,000,000$40,000,000 during 2014,2015, with maturities ranging from 5 to 10 years, to replace maturities and lock in lower rates. ThereThe Company borrowed $10,000,000 in 2014 and there were no new long term borrowings in 2013 or 2012.2013. Repayment of amortizing and fixed maturity loans through FHLB totaled $11,625,000$1,714,000 for the year. These loans carry an average rate of 2.33%1.86% at December 31, 2014. The subordinated debt was all redeemed and/or converted to Preferred stock by December 31. 2014.2015.
Contractual Obligations and Scheduled Payments (dollars in thousands)
| December 31, 2014 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||
| Less than | One Year Through | Three Years Through | More than | Less than | One Year Through | Three Years Through | More than | |||||||||||||||||||||||||||||||||
| One Year | Three Years | Five Years | Five Years | Total | One Year | Three Years | Five Years | Five Years | Total | |||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | $ | 4,358 | - | - | - | $ | 4,358 | $ | 3,995 | $ | - | $ | - | $ | - | $ | 3,995 | |||||||||||||||||||||||
| FHLB Short term advances | 10,000 | - | - | - | 10,000 | 20,000 | - | - | - | 20,000 | ||||||||||||||||||||||||||||||
| Federal Funds Purchased | - | - | - | - | - | 959 | - | - | - | 959 | ||||||||||||||||||||||||||||||
| FHLB long term advances | 500 | 1,500 | 3,500 | 4,375 | 9,875 | 3,929 | 12,857 | 20,357 | 11,018 | 48,161 | ||||||||||||||||||||||||||||||
| Subordinated Debt | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Total | $ | 14,858 | $ | 1,500 | $ | 3,500 | $ | 4,375 | $ | 24,233 | $ | 28,883 | $ | 12,857 | $ | 20,357 | $ | 11,018 | $ | 73,115 | ||||||||||||||||||||
See Note 11 (Short Term Debt) and Note 12 (Long Term Debt) to the Consolidated Financial Statements for a discussion of the rates, terms, and conversion features on these advances.
Stockholders’ Equity
Total stockholders' equity increased $23,657,000$5,152,000 or 43.70%6.62% in 2014. This increase includes a common stock raise of $12,000,000 and a new issuance of preferred stock which totaled $9,425,123. In addition, net2015. Net income totaled $5,801,609,$8,417,009, noncontrolling interest net income totaled $45,653,$164,575, other sales of common stock totaled $55,709,$146,418, changes in other comprehensive income decreased $1,401,498,$353,484, and capital was reduced by dividends ($2.2322.915 million), repurchases of common stock of $289,119 and minority interest distributions of $37,516.$18,260. As of December 31, 2014,2015, book value per common share was $21.20$22.38 compared to $21.56$20.77 as of December 31, 2013.2014. Dividends are paid to stockholders on a quarterly basis in uniform amounts unless unexpected fluctuations in net income indicate a change to this policy is needed.
Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity's investments, the more capital it is required to maintain. The Bank, as well as the Company, is required to maintain these minimum capital levels. TheIn March 2015 the Company implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two types ofprevious capital guidelines areof Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At December 31, 2014,2015, the Company had Common Equity Tier I capital of 16.09%12.46%, Tier I capital of 14.13% of risk weighted assets and combined Tier I and II capital of 17.35%15.38% of risk weighted assets. Regulatory minimums at this date were 6% and 8%10%, 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 Company 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%5% for this ratio, but can increase the minimum requirement based upon an institution's overall financial condition. At December 31, 2014,2015, the Company reported a leverage ratio of 12.88%12.18%. The Bank's leverage ratio was also substantially above the minimum.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Market Risk Management
Most of the Company’s net income is dependent on the Bank’s net interest income. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest bearing liabilities and interest earning assets. Fortunately the Company’s net interest margin increased .28%.13% in 20142015 following an increase of .10%.28% in 2013.2014. This increase can be attributed to the growth in the Dealer finance division and continued reduction in cost of funds, in addition to the matching of maturities of interest bearing liabilities to interest earning assets. Due to a slowing of the national economy and market turbulence related to the sub-prime mortgage lending crisis,In December 2015, the Federal Reserve began cutting short term interest rates in September 2007. The Federal Reserve has cutOpen Market Committee elected to raise the short term rates a total of 5.00%target .25% to a target of 0.25 to .25%..50% due to expanding economic activity.
Net interest income is also affected by changes in the mix of funding that supports earning assets. For example, higher levels of non-interest bearing demand deposits and leveraging earning assets by funding with stockholder’s equity would result in greater levels of net interest income than if most of the earning assets were funded with higher cost interest-bearing liabilities, such as certificates of deposit.
Liquid assets, which include cash and cash equivalents, federal funds sold, interest bearing deposits and short term investments averaged $27,510,000$17,022,000 for 2014.2015. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Bank's membership in the Federal Home Loan Bank has historically provided liquidity as the Bank borrows money that is repaid over a five to ten year period and uses the money to make fixed rate loans. The matching of the long-term receivables and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.
The following table depicts the Company’s interest rate sensitivity, as measured by the repricing of its interest sensitive assets and liabilities as of December 31, 2014.2015. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. The analysis indicates an asset sensitive one-year cumulative GAP position of 13.98%15.59% of total earning assets, compared to 15.35%13.98% in 2013.2014. Approximately 43.36%41.20% of rate sensitive assets and 40.91%36.48% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less than one year) increased $6,904,000$10,446,000 during the year, while total earning assets increased $48,547,000.$54,741,000. The increase is attributed to growth in Loans Held for Investment of $39,749,000$25,811,000 as well as Loans Held for Sale of $9,578,000.$44,424,000. Growth in the loan held for investment portfolio was concentrated in real estate secured loans, commercial and the Dealer Finance division. Short term liabilities increased $7,103,000,$10,596,000, while total interest bearing liabilities increased $6,597,000.$29,459,000. The increase in short term liabilities is due to an increase in short term debt of $10,000,000$20,000,000 to fund Loans Held for Sale. Due to the relatively flat yield curve, management has kept deposit rates low. These actions and the increase in total earning assets have resulted in a slightly lower one year cumulative gap than prior year.
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Market Risk Management, continued
The following GAP analysis shows the time frames as of December 31, 2014,2015, in which the Company’s assets and liabilities are subject to repricing:
| 1-90 | 91-365 | 1-5 | Over 5 | Not | 1-90 | 91-365 | 1-5 | Over 5 | Not | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Days | Days | Years | Years | Classified | Total | Days | Days | Years | Years | Classified | Total | ||||||||||||||||||||||||||||||||||||
| Rate Sensitive Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | $ | 110,491 | $ | 97,968 | $ | 300,595 | $ | 6,443 | $ | - | $ | 515,497 | $ | 122,425 | $ | 65,307 | $ | 327,026 | $ | 26,550 | $ | - | $ | 541,308 | ||||||||||||||||||||||||
| Loans held for sale | 13,382 | - | - | - | - | 13,382 | 57,806 | - | - | - | - | 57,806 | ||||||||||||||||||||||||||||||||||||
| Federal funds sold | 16,051 | - | - | - | - | 16,051 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Investment securities | 2,000 | 125 | 10,058 | 1,022 | 135 | 13,340 | 125 | 4,075 | 8,020 | 817 | 135 | 13,172 | ||||||||||||||||||||||||||||||||||||
| Credit Cards | 2,705 | - | - | - | - | 2,705 | 2,745 | - | - | - | - | 2,745 | ||||||||||||||||||||||||||||||||||||
| Interest bearing bank deposits | 911 | - | - | - | - | 911 | 1,596 | - | - | - | - | 1,596 | ||||||||||||||||||||||||||||||||||||
| Total | 145,540 | 98,093 | 310,653 | 7,465 | 135 | 561,886 | 184,697 | 69,382 | 335,046 | 27,367 | 135 | 616,627 | ||||||||||||||||||||||||||||||||||||
| Rate Sensitive Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing demand deposits | - | 31,689 | 69,166 | 18,739 | - | 119,594 | - | 29,783 | 62,379 | 16,298 | - | 108,460 | ||||||||||||||||||||||||||||||||||||
| Savings deposits | - | 12,850 | 38,549 | 12,850 | - | 64,249 | - | 18,076 | 54,230 | 18,077 | - | 90,383 | ||||||||||||||||||||||||||||||||||||
| Certificates of deposit $100,000 and over | 32,378 | 14,354 | 33,080 | - | - | 79,812 | 5,239 | 20,486 | 27,900 | - | - | 53,625 | ||||||||||||||||||||||||||||||||||||
| Other certificates of deposit | 20,460 | 38,482 | 56,709 | - | - | 115,651 | 14,683 | 40,827 | 51,905 | - | - | 107,415 | ||||||||||||||||||||||||||||||||||||
| Total Deposits | 52,838 | 97,375 | 197,504 | 31,589 | - | 379,306 | 19,922 | 109,172 | 196,414 | 34,375 | - | 359,883 | ||||||||||||||||||||||||||||||||||||
| Short-term debt | 14,358 | - | - | - | - | 14,358 | 24,954 | - | - | - | - | 24,954 | ||||||||||||||||||||||||||||||||||||
| Long-term debt | 125 | 375 | 5,000 | 4,375 | - | 9,875 | 982 | 2,947 | 33,214 | 11,018 | - | 48,161 | ||||||||||||||||||||||||||||||||||||
| Total | 67,321 | 97,750 | 202,504 | 35,964 | - | 403,539 | 45,858 | 112,119 | 229,628 | 45,393 | - | 432,998 | ||||||||||||||||||||||||||||||||||||
| Discrete Gap | 78,219 | 343 | 108,149 | (28,499 | ) | 135 | 158,347 | 138,839 | (42,737 | ) | 105,418 | (18,026 | ) | 135 | 183,629 | |||||||||||||||||||||||||||||||||
| Cumulative Gap | 78,219 | 78,562 | 186,711 | 158,212 | 158,347 | 138,839 | 96,102 | 201,520 | 183,494 | 183,629 | ||||||||||||||||||||||||||||||||||||||
| As a % of Earning Assets | 13.92 | % | 13.98 | % | 33.22 | % | 28.16 | % | 28.18 | % | 22.52 | % | 15.59 | % | 32.68 | % | 29.76 | % | 29.78 | % | ||||||||||||||||||||||||||||
| In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run off. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities on deposits which have no stated maturity dates were derived from guidance contained in FDICIA 305. |
36
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Quarterly Results (unaudited)
The table below lists the Company’s quarterly performance for the years ended December 31, 20142015 and 2013:2014:
| 2014 | 2015 | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fourth | Third | Second | First | Total | Fourth | Third | Second | First | Total | ||||||||||||||||||||||||||||||
| Interest and Dividend Income | $ | 6,934 | $ | 6,873 | $ | 6,674 | $ | 6,291 | $ | 26,772 | $ | 7,518 | $ | 7,451 | $ | 7,373 | $ | 7,011 | $ | 29,353 | ||||||||||||||||||||
| Interest Expense | 871 | 908 | 919 | 950 | 3,648 | 771 | 722 | 698 | 685 | 2,876 | ||||||||||||||||||||||||||||||
| Net Interest Income | 6,063 | 5,965 | 5,755 | 5,341 | 23,124 | 6,747 | 6,729 | 6,675 | 6,326 | 26,477 | ||||||||||||||||||||||||||||||
| Provision for Loan Losses | - | 750 | 750 | 750 | 2,250 | - | - | - | 300 | 300 | ||||||||||||||||||||||||||||||
| Net Interest Income after Provision, | ||||||||||||||||||||||||||||||||||||||||
| For Loan Losses | 6,063 | 5,215 | 5,005 | 4,591 | 20,874 | |||||||||||||||||||||||||||||||||||
Net Interest Income after Provision, For Loan Losses | 6,747 | 6,729 | 6,675 | 6,026 | 26,177 | |||||||||||||||||||||||||||||||||||
| Non-Interest Income | 780 | 995 | 934 | 776 | 3,485 | 813 | 797 | 783 | 719 | 112 | ||||||||||||||||||||||||||||||
| Non-Interest Expense | 4,194 | 3,923 | 3,801 | 3,738 | 15,656 | 4,614 | 4,494 | 4,496 | 4,382 | 17,986 | ||||||||||||||||||||||||||||||
| Income before taxes | 2,649 | 2,287 | 2,138 | 1,629 | 8,703 | 2,946 | 3,032 | 2,962 | 2,363 | 11,303 | ||||||||||||||||||||||||||||||
| Income Tax Expense | 1,057 | 726 | 642 | 476 | 2,901 | 766 | 842 | 786 | 492 | 2,886 | ||||||||||||||||||||||||||||||
| Net Income | $ | 1,592 | $ | 1,561 | $ | 1,496 | $ | 1,153 | $ | 5,802 | $ | 2,180 | $ | 2,190 | $ | 2,176 | $ | 1,871 | $ | 8,417 | ||||||||||||||||||||
| Net Income Per Average Common Share | $ | .43 | $ | .48 | $ | .45 | $ | .46 | $ | 1.82 | $ | .62 | $ | .63 | $ | .62 | $ | .53 | $ | 2.40 | ||||||||||||||||||||
| 2013 | 2014 | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fourth | Third | Second | First | Total | Fourth | Third | Second | First | Total | ||||||||||||||||||||||||||||||
| Interest and Dividend Income | $ | 6,400 | $ | 6,458 | $ | 6,509 | $ | 6,599 | $ | 25,966 | $ | 6,934 | $ | 6,873 | $ | 6,674 | $ | 6,291 | $ | 26,772 | ||||||||||||||||||||
| Interest Expense | 1,073 | 1,194 | 1,228 | 1,278 | 4,773 | 871 | 908 | 919 | 950 | 3,648 | ||||||||||||||||||||||||||||||
| Net Interest Income | 5,327 | 5,264 | 5,281 | 5,321 | 21,193 | 6,063 | 5,965 | 5,755 | 5,341 | 23,124 | ||||||||||||||||||||||||||||||
| Provision for Loan Losses | 750 | 1,000 | 1,125 | 900 | 3,775 | - | 750 | 750 | 750 | 2,250 | ||||||||||||||||||||||||||||||
| Net Interest Income after Provision, | ||||||||||||||||||||||||||||||||||||||||
| For Loan Losses | 4,577 | 4,264 | 4,156 | 4,421 | 17,418 | |||||||||||||||||||||||||||||||||||
Net Interest Income after Provision, For Loan Losses | 6,063 | 5,215 | 5,005 | 4,591 | 20,874 | |||||||||||||||||||||||||||||||||||
| Non-Interest Income | 939 | 1,026 | 1,094 | 866 | 3,925 | 780 | 789 | 738 | 570 | 2,877 | ||||||||||||||||||||||||||||||
| Non-Interest Expense | 3,890 | 3,662 | 3,565 | 3,603 | 14,720 | 4,194 | 3,923 | 3,801 | 3,738 | 15,656 | ||||||||||||||||||||||||||||||
| Income before taxes | 1,626 | 1,628 | 1,685 | 1,684 | 6,623 | 2,649 | 2,081 | 1,942 | 1,423 | 8,095 | ||||||||||||||||||||||||||||||
| Income Tax Expense | 442 | 445 | 552 | 468 | 1,907 | 1,057 | 520 | 446 | 270 | 2,293 | ||||||||||||||||||||||||||||||
| Net Income | $ | 1,184 | $ | 1,183 | $ | 1,133 | $ | 1,216 | $ | 4,716 | $ | 1,592 | $ | 1,561 | $ | 1,496 | $ | 1,153 | $ | 5,802 | ||||||||||||||||||||
| Net Income Per Average Common Share | $ | .47 | $ | .47 | $ | .45 | $ | .49 | $ | 1.88 | $ | .43 | $ | .48 | $ | .45 | $ | .46 | $ | 1.82 | ||||||||||||||||||||
37
Item 8. Financial Statements and Supplementary Data
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 20142015 and 20132014
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| Assets | ||||||||||||||||
| Cash and due from banks (notes 3 and 15) | $ | 6,241,016 | $ | 5,834,596 | $ | 6,923,065 | $ | 6,241,016 | ||||||||
| Money market funds | 910,527 | 708,049 | 1,596,382 | 910,527 | ||||||||||||
| Federal funds sold | 16,051,000 | 2,000 | - | 16,051,000 | ||||||||||||
| Cash and cash equivalents | 23,202,543 | 6,544,645 | 8,519,447 | 23,202,543 | ||||||||||||
| Securities: | ||||||||||||||||
| Held to maturity - fair value of $125,150 and $106,387 in 2014 and 2013, respectively (note 4) | 125,150 | 106,387 | ||||||||||||||
| Held to maturity - fair value of $125,043 and $125,150 in 2015 and 2014, respectively (note 4) | 125,043 | 125,150 | ||||||||||||||
| Available for sale (note 4) | 13,215,112 | 30,265,781 | 13,046,945 | 13,215,112 | ||||||||||||
| Other investments (note 4) | 8,964,640 | 8,113,600 | 12,157,115 | 8,964,640 | ||||||||||||
| Loans held for sale | 13,381,941 | 3,804,425 | 57,805,529 | 13,381,941 | ||||||||||||
| Loans held for investment (notes 5) | 518,201,574 | 478,453,008 | 544,053,477 | 518,201,574 | ||||||||||||
| Less allowance for loan losses (note 6) | (8,724,731 | ) | (8,184,376 | ) | ||||||||||||
| Net Loans Held for Investment | 509,476,843 | 470,268,632 | ||||||||||||||
| Less: allowance for loan losses (note 6) | (8,781,453 | ) | (8,724,731 | ) | ||||||||||||
| Net loans held for investment | 535,272,024 | 509,476,843 | ||||||||||||||
| Other real estate owned (note 9) | 3,507,153 | 2,628,418 | 2,127,685 | 3,507,153 | ||||||||||||
| Bank premises and equipment, net (note 8) | 6,458,254 | 6,525,057 | 7,542,078 | 6,458,254 | ||||||||||||
| Interest receivable | 1,674,846 | 1,498,112 | 1,708,617 | 1,674,846 | ||||||||||||
| Goodwill (note 23) | 2,669,517 | 2,669,517 | 2,669,517 | 2,669,517 | ||||||||||||
| Bank owned life insurance (note 24) | 12,581,210 | 12,121,772 | 13,046,111 | 12,581,210 | ||||||||||||
| Other assets | 10,050,893 | 8,241,821 | 11,336,735 | 10,050,893 | ||||||||||||
| Total Assets | $ | 605,308,102 | $ | 552,788,167 | $ | 665,356,846 | $ | 605,308,102 | ||||||||
| Liabilities | ||||||||||||||||
| Deposits: (note 10) | ||||||||||||||||
| Noninterest bearing | $ | 112,197,722 | $ | 92,396,921 | $ | 134,786,875 | $ | 112,197,722 | ||||||||
| Interest bearing: | ||||||||||||||||
| Demand | 93,693,468 | 92,562,273 | 81,491,760 | 93,693,468 | ||||||||||||
| Money market accounts | 25,900,061 | 24,894,002 | 26,967,837 | 25,900,061 | ||||||||||||
| Savings | 64,249,199 | 58,292,273 | 90,383,486 | 64,249,199 | ||||||||||||
| Time deposits over $100,000 | 79,812,757 | 69,673,722 | 53,624,554 | 79,812,757 | ||||||||||||
| All other time deposits | 115,651,329 | 126,330,053 | 107,415,244 | 115,651,329 | ||||||||||||
| Total Deposits | 491,504,536 | 464,149,244 | ||||||||||||||
| Total deposits | 494,669,756 | 491,504,536 | ||||||||||||||
| Short-term debt (note 11) | 14,358,492 | 3,423,078 | 24,954,051 | 14,358,492 | ||||||||||||
| Accrued liabilities | 11,771,671 | 9,383,610 | 14,621,913 | 11,771,671 | ||||||||||||
| Subordinated debt (note 12) | - | 10,191,000 | ||||||||||||||
| Long-term debt (note 12) | 9,875,000 | 11,500,000 | ||||||||||||||
| Federal Home Loan Bank debt (note 12) | 48,160,714 | 9,875,000 | ||||||||||||||
| Total Liabilities | 527,509,699 | 498,646,932 | 582,406,434 | 527,509,699 | ||||||||||||
| Commitments and Contingencies (notes 4 and 16) | ||||||||||||||||
| Commitments and contingencies (notes 4 and 16) | ||||||||||||||||
| Stockholders’ Equity (Note 22) | ||||||||||||||||
| Preferred Stock $5 par value, 400,000 shares authorized, issued and outstanding for 2014 | ||||||||||||||||
| and none in 2013 | 9,425,123 | - | ||||||||||||||
| Common stock $5 par value, 6,000,000 shares authorized, 3,291,766 and | ||||||||||||||||
| 2,511,735 shares issued and outstanding for 2014 and 2013, respectively | 16,458,830 | 12,558,675 | ||||||||||||||
| Preferred Stock $5 par value, 400,000 shares authorized, issued and outstanding for 2015 | 9,425,123 | 9,425,123 | ||||||||||||||
| Common stock $5 par value, 6,000,000 shares authorized, 3,285,404 and 3,291,766 | ||||||||||||||||
| shares issued and outstanding at December 31, 2015 and 2014, respectively | 16,427,020 | 16,458,830 | ||||||||||||||
| Additional paid in capital – common stock | 11,259,995 | 3,104,441 | 11,149,104 | 11,259,995 | ||||||||||||
| Retained earnings (note 19) | 42,554,421 | 38,984,724 | 48,056,300 | 42,554,421 | ||||||||||||
| Noncontrolling interest | 426,365 | 418,228 | 572,680 | 426,365 | ||||||||||||
| Accumulated other comprehensive income (loss) | (2,326,331 | ) | (924,833 | ) | ||||||||||||
| Accumulated other comprehensive loss | (2,679,815 | ) | (2,326,331 | ) | ||||||||||||
| Total Stockholders' Equity | 77,798,403 | 54,141,235 | 82,950,412 | 77,798,403 | ||||||||||||
| Total Liabilities and Stockholders' Equity | $ | 605,308,102 | $ | 552,788,167 | $ | 665,356,846 | $ | 605,308,102 | ||||||||
See accompanying Notes to the Consolidated Financial Statements.
38
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income
For the years ended 2015, 2014 2013 and 2012
| 2014 | 2013 | 2012 | ||||||||||
| Interest and Dividend Income | ||||||||||||
| Interest and fees on loans held for investment | $ | 26,210,609 | $ | 25,070,039 | $ | 25,247,444 | ||||||
| Interest on loans held for sale | 312,364 | 647,622 | 1,736,361 | |||||||||
| Interest on deposits and federal funds sold | 44,435 | 54,679 | 30,363 | |||||||||
| Interest on debt securities | 204,649 | 193,244 | 210,371 | |||||||||
| Total Interest and Dividend Income | 26,772,057 | 25,965,584 | 27,224,539 | |||||||||
| Interest Expense | ||||||||||||
| Interest on demand deposits | 663,618 | 791,245 | 1,194,567 | |||||||||
| Interest on savings deposits | 121,808 | 119,020 | 182,479 | |||||||||
| Interest on time deposits over $100,000 | 589,673 | 781,950 | 908,389 | |||||||||
| Interest on all other time deposits | 1,114,470 | 1,549,273 | 2,035,900 | |||||||||
| Total interest on deposits | 2,489,569 | 3,241,488 | 4,321,335 | |||||||||
| Interest on short-term debt | 9,437 | 23,956 | 51,380 | |||||||||
| Interest on long-term debt | 1,148,716 | 1,507,299 | 1,921,356 | |||||||||
| Total Interest Expense | 3,647,722 | 4,772,743 | 6,294,071 | |||||||||
| Net Interest Income | 23,124,335 | 21,192,841 | 20,930,468 | |||||||||
Provision for Loan losses (note 6) | 2,250,000 | 3,775,000 | 4,200,000 | |||||||||
| Net Interest Income After Provision for Loan Losses | 20,874,335 | 17,417,841 | 16,730,468 | |||||||||
| Noninterest Income | ||||||||||||
| Service charges on deposit accounts | 1,033,959 | 1,117,910 | 1,168,221 | |||||||||
| Insurance and other commissions | 635,543 | 868,464 | 868,965 | |||||||||
| Other operating income | 1,393,897 | 1,537,397 | 1,254,490 | |||||||||
| Income on bank owned life insurance | 466,936 | 508,658 | 481,681 | |||||||||
| Total Noninterest Income | 3,530,335 | 4,032,429 | 3,773,357 | |||||||||
| Noninterest Expenses | ||||||||||||
| Salaries | 6,898,400 | 6,524,515 | 5,823,204 | |||||||||
| Employee benefits (note 14) | 1,911,250 | 2,146,871 | 1,972,835 | |||||||||
| Occupancy expense | 621,855 | 606,935 | 553,655 | |||||||||
| Equipment expense | 589,919 | 547,948 | 549,564 | |||||||||
| FDIC insurance assessment | 690,000 | 704,103 | 706,673 | |||||||||
| Other real estate owned expenses | 407,219 | 214,832 | 303,802 | |||||||||
| Other operating expenses | 4,537,269 | 3,974,791 | 3,451,645 | |||||||||
| Total Noninterest Expenses | 15,655,912 | 14,719,995 | 13,361,378 | |||||||||
| Income before Income Taxes | 8,748,758 | 6,730,275 | 7,142,447 | |||||||||
Income Tax Expense (note 13) | 2,901,496 | 1,907,297 | 2,095,397 | |||||||||
| Consolidated Net Income – F & M Bank Corp. | 5,847,262 | 4,822,978 | 5,047,050 | |||||||||
| Net Income - Noncontrolling interest | (45,653 | ) | (107,185 | ) | (145,966 | ) | ||||||
| Net Income-F & M Bank Corp. | $ | 5,801,609 | $ | 4,715,793 | $ | 4,901,084 | ||||||
| Dividends paid/accumulated on preferred stock | 127,500 | - | - | |||||||||
| Net Income available to common stockholders | $ | 5,674,109 | $ | 4,715,793 | $ | 4,901,084 | ||||||
| Per Share Data | ||||||||||||
| Net Income - basic | 1.82 | 1.88 | 1.96 | |||||||||
| Net Income - diluted | 1.80 | 1.88 | 1.96 | |||||||||
| Cash Dividends | .68 | .68 | .64 | |||||||||
| Average Common Shares Outstanding – basic | 3,119,333 | 2,504,015 | 2,496,300 | |||||||||
| Average Common Shares Outstanding – diluted | 3,229,942 | 2,504,015 | 2,496,300 | |||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Interest and Dividend Income | ||||||||||||
| Interest and fees on loans held for investment | $ | 27,930,151 | $ | 26,210,609 | $ | 25,070,039 | ||||||
| Interest from loans held for sale | 1,099,419 | 312,364 | 647,622 | |||||||||
| Interest from deposits and federal funds sold | 20,990 | 44,435 | 54,679 | |||||||||
| Interest from debt securities | 302,117 | 204,649 | 193,244 | |||||||||
| Total interest and dividend Income | 29,352,677 | 26,772,057 | 25,965,584 | |||||||||
| Interest Expense | ||||||||||||
| Interest from demand deposits | 539,469 | 663,618 | 791,245 | |||||||||
| Interest from savings deposits | 212,186 | 121,808 | 119,020 | |||||||||
| Interest from time deposits over $100,000 | 485,285 | 589,673 | 781,950 | |||||||||
| Interest from all other time deposits | 916,219 | 1,114,470 | 1,549,273 | |||||||||
| Total interest on deposits | 2,153,159 | 2,489,569 | 3,241,488 | |||||||||
| Interest from short-term debt | 69,179 | 9,437 | 23,956 | |||||||||
| Interest from long-term debt | 653,271 | 1,148,716 | 1,507,299 | |||||||||
| Total interest expense | 2,875,609 | 3,647,722 | 4,772,743 | |||||||||
| Net Interest Income | 26,477,068 | 23,124,335 | 21,192,841 | |||||||||
Provision for Loan and Lease losses (note 6) | 300,000 | 2,250,000 | 3,775,000 | |||||||||
| Net Interest Income After Provision for Loan Losses | 26,177,068 | 20,874,335 | 17,417,841 | |||||||||
| Noninterest Income | ||||||||||||
| Service charges on deposit accounts | 963,459 | 1,033,959 | 1,117,910 | |||||||||
| Insurance and other commissions | 1,058,281 | 635,543 | 868,464 | |||||||||
| Other operating income | 1,401,162 | 1,393,897 | 1,537,397 | |||||||||
| Income from bank owned life insurance | 473,098 | 466,936 | 508,658 | |||||||||
| Low income housing partnership losses | (619,534 | ) | (608,360 | ) | (855,527 | ) | ||||||
| Total noninterest income | 3,276,466 | 2,921,975 | 3,176,902 | |||||||||
| Noninterest Expenses | ||||||||||||
| Salaries | 7,816,214 | 6,898,400 | 6,524,515 | |||||||||
| Employee benefits (note 14) | 2,239,258 | 1,911,250 | 2,146,871 | |||||||||
| Occupancy expense | 678,799 | 621,855 | 606,935 | |||||||||
| Equipment expense | 651,113 | 589,919 | 547,948 | |||||||||
| FDIC insurance assessment | 587,000 | 690,000 | 704,103 | |||||||||
| Other real estate owned expenses | 566,147 | 407,219 | 214,832 | |||||||||
| Other operating expenses | 5,447,347 | 4,537,269 | 3,974,791 | |||||||||
| Total noninterest expenses | 17,985,878 | 15,655,912 | 14,719,995 | |||||||||
| Income before income taxes | 11,467,656 | 8,140,398 | 5,874,748 | |||||||||
Income Tax Expense (note 13) | 2,886,072 | 2,293,136 | 1,051,770 | |||||||||
| Consolidated Net Income – F & M Bank Corp. | 8,581,584 | 5,847,262 | 4,822,978 | |||||||||
| Net Income attributed to Noncontrolling interest | (164,575 | ) | (45,653 | ) | (107,185 | ) | ||||||
| Net Income-F & M Bank Corp. | $ | 8,417,009 | $ | 5,801,609 | $ | 4,715,793 | ||||||
| Dividends paid/accumulated on preferred stock | 510,000 | 127,500 | - | |||||||||
| Net income available to common stockholders | $ | 7,907,009 | $ | 5,674,109 | $ | 4,715,793 | ||||||
| Per Common Share Data | ||||||||||||
| Net income - basic | 2.40 | 1.82 | 1.88 | |||||||||
| Net income - diluted | 2.25 | 1.80 | 1.88 | |||||||||
| Cash dividends on common stock | .73 | .68 | .68 | |||||||||
| Weighted average common shares outstanding – basic | 3,290,812 | 3,119,333 | 2,504,015 | |||||||||
| Weighted average common shares outstanding – diluted | 3,735,212 | 3,229,942 | 2,504,015 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
39
F & M BANK CORP.
Consolidated Statements of Comprehensive Income
For the years ended 2015, 2014 2013 and 20122013
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Net Income: | ||||||||||||||||||||||||
| Net income – F & M Bank Corp | $ | 5,801,609 | $ | 4,715,793 | $ | 4,901,084 | $ | 8,417,009 | $ | 5,801,609 | $ | 4,715,793 | ||||||||||||
| Net income attributable to noncontrolling interest | 45,653 | 107,185 | 145,966 | 164,575 | 45,653 | 107,185 | ||||||||||||||||||
| Total net income | 5,847,262 | 4,822,978 | 5,047,050 | 8,581,584 | 5,847,262 | 4,822,978 | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||
| Pension plan adjustment | (2,145,868 | ) | 2,314,274 | (557,609 | ) | (537,005 | ) | (2,145,868 | ) | 2,314,274 | ||||||||||||||
| Tax effect | 729,595 | (786,853 | ) | 189,587 | 182,582 | 729,595 | (786,853 | ) | ||||||||||||||||
| Pension plan adjustment, net of tax | (1,416,273 | ) | 1,527,421 | (368,022 | ) | (354,423 | ) | (1,416,273 | ) | 1,527,421 | ||||||||||||||
| Unrealized holding gains (losses) | ||||||||||||||||||||||||
| on available-for-sale securities | 22,386 | (75,127 | ) | 26,470 | 1,423 | 22,386 | (75,127 | ) | ||||||||||||||||
| Tax effect | (7,611 | ) | 25,543 | (9,000 | ) | (484 | ) | (7,611 | ) | 25,543 | ||||||||||||||
| Unrealized holding gain (losses), net of tax | 14,775 | (49,584 | ) | 17,470 | 939 | 14,775 | (49,584 | ) | ||||||||||||||||
| Other comprehensive income | (353,484 | ) | (1,401,498 | ) | 1,477,837 | |||||||||||||||||||
| Total comprehensive income | $ | 4,445,764 | $ | 6,300,815 | $ | 4,696,498 | $ | 8,228,100 | $ | 4,445,764 | $ | 6,300,815 | ||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
40
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2015, 2014 2013 and 20122013
| Accumulated | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Additional Paid in | Retained | Noncontrolling | Income | Preferred | Common | Additional Paid in | Retained | Noncontrolling | Income | ||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Interest | (Loss) | Total | Stock | Stock | Capital | Earnings | Interest | (Loss) | Total | ||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2011 | $ | - | $ | 12,463,580 | $ | 2,080,691 | $ | 32,671,401 | $ | 216,165 | $ | (2,052,118 | ) | $ | 46,179,719 | ||||||||||||||||||||||||||||||||||||
| Net income | 4,901,084 | 145,966 | 5,047,050 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (350,552 | ) | (350,552 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | (1,597,673 | ) | (1,597,673 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued (6,828 shares) | - | 34,140 | 71,276 | - | - | - | 105,416 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2012 | $ | - | $ | 12,497,720 | $ | 2,951,967 | $ | 35,974,812 | $ | 362,131 | $ | (2,402,670 | ) | $ | 49,383,960 | $ | - | $ | 12,497,720 | $ | 2,951,967 | $ | 35,974,812 | $ | 362,131 | $ | (2,402,670 | ) | $ | 49,383,960 | |||||||||||||||||||||
| Net income | 4,715,793 | 107,185 | 4,822,978 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income consolidated | 4,715,793 | 107,185 | 4,822,978 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 1,477,837 | 1,477,837 | 1,477,837 | 1,477,837 | |||||||||||||||||||||||||||||||||||||||||||||||
| Minority Interest Contributed Capital (Distributions) | (51,088 | ) | (51,088 | ) | (51,088 | ) | (51,088 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | (1,705,881 | ) | (1,705,881 | ) | (1,705,881 | ) | (1,705,881 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Stock issued (12,141 shares) | 60,955 | 152,474 | - | - | - | 213,429 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued (12,141 shares) | 60,955 | 152,474 | - | - | - | 213,429 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2013 | $ | - | $ | 12,558,675 | $ | 3,104,441 | $ | 38,984,724 | $ | 418,228 | $ | (924,833 | ) | $ | 54,141,235 | $ | - | $ | 12,558,675 | $ | 3,104,441 | $ | 38,984,724 | $ | 418,228 | $ | (924,833 | ) | $ | 54,141,235 | |||||||||||||||||||||
| Net income | 5,801,609 | 45,653 | 5,847,262 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income consolidated | 5,801,609 | 45,653 | 5,847,262 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (1,401,498 | ) | (1,401,498 | ) | (1,401,498 | ) | (1,401,498 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Minority Interest Contributed Capital (Distributions) | (37,516 | ) | (37,516 | ) | (37,516 | ) | (37,516 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | (127,500 | ) | (127,500 | ) | (127,500 | ) | (127,500 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | (2,104,412 | ) | (2,104,412 | ) | (2,104,412 | ) | (2,104,412 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued (400,000 shares) | 9,425,123 | 9,425,123 | 9,425,123 | 9,425,123 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock issued (780,031 shares) | - | 3,900,155 | 8,155,554 | - | - | - | 12,055,709 | - | 3,900,155 | 8,155,554 | - | - | - | 12,055,709 | |||||||||||||||||||||||||||||||||||||
| Balance December 31, 2014 | $ | 9,425,123 | $ | 16,458,830 | $ | 11,259,995 | $ | 42,554,421 | $ | 426,365 | $ | (2,326,331 | ) | $ | 77,798,403 | $ | 9,425,123 | $ | 16,458,830 | $ | 11,259,995 | $ | 42,554,421 | $ | 426,365 | $ | (2,326,331 | ) | $ | 77,798,403 | |||||||||||||||||||||
| Net income consolidated | 8,417,009 | 164,575 | 8,581,584 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (353,484 | ) | (353,484 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Minority Interest Distribution | (18,260 | ) | (18,260 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | (510,000 | ) | (510,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | (2,405,130 | ) | (2,405,130 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased (13,277 shares) | (66,390 | ) | (222,729 | ) | (289,119 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock issued (6,916 shares) | 34,580 | 111,838 | - | - | - | 146,418 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2015 | $ | 9,425,123 | $ | 16,427,020 | $ | 11,149,104 | $ | 48,056,300 | $ | 572,680 | $ | (2,679,815 | ) | $ | 82,950,412 | ||||||||||||||||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
41
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 2013 and 20122013
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||||
| Net income | $ | 5,801,609 | $ | 4,715,793 | $ | 4,901,084 | $ | 8,417,009 | $ | 5,801,609 | $ | 4,715,793 | ||||||||||
| Adjustments to reconcile net income to net cash | ||||||||||||||||||||||
| provided by (used in) operating activities: | ||||||||||||||||||||||
| Depreciation | 612,116 | 581,625 | 597,920 | 709,237 | 612,116 | 581,625 | ||||||||||||||||
| Amortization (Accretion) of securities | 76,057 | 45,416 | 74,190 | |||||||||||||||||||
| Amortization of securities | 147,407 | 76,057 | 45,416 | |||||||||||||||||||
| Sale of loans held for sale originated | 56,210,640 | 79,778,381 | 76,622,865 | 75,364,878 | 56,210,640 | 79,778,381 | ||||||||||||||||
| Loans held for sale originated | (56,044,669 | (71,169,362 | ) | (81,529,577 | ) | (77,151,936 | ) | (56,044,669 | ) | (71,169,362 | ) | |||||||||||
| Provision for loan losses | 2,250,000 | 3,775,000 | 4,200,000 | 300,000 | 2,250,000 | 3,775,000 | ||||||||||||||||
| Benefit (expense) for deferred taxes | (515,538 | (568,858 | ) | 494,733 | 340,941 | (515,538 | ) | (568,858 | ) | |||||||||||||
| (Increase) decrease in interest receivable | (176,734 | 204,735 | 113,014 | (33,771 | ) | (176,734 | ) | 204,735 | ||||||||||||||
| (Increase) decrease in other assets | (1,473,634 | (967,516 | ) | 1,729,648 | ||||||||||||||||||
| Increase (decrease) in accrued expenses | 1,159,913 | 1,731,973 | 528,576 | |||||||||||||||||||
| Increase in other assets | (457,010 | ) | (1,473,634 | ) | (967,516 | ) | ||||||||||||||||
| Increase in accrued expenses | 1,480,074 | 1,159,913 | 1,731,973 | |||||||||||||||||||
| Amortization of limited partnership investments | 608,360 | 581,737 | 550,989 | 627,326 | 608,360 | 581,737 | ||||||||||||||||
| Loss on sale and valuation adjustments of other real estate owned | 318,714 | 97,155 | 200,865 | 488,583 | 318,714 | 97,155 | ||||||||||||||||
| Income from life insurance investment | (466,936 | (508,658 | ) | (481,681 | ) | (473,098 | ) | (466,936 | ) | (508,658 | ) | |||||||||||
| Net Cash Provided by Operating Activities | 8,359,898 | 18,297,421 | 8,002,626 | 9,759,640 | 8,359,898 | 18,297,421 | ||||||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||||||||||
| (Increase) decrease in interest bearing bank deposits | - | 248,000 | (95,585 | ) | ||||||||||||||||||
| Purchase of bank owned life insurance | - | - | (4,063,687 | ) | ||||||||||||||||||
| Decrease in interest bearing bank deposits | - | - | 248,000 | |||||||||||||||||||
| Proceeds from maturities of securities available for sale | 27,495,319 | 10,712,508 | 20,647,760 | 8,242,751 | 27,495,319 | 10,712,508 | ||||||||||||||||
| Proceeds from maturities of securities held to maturity | 106,000 | - | 106,000 | |||||||||||||||||||
| Purchases of securities available for sale | (11,957,235 | (31,093,384 | ) | (17,946,019 | ) | (12,040,262 | ) | (11,957,235 | ) | (31,093,384 | ) | |||||||||||
| Purchases of securities held to maturity | (125,250 | - | (125,250 | ) | ||||||||||||||||||
| Net increase in loans held for investment | (43,642,033 | (17,149,156 | ) | (18,806,297 | ) | (25,892,052 | ) | (43,642,033 | ) | (17,149,156 | ) | |||||||||||
| Net (increase) decrease in loans held for sale participations | (9,743,487 | 64,793,073 | (11,756,993 | ) | (42,636,530 | ) | (9,743,487 | ) | 64,793,073 | |||||||||||||
| Net purchase of property and equipment | (545,313 | (661,621 | ) | (565,898 | ) | (1,793,061 | ) | (545,313 | ) | (661,621 | ) | |||||||||||
| Proceeds from sale of other real estate owned | 986,373 | 928,897 | 1,564,272 | 687,756 | 986,373 | 928,897 | ||||||||||||||||
| Net Cash Provided by (Used in) Investing Activities | (37,425,626 | 27,778,317 | (31,022,447 | ) | (73,431,398 | ) | (37,425,626 | ) | 27,778,317 | |||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||||||||||
| Net change in demand and savings deposits | 27,894,981 | 15,867,944 | 19,689,196 | 37,589,508 | 27,894,981 | 15,867,944 | ||||||||||||||||
| Net change in time deposits | (539,689 | (5,514,239 | ) | (1,840,280 | ) | (34,424,288 | ) | (539,689 | ) | (5,514,239 | ) | |||||||||||
| Net change in short-term debt | 10,935,414 | (31,174,274 | ) | 16,058,389 | 10,595,559 | 10,935,414 | (31,174,274 | ) | ||||||||||||||
| Dividends paid in cash | (2,231,912 | (1,705,881 | ) | (1,597,673 | ) | (2,915,130 | ) | (2,231,912 | ) | (1,705,881 | ) | |||||||||||
| Proceeds from long-term debt | 10,000,000 | - | - | 40,000,000 | 10,000,000 | - | ||||||||||||||||
| Proceeds from issuance of preferred stock | 6,831,123 | - | - | - | 6,831,123 | - | ||||||||||||||||
| Proceeds from issuance of common stock | 12,055,709 | 213,429 | 105,416 | 146,418 | 12,055,709 | 213,429 | ||||||||||||||||
| Repurchase of common stock | (289,119 | ) | ||||||||||||||||||||
| Repayments of long-term debt | (19,222,000 | (26,214,286 | ) | (9,392,857 | ) | (1,714,286 | ) | (19,222,000 | ) | (26,214,286 | ) | |||||||||||
| Net Cash Provided by (Used in) Financing Activities | 45,723,626 | (48,527,307 | ) | 23,022,191 | 48,988,662 | 45,723,626 | (48,527,307 | ) | ||||||||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 16,657,898 | (2,451,569 | ) | 2,370 | (14,683,096 | ) | 16,657,898 | (2,451,569 | ) | |||||||||||||
| Cash and Cash Equivalents, Beginning of Year | 6,544,645 | 8,996,214 | 8,993,844 | 23,202,543 | 6,544,645 | 8,996,214 | ||||||||||||||||
| Cash and Cash Equivalents, End of Year | $ | 23,202,543 | $ | 6,544,645 | $ | 8,996,214 | $ | 8,519,447 | $ | 23,202,543 | $ | 6,544,645 | ||||||||||
| Supplemental Disclosure: | ||||||||||||||||||||||
| Cash paid for: | ||||||||||||||||||||||
| Interest expense | $ | 3,703,190 | $ | 6,500,592 | $ | 6,245,244 | $ | 2,854,119 | $ | 3,703,190 | $ | 6,500,592 | ||||||||||
| Income taxes | 1,607,000 | 800,000 | 1,700,000 | 1,500,000 | 1,607,000 | 800,000 | ||||||||||||||||
| Transfers from loans to other real estate owned | 2,914,958 | 1,337,890 | 1,972,032 | 125,000 | 2,914,958 | 1,337,890 | ||||||||||||||||
| Noncash exchange of other real estate owned | (780,097 | (569,245 | ) | (567,171 | ) | |||||||||||||||||
| Loans originated for the sale of other real estate owned | (328,129 | ) | (780,097 | ) | (569,245 | ) | ||||||||||||||||
| Conversion of subordinated debt to preferred stock | 2,594,000 | - | - | - | 2,594,000 | |||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
42
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 1 NATURE OF OPERATIONS:
F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers located mainly in Rockingham, Shenandoah, Page and PageAugusta Counties in Virginia, and the adjacent countiescounty of Augusta, Virginia and Hardy, West Virginia. Services are provided at nineeleven branch offices, a Dealer Finance Division and a loan production office. The Company offers insurance, mortgage lending and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc, and VBS Mortgage, LLC.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and to accepted practice within the banking industry.
The following is a summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Farmers and Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc. and VBS Mortgage, LLC, (net of minority interest). Significant inter-company accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in those statements; actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, which is sensitive to changes in local and national economic conditions, and the other than temporary impairment of investments in the investment portfolio.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits at other financial institutions whose initial maturity is ninety days or less and Federal funds sold.
Investment Securities
Management reviews the securities portfolio and classifies all securities as either held to maturity or available for sale at the date of acquisition. Securities that the Company has both the positive intent and ability to hold to maturity (at time of purchase) are classified as held to maturity securities. All other securities are classified as available for sale. Securities held to maturity are carried at historical cost and adjusted for amortization of premiums and accretion of discounts, using the effective interest method. Securities available for sale are carried at fair value with any valuation adjustments reported, net of deferred taxes, as a part of other accumulated comprehensive income.
Interest, amortization of premiums and accretion of discounts on securities are reported as interest income using the effective interest method. Gains (losses) realized on sales and calls of securities are determined on the specific identification method.
Accounting for Historic Rehabilitation and Low Income Housing Partnerships
The Company periodically invests in low income housing partnerships whose primary benefit is the distribution of federal income tax credits to partners. The Company recognizes these benefits and the cost of the investments over the life of the partnership (usually 15 years). In addition, state and federal historic rehabilitation credits are generated from some of the partnerships. Amortization of these investments is prorated based on the amount of benefits received in each year to the total estimated benefits over the life of the projects. All benefits have been shown as a partThe effective yield method is used to record the income statement effects of income tax expense.these investments.
43
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes
Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes.
Loans Held for Investment
Loans are carried on the balance sheet net of any unearned interest and the allowance for loan losses. Interest income on loans is determined using the effective interest method on the daily amount of principal outstanding except where serious doubt exists as to collectability of the loan, in which case the accrual of income is discontinued.
Loans Held for Sale
These loans consists of fixed rate loans made through its subsidiary, VBS Mortgage and loans purchased from Gateway Savings Bank, Oakland, CA and NorthPointeNorthpointe Bank, Grand Rapids, MI.
VBS Mortgage originates conforming mortgage loans for sale in the secondary market. The bank (VBS) gives the customer a rate commitment at the time the rate is locked. The bank then immediately gets a rate lock-in from the investor that will be buying the loan upon closing. Both the rate lock and the purchase commitments (which is a blanket agreement) are best effort agreements, subject to final approval and underwriting. Because either party can walk away from these agreements prior to closing, neither the rate lock commitment nor the purchase commitment is considered a derivative contract. The bank provides a warehouse line for the Mortgage subsidiary after closing, until the loan is purchased by the investor. The average time on the line is two or three weeks. Although VBS does have a line, loans are actually assigned to the bank at closing and then reassigned prior to purchase from investor. There were $2.6$3.6 million of these mortgage loans held for resale at the end of the year. All of these loans are under contract to deliver to an investor as a specified price. Because of this and the short holding period, these loans are carried at par and a gain is recorded at transfer to the investor. The effect of not marking these loans to market is not material to the current year financial statements.
Gateway Savings Bank (“Gateway”) loans are originated by a network of mortgage loan originators throughout the United States. A take outtakeout commitment is in place at the time the loans are purchased. The Gateway arrangement has been used since 2003 as a higher yielding alternative to federal funds sold or investment securities. These loans are short-term, residential real estate loans that have an average life in our portfolio of approximately two weeks. The Bank holds these loans during the period of time between loan closing and when the loan is paid off by the ultimate secondary market purchaser. Gateway Savings Bank discontinued the loan participation program in December of 2014 and the Company became a participant with NorthPointeNorthpointe Bank which obtained the Gateway Savings Bank program and incorporated it into their existing program. The NorthPointeNorthpointe Bank program and procedures are the same as described above for Gateway.
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectability of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
44
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Allowance for Loan and Lease Losses, continued
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Other Real Estate Owned (OREO)
As of December 31, 2014,2015, the Bank had $3.5$2.1 million classified as OREO on the balance sheet, compared to $2.63$3.5 million as of December 31, 2013.2014. The table in Note 9 reflects the OREO activity in 2014.2015. The Company’s policy is to carry OREO on its balance sheet at the lower of cost or market. Values are reviewed periodically and additional losses are recognized if warranted based on market conditions.
Nonaccrual Loans
Loans are placed on nonaccrual status when they become ninety days or more past due, unless there is an expectation that the loan will either be brought current or paid in full in a reasonable period of time.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over the estimated useful lives of the assets on a combination of the straight-line and accelerated methods. The ranges of the useful lives of the premises and equipment are as follows:
| Buildings and Improvements | 10 - 40 years |
Furniture and Fixtures | 5 - 20 years |
Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and losses on dispositions are reflected in other income or expense.
Goodwill
The Company accounts for goodwill and intangible assets under ASC 805, “Business Combination” and ASC 350 “Intangibles”, respectively.
Goodwill totaled $2,669,517 at December 31, 2015 and 2014. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2015, 2014 or 2013.
45
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Pension Plans
The Bank has a qualified noncontributory defined benefit pension plan which covers all full time employees hired prior to April 1, 2012. The benefits are primarily based on years of service and earnings. On December 31, 2006 theThe Company adoptedcomplies with ASC 325-960 “Defined Benefit Pension Plans” (formerly SFAS No. 158), which was issued in September of 2006 to requirerequires recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under ASC 325-960, gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Total advertising costs included in other operating expenses for 2015, 2014, and 2013 were $401,138, $317,780, and 2012 were $317,780, $278,555, and $251,258, respectively.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities and changes in pension plan funding status, such as unrealized gains and losses on available-for-sale securities and gains or losses on certain derivative contracts, are reported as a separate component of the equity section of the balance sheet. Such items, along with operating net income, are components of comprehensive income.
| For the year ended | ||||
| December 31, 2014 | ||||
| Earnings Available to Common Stockholders: | ||||
| Net Income | $ | 5,801,609 | ||
| Preferred Stock Dividends | 127,500 | |||
| Net Income Available to Common Stockolders | $ | 5,674,109 | ||
| Year ending December 31, 2014 | ||||||||||||
| Income | Shares | Per Share Amounts | ||||||||||
| Basic EPS | $ | 5,674,109 | 3,119,333 | $ | 1.82 | |||||||
| Effect of Dilutive Securities: | ||||||||||||
| Convertible Preferred Stock | 127,500 | 110,609 | (0.02 | ) | ||||||||
| Diluted EPS | $ | 5,801,609 | 3,229,942 | $ | 1.80 | |||||||
Derivative Financial Instruments and Change in Accounting Principle
On January 1, 2001, the Company adopted ASC 815 “Derivative and Hedging Investments” (formerly SFAS No. 133). This statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value.
Under ASC 815, the gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedging item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in their fair values due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair value of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at offsetting changes in the fair value of the hedging items due to the designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed out and settled or classified as a trading activity.
46
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 2 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 common share calculation.
Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.
The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:
| For the year ended | ||||||||
| December 31, 2015 | December 31, 2014 | |||||||
| Earnings Available to Common Stockholders: | ||||||||
| Net Income | $ | 8,581,584 | $ | 5,847,262 | ||||
| Minority interest | $ | 164,575 | $ | 45,653 | ||||
| Preferred Stock Dividends | 510,000 | 127,500 | ||||||
| Net Income Available to Common Stockholders | $ | 7,907,009 | $ | 5,674,109 | ||||
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated:
| Year ended | ||||||||||||||||||||||||
| 12/31/2015 | 12/31/2014 | |||||||||||||||||||||||
| Income | Shares | Per Share Amounts | Income | Shares | Per Share Amounts | |||||||||||||||||||
| Basic EPS | $ | 7,907,009 | 3,735,212 | $ | 2.40 | $ | 5,674,109 | 3,229,942 | $ | 1.82 | ||||||||||||||
| Effect of Dilutive Securities: | ||||||||||||||||||||||||
| Convertible Preferred Stock | 510,000 | 444,400 | (0.15 | ) | 127,500 | 110,631 | (0.02 | ) | ||||||||||||||||
| Diluted EPS | $ | 8,417,009 | 3,290,812 | $ | 2.25 | $ | 5,801,609 | 3,119,311 | $ | 1.80 | ||||||||||||||
There were no dilutive securities for the years ended December 31, 2013.
47
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2015, the FASB issued guidance which provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (“ASC”), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements. The Company does not expect these amendments to have a material effect on its financial statements.
48
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements, continued
In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB issued new guidance to change accounting for leases and that will generally require most leases to be recognized on the balance sheet. The new lease standard only contains targeted changes to accounting by lessors, however, lessees will be required to recognize most leases in their balance sheets as lease liabilities for lease payments and right-of-use assets representing the lessee’s rights to use the underlying assets for the lease terms for lease arrangements longer than 12 months. Under this approach, a lessee will account for most existing capital/finance leases as Type A leases and most existing operating leases as Type B leases. Type A and Type B leases have unique accounting and disclosure requirements. Existing sale-leaseback guidance, including guidance for real estate, will be replaced with a new model applicable to both lessees and lessors. The new guidance will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting.
Standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 3 CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $25,000 for the years ended December 31, 20142015 and 2013.2014.
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair value of securities held to maturity are as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| December 31, 2014 | ||||||||||||||||
| U. S. Treasuries | $ | 125,150 | $ | - | $ | - | $ | 125,150 | ||||||||
December 31, 2013 | ||||||||||||||||
U. S. Treasuries | $ | 106,387 | $ | - | $ | - | $ | 106,387 | ||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| December 31, 2015 | ||||||||||||||||
| U. S. Treasuries | $ | 125,043 | $ | - | $ | - | $ | 125,043 | ||||||||
| December 31, 2014 | ||||||||||||||||
| U. S. Treasuries | $ | 125,150 | $ | - | $ | - | $ | 125,150 | ||||||||
The amortized cost and fair value of securities available for sale are as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | 4,015,440 | $ | 5,840 | $ | - | $ | 4,021,280 | ||||||||||||||||||||||||
| Government sponsored enterprises | 8,080,540 | 3,780 | 10,600 | 8,073,720 | ||||||||||||||||||||||||||||
| Mortgage-backed obligations of federal agencies | 810,802 | 6,143 | - | 816,945 | ||||||||||||||||||||||||||||
| Marketable equities | 135,000 | - | - | 135,000 | ||||||||||||||||||||||||||||
| Total Securities Available for Sale | $ | 13,041,782 | $ | 15,763 | $ | 10,600 | $ | 13,046,945 | ||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | 4,025,740 | $ | - | $ | 6,100 | $ | 4,019,640 | $ | 4,025,740 | $ | - | $ | 6,100 | $ | 4,019,640 | ||||||||||||||||
| Government sponsored enterprises | 8,039,540 | 8,940 | 9,880 | 8,038,600 | 8,039,540 | 8,940 | 9,880 | 8,038,600 | ||||||||||||||||||||||||
| Mortgage-backed obligations of federal agencies | 1,011,092 | 10,780 | - | 1,021,872 | 1,011,092 | 10,780 | - | 1,021,872 | ||||||||||||||||||||||||
| Marketable equities | 135,000 | - | - | 135,000 | 135,000 | - | - | 135,000 | ||||||||||||||||||||||||
| Total Securities Available for Sale | $ | 13,211,372 | $ | 19,720 | $ | 15,980 | $ | 13,215,112 | $ | 13,211,372 | $ | 19,720 | $ | 15,980 | $ | 13,215,112 | ||||||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
| Government sponsored enterprises | 29,075,893 | 11,460 | 22,253 | 29,065,100 | ||||||||||||||||||||||||||||
| Mortgage-backed obligations of federal agencies | 1,208,533 | - | 7,852 | 1,200,681 | ||||||||||||||||||||||||||||
| Marketable equities | - | - | - | - | ||||||||||||||||||||||||||||
| Total Securities Available for Sale | $ | 30,284,426 | $ | 11,460 | $ | 30,105 | $ | 30,265,781 | ||||||||||||||||||||||||
The amortized cost and fair value of securities at December 31, 2014,2015, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Securities Held to Maturity | Securities Available for Sale | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due in one year or less | $ | 125,150 | $ | 125,150 | $ | 2,000,000 | $ | 1,999,980 | ||||||||
| Due after one year through five years | - | - | 10,065,280 | 10,058,260 | ||||||||||||
Due after five years | - | - | 1,146,092 | 1,156,872 | ||||||||||||
Total | 125,150 | 125,150 | 13,211,372 | 13,215,112 | ||||||||||||
| Securities Held to Maturity | Securities Available for Sale | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Due in one year or less | $ | 125,043 | $ | 125,043 | $ | 4,015,440 | $ | 4,021,280 | ||||||||
| Due after one year through five years | - | - | 8,080,540 | 8,073,720 | ||||||||||||
| Due after five years | - | - | 945,802 | 951,945 | ||||||||||||
| Total | $ | 125,043 | $ | 125,043 | $ | 13,041,782 | $ | 13,046,945 | ||||||||
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
There were no sales of debt or equity securities during 2015, 2014 2013 or 20122013.
The carrying value (which approximates fair value) of securities pledged by the Bank to secure deposits and for other purposes amounted to $12,912,000 at December 31, 2015 and $13,080,000 at December 31, 2014 and $10,255,000 at December 31, 2013.2014.
Other investments consist of investments in eighteennineteen low-income housing and historic equity partnerships (carrying basis of $6,340,000)$7,213,000), stock in the Federal Home Loan Bank (carrying basis of $1,392,000)$3,441,000), and various other investments (carrying basis of $1,233,000)$1,503,000). The interests in the low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The market values of these securities are estimated to approximate their carrying value as of December 31, 2014.2015. At December 31, 2014,2015, the Company was committed to invest an additional $3,679,541$4,358,041 in seveneight low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in accrued liabilities on the balance sheet.
The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio includes fixed rate bonds, whose prices move inversely with rates and variable rate bonds. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business behind the instrument. Bonds deteriorate in value due to credit quality of the individual issuer and changes in market conditions. These losses relate to market conditions and the timing of purchases.
A summary of these losses (in thousands) is as follows:
| Less than 12 Months | More than 12 Months | Total | Less than 12 Months | More than 12 Months | Total | |||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||
| Government sponsored enterprises | 6,056 | (11 | ) | - | - | 6,056 | (11 | ) | ||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed obligations | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,056 | $ | (11 | ) | $ | - | $ | - | $ | 6,056 | $ | (11 | ) | ||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||||||||
| 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | 4,020 | $ | (6 | ) | $ | - | $ | - | $ | 4,020 | $ | (6 | ) | $ | 4,020 | $ | (6 | ) | $ | - | $ | - | $ | 4,020 | $ | (6 | ) | ||||||||||||||||||||
| Government sponsored enterprises | 2,004 | (2 | ) | 1,991 | (8 | ) | 3,995 | (10 | ) | 2,004 | (2 | ) | 1,991 | (8 | ) | 3,995 | (10 | ) | ||||||||||||||||||||||||||||||
| Mortgage-backed obligations | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Total | $ | 6,024 | $ | (8 | ) | $ | 1,991 | $ | (8 | ) | $ | 8,015 | $ | (16 | ) | $ | 6,024 | $ | (8 | ) | $ | 1,991 | $ | (8 | ) | $ | 8,015 | $ | (16 | ) | ||||||||||||||||||
| 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
| U. S. Treasuries | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||
| Government sponsored enterprises | 4,984 | (22 | ) | - | - | 4,984 | (22 | ) | ||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed obligations | 1,191 | (8 | ) | - | - | 1,191 | (8 | ) | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,175 | $ | (30 | ) | $ | - | $ | - | $ | 6,175 | $ | (30 | ) | ||||||||||||||||||||||||||||||||||
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company did not recognize any other-than-temporary impairment losses in 2015, 2014 2013 or 2012.2013.
NOTE 5 LOANS:
Loans held for investment as of December 31:
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| Construction/Land Development | $ | 67,180,467 | $ | 68,512,341 | $ | 69,759,401 | $ | 67,180,467 | ||||||||
| Farmland | 12,507,446 | 13,197,398 | 13,377,740 | 12,507,446 | ||||||||||||
| Real Estate | 162,248,606 | 154,628,068 | 166,586,877 | 162,248,606 | ||||||||||||
| Multi-Family | 11,775,205 | 11,797,010 | 7,558,460 | 11,775,205 | ||||||||||||
| Commercial Real Estate | 122,305,417 | 113,415,234 | 128,031,686 | 122,305,417 | ||||||||||||
| Home Equity – closed end | 9,393,805 | 10,228,264 | 9,135,433 | 9,393,805 | ||||||||||||
| Home Equity – open end | 52,181,679 | 47,357,787 | 56,599,337 | 52,181,679 | ||||||||||||
| Commercial & Industrial – Non-Real Estate | 28,160,584 | 25,903,011 | 27,954,171 | 28,160,584 | ||||||||||||
| Consumer | 9,109,994 | 10,162,457 | 8,219,391 | 9,109,994 | ||||||||||||
| Credit cards | 2,705,285 | 2,679,718 | ||||||||||||||
| Dealer Finance | 40,633,086 | 20,571,720 | 54,085,791 | 40,633,086 | ||||||||||||
| Credit Cards | 2,745,190 | 2,745,190 | ||||||||||||||
| Total | $ | 518,201,574 | $ | 478,453,008 | $ | 544,053,477 | $ | 518,201,574 | ||||||||
The Company has pledged loans as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $183,483,000$182,312,000 and $164,605,000$183,483,000 as of December 31, 20142015 and 2013,2014, respectively. The Company maintains a blanket lien on its entire residential real estate portfolio and also began pledges commercial and home equity loans.
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 5 LOANS (CONTINUED):
The following is a summary of information pertaining to impaired loans (in thousands):
| Unpaid | Average | Interest | Unpaid | Average | Interest | |||||||||||||||||||||||||||||||||||
| December 31, 2014 | Recorded | Principal | Related | Recorded | Income | |||||||||||||||||||||||||||||||||||
| December 31, 2015 | Recorded | Principal | Related | Recorded | Income | |||||||||||||||||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | ||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | $ | 4,982 | $ | 5,402 | $ | - | $ | 5,412 | $ | 251 | $ | 1,361 | $ | 1,499 | $ | - | $ | 3,622 | $ | 73 | ||||||||||||||||||||
| Farmland | - | - | - | 1,163 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Real Estate | 141 | 141 | - | 85 | 5 | 1,097 | 1,097 | - | 734 | 58 | ||||||||||||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 1,159 | 1,459 | - | 1,450 | 66 | 307 | 307 | - | 874 | 17 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | - | - | - | 123 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Home Equity – open end | 1,649 | 1,649 | - | 330 | 57 | 1,159 | 1,159 | - | 1,513 | 82 | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 191 | 191 | - | 237 | 11 | 181 | 181 | - | 186 | 10 | ||||||||||||||||||||||||||||||
| Consumer | - | - | - | - | - | 18 | 18 | - | 7 | - | ||||||||||||||||||||||||||||||
| Credit cards | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Credit Cards | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Dealer Finance | - | - | - | - | - | 4 | 4 | - | 1 | 4 | ||||||||||||||||||||||||||||||
| 8,122 | 8,842 | - | 8,800 | 390 | 4,127 | 4,265 | - | 6,937 | 244 | |||||||||||||||||||||||||||||||
| Impaired loans with a valuation allowance | ||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | 12,976 | 14,749 | 1,469 | 12,056 | 326 | 11,534 | 11,534 | 2,373 | 12,884 | 299 | ||||||||||||||||||||||||||||||
| Farmland | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Real Estate | 926 | 926 | 101 | 988 | 105 | 324 | 324 | 238 | 699 | 46 | ||||||||||||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 938 | 938 | 47 | 1,030 | 4 | 890 | 890 | 18 | 900 | 15 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | - | - | - | 72 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Home Equity – open end | - | - | - | 40 | - | 1,414 | 1,414 | 269 | 613 | 75 | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Credit cards | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Dealer Finance | - | - | - | - | - | 68 | 68 | 17 | 38 | 5 | ||||||||||||||||||||||||||||||
| 14,840 | 16,613 | 1,617 | 14,186 | 435 | 14,230 | 14,230 | 2,915 | 15,134 | 440 | |||||||||||||||||||||||||||||||
| Total impaired loans | $ | 22,962 | $ | 25,455 | $ | 1,617 | $ | 22,986 | $ | 825 | $ | 18,357 | $ | 18,495 | $ | 2,915 | $ | 22,071 | $ | 684 | ||||||||||||||||||||
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 5 LOANS (CONTINUED):
The following is a summary of information pertaining to impaired loans (in thousands):
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
| Unpaid | Average | Interest | Unpaid | Average | Interest | |||||||||||||||||||||||||||||||||||
| December 31, 2013 | Recorded | Principal | Related | Recorded | Income | |||||||||||||||||||||||||||||||||||
| December 31, 2014 | Recorded | Principal | Related | Recorded | Income | |||||||||||||||||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | ||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | $ | 3,960 | $ | 4,543 | $ | - | $ | 5,750 | $ | 153 | $ | 4,982 | $ | 5,402 | $ | - | $ | 5,412 | $ | 251 | ||||||||||||||||||||
| Farmland | 1,459 | 1,459 | - | 1,475 | 67 | - | - | - | 1,163 | - | ||||||||||||||||||||||||||||||
| Real Estate | 49 | 49 | - | 529 | 3 | 141 | 141 | - | 85 | 5 | ||||||||||||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 851 | 851 | - | 616 | 56 | 1,159 | 1,459 | - | 1,450 | 66 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | 308 | 308 | - | 284 | 25 | - | - | - | 123 | - | ||||||||||||||||||||||||||||||
| Home Equity – open end | - | - | - | 20 | - | 1,649 | 1,649 | - | 330 | 57 | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 242 | 242 | - | 64 | 12 | 191 | 191 | - | 237 | 11 | ||||||||||||||||||||||||||||||
| Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Credit cards | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Dealer Finance | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| 6,869 | 7,452 | - | 8,738 | 316 | 8,122 | 8,842 | - | 8,800 | 390 | |||||||||||||||||||||||||||||||
| Impaired loans with a valuation allowance | ||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | 8,291 | 9,716 | 1,560 | 10,855 | 175 | 12,976 | 14,749 | 1,469 | 12,056 | 326 | ||||||||||||||||||||||||||||||
| Farmland | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Real Estate | 1,145 | 1,145 | 154 | 966 | 48 | 926 | 926 | 101 | 988 | 105 | ||||||||||||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 818 | 1,118 | 282 | 1,171 | 4 | 938 | 938 | 47 | 1,030 | 4 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | 180 | 180 | 17 | 409 | 3 | - | - | - | 72 | - | ||||||||||||||||||||||||||||||
| Home Equity – open end | 100 | 100 | 9 | 93 | 5 | - | - | - | 40 | - | ||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | - | - | - | 141 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Consumer | 2 | 2 | - | 1 | 1 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Credit cards | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Dealer Finance | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| 10,536 | 12,261 | 2,022 | 13,636 | 236 | 14,840 | 16,613 | 1,617 | 14,186 | 435 | |||||||||||||||||||||||||||||||
| Total impaired loans | $ | 17,405 | $ | 19,713 | $ | 2,022 | $ | 22,374 | $ | 552 | $ | 22,962 | $ | 25,455 | $ | 1,617 | $ | 22,986 | $ | 825 | ||||||||||||||||||||
Loans held for sale consists of loans originated by VBS Mortgage and the Bank’s commitment to purchase residential mortgage loan participations from Gateway Bank and NorthPointeNorthpointe Bank. The volume of loans purchased fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of December 31, 2015 and 2014 were $57,805,529 and 2013 were $13,381,941, and $3,804,425, respectively.
December 31, 2014 (in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 4,007 | $ | 1,611 | $ | 223 | $ | 2,119 | $ | 4,738 | $ | 1,469 | $ | 3,269 | ||||||||||||||
| Farmland | (2 | ) | - | - | 2 | - | - | - | ||||||||||||||||||||
| Real Estate | 400 | 208 | - | 431 | 623 | 101 | 522 | |||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | |||||||||||||||||||||
| Commercial Real Estate | 777 | - | 108 | (759 | ) | 126 | 47 | 79 | ||||||||||||||||||||
| Home Equity – closed end | 157 | - | - | 31 | 188 | - | 188 | |||||||||||||||||||||
| Home Equity – open end | 476 | 80 | - | (242 | ) | 154 | - | 154 | ||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 1,464 | 385 | 356 | (224 | ) | 1,211 | - | 1,211 | ||||||||||||||||||||
| Consumer | 156 | 33 | 33 | 58 | 214 | - | 214 | |||||||||||||||||||||
| Dealer Finance | 628 | 107 | 6 | 809 | 1,336 | - | 1,336 | |||||||||||||||||||||
| Credit Cards | 121 | 46 | 35 | 25 | 135 | - | 135 | |||||||||||||||||||||
| Total | $ | 8,184 | $ | 2,470 | $ | 761 | $ | 2,250 | $ | 8,725 | $ | 1,617 | $ | 7,108 | ||||||||||||||
December 31, 2013 (in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 2,771 | $ | 2,127 | $ | 40 | $ | 3,323 | $ | 4,007 | $ | 1,560 | $ | 2,447 | ||||||||||||||
| Farmland | (2 | ) | - | - | - | (2 | ) | - | (2 | ) | ||||||||||||||||||
| Real Estate | 924 | 173 | - | (351 | ) | 400 | 154 | 246 | ||||||||||||||||||||
| Multi-Family | (37 | ) | - | - | 37 | - | - | - | ||||||||||||||||||||
| Commercial Real Estate | 1,113 | 201 | 42 | (177 | ) | 777 | 282 | 495 | ||||||||||||||||||||
| Home Equity – closed end | 360 | 159 | - | (44 | ) | 157 | 17 | 140 | ||||||||||||||||||||
| Home Equity – open end | 659 | 68 | 29 | (144 | ) | 476 | 9 | 467 | ||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 2,113 | 986 | 127 | 210 | 1,464 | - | 1,464 | |||||||||||||||||||||
| Consumer | 51 | 173 | 14 | 264 | 156 | - | 156 | |||||||||||||||||||||
| Dealer Finance | 72 | 17 | - | 573 | 628 | - | 628 | |||||||||||||||||||||
| Credit Cards | 130 | 121 | 28 | 84 | 121 | - | 121 | |||||||||||||||||||||
| Total | $ | 8,154 | $ | 4,025 | $ | 280 | $ | 3,775 | $ | 8,184 | $ | 2,022 | $ | 6,162 | ||||||||||||||
54
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):LOSSES:
| December 31, 2014 | Loan Receivable | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||
| Construction/Land Development | $ | 67,181 | $ | 17,958 | $ | 49,223 | ||||||
| Farmland | 12,507 | - | 12,507 | |||||||||
| Real Estate | 162,249 | 1,067 | 161,182 | |||||||||
| Multi-Family | 11,775 | - | 11,775 | |||||||||
| Commercial Real Estate | 122,305 | 2,097 | 120,208 | |||||||||
| Home Equity – closed end | 9,394 | - | 9,394 | |||||||||
| Home Equity –open end | 52,182 | 1,649 | 50,533 | |||||||||
| Commercial & Industrial – Non-Real Estate | 28,161 | 191 | 27,970 | |||||||||
| Consumer | 9,110 | - | 9,110 | |||||||||
| Dealer Finance | 40,633 | 40,633 | ||||||||||
| Credit Cards | 2,705 | - | 2,705 | |||||||||
| $ | 518,202 | $ | 22,962 | $ | 495,240 | |||||||
| Total | ||||||||||||
| December 31, 2013 | Loan Receivable | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||||||||||||||||||
December 31, 2015 (in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||
| Construction/Land Development | $ | 68,512 | $ | 12,251 | $ | 56,261 | $ | 4,738 | $ | 156 | $ | 85 | $ | (225 | ) | $ | 4,442 | $ | 2,373 | $ | 2,069 | |||||||||||||||||||
| Farmland | 13,197 | 1,459 | 11,738 | - | - | - | 95 | 95 | - | 95 | ||||||||||||||||||||||||||||||
| Real Estate | 154,628 | 1,194 | 153,434 | 623 | 25 | 37 | 171 | 806 | 238 | 568 | ||||||||||||||||||||||||||||||
| Multi-Family | 11,797 | - | 11,797 | - | - | - | 71 | 71 | - | 71 | ||||||||||||||||||||||||||||||
| Commercial Real Estate | 113,415 | 1,669 | 111,746 | 126 | - | 65 | 254 | 445 | 18 | 427 | ||||||||||||||||||||||||||||||
| Home Equity – closed end | 10,228 | 488 | 9,740 | 188 | 26 | 6 | 6 | 174 | - | 174 | ||||||||||||||||||||||||||||||
| Home Equity –open end | 47,358 | 100 | 47,258 | |||||||||||||||||||||||||||||||||||||
| Home Equity – open end | 154 | 51 | - | 531 | 634 | 269 | 365 | |||||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 25,903 | 242 | 25,661 | 1,211 | - | 62 | (218 | ) | 1,055 | - | 1,055 | |||||||||||||||||||||||||||||
| Consumer | 10,163 | 2 | 10,161 | 214 | 32 | 32 | (106 | ) | 108 | - | 108 | |||||||||||||||||||||||||||||
| Dealer Finance | 20,572 | 20,572 | 1,336 | 251 | 24 | (273 | ) | 836 | 17 | �� | 819 | |||||||||||||||||||||||||||||
| Credit Cards | 2,680 | - | 2,680 | 135 | 60 | 46 | (6 | ) | 115 | - | 115 | |||||||||||||||||||||||||||||
| $ | 478,453 | $ | 17,405 | $ | 461,048 | |||||||||||||||||||||||||||||||||||
| Total | $ | 8,725 | $ | 601 | $ | 357 | $ | 300 | $ | 8,781 | $ | 2,915 | $ | 5,866 | ||||||||||||||||||||||||||
| 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, 2014 | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 205 | $ | 166 | $ | - | $ | 4,508 | $ | 4,879 | $ | 62,302 | $ | 67,181 | ||||||||||||||
| Farmland | - | - | - | - | - | 12,507 | 12,507 | |||||||||||||||||||||
| Real Estate | 5,085 | 635 | - | 973 | 6,693 | 155,556 | 162,249 | |||||||||||||||||||||
| Multi-Family | - | - | - | - | - | 11,775 | 11,775 | |||||||||||||||||||||
| Commercial Real Estate | 747 | - | - | 1,165 | 1,912 | 120,393 | 122,305 | |||||||||||||||||||||
| Home Equity – closed end | 162 | 15 | - | 10 | 187 | 9,207 | 9,394 | |||||||||||||||||||||
| Home Equity – open end | 730 | 25 | - | 143 | 898 | 51,284 | 52,182 | |||||||||||||||||||||
| Commercial & Industrial – Non- Real Estate | - | - | - | 14 | 14 | 28,147 | 28,161 | |||||||||||||||||||||
| Consumer | 290 | 9 | - | - | 299 | 8,811 | 9,110 | |||||||||||||||||||||
| Dealer Finance | 696 | 189 | - | 161 | 1,046 | 39,587 | 40,633 | |||||||||||||||||||||
| Credit Cards | 36 | - | 1 | - | 37 | 2,668 | 2,705 | |||||||||||||||||||||
| Total | $ | 7,951 | $ | 1,039 | $ | 1 | $ | 6,974 | $ | 15,965 | $ | 502,237 | $ | 518,202 | ||||||||||||||
December 31, 2014 (in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 4,007 | $ | 1,611 | $ | 223 | $ | 2,119 | $ | 4,738 | $ | 1,469 | $ | 3,269 | ||||||||||||||
| Farmland | (2 | ) | - | - | 2 | - | - | - | ||||||||||||||||||||
| Real Estate | 400 | 208 | - | 431 | 623 | 101 | 522 | |||||||||||||||||||||
| Multi-Family | - | - | - | - | - | - | - | |||||||||||||||||||||
| Commercial Real Estate | 777 | - | 108 | (759 | ) | 126 | 47 | 79 | ||||||||||||||||||||
| Home Equity – closed end | 157 | - | - | 31 | 188 | - | 188 | |||||||||||||||||||||
| Home Equity – open end | 476 | 80 | - | (242 | ) | 154 | - | 154 | ||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 1,464 | 385 | 356 | (224 | ) | 1,211 | - | 1,211 | ||||||||||||||||||||
| Consumer | 156 | 33 | 33 | 58 | 214 | - | 214 | |||||||||||||||||||||
| Dealer Finance | 628 | 107 | 6 | 809 | 1,336 | - | 1,336 | |||||||||||||||||||||
| Credit Cards | 121 | 46 | 35 | 25 | 135 | - | 135 | |||||||||||||||||||||
| Total | $ | 8,184 | $ | 2,470 | $ | 761 | $ | 2,250 | $ | 8,725 | $ | 1,617 | $ | 7,108 | ||||||||||||||
55
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):
| 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, 2013 | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 167 | $ | 735 | $ | - | $ | 8,556 | $ | 9,458 | $ | 59,054 | $ | 68,512 | ||||||||||||||
| Farmland | - | - | - | - | - | 13,197 | 13,197 | |||||||||||||||||||||
| Real Estate | 4,659 | 920 | 246 | 1,407 | 7,232 | 147,396 | 154,628 | |||||||||||||||||||||
| Multi-Family | 107 | - | - | - | 107 | 11,690 | 11,797 | |||||||||||||||||||||
| Commercial Real Estate | 858 | - | - | 1,474 | 2,332 | 111,083 | 113,415 | |||||||||||||||||||||
| Home Equity – closed end | 122 | 79 | 10 | 180 | 391 | 9,837 | 10,228 | |||||||||||||||||||||
| Home Equity – open end | 549 | 39 | 51 | 222 | 861 | 46,497 | 47,358 | |||||||||||||||||||||
| Commercial & Industrial – Non- Real Estate | 148 | 20 | 4 | 416 | 588 | 25,315 | 25,903 | |||||||||||||||||||||
| Consumer | 169 | 71 | 5 | - | 245 | 9,918 | 10,163 | |||||||||||||||||||||
| Dealer Finance | 335 | 72 | 11 | - | 418 | 20,154 | 20,572 | |||||||||||||||||||||
| Credit Cards | 21 | 3 | - | - | 24 | 2,656 | 2,680 | |||||||||||||||||||||
| Total | $ | 7,135 | $ | 1,939 | $ | 327 | $ | 12,255 | $ | 21,656 | $ | 456,797 | $ | 478,453 | ||||||||||||||
| December 31, 2015 | Loan Receivable | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||
| Construction/Land Development | $ | 69,759 | $ | 12,895 | $ | 56,864 | ||||||
| Farmland | 13,378 | - | 13,378 | |||||||||
| Real Estate | 166,587 | 1,421 | 165,167 | |||||||||
| Multi-Family | 7,559 | - | 7,559 | |||||||||
| Commercial Real Estate | 128,032 | 1,197 | 126,835 | |||||||||
| Home Equity – closed end | 9,135 | - | 9,135 | |||||||||
| Home Equity –open end | 56,599 | 2,573 | 54,026 | |||||||||
| Commercial & Industrial – Non-Real Estate | 27,954 | 181 | 27,773 | |||||||||
| Consumer | 8,219 | 18 | 8,201 | |||||||||
| Dealer Finance | 54,086 | 72 | 54,013 | |||||||||
| Credit Cards | 2,745 | - | 2,745 | |||||||||
| $ | 544,053 | $ | 18,357 | $ | 525,696 | |||||||
| Total | ||||||||||||
| December 31, 2014 | Loan Receivable | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | |||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | - | $ | 165 | $ | 8,460 | $ | 24,227 | $ | 9,605 | $ | 3,815 | $ | 20,909 | $ | - | $ | 67,181 | $ | 67,181 | $ | 17,958 | $ | 49,223 | ||||||||||||||||||||||||
| Farmland | 68 | - | 1,640 | 3,451 | 5,228 | - | 2,120 | - | 12,507 | 12,507 | - | 12,507 | ||||||||||||||||||||||||||||||||||||
| Real Estate | - | 629 | 60,290 | 66,464 | 23,934 | 7,083 | 3,849 | - | 162,249 | 162,249 | 1,067 | 161,182 | ||||||||||||||||||||||||||||||||||||
| Multi-Family | - | 468 | 4,145 | 2,183 | 4,979 | - | - | - | 11,775 | 11,775 | - | 11,775 | ||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | - | 1,687 | 22,800 | 65,653 | 19,058 | 10,571 | 2,536 | - | 122,305 | 122,305 | 2,097 | 120,208 | ||||||||||||||||||||||||||||||||||||
| Home Equity – closed end | - | - | 4,327 | 3,090 | 1,812 | 154 | 11 | - | 9,394 | 9,394 | - | 9,394 | ||||||||||||||||||||||||||||||||||||
| Home Equity – open end | - | 1,555 | 13,433 | 28,425 | 4,309 | 1,936 | 2,524 | - | 52,182 | |||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial (Non-Real Estate) | 643 | 74 | 4,692 | 18,039 | 3,948 | 735 | 30 | - | 28,161 | |||||||||||||||||||||||||||||||||||||||
| Home Equity –open end | 52,182 | 1,649 | 50,533 | |||||||||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial – Non-Real Estate | 28,161 | 191 | 27,970 | |||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 9,110 | - | 9,110 | |||||||||||||||||||||||||||||||||||||||||||||
| Dealer Finance | 40,633 | 40,633 | ||||||||||||||||||||||||||||||||||||||||||||||
| Credit Cards | 2,705 | - | 2,705 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 518,202 | $ | 22,962 | $ | 495,240 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 711 | $ | 4,578 | $ | 119,787 | $ | 211,532 | $ | 72,873 | $ | 24,294 | $ | 31,979 | $ | - | $ | 465.754 | ||||||||||||||||||||||||||||||
Credit Cards | Consumer | |||||||
| Performing | $ | 2,704 | $ | 49,582 | ||||
| Non performing | 1 | 161 | ||||||
| Total | $ | 2,705 | $ | 49,743 |
| 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, 2015 | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 104 | $ | - | $ | - | $ | 4,688 | $ | 4,792 | $ | 64,967 | $ | 69,759 | ||||||||||||||
| Farmland | - | - | - | - | - | 13,378 | 13,378 | |||||||||||||||||||||
| Real Estate | 2,684 | 1,332 | 272 | 1,010 | 5,298 | 161,289 | 166,587 | |||||||||||||||||||||
| Multi-Family | - | - | - | - | - | 7,559 | 7,559 | |||||||||||||||||||||
| Commercial Real Estate | 340 | 241 | - | - | 581 | 127,451 | 128,032 | |||||||||||||||||||||
| Home Equity – closed end | 41 | 7 | - | - | 48 | 9,087 | 9,135 | |||||||||||||||||||||
| Home Equity – open end | 918 | 46 | 107 | 40 | 1,111 | 55,488 | 56,599 | |||||||||||||||||||||
| Commercial & Industrial – Non- Real Estate | 114 | 3 | 25 | 109 | 251 | 27,703 | 27,954 | |||||||||||||||||||||
| Consumer | 120 | 10 | - | - | 130 | 8,089 | 8,219 | |||||||||||||||||||||
| Dealer Finance | 905 | 183 | 152 | 108 | 1,348 | 52,738 | 54,086 | |||||||||||||||||||||
| Credit Cards | 10 | 13 | 15 | - | 38 | 2,707 | 2,745 | |||||||||||||||||||||
| Total | $ | 5,236 | $ | 1,835 | $ | 571 | $ | 5,955 | $ | 13,597 | $ | 530,456 | $ | 544,053 | ||||||||||||||
56
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):
| 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, 2014 | ||||||||||||||||||||||||||||
| Construction/Land Development | $ | 205 | $ | 166 | $ | - | $ | 4,508 | $ | 4,879 | $ | 62,302 | $ | 67,181 | ||||||||||||||
| Farmland | - | - | - | - | - | 12,507 | 12,507 | |||||||||||||||||||||
| Real Estate | 5,085 | 635 | - | 973 | 6,693 | 155,556 | 162,249 | |||||||||||||||||||||
| Multi-Family | - | - | - | - | - | 11,775 | 11,775 | |||||||||||||||||||||
| Commercial Real Estate | 747 | - | - | 1,165 | 1,912 | 120,393 | 122,305 | |||||||||||||||||||||
| Home Equity – closed end | 162 | 15 | - | 10 | 187 | 9,207 | 9,394 | |||||||||||||||||||||
| Home Equity – open end | 730 | 25 | - | 143 | 898 | 51,284 | 52,182 | |||||||||||||||||||||
| Commercial & Industrial – Non- Real Estate | - | - | - | 14 | 14 | 28,147 | 28,161 | |||||||||||||||||||||
| Consumer | 290 | 9 | - | - | 299 | 8,811 | 9,110 | |||||||||||||||||||||
| Dealer Finance | 696 | 189 | - | 161 | 1,046 | 39,587 | 40,633 | |||||||||||||||||||||
| Credit Cards | 36 | - | 1 | - | 37 | 2,668 | 2,705 | |||||||||||||||||||||
| Total | $ | 7,951 | $ | 1,039 | $ | 1 | $ | 6,974 | $ | 15,965 | $ | 502,237 | $ | 518,202 | ||||||||||||||
| CREDIT QUALITY INDICATORS (in thousands) | ||||||||||||||||||||||||||||||||||||
| AS OF DECEMBER 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Corporate Credit Exposure | ||||||||||||||||||||||||||||||||||||
Credit Risk Profile by Creditworthiness Category | ||||||||||||||||||||||||||||||||||||
| 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 | $ | - | $ | 485 | $ | 8,410 | $ | 31,783 | $ | 14,260 | $ | 3,216 | $ | 11,605 | $ | - | $ | 69,759 | ||||||||||||||||||
| Farmland | 66 | - | 2,615 | 3,768 | 4,952 | 1,977 | - | - | 13,378 | |||||||||||||||||||||||||||
| Real Estate | - | 955 | 54,400 | 76,545 | 23,695 | 8,334 | 2,658 | - | 166,587 | |||||||||||||||||||||||||||
| Multi-Family | - | 391 | 3,925 | 3,046 | 197 | - | - | - | 7,559 | |||||||||||||||||||||||||||
| Commercial Real Estate | - | 2,087 | 25,889 | 74,337 | 20,271 | 4,149 | 1,299 | - | 128,032 | |||||||||||||||||||||||||||
| Home Equity – closed end | - | - | 3,549 | 3,792 | 1,661 | 114 | 19 | - | 9,135 | |||||||||||||||||||||||||||
| Home Equity – open end | - | 1,657 | 15,043 | 31,455 | 4,827 | 398 | 3,219 | - | 56,599 | |||||||||||||||||||||||||||
| Commercial & Industrial (Non-Real Estate) | 896 | 646 | 6,423 | 17,053 | 2,281 | 517 | 138 | - | 27,954 | |||||||||||||||||||||||||||
| Total | $ | 962 | $ | 6,221 | $ | 120,254 | $ | 241,779 | $ | 72,144 | $ | 18,705 | $ | 18,938 | $ | - | $ | 479,003 | ||||||||||||||||||
| Consumer Credit Exposure | ||||||||
| Credit Risk Profile Based on Payment Activity | ||||||||
| Credit Cards | Consumer | |||||||
| Performing | $ | 2,730 | $ | 62,046 | ||||
| Non performing | 15 | 259 | ||||||
| Total | $ | 2,745 | $ | 62,305 | ||||
| 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 | $ | - | $ | - | $ | 3,166 | $ | 25,657 | $ | 11,116 | $ | 2,946 | $ | 25,627 | $ | - | $ | 68,512 | |||||||||||||||||||||||||
| Farmland | 69 | - | 1,406 | 5,206 | 4,816 | 143 | 1,557 | - | 13,197 | ||||||||||||||||||||||||||||||||||
| Real Estate | - | 562 | 68,241 | 52,190 | 19,037 | 7,821 | 6,777 | - | 154,628 | ||||||||||||||||||||||||||||||||||
| Multi-Family | - | 668 | 4,442 | 2,275 | 4,412 | - | - | - | 11,797 | ||||||||||||||||||||||||||||||||||
| Commercial Real Estate | - | 1,897 | 18,062 | 55,350 | 21,677 | 13,406 | 3,023 | - | 113,415 | ||||||||||||||||||||||||||||||||||
| Home Equity – closed end | - | - | 4,574 | 3,117 | 1,870 | 281 | 386 | - | 10,228 | ||||||||||||||||||||||||||||||||||
| Home Equity – open end | - | 1,482 | 13,308 | 26,734 | 4,840 | 327 | 667 | - | 47,358 | ||||||||||||||||||||||||||||||||||
| Commercial & Industrial (Non-Real Estate) | 815 | 92 | 3,631 | 16,265 | 3,108 | 1,516 | 476 | - | 25,903 | ||||||||||||||||||||||||||||||||||
| Total | $ | 884 | $ | 4,701 | $ | 116,830 | $ | 186,794 | $ | 70,876 | $ | 26,440 | $ | 38,513 | $ | - | $ | 445,038 | |||||||||||||||||||||||||
57
Credit Cards | Consumer | ||||||||
| Performing | $ | 2,680 | $ | 30,719 | |||||
| Non performing | - | 16 | |||||||
| Total | $ | 2,680 | $ | 30,735 | |||||
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):
| CREDIT QUALITY INDICATORS (in thousands) | ||||||||||||||||||||||||||||||||||||
| AS OF DECEMBER 31, 2014 | ||||||||||||||||||||||||||||||||||||
| Corporate Credit Exposure | ||||||||||||||||||||||||||||||||||||
Credit Risk Profile by Creditworthiness Category | ||||||||||||||||||||||||||||||||||||
| 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 | $ | - | $ | 165 | $ | 8,460 | $ | 24,227 | $ | 9,605 | $ | 3,815 | $ | 20,909 | $ | - | $ | 67,181 | ||||||||||||||||||
| Farmland | 68 | - | 1,640 | 3,451 | 5,228 | - | 2,120 | - | 12,507 | |||||||||||||||||||||||||||
| Real Estate | - | 629 | 60,290 | 66,464 | 23,934 | 7,083 | 3,849 | - | 162,249 | |||||||||||||||||||||||||||
| Multi-Family | - | 468 | 4,145 | 2,183 | 4,979 | - | - | - | 11,775 | |||||||||||||||||||||||||||
| Commercial Real Estate | - | 1,687 | 22,800 | 65,653 | 19,058 | 10,571 | 2,536 | - | 122,305 | |||||||||||||||||||||||||||
| Home Equity – closed end | - | - | 4,327 | 3,090 | 1,812 | 154 | 11 | - | 9,394 | |||||||||||||||||||||||||||
| Home Equity – open end | - | 1,555 | 13,433 | 28,425 | 4,309 | 1,936 | 2,524 | - | 52,182 | |||||||||||||||||||||||||||
| Commercial & Industrial (Non-Real Estate) | 643 | 74 | 4,692 | 18,039 | 3,948 | 735 | 30 | - | 28,161 | |||||||||||||||||||||||||||
| Total | $ | 711 | $ | 4,578 | $ | 119,787 | $ | 211,532 | $ | 72,873 | $ | 24,294 | $ | 31,979 | $ | - | $ | 465.754 | ||||||||||||||||||
| Consumer Credit Exposure | ||||||||
| Credit Risk Profile Based on Payment Activity | ||||||||
| Credit Cards | Consumer | |||||||
| Performing | $ | 2,704 | $ | 49,582 | ||||
| Non performing | 1 | 161 | ||||||
| Total | $ | 2,705 | $ | 49,743 | ||||
Description of loan grades:
Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.
Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.
Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.
Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.
Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 6 ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Grade 6 – Watch: Loans are currently protected, but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.
Grade 8 – Doubtful: 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.
| NOTE 7 | TROUBLED DEBT RESTRUCTURING |
In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which 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 evaluated individually.
| During the twelve months ended December 31, 2015, the Bank modified 16 loans that were considered to be troubled debt restructurings. These modifications include rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof. |
| December 31, 2015 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| (in thousands) | Outstanding | Outstanding | ||||||||||
| Troubled Debt Restructurings | Number of Contracts | Recorded Investment | Recorded Investment | |||||||||
| Commercial | 1 | $ | 974 | $ | 974 | |||||||
| Real Estate | 5 | 1,408 | 1,408 | |||||||||
| Home Equity | 4 | 1,414 | 1,414 | |||||||||
| Consumer | 6 | 73 | 73 | |||||||||
| Total | 16 | $ | 3,869 | $ | 3,869 | |||||||
As of December 31, 2015, there were no loans restructured in the previous twelve months, in default. A restructured loan is considered in default when it becomes 90 days past due.
59
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
| NOTE 7 | TROUBLED DEBT RESTRUCTURING (CONTINUED): |
| During the twelve months ended December 31, 2014, the Bank modified 3 loans that were considered to be troubled debt restructurings. These modifications include rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof. |
| December 31, 2014 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| (in thousands) | Outstanding | Outstanding | ||||||||||
| Number of Contracts | Recorded Investment | Recorded Investment | ||||||||||
| Troubled Debt Restructurings | ||||||||||||
| Real Estate | 2 | $ | 179 | $ | 179 | |||||||
| Consumer | 1 | 22 | 22 | |||||||||
| $ | 201 | $ | 201 | |||||||||
| December 31, 2014 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| (in thousands) | Outstanding | Outstanding | ||||||||||
| Number of Contracts | Recorded Investment | Recorded Investment | ||||||||||
| Troubled Debt Restructurings | ||||||||||||
| Real Estate | 2 | $ | 179 | $ | 179 | |||||||
| Consumer | 1 | 22 | 22 | |||||||||
| 3 | $ | 201 | $ | 201 | ||||||||
As of December 31, 2014, there was one loan restructured in the previous twelve months, in default. This was a real estate loan totaling $97,000. A restructured loan is considered in default when it becomes 90 days past due.
| December 31, 2013 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| (in thousands) | Outstanding | Outstanding | ||||||||||
| Number of Contracts | Recorded Investment | Recorded Investment | ||||||||||
| Troubled Debt Restructurings | ||||||||||||
| Construction/Land Development | 1 | $ | 937 | $ | 937 | |||||||
| Real Estate | 1 | 50 | 50 | |||||||||
| Commercial Real Estate | 1 | 312 | 312 | |||||||||
| Commercial & Industrial – Non- Real Estate | 1 | 201 | 201 | |||||||||
| $ | 1,500 | $ | 1,500 | |||||||||
| NOTE 8 | BANK PREMISES AND EQUIPMENT |
Bank premises and equipment as of December 31 are summarized as follows:
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| Land | $ | 1,418,003 | $ | 1,418,003 | $ | 1,868,709 | $ | 1,418,003 | ||||||||
| Buildings and improvements | 6,793,644 | 6,771,867 | 7,209,427 | 6,793,644 | ||||||||||||
| Furniture and equipment | 6,479,815 | 5,963,779 | 7,397,173 | 6,479,815 | ||||||||||||
| 14,691,462 | 14,153,649 | 16,475,309 | 14,691,462 | |||||||||||||
| Less - accumulated depreciation | (8,233,208 | ) | (7,628,592 | ) | (8,933,231 | ) | (8,233,208 | ) | ||||||||
| Net | $ | 6,458,254 | $ | 6,525,057 | $ | 7,542,078 | $ | 6,458,254 | ||||||||
Provisions for depreciation of $709,237 in 2015, $612,116 in 2014, and $581,625 in 2013 and $597,920 in 2012 were charged to operations.
60
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 9 OTHER REAL ESTATE OWNED
The tables below reflect OREO activity for 20142015 and 2013:2014:
| Other Real Estate Owned | ||||||||
| 2015 | 2014 | |||||||
| Balance as of January 1 | $ | 3,507,153 | $ | 2,628,418 | ||||
| Property acquired at foreclosure | 125,000 | 2,914,958 | ||||||
| Capital improvements on foreclosed property | 98,929 | 48,961 | ||||||
| Sale of other real estate owned financed by Bank | (328,129 | ) | (780,097 | ) | ||||
| Sales of foreclosed properties | (737,663 | ) | (1,029,452 | ) | ||||
| Write down of OREO | (537,605 | ) | (275,635 | ) | ||||
| Balance as of December 31 | $ | 2,127,685 | $ | 3,507,153 | ||||
NOTE 10 DEPOSITS:
| Other Real Estate Owned | ||||||||
| 2014 | 2013 | |||||||
| Balance beginning of year | $ | 2,628,418 | $ | 2,883,947 | ||||
| Property acquired at foreclosure | 2,914,958 | 1,337,890 | ||||||
| Capital improvements on foreclosed property | 48,961 | 11,329 | ||||||
| Sale of other real estate owned financed by Bank | (780,097 | ) | (569,245 | ) | ||||
| Sales of foreclosed properties | (1,029,452 | ) | (964,149 | ) | ||||
| Valuation adjustments | (275,635 | ) | (71,354 | ) | ||||
| Balance as of December 31 | $ | 3,507,153 | $ | 2,628,418 | ||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Noninterest bearing demand deposits | $ | 134,786,875 | $ | 112,197,722 | ||||
| Savings and interest bearing demand deposits: | ||||||||
| Interest checking accounts | 108,459,597 | 119,593,529 | ||||||
| Savings accounts | 90,383,486 | 64,249,199 | ||||||
| Time Deposits: | ||||||||
| Balances of less than $100,000 | 107,415,244 | 115,651,329 | ||||||
| Balances of $100,000 and more | 53,624,554 | 79,812,757 | ||||||
| Total Deposits | $ | 494,669,756 | $ | 491,504,536 | ||||
The Company’s deposits over $250,000 were not readily available from their data processing system.
At December 31, 2015, the scheduled maturities of time deposits are as follows:
| 2016 | $ | 68,800,143 | ||
| 2017 | 38,529,664 | |||
| 2018 | 27,310,066 | |||
| 2019 | 12,595,076 | |||
| 2020 and after | 13,804,849 | |||
| Total | $ | 161,039,798 |
F& M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 2013
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Noninterest bearing demand deposits | $ | 112,197,722 | $ | 92,396,921 | ||||
| Savings and interest bearing demand deposits: | ||||||||
| Interest checking accounts | 119,593,529 | 117,456,275 | ||||||
| Savings accounts | 64,249,199 | 58,292,273 | ||||||
| Time Deposits: | ||||||||
| Balances of less than $100,000 | 115,651,329 | 126,330,053 | ||||||
| Balances of $100,000 and more | 79,812,757 | 69,673,722 | ||||||
| Total Deposits | $ | 491,504,536 | $ | 464,149,244 | ||||
| 2015 | $ | 92,047,350 | ||
| 2016 | 58,857,584 | |||
| 2017 | 16,213,687 | |||
| 2018 | 15,150,944 | |||
| 2019 and after | 13,194,521 | |||
| Total | $ | 195,464,086 |
NOTE 11 SHORT-TERM DEBT:
Short-term debt, all maturing within 12 months, information is summarized as follows:
| Maximum | Weighted | |||||||||||||||||||
| Outstanding | Outstanding | Average | Average | Year End | ||||||||||||||||
| at any | at | Balance | Interest | Interest | ||||||||||||||||
| Month End | Year End | Outstanding | Rate | Rate | ||||||||||||||||
| 2015 | ||||||||||||||||||||
| Federal funds purchased | $ | 8,843,000 | $ | 959,217 | $ | 833,907 | .02 | % | .78 | % | ||||||||||
| FHLB short term | 45,000 ,000 | 20,000,000 | 26,739,726 | .16 | % | .19 | % | |||||||||||||
| Securities sold under agreements to repurchase | 4,697,341 | 3,994,834 | 4,443,753 | .04 | % | .25 | % | |||||||||||||
| Totals | $ | 24,954,051 | $ | 32,017,386 | .21 | % | .22 | % | ||||||||||||
| 2014 | ||||||||||||||||||||
| Federal funds purchased | $ | 491,000 | $ | - | $ | 7,704 | .001 | % | .61 | % | ||||||||||
| FHLB short term | 10,000 ,000 | 10,000,000 | 27,397 | .001 | % | .17 | % | |||||||||||||
| Securities sold under agreements to repurchase | 5,066,238 | 4,358,492 | 3,837,612 | .23 | % | .24 | % | |||||||||||||
| Totals | $ | 14,358,492 | $ | 3,872,713 | .23 | % | .23 | % | ||||||||||||
| Maximum | Weighted | |||||||||||||||||||
| Outstanding | Outstanding | Average | Average | Year End | ||||||||||||||||
| at any | at | Balance | Interest | Interest | ||||||||||||||||
| Month End | Year End | Outstanding | Rate | Rate | ||||||||||||||||
| 2014 | ||||||||||||||||||||
| Federal funds purchased | $ | 491,000 | $ | - | $ | 7,704 | .001 | % | .61 | % | ||||||||||
| FHLB short term | 10,000 ,000 | 10,000,000 | 27,397 | .001 | % | .17 | % | |||||||||||||
| Securities sold under agreements to repurchase | 5,066,238 | 4,358,492 | 3,837,612 | .23 | % | .24 | % | |||||||||||||
| Totals | $ | 14,358,492 | $ | 3,872,713 | .23 | % | .23 | % | ||||||||||||
| 2013 | ||||||||||||||||||||
| Federal funds purchased | $ | - | $ | - | $ | 42,838 | .01 | % | .97 | % | ||||||||||
| FHLB short term | 17,500,000 | - | 2,938,356 | .23 | % | .49 | % | |||||||||||||
| Securities sold under agreements to repurchase | 3,522,999 | 3,423,078 | 3,190,186 | .14 | % | .28 | % | |||||||||||||
| Totals | $ | 3,423,078 | $ | 6,171,380 | .38 | % | .39 | % | ||||||||||||
| 2012 | ||||||||||||||||||||
| Federal funds purchased | $ | 9,283,000 | $ | 9,283,000 | $ | 776,617 | .51 | % | .90 | % | ||||||||||
| FHLB short term | 32,500,000 | 22,500,000 | 8,088,798 | .46 | % | .37 | % | |||||||||||||
| Securities sold under agreements to repurchase | 4,773,045 | 2,814,352 | 3,949,934 | .35 | % | .38 | % | |||||||||||||
| Totals | $ | 34,597,352 | $ | 12,815,349 | .41 | % | .41 | % | ||||||||||||
Repurchase agreements are secured transactions with customers and generally mature the day following the date sold. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB daily rate credit, which is secured by the loan portfolio, is a variable rate loan that acts as a line of credit to meet financing needs.
As of December 31, 2014,2015, the Company had unsecured lines of credit with correspondent banks totaling $26,000,000, which may be used in the management of short-term liquidity.
62
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 12 LONG-TERM DEBT:
The Company borrowed $10,000,000$40,000,000 from the Federal Home Loan Bank of Atlanta (FHLB) in 20142015 to fund loan growth and extend maturities of long term debt at lower rates. ThereThey borrowed $10,000,000 in 2014 and there were no new borrowings from FHLB in 2013 and 2012.2013. The interest rates on the notes payable are fixed at the time of the advance and range from 2.00%1.16% to 2.56%; the weighted average interest rate was 2.33%1.86% and 3.37%2.33% at December 31, 20142015 and 2013,2014, respectively. The balance of these obligations at December 31, 20142015 and December 31, 20132014 were $9,875,000$48,161,000 and $11,500,000,$9,875,000, respectively. The long-term debt is secured by qualifying mortgage loans owned by the Company.
The maturities of long-term Federal Home Loan Bank borrowings as of December 31, 20142015 are as follows:
| 2015 | $ | 500,000 | ||||||
| 2016 | 500,000 | $ | 3,929,000 | |||||
| 2017 | 500,000 | 3,929,000 | ||||||
| 2018 | 500,000 | 8,929,000 | ||||||
| 2019 | 6,429,000 | |||||||
| 2020 | 13,929,000 | |||||||
| Thereafter | 7,875,000 | 11,016,000 | ||||||
| Total | $ | 9,875,000 | $ | 48,161,000 | ||||
NOTE 13 INCOME TAX EXPENSE:
The components of the income tax expense are as follows:
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Current expense | ||||||||||||||||||||||||
| Federal | $ | 2,385,958 | $ | 1,338,439 | $ | 2,590,130 | $ | 3,227,013 | $ | 1,777,598 | $ | 482,912 | ||||||||||||
| Deferred (benefit) expense | ||||||||||||||||||||||||
| Federal | 505,684 | 636,452 | (412,621 | ) | (340,941 | ) | 505,684 | 636,452 | ||||||||||||||||
| State | 9,854 | (67,594 | ) | (82,112 | ) | - | 9,854 | (67,594 | ) | |||||||||||||||
| Total Deferred (benefit) expense | 515,538 | 568,858 | (494,733 | ) | (340,941 | ) | 515,538 | 568,858 | ||||||||||||||||
| Total Income Tax Expense | $ | 2,901,496 | $ | 1,907,297 | $ | 2,095,397 | $ | 2,886,072 | $ | 2,293,136 | $ | 1,051,770 | ||||||||||||
63
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 13 INCOME TAX EXPENSE (CONTINUED):
The components of the deferred taxes as of December 31 are as follows:
| Deferred Tax Assets: | 2014 | 2013 | 2015 | 2014 | ||||||||||||
| Allowance for loan losses | $ | 2,201,291 | $ | 1,788,360 | $ | 2,564,214 | $ | 2,201,291 | ||||||||
| Split Dollar Life Insurance | 4,440 | 4,440 | 4,440 | 4,440 | ||||||||||||
| Nonqualified deferred compensation | 594,132 | 527,909 | 702,440 | 594,132 | ||||||||||||
| Low income housing partnerships losses | 308,539 | - | 210,107 | 308,539 | ||||||||||||
| Securities impairment | - | 532,211 | ||||||||||||||
| Core deposit amortization | 72,188 | 298,019 | 176,605 | 72,188 | ||||||||||||
| State historic tax credits | - | 26,432 | ||||||||||||||
| Other real estate owned | 3,746 | 3,746 | 269,610 | 3,746 | ||||||||||||
| Pension plan | 1,199,686 | 470,091 | 1,382,268 | 1,199,686 | ||||||||||||
| Total Assets | $ | 4,384,022 | $ | 3,651,208 | $ | 5,309,684 | $ | 4,384,022 | ||||||||
| Deferred Tax Liabilities: | 2014 | 2013 | 2015 | 2014 | ||||||||||||
| Unearned low income housing credits | $ | 523,769 | $ | 661,841 | $ | 418,416 | $ | 523,769 | ||||||||
| Depreciation | 320,743 | 363,946 | 359,406 | 320,743 | ||||||||||||
| Pension | 1,864,964 | 1,423,461 | 1,988,736 | 1,864,964 | ||||||||||||
| Goodwill tax amortization | 853,880 | 791,771 | 901,340 | 853,880 | ||||||||||||
| Securities available for sale | 1,272 | (6,339 | ) | 1,757 | 1,272 | |||||||||||
| Other | - | (74,926 | ) | |||||||||||||
| Total Liabilities | 3,564,628 | 3,159,754 | 3,669,655 | 3,564,628 | ||||||||||||
| Net Deferred Tax Asset (included in Other Assets on Balance Sheet) | $ | 819,394 | $ | 491,454 | $ | 1,640,029 | $ | 819,394 | ||||||||
The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rates:
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Tax expense at federal statutory rates | $ | 2,959,056 | $ | 2,251,851 | $ | 2,378,804 | $ | 3,843,048 | $ | 2,959,056 | $ | 2,251,851 | ||||||||||||
| Increases (decreases) in taxes resulting from: | ||||||||||||||||||||||||
| State income taxes, net | 8,659 | 9,229 | 6,132 | |||||||||||||||||||||
| Partially exempt income | (54,529 | ) | (44,676 | ) | (49,828 | ) | ||||||||||||||||||
| State income taxes, net of federal benefit | 8,087 | 8,659 | 9,229 | |||||||||||||||||||||
| Partially tax-exempt income | (46,348 | ) | (54,529 | ) | (44,676 | ) | ||||||||||||||||||
| Tax-exempt income | (190,192 | ) | (197,482 | ) | (188,932 | ) | (222,672 | ) | (190,192 | ) | (197,482 | ) | ||||||||||||
| Prior year LIH credits | (21,787 | ) | (61,768 | ) | 97,857 | (132,028 | ) | (21,787 | ) | (61,768 | ) | |||||||||||||
| Deferred Tax Asset Valuation Allowance | 396,440 | - | - | |||||||||||||||||||||
| LIH and historic credits | (568,854 | ) | (484,955 | ) | (611,795 | ) | ||||||||||||||||||
| Deferred Tax Asset Valuation Allowance - reversal | - | 396,440 | - | |||||||||||||||||||||
| Other | (196,151 | ) | (49,857 | ) | (148,636 | ) | 4,840 | (112,714 | ) | (2,710 | ) | |||||||||||||
| Total Income Tax Expense | $ | 2,901,496 | $ | 1,907,297 | $ | 2,095,397 | $ | 2,886,072 | $ | 2,293,136 | $ | 1,051,770 | ||||||||||||
Management evaluated the likelihood of recognizing the Company’s deferred tax asset. Based on the evidence supporting this asset, it was decided to record a partial valuation allowance against the asset on the Company’s books in the amount of $781,936 and $385,496$582,778 for the years ended 20142015 and 2013.2014. A deferred tax asset is created from the difference between book income using Generally Accepted Accounting Principles and taxable income.
The Corporation has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with accounting guidance related to income taxes.
The Corporation and its subsidiaries file federal income tax returns and state income tax returns. With few exceptions, the Corporation is no longer subject to federal or state income tax examinations by tax authorities for years before 2011.2012.
64
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 20142015 and 20132014
NOTE 14 EMPLOYEE BENEFITS:
Defined Benefit Pension Plan
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its employees.employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings.
The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets for 2015, 2014 2013 and 2012:2013:
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Change in Benefit Obligation | ||||||||||||||||||||||||
| Benefit obligation, beginning | $ | 7,933,568 | $ | 8,931,940 | $ | 7,296,932 | $ | 10,777,415 | $ | 7,933,568 | $ | 8,931,940 | ||||||||||||
| Service cost | 501,032 | 599,933 | 518,634 | 648,334 | 501,032 | 599,933 | ||||||||||||||||||
| Interest cost | 377,706 | 350,314 | 327,924 | 410,944 | 377,706 | 350,314 | ||||||||||||||||||
| Actuarial gain (loss) | 2,030,583 | (1,300,094 | ) | 1,066,019 | (137,048 | ) | 2,030,583 | (1,300,094 | ) | |||||||||||||||
| Benefits paid | (65,474 | ) | (648,525 | ) | (277,569 | ) | (754,987 | ) | (65,474 | ) | (648,525 | ) | ||||||||||||
| Benefit obligation, ending | $ | 10,777,415 | $ | 7,933,568 | $ | 8,931,940 | $ | 10,944,658 | $ | 10,777,415 | $ | 7,933,568 | ||||||||||||
| Change in Plan Assets | ||||||||||||||||||||||||
| Fair value of plan assets, beginning | $ | 9,687,226 | $ | 8,123,437 | $ | 6,760,513 | $ | 11,683,845 | $ | 9,687,226 | $ | 8,123,437 | ||||||||||||
| Actual return on plan assets | 562,093 | 1,462,314 | 890,493 | (640 | ) | 562,093 | 1,462,314 | |||||||||||||||||
| Employer contribution | 1,500,000 | 750,000 | 750,000 | 750,000 | 1,500,000 | 750,000 | ||||||||||||||||||
| Benefits paid | (65,474 | ) | (648,525 | ) | (277,569 | ) | (754,987 | ) | (65,474 | ) | (648,525 | ) | ||||||||||||
| Fair value of plan assets, ending | 11,683,845 | 9,687,226 | 8,123,437 | 11,678,218 | 11,683,845 | 9,687,226 | ||||||||||||||||||
| Funded status at the end of the year | $ | 906,430 | $ | 1,753,658 | $ | (808,503 | ) | $ | 733,560 | $ | 906,430 | $ | 1,753,658 | |||||||||||
