10-Q 1 fmbm_10q.htm FORM 10-Q fmbm_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

    Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2023

 

    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 000-13273

 

F&M BANK CORP.

 

Virginia

 

54-1280811

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

P. O. Box 1111

Timberville, Virginia 22853

(Address of Principal Executive Offices) (Zip Code)

 

 (540) 896-8941

(Registrant's Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒

 

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at November 3, 2023

Common Stock, par value ‑ $5 per share

 

3,482,373 shares

 

 

 

 

F & M BANK CORP.

 

Index

 

 

 

 

Page

 

 

 

 

 

 

Part I

Financial Information

 

3

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

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

 

7

 

 

 

 

 

 

 

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

 

8

 

 

 

 

 

 

 

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

 

9

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

10

 

 

 

 

 

 

Item 2.

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

 

43

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

53

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

53

 

 

 

 

 

 

Part II

Other Information

 

54

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

54

 

 

 

 

 

 

Item 1a.

Risk Factors

 

54

 

 

 

 

 

 

Item 2.

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

 

54

 

 

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

54

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

54

 

 

 

 

 

 

Item 5.

Other Information

 

54

 

 

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

 

 

Signatures

 

56

 

 

 

 

 

 

Certifications  

 

 

 

 
2

Table of Contents

 

Part I Financial Information

 

Item 1 Financial Statements

 

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022*

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$17,391

 

 

$17,926

 

Money market funds and interest-bearing deposits in other banks

 

 

184

 

 

 

687

 

Federal funds sold

 

 

4,583

 

 

 

16,340

 

Cash and cash equivalents

 

 

22,158

 

 

 

34,953

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

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

 

 

125

 

 

 

125

 

Less: allowance for credit losses

 

 

-

 

 

 

-

 

Held to maturity, net

 

 

125

 

 

 

125

 

 

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

372,339

 

 

 

392,095

 

Other investments

 

 

11,038

 

 

 

11,317

 

Loans held for sale, at fair value

 

 

2,027

 

 

 

1,373

 

 

 

 

 

 

 

 

 

 

Loans held for investment, net of deferred fees and costs

 

 

805,602

 

 

 

743,604

 

Less: allowance for credit losses

 

 

(9,166)

 

 

(7,936)

Net loans held for investment

 

 

796,436

 

 

 

735,668

 

 

 

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

23,927

 

 

 

19,587

 

Interest receivable

 

 

4,645

 

 

 

3,995

 

Goodwill

 

 

3,082

 

 

 

3,082

 

Bank owned life insurance

 

 

22,705

 

 

 

23,554

 

Other assets

 

 

23,937

 

 

 

20,153

 

Total Assets

 

$1,282,419

 

 

$1,245,902

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest bearing

 

$277,219

 

 

$293,596

 

Interest bearing

 

 

856,691

 

 

 

789,781

 

Total deposits

 

 

1,133,910

 

 

 

1,083,377

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

 

60,000

 

 

 

70,000

 

Long-term debt

 

 

6,922

 

 

 

6,890

 

Other liabilities

 

 

14,567

 

 

 

14,843

 

Total liabilities

 

 

1,215,399

 

 

 

1,175,110

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

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

 

 

17,246

 

 

 

17,149

 

Additional paid in capital

 

 

10,941

 

 

 

10,577

 

Retained earnings

 

 

81,481

 

 

 

83,078

 

Accumulated other comprehensive loss

 

 

(42,648)

 

 

(40,012)

Total shareholders’ equity

 

 

67,020

 

 

 

70,792

 

Total liabilities and shareholders’ equity

 

$1,282,419

 

 

$1,245,902

 

 

*2022 derived from audited consolidated financial statements.

 

See Notes to Consolidated Financial Statements

 

 
3

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Income

 (Dollars in thousands, except per share data)

 (Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

Interest and Dividend income

 

2023

 

 

2022

 

Interest and fees on loans held for investment

 

$12,525

 

 

$8,881

 

Interest and fees on loans held for sale

 

 

19

 

 

 

29

 

Interest from money market funds and federal funds sold

 

 

68

 

 

 

48

 

Interest on debt securities

 

 

2,005

 

 

 

2,054

 

Total interest and dividend income

 

 

14,617

 

 

 

11,012

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Total interest on deposits

 

 

5,811

 

 

 

1,378

 

Interest from short-term debt

 

 

702

 

 

 

158

 

Interest from long-term debt

 

 

115

 

 

 

345

 

Total interest expense

 

 

6,628

 

 

 

1,881

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

7,989

 

 

 

9,131

 

 

 

 

 

 

 

 

 

 

Provision for Credit Losses

 

 

620

 

 

 

-

 

Net Interest Income After Provision for Credit Losses

 

 

7,369

 

 

 

9,131

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

256

 

 

 

255

 

Investment services and insurance income

 

 

374

 

 

 

316

 

Mortgage banking income

 

 

536

 

 

 

666

 

Title insurance income

 

 

444

 

 

 

376

 

Income on bank owned life insurance

 

 

181

 

 

 

178

 

Low-income housing partnership losses

 

 

(205)

 

 

(205)

ATM and check card fees

 

 

672

 

 

 

628

 

Other operating income

 

 

269

 

 

 

68

 

Total noninterest income

 

 

2,527

 

 

 

2,282

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries

 

 

4,210

 

 

 

4,334

 

Employee benefits

 

 

907

 

 

 

1,184

 

Occupancy expense

 

 

371

 

 

 

342

 

Equipment expense

 

 

357

 

 

 

294

 

FDIC insurance assessment

 

 

225

 

 

 

215

 

OREO expenses

 

 

-

 

 

 

59

 

Advertising expense

 

 

259

 

 

 

193

 

Legal and professional fees

 

 

326

 

 

 

294

 

ATM and check card fees

 

 

349

 

 

 

321

 

Telecommunication and data processing expense

 

 

551

 

 

 

619

 

Directors fees

 

 

124

 

 

 

131

 

Bank franchise tax

 

 

129

 

 

 

124

 

Other operating expenses

 

 

1,114

 

 

 

762

 

Total noninterest expense

 

 

8,922

 

 

 

8,872

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

974

 

 

 

2,541

 

Income tax (benefit) expense

 

 

(44)

 

 

237

 

Net Income

 

$1,018

 

 

$2,304

 

Per Common Share Data

 

 

 

 

 

 

 

 

Net income

 

$0.29

 

 

$0.67

 

Cash dividends on common stock

 

 

0.26

 

 

 

0.26

 

Weighted average common shares outstanding

 

 

3,480,670

 

 

 

3,453,767

 

 

See Notes to Consolidated Financial Statements

 

 
4

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Income

 (Dollars in thousands, except per share data)

 (Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Interest and Dividend income

 

2023

 

 

2022

 

Interest and fees on loans held for investment

 

$34,896

 

 

$24,384

 

Interest and fees on loans held for sale

 

 

66

 

 

 

90

 

Interest from money market funds and federal funds sold

 

 

218

 

 

 

87

 

Interest on debt securities

 

 

6,034

 

 

 

5,521

 

Total interest and dividend income

 

 

41,214

 

 

 

30,082

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Total interest on deposits

 

 

15,069

 

 

 

3,060

 

Interest from short-term debt

 

 

2,217

 

 

 

204

 

Interest from long-term debt

 

 

343

 

 

 

628

 

Total interest expense

 

 

17,629

 

 

 

3,892

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

23,585

 

 

 

26,190

 

 

 

 

 

 

 

 

 

 

Provision for Credit Losses

 

 

1,159

 

 

 

150

 

Net Interest Income After Provision for Credit Losses

 

 

22,426

 

 

 

26,040

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

755

 

 

 

836

 

Investment services and insurance income

 

 

1,236

 

 

 

1,020

 

Mortgage banking income

 

 

1,619

 

 

 

2,647

 

Title insurance income

 

 

1,069

 

 

 

1,215

 

Income on bank owned life insurance

 

 

982

 

 

 

522

 

Low-income housing partnership losses

 

 

(616)

 

 

(613)

ATM and check card fees

 

 

1,971

 

 

 

1,823

 

Net investment securities losses

 

 

-

 

 

 

(97)

Other operating income

 

 

629

 

 

 

489

 

Total noninterest income

 

 

7,645

 

 

 

7,842

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries

 

 

13,571

 

 

 

12,690

 

Employee benefits

 

 

3,044

 

 

 

3,712

 

Occupancy expense

 

 

1,023

 

 

 

1,028

 

Equipment expense

 

 

1,138

 

 

 

918

 

FDIC insurance assessment

 

 

545

 

 

 

496

 

OREO expense

 

 

-

 

 

 

59

 

Advertising expense

 

 

753

 

 

 

599

 

Legal and professional fees

 

 

1,235

 

 

 

945

 

ATM and check card fees

 

 

944

 

 

 

954

 

Telecommunication and data processing expense

 

 

1,926

 

 

 

2,205

 

Directors fees

 

 

409

 

 

 

424

 

Bank franchise tax

 

 

449

 

 

 

456

 

Other operating expenses

 

 

3,246

 

 

 

2,495

 

Total noninterest expense

 

 

28,283

 

 

 

26,981

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,788

 

 

 

6,901

 

Income tax (benefit) expense

 

 

(526)

 

 

280

 

Net Income

 

$2,314

 

 

$6,621

 

 

 

 

 

 

 

 

 

 

Per Common Share Data

 

 

 

 

 

 

 

 

Net income

 

$0.67

 

 

$1.92

 

Cash dividends on common stock

 

 

0.78

 

 

 

0.78

 

Weighted average common shares outstanding

 

 

3,473,911

 

 

 

3,447,470

 

 

See Notes to Consolidated Financial Statements

 

 
5

Table of Contents

 

F & M BANK CORP.

Consolidated Statements of Comprehensive Loss

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$1,018

 

 

$2,304

 

 

$2,314

 

 

$6,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses on available-for sale securities

 

 

(6,865)

 

 

(9,879)

 

 

(3,337)

 

 

(49,606)

Tax effect

 

 

1,442

 

 

 

2,075

 

 

 

701

 

 

 

10,417

 

Unrealized holding losses, net of tax

 

 

(5,423)

 

 

(7,804)

 

 

(2,636)

 

 

(39,189)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications adjustment for losses included in net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

97

 

Tax effect

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

(5,423)

 

 

(7,804)

 

 

(2,636)

 

 

(39,112)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

$(4,405)

 

$(5,500)

 

$(322)

 

$(32,491)

 

See Notes to Consolidated Financial Statements

 

 
6

Table of Contents

 

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

 

Three Months Ended September 30, 2023 and 2022.

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance June 30, 2022

 

$17,121

 

 

$10,351

 

 

$80,878

 

 

$(36,400)

 

$71,950

 

Net income

 

 

-

 

 

 

-

 

 

 

2,304

 

 

 

-

 

 

 

2,304

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,804)

 

 

(7,804)

Dividends on common stock ($.26 per share)

 

 

-

 

 

 

-

 

 

 

(903)

 

 

-

 

 

 

(903)

Common stock issued

 

 

14

 

 

 

55

 

 

 

-

 

 

 

-

 

 

 

69

 

Stock-based compensation expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Balance, September 30, 2022

 

$17,135

 

 

$10,467

 

 

$82,279

 

 

$(44,204)

 

$65,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2023

 

$17,228

 

 

$10,822

 

 

$81,369

 

 

$(37,225)

 

$72,194

 

Net income

 

 

-

 

 

 

-

 

 

 

1,018

 

 

 

-

 

 

 

1,018

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,423)

 

 

(5,423)

Dividends on common stock ($.26 per share)

 

 

-

 

 

 

-

 

 

 

(906)

 

 

-

 

 

 

(906)

Common stock issued

 

 

18

 

 

 

58

 

 

 

-

 

 

 

-

 

 

 

76

 

Stock-based compensation expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Balance, September 30, 2023

 

$17,246

 

 

$10,941

 

 

$81,481

 

 

$(42,648)

 

$67,020

 

 

See Notes to Consolidated Financial Statements

 

 
7

Table of Contents

 

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

 

Nine Months Ended September 30, 2023 and 2022.

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$17,071

 

 

$10,127

 

 

$78,350

 

 

$(5,092)

 

$100,456

 

Net Income

 

 

-

 

 

 

-

 

 

 

6,621

 

 

 

-

 

 

 

6,621

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(39,112)

 

 

(39,112)

Dividends on common stock ($.78 per share)

 

 

-

 

 

 

-

 

 

 

(2,692)

 

 

-

 

 

 

(2,692)

Common stock issued

 

 

38

 

 

 

175

 

 

 

-

 

 

 

-

 

 

 

213

 

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

 

 

26

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

56

 

Stock-based compensation expense

 

 

-

 

 

 

135

 

 

 

-

 

 

 

-

 

 

 

135

 

Balance, September 30, 2022

 

$17,135

 

 

$10,467

 

 

$82,279

 

 

$(44,204)

 

$65,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2022

 

$17,149

 

 

$10,577

 

 

$83,078

 

 

$(40,012)

 

$70,792

 

Net income

 

 

-

 

 

 

-

 

 

 

2,314

 

 

 

-

 

 

 

2,314

 

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

 

 

-

 

 

 

-

 

 

 

(1,203)

 

 

-

 

 

 

(1,203)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,636)

 

 

(2,636)

Dividends on common stock ($.78 per share)

 

 

-

 

 

 

-

 

 

 

(2,708)

 

 

-

 

 

 

(2,708)

Common stock issued

 

 

57

 

 

 

182

 

 

 

-

 

 

 

-

 

 

 

239

 

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

 

 

40

 

 

 

(12)

 

 

-

 

 

 

-

 

 

 

28

 

Stock-based compensation expense

 

 

-

 

 

 

194

 

 

 

-

 

 

 

-

 

 

 

194

 

Balance, September 30, 2023

 

$17,246

 

 

$10,941

 

 

$81,481

 

 

$(42,648)

 

$67,020

 

 

See Notes to Consolidated Financial Statements

 

 
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F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$2,314

 

 

$6,621

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

958

 

 

 

833

 

Amortization of intangibles

 

 

23

 

 

 

28

 

Amortization of securities

 

 

11,594

 

 

 

19,173

 

Proceeds from loans held for sale

 

 

93,872

 

 

 

116,448

 

Loans held for sale originated

 

 

(92,677)

 

 

(112,954)

Gain on sale of loans held for sale

 

 

(1,849)

 

 

(1,917)

Provision for credit losses

 

 

1,159

 

 

 

150

 

Increase in interest receivable

 

 

(650)

 

 

(543)

(Increase) decrease in deferred taxes

 

 

(1)

 

 

9,179

 

(Increase) decrease in other assets

 

 

(2,691)

 

 

1,039

 

Decrease in accrued expenses

 

 

(1,025)

 

 

(9,244)

Amortization of limited partnership investments

 

 

616

 

 

 

613

 

Amortization of debt issuance costs

 

 

32

 

 

 

107

 

Income from life insurance investment

 

 

(612)

 

 

(522)

Gain on life insurance investment

 

 

(370)

 

 

-

 

Loss on the sale of investment securities

 

 

-

 

 

 

97

 

Gain on the sale of fixed assets

 

 

(16)

 

 

(10)

Stock-based compensation expense

 

 

194

 

 

 

135

 

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

 

 

-

 

 

 

59

 

Net cash provided by operating activities

 

 

10,871

 

 

 

29,292

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of investments available for sale and other investments

 

 

-

 

 

 

(108,057)

Proceeds from maturity of investments available for sale

 

 

4,825

 

 

 

4,000

 

Proceeds from the sale of investments available for sale

 

 

-

 

 

 

8,699

 

Investment in restricted stock, net

 

 

(137)

 

 

(891)

Investment in limited partnership

 

 

(200)

 

 

(220)

Net increase in loans held for investment

 

 

(62,702)

 

 

(37,753)

Proceeds from life insurance investment

 

 

1,738

 

 

 

-

 

Proceeds from the sale of fixed assets

 

 

93

 

 

 

27

 

Net purchase of property and equipment

 

 

(5,375)

 

 

(2,720)

Proceeds from the sale of other real estate owned

 

 

-

 

 

 

138

 

Net cash (used in) investing activities

 

 

(61,758)

 

 

(136,777)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

50,533

 

 

 

37,099

 

Net change in short-term debt

 

 

(10,000)

 

 

30,000

 

Dividends paid in cash

 

 

(2,708)

 

 

(2,692)

Proceeds from issuance of common stock

 

 

267

 

 

 

269

 

Repayments of long-term debt

 

 

-

 

 

 

(15,000)

Net cash provided by financing activities

 

 

38,092

 

 

 

49,676

 

Net decrease in Cash and Cash Equivalents

 

 

(12,795)

 

 

(57,809)

Cash and cash equivalents, beginning of period

 

 

34,953

 

 

 

88,121

 

Cash and cash equivalents, end of period

 

$22,158

 

 

$30,312

 

Supplemental Cash Flow information:

 

 

 

 

 

 

 

 

Cash paid for: Interest

 

$16,709

 

 

$4,031

 

Taxes

 

 

360

 

 

 

-

 

Supplemental non-cash disclosures:

 

 

 

 

 

 

 

 

Change in unrealized loss on securities available for sale

 

$3,337

 

 

$(49,509)

Cumulative effect of the adoption of ASC 326

 

 

1,524

 

 

 

-

 

Transfer from loans to other real estate owned

 

 

-

 

 

 

197

 

 

See Notes to Consolidated Financial Statements

 

 
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Notes to the Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

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

 

Use of Estimates

 

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

 

Reclassification

 

Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.

 

Nature of Operations

 

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

 

Cash and Cash Equivalents

 

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

 

Accounting Standards Adopted in 2023

 

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

 

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

 

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

 

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

 

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

 

Allowance for Credit Losses – Held to Maturity Securities

 

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

 

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

 

Allowance for Credit Losses – Available for Sale Securities

 

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

 

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

 

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

 

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

 

Loans

 

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

 

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

 

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

 

Allowance for Credit Losses – Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
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Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
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Table of Contents

 

Allowance for Credit Losses – Unfunded Commitments

 

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

 

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

 

Earnings per Share

 

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends.

 

Recent Accounting Pronouncements

 

Accounting Standards adopted in 2023:

 

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

 

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

 

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

 

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

 

 
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Table of Contents

 

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

 

Accounting Standards Pending Adoption:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

 

 
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Note 2. Investment Securities

 

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

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Treasury

 

$125

 

 

$-

 

 

$12

 

 

$113

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Treasury

 

$125

 

 

$-

 

 

$13

 

 

$112

 

 

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

 

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

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$39,918

 

 

$-

 

 

$2,912

 

 

$37,006

 

U.S. Agency

 

 

143,484

 

 

 

-

 

 

 

11,870

 

 

 

131,614

 

Municipal bonds

 

 

41,382

 

 

 

-

 

 

 

5,059

 

 

 

36,323

 

Mortgage-backed securities

 

 

171,546

 

 

 

161

 

 

 

29,988

 

 

 

141,719

 

Corporate

 

 

30,550

 

 

 

-

 

 

 

4,873

 

 

 

25,677

 

Total Securities Available for Sale

 

$426,880

 

 

$161

 

 

$54,702

 

 

$372,339

 

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$39,902

 

 

$-

 

 

$3,259

 

 

$36,643

 

U.S. Agency

 

 

143,473

 

 

 

-

 

 

 

13,725

 

 

 

129,748

 

Municipal bonds

 

 

46,331

 

 

 

27

 

 

 

4,160

 

 

 

42,198

 

Mortgage-backed securities

 

 

183,044

 

 

 

77

 

 

 

26,246

 

 

 

156,875

 

Corporate

 

 

30,550

 

 

 

-

 

 

 

3,919

 

 

 

26,631

 

Total Securities Available for Sale

 

$443,300

 

 

$104

 

 

$51,309

 

 

$392,095

 

 

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

 

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

 

 

 

Securities Held to Maturity

 

 

Securities Available for Sale

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$125

 

 

$113

 

 

$25,491

 

 

$25,096

 

Due after one year through five years

 

 

-

 

 

 

-

 

 

 

186,744

 

 

 

171,180

 

Due after five years

 

 

-

 

 

 

-

 

 

 

71,573

 

 

 

60,115

 

Due after ten years

 

 

-

 

 

 

-

 

 

 

143,072

 

 

 

115,948

 

Total

 

$125

 

 

$113

 

 

$426,880

 

 

$372,339

 

 

 
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Table of Contents

 

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

 

 

 

Three Months

Ended

September 30,

2023

 

 

Nine Months

Ended

September 30,

2023

 

Realized gains (losses):

 

 

 

 

 

 

 Gross realized gains

 

$-

 

 

$-

 

 Gross realized losses

 

 

-

 

 

 

-

 

Net realized (losses)

 

$-

 

 

$-

 

Proceeds from sales of securities

 

$-

 

 

$-

 

 

 

 

Three Months

Ended

September 30,

2022

 

 

Nine Months

Ended

September 30,

2022

 

Realized gains (losses):

 

 

 

 

 

 

 Gross realized gains

 

$-

 

 

$-

 

 Gross realized (losses)

 

 

-

 

 

 

(97)

Net realized (losses)

 

$-

 

 

$(97)

Proceeds from sales of securities

 

$-

 

 

$8,699

 

 

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

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$-

 

 

$-

 

 

$37,006

 

 

$2,912

 

 

$37,006

 

 

$2,912

 

U.S. Agency

 

 

-

 

 

 

-

 

 

 

131,614

 

 

 

11,870

 

 

 

131,614

 

 

 

11,870

 

Municipal bonds

 

 

5,432

 

 

 

593

 

 

 

30,890

 

 

 

4,466

 

 

 

36,322

 

 

 

5,059

 

Mortgage-backed securities

 

 

-

 

 

 

-

 

 

 

136,523

 

 

 

29,988

 

 

 

136,523

 

 

 

29,988

 

Corporate

 

 

1,673

 

 

 

327

 

 

 

24,004

 

 

 

4,546

 

 

 

25,677

 

 

 

4,873

 

Total

 

$7,105

 

 

$920

 

 

$360,037

 

 

$53,782

 

 

$367,142

 

 

$54,702

 

 

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

 

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

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$9,657

 

 

$362

 

 

$26,987

 

 

$2,897

 

 

$36,644

 

 

$3,259

 

U.S. Agency

 

 

13,914

 

 

 

1,083

 

 

 

115,835

 

 

 

12,642

 

 

 

129,749

 

 

 

13,725

 

Municipal bonds

 

 

21,805

 

 

 

1,426

 

 

 

18,710

 

 

 

2,734

 

 

 

40,515

 

 

 

4,160

 

Mortgage-backed securities

 

 

32,823

 

 

 

2,429

 

 

 

119,892

 

 

 

23,817

 

 

 

152,715

 

 

 

26,246

 

Corporate

 

 

16,252

 

 

 

2,198

 

 

 

10,379

 

 

 

1,721

 

 

 

26,631

 

 

 

3,919

 

Total

 

$94,451

 

 

$7,498

 

 

$291,803

 

 

$43,811

 

 

$386,254

 

 

$51,309

 

 

 
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Table of Contents

 

As of September 30, 2023, other investments consist of investments in twelve low-income housing and historic equity partnerships (carrying basis of $5.3 million), stock in the Federal Home Loan Bank of Atlanta (“FHLB’) (carrying basis $3.7 million) and various other investments (carrying basis $2.0 million). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of September 30, 2023. At September 30, 2023, the Company was committed to invest an additional $625,000 in three low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in other liabilities on the consolidated balance sheet.

 

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

 

Note 3. Loans and Allowance for Credit Losses

 

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

 

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

 

September 30,

2023

 

1-4 Family residential construction

 

$34,320

 

Other construction, land development and land

 

 

46,027

 

Secured by farmland

 

 

80,502

 

Home equity – open end

 

 

46,351

 

Real estate

 

 

182,814

 

Home Equity – closed end

 

 

5,054

 

Multifamily

 

 

8,257

 

Owner-occupied commercial real estate

 

 

91,836

 

Other commercial real estate

 

 

102,216

 

Agricultural loans

 

 

13,299

 

Commercial and industrial

 

 

47,282

 

Credit Cards

 

 

3,316

 

Automobile loans

 

 

123,981

 

Other consumer loans

 

 

15,149

 

Municipal loans

 

 

5,844

 

Gross loans

 

 

806,248

 

Unamortized net deferred loan fees

 

 

(646)

Less allowance for credit losses

 

 

9,166

 

Net loans

 

$796,436

 

 

 
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Table of Contents

 

 

 

December 31,

2022

 

Construction/Land Development

 

$68,671

 

Farmland

 

 

74,322

 

Real Estate

 

 

153,281

 

Multi-Family

 

 

9,622

 

Commercial Real Estate

 

 

195,163

 

Home Equity – closed end

 

 

4,707

 

Home Equity – open end

 

 

46,928

 

Commercial & Industrial – Non-Real Estate

 

 

56,625

 

Consumer

 

 

6,488

 

Dealer Finance

 

 

125,125

 

Credit Cards

 

 

3,242

 

Gross loans

 

 

744,174

 

Unamortized net deferred loan fees

 

 

(570)

Less allowance for credit losses

 

 

7,936

 

Net loans

 

$735,668

 

 

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

 

Nonaccrual and Past Due Loans

 

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

 

 

 

Accruing Loans 30-59 Days Past due

 

 

Accruing Loans 60-89 Days Past due

 

 

Accruing Loans 90 Days or More Past due

 

 

Nonaccrual

Loans

 

 

Accruing Current Loans

 

 

Total Loans

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family residential construction

 

$-

 

 

$-

 

 

$-

 

 

$723

 

 

$33,597

 

 

$34,320

 

Other construction, land development and land

 

 

-

 

 

 

-

 

 

 

-

 

 

 

545

 

 

 

45,482

 

 

 

46,027

 

Secured by farmland

 

 

-

 

 

 

-

 

 

 

-

 

 

 

977

 

 

 

79,525

 

 

 

80,502

 

Home equity – open end

 

 

494

 

 

 

-

 

 

 

-

 

 

 

225

 

 

 

45,632

 

 

 

46,351

 

Real estate

 

 

1,714