10-Q 1 fmbm_10q.htm QUARTERLY REPORT Blueprint
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
☒ Quarterly report Under Section 13 or 15(d)  of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2019.
 
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number: 000-13273
 
F & M BANK CORP.
 
Virginia
 
54-1280811
 (State or Other Jurisdiction of Incorporation or Organization) 
 
 (I.R.S. Employer Identification No.)
 
P. O. Box 1111
Timberville, Virginia 22853
(Address of Principal Executive Offices) (Zip Code)
 
  (540) 896-8941
 (Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “an emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer ☐
 
Accelerated filer ☑
 ☑
Non-accelerated filer ☐
 
Emerging growth company ☐
 ☐
(Do not check if a smaller reporting company) 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
 
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at August 6, 2019
Common Stock, par value - $5
 
3,173,741 shares
 

 
 
 
F & M BANK CORP.
 
 
 
Page
 
PART I
 
 
  Financial Information
 
 
 
 
 
 
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 


 
 
 
   
 
 
 
 
 
 
 
 
PART II
 
 
 Other Information
 
 
 
 












 
 
 
 
 
 
 

 
 
 
 
Part I Financial Information
Item 1 Financial Statements
 
F & M BANK CORP.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
 
 
June 30,
 
 
December 31,
 
 
 
2019
 
 
2018*
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
Cash and due from banks
 $8,049 
 $9,522 
Money market funds
  794 
  1,390 
Federal funds sold
  5,937 
  - 
Cash and cash equivalents
  14,780 
  10,912 
Securities:
    
    
Held to maturity – fair value of $124 and $123 in 2019 and 2018, respectively
  124 
  123 
Available for sale
  8,354 
  8,289 
Other investments
  15,047 
  13,432 
Loans held for sale
  78,406 
  55,910 
Loans held for investment
  636,407 
  638,799 
Less: allowance for loan losses
  (6,050)
  (5,240)
Net loans held for investment
  630,357 
  633,559 
 
    
    
Other real estate owned, net
  1,969 
  2,443 
Bank premises and equipment, net
  18,581 
  17,766 
Interest receivable
  2,147 
  2,078 
Goodwill
  2,884 
  2,884 
Bank owned life insurance
  19,753 
  19,464 
Other assets
  14,547 
  13,393 
Total assets
 $806,949 
 $780,253 
Liabilities
    
    
Deposits:
    
    
Noninterest bearing
 $162,917 
 $157,146 
Interest bearing
  445,553 
  434,179 
Total deposits
  608,470 
  591,325 
 
    
    
Short-term debt
  40,000 
  40,116 
Accrued liabilities
  18,487 
  16,683 
Long-term debt
  47,917 
  40,218 
Total liabilities
  714,874 
  688,342 
 
    
    
Stockholders’ Equity
    
    
Preferred Stock $25 par value, 400,000 shares authorized, 246,660 and 249,860 issued and
 $5,592 
  5,672 
  outstanding for June 30, 2019 and December 31, 2018, respectively
    
    
Common stock, $5 par value, 6,000,000 shares authorized, 3,181,465 and 3,213,132 shares issued
  15,907 
  16,066 
  and outstanding for June 30, 2019 and December 31, 2018, respectively.
    
    
Additional paid in capital – common stock
  7,127 
  7,987 
Retained earnings
  66,741 
  65,596 
Non-controlling interest in consolidated subsidiaries
  588 
  559 
Accumulated other comprehensive loss
  (3,880)
  (3,969)
Total stockholders’ equity
 $92,075 
  91,911 
Total liabilities and stockholders’ equity
 $806,949 
 $780,253 
*2018 derived from audited consolidated financial statements.
 
See Notes to Consolidated Financial Statements
 
 
3
 
 
F & M BANK CORP.
Consolidated Statements of Income
(Dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
June 30,
 
Interest and Dividend income
 
2019
 
 
2018
 
Interest and fees on loans held for investment
 $9,107 
 $8,529 
Interest and fees on loans held for sale
  497 
  308 
Interest from money market funds and federal funds sold
  40 
  5 
Interest on debt securities – taxable
  138 
  120 
Total interest and dividend income
  9,782 
  8,962 
 
    
    
Interest expense
    
    
       Total interest on deposits
  1,258 
  766 
       Interest from short-term debt
  216 
  126 
       Interest from long-term debt
  252 
  223 
Total interest expense
  1,726 
  1,115 
 
    
    
Net interest income
  8,056 
  7,847 
 
    
    
Provision for Loan Losses
  1,600 
  1,350 
Net Interest Income After Provision for Loan Losses
  6,456 
  6,497 
 
    
    
Noninterest income
    
    
Service charges on deposit accounts
  417 
  358 
Investment services and insurance income, net
  171 
  223 
        Mortgage banking income, net
  815 
  615 
        Title insurance income
  406 
  306 
Income on bank owned life insurance
  149 
  112 
        Low income housing partnership losses
  (213)
  (192)
       ATM and check card fees
  529 
  388 
       Other operating income
  201 
  189 
Total noninterest income
  2,475 
  1,999 
 
    
    
Noninterest expense
    
    
Salaries
  2,633 
  3,047 
Employee benefits
  1,444 
  953 
Occupancy expense
  291 
  286 
Equipment expense
  294 
  259 
FDIC insurance assessment
  84 
  48 
       Other real estate owned, net
  25 
  17 
       Marketing expense
  139 
  129 
       Legal and professional fees
  196 
  95 
      ATM and check card fees
  213 
  195 
      Telecommunication and data processing expense
  426 
  417 
      Directors fees
  102 
  114 
      Bank franchise tax
  152 
  146 
       Other operating expenses
  1,093 
  927 
Total noninterest expense
  7,092 
  6,633 
 
    
    
Income before income taxes
  1,839 
  1,863 
Income tax expense
  153 
  159 
Net Income
  1,686 
  1,704 
        Net income attributable to non-controlling interest
  51 
  16 
Net Income attributable to F & M Bank Corp.
 $1,635 
 $1,688 
        Dividends paid/accumulated on preferred stock
  79 
  104 
Net income available to common stockholders
 $1,556 
 $1,584 
 
Per Common Share Data
 
 
 
 
 
 
Net income – basic
 $.49 
 $.49 
Net income – diluted
 $.47 
 $.47 
Cash dividends on common stock
 $.25 
 $.25 
Weighted average common shares outstanding – basic
  3,200,119 
  3,250,749 
Weighted average common shares outstanding – diluted
  3,447,148 
  3,609,812 
 
See Notes to Consolidated Financial Statements
 
 
4
 
 
F & M BANK CORP.
Consolidated Statements of Income
(Dollars in thousands)
(Unaudited)
 
 
 
Six Months Ended
 
 
 
June 30,
 
Interest and Dividend income
 
2019
 
 
2018
 
Interest and fees on loans held for investment
 $18,194 
 $17,010 
Interest and fees on loans held for sale
  823 
  458 
Interest from money market funds and federal funds sold
  53 
  25 
Interest on debt securities – taxable
  243 
  212 
Total interest and dividend income
  19,313 
  17,705 
 
    
    
Interest expense
    
    
       Total interest on deposits
  2,359 
  1,505 
       Interest from short-term debt
  419 
  136 
       Interest from long-term debt
  446 
  453 
Total interest expense
  3,224 
  2,094 
 
    
    
Net interest income
  16,089 
  15,611 
 
    
    
Provision for Loan Losses
  3,050 
  2,030 
Net Interest Income After Provision for Loan Losses
  13,039 
  13,581 
 
    
    
Noninterest income
    
    
Service charges on deposit accounts
  803 
  724 
Investment services and insurance income
  322 
  420 
        Mortgage banking income, net
  1,345 
  1,135 
        Title insurance income
  682 
  562 
Income on bank owned life insurance
  296 
  222 
        Low income housing partnership losses
  (427)
  (384)
        ATM and check card fees
  898 
  735 
        Other operating income
  346 
  318 
Total noninterest income
  4,265 
  3,732 
 
    
    
Noninterest expense
    
    
Salaries
  5,466 
  6,147 
Employee benefits
  2,634 
  1,876 
Occupancy expense
  571 
  537 
Equipment expense
  563 
  517 
FDIC insurance assessment
  166 
  96 
       Other real estate owned, net
  299 
  2 
       Marketing expense
  287 
  231 
       Legal and professional fees
  350 
  199 
      ATM and check card fees
  406 
  356 
      Telecommunication and data processing expense
  788 
  751 
      Directors fees
  204 
  228 
      Bank franchise tax
  283 
  312 
       Other operating expenses
  2,105 
  1,858 
Total noninterest expense
  14,122 
  13,110 
 
    
    
Income before income taxes
  3,182 
  4,203 
Income tax expense
  232 
  538 
Net Income
  2,950 
  3,665 
        Net income attributable to non-controlling interest
  29 
  5 
Net Income attributable to F & M Bank Corp.
 $2,921 
 $3,660 
        Dividends paid/accumulated on preferred stock
  157 
  207 
Net income available to common stockholders
 $2,764 
 $3,453 
 
Per Common Share Data
    
    
Net income – basic
 $.86 
 $1.06 
Net income – diluted
 $.84 
 $1.01 
Cash dividends on common stock
  .50 
  .70 
Weighted average common shares outstanding – basic
  3,200,119 
  3,253,007 
Weighted average common shares outstanding – diluted
  3,474,569 
  3,612,601 
 
See Notes to Consolidated Financial Statements
 
 
5
 
 
F & M BANK CORP.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 $2,921 
 $3,660 
 $1,635 
 $1,688 
 
    
    
    
    
Other comprehensive income (loss):
    
    
    
    
Unrealized holding gains (losses)
    
    
    
    
     on available-for-sale securities
  113 
  (168)
  80 
  (22)
Tax effect
  24 
  35 
  17 
  4 
Unrealized holding gains (losses), net of tax
  89 
  (133)
  63 
  (18)
Total other comprehensive income (loss)
  89 
  (133)
  63 
  (18)
Total comprehensive income
 $3,010 
 $3,527 
 $1,698 
 $1,670 
 
    
    
    
    
Comprehensive income attributable to noncontrolling interests
 $29 
 $5 
 $51 
 $16 
 
    
    
    
    
Comprehensive income attributable to F&M Bank Corp.
 $3,039 
 $3,532 
 $1,749 
 $1,686 
 
    
    
    
    
 
See Notes to Consolidated Financial Statements
 
 
 
6
 
 
F & M BANK CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
Three Months Ended June 30, 2019 and 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
Preferred
 
 
Common
 
 
Additional Paid in
 
 
Retained
 
 
Noncontrolling
 
 
Comprehensive
 
 
 
 
 
 
Stock
 
 
Stock
 
 
Capital
 
 
Earnings
 
 
Interest
 
 
Loss
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2018
 $7,529 
 $16,279 
 $10,249 
 $61,323 
 $538 
 $(4,257)
 $91,661 
     Net income
  - 
  - 
  - 
  1,688 
  16 
  - 
  1,704 
    Other comprehensive loss
  - 
  - 
  - 
  - 
  - 
  (18)
  (18)
Dividends on preferred stock ($1.488 per share)
  - 
  - 
  - 
  (207)
  - 
  - 
  (207)
Dividends on common stock ($.25 per share)
  - 
  - 
  - 
  (814)
  - 
  - 
  (814)
Common stock repurchased (17,008 shares)
  - 
  (74)
  (477)
  - 
  - 
  - 
  (551)
Common stock issued (4,434 shares)
  - 
  7 
  46 
  - 
  - 
  - 
  53 
Preferred stock repurchased (1,640 shares)
  (41)
  - 
  (22)
  - 
  - 
  - 
  (63)
 
    
    
    
    
    
    
    
Balance, June 30, 2018
 $7,488 
 $16,212 
 $9,796 
 $61,989 
 $554 
 $(4,275)
 $91,764 
 
    
    
    
    
    
    
    
Balance March 31, 2019
 $5,592 
 $16,019 
 $7,707 
 $66,063 
 $537 
 $(3,943)
 $91,975 
     Net income
  - 
  - 
  - 
  1,635 
  51 
  - 
  1,686 
    Other comprehensive income
  - 
  - 
  - 
  - 
  - 
  63 
  63 
Dividends on preferred stock ($1.488 per share)
  - 
  - 
  - 
  (158)
  - 
  - 
  (158)
Dividends on common stock ($.80 per share)
  - 
  - 
  - 
  (799)
  - 
  - 
  (799)
Common stock repurchased (22,583 shares)
  - 
  (124)
  (642)
  - 
  - 
  - 
  (766)
Common stock issued (7,494 shares)
  - 
  12 
  62 
  - 
  - 
  - 
  74 
 
    
    
    
    
    
    
    
Balance, June 30, 2019
 $5,592 
 $15,907 
 $7,127 
 $66,741 
 $588 
 $(3,880)
 $92,075 
 
 
See Notes to Consolidated Financial Statements
 
 
7
 
 
F & M BANK CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30, 2019 and 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
Preferred
 
 
Common
 
 
Additional Paid in
 
 
Retained
 
 
Noncontrolling
 
 
Comprehensive
 
 
 
 
 
 
Stock
 
 
Stock
 
 
Capital
 
 
Earnings
 
 
Interest
 
 
Loss
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 $7,529 
 $16,275 
 $10,225 
 $60,814 
 $574 
 $(4,142)
 $91,275 
Net Income
  - 
  - 
  - 
  3,660 
  5 
  - 
  3,665 
Other comprehensive loss
  - 
  - 
  - 
  - 
  - 
  (133)
  (133)
Distributions to noncontrolling interest
  - 
  - 
  - 
  - 
  (25)
  - 
  (25)
Dividends on preferred stock ($1.28 per share)
  - 
  - 
  - 
  (207)
  - 
  - 
  (207)
Dividends on common stock ($1.20 per share)
  - 
  - 
  - 
  (2,278)
  - 
  - 
  (2,278)
Common stock repurchased (49,446 shares)
  - 
  (85)
  (539)
  - 
  - 
  - 
  (624)
Common stock issued (7,542 shares)
  - 
  22 
  132 
  - 
  - 
  - 
  154 
Preferred stock repurchased (1,640 shares)
  (41)
  - 
  (22)
  - 
  - 
  - 
  (63)
 
    
    
    
    
    
    
    
Balance, June 30, 2018
 $7,488 
 $16,212 
 $9,796 
 $61,989 
 $554 
 $(4,275)
 $91,764 
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
Balance, December 31, 2018
 $5,672 
 $16,066 
 $7,987 
 $65,596 
 $559 
 $(3,969)
 $91,911 
Net Income
  - 
  - 
  - 
  2,921 
  29 
  - 
  2,950 
Other comprehensive income
  - 
  - 
  - 
  - 
  - 
  89 
  89 
Distributions to noncontrolling interest
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Dividends on preferred stock ($1.28 per share)
  - 
  - 
  - 
  (157)
  - 
  - 
  (157)
Dividends on common stock ($1.20 per share)
  - 
  - 
  - 
  (1,619)
  - 
  - 
  (1,619)
Preferred converted to Common (2,000 pfd shares)
  (50)
  11 
  39 
  - 
  - 
  - 
  - 
Common stock repurchased (49,446 shares)
  - 
  (190)
  (997)
  - 
  - 
  - 
  (1,187)
Common stock issued (7,542 shares)
  - 
  20 
  109 
  - 
  - 
  - 
  129 
Preferred stock repurchased (1,200 shares)
  (30)
  - 
  (11)
  - 
  - 
  - 
  (41)
 
    
    
    
    
    
    
    
Balance, June 30, 2019
 $5,592 
 $15,907 
 $7,127 
 $66,741 
 $588 
 $(3,880)
 $92,075 
 
See Notes to Consolidated Financial Statements
 
 
8
 
 
 
F & M BANK CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 $2,921 
 $3,660 
Reconcile net income to net cash provided by operating activities:
    
    
Depreciation
  603 
  563 
Amortization of intangibles
  41 
  33 
Amortization of securities
  1 
  3 
Proceeds from loans held for sale originated
  55,011 
  22,918 
Loans held for sale originated
  (53,685)
  (21,813)
Gain on sale of loans held for sale originated
  (1,326)
  (1,105)
Provision for loan losses
  3,050 
  2,030 
(Increase) decrease in interest receivable
  (69)
  24 
Increase in other assets
  (752)
  (566)
Increase (decrease) in accrued liabilities
  1,372 
  (1,317)
Amortization of limited partnership investments
  427 
  384 
Income from life insurance investment
  (296)
  (222)
Loss (gain) on the sale of fixed assets
  10 
  (9)
               Loss (gain) on sale and valuation adjustments for other real estate owned
  274 
  (30)
  Net cash provided by operating activities
  7,582 
  4,553 
Cash flows from investing activities
    
    
Purchase of investments available for sale and other investments
  (2,054)
  (3,361)
Purchase of title insurance company
  - 
  (75)
Proceeds from maturity of investments available for sale
  59 
  20,893 
Net decrease (increase) in loans held for investment
  92 
  (18,137)
Net increase in loans held for sale participations
  (22,496)
  (10,046)
Purchase of bank owned life insurance
  - 
  (5,000)
Proceeds from the sale of fixed assets
  - 
  9 
Proceeds from the sale of other real estate owned
  260 
  - 
Net purchase of property and equipment
  (1,428)
  (2,156)
  Net cash used in investing activities
  (25,567)
  (17,873)
Cash flows from financing activities
    
    
Net change in deposits
  17,145 
  (611)
Net change in short-term debt
  (116)
  20,704 
Dividends paid in cash
  (1,776)
  (2,485)
Proceeds from issuance of common stock
  129 
  154 
Repurchase of preferred stock
  (41)
  (63)
Repurchase of common stock
  (1,187)
  (624)
Issuance of long-term debt
  10,000 
  - 
Repayments of long-term debt
  (2,301)
  (2,298)
  Net cash provided by financing activities
  21,853 
  14,777 
Net increase in Cash and Cash Equivalents
  3,868 
  1,457 
Cash and cash equivalents, beginning of period
  10,912 
  11,907 
Cash and cash equivalents, end of period
 $14,780 
 $13,364 
Supplemental Cash Flow information:
    
    
Cash paid for:
    
    
Interest
 $3,201 
 $2,087 
           Taxes
  - 
  1,357 
Supplemental non-cash disclosures:
    
    
Transfer from loans to other real estate owned
  60 
  20 
Change in unrealized gain (loss) on securities available for sale
  113 
  (168)
Right of Use asset and lease liability at adoption
  1,034 
  - 
See Notes to Consolidated Financial Statements
 
9
 
Notes to the Consolidated Financial Statements
 
Note 1.           
Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC (dba F&M Mortgage), (net of non-controlling interest) and VSTitle, LLC and were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).
 
The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Nature of Operations
 
The Company, through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily located in Rockingham, Shenandoah, Page and Augusta Counties in Virginia. Services are provided at thirteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc. (FMFS), F&M Mortgage, and VSTitle, LLC (VST).
 
Basis of Presentation
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangibles, fair value, the valuation of deferred tax assets and liabilities, pension accounting and the valuation of foreclosed real estate. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.
 
Reclassification
 
Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.
 
 
10
 
 
Note 1.           
Summary of Significant Accounting Policies, continued
 
Earnings per Share
 
Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  In calculating diluted EPS, net income available to common stockholders is used as the numerator and the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per share calculation.
 
Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.
 
The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:  
 
(dollars in thousands)
 
For the Six months ended
 
 
For the Three months ended
 
 
For the Six months ended
 
 
For the Three months ended
 
 
 
June 30, 2019
 
 
June 30, 2019
 
 
June 30, 2018
 
 
June 30, 2018
 
Earnings available to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 $2,950 
 $1,686 
 $3,665 
 $1,704 
Non-controlling interest income
  29 
  51 
  5 
  16 
Preferred stock dividends
  157 
  79 
  207 
  104 
Net income available to common stockholders
 $2,764 
 $1,556 
 $3,453 
 $1,584 
 
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated:
 
 
 
Six months ended June 30, 2019
 
 
Six months ended June 30, 2018
 
 
 
Income
 
 
Weighted Average Shares
 
 
Per Share Amounts
 
 
Income
 
 
Weighted Average Shares
 
 
Per Share Amounts
 
Basic EPS
 $2,764 
  3,200,119 
 $.86 
 $3,453 
  3,253,007 
 $1.06 
Effect of Dilutive Securities:
    
    
    
    
    
    
     Convertible Preferred Stock
  157 
  274,450 
  (.02)
  207 
  359,594 
  (.05)
Diluted EPS
 $2,921 
  3,474,569 
 $.84 
 $3,660 
  3,612,601 
 $1.01 
 
 
 
Three months ended June 30, 2019
 
 
Three months ended June 30, 2018
 
 
 
Income
 
 
Weighted Average Shares
 
 
Per Share Amounts
 
 
Income
 
 
Weighted Average Shares
 
 
Per Share Amounts
 
Basic EPS
 $1,556 
  3,200,119 
 $.49 
 $1,584 
  3,250,749 
 $.49 
Effect of Dilutive Securities:
    
    
    
    
    
    
     Convertible Preferred Stock
  79 
  247,029 
  (.02)
  104 
  359,063 
  (.02)
Diluted EPS
 $1,635 
  3,447,148 
 $.47 
 $1,688 
  3,609,812 
 $.47 
 
 
 
11
 
 
Note 2. 
Investment Securities
 
Investment securities available for sale are carried in the consolidated balance sheets at their approximate fair value. Investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost at June 30, 2019 and December 31, 2018 are as follows:
 
 
 
 
 
 
Gross
 
 
Gross
 
 
 
 
 
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasuries
 $124 
 $- 
 $- 
 $124 
December 31, 2018
    
    
    
    
U. S. Treasuries
 $123 
 $- 
 $- 
 $123 
 
    
    
    
    
 
The amortized cost and fair value of securities available for sale are as follows:
 
 
 
Amortized Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
 
Fair Value
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Government sponsored enterprises
 $7,999 
 $2
 $11
 $7,990 
Mortgage-backed obligations of federal agencies
  361 
  3 
  - 
  364 
Total Securities Available for Sale
 $8,360 
 $5
 $11
 $8,354 
 
    
    
    
    
December 31, 2018
    
    
    
    
U.S. Government sponsored enterprises
 $7,999 
 $- 
 $113 
 $7,886 
Mortgage-backed obligations of federal agencies
  409 
  - 
  6 
  403 
Total Securities Available for Sale
 $8,408 
 $- 
 $119 
 $8,289 
 
The amortized cost and fair value of securities at June 30, 2019, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
Securities Held to Maturity
 
 
Securities Available for Sale
 
 
 
Amortized
 
 
Fair
 
 
Amortized
 
 
Fair
 
(dollars in thousands)
 
Cost
 
 
Value
 
 
Cost
 
 
Value
 
Due in one year or less
 $124 
 $124 
 $1,995 
 $1,995 
Due after one year through five years
  - 
  - 
  6,005 
  5,995 
Due after five years
  - 
  - 
  360 
  364 
Total
 $124 
 $124 
 $8,360 
 $8,354 
 
There were no sales of available for sale securities in the first or second quarters of 2019 or 2018. The securities held are U.S. Agency and Government Sponsored Entities and Agency MBS which carry an implicit government guarantee. There were no securities with other than temporary impairment.
 
 
12
 
 
Note 2.          Investment Securities, continued
 
A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type of June 30, 2019 and December 31, 2018 were as follows:
 
 
 
Less than 12 Months
 
 
More than 12 Months
 
 
Total
 
 
 
Fair Value
 
 
Unrealized Losses
 
 
Fair Value
 
 
Unrealized Losses
 
 
Fair Value
 
 
Unrealized Losses
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Government sponsored enterprises (Three securities)
 $- 
 $- 
 $5,998 
 $(11)
 $5,998 
 $(11)
Total
 $- 
 $- 
 $5,998 
 $(11)
 $5,998 
 $(11)
 
 
 
Less than 12 Months
 
 
More than 12 Months
 
 
Total
 
 
 
Fair Value
 
 
Unrealized Losses
 
 
Fair Value
 
 
Unrealized Losses
 
 
Fair Value
 
 
Unrealized Losses
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Government sponsored enterprises (Four securities)
 $- 
 $- 
 $7,886 
 $(113)
 $7,886 
 $(113)
Mortgage-backed obligations of federal agencies (One security)
  - 
  - 
  403 
  (6)
  403 
  (6)
Total
 $- 
 $- 
 $8,289 
 $(119)
 $8,289 
 $(119)
 
Other investments consist of investments in twenty low-income housing and historic equity partnerships (carrying basis of $9,000), stock in the Federal Home Loan Bank (carrying basis $4,443 and various other investments (carrying basis $1,604). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of June 30, 2019. At June 30, 2019, the Company was committed to invest an additional $3,988 in six low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in accrued liabilities on the consolidated balance sheet.
 
Note 3.     
Loans
 
(dollars in thousands)
 
2019
 
 
2018
 
Construction/Land Development
 $66,959 
 $61,659 
Farmland
  25,608 
  17,030 
Real Estate
  182,838 
  192,278 
Multi-Family
  9,247 
  9,665 
Commercial Real Estate
  140,967 
  147,342 
Home Equity – closed end
  9,024 
  11,039 
Home Equity – open end
  50,326 
  53,197 
Commercial & Industrial – Non-Real Estate
  34,356 
  36,021 
Consumer
  10,181 
  9,861 
Dealer Finance
  103,922 
  97,523 
Credit Cards
  2,979 
  3,184 
Total
 $636,407 
 $638,799 
 
Loans held for investment outstanding at June 30, 2019 and December 31, 2018 are summarized as follows:
 
The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $189,972 and $186,673 as of June 30, 2019 and December 31, 2018, respectively. The Company maintains a blanket lien on its entire residential real estate portfolio and certain commercial and home equity loans.
 
 
13
 
Note 3.  
Loans, continued
 
 
 
June 30, 2019
 
 
December 31, 2018
 
 
 
 
 
 
Unpaid
 
 
 
 
 
 
 
 
Unpaid
 
 
 
 
 
 
Recorded
 
 
Principal
 
 
Related
 
 
Recorded
 
 
Principal
 
 
Related
 
 
 
Investment
 
 
Balance
 
 
Allowance
 
 
Investment
 
 
Balance
 
 
Allowance
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $1,977 
 $1,977 
 $- 
 $2,414 
 $2,414 
 $- 
     Farmland
  1,943 
  1,943 
  - 
  1,941 
  1,941 
  - 
     Real Estate
  2,109 
  2,109 
  - 
  1,932 
  1,932 
  - 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  1,977 
  1,977 
  - 
  6,176 
  6,176 
  - 
     Home Equity – closed end
  720 
  720 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial & Industrial – Non-Real Estate
  23 
  23 
  - 
  - 
  - 
  - 
     Consumer
  - 
  - 
  - 
  - 
  - 
  - 
     Credit cards
  - 
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  33 
  33 
  - 
  32 
  32 
  - 
 
  8,782 
  8,782 
  - 
  12,495 
  12,495 
    
Impaired loans with a valuation allowance
    
    
    
    
    
    
     Construction/Land Development
  2,580 
  4,166 
  573 
  4,311 
  4,871 
  1,627 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  416 
  416 
  8 
  422 
  422 
  7 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  4,111 
  4,111 
  566 
  - 
  1,500 
  - 
     Home Equity – closed end
  - 
  - 
  - 
  - 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial & Industrial – Non-Real Estate
  - 
  - 
  - 
  - 
  - 
  - 
     Consumer
  4 
  4 
  1 
  8 
  8 
  2 
     Credit cards
  - 
  - 
  - 
  - 
  - 
  - 
     Dealer Finance
  193 
  193 
  11 
  194 
 194 
  10 
 
  7,304 
  8,890 
  1,159 
  4,935 
  6,995 
  1,646 
Total impaired loans
 $16,086 
 $17,672 
 $1,159 
 $17,430 
 $19,490 
 $1,646 
 
The following is a summary of information pertaining to impaired loans (dollars in thousand):
 
The Recorded Investment is defined as the original principal balance less principal payments, charge-offs and nonaccrual payments applied to principal.
 
Loans held for sale consists of loans originated by F&M Mortgage for sale in the secondary market, and the Bank’s commitment to purchase residential mortgage loan participations from Northpointe Bank. The volume of loans purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of June 30, 2019 and December 31, 2018 were $78,406 and $55,910, respectively.
 
 
14
 
Note 3.
Loans Held for Investment, continued
 
The following is a summary of the average investment and interest income recognized for impaired loans (dollars in thousands):
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
Average Recorded
 
 
Interest Income
 
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
 
Investment
 
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $2,011 
 $84 
 $4,759 
 $45 
 $2,195 
 $123 
 $4,929 
 $79 
     Farmland
  1,942 
  1 
  1,984 
  62 
  1,942 
  1 
  1,984 
  62 
     Real Estate
  2,013 
  (7)
  837 
  (6)
  2,020 
  22 
  982 
  11 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  1,901 
  189 
  797 
  4 
  4,076 
  228 
  2,608 
  9 
     Home Equity – closed end
  360 
  - 
  - 
  - 
  360 
  - 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  - 
  - 
  - 
  116 
  - 
     Commercial & Industrial – Non-Real Estate
  12 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Consumer and credit cards
  - 
  - 
  - 
  - 
  12 
  - 
  3 
  - 
     Dealer Finance
  45 
  (1)
  33 
  - 
  33 
  0 
  32 
  1 
 
  8,284 
  266 
  8,410 
  105 
  10,638 
  374 
  10,654 
  162 
Impaired loans with a valuation allowance:
    
    
    
    
    
    
    
    
     Construction/Land Development
 $2,651 
 $(27)
 $7,417 
 $64 
 $3,445 
 $31 
 $6,610 
 $98 
     Farmland
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Real Estate
  417 
  58 
  1,283 
  9 
  419 
  65 
  1,251 
  27 
     Multi-Family
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial Real Estate
  4,152 
  (104)
  5,407 
  73 
  2,056 
  33 
  3,605 
  141 
     Home Equity – closed end
  - 
  41 
  - 
  - 
  - 
  41 
  - 
  - 
     Home Equity – open end
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
     Commercial & Industrial – Non-Real Estate
  - 
  2 
  - 
  - 
  - 
  1 
  - 
  - 
     Consumer and credit card
  5 
  - 
  12 
  - 
  6 
  - 
  8 
  1 
     Dealer Finance
  176 
  5 
  198 
  4 
  194 
  9 
  148 
  8 
 
  7,401 
  (25)
  14,317 
  150 
  6,120 
  180 
  11,622 
  275 
Total Impaired Loans
 $15,685 
 $241 
 $22,727 
 $255 
 $16,758 
 $554 
 $22,276 
 $437 
 
 
15
 
 
Note 3.   
Loans, continued
 
The following table presents the aging of the recorded investment of past due loans (dollars in thousands) as of June 30, 2019 and December 31, 2018:
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
 
Non-Accrual Loans
 
 
Recorded Investment >90 days & accruing
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $799 
 $1,224 
 $899 
 $2,922 
 $64,037 
 $66,959 
 $2,627 
 $- 
Farmland
  - 
  - 
  1,942 
  1,942 
  23,666 
  25,608 
  1,942 
  - 
Real Estate
  2,094 
  1,903 
  1,176 
  5,173 
  177,665 
  182,838 
  1,523 
  343 
Multi-Family
  - 
  - 
  - 
  - 
  9,247 
  9,247 
  - 
  - 
Commercial Real Estate
  1,446 
  4,772 
  52 
  6,270 
  134,697 
  140,967 
  4,817 
  - 
Home Equity – closed end
  3 
  101 
  - 
  104 
  8,920 
  9,024 
  - 
  - 
Home Equity – open end
  574 
  99 
  166 
  839 
  49,487 
  50,326 
  139 
  27 
Commercial & Industrial – Non- Real Estate
  197 
  373 
  - 
  570 
  33,786 
  34,356 
  12 
  - 
Consumer
  96 
  4 
  55 
  155 
  10,026 
  10,181 
  78 
  - 
Dealer Finance
  1,324 
  415 
  162 
  1,901 
  102,021 
  103,922 
  177 
  - 
Credit Cards
  167 
  - 
  - 
  167 
  2,812 
  2,979 
  - 
  3 
Total
 $6,700 
 $8,891 
 $4,452 
 $20,043 
 $616,364 
 $636,407 
 $11,315 
 $373 
 
 
 
30-59 Days Past due
 
 
60-89 Days Past Due
 
 
Greater than 90 Days
 
 
Total Past Due
 
 
Current
 
 
Total Loan Receivable
 
 
Non-Accrual Loans
 
 
Recorded Investment >90 days & accruing
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $290 
 $- 
 $1,767 
 $2,057 
 $59,602 
 $61,659 
 $2,327 
 $- 
Farmland
  - 
  - 
  - 
  - 
  17,030 
  17,030 
  - 
  - 
Real Estate
  3,074 
  677 
  1,729 
  5,480 
  186,798 
  192,278 
  1,477 
  726 
Multi-Family
  - 
  - 
  - 
  - 
  9,665 
  9,665 
  - 
  - 
Commercial Real Estate
  479 
  189 
  5,073 
  5,741 
  141,601 
  147,342 
  5,074 
  - 
Home Equity – closed end
  - 
  - 
  12 
  12 
  11,027 
  11,039 
  - 
  12 
Home Equity – open end
  148 
  171 
  320 
  639 
  52,558 
  53,197 
  269 
  51 
Commercial & Industrial – Non- Real Estate
  40 
  22 
  80 
  142 
  35,879 
  36,021 
  98 
  - 
Consumer
  89 
  26 
  3 
  118 
  9,743 
  9,861 
  5 
  2 
Dealer Finance
  2,763 
  337 
  96 
  3,196 
  94,327 
  97,523 
  155 
  9 
Credit Cards
  50 
  11 
  9 
  70 
  3,114 
  3,184 
  - 
  - 
Total
 $6,933 
 $1,433 
 $9,089 
 $17,455 
 $621,344 
 $638,799 
 $9,405 
 $800 
 
At June 30, 2019 and December 31, 2018, other real estate owned included $345 and $375 of foreclosed residential real estate. The Company has $521 of consumer mortgages for which foreclosure is in process at June 30, 2019 and $103 at December 31, 2018.
 
For the six months ended June 30, 2019 and June 30, 3018, nonaccrual loans would have earned approximately $160 and $252, respectively, in interest income had they been accruing loans.
 
 
16
 
 
 
Note 4.  
Allowance for Loan Losses
 
A summary of changes in the allowance for loan losses (dollars in thousands) for June 30, 2019 and December 31, 2018 is as follows:
 
June 30, 2019
 
Beginning Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
Ending Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $2,094 
 $1,585 
 $- 
 $1,334 
 $1,843 
 $573 
 $1,270 
Farmland
  15 
  - 
  - 
  10 
  25 
  - 
  25 
Real Estate
  292 
  25 
  1 
  8 
  276 
  8 
  268 
Multi-Family
  10 
  - 
  - 
  - 
  10 
  - 
  10 
Commercial Real Estate
  416 
  - 
  16 
  985 
  1,417 
  566 
  851 
Home Equity – closed end
  13 
  - 
  - 
  (4)
  9 
  - 
  9 
Home Equity – open end
  126 
  30 
  - 
  (43)
  53 
  - 
  53 
 Commercial & Industrial – Non-Real Estate
  192 
  126 
  72 
  283 
  421 
  - 
  421 
 Consumer
  70 
  63 
  29 
  19 
  55 
  - 
  55 
Dealer Finance
  1,974 
  1,088 
  595 
  393 
  1,874 
  12 
  1,862 
Credit Cards
  38 
  52 
  16 
  65 
  67 
  - 
  67 
Total
 $5,240 
 $2,969 
 $729 
 $3,050 
 $6,050 
 $1,159 
 $4,891 
 
December 31, 2018
 
Beginning Balance
 
 
Charge-offs
 
 
Recoveries
 
 
Provision
 
 
Ending Balance
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction/Land Development
 $2,547 
 $489 
 $122 
 $(86)
 $2,094 
 $1,627 
 $467 
Farmland
  25 
  - 
  - 
  (10)
  15 
  - 
  15 
Real Estate
  719 
  99 
  12 
  (340)
  292 
  7 
  285 
Multi-Family
  19 
  - 
  - 
  (9)
  10 
  - 
  10 
Commercial Real Estate
  482 
  1,546 
  1 
  1,479 
  416 
  - 
  416 
Home Equity – closed end
  66 
  3 
  4 
  (54)
  13 
  - 
  13 
Home Equity – open end
  209 
  - 
  8 
  (91)
  126 
  - 
  126 
 Commercial & Industrial – Non-Real Estate
  337 
  573 
  91 
  337 
  192 
  - 
  192 
 Consumer
  148 
  51 
  41 
  (68)
  70 
  2 
  68 
Dealer Finance
  1,440 
  2,083 
  861 
  1,756 
  1,974 
  10 
  1,964 
Credit Cards
  52 
  76 
  46 
  16 
  38 
  - 
  38 
Total
 $6,044 
 $4,920 
 $1,186 
 $2,930 
 $5,240 
 $1,646 
 $3,594 
 
 
 
17
 
Note 4.    
Allowance for Loan Losses, continued
 
The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $66,959 
 $4,557 
 $62,402 
Farmland
  25,608 
  1,943 
  23,665 
Real Estate
  182,838 
  2,525 
  180,313 
Multi-Family
  9,247 
  - 
  9,247 
Commercial Real Estate
  140,967 
  6,088 
  134,879 
Home Equity – closed end
  9,024 
  720 
  8,304 
Home Equity –open end
  50,326 
  - 
  50,326 
Commercial & Industrial – Non-Real Estate
  34,356 
  23 
  34,333 
Consumer
  10,181 
  4 
  10,177 
Dealer Finance
  103,922 
  226 
  103,696 
Credit Cards
  2,979 
  - 
  2,979 
 
 $636,407 
 $16,086 
 $620,321 
Total
    
    
    
 
December 31, 2018
 
Loan Receivable
 
 
Individually Evaluated for Impairment
 
 
Collectively Evaluated for Impairment
 
Construction/Land Development
 $61,659 
 $6,725 
 $54,934 
Farmland
  17,030 
  1,941 
  15,089 
Real Estate
  192,278 
  2,354 
  189,924 
Multi-Family
  9,665 
  - 
  9,665 
Commercial Real Estate
  147,342 
  6,176 
  141,166 
Home Equity – closed end
  11,039 
  - 
  11,039 
Home Equity –open end
  53,197 
  - 
  53,197 
Commercial & Industrial – Non-Real Estate
  36,021 
  - 
  36,021 
Consumer
  9,861 
  8 
  9,853 
Dealer Finance
  97,523 
  226 
  97,297 
Credit Cards
  3,184 
  - 
  3,184 
 
 $638,799 
 $17,430 
 $621,369 
Total
    
    
    
 
During the second quarter of 2019, management changed the historical net charge off lookback period from five years to two years for all segments given recent asset quality trends and charge off experience. Management believes the two year lookback period is more indicative of the risk remaining in the loan portfolio.
 
This change and the effect on provision expense for the six months ended June 30, 2019 and the allowance for loan losses at June 30, 2019 was as follows:
 
 
 
Calculated Provision Based on Current Methodology
 
 
Calculated Provision Based on Prior Methodology
 
 
Difference
 
Construction and Development
 $1,334 
 $715 
 $619 
Farmland
  10 
  10 
  - 
Real Estate
  8 
  (6)
  14 
Multi-Family
  - 
  - 
  - 
Commercial RE
  985 
  531 
  454 
Home Equity - Closed End
  4 
  5 
  (1)
Home Equity - Open End
  43 
  110 
  (67)
C&I - Non - RE
  283 
  (16)
  300 
Consumer
  19 
  (15)
  34 
Dealer Finance
  393 
  393 
  - 
Credit Cards
  65 
  42 
  23 
 
 $3,050 
 $1 675 
 $1,375 
 
 
18
 
 
Note 4.   
Allowance for Loan Losses, continued
 
The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands) as of June 30, 2019 and December 31, 2018:

June 30, 2019
 
 
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
 $- 
 $453 
 $18,520 
 $35,043 
 $9,076 
 $128 
 $3,739 
 $- 
 $66,959 
Farmland
  61 
  398 
  6,661 
  13,084 
  2,962 
  500 
  1,942 
  - 
  25,608 
Real Estate
  - 
  1,683 
  52,573 
  98,278 
  22,537 
  3,200 
  4,567 
  - 
  182,838 
Multi-Family
  - 
  - 
  2,585 
  6,503 
  159 
  - 
  - 
  - 
  9,247 
Commercial Real Estate
  - 
  2,112 
  44,155 
  76,961 
  12,078 
  844 
  4,817 
  - 
  140,967 
Home Equity – closed end
  - 
  152 
  2,711 
  4,074 
  1,984 
  102 
  1 
  - 
  9,024 
Home Equity – open end
  9 
  2,265 
  18,306 
  25,843 
  3,368 
  199 
  336 
  - 
  50,326 
Commercial & Industrial (Non-Real Estate)
  163 
  2,409 
  16,242 
  13,207 
  1,771 
  503 
  61 
  - 
  34,356 
Consumer (excluding dealer)
  33 
  157 
  3,334 
  4,778 
  1,732 
  53 
  94 
  - 
  10,181 
Total
 $266 
 $9,629 
 $165,087 
 $277,771 
 $55,667 
 $5,529 
 $15,557 
 $- 
 $529,506 
 
 
 
Credit Cards
 
 
Dealer Finance
 
Performing
 $2,979 
 $103,745 
Non-performing
  - 
  177 
Total
 $2,979 
 $103,922 
 
 
19
 
 
Note 4.  
Allowance for Loan Losses, continued
 
 December 31, 2018
 
Grade 1 Minimal Risk
 
 
Grade 2 Modest Risk
 
 
Grade 3 Average Risk
 
 
Grade 4 Acceptable Risk
 
 
Grade 5 Marginally Acceptable
 
 
Grade 6 Watch
 
 
Grade 7 Substandard
 
 
Grade 8 Doubtful
 
 
Total
 
Construction/Land Development
 $- 
 $1,148 
 $15,857 
 $29,301 
 $9,353 
 $- 
 $6,000 
 $- 
 $61,659 
Farmland
  62 
  - 
  4,953 
  6,376 
  3,205 
  493 
  1,941 
  - 
  17,030 
Real Estate
  - 
  1,644 
  55,429 
  106,387 
  22,679 
  1,531 
  4,608 
  - 
  192,278 
Multi-Family
  - 
    
  2,895 
  6,604 
  166 
  - 
  - 
  - 
  9,665 
Commercial Real Estate
  - 
  2,437 
  44,065 
  81,916 
  11,564 
  2,286 
  5,074 
  - 
  147,342 
Home Equity – closed end
  - 
  31 
  3,245 
  5,842 
  1,909 
  - 
  12 
  - 
  11,039 
Home Equity – open end
  60 
  1,554 
  19,464 
  27,347 
  4,157 
  223 
  392 
  - 
  53,197 
Commercial & Industrial (Non-Real Estate)
  193 
  2,291 
  17,144 
  13,254 
  2,704 
  337 
  98 
  - 
  36,021 
Consumer (excluding dealer)
  27 
  190 
  2,648 
  5,192 
  1,800 
  - 
  4 
  - 
  9,861 
Total
 $342 
 $9,295 
 $165,700 
 $282,219 
 $57,537 
 $4,870 
 $18,129 
 $- 
 $538,092 
 
 
 
Credit Cards
 
 
Dealer Finance
 
Performing
 $3,175 
 $97,368 
Non-performing
  9 
  155 
Total
 $3,184 
 $97,523 
 
Description of internal loan grades:
 
Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.
 
Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.
 
Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.
 
Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must be covered through additional long term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.
 
 
20
 
 
Note 4.    
Allowance for Loan Losses, continued
 
Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.
 
Grade 6 – Watch: Loans are currently protected, but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.
 
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.
 
Grade 8 – Doubtful: The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.
 
Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming when payments of principal and interest are past due 90 days or more.
 
Note 5.      
Employee Benefit Plan
 
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31st as the measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in 2019.
 
 The following is a summary of net periodic pension costs for the three and six month periods ended June 30, 2019 and 2018:
 
 
 
Six Months Ended
 
 
Three Months Ended
 
 
 
June 30, 2019
 
 
June 30, 2018
 
 
June 30, 2019
 
 
June 30, 2018
 
Service cost
 $369 
 $384 
 $184 
 $192 
Interest cost
  274 
  248 
  137 
  124 
Expected return on plan assets
  (403)
  (462)
  (201)
  (231)
Amortization of prior service cost
  (8)
  (8)
  (4)
  (4)
Amortization of net loss
  141 
  152 
  71 
  76 
Net periodic pension cost
 $373 
 $314 
 $187 
 $157 
 
 
 
21
 
 
Note 6.  
Fair Value
 
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
 
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
 
The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.
 
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
 
 
Level 1 –
Valuation is based on quoted prices in active markets for identical assets and liabilities.
 
Level 2 –
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
 
Level 3 –
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
 
 
22
 
Note 6.     
Fair Value, continued
 
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
 
Securities
 
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.
 
Derivatives
 
The Company’s derivatives are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs.
 
The following tables present the balances of financial assets measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
June 30, 2019
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
 $7,990 
 $- 
 $7,990 
 $- 
Mortgage-backed obligations of federal agencies
  364 
  - 
  364 
  - 
Total securities available for sale
 $8,354 
 $- 
 $8,354 
 $- 
Derivatives (Indexed CD product)
 $67 
 $- 
 $67 
 $- 
 
    
    
    
    
 
December 31, 2018
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Government sponsored enterprises
 $7,886 
  - 
 $7,886 
  - 
Mortgage-backed obligations of federal agencies
  403 
  - 
  403 
  - 
Total securities available for sale
 $8,289 
 $- 
 $8,289 
 $- 
Derivatives (Indexed CD product)
 $44 
  - 
 $44 
  - 
 
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
 
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
 
Loans Held for Sale
 
Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan and loans originated by F&M Mortgage for sale in the secondary market. Loan participations are generally repurchased within 15 days.  Loans originated for sale by F&M Mortgage are recorded at lower of cost or market. No market adjustments were required at June 30, 2019 or December 31, 2018; therefore, loans held for sale were carried at cost. Because of the short-term nature and fixed repurchase price, the book value of these loans approximate fair value at June 30, 2019 and December 31, 2018.

 
23
 
 
Note 6.     
Fair Value, continued
 
Impaired Loans
 
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
 
The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.
 
Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations.
 
The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation approach.  Appraisals conducted by an independent, licensed appraiser outside of the Company as observable market data is categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
 
As of June 30, 2019 and December 31, 2018, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.
 
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):
 
June 30, 2019
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $2,007 
 $- 
 $- 
 $2,007 
     Real Estate
  408 
  - 
  - 
  408 
     Commercial Real Estate
  3,545 
  - 
  - 
  3,545 
     Consumer
  3 
  - 
  - 
  3 
     Dealer Finance
  182 
  - 
  - 
  182 
Impaired loans
 $6,145 
 $- 
 $- 
 $6,145 
 
December 31, 2018
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction/Land Development
 $2,684 
  - 
  - 
 $2,684 
     Real Estate
  415 
  - 
  - 
  415 
     Consumer
  6 
    
    
  6 
     Dealer Finance
  184 
  - 
  - 
  184 
Impaired loans
 $3,289 
  - 
  - 
 $3,289 
 
 
24
 
 
Note 6.   
Fair Value, continued
 
The following table presents information about Level 3 Fair Value Measurements for June 30, 2019:
 
 
 
Fair Value at
June 30,
2019
 
 
Valuation Technique
 
 
Significant Unobservable Inputs
 
 
Range
 
(dollars in thousands)
 
 



Impaired Loans
 $6,145 
Discounted appraised value
Discount for selling costs and marketability
6%-28% (Average 11.8%)
 
The following table presents information about Level 3 Fair Value Measurements for December 31, 2018:
 
 
 
Fair Value at
December 31,
2018
 
 
Valuation Technique
 
 
Significant Unobservable Inputs
 
 
Range
 
(dollars in thousands)
   



Impaired Loans
 $3,289 
Discounted appraised value
Discount for selling costs and marketability
2%-9% (Average 4.21 %)
 
Other Real Estate Owned
 
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
 
The Company markets other real estate owned both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.
 
The following table summarizes the Company’s other real estate owned that were measured at fair value on a nonrecurring basis as of June 30, 2019 and December 31, 2018 (dollars in thousands).
 
June 30, 2019
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 $1,969 
  - 
  - 
 $1,969 
 
December 31, 2018
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 $2,443 
  - 
  - 
 $2,443 
 
The following table presents information about Level 3 Fair Value Measurements for June 30, 2019:
 
 
 
Fair Value at
June 30,
2019
 
 
Valuation Technique
 
 
Significant Unobservable Inputs
 
 
Range
 
(dollars in thousands)
 
 
 
 
 
 
Other real estate owned
 $1,969 
Discounted appraised value
Discount for selling costs
2.5%-10% (Average 4%)
 
The following table presents information about Level 3 Fair Value Measurements for December 31, 2018:
 
 
 
Fair Value at
December 31,
2018
 
 
Valuation Technique
 
 
Significant Unobservable Inputs
 
 
Range
 
(dollars in thousands)
 
 
 
 
 
 
Other real estate owned
 $2,443 
Discounted appraised value
Discount for selling costs
5%-15% (Average 8%)
 
 
25
 
 
Note 7. Disclosures about Fair Value of Financial Instruments
 
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2019 and December 31, 2018. For short-term financial assets such as cash and cash equivalents and short-term liabilities, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest bearing demand, interest bearing demand and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.
 
The estimated fair values, and related carrying amounts (dollars in thousands), of the Company’s financial instruments are as follows:
 
 
 
 
 
 
Fair Value Measurements at June 30, 2019 Using
 
(dollars in thousands)
 
Carrying Amount
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Significant Other Observable Inputs (Level 2)
 
 
Significant Unobservable Inputs (Level 3)
 
 
Fair Value at June 30, 2019
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $14,780 
 $14,780 
 $- 
 $- 
 $14,780 
Securities
  8,478 
  - 
  8,478 
  - 
  8,478 
Loans held for sale
  78,406 
  - 
  78,406 
  - 
  78,406 
Loans held for investment, net
  630,357 
  - 
  - 
  629,467 
  629,467 
Interest receivable
  2,147 
  - 
  2,147 
  - 
  2,147 
Bank owned life insurance
  19,753 
  - 
  19,753 
  - 
  19,753 
Total
 $753,921 
 $14,780 
 $108,784 
 $629,467 
 $753,031 
Liabilities:
    
    
    
    
    
Deposits
 $608,470 
 $- 
 $462,504 
 $146,732 
 $609,236 
Short-term debt
  40,000 
  - 
  40,000 
  - 
  40,000 
Long-term debt
  47,917 
  - 
  - 
  48,265 
  48,265 
Interest payable
  371 
  - 
  371 
  - 
  371 
Total
 $696,758 
 $- 
 $502,875 
 $194,997 
 $697,872 
 
 
 
26
 
 
Note 7. Disclosures About Fair Value of Financial Instruments, continued
 
 
 
 
 
 
Fair Value Measurements at December 31, 2018 Using
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Carrying Amount
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Significant Other Observable Inputs (Level 2)
 
 
Significant Unobservable Inputs (Level 3)
 
 
Fair Value at December 31, 2018
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $10,912 
 $10,912 
 $- 
 $- 
 $10,912 
Securities
  8,412 
  - 
  8,412 
  - 
  8,412 
Loans held for sale
  55,910 
  - 
  55,910 
  - 
  55,910 
Loans held for investment, net
  633,559 
  - 
  - 
  613,717 
  613,717 
Interest receivable
  2,078 
  - 
  2,078 
  - 
  2,078 
Bank owned life insurance
  19,464 
  - 
  19,464 
  - 
  19,464 
Total
 $730,335 
 $10,912 
 $85,864 
 $613,717 
 $710,493 
Liabilities:
    
    
    
    
    
Deposits
 $591,325 
 $- 
 $441,319 
 $153,848 
 $595,167 
Short-term debt
  40,116 
  - 
  40,116 
  - 
  40,116 
Long-term debt
  40,218 
  - 
  - 
  39,609 
  39,609 
Interest payable
  348 
  - 
  348 
  - 
  348 
Total
 $672,007 
 $- 
 $481,783 
 $193,457 
 $675,240 
 
Note 8. 
Troubled Debt Restructuring
 
In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which are considered in the qualitative factors within the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance for loan loss methodology. Additionally, specific reserves may be established on restructured loans which are evaluated individually for impairment.
 
During the six months ended June 30, 2019, there were nine loan modifications that were considered to be troubled debt restructurings. Seven of these loans were modified during the three months ended June 30, 2019 and two loan modifications that would be considered a troubled debt restructuring were modified during the first quarter of 2019. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.
 
 
 
Six months ended June 30, 2019
 
 
 
 
 
 
Pre-Modification
 
 
Post-Modification
 
(dollars in thousands)
 
 
 
 
Outstanding
 
 
Outstanding
 
Troubled Debt Restructurings
 
Number of Contracts
 
 
Recorded Investment
 
 
Recorded Investment
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
  1 
 $182 
 $182 
Real Estate
  1 
  193 
  193 
Home Equity
  1 
  720 
  720 
Commercial and Industrial
  1 
  23 
  23 
Consumer
  5 
  35 
  35 
Total
  9 
 $1,153 
 $1,153 
 
 
27
 
 
Note 8.    
Troubled Debt Restructuring, continued
 
At June 30, 2019, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
During the six months ended June 30, 2018, there were sixteen loan modifications that were considered to be troubled debt restructurings. Six of these loans were modified during the three months ended June 30, 2018 and ten loan modifications that would be considered a troubled debt restructuring were modified during the first quarter of 2018.
 
 
 
Six months ended June 30, 2018
 
(dollars in thousands)
 
 Number of
 
 
Pre-Modification Outstanding Recorded
 
 
Post-Modification Outstanding Recorded
 
Troubled Debt Restructurings
 
Contracts
 
 
  Investment
 
 
  Investment
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
  1 
 $1,002 
 $1,002 
Real Estate
  2 
  1,255 
  1,255 
Consumer
  13 
  196 
  196 
Total
  16 
 $2,453 
 $2,453 
 
At June 30, 2018, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.
 
 
28
 
 
Note 9. 
Accumulated Other Comprehensive Loss
 
The balances in accumulated other comprehensive loss are shown in the following tables for June 30, 2019 and 2018:
 
(dollars in thousands)
 
Unrealized Securities Gains (Losses)
 
 
Adjustments Related to Pension Plan
 
 
Accumulated Other Comprehensive Loss
 
Balance at December 31, 2018
 $(94)
 $(3,875)
 $(3,969)
  Change in unrealized securities gains (losses), net of tax
  89 
  - 
  89 
Balance at June 30, 2019
 $(5)
 $(3,875)
 $(3,880)
 
(dollars in thousands)
 
Unrealized Securities Gains (Losses)
 
 
Adjustments Related to Pension Plan
 
 
Accumulated Other Comprehensive Loss
 
Balance at December 31, 2017
 $(20)
 $(4,122)
 $(4,142)
  Change in unrealized securities gains (losses), net of tax
  (133)
  - 
  (133)
Balance at June 30, 2018
 $(153)
 $(4,122)
 $(4,275)
 
There were no reclassifications adjustments reported on the consolidated statements of income during the three or six months ended June 30, 2019 or 2018.
 
Note 10.   
Business Segments
 
The Company utilizes its subsidiaries to provide multiple business segments including retail banking, mortgage banking, title insurance services, investment services and credit life and accident and health insurance products related to lending. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from title insurance services, investment services and insurance products consist of commissions on products provided.
 
 
29
 
 
Note 10. 
Business Segments, continued
 
The following tables represent revenues and expenses by segment for the three and six months ended June 30, 2019 and June 30, 2018.
 
 
 
Six Months Ended June 30, 2019
 
 
 
F&M Bank
 
 
F&M Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $19,254 
 $68 
 $75 
 $- 
 $- 
 $(84)
 $19,313 
Service charges on deposits
  803 
  - 
  - 
  - 
  - 
  - 
  803 
Investment services and insurance income
  - 
  - 
  325 
  - 
  - 
  (3)
  322 
Mortgage banking income, net
  - 
  1,345 
  - 
  - 
  - 
  - 
  1,345 
Title insurance income
  - 
  - 
  - 
  682 
  - 
  - 
  682 
Other operating income (loss)
  1,110 
  28 
  - 
  - 
  (24)
  (1)
  1,113 
Total income (loss)
  21,167 
  1,441 
  400 
  682 
  (24)
  (88)
  23,578 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  3,233 
  75 
  - 
  - 
  - 
  (84)
  3,224 
Provision for loan losses
  3,050 
  - 
  - 
  - 
  - 
  - 
  3,050 
Salary and benefit expense
  6,576 
  917 
  150 
  457 
  - 
  - 
  8,100 
Other operating expenses
  5,489 
  354 
  28 
  124 
  31 
  (4)
  6,022 
Total expense
  18,348 
  1,346 
  178 
  581 
  31 
  (88)
  20,396 
Net income (loss) before taxes
  2,819 
  95 
  222 
  101 
  (55)
  - 
  3,182 
Income tax expense
  158 
  - 
  33 
  - 
  41 
  - 
  232 
Net income (loss)
 $2,661 
 $95 
 $189 
 $101 
 $(96)
 $- 
 $2,950 
Net income attributable to non-controlling interest
  - 
  29 
  - 
  24 
  (24)
  - 
  29 
Net Income attributable to F & M Bank Corp.
 $2,661 
 $66 
 $189 
 $77 
 $(72)
 $- 
 $2,921 
Total Assets
 $809,712 
 $11,210 
 $7,332 
 $1,615 
 $91,674 
 $(114,594)
 $806,949 
Goodwill
 $2,670 
 $47 
 $- 
 $3 
 $164 
 $- 
 $2,884 

 
30
 
 
Note 10.    
Business Segments, continued
 
 
 
Three months ended June 30, 2019
 
 
 
F&M Bank
 
 
F&M Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $9,754 
 $43 
 $41 
 $- 
 $- 
 $(56)
 $9,782 
Service charges on deposits
  417 
  - 
  - 
  - 
  - 
  - 
  417 
Investment services and insurance income
  - 
  - 
  174 
  - 
  - 
  (3)
  171 
Mortgage banking income, net
  - 
  815 
  - 
  - 
  - 
  - 
  815 
Title insurance income
  - 
  - 
  - 
  406 
  - 
  - 
  406 
Other operating income (loss)
  665 
  28 
  - 
  - 
  (27)
  - 
  666 
Total income (loss)
  10,836 
  886 
  215 
  406 
  (27)
  (59)
  12,257 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  1,732 
  50 
  - 
  - 
  - 
  (56)
  1,726 
Provision for loan losses
  1,600 
  - 
  - 
  - 
  - 
  - 
  1,600 
Salary and benefit expense
  3,285 
  489 
  69 
  234 
  - 
  - 
  4,077 
Other operating expenses
  2,739 
  177 
  16 
  62 
  24 
  (3)
  3,015 
Total expense
  9,356 
  716 
  85 
  296 
  24 
  (59)
  10,418 
Net income (loss) before taxes
  1,480 
  170 
  130 
  110 
  (51)
  - 
  1,839 
Income tax expense
  112 
  - 
  19 
  - 
  22 
  - 
  153 
Net income (loss)
 $1,368 
 $170 
 $111 
 $110 
 $(73)
 $- 
 $1,686 
Net income attributable to non-controlling interest
  - 
  51 
  - 
  27 
  (27)
  - 
  51 
Net Income attributable to F & M Bank Corp.
 $1,368 
 $119 
 $111 
 $83 
 $(46)
 $- 
 $1,635 
 
 
31
 
 
Note 10. 
Business Segments, continued
 
 
 
Six Months Ended June 30, 2018
 
 
 
F&M Bank
 
 
VBS Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $17,620 
 $71 
 $71 
 $- 
 $- 
 $(57)
 $17,705 
Service charges on deposits
  724 
  - 
  - 
  - 
  - 
  - 
  724 
Investment services and insurance income
  - 
  - 
  431 
  - 
  - 
  (11)
  420 
Mortgage banking income, net
  - 
  1,135 
  - 
  - 
  - 
  - 
  1,135 
Title insurance income
  - 
  109 
  - 
  453 
  - 
  - 
  562 
Other operating income
  843 
  48 
  - 
  - 
  - 
  - 
  891 
Total income (loss)
  19,187 
  1,363 
  502 
  453 
  - 
  (68)
  21,437 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  2,097 
  54 
  - 
  - 
  - 
  (57)
  2,094 
Provision for loan losses
  2,030 
  - 
  - 
  - 
  - 
  - 
  2,030 
Salary and benefit expense
  6,564 
  831 
  283 
  345 
  - 
  - 
  8,023 
Other operating expenses
  4,496 
  456 
  28 
  89 
  29 
  (11)
  5,087 
Total expense
  15,187 
  1,341 
  311 
  434 
  29 
  (68)
  17,234 
Net income (loss) before taxes
  4,000 
  22 
  191 
  19 
  (29)
  - 
  4,203 
Income tax expense
  284 
  - 
  36 
  - 
  218 
  - 
  538 
Net income (loss)
 $3,716 
 $22 
 $155 
 $19 
 $(247)
 $- 
 $3,665 
Net income attributable to non-controlling interest
  - 
  5 
  - 
  - 
  - 
  - 
  5 
Net Income attributable to F & M Bank Corp.
 $3,716 
 $17 
 $155 
 $19 
 $(247)
 $- 
 $3,660 
Total Assets
 $772,244 
 $8,332 
 $6,910 
 $707 
 $91,480 
 $(109,005)
 $770,668 
Goodwill
 $2,670 
 $65 
 $- 
 $57 
 $164 
 $- 
 $2,956 
 
 
32
 
 
Note 10. 
Business Segments, continued
 
 
Three Months Ended June 30, 2018
 
 
 
F&M Bank
 
 
VBS Mortgage
 
 
TEB Life/FMFS
 
 
VS Title
 
 
Parent Only
 
 
Eliminations
 
 
F&M Bank Corp. Consolidated
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income
 $8,916 
 $42 
 $36 
 $- 
 $- 
 $(32)
 $8,962 
Service charges on deposits
  358 
  - 
  - 
  - 
  - 
  - 
  358 
Investment services and insurance income
  - 
  - 
  228 
  - 
  - 
  (5)
  223 
Mortgage banking income, net
  - 
  615 
  - 
  - 
  - 
  - 
  615 
Title insurance income
  - 
  47 
  - 
  259 
  - 
  - 
  306 
Other operating income
  450 
  47 
  - 
  - 
  - 
  - 
  497 
Total income (loss)
  9,724 
  751 
  264 
  259 
  - 
  (37)
  10,961 
Expenses:
    
    
    
    
    
    
    
Interest Expense
  1,116 
  31 
  - 
  - 
  - 
  (32)
  1,115 
Provision for loan losses
  1,350 
  - 
  - 
  - 
  - 
  - 
  1,350 
Salary and benefit expense
  3,268 
  416 
  137 
  179 
  - 
  - 
  4,000 
Other operating expenses
  2,317 
  246 
  18 
  42 
  15 
  (5)
  2,633 
Total expense
  8,051 
  693 
  155 
  221 
  15 
  (37)
  9,098 
Net income (loss) before taxes
  1,673 
  58 
  109 
  38 
  (15)
  - 
  1,863 
Income tax expense
  144 
  - 
  21 
  - 
  (6)
  - 
  159 
Net income (loss)
 $1,529 
 $58 
 $88 
 $38 
 $(9)
 $- 
 $1,704 
Net income attributable to non-controlling interest
  - 
  16 
  - 
  - 
  - 
  - 
  16 
Net Income attributable to F & M Bank Corp.
 $1,529 
 $42 
 $88 
 $38 
 $(9)
 $- 
 $1,688 
 
Note 11.     
Debt
 
Short-term Debt
 
The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (FHLB) short term borrowings to support the loans held for sale participation program and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. Short-term debt totaled $40 million at June 30, 2019 and has decreased slightly from $40.1 million at December 31, 2018. Deposit growth has allowed the Company to fund increases in Loans Held for Sale without increasing FHLB short term debt.
 
Long-term Debt
 
The Company utilizes the FHLB advance program to fund loan growth and provide liquidity. The interest rates on long-term debt are fixed at the time of the advance and range from 1.16% to 2.56%; the weighted average interest rate was 2.08% and 1.96 at June 30, 2019 and December 31, 2018, respectively. The balance of these obligations at June 30, 2019 and December 31, 2018 were $47,911 and $40,125 respectively. The Company borrowed an additional $10,000 during second quarter of 2019, there were no additional borrowings in 2018. FHLB advances include a $5 million line of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.
 
In addition, the Company had a note payable to purchase a lot adjacent to one of the Bank branches for $85 at June 30, 2018 that was paid on January 1, 2019. There was $85 outstanding on this note at December 31, 2018. VS Title, LLC has a note payable for vehicle purchases with a balance of $6 at June 30, 2019.
 
 
33
 
 
Note 12.    
Revenue Recognition
 
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
 
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
 
Service Charges on Deposit Accounts
 
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), overdraft fees, monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
 
Investment Services and Insurance Income
 
Investment services and insurance income primarily consists of commissions received on mutual funds and other investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.
 
Title Insurance Income
 
VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate transaction is completed.
 
ATM and Check Card Fees
 
ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
 
Other
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, online payment fees, cashier’s checks, mobile banking fees and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
 
 
34
 
 
Note 12.     
Revenue Recognition, continued
 
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2019 and 2018.
 
 
 
Six Months Ended June 30,
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest Income (in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
     In-scope of Topic 606:
 
 
 
 
 
 
 
 
 
 
 
 
Service Charges on Deposits
 $803 
 $724 
 $417 
 $358 
        Investment Services and Insurance Income
  322 
  420 
  171 
  223 
Title Insurance Income
  682 
  562 
  406 
  306 
ATM and check card fees
  898 
  735 
  529 
  388 
Other
  281 
  250 
  153 
  135 
Noninterest Income (in-scope of Topic 606)
  2,986 
  2,691 
  1,676 
  1,409 
Noninterest Income (out-of-scope of Topic 606)
  1,279 
  1,041 
  799 
  590 
Total Noninterest Income
 $4,265 
 $3,732 
 $2,475 
 $1,999 
 
Contract Balances
 
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.
 
Contract Acquisition Costs
 
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
 
 
35
 
 
Note 13.    Leases
 
On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.03 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
 
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of each lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
 
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
 
The following tables present information about the Company’s leases:
 
(Dollars in thousands)
 
June 30,
2019
 
Lease liabilities
 $974 
Right-of-use assets
 $1,005 
Weighted average remaining lease term
  
8.01 years
 
Weighted average discount rate
  3.51%
 
 
 
For the Three Months Ended
 June 30,
2019
 
 
For the Six Months Ended
June 30,
2019
 
Lease cost (in thousands)
 
 
 
 
 
 
Operating lease cost
 $32 
 $64 
Total lease cost
 $32 
 $64 
 
    
    
Cash paid for amounts included in the measurement of lease liabilities
 $38 
 $75 
 
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:
 
Lease payments due (in thousands)
 
As of
June 30,
2019
 
  Six months ending December 31, 2019
 $79 
  Twelve months ending December 31, 2020
  128 
  Twelve months ending December 31, 2021
  110 
  Twelve months ending December 31, 2022
  105 
  Twelve months ending December 31, 2023
  93 
  Twelve months ending December 31, 2024
  92 
  Thereafter
  627 
Total undiscounted cash flows
 $1,234 
Discount
  (260)
Lease liabilities
 $974 
 
 
36
 
 
Item 2.    
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
F & M Bank Corp. (Company), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (Bank). TEB Life Insurance Company (TEB) and Farmers & Merchants Financial Services (FMFS) are wholly owned subsidiaries of the Bank. The Bank also holds a majority ownership in VBS Mortgage LLC (dba F&M Mortgage) and F & M Bank Corp. holds a majority ownership in VSTitle LLC (VST), with the remaining minority interest owned by F&M Mortgage.
 
The Bank is a full service commercial bank offering a wide range of banking and financial services through its thirteen branch offices as well as its loan production office located in Penn Laird, VA (which specializes in providing automobile financing through a network of automobile dealers). TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides, brokerage services and property/casualty insurance to customers of the Bank. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, and Woodstock, VA. VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, VA.
 
The Company’s primary trade area services customers in Rockingham County, Shenandoah County, Page County and Augusta County.
 
Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s December 31, 2018 Form 10-K.
 
Forward-Looking Statements
 
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. 
 
Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits.
 
We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
 
 
37
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Critical Accounting Policies
 
General
 
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. 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.
 
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.
 
 
38
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Critical Accounting Policies (continued)
 
Goodwill and Intangibles
 
In June 2001, the Financial Accounting Standards Board issued ASC 805, Business Combinations and ASC 350, Intangibles. The provisions of ASC 350 discontinue 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. The goodwill is not amortized but is tested for impairment at least annually. Based on this testing, there were no impairment charges recorded. Goodwill totaled $2,884 at June 30, 2019. The intangible assets related to the purchase of VST and a purchase by VST of a small title company are amortized over periods up to 15 years. Intangible assets totaled $250 at June 30, 2019. Amortization recognized through June 30, 2019 totaled $41.
 
Income Tax
 
The determination of income taxes represents results in income and expense being recognized in different periods for financial reporting purposes versus for the purpose of computing income taxes currently payable. Deferred taxes are provided on such temporary differences and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Further, the Company seeks strategies that minimize the tax effect of implementing its business strategies. Management makes judgments regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. As a result, it is considered a significant estimate.
 
Fair Value
 
The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management’s judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.
 
Pension Plan Accounting
 
The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated obligation include discount rates, expected return on assets, mortality rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company’s financial condition and results of operations. As a result, accounting for the Company’s pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.
 
 
39
 
 
Item 2.   
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Critical Accounting Policies (continued)
 
Other Real Estate Owned (OREO)
 
OREO is held for sale and represents real estate acquired through or in lieu of foreclosure. OREO is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The Company’s policy is to carry OREO on its balance sheet at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
 
Overview
 
Net income for the six months ended June 30, 2019 was $2,921 or $.84 per diluted share, compared to $3,660 or $1.01 in the same period in 2018, a decrease of 20.19%. This is a $739 decrease compared to the first six months of 2018. Our pre-tax core operating earnings increased $220 to a total of $6,443 versus $6,223 during the six months ended June 30, 2019. Core operating earnings excludes the 2019 provision for loan losses and losses on OREO. During the six months ended June 30, 2019, noninterest income increased 14.28% and noninterest expense increased 7.72% during the same period.
 
During the three months ended June 30, 2019, net income was $1,635 or $.47 per diluted share, compared to $1,688 or $.47 in the same period in 2018, a decrease of 3.14%. Pre-tax core operating earnings increased $156 for the three months ended June 30, 2019, from $3,181 to $3,337. In the three months ended June 30, 2018, noninterest income increased 23.81% and noninterest expense increased 6.92%. Net income from Bank operations adjusted for income from Parent activities, is as follows:
 
GAAP Financial Measurements:
 
2019
 
 
2018
 
 
 
Six Months
Ended
 
 
Three Months
Ended
 
 
 Six Months
Ended
 
 
Three Months
Ended
 
 
 
June 30, 2019
 
 
June 30, 3018
 
     Net Income from Bank and Bank subsidiary operations
 $2,917
 $1,598
 $3,888 
 $1,659 
     Income (loss) from Parent Company Activities (including VST)
 4
  37
  (228)
  29 
Net Income
 $2,921 
 $1,635 
 $3,660 
 $1,688 
Non-GAAP Financial Measurements:
    
    
    
    
     Less gain attributable to noncontrolling interest
  29 
  51 
  5 
  16 
     Add tax expense
  232 
  153 
  538 
  159 
     Add provision for loan and lease losses
  3,050 
  1,600 
  2,030 
  1,350 
     Add OREO write downs, net
  269 
  - 
  - 
  - 
Net Income from core operations
 $6,443 
 $3,337 
 $6,223 
 $3,181 
 
Results of Operations
 
As shown in Table I, the 2019 year to date tax equivalent net interest income increased $475 or 3.03% compared to the same period in 2018. The tax equivalent adjustment to net interest income totaled $38 for the first six months of 2019. The yield on earning assets increased .12%, while the cost of funds increased .35% compared to the same period in 2018.
 
The three months ended June 30, 2019 tax equivalent net interest income increased $208 or 2.64% compared to the same period in 2018. The tax equivalent adjustment to net interest income totaled $19 for the three months ended June 30, 2018.
 
 
40
 
 
Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Results of Operations, continued
 
Year to date, the combination of the increase in yield on assets and the increase in cost of funds coupled with changes in balance sheet leverage resulted in the net interest margin decreasing to 4.57% at June 30, 2019, a decrease of 16 basis points when compared to the same period in 2018. For the three months ended June 30, 2019, the net interest margin decreased 15 basis points when compared to the same period in 2018. A schedule of the net interest margin for the three and six month periods ended June 30, 2019 and 2018 can be found in Table I.
 
GAAP Financial Measurements:
(Dollars in thousands).
 
June 30, 2019
 
 
June 30, 2018
 
 
 
Six Months
 
 
Three Months
 
 
Six Months
 
 
Three Months
 
         Interest Income – Loans
 $19,017 
 $9,604 
 $17,468 
 $8,837 
Interest Income - Securities and Other Interest-Earnings Assets
  296 
  178 
  237 
  125 
         Interest Expense – Deposits
  2,359 
  1,258 
  1,505 
  766 
         Interest Expense - Other Borrowings
  865 
  468 
  589 
  349 
Total Net Interest Income
  16,089 
  8,056 
  15,611 
  7,847 
 
    
    
    
    
Non-GAAP Financial Measurements:
    
    
    
    
Add: Tax Benefit on Tax-Exempt Interest Income – Loans
  38 
  19 
  41 
  20 
Total Tax Benefit on Tax-Exempt Interest Income
  38 
  19 
  41 
  20 
Tax-Equivalent Net Interest Income
 $16,127 
 $8,075 
 $15,652 
 $7,867 
 
The following table provides detail on the components of tax equivalent net interest income:
 
The Interest Sensitivity Analysis contained in Table II indicates the Company is in an asset sensitive position in the one year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 37.74% of rate sensitive assets and 36.36% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has kept deposit rates low. The growth in earning assets and the growth in noninterest bearing accounts has resulted in the decrease in the positive GAP position in the one year time period.
 
The increase in noninterest income of $533 for the six-month period June 30, 2019 compared to the same period in 2018 is due to growth in mortgage banking income ($210), title insurance income ($120) and income on bank owned life insurance ($74). The increase in noninterest income of $476 for the three months ended June 30, 2019 is primarily due to growth in mortgage banking income ($200), title insurance income ($100) and service charges on deposit accounts ($59).
 
Noninterest expense for the six months ended June 30, 2019 increased $1,012 as compared to 2018. Expenses increased in the areas of other real estate owned ($297), legal and professional fess ($151), salaries and benefits ($77), FDIC assessment ($70), and audit and exam fees ($78). For the three months ended June 30, 2019 noninterest expense increased $459. Areas of increase were salary and benefits ($77), legal and professional fees ($101), FDIC assessment ($36) and equipment expense ($35). Increases in salaries and benefits relate almost entirely to pension settlement costs due to large pension payouts resulting from recent staff retirements. Legal and professional fee increases relate to consulting engagements for strategic planning, credit administration and deposit operations. Audit and exam fee increase are due to increased state assessment and outsourcing of internal audit and loan review.
  
 
41
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Balance Sheet
 
Federal Funds Sold and Interest Bearing Bank Deposits
 
The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at 2.25% to 2.50% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. Balances in federal funds sold and interest bearing bank deposits have increased since year end due to changes in the composition of the balance sheet.
 
Securities
 
The Company’s securities portfolio serves to assist the Company with asset liability management.
 
The securities portfolio consists of investment securities commonly referred to as securities held to maturity and securities available for sale. Securities are classified as Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at fair value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders’ equity. The low income housing projects included in other investments are held for the tax losses and credits that they provide.
 
As of June 30, 2019, the fair value of securities available for sale was below their cost by $6. The portfolio is made up of primarily agency securities with an average portfolio life of just over three years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates. There are no securities that will mature in 2019.
 
In reviewing investments as of June 30, 2019, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.
 
Loan Portfolio
 
The Company operates in a predominately rural area that includes the counties of Rockingham, Page, Shenandoah and Augusta in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. There are no loan concentrations as defined by regulatory guidelines.
 
Loans Held for Investment of $636,407 decreased $2,392 at June 30, 2019 compared to December 31, 2018. The following categories experienced growth: construction, agriculture and dealer finance. During the quarter some agribusiness loans were reclassified from commercial and industrial and commercial real estate into the farmland category to more accurately reflect the loan purpose.
 
Loans Held for Sale totaled $78,406 at June 30, 2019, an increase of $22,496 compared to December 31, 2018. The Northpointe participation loan program as well as F&M mortgage loans are typically subject to seasonal fluctuations, both have increased since year end with the largest portion being Northpointe.
 
 
42
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Loan Portfolio (continued)
 
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $11,688 at June 30, 2019 compared to $10,205 at December 31, 2018. The increase in nonperforming loans is primarily due to one commercial relationship which was placed on non-accrual status during the second quarter. This relationship has been reviewed for impairment and properly provisioned at June 30, 2019. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses and what has previously been charged off, management believes the Bank is generally well secured and continues to actively work with its customers to effect payment. As of June 30, 2019 and December 31, 2018, the Company held $1,969 and $2,443 of real estate which was acquired through foreclosure, respectively.
 
The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):
 
 
 
 June 30,
2019
 
 
December 31,
2018
 
 
 
 
 
 
 
 
Nonaccrual Loans
 
 
 
 
 
 
     Real Estate
 $4,150 
 $3,804 
     Commercial
  6,771 
  5,172 
     Home Equity
  139 
  269 
     Other
  255 
  160 
 
  11,315 
 $9,405 
Loans past due 90 days or more (excluding nonaccrual)
    
    
     Real Estate
  343 
  726 
     Commercial
  - 
  - 
     Home Equity
  27 
  63 
     Other
  3 
  11 
 
    
  800 
Total Nonperforming loans
 $11,688 
 $10,205 
 
    
    
Restructured Loans current and performing:
    
    
      Real Estate
  3,811 
  6,574 
      Commercial
  1,428 
  1,249 
      Home Equity
  720 
  - 
       Other
  228 
  205 
 
    
    
Nonperforming loans as a percentage of loans held for investment
  1.84%
  1.60%
 
    
    
Net charge offs to total loans held for investment
  .35%
  .58%
 
    
    
Allowance for loan and lease losses to nonperforming loans
  51.76%
  51.34%
 
 
43
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Allowance for Loan Losses
 
The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
 
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.
 
In evaluating the portfolio, loans are segregated into loans with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors.
 
Loans that are not impaired are categorized by call report code into unimpaired and classified loans. For unimpaired loans an estimate is calculated based on actual loss experience over the last two years, which is a change in methodology from prior five year lookback period for all segments, other than dealer. During the second quarter of 2019, Management shortened the historical lookback period for all segments to two years. Management feels the change in methodology was necessary given the rise in charge offs experienced in the last two years compared to the average over the past five years. The shorter period is believed to be more indicative of the risk remaining in the loan portfolio given asset quality trends. This change in methodology and increase in provision expense is detailed in Note 4 of the consolidated financial statements. The Company monitors the net losses for this division and adjusts based on how the portfolio performs since the department was established in 2012.  For classified loans, loans are grouped by call code and past due or adverse risk rating. Loss rates are assigned based on actual loss experience over the last five years multiplied by a risk factor. The Dealer finance loans are given a higher risk factor for past due and adverse risk ratings based on back testing of the risk factors.
 
A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses.  The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation.
 
The allowance for loan losses of $6,050 at June 30, 2019 is equal to .95% of loans held for investment. This compares to an allowance of $5,240 (.82%) at December 31, 2018. The Company experienced an increase in nonperforming loans during the first six months of 2019. Previously identified impaired loans totaling $3.6 million were moved to nonaccrual status at which time specific reserves established in prior periods totaling $1,585 were charged off. The Bank also recorded a specific reserve of $566 on another previously identified impaired loan relationship of $4.1 million (net of prior year charge-off) based on an offer to purchase the note. Subsequent to June 30, 2019 the offer to purchase this loan was approved and will result in a decrease in impaired loans in the third quarter of $4.1 million. Impaired loans related to one borrower relationship declined by $483 (specific reserves increased by $23) as the collateral was purchased at foreclosure sale without any loss to the bank. In addition, past due and adversely risk rated loans have higher allocation factors within the allowance for loan losses calculation. As reflected in Note 4, the Company made a change in its allowance for loan losses methodology to reduce the look back period on historical losses from five years to two years. This revised lookback period more accurately reflects recent loss history within the portfolio. As a result, if the aforementioned change in methodology, the Bank recorded a $1,600 provision for loan losses in the second quarter and a total provision of $3,050 year to date. Management will continue to monitor nonperforming and past due loans and will make necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or cash flow expectations.
 
 
44
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Deposits and Other Borrowings
 
The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits at June 30, 2019 have increased $17,145 since December 31, 2018. Noninterest bearing deposits increased $5,771 while interest bearing increased $11,374. The increase in deposits in the first six months of 2019 is due to a focus on deposit growth as an organization. The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep) programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. At June 30, 2019 and December 31, 2018 the Company had a total of $25.1 million and $22.5 million of combined balances in these programs, respectively.
 
Short-term borrowings
 
Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), and short-term fixed rate FHLB borrowings. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. As of June 30, 2019, short-term debt consisted of $40,000 in FHLB short-term borrowings. This compared to FHLB short-term borrowings of $30,000 at December 31, 2018. The increase in short-term borrowings was used to fund the increase in loans held for sale. There were no balances in Federal funds purchased at June 30, 2019 and $10,116 at December 31, 2018.
 
Long-term borrowings
 
Borrowings from the FHLB continue to be an important source of funding. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to fund loan growth and also assist the Bank in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure to interest rate changes. The Company borrowed an additional $10,000 in long term advances during the first six months of 2019, there were no new borrowings in 2018. Long term FHLB borrowings totaled $47,911 and $40,125 at June 30, 2019 and December 31, 2018.
 
The Company also had a note payable on a lot adjacent to one of the branches in the amount of $85 December 31, 2018, which was paid in full in January 2019. VSTitle, LLC has a vehicle loan with a balance of $6 at June 30, 2019 and $8 at December 31, 2018.
 
 
 
45
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Capital
 
The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.
 
In March 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At June 30, 2019, the Bank had Common Equity Tier I capital of 12.95%, Tier I capital of 12.95% of risk weighted assets and combined Tier I and II capital of 13.82% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December 31, 2018, the Bank had Common Equity Tier I capital of 13.65%, Tier I capital of 13.65% of risk weighted assets and combined Tier I and II capital of 14.44% of risk weighted assets. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital.
 
In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial condition. At June 30, 2019 and December 31, 2018, the Bank reported a leverage ratio of 11.38% and 11.79%, respectively, which was also substantially above the minimum. The Bank also reported a capital conservation buffer of 5.82% at June 30, 2018 and 6.44% at December 31, 2018. The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments. The capital conservation buffer was fully phased in on January 1, 2019 at 2.5%.
 
Liquidity
 
Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs.
 
Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution, with Zions Bank and Pacific Coast Bankers Bank. The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings.
 
Interest Rate Sensitivity
 
In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.
 
As of June 30, 2019, the Company had a cumulative Gap Rate Sensitivity Ratio of 11.17% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.
 
A summary of asset and liability repricing opportunities is shown in Table II.
 
 
46
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards
 
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and has formed a Current Expected Credit Losses steering committee which has chosen a vendor and are currently analyzing data, environmental factors and forecast.
 
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
 
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
 
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.
 
 
47
 
 
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Effect of Newly Issued Accounting Standards, continued
 
In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.
 
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The BankCompany does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.
 
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.
 
Existence of Securities and Exchange Commission Web Site
 
The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov).
 
 
 
48
 
TABLE I
F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)
(Dollar Amounts in Thousands)
 
 
 
Six Months Ended
 
 
Six Months Ended
 
 
Three Months Ended
 
 
Three Months Ended
 
 
 
June 30, 2019
 
 
June 30, 2018
 
 
June 30, 2019
 
 
June 30, 2018
 
Average
 
 
 
 
Income/
 
 
Average
 
 
 
 
 
Income/
 
 
Average
 
 
 
 
 
Income/
 
 
Average
 
 
 
 
 
Income/
 
 
Average
 
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
 
Balance2,4
 
 
Expense
 
 
Rates
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Loans held for investment1,2
 $646,045 
 $18,232 
  5.69%
 $624,278 
 $17,051 
  5.51%
 $646,880 
 $9,126 
  5.66%
 $628,381 
 $8,549 
  5.46%
     Loans held for sale
  47,421 
  823 
  3.50%
  26,226 
  458 
  3.52%
  57,257 
  497 
  3.48%
  38,602 
  308 
  3.20%
     Federal funds sold
  3,697 
  43 
  2.35%
  2,676 
  18 
  1.36%
  6,000 
  25 
  1.67%
  886 
  2 
  .91%
     Interest bearing deposits
  831 
  9 
  2.18%
  1,087 
  7 
  1.30%
  816 
  4 
  1.97%
  1,069 
  3 
  1.13%
     Investments
    
    
    
    
    
    
    
    
    
    
    
    
Taxable 3
  13,788 
  243 
  3.55%
  13,552 
  212 
  3.15%
  14,034 
  139 
  3.97%
  13,522 
  120 
  3.56%
Partially taxable
  123 
  1 
  1.64%
  124 
  - 
  - 
  124 
  - 
  - 
  124 
  - 
  - 
     Total earning assets
 $711,905 
 $19,351 
  5.48%
 $667,943 
 $17,746 
  5.36%
 $725,111 
 $9,791 
  5.42%
 $682,584 
 $8,982 
  5.28%
Interest Expense
    
    
    
    
    
    
    
    
    
    
    
    
     Demand deposits
  88,981 
  101 
  .23%
  87,363 
  58 
  .13%
  90,194 
  54 
  .24%
  87,465 
  30 
  .14%
     Savings
  196,311 
  1,082 
  1.11%
  151,359 
  484 
  .64%
  200,351 
  598 
  1.20%
  152,540 
  244 
  .64%
     Time deposits
  151,431 
  1,176 
  1.57%
  164,141 
  963 
  1.18%
  149,866 
  606 
  1.62%
  163,024 
  490 
  1.20%
     Short-term debt
  32,953 
  419 
  2.56%
  13,945 
  136 
  1.98%
  34,208 
  216 
  2.53%
  24,935 
  126 
  2.03%
     Long-term debt
  47,326 
  446 
  1.90%
  48,291 
  453 
  1.89%
  47,767 
  252 
  2.12%
  47,731 
  223 
  1.87%
     Total interest bearing liabilities
 $517,002 
 $3,224 
  1.26%
 $465,099 
 $2,094 
  .91%
 $522,386 
 $1,726 
  1.33%
 $475,695 
 $1,115 
  .94%
 
    
    
    
    
    
    
    
    
    
    
    
    
Tax equivalent net interest income
    
 $16,127 
    
    
 $15,652 
    
    
 $8,075 
    
    
 $7,867 
    
 
    
    
    
    
    
    
    
    
    
    
    
    
Net interest margin
    
    
  4.57%
    
    
  4.73%
    
    
  4.47%
    
    
  4.62%
 
1 Interest income on loans includes loan fees.
2 Loans held for investment include nonaccrual loans.
3 An incremental income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans in 2018 and 34% was used in 2017.
4 Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.
 
 
49
 
TABLE II
 
F & M BANK CORP.
Interest Sensitivity Analysis
June 30, 2019
(Dollars In Thousands)
 
The following table presents the Company’s interest sensitivity.
 
 
  0 – 3 
  4 – 12 
  1 – 5 
 
Over 5
 
 
Not
 
 
 
 
 
  Months   
   Months   
  Years   
 
  Years
 
 
Classified  
 
 
  Total
 
 
    
    
    
 
 
 
 
 
 
 
 
 
Uses of funds
    
    
    
 
 
 
 
 
 
 
 
 
Loans
    
    
    
 
 
 
 
 
 
 
 
 
Commercial
 $41,459 
 $16,686 
 $125,538 
 $26,495 
 $- 
 $210,178 
Installment
  2,169 
  1,885 
  83,989 
  26,060 
  - 
  114,103 
Real estate loans for investments
  77,679 
  45,398 
  172,119 
  13,951 
  - 
  309,147 
Loans held for sale
  78,406 
  - 
  - 
  - 
  - 
  78,406 
Credit cards
  2,979 
  - 
  - 
  - 
  - 
  2,979 
Interest bearing bank deposits
  794 
  - 
  - 
  - 
  - 
  794 
Federal funds sold
  5,937 
    
    
    
    
  5,937 
Investment securities
  - 
  2,119 
  5,995 
  364 
  - 
  8,478 
Total
 $209,423 
 $66,088 
 $387,641 
 $66,870 
 $- 
 $730,022 
 
    
    
    
    
    
    
Sources of funds
    
    
    
    
    
    
Interest bearing demand deposits
 $- 
 $68,896 
 $106,469 
 $18,786 
 $- 
 $194,151 
Savings deposits
  - 
  20,998 
  62,994 
  20,998 
  - 
  104,990 
Certificates of deposit $100,000 and over
  4,907 
  12,638 
  31,439 
  - 
  - 
  48,984 
Other certificates of deposit
  9,595 
  24,981 
  62,852 
  - 
  - 
  97,428 
Short-term borrowings
  40,000 
  - 
  - 
  - 
  - 
  40,000 
Long-term borrowings
  3,608 
  8,321 
  33,863 
  2,125 
  - 
  47,917 
Total
 $58,110 
 $135,834 
 $297,617 
 $41,909 
 $- 
 $533,470 
 
    
    
    
    
    
    
Discrete Gap
 $151,313 
 $(69,746)
 $90,024 
 $24,962 
 $- 
 $196,553 
 
    
    
    
    
    
    
Cumulative Gap
 $151,313 
 $81,567 
 $171,591 
 $196,553 
 $196,553 
    
 
    
    
    
    
    
    
Ratio of Cumulative Gap to Total Earning Assets
  20.73%
  11.17%
  23.50%
  26.92%
  26.92%
    
 
Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of June 30, 2019. In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Investment securities included in the table consist of securities held to maturity and securities available for sale. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from guidance contained in FDICIA 305.
 
 
50
 
 
Item 3. 
Quantitative and Qualitative Disclosures about Market Risk
 
The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provide management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2018 in the Company’s 2017 Form 10-K, Item 7A or Part II.
 
Item 4.  Controls and Procedures
 
The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2019 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
 
Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.
 
 
 
51
 

Part II          
Other Information
 
Item 1.           
Legal Proceedings
There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.
 
Item 1a.           
Risk Factors –
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20158.
 
Item 2.    
Unregistered Sales of Equity Securities and Use of Proceeds –None
 
Item 3.         
Defaults Upon Senior Securities – None
 
Item 4. 
Mine Safety Disclosures None
 
Item 5.      
Other Information – None
 
Item 6.      
Exhibits
 
 
  
52
 

 
Exhibit Number
 
Exhibit Description
 
 
 
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)
 
 
 
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
 
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended June 30, 2019, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
  
 
  rs’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
53
 
 
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  
 
F & M BANK CORP.
 
 
 
 
 
Date: August 8, 2019
By:  
/s/ Mark C. Hanna
 
 
 
Mark C. Hanna  
 
 
 
President and Chief Executive Officer
 
 
 
 
F & M BANK CORP.
 
 
 
 
 
Date: August 8, 2019
By:  
/s/ Carrie A. Comer
 
 
 
Carrie A. Comer
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
54
 
 
Exhibit Index:
 
Exhibit Number
 
Exhibit Description
 
 
 
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)
 
 
 
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
 
 
 
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
101
 
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended June 30, 2019, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
 
 
 
55