BACK COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
FRONT COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
INSIDE COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 1 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 2 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 3 / F&M 2017 ANNUAL REPORT /
4MM /
4MM /
4MM /
PMS RED 202,
PMS RED 202,
PMS RED 202,
: PMS GREY 432,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PAGE 11
PAGE 12
PAGE 10
4MM /
4MM /
4MM /
4MM /
4MM /
4MM /
4MM /
PAGE 4
PAGE 5
PAGE 6
PAGE 7
PAGE 8
PAGE 9
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
F&M BANK CORP
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
BANK PERFORMANCE REPORT,
PEER GROUP 3
INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
FARMERS-&-MERCHANTS-
affiliated with either entity.
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
Products and services made
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
VISIT WWW.FMBANKVA.COM
Securities and Insurance
OR DOWNLOAD THE APP FROM THE
FMBANKVA
Products:
APP STORE OR GOOGLE PLAY
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FMBANKVA
BACK COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
FRONT COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
INSIDE COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 1 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 2 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 3 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 4 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 5 / F&M 2017 ANNUAL REPORT /
4MM /
4MM /
PMS RED 202,
PMS RED 202,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PAGE 12
PAGE 11
PAGE 10
4MM /
4MM /
4MM /
4MM /
4MM /
4MM /
PAGE 6
PAGE 7
PAGE 8
PAGE 9
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
EDINBURG
WOODSTOCK
BROADWAY
TIMBERVILLE
BRIDGEWATER
LURAY
STAUNTON
COFFMAN’S CORNER
VBS MORTGAGE
DEALER FINANCE
CRAIGSVILLE
STAUNTON /
FISHERSVILLE
VS TITLE
GROTTOES
CROSSROADS
ELKTON
INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
F&M BANK CORP
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
BANK PERFORMANCE REPORT,
PEER GROUP 3
FARMERS-&-MERCHANTS-
affiliated with either entity.
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
Products and services made
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
VISIT WWW.FMBANKVA.COM
Securities and Insurance
OR DOWNLOAD THE APP FROM THE
FMBANKVA
Products:
APP STORE OR GOOGLE PLAY
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FMBANKVA
BACK COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
FRONT COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
INSIDE COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 1 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 2 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 3 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 4 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 5 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 6 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 7 / F&M 2017 ANNUAL REPORT /
PMS RED 202,
PMS RED 202,
PMS RED 202,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
PMS RED 202,
PMS RED 202,
PMS RED 202,
PAGE 11
PAGE 10
PAGE 12
4MM /
4MM /
4MM /
4MM /
4MM /
4MM /
PAGE 8
PAGE 9
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
F&M BANK CORP
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
BANK PERFORMANCE REPORT,
PEER GROUP 3
2017 includes reclass of subsidiary income
FARMERS-&-MERCHANTS-
affiliated with either entity.
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
Products and services made
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
VISIT WWW.FMBANKVA.COM
Securities and Insurance
OR DOWNLOAD THE APP FROM THE
FMBANKVA
Products:
APP STORE OR GOOGLE PLAY
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FMBANKVA
/ F&M 2017 ANNUAL REPORT /
4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
BACK COVER
BLEED:
FRONT COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
INSIDE COVER / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 1 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 2 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 3 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 4 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 5 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 6 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 7 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 8 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 9 / F&M 2017 ANNUAL REPORT /
: PMS GREY 432,
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PAGE 10
PAGE 11
PAGE 12
4MM /
4MM /
4MM /
4MM /
BLEED:
BLEED:
BLEED:
BLEED:
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
F&M BANK CORP
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
BANK PERFORMANCE REPORT,
PEER GROUP 3
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
affiliated with either entity.
Products and services made
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
Products:
Securities and Insurance
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
FMBANKVA
APP STORE OR GOOGLE PLAY
FMBANKVA
4MM /
PMS RED 202,
PMS RED 202,
: PMS GREY 432,
: PMS GREY 432,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
FRONT COVER
INSIDE COVER
SPOT COLORS
SPOT COLORS
BACK COVER
4MM /
BLEED:
BLEED:
PAGE 1 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 2 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 3 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 4 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 5 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 6 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 7 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 8 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 9 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 10 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 11 / F&M 2017 ANNUAL REPORT /
PMS RED 202,
PMS RED 202,
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
SPOT COLORS
SPOT COLORS
PAGE 12
4MM /
4MM /
BLEED:
BLEED:
INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
VISIT WWW.FMBANKVA.COM
FMBANKVA
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
F&M BANK CORP
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
BANK PERFORMANCE REPORT,
PEER GROUP 3
TRACK
SPENDING
SET
GOALS
PLAN
RETIREMENT
BUDGET
NET
WORTH
SAVE
MONEY
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
affiliated with either entity.
Products and services made
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
Products:
Securities and Insurance
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
FMBANKVA
APP STORE OR GOOGLE PLAY
FMBANKVA
4MM /
PMS RED 202,
: PMS GREY 432,
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
FRONT COVER
INSIDE COVER
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
BACK COVER
PMS RED 202,
PMS RED 202,
PMS RED 202,
4MM /
4MM /
4MM /
PAGE 1
PAGE 2
BLEED:
BLEED:
BLEED:
BLEED:
BLEED:
PAGE 3 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 4 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 5 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 6 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 7 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 8 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
PAGE 9 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
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INCREASED
REFERRALS
STAUNTON
BRANCH
OPENED
HIGH
TRAFFIC
BRANCH
MOVES
7,106
FOLLOWERS
ON SOCIAL
MEDIA
2018
BRANCHES
PLANNED
STOCK
IMPROVED
F&M BANK CORP
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
VISIT WWW.FMBANKVA.COM
BANK PERFORMANCE REPORT,
FMBANKVA
OR DOWNLOAD THE APP FROM THE
PEER GROUP 3
APP STORE OR GOOGLE PLAY
FMBANKVA
RETIREMENT
PLANS
FIXED
ANNUITIES
INDIVIDUAL
STOCKS
FINANCIAL
SERVICES
MUTUAL
FUNDS
INVESTMENT
TRUSTS
BROKERED
CDS
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
affiliated with either entity.
Products and services made
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
Securities and Insurance
Products:
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
FMBANKVA
APP STORE OR GOOGLE PLAY
FMBANKVA
4MM /
4MM /
PMS RED 202,
: PMS GREY 432,
: PMS GREY 432,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
FRONT COVER
INSIDE COVER
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
BACK COVER
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
4MM /
4MM /
4MM /
4MM /
PAGE 1
PAGE 2
PAGE 3
PAGE 4
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STAUNTON
INCREASED
BRANCH
REFERRALS
OPENED
7,106
HIGH
FOLLOWERS
TRAFFIC
BRANCH
ON SOCIAL
MOVES
MEDIA
2018
STOCK
BRANCHES
PLANNED
IMPROVED
F&M BANK CORP
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
VISIT WWW.FMBANKVA.COM
BANK PERFORMANCE REPORT,
FMBANKVA
OR DOWNLOAD THE APP FROM THE
PEER GROUP 3
APP STORE OR GOOGLE PLAY
FMBANKVA
YEARS
VICKIE
WENDT
KITTY
PURCELL
YEARS
MARY
CAMPBELL
SHARRIE
HARRISON
LARRY
CAPLINGER
CHUCK
FOLTZ
YEARS
LYNETTE
WINE
ROBIN
MILLER
YEARS
BONNIE
HARRIS
JESSICA
HARTMAN
RYAN
MAY
KRISTA
SUTER
ROBERTA
KAGEY
ANN
KIRTLEY
SHERRILL
BEAHM
GREG
BERKSHIRE
YEARS
SHEILA
REEDY
YEARS
SARAH
PRUSAK
JT
BISHOP
DONNA
BROWN
GARY
DAVENPORT
ED
STRUNK
TAMMY
WHITMIRE
JENNIFER
FOLTZ
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
affiliated with either entity.
Products and services made
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
Products:
Securities and Insurance
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
4MM /
4MM /
4MM /
PMS RED 202,
PMS RED 202,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
/ F&M 2017 ANNUAL REPORT /
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PMS DUSTY GREEN 5483,
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
PLUS SPOT VARNISH
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
: PMS GREY 432,
FRONT COVER
INSIDE COVER
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
SPOT COLORS
BACK COVER
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
PMS RED 202,
4MM /
4MM /
4MM /
4MM /
4MM /
PAGE 1
PAGE 2
PAGE 3
PAGE 4
PAGE 5
PAGE 6
BLEED:
BLEED:
BLEED:
BLEED:
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PAGE 12 / F&M 2017 ANNUAL REPORT / BLEED: 4MM / SPOT COLORS: PMS GREY 432, PMS RED 202, PMS DUSTY GREEN 5483, PLUS SPOT VARNISH
STAUNTON
INCREASED
BRANCH
REFERRALS
OPENED
7,106
HIGH
FOLLOWERS
TRAFFIC
BRANCH
ON SOCIAL
MOVES
MEDIA
2018
STOCK
BRANCHES
PLANNED
IMPROVED
F&M BANK CORP
FARMERS-&-MERCHANTS-
FARMERSANDMERCHANTSBANK
BANK-OF-VIRGINIA
PEER TOP 20%
PER MEDIAN
DIVIDENDS DECLARED
PEER STATISTICS FROM THE
DECEMBER 31, 2017 UNIFORM
VISIT WWW.FMBANKVA.COM
BANK PERFORMANCE REPORT,
FMBANKVA
OR DOWNLOAD THE APP FROM THE
PEER GROUP 3
APP STORE OR GOOGLE PLAY
FMBANKVA
* Investment and
insurance products and
services are offered through
INFINEX INVESTMENTS, INC.
Member FINRA/SIPC. Farmers &
Merchants Financial Services, Inc.
is a nonbank subsidiary of Farmers
and Merchants Bank. Infinex is not
affiliated with either entity.
Products and services made
available through Ininex are not
insured by the FDIC or any other
agency of the United States and
are not deposits or obligations of
nor guaranteed or insured by any
bank or bank affiliate. These
products are subject to investment
risk, including the possible loss of
value. We do not provide tax
advice. Please consult your
advisor.
Products:
Securities and Insurance
Not Insured By FDIC or any
Federal Government Agency
May Lose Value
Not a Deposit of or Guaranteed
by the Bank or any
Bank Affiliate
FARMERSANDMERCHANTSBANK
FARMERS-&-MERCHANTS-
BANK-OF-VIRGINIA
FMBANKVA
VISIT WWW.FMBANKVA.COM
OR DOWNLOAD THE APP FROM THE
APP STORE OR GOOGLE PLAY
FMBANKVA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2017
Commission file number: 0-13273
F & M BANK CORP.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
54-1280811
(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: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $5 Par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Sarbanes Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
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
smaller reporting company) Smaller reporting company
☒ Non-accelerated filer ☐ (Do not check if a
☒ 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 [x]
The registrant’s Common Stock is traded Over-the-Counter under the symbol FMBM. The aggregate market value of the 2,932,029
shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2017 was approximately
$85,615,255 based on the closing sales price of $29.20 per share on that date. For purposes of this calculation, the term “affiliate”
refers to all directors and executive officers of the registrant.
As of the close of business on March 9, 2018, there were 3,256,579 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2018 (the “Proxy Statement”).
Table of Contents
PART I
Page
Item 1
Business .............................................................................................................................................................. 2
Item 1A Risk Factors ........................................................................................................................................................ 8
Item 1B Unresolved Staff Comments…………………………………………………..……………………………15
Item 2
Properties………………………………………………………………………………………….………..15
Item 3
Legal Proceedings ............................................................................................................................................. 15
Item 4 Mine Safety Disclosures ................................................................................................................................... 16
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities……………….……………………………………………………………………...……16
Item 6
Selected Financial Data .................................................................................................................................... 18
Item 7 Management’s Discussion and Analysis of Financial Condition
and Results of Operations ............................................................................................................................. 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......................................................................... 41
Item 8
Financial Statements and Supplementary Data…………….. ......................................................................... 42
Item 9
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................................................................................................... 97
Item 9A Controls and Procedures ................................................................................................................................... 97
Item 9B Other Information ............................................................................................................................................. 98
PART III
Item 10 Directors, Executive Officers and Corporate Governance .............................................................................. 98
Item 11
Executive Compensation .................................................................................................................................. 98
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 98
Item 13 Certain Relationships and Related Transactions, and Director Independence ............................................... 98
Item 14
Principal Accounting Fees and Services .......................................................................................................... 98
PART IV
Item 15
Exhibits and Financial Statement Schedules ................................................................................................... 99
Item 16
Form 10-K Summary……………………………………………………………………………………...100
Signatures .......................................................................................................................................................................... 101
PART I
Item 1. Business
General
F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one bank financial holding company
pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, and owns 100% of the outstanding stock of its
affiliate, Farmers & Merchants Bank (“Bank”) and a majority interest in VS Title, LLC (“VST”). TEB Life Insurance
Company (“TEB”) and Farmers & Merchants Financial Services, Inc. (“FMFS”) are wholly owned subsidiaries of the
Bank. The Bank also holds a majority ownership in VBS Mortgage, LLC (“VBS”).
The Bank was chartered on April 15, 1908, as a state chartered bank under the laws of the Commonwealth of Virginia.
TEB was incorporated on January 27, 1988, as a captive life insurance company under the laws of the State of Arizona.
FMFS is a Virginia chartered corporation and was incorporated on February 25, 1993. VBS (formerly Valley Broker
Services, Inc.) was incorporated on May 11, 1999. The Bank purchased a majority interest in VBS on November 3, 2008
and the Company purchased a majority interest in VST on January 1, 2017. VBS Mortgage owns the remaining minority
interest in VST.
As a commercial bank, the Bank offers a wide range of banking services including commercial and individual demand
and time deposit accounts, commercial and individual loans, internet and mobile banking, drive-in banking services,
ATMs at all branch locations and several off-site locations, as well as a courier service for its commercial banking
customers. TEB was organized to re-insure credit life and accident and health insurance currently being sold by the Bank
in connection with its lending activities. FMFS was organized to write title insurance but now provides brokerage
services, commercial and personal lines of insurance to customers of the Bank. VBS originates conventional and
government sponsored mortgages through their offices in Harrisonburg, Woodstock and Fishersville. VS Title provides
title insurance and real estate settlement services through their offices in Harrisonburg, Fishersville and Charlottesville,
VA.
The Bank makes various types of commercial and consumer loans and has a large portfolio of residential mortgages and
indirect auto lending. The local economy is relatively diverse with strong employment in the agricultural, manufacturing,
service and governmental sectors.
The Company’s and the Bank’s principal executive office is at 205 South Main Street, Timberville, VA 22853, and its
phone number is (540) 896-8941.
Filings with the SEC
The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities
and Exchange Commission (“SEC”). These reports are posted and are available at no cost on the Company’s website,
www.FMBankVA.com, as soon as reasonably practicable after the Company files such documents with the SEC. The
Company’s filings are also available through the SEC’s website at www.sec.gov.
Employees
On December 31, 2017, the Bank had 178 full-time and part-time employees; including executive officers, loan and
other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s
employees is represented by a union or covered under a collective bargaining agreement. Management of the Company
considers their employee relations to be excellent. No one employee devotes full-time services to F & M Bank Corp.
Competition
The Bank's offices face strong competition from numerous other financial institutions. These other institutions include
large national and regional banks, other community banks, nationally chartered savings banks, credit unions, consumer
finance companies, mortgage companies, loan production offices, mutual funds and life insurance companies.
Competition for loans and deposits is affected by a variety of factors including interest rates, types of products offered,
the number and location of branch offices, marketing strategies and the reputation of the Bank within the communities
served.
2
PART I, continued
Item 1. Business, continued
Regulation and Supervision
General. The operations of the Company and the Bank are subject to federal and state statutes, which apply to financial
holding companies and state member banks of the Federal Reserve System. The common stock of the Company is
registered pursuant to and subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the
“Exchange Act”). These include, but are not limited to, the filing of annual, quarterly, and other current reports with the
Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Company is directly
affected by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The Company believes it is in compliance with SEC
and other rules and regulations implemented pursuant to Sarbanes-Oxley and intends to comply with any applicable
rules and regulations implemented in the future.
The Company, as a financial holding company, is subject to the provisions of the Bank Holding Company Act of 1956,
as amended (the "Act") and is supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”). The Act requires the Company to secure the prior approval of the Federal Reserve Board before the Company
acquires ownership or control of more than 5% of the voting shares or substantially all of the assets of any institution,
including another bank.
As a financial holding company, the Company is required to file with the Federal Reserve Board an annual report and
such additional information as it may require pursuant to the Act. The Federal Reserve Board may also conduct
examinations of F & M Bank Corp. and any or all of its subsidiaries. Under Section 106 of the 1970 Amendments to the
Act and the regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with an extension of credit, provision of credit, sale or lease of
property or furnishing of services.
The Federal Reserve Board regulations limit activities of financial holding companies to managing or controlling banks
or non-banking activities closely related to banking. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency activities. Since 1994, the Company has
entered into agreements with the Virginia Community Development Corporation to purchase equity positions in several
Low-Income Housing Funds; these funds provide housing for low-income individuals throughout Virginia. Approval of
the Federal Reserve Board is necessary to engage in any of the activities described above or to acquire interests engaging
in these activities.
The Bank as a state member bank is supervised and regularly examined by the Virginia Bureau of Financial Institutions
and the Federal Reserve Board; such supervision and examination by the Virginia Bureau of Financial Institutions and
the Federal Reserve Board is intended primarily for the protection of depositors and not the stockholders of the
Company.
Payment of Dividends. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion
of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations
applicable to the payment of dividends by the Bank to the Company. Under the current regulatory guidelines, prior
approval from the Federal Reserve Board is required if cash dividends declared in any given year exceed net income
for that year, plus retained net profits of the two preceding years. A bank also may not declare a dividend out of or in
excess of its net undivided profits without regulatory approval. The payment of dividends by the Bank or the Company
may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines.
Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or
unsound practice in conducting their businesses. The payment of dividends, depending on the financial condition of
the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice. Based on the Bank’s
current financial condition, the Company does not expect that any of these laws will have any impact on its ability to
obtain dividends from the Bank.
3
PART I, continued
Item 1. Business, continued
Regulation and Supervision, continued
The Company also is subject to regulatory restrictions on dividends to its shareholders. Regulators have indicated
that bank holding companies should generally pay dividends only if the organization’s net income available to
common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of
earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial
condition. Further, a bank holding company should inform and consult with the Federal Reserve Board prior to
declaring a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that
could result in a material adverse change to the organization’s capital structure.
Capital Requirements. In 2013, the Federal Reserve, the Federal Deposit Insurance Company (FDIC) and the Office
of the Comptroller of the Currency (OCC) approved a new rule that substantially amends the regulatory risk-based
capital rules applicable to us. The final rule implements the "Basel III" regulatory capital reforms and changes required
by the Dodd-Frank Act (see definition below). The final rule includes new minimum risk-based capital and leverage
ratios which was effective for us on January 1, 2015, and refines the definition of what constitutes "capital" for
purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1
("CET1") capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a
total capital ratio of 8%, which is unchanged from the previous rules; and (iv) a Tier 1 leverage ratio of 4%. The final
rule also establishes a "capital conservation buffer" of 2.5% above the new regulatory minimum capital ratios, and
when fully effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of
7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The capital
conservation buffer is being phased in from 0.00% for 2015 to 2.50% by 2019. An institution will be subject to
limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level
falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that
can be utilized for such activities.
The CETI and Tier 1 leverage ratio of the Bank as of December 31, 2017, were 14.43% and 12.07%, respectively,
which are significantly above the minimum requirements. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible assets.
In September 2017, the federal bank regulatory agencies proposed to revise and simplify the capital treatment for
certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and
minority interests for banking organizations, such as the Bank, that are not subject to the advanced approaches
requirements. In November 2017, the regulatory agencies revised the capital rules enacted in 2013 to extend the
current transitional treatment of these items for non-advanced approaches banking organizations until the September
2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain
commercial real estate loans under the standardized approach, which the Bank uses to calculate its capital ratios.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III
post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these
standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights
and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused
credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed
framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in
through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor
apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company
and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.
4
PART I, continued
Item 1. Business, continued
Regulation and Supervision, continued
Source of Strength. Federal Reserve policy has historically required bank holding companies to act as a source of
financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory
requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including
at times when the Company may not be in a financial position to provide such resources. Any capital loans by a
bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain
other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to priority of payment.
Safety and Soundness. There are a number of obligations and restrictions imposed on bank holding companies and
their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of
such depository institutions and the FDIC insurance fund in the event of a depository institution default. For example,
under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured
depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary
bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with
its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan. Under the Federal Deposit Insurance Act, the federal bank
regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish
general standards relating to internal controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified
in the guidelines.
The Gramm-Leach-Bliley Act. Effective on March 11, 2001, the Gramm-Leach-Bliley Act (the “GLB Act”) allows a
bank holding company or other company to certify status as a financial holding company, which will allow such
company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary
to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting
insurance or acting as an insurance principal, agent or broker; dealing in or making markets in securities; and engaging
in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what
other activities are financial in nature, or incidental or complementary thereto.
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks
in New York, Pennsylvania and Northern Virginia which occurred on September 11, 2001. The Patriot Act is intended
to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat
terrorism on a variety of fronts. The continuing and potential impact of the Patriot Act and related regulations and
policies on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-
money laundering and financial transparency laws, and imposes various regulations, including standards for verifying
client identification at account opening, and rules to promote cooperation among financial institutions, regulators and
law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Community Reinvestment Act. The requirements of the Community Reinvestment Act are also applicable to the Bank.
The act imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. A financial institution’s efforts in meeting community needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
5
PART I, continued
Item 1. Business, continued
Regulation and Supervision, continued
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21,
2010. Its wide-ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the
American financial services industry. Among the provisions of the Dodd-Frank Act that directly impact the Company
is the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to implement,
examine and enforce complaints with federal consumer protection laws, which govern all financial institutions. For
smaller financial institutions, such as the Company and the Bank, their primary regulators will continue to conduct its
examination activities.
The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of
additional disclosures for consumer mortgages. In addition, the Federal Reserve has issued new rules that have the
effect of limiting the fees charged to merchants for debit card transactions. The result of these rules will be to limit
the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act
also contains provisions that affect corporate governance and executive compensation.
Although the Dodd-Frank Act provisions themselves are extensive, the ultimate impact on the Company of this
massive legislation is unknown. The Act provides that several federal agencies, including the Federal Reserve and the
Securities and Exchange Commission, shall issue regulations implementing major portions of the legislation, and this
process is ongoing.
Mortgage Lending. In 2013, the CFPB adopted a rule, effective in January 2014, to implement certain sections of the
Dodd-Frank Act requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay
any closed-end consumer credit transaction secured by a 1-4 family dwelling. The rule also establishes certain
protections from liability under this requirement to ensure a borrower’s ability to repay for loans that meet the
definition of “qualified mortgage.” Loans that satisfy this “qualified mortgage” safe harbor will be presumed to have
complied with the new ability-to-repay standard.
Forward-Looking Statements
Certain information contained in this report may include “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking
statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. Such
forward-looking statements involve known and unknown risks including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
Changes in the quality or composition of our loan or investment portfolios, including adverse developments
in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual
borrowers or issuers;
The strength of the economy in our target market area, as well as general economic, market, or business
conditions;
An insufficient allowance for loan losses as a result of inaccurate assumptions;
Our ability to maintain our “well-capitalized” regulatory status;
Changes in the interest rates affecting our deposits and our loans;
Changes in our competitive position, competitive actions by other financial institutions and the competitive
nature of the financial services industry and our ability to compete effectively against other financial
institutions in our banking markets;
Our ability to manage growth;
Our potential growth, including our entrance or expansion into new markets, the opportunities that may be
presented to and pursued by us and the need for sufficient capital to support that growth;
Our exposure to operational risk;
Our ability to raise capital as needed by our business;
Changes in laws, regulations and the policies of federal or state regulators and agencies;
Other circumstances, many of which are beyond our control; and
Other factors identified in “Risk Factors” below and in other reports the Company files with the SEC from
time to time.
6
PART I, continued
Item 1. Business, continued
Forward-Looking Statements, continued
Although we believe that our expectations with respect to the forward-looking statements are based upon reliable
assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that our
actual results, performance or achievements will not differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Operating Revenue
The following table displays components that contributed 15% or more of the Company’s total operating revenue for
the years ended December 31, 2017, 2016, and 2015:
Period
Class of Service
Percentage of Total Revenues
December 31, 2017
Interest and fees on loans held for investment
December 31, 2016
Interest and fees on loans held for investment
December 31, 2015
Interest and fees on loans held for investment
77.35%
79.02%
81.75%
Executive Officers of the Company
Dean W. Withers, 60, has served as CEO of the Company and Bank since March 1, 2018. Prior to that he served as
President/CEO of the Bank since May 2004; Executive Vice President of the Bank from Jan. 2003 to May 2004;
Vice President of the Bank from 1993 to 2003. As stated in the form 8-K/A filed in December 2017, Mr. Withers
will continue as CEO of the Company and Bank for a transition period, no official retirement date has been set.
Mark C. Hanna, 49, has served as President of the Bank since December 2017. Prior to joining the Company, he
served as Executive Vice President and Tidewater Regional President of EVB and its successor, Sonabank from
November 2014 through October 2017. Previously, he served as President and Chief Executive Officer of Virginia
Company Bank from November 2006 through November 2014.
Neil W. Hayslett, 56, has served as Executive Vice President and Chief Operating Officer of the Bank and the
Company since March 1, 2018, prior to that he served as Executive Vice President/Chief Administrative Officer of
the Bank and the Company from June 2013 until March 2018 and Executive Vice President/Chief Financial Officer
from November 2007 until June 2013. Prior to that time, he served as Senior Vice President/Chief Financial Officer
of the Bank and the Company from January 2003 until November 2007 and served as Vice President/Chief Financial
Officer from October 1996 to January 2003.
Carrie A. Comer, 48, has served as Executive Vice President and Chief Financial Officer of the Bank and the Company
since March 1, 2018, prior to that she served as Senior Vice President/Chief Financial Officer of the Company and
Bank since June 2013. Ms. Comer served as Vice President/Controller of the Bank from March 2009 to June 2013.
From December 2005 to March 2009, Ms. Comer served as Assistant Vice President/Controller of F&M Bank.
Larry A. Caplinger, 65, has served as Executive Vice President and Chief Projects Officer of the Bank and the
Company since January 1, 2018. Prior to that he served as Executive Vice President/Chief Lending Officer of the
Bank and the Company since November 2007. Prior to that time, he served as Senior Vice President of the Bank from
May 1990 until November 2007 and Senior Vice President of the Company from April 2002 until November 2007.
Larry has held a number of positions with the Bank over his 45-year career with the Company.
Stephanie E. Shillingburg, 56, has served as Executive Vice President/Chief Banking Officer of the Bank and the
Company since July 2016, Executive Vice President/Chief Retail Officer from June 2013 until July 2016, Senior Vice
President/Branch Administrator from February 2005 until June 2013. She also served as Vice President/Branch
Administrator from March 2003 until February 2005 and as Branch Manager of the Edinburg Branch from February
2001 until March 2003.
7
PART I, continued
Item 1. Business, continued
Executive Officers of the Company continued
Edward Strunk, 61, has served as Executive Vice President and Chief Credit Officer of the Bank and the Company
since March 1, 2018. Prior to that he serviced as Senior Vice President/Senior Lending Officer since July 2006, Senior
Vice President/Commercial Loan Administrator from May 2011 until July 2016, Vice President/Commercial Loan
Administrator from February 2011 until May 2011 and Vice Present/Business Development Officer III from May
2007 until February 2011.
Josh Hale, 41, has served as Executive Vice President and Chief Lending Officer of the Bank and the Company since
March 1, 2018. Prior to that he served as Senior Vice President/Business Development Leader since June 2013, Vice
President/Commercial Relationship Manager III from December 2010 until June 2013, Vice President/Business
Development Officer II from March 2009 until December 2010 and Assistant Vice President/Business Development
Officer II from December 2004 until March 2009.
Item 1A. Risk Factors
General economic conditions in our market area could adversely affect us.
We are affected by the general economic conditions in the local markets in which we operate. Conditions such as
economic recession, falling home prices, rising foreclosures and other factors beyond our control could lead to, among
other things, an increased level of commercial and consumer delinquencies. If economic conditions in our market
deteriorate, we could experience further adverse consequences, including a decline in demand for our products and
services and an increase in problem assets, forecloses and loan losses. Future economic conditions in our market will
depend on factors outside of our control such as political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government, military and fiscal policies and inflation, any of which
could negatively affect our performance and financial condition.
Our allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.
Like all financial institutions, we maintain an allowance for loan losses to provide for loans that our borrowers may
not repay in their entirety. We believe that we maintain an allowance for loan losses at a level adequate to absorb
probable losses inherent in the loan portfolio. Through a periodic review and consideration of the loan portfolio,
management determines the amount of the allowance for loan losses by considering general market conditions, credit
quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial
obligations with us. At December 31, 2017, our non-performing loans were $7.1 million, compared to $4.9 million
at December 31, 2016. Approximately $1.5 million of the increase is related to one relationship that is reviewed for
impairment and a specific reserve of $249,000 has been recorded. The Company did not record a provision for loan
losses for the year ended December 31, 2017, and our loan loss allowance was $6.04 million, or .98% of total loans
held for investment at December 31, 2017. The Company anticipates that a provision for loan losses will be required
in 2018 based on expected growth coupled with normalized five year historical charge-offs in the lookback period.
The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes
in interest rates, which may be beyond our control, and these losses may exceed current estimates. Although we believe
the allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot fully
predict such losses or that the loss allowance will be adequate in the future. While the risk of nonpayment is inherent
in banking, we could experience greater nonpayment levels than we anticipate. In addition, we have loan participation
arrangements with several other banks within the region and may not be able to exercise control of negotiations with
borrowers in the event these loans do not perform. Additional problems with asset quality could cause our interest
income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect
our results of operations and financial condition.
Federal and state regulators periodically review our allowance for loan losses and may require us to increase our
provision for loan losses or recognize further loan charge-offs, based on judgments different than those of
management. Any increase in the amount of the provision or loans charged-off as required by these regulatory agencies
could have a negative effect on our operating results.
8
PART I, continued
Item 1A. Risk Factors, continued
Our loan concentrations could, as a result of adverse market conditions, increase credit losses which could
adversely impact earnings.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate,
construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential
and commercial) in our market area, which could result in adverse consequences to us in the event of a prolonged
economic downturn in our market. As of December 31, 2017, approximately 80% of our loans had real estate as a
primary or secondary component of collateral. A significant decline in real estate values in our market would mean
that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer
losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral
would be diminished. In addition, our consumer loans (such as automobile loans) are collateralized, if at all, with
assets that may not provide an adequate source of repayment of the loan due to depreciation, damage or loss.
In addition, we have a large portfolio of residential mortgages which could be adversely affected by a decline in the
real estate markets. Construction and development lending entails significant additional risks, because these loans,
which often involve larger loan balances concentrated with single borrowers or groups of related borrowers, are
dependent on the successful completion of real estate projects. Loan funds for construction and development loans
often are advanced upon the security of the land or home under construction, which value is estimated prior to the
completion of construction. The deterioration of one or a few of these loans could cause a significant increase in the
percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these
loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material
adverse effect on our financial condition.
Our dealer finance division exposes us to increased credit risks.
In 2012, the Bank began a loan production office which specializes in providing consumer installment loans to finance
automobile purchases through a network of automobile dealers. As of December 31, 2017, we had approximately $75
million in loans outstanding in this portfolio. We serve customers over a broad range of creditworthiness, and the
required terms and rates are reflective of those risk profiles. While these loans have higher yields than many of our
other loans, such loans involve significant risks in addition to normal credit risk. Potential risk elements associated
with indirect lending include the limited personal contact with the borrower as a result of indirect lending through our
network of dealers, the absence of assured continued employment of the borrower, the varying general
creditworthiness of the borrower, changes in the local economy and difficulty in monitoring collateral. While indirect
automobile loans are secured, such loans are secured by depreciating assets and characterized by loan to value ratios
that could result in us not recovering the full value of an outstanding loan upon default by the borrower. Delinquencies,
charge-offs and repossessions of vehicles in this portfolio are always concerns. If general economic conditions
worsen, we may experience higher levels of delinquencies, repossessions and charge-offs.
Our small-to-medium sized business target market may have fewer financial resources to weather continued
downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and financial services
needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than
larger entities. If general economic conditions negatively impact this major economic sector in the markets in which
we operate, our results of operations and financial condition may be adversely affected.
9
PART I, continued
Item 1A. Risk Factors, continued
Our inability to maintain adequate sources of funding and liquidity may negatively impact our current
financial condition or our ability to grow.
Our access to funding and liquidity sources in amounts adequate to finance our activities on terms which are acceptable
to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. In
managing our balance sheet, a primary source of funding asset growth and liquidity historically has been deposits,
including both local customer deposits and brokered deposits. If the level of deposits were to materially decrease, we
would have to raise additional funds by increasing the interest that we pay on certificates of deposit or other depository
accounts, seek other debt or equity financing, or draw upon our available lines of credit. Our access to these funding
and liquidity sources could be detrimentally impacted by a number of factors, including operating losses, rising levels
of non-performing assets, a decrease in the level of our business activity as a result of a downturn in the markets in
which our loans or deposits are concentrated or regulatory restrictions. In addition, our ability to continue to attract
deposits and other funding or liquidity sources is subject to variability based upon additional factors including volume
and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. We
do not maintain significant additional sources of liquidity through potential sales in our investment portfolio or liquid
assets at the holding company level. Our potential inability to maintain adequate sources of funding or liquidity may,
among other things, inhibit our ability to fund asset growth or negatively impact our financial condition, including our
ability to pay dividends or satisfy our obligations.
If we do not maintain our capital requirements and our status as a “well-capitalized” bank, there could an
adverse effect on our liquidity and our ability to fund our loan portfolio.
We are subject to regulatory capital adequacy guidelines. If we fail to meet the capital adequacy guidelines for a “well-
capitalized” bank, it could increase the regulatory scrutiny for the Bank and the Company. In addition, if we failed to
be “well capitalized” for regulatory capital purposes, we would not be able to renew or accept brokered deposits
without prior regulatory approval and we would not be able to offer interest rates on our deposit accounts that are
significantly higher than the average rates in our market area. As a result, it would be more difficult for us to attract
new deposits as our existing brokered deposits mature and do not roll over and to retain or increase existing, non-
brokered deposits. If we are prohibited from renewing or accepting brokered deposits and are unable to attract new
deposits, our liquidity and our ability to fund our loan portfolio may be adversely affected. In addition, we would be
required to pay higher insurance premiums to the FDIC, which would reduce our earnings.
We are subject to more stringent capital requirements as a result of the Basel III regulatory capital reforms
and the Dodd-Frank Act which could adversely affect our results of operations and future growth.
In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that substantially amends the regulatory
risk-based capital rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and
changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios
which were effective for us on January 1, 2015 and refines the definition of what constitutes “capital” for purposes of
calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital
ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio
of 8%, which is unchanged from the previous rules; and (iv) a Tier 1 leverage ratio of 4%. The final rule also
establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully
effective in 2019, will result in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a
Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The capital conservation buffer
is being phased in from 0.00% for 2015 to 2.50% by 2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer
amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for
such activities. In addition, the final rule provides for a number of new deductions from and adjustments to capital
and prescribes a revised approach for risk weightings that could result in higher risk weights for a variety of asset
categories.
The application of these more stringent capital requirements for us could, among other things, result in lower returns
on equity, require the raising of additional capital, adversely affect our future growth opportunities, and result in
regulatory actions such as a prohibition on the payment of dividends or on the repurchase shares if we are unable to
comply with such requirements.
10
PART I, continued
Item 1A. Risk Factors, continued
Consumer financial protection laws and regulations could adversely impact our earnings due to, among other
things, increased compliance costs or costs due to noncompliance.
The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPD”) with broad authority to
administer a new federal regulatory framework of consumer financial regulation, including consumer mortgage
banking. For example, the CFPB issued a rule, effective as of January 14, 2014, designed to clarify for lenders how
they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a
borrower’s ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to
have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a
“qualified mortgage” loan must not contain certain specified features, including but not limited to:
•
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•
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount
points” for prime loans);
interest-only payments;
negative-amortization; and
terms longer than 30 years.
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%.
Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the
loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first
five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified
mortgages and other consumer financial protection laws could limit our ability or desire to make certain types of loans
or loans to certain borrowers or could make it more expensive and/or time consuming to make these loans, which
could adversely impact our growth or profitability.
In addition, the CFPB has been directed to write rules identifying practices or acts that are unfair, deceptive or abusive
in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a
consumer financial product or service, and has initiated enforcement actions against a variety of bank and non-bank
market participants with respect to a number of consumer financial products and services. These enforcement actions
may serve as precedent for how the CFPB and other regulatory agencies interpret and enforce consumer protection
laws, including practices or acts that are deemed to be unfair, deceptive or abusive, with respect to all supervised
institutions, which may result in the imposition of higher standards of compliance with such laws.
Our future success is dependent on our ability to effectively compete in the face of substantial competition
from other financial institutions in our primary markets.
We encounter significant competition for deposits, loans and other financial services from banks and other financial
institutions, including savings and loan associations, savings banks, finance companies, and credit unions in our
market area. A number of these banks and other financial institutions are significantly larger than us and have
substantially greater access to capital and other resources, larger lending limits, more extensive branch systems, and
may offer a wider array of banking services. To a limited extent, we compete with other providers of financial services,
such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and
governmental organizations any of which may offer more favorable financing rates and terms than us. Many of these
non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank
competitors may have advantages in providing certain services. This competition may reduce or limit our margins and
our market share and may adversely affect our results of operations and financial condition.
11
PART I, continued
Item 1A. Risk Factors, continued
Our exposure to operational risk may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk,
legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees
or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer
or telecommunications systems.
Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from our actual
alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance
or the occurrence of any of the events or instances mentioned below, or from actions taken by government regulators
or community organizations in response to that conduct. Negative public opinion could also result from adverse news
or publicity that impairs the reputation of the financial services industry generally.
Further, if any of our financial, accounting, or other data processing systems fail or have other significant shortcomings,
we could be adversely affected. We depend on internal systems and outsourced technology to support these data storage
and processing operations. Our inability to use or access these information systems at critical points in time could
unfavorably impact the timeliness and efficiency of our business operations. We could be adversely affected if one of
our employees causes a significant operational break-down or failure, either as a result of human error or where an
individual purposefully sabotages or fraudulently manipulates our operations or systems. We are also at risk of the impact
of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures
involving power or communications systems operated by others.
Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper
use of confidential information. We may not be able to prevent employee errors or misconduct, and the precautions we
take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to
civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which
criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although
we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies
and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to our
reputation.
If any of the foregoing risks materialize, it could have a material adverse effect on our business, financial condition
and results of operations.
Changes in market interest rates could affect our cash flows and our ability to successfully manage our
interest rate risk.
Our profitability and financial condition depend to a great extent on our ability to manage the net interest margin, which
is the difference between the interest income earned on loans and investments and the interest expense paid for deposits
and borrowings. The amounts of interest income and interest expense are principally driven by two factors; the market
levels of interest rates, and the volumes of earning assets or interest bearing liabilities. The management of the net interest
margin is accomplished by our Asset Liability Committee. Short term interest rates are highly sensitive to factors beyond
our control and are effectively set and managed by the Federal Reserve, while longer term rates are generally determined
by the market based on investors’ inflationary expectations. Thus, changes in monetary and or fiscal policy will affect
both short term and long term interest rates which in turn will influence the origination of loans, the prepayment speed
of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities
and paid on deposits or other sources of funding. The impact of these changes may be magnified if we do not effectively
manage the relative sensitivity of our earning assets and interest bearing liabilities to changes in market interest rates. We
generally attempt to maintain a neutral position in terms of the volume of earning assets and interest bearing liabilities
that mature or can re-price within a one year period in order that we may maintain the maximum net interest margin;
however, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and
greatly influence this ability to maintain a neutral position.
12
PART I, continued
Item 1A. Risk Factors, continued
Generally, our earnings will be more sensitive to fluctuations in interest rates the greater the difference between the
volume of earning assets and interest bearing liabilities that mature or are subject to re-pricing in any period. The
extent and duration of this sensitivity will depend on the cumulative difference over time, the velocity and direction
of interest rate changes, and whether we are more asset sensitive or liability sensitive. Additionally, the Asset Liability
Committee may desire to move our position to more asset sensitive or more liability sensitive depending upon their
expectation of the direction and velocity of future changes in interest rates in an effort to maximize the net interest
margin. Should we not be successful in maintaining the desired position, or should interest rates not move as
anticipated, our net interest margin may be negatively impacted.
Our inability to successfully manage growth or implement our growth strategy may adversely affect our
results of operations and financial condition.
We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets,
locations or opportunities to expand in the future. Our ability to manage growth successfully also depends on whether
we can maintain capital levels adequate to support our growth, maintain cost controls, asset quality and successfully
integrate any businesses acquired into the organization.
As we continue to implement our growth strategy, we may incur increased personnel, occupancy and other operating
expenses. We must absorb those higher expenses while we begin to generate new deposits, and there is a further time
lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus,
our plans to branch could depress earnings in the short run, even if we efficiently execute a branching strategy leading
to long-term financial benefits.
Our operations rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service agreements. Although we maintain a system of comprehensive policies and a
control framework designed to monitor vendor risks, the failure of an external vendor to perform in accordance with
the contracted arrangements under service agreements could be disruptive to our operations, which could have a
material adverse impact on our business and, in turn, our financial condition and results of operations.
Our operations may be adversely affected by cyber security risks.
In the ordinary course of business, we collect and store sensitive data, including proprietary business information and
personally identifiable information of its customers and employees in systems and on networks. The secure processing,
maintenance and use of this information is critical to operations and our business strategy. We have invested in
accepted technologies and review processes and practices that are designed to protect our networks, computers and
data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure
may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach
of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A
breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to our
reputation, which could adversely affect our business.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the
businesses in which we are engaged.
We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of
our operations. Laws and regulations may change from time to time and are primarily intended for the protection of
consumers, depositors and the deposit insurance funds. The impact of any changes to laws and regulations or other
actions by regulatory agencies may negatively impact us or our ability to increase the value of our business.
Additionally, actions by regulatory agencies or significant litigation against us could cause us to devote significant
time and resources to defending ourselves and may lead to penalties that materially affect us. Future changes in the
laws or regulations or their interpretations or enforcement could be materially adverse us and our shareholders.
13
PART I, continued
Item 1A. Risk Factors, continued
Changes in accounting standards could impact reported earnings.
The accounting standard setters, including the Financial Accounting Standards Board (FASB), SEC and other
regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of
our consolidated financial statements. These changes can be difficult to predict and can materially impact how we
record and report our financial condition and results of operations. In some cases, we could be required to apply a new
or revised standard retroactively, resulting in the restatement of prior period financial statements.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that
historically have involved banks. The activity and prominence of so-called marketplace lenders and other
technological financial service companies have grown significantly over recent years and is expected to continue
growing. In addition, consumers can now maintain funds that would have historically been held as bank deposits in
brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete
transactions, such as paying bills and/or transferring funds directly without the assistance of banks. If we are unable
to address the competitive pressures that we face, we could lose market share, which could result in reduced net
revenue and profitability and lower returns, as well as the loss of customer deposits. The loss of these revenue streams
and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and
results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability
to address the needs of our customers by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services to our customers.
Failure to successfully keep pace with technological change affecting the financial services industry could have a
material adverse impact on our business and, in turn, our financial condition and results of operations.
The full impact of changes to federal tax laws is uncertain and may negatively impact our financial
performance.
We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive
to previous periods and, as a result, could negatively affect our current and future financial performance.
The Tax Cuts and Jobs Act, the full impact of which is subject to further evaluation and analysis, is likely to have both
positive and negative effects on our financial performance. For example, the new legislation will result in a reduction
in our federal corporate tax rate from 35% to 21% beginning in 2018, which is expected to have a favorable impact
on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain
deductions, such as the deduction of FDIC deposit insurance premiums, which will partially offset the anticipated
increase in net earnings from the lower tax rate. In addition, as a result of the lower corporate tax rate, we were required
under Generally Accepted Accounting Principles (GAAP) to record a tax expense due to remeasurement in the fourth
quarter of 2017 with respect to our deferred tax assets amounting to $811,000. Further, the full impact of the Tax Act
may differ from the foregoing and from our expectations, possibly materially, due to changes in interpretations or in
assumptions that we have made or that we make in 2018, guidance or regulations that may be promulgated, and other
actions that we may take as a result of the Tax Act.
Similarly, the Bank’s customers are likely to experience varying effects from both the individual and business tax
provisions of the Tax Act. For example, changes to tax deductibility of business interest expense could impact
business customer borrowing. Such effects, whether positive or negative, may have a corresponding impact on our
business and the economy as a whole.
14
PART I, continued
Item 1B. Unresolved Staff Comments
The Company does not have any unresolved staff comments to report for the year ended December 31, 2017.
Item 2. Properties
The locations of F & M Bank Corp. and its subsidiaries are shown below.
Corporate Offices Timberville Branch
205 South Main Street 165 New Market Road
Timberville, VA 22853 Timberville, VA 22853
Elkton Branch
127 West Rockingham Street
Elkton, VA 22827
Broadway Branch
126 Timberway
Broadway, VA 22815
Bridgewater Branch
100 Plaza Drive
Bridgewater, VA 22812
Woodstock Branch
161 South Main Street
Woodstock, VA 22664
Luray Branch
700 East Main Street
Luray, VA 22835
Myers Corner Branch
30 Gosnell Crossing
Staunton, VA 24401
Craigsville Branch
125 W. Craig Street
Craigsville, VA 24430
Coffman’s Corner Branch
2030 Legacy Lane
Harrisonburg, VA 22801
Edinburg Branch
120 South Main Street
Edinburg, VA 22824
Crossroads Branch
80 Cross Keys Road
Harrisonburg, VA 22801
Dealer Finance Division
4759 Spotswood Trail
Penn Laird, VA 22846
North Augusta Branch
2813 North Augusta Street
Staunton, VA 22401
Grottoes Branch
200 Augusta Avenue
Grottoes, VA 24441
With the exception of the Edinburg Branch, Luray Branch, Dealer Finance Division, and the North Augusta Branch, the
remaining facilities are owned by Farmers & Merchants Bank. ATMs are available at all branch locations.
Through an agreement with FCTI, Inc., the Bank also operates cash only ATMs at five Food Lion grocery stores, one in
Mt. Jackson, VA and four in Harrisonburg, VA. The Bank has an agreement with CardTronics ATM to operate twelve
cash only ATMs in various Rite Aid Pharmacies, CVS Pharmacies and Target Stores in Rockingham and Augusta
Counties of VA. The Bank also has an agreement with ATM USA to operate ATMs in various locations in our market
area.
VBS’ offices are located at:
Harrisonburg Office Fishersville Office Woodstock Office
2040 Deyerle Avenue 1842 Jefferson Hwy
Suite 107 Fishersville, VA 22939
Harrisonburg, VA 22801
161 South Main Street
Woodstock, VA 22664
VS Title’s offices are located at:
Harrisonburg Office Fishersville Office Charlottesville Office
410 Neff Avenue 1707 Jefferson Highway 154 Hansen Rd., Suite 202-C
Harrisonburg, VA 22801 Fishersville, VA 22939 Charlottesville, VA 22911
Item 3. Legal Proceedings
In the normal course of business, the Company may become involved in litigation arising from banking, financial, or
other activities of the Company. Management after consultation with legal counsel, does not anticipate that the
ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition,
operating results or liquidity.
15
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Stock Listing
The Company’s Common Stock is quoted under the symbol “FMBM” on the OTCQX Market. The bid and ask price is
quoted at www.OTCMARKETS.com/Stock/FMBM/quote. With its inclusion on the OTCQX Markets, there are now
several active market makers for FMBM stock.
Transfer Agent and Registrar
Broadridge Financial Solutions
2 Journal Plaza Square, 7th Floor
Jersey City, NJ 07306
Stock Performance
The following graph compares the cumulative total return to the shareholders of the Company for the last five fiscal years
with the total return of the Russell 2000 Index and the SNL Bank Index, as reported by SNL Financial, LC, assuming an
investment of $100 in the Company’s common stock on December 31, 2012, and the reinvestment of dividends.
Index
F & M Bank Corp.
Russell 2000 Index
SNL Bank Index
Period Ending
12/31/12
100.00
100.00
100.00
12/31/13
126.23
138.82
137.30
12/31/14
138.04
145.62
153.48
12/31/15
166.31
139.19
156.10
12/31/16
197.11
168.85
197.23
12/31/17
258.36
193.58
232.91
16
PART II, continued
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities, continued
Recent Stock Prices and Dividends
Dividends to common shareholders totaled $2,972,000 and $2,628,000 in 2017 and 2016, respectively. Preferred stock
dividends were $415,000 and $487,000 in 2017 and 2016, respectively. Regular quarterly dividends have been declared
for at least 25 years. The payment of dividends depends on the earnings of the Company and its subsidiaries, the financial
condition of the Company and other factors including capital adequacy, regulatory requirements, general economic
conditions and shareholder returns. The ratio of dividends per common share to net income per common share was
35.67% in 2017, compared to 28.88% in 2016.
Refer to Payment of Dividends in Item 1. Business, Regulation and Supervision section above for a summary of
applicable restrictions on the Company’s ability to pay dividends.
Stock Repurchases
As previously reported, on September 18, 2008, the Company’s Board of Directors approved an increase in the number
of shares of common stock that the Company can repurchase under the share repurchase program from 150,000 to
200,000 shares. On October 20, 2016, the Company’s Board of Directors approved a plan to repurchase up to an
additional 150,000 shares of common stock. Shares repurchased through the end of 2017 totaled 221,976 shares; of
this amount, 21,984 were repurchased in 2017 at an average price of $32.39 per share.
The number of common shareholders was approximately 2,104 as of March 9, 2018. This amount includes all
shareholders, whether titled individually or held by a brokerage firm or custodian in street name.
Quarterly Stock Information
These quotes include the terms of trades transacted through a broker. The terms of exchanges occurring between
individual parties may not be known to the Company.
2017
Stock Price Range
Quarter
Low
High
1st
2nd
3rd
4th
Total
$ 26.50
27.50
29.20
30.02
$ 28.45
29.35
32.00
34.50
2016
Stock Price Range
Low
High
$ 21.75
23.02
23.50
24.82
$ 23.55
25.00
26.25
27.00
Per Share
Dividends
Declared
$ .22
.23
.24
.25
.94
$
Per Share
Dividends
Declared
$ .19
.19
.20
.22
.80
$
17
PART II, continued
Item 6. Selected Financial Data
Five Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per share data)
Income Statement Data:
Interest and Dividend Income
Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income After Provision for Loan Losses
Noninterest Income6
Low income housing partnership losses
Noninterest Expenses6
Income before income taxes
Income Tax Expense
Net income attributable to noncontrolling interest
Net Income attributable to F & M Bank Corp.
Per Common Share Data:
Net Income – basic
Net Income - diluted
Dividends Declared
Book Value per Common Share
Balance Sheet Data:
Assets
Loans Held for Investment
Loans Held for Sale
Securities
Deposits
Short-Term Debt
Long-Term Debt
Stockholders’ Equity
Average Common Shares Outstanding – basic
Average Common Shares Outstanding – diluted
Financial Ratios:
Return on Average Assets1
Return on Average Equity1
Net Interest Margin
Efficiency Ratio 2
Dividend Payout Ratio - Common
Capital and Credit Quality Ratios:
Average Equity to Average Assets1
Allowance for Loan Losses to Loans3
Nonperforming Loans to Total Assets4
Nonperforming Assets to Total Assets5
Net Charge-offs to Total Loans3
1 Ratios are primarily based on daily average balances.
2
2017
20166
20156
2014
2013
$ 34,095
3,897
30,198
-
30,198
8,517
(625)
24,719
13,371
4,330
(31)
$ 9,010
$ 32,150
3,599
28,551
-
28,551
6,313
(731)
21,272
12,861
3,099
(194)
$ 9,568
$ 29,404
2,876
26,528
300
26,228
5,412
(619)
19,554
11,467
2,886
(164)
$ 8,417
$ 26,772
3,648
23,124
2,250
20,874
3,530
(608)
15,656
8,140
2,293
(45)
$ 5,802
$ 25,966
4,773
21,193
3,775
17,418
4,032
(856)
14,720
5,874
1,051
(107)
$ 4,716
$ 2.63
$ 2.48
.94
25.73
$ 2.77
$ 2.57
.80
24.18
$ 2.40
$ 2.25
.73
22.38
$ 1.82
$ 1.80
.68
20.77
$ 1.88
$ 1.88
.68
21.56
$ 753,270
616,974
39,775
41,243
569,177
25,296
49,733
91,275
3,270
3,632
$ 744,889
591,636
62,735
39,475
537,085
40,000
64,237
86,682
3,282
3,717
$ 665,357
544,053
57,806
25,329
494,670
24,954
48,161
82,950
3,291
3,735
$ 605,308
518,202
13,382
22,305
491,505
14,358
9,875
77,798
3,119
3,230
$ 552,788
478,453
3,804
38,486
464,149
3,423
21,691
54,141
2,504
2,504
1.21%
10.01%
4.53%
63.54%
35.74%
1.34%
11.18%
4.34%
60.78%
28.88%
1.31%
10.46%
4.43%
60.97%
30.42%
1.00%
8.65%
4.30%
58.51%
37.36%
12.10%
.98%
.94%
1.21%
.24%
11.97%
1.27%
.65%
.94%
.21%
12.49%
1.61%
.98%
1.34%
.04%
11.59%
1.68%
1.15%
1.73%
.33%
.82%
9.11%
4.02%
58.15%
36.17%
9.00%
1.71%
2.28%
2.75%
.78%
The Efficiency Ratio equals noninterest expenses divided by the sum of tax equivalent net interest income and
noninterest income. Noninterest income excludes gains (losses) on securities transactions and LIH Partnership
losses. Ratio for 2017, 2016 and 2015 reflects reclassification of VBS and VST (2017 only) to report gross
income/expense rather than net.
3 Calculated based on Loans Held for Investment, excludes Loans Held for Sale.
4 Calculated based on 90 day past due and non-accrual to Total Assets.
5 Calculated based on 90 day past due, non-accrual and OREO to Total Assets
6 Data reflects reclassification of VBS (2017, 2016, 2015) and VST (2017) to report gross income/expense rather
than net
18
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information about the major components of the results of operations and financial
condition, liquidity and capital resources of F & M Bank Corp. and its subsidiaries. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.
Lending Activities
Credit Policies
The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our
borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions.
In an effort to manage the risk, our loan policy gives loan amount approval limits to individual loan officers based on
their position and level of experience and to our loan committees based on the size of the lending relationship. The
risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market
employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the
ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the
supply and demand for the type of real estate under construction.
We have written policies and procedures to help manage credit risk. We have a loan review policy that includes regular
portfolio reviews to establish loss exposure and to ascertain compliance with our loan policy.
We use a management loan committee and a directors’ loan committee to approve loans. The management loan
committee is comprised of members of senior management, and the directors’ loan committee is comprised of any six
directors. Both committees approve new, renewed and or modified loans that exceed officer loan authorities. The
directors’ loan committee also reviews any changes to our lending policies, which are then approved by our board of
directors.
Construction and Development Lending
We make construction loans, primarily residential, and land acquisition and development loans. The construction loans
are secured by residential houses under construction and the underlying land for which the loan was obtained. The
average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest
changes. The majority of the interest rates charged on these loans float with the market. Construction lending entails
significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan
balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction
lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction,
which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the
total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with
construction lending, we generally limit loan amounts to 75% to 90% of appraised value, in addition to analyzing the
creditworthiness of our borrowers. We also obtain a first lien on the property as security for our construction loans
and typically require personal guarantees from the borrower’s principal owners.
19
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in our market area, including
multi-family residential buildings, commercial buildings and offices, shopping centers and churches. Commercial real
estate lending entails significant additional risks, compared with residential mortgage lending. Commercial real estate
loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.
Additionally, the payment experience on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse
conditions in the real estate market or in the economy in general. Our commercial real estate loan underwriting criteria
require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and
reputation. We also evaluate the location of the security property and typically require personal guarantees or
endorsements of the borrower’s principal owners.
Business Lending
Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To
manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower’s principal
owners and monitor the financial condition of our business borrowers. Residential mortgage loans generally are made
on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real
estate whose value tends to be readily ascertainable. In contrast, business loans typically are made on the basis of the
borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as
real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of
business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business
loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
We offer various consumer loans, including personal loans and lines of credit, automobile loans, deposit account
loans, installment and demand loans, and home equity lines of credit and loans. Such loans are generally made to
clients with whom we have a pre-existing relationship. We currently originate all of our consumer loans in our
geographic market area.
The underwriting standards employed by us for consumer loans include a determination of the applicant’s payment
history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income
from primary employment and additionally from any verifiable secondary income. Although creditworthiness of the
applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security
in relation to the proposed loan amount. For home equity lines of credit and loans we require title insurance, hazard
insurance and, if required, flood insurance.
Residential Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan to value limits
ranging between 80 and 90% depending on the age of the property, borrower’s income and credit worthiness. Loans
that are retained in our portfolio generally carry adjustable rates that can change every three to five years, based on
amortization periods of twenty to thirty years.
20
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary VBS
Mortgage. These loans are funded by VBS utilizing a line of credit at the Bank until sold to investors in the secondary
market. Similarly, the Bank also has a relationship with Northpointe Bank in Grand Rapids, MI whereby it purchases
fixed rate conforming 1-4 family mortgage loans for short periods of time pending those loans being sold to investors
in the secondary market. These loans have an average duration of ten days to two weeks, but occasionally remain on
the Bank’s books for up to 60 days. The Bank began its relationship with Northpointe Bank in 2014 and had a similar
program with a prior bank since 2003. This relationship allows the Bank to achieve a higher rate of return than is
available on other short term investment opportunities.
Dealer Finance Division
In September 2012, the Bank started a loan production office in Penn Laird, VA which specializes in providing
automobile financing through a network of automobile dealers. The Dealer Finance Division was originally staffed
with three officers that have extensive experience in Dealer Finance. Based on the strong growth of this division the
staff has been increased to six employees. This office is serving the automobile finance needs for customers of dealers
throughout the existing geographic footprint of the Bank. Approximately fifty dealers have signed contracts to
originate loans on behalf of the Bank. As of year end 2017, the division had total loans outstanding of $75.2 million.
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.
21
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Allowance for Loan Losses, continued
Allowances for loans are determined by applying estimated loss factors to the portfolio based on management’s
evaluation and “risk grading” of the loan portfolio. Specific allowances are typically provided on all impaired loans in
excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades. The specific reserves
are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit,
given the current payment status of the loan and the value of any underlying collateral.
While management uses the best information available to establish the allowance for loan and lease losses, future
adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in
making the valuations or, if required by regulators, based upon information available to them at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and
other relevant considerations indicate that loss levels may vary from previous estimates.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued ASC 805, 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. Goodwill totaled $2,639,000 at January 1, 2002. As of December
31, 2008, the Company recognized $31,000 in additional goodwill related to the purchase of 70% ownership in VBS
Mortgage. In 2017 the Company recognized $211,000 in goodwill and $285,000 in intangibles related to the purchase
of 76% ownership in VST. The goodwill is not amortized but is tested for impairment at least annually. Based on this
testing, there were no impairment charges for 2017, 2016 or 2015. The Intangibles related to the VST purchase are
amortized over periods up to 15 years with $53,000 recorded in 2017.
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.
22
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
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.
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.
23
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Overview
The Company’s net income for 2017 totaled $9,010,000 or $2.63 per common share, a decrease of 5.83% from
$9,568,000 or $2.77 a share in 2016. Return on average equity decreased in 2017 to 10.01% versus 11.18% in 2016, and
the return on average assets decreased from 1.34% in 2016 to 1.21% in 2017. These results reflect an $811,000 tax
adjustment due to the write down of deferred tax assets as a result of the change in federal corporate income tax rate from
34% to 21% with the passing of the Tax Cuts & Jobs Act.
See page 19 for a five-year summary of selected financial data.
Changes in Net Income per Common Share (Basic)
2017
to 2016
2016
to 2015
Prior Year Net Income Per Common Share (Basic)
$ 2.77 $ 2.40
Change from differences in:
Net interest income 1
Provision for loan losses
Noninterest income, excluding securities gains
Security gains (losses), net
Noninterest expenses1
Income taxes
Effect of preferred stock dividend
Change in average shares outstanding
Total Change
.52
-
1.36
(.01)
(1.66)
(.38)
.02
.01
(.14) .37
$ 2.63 $ 2.77
Net Income Per Common Share (Basic)
1Noninterest income and noninterest expense reflect the reclassification of VBS to record gross income/expense rather than net.
.62
.09
(.08)
-
(.40)
.12
.01
.01
Net Interest Income
The largest source of operating revenue for the Company is net interest income, which is calculated as the difference
between the interest earned on earning assets and the interest expense paid on interest bearing liabilities. Net interest
income increased 5.78% from 2016 to 2017 following an increase of 7.60% from 2015 to 2016. The net interest margin
is the net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest
earning assets and interest bearing liabilities, along with their yields and rates, have a significant impact on the level of
net interest income. Tax equivalent net interest income for 2017 was $30,342,000 representing an increase of $1,714,000
or 5.99% over the prior year. A 7.60% increase in 2016 versus 2015 resulted in total tax equivalent net interest income
of $28,683,000.
In this discussion and in the tabular analysis of net interest income performance, entitled “Consolidated Average
Balances, Yields and Rates,” (found on page 26), the interest earned on tax exempt loans and investment securities has
been adjusted to reflect the amount that would have been earned had these investments been subject to normal income
taxation. This is referred to as tax equivalent net interest income. For a reconciliation of tax equivalent net interest income
to GAAP measures, see the table on page 40.
Tax equivalent income on earning assets increased $2,012,000 in 2017 compared to 2016. Loans held for investment,
expressed as a percentage of total earning assets, increased in 2017 to 90.29% as compared to 86.02% in 2016. During
2017, yields on earning assets increased 23 basis points (BP), primarily due to rate increases during 2017 specifically in
commercial loans, investments and federal funds sold. The average cost of interest bearing liabilities increased 6BP in
2017, following an increase of 9BP in 2016. The increase in 2017 in due to increased cost of deposits and debt as rates
increased.
The analysis on the next page reveals an increase in the net interest margin to 4.53% in 2017 from 4.34% in 2016,
primarily due to changes in balance sheet leverage and increased interest rates during the year.
24
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Consolidated Average Balances, Yields and Rates1
Balance
2017
Interest
Rate
Balance
2016
Interest
Rate
Balance
2015
Interest
Rate
ASSETS
Loans2
Commercial
Real estate
Installment
Loans held for investment4
Loans held for sale
Investment securities3
Fully taxable
Partially taxable
$ 182,646 $ 9,475
5.19% $ 176,389 $ 8,362
312,435
90,787 6,470 7.13% 78,524
16,678 5.04%
330,828
15,781 5.05%
295,892
5,805 7.39% 65,870
4.74% $ 170,272
$ 8,103
4.76%
14,976 5.07%
4,981 7.56%
604,261
37,008
32,623
1,112
5.40%
3.00%
567,348
68,438
29,948
1,924
5.28%
2.81%
532,034
40,450
28,087
1,099
5.28%
2.72%
10,886
15,714
125 - - 125
338 3.10%
372 2.37%
- -
17,372
327 1.88%
125 - -
Total investment securities
11,011
338
3.07%
15,839
372
2.37%
17,497
327
1.88%
Interest bearing deposits in banks
Federal funds sold
Total Earning Assets
1,512
727
10
15,475 156 1.01% 7,195
669,267 34,239 5.12% 659,547
.66%
3
.41%
1,223
35 .49% 9,310
4.89% 600,514
32,282
Allowance for loan losses
Nonearning assets
Total Assets
(6,793)
81,552
$ 744,026
(8,162)
63,205
$ 714,590
(8,933)
52,378
$ 643,959
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand –interest bearing
Savings
Time deposits
$ 121,095 $ 538 .44% $ 113,525 $ 499 .44% $ 112,334
114,489 516
100,298
159,415 1,634 1.02% 160,221
.45%
76,491
441
1,440 .90% 171,829
.44%
-
-
21 .23%
4.92%
29,534
$ 539 .48%
.28%
212
1,402 .82%
Total interest bearing deposits
394,999
2,688 .68%
374,044
2,380
.64%
360,654
2,153
.60%
Short-term debt
Long-term debt
20,398
37,716
63
53,004 1,146 2.16% 56,253
.31%
55
32,017
1,164 2.07% 31,856
.15%
69
.22%
654 2.05%
Total interest bearing liabilities
468,401 3,897 .83% 468,013
3,599 .77% 424,527
2,876 .68%
Noninterest bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
153,640
31,936
653,977
90,049
141,180
19,824
629,017
85,572
125,665
13,318
563,510
80,449
Total liabilities and stockholders’ equity
$ 744,026
$ 714,590
$ 643,959
Net interest earnings
$ 30,342
$ 28,683
$ 26,658
Net yield on interest earning assets (NIM)
4.53%
4.34%
4.44%
Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate of 34%.
Interest income on loans includes loan fees.
1
2
3 Average balance information is reflective of historical cost and has not been adjusted for changes in market value.
4
Includes nonaccrual loans.
25
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
The following table illustrates the effect of changes in volumes and rates.
2017 Compared to 2016
Increase (Decrease)
2016 Compared to 2015
Increase (Decrease)
Due to Change
in Average:
Volume
Rate
Increase
Or
(Decrease)
Due to Change
in Average:
Volume
Rate
Increase
or
(Decrease)
Interest income
Loans held for investment
Loans held for sale
Investment securities
Fully taxable
Partially taxable
$ 1,949 $ 726
72
(884)
$ 2,675 $ 1,865 $ (4)
64
(812)
761
$ 1,861
825
(114)
-
80
-
(34)
-
(31)
-
76
-
45
-
Interest bearing deposits in banks
Federal funds sold
Total Interest Income
3
40
994
4
81
963
7
121
1,957
-
(5)
2,590
3
19
158
3
14
2,748
Interest expense
Deposits
Demand - interest bearing
Savings
Time deposits
Short-term debt
Long-term debt
Total Interest Expense
Net Interest Income
33
62
(7)
6
13
201
39
75
194
6
67
(95)
(46)
162
133
(40)
229
38
(67)
(4)
$ 998
(14)
13
(25) 33
510
500
49
302
723
491
$ 661 $ 1,659 $ 2,099 $ (74) $ 2,025
8
(18)
298
(27)
10
232
Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average
balances outstanding. The rate change is determined by multiplying the current year average balance outstanding by the
change in rate from the prior year to the current year.
Interest Income
Tax equivalent interest income increased $2,012,000 or 6.24% in 2017, after increasing 9.31% or $2,744,000 in 2016.
Overall, the yield on earning assets increased .23%, from 4.89% to 5.12%. Average loans held for investment grew during
2017, with average loans outstanding increasing $36,913,000 to $604,261,000. Average real estate loans increased
5.89%, commercial loans increased 3.55% and consumer installment loans increased 15.62% on average. The increase
in average consumer loans is a result of the growth in our Dealer Finance Division which opened at the end of 2012. The
increase in tax equivalent interest income is primarily due to the growth in the loan portfolio, with commercial loans
contributing the most interest income growth.
26
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
The following table provides detail on the components of tax equivalent net interest income:
GAAP Financial Measurements:
(Dollars in thousands).
Interest Income – Loans
Interest Income - Securities and Other Interest-Earnings Assets
Interest Expense – Deposits
Interest Expense - Other Borrowings
Total Net Interest Income
Non-GAAP Financial Measurements:
2017
2016
2015
$ 33,591 $ 31,740 $ 29,056
348
410
504
2,153
2,380
2,688
723
1,219
1,209
26,528
28,551
30,198
Add: Tax Benefit on Tax-Exempt Interest Income – Loans
Add: Tax Benefit on Tax-Exempt Interest Income - Securities and Other
Interest-Earnings Assets
130
-
132
-
144
-
Total Tax Benefit on Tax-Exempt Interest Income
Tax-Equivalent Net Interest Income
144
130
132
$ 30,342 $ 28,683 $ 26,658
Interest Expense
Interest expense increased $298,000 or 8.28% during 2017, which followed a 25.14% increase or $723,000 in 2016. The
average cost of funds of .83% increased .06% compared to 2016, which followed an increase of .09% in 2016 compared
to 2015. Average interest bearing liabilities increased $388,000 in 2017 following an increase of $43,486,000 in 2016.
The average interest bearing liabilities have remained flat in 2017 and increased 10.24% in 2016. Changes in the cost of
funds attributable to rate and volume variances can be found in the table at the top of page 23.
Noninterest Income
Noninterest income continues to be an increasingly important factor in maintaining and growing profitability.
Management is conscious of the need to constantly review fee income and develop additional sources of complementary
revenue. During 2017, VBS Mortgage’s income was reclassified to report gross income and gross expenses in the
appropriate income statement categories rather than netting in noninterest income, 2016 and 2015 income statements
were reclassified to be comparative.
Noninterest income, exclusive of security gains or losses, increased 42.14% or $2,352,000, in 2017 following an increase
of 16.46% in 2016. The increase is due to the addition of VST Title, increases in VBS Mortgage gross revenue and
service charges on deposit account. In addition, the FHLB prepayment gain of $504,000 is recorded in noninterest
income. The losses on low income housing projects decreased 14.5% for 2017 due to recognition of $162,000 in gains
related to a fund that was dissolved. The 2016 increase over 2015 was primarily due to record earnings at VBS Mortgage.
The Company reported an investment loss related to both the Bank and VBS exiting the Bankers Title investment in
2017. The total loss was $42,000. There were no security transactions in 2016 or 2015 which resulted in a gain or
loss.
27
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Noninterest Expense
Noninterest expenses increased from $21,272,000 in 2016 to $24,719,000 in 2017, a 16.20% increase. Salary and
benefits increased 16.05% to $14,854,000 in 2017 following an increase of 11.72% in 2016. This increase was the
result of normal salary increases, additions to staff for new branches, the addition of VS Title (in 2017) and
administrative positions as well as increasing benefit costs (including health care cost, pension expense and profit
sharing expenses). Occupancy and Equipment expenses increased $268,000 or 16.72% due to the growth in our
branch network following an increase of 5.74% in 2016. Other operating expenses increased $1,125,000 in 2017,
following a $288,000 increase in 2016. The primary increases were in the areas of information technology ($211,000),
credit and debit card related services ($114,000), contributions ($266,000), and VBS and VST other operating expense
growth ($101,000). The 2016 primary increases were in advertising and employee appreciation ($70,000), other loan
related costs ($127,000), legal and professional expense ($108,000) and checking account program expenses ($257,000).
Total noninterest expense as a percentage of average assets totaled 3.32%, 2.98%, and 3.04%, in 2017, 2016 and 2015,
respectively. With the growth in branches, addition of VST and increased staff at VBS mortgage noninterest expenses
have shown increase relative to peer data. Peer group averages (as reported in the most recent Uniform Bank Performance
Report) have ranged between 2.80%, 2.84% and 2.86% over the same time period.
Provision for Loan Losses
Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and
volume of the portfolio and industry standards. Specific factors considered by management in determining the
adequacy of the level of the allowance for loan losses include internally generated loan review reports, past due reports
and historical loan loss experience. This review also considers concentrations of loans in terms of geography, business
type and level of risk. Management evaluates nonperforming loans relative to their collateral value, when deemed
collateral dependent, and makes the appropriate adjustments to the allowance for loan losses when needed. Based on
the factors outlined above, the current year provision for loan losses remained at $0 as in 2016. The current levels of
the allowance for loan losses reflect increased net charge-off activity, loan growth, and other credit risk factors that the
Company considers in assessing the adequacy of the allowance for loan losses. The Company has experienced an
increase in past due loans and nonperforming loans at year end; the nonperforming loans increase can be attributed to
one borrower ($1.1 million) that has a specific reserve in the allowance for loan losses; the past due loan increase is
primarily attributed to one borrower ($5.9 million) that is being closely monitored. Management is in the process of
restructuring the relationship and has determined that there is no impairment at this time. Management will continue to
monitor nonperforming and past due loans and will make necessary adjustments to specific reserves and record provision
for loan losses if conditions change regarding collateral values or cash flow expectations. Management anticipates the
Bank will need to record provision expense in 2018 due to expected growth and a normalized historical charge-off rate.
Actual net loan charge-offs were $1,499,000 in 2017 and $1,238,000 in 2016. Net charge-offs as a percentage of loans
held for investment totaled .24% and .21% in 2017 and 2016, respectively. The Dealer Finance Division’s charge-off
percentage is the largest category at .11% of loans held for investment and land development was .09%. As stated in
the most recently available Uniform Bank Performance Report (UPBR), peer group loss averages were .10% in 2017
and .11% in 2016. The Bank anticipates losses will remain above peer due to the Dealer Finance Division, however
these losses have been in line with expectations and are more than offset by the increased yield derived from this
portfolio.
Balance Sheet
Total assets increased 1.13% during the year to $753,270,000, an increase of $8,381,000 from $744,889,000 in 2016.
Loans held for investment grew $25,338,000, Bank premises and equipment increased $5,554,000, whereas loans held
for sale decreased $22,960,000 and other asset categories experienced modest fluctuations. Average earning assets
increased 1.47% or $9,720,000 to $669,267,000 at December 31, 2017. The increase in earning assets is due largely
to the growth in the loans held for investment offset by the decrease in short-term loan participation program with
Northpointe Bank. Deposits grew $32,092,000 and other liabilities decreased $28,304,000 in 2017. Average interest
bearing deposits increased $20,955,000 for 2017 or 5.60%, with increases in both interest-bearing demand accounts
and savings accounts. There was a slight decrease in the time deposit category. The Company continues to utilize its
assets well, with 89.95% of average assets consisting of earning assets.
28
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Investment Securities
Total securities increased $1,768,000 or 4.48% in 2017 to $41,243,000 at December 31, 2017 from $39,475,000 at
December 31, 2016. Average balances in investment securities decreased 30.48% in 2017 to $11,011,000. At year end,
1.65% of average earning assets of the Company were held as investment securities, all of which are unpledged.
Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest
rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 3.07%
for 2017, up from 2.37% in 2016.
There were no Other Than Temporary Impairments (OTTI) write-downs in 2017, 2016 or 2015. In 2017, the Company
recognized a $42,000 loss on exit of the Banker’s Title investment; there were no security gains or losses in 2016 or
2015.
The composition of securities at December 31 was:
(Dollars in thousands)
2017
2016
2015
Available for Sale1
U.S. Treasury and Agency
Mortgage-backed obligations of federal
agencies2
Equity securities
Total
Held to Maturity
U.S. Treasury and Agency
Total
$ 27,978
502
$ 24,014 $ 12,095
817
634
135
28,615
135
24,783
135
13,047
125
125
125
125
125
125
Other Equity Investments
Total Securities
12,503
12,157
14,567
$ 41,243 $ 39,475 $ 25,329
1
2
At estimated fair value. See Note 4 to the Consolidated Financial Statements for amortized cost.
Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral.
Maturities and weighted average yields of securities at December 31, 2017 are presented in the table below. Amounts are
shown by contractual maturity; expected maturities will differ as issuers may have the right to call or prepay obligations.
Maturities of other investments are not readily determinable due to the nature of the investment; see Note 4 to the
Consolidated Financial Statements for a description of these investments.
(Dollars in thousands)
Amount Yield Amount Yield Amount
Yield
Less
Than one Year
One to
Five Years
Five to
Ten Years
Over
Ten Years
Amount Yield
Total
Yield
Debt Securities Available for
Sale
U.S. Treasury & Agency
Mortgage-backed obligations of
federal agencies
Equity securities
Total
Debt Securities Held to
Maturity
$ 19,998
1.05% $ 7,980
2.06%
$ -
502
2.41%
-
-
$ 19,978 1.05% $ 7,980
-
2.06% $ 502
2.41%
$ -
-
135
$ 135
$ 27,978
502
1.34%
2.41%
135
1.36%
$ 28,615
U.S. Treasury & Agency
Total
$ 125
$ 125
.75%
.75%
$ 125
$ 125
.75%
.75%
29
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Analysis of Loan Portfolio
The Company’s market area has a relatively stable economy which tends to be less cyclical than the national economy.
Major industries in the market area include agricultural production and processing, higher education, retail sales, services
and light manufacturing.
The Company’s portfolio of loans held for investment totaled $616,974,000 at December 31, 2017 compared with
$591,636,000 at the beginning of the year. The Company’s policy has been to make conservative loans that are held for
future interest income, utilizing prudent underwriting and a strong loan review program. Collateral required by the
Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the
borrower. Commercial loans, including agricultural and multifamily loans, increased 3.89% during 2017 to
$209,721,000. Real estate mortgages increased $12,260,000 or 5.14%. Growth has included a variety of loan and
collateral types including owner occupied residential real estate and residential rental properties. Construction loans
decreased $4,552,000 or 5.98%. The Bank also has loan participation arrangements with several other banks within the
region to aid in diversification of the loan portfolio geographically, by collateral type and by borrower.
Consumer installment loans increased $9,411,000 or 13.06%. This category includes personal loans, auto loans and other
loans to individuals. This category began increasing during the fourth quarter of 2012 due to the opening of the Dealer
Finance Division in Penn Laird, Virginia; at year end this Division had a loan portfolio of $75,169,000. Credit card
balances increased $117,000 to $2,939,000 but are a minor component of the loan portfolio. The following table presents
the changes in the loan portfolio over the previous five years.
(Dollars in thousands)
2017
2016
December 31
2015
2014
2013
Real estate – mortgage
Real estate – construction
Consumer installment
Commercial
Agricultural
Multi-family residential
Credit cards
Other
Total Loans
$ 250,891
71,620
81,458
182,360
17,064
10,298
2,939
344
$ 616,974
$ 238,631
76,172
72,048
178,392
15,876
7,605
2,822
90
$ 591,636
$ 232,321
69,759
62,239
153,691
15,672
7,559
2,745
67
$ 544,053
$ 223,824
67,180
49,615
147,599
15,374
11,775
2,705
130
$ 518,202
$ 212,630
68,512
30,643
135,835
16,265
11,797
2,680
91
$ 478,453
The following table shows the Company’s loan maturity and interest rate sensitivity as of December 31, 2017:
(Dollars in thousands)
Commercial and
agricultural loans
Multi-family residential
Real Estate – mortgage
Real Estate – construction
Consumer – installment/credit cards/other
Total
Loans with predetermined rates
Loans with variable or
adjustable rates
Total
Less Than
1 Year
1-5
Years
Over
5 Years
Total
$ 106,048 $ 26,790 $ 199,424
$ 66,586
10,298
4,628
250,891
104,699
71,620
50,857
9,027
84,741
$ 235,797 $ 333,030 $ 48,147 $ 616,974
497
4,620
2,126
14,114
5,173
141,572
18,637
61,600
$ 28,101 $ 79,748 $ 30,378 $ 138,227
207,696
478,747
$ 235,797 $ 333,030 $ 48,147 $ 616,974
253,282
17,769
30
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Analysis of Loan Portfolio, continued
Residential real estate loans are generally made for a period not to exceed 25 years and are secured by a first deed of trust
which normally does not exceed 90% of the appraised value. If the loan to value ratio exceeds 90%, the Company
requires additional collateral, guarantees or mortgage insurance. On approximately 94% of the real estate loans, interest
is adjustable after each one, three or five-year period. The remainder of the portfolio is comprised of fixed rate loans that
are generally made for a fifteen-year or a twenty-year period with an interest rate adjustment after ten years.
Since 1992, fixed rate real estate loans have been funded with fixed rate borrowings from the Federal Home Loan Bank,
which allows the Company to control its interest rate risk. In addition, the Company makes home equity loans secured
by second deeds of trust with total indebtedness not to exceed 90% of the appraised value. Home equity loans are made
for three, five or ten year periods at a fixed rate or as a revolving line of credit.
Construction loans may be made to individuals, who have arranged with a contractor for the construction of a residence,
or to contractors that are involved in building pre-sold, spec-homes or subdivisions. The majority of commercial loans
are made to small retail, manufacturing and service businesses. Consumer loans are made for a variety of reasons;
however, approximately 74% of the loans are secured by automobiles and trucks.
Approximately 80% of the Company’s loans are secured by real estate; however, policies relating to appraisals and loan
to value ratios are adequate to control the related risk. Market values appear to have rebounded from the recession with
modest increases in 2015, 2016, and 2017. Unemployment rates in the Company’s market area continue to be below
both the national and state averages.
The Bank has not identified any loan categories that would be considered loan concentrations of greater than 25% of
capital. While the Bank has not developed a formal policy limiting the concentration level to any particular loan type or
industry segment, it has established target limits on both a nominal and percentage of capital basis. Concentrations are
monitored and reported to the board of directors quarterly. Concentration levels have been used by management to
determine how aggressively we may price or pursue new loan requests. At December 31, 2017, there are no industry
categories of loans that exceed 10% of total loans.
Nonaccrual and Past Due Loans
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on
which interest accruals have been suspended or discontinued permanently. The Company would have earned
approximately $102,000 in additional interest income had the loans on nonaccrual status been current and performing.
Nonperforming loans totaled $7,102,000 at December 31, 2017 compared to $4,870,000 at December 31, 2016. At
December 31, 2017, $198,000 of loans 90 days or more past due were not on nonaccrual status. Approximately 88%
of these nonperforming loans are secured by real estate. Although management expects that there may be additional
loan losses, the Bank believes that it is generally well secured and continues to actively work with its customers to
effect payment. As of December 31, 2017, the Company holds $1,984,000 of real estate which was acquired through
foreclosure.
Nonperforming loans have increased approximately $2,232,000 since December 31, 2016. Of the increase, $1.5
million relates to two borrowers; one of which has sold equipment and the loan will be modified for collection of the
remaining balance, with no loss anticipated as of December 31, 2017. The other relationship is in the process of
subdividing property to sell in order to bring the loan current; this loan has been reviewed for impairment and has a
specific reserve of $249,000 in our allowance for loan losses at December 31, 2017.
31
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Nonaccrual and Past Due Loans, continued
The following is a summary of information pertaining to nonperforming loans:
(Dollars in thousands)
Nonaccrual Loans:
Real Estate
Commercial
Home Equity
Other
Loans past due 90 days or more:
Real Estate
Commercial
Home Equity
Other
2017
2016
2015
2014
2013
$ 5,628 $ 4,204 $ 5,698 $ 5,481 $ 9,963
599
451
226
143
-
-
70
311
178
81
-
-
109
40
108
272
25
107
1,179
1,890
153
161
0
0
0
402
-
246
4
61
55
26
67
1
16
Total Nonperforming loans
$ 7,102 $ 4,870 $ 6,526 $ 6,975 $12,582
Restructured Loans current and performing:
Real Estate
Commercial
Home Equity
Other
7,710
-
8,641
1,121
8,713
7,484
3,913
1,463 518 3,989
-
78
-
76
1,414
91
290
22
727
-
Nonperforming loans as a percentage of loans held for investment
1.15%
.82%
1.20%
1.35%
2.63%
Net Charge Offs to Total Loans Held for Investment
.24%
.21%
.04%
.33%
.78%
Allowance for loan and lease losses to nonperforming loans
85.10%
154.89% 134.55% 125.09%
65.04%
Potential Problem Loans
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not represent or result from
trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or
capital resources. Nor do they represent material credits about which management is aware of any information which
causes it to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of
December 31, 2017, management is not aware of any potential problem loans which are not already classified for
regulatory purposes or on the watch list as part of the Bank’s internal grading system.
32
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses
In evaluating the portfolio, loans are segregated into loans with identified potential losses, pools of loans by type,
with separate weighting for past dues and adverse rated loans, 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 five years, for loans of that type. During
2015, the Company felt the two-year loss history utilized in 2014 and prior would not be indicative of the amount of
losses that could occur in our current economic cycle, therefore the loss history was expanded to five years to
capture a more representative loss history. Dealer finance loans utilize a two-year loss history. 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 $6,044,000 at December 31, 2017 is equal to .98% of total loans held for investment.
This compares to an allowance of $7,543,000 or 1.27% at December 31, 2016 and 1.61% at December 31, 2015.
Management and the Board of Directors feel that the current reserve level is adequate based on the analysis of
historical losses, delinquency rates, collateral values of delinquent loans and a thorough review of the loan portfolio.
The allowance for loan losses to nonperforming loans has decreased from 154.89% to 85.10% in 2017; increases in
the nonperforming loans have been analyzed and, where necessary, a specific reserve has been recorded. In addition,
past due and adversely risk rated loans have higher allocation factors within the allowance for loan losses calculation.
The Company has experienced a continued decline in historical charge-off rates with 2017 replacing 2012 in the five-
year lookback and the local economy showing continued improvements in unemployment. Management will continue
to monitor relationships that have recently become past due but are not considered impaired at this time.
Loan losses, net of recoveries, totaled $1,499,000 in 2017 which is equivalent to .24% of total loans outstanding. Over
the preceding three years, the Company has had an average loss rate of .16%, compared to a .11% loss rate for its peer
group.
33
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses, continued
A summary of the activity in the allowance for loan losses follows:
(Dollars in thousands)
2017
2016
2015
2014
2013
Balance at beginning of period
Provision charged to expenses
Loan losses:
Construction/land development
Farmland
Real Estate
Multi-family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non Real Estate
Consumer
Dealer Finance
Credit Cards
Total loan losses
Recoveries:
Construction/land development
Farmland
Real Estate
Multi-family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non Real Estate
Consumer
Dealer Finance
Credit Cards
Total recoveries
Net loan losses
Balance at end of period
Allowance for loan losses as a
percentage of loans
$ 7,543
-
$ 8,781
-
$ 8,725
300
$ 8,184
2,250
$ 8,154
3,775
620
-
-
-
-
7
26
179
136
1,806
98
2,872
-
-
2
-
13
25
53
72
28
1,143
37
1,373
(1,499)
$ 6,044
356
-
23
-
19
8
370
293
37
1,081
74
2,261
7
-
4
-
135
-
120
267
19
417
54
1,023
(1,238)
$ 7,543
156
-
25
-
-
26
51
-
32
251
60
601
85
-
37
-
65
6
-
62
32
24
46
357
(244)
$ 8,781
1,611
-
208
-
-
-
80
385
33
107
46
2,470
223
-
-
-
108
-
-
356
33
6
35
761
(1,709)
$ 8,725
2,127
-
173
-
201
159
68
986
173
17
121
4,025
40
-
-
-
42
-
29
127
14
-
28
280
(3,745)
$ 8,184
.98%
1.27%
1.61%
1.68%
1.71%
Net loan losses to loans held for investment
.24%
.21%
.04%
.33%
.78%
34
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Loan Losses and the Allowance for Loan Losses, continued
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2017
2016
2015
2014
2013
Allowance for loan
losses:
(dollars in
thousands)
Balance Percentage
Balance Percentage
Balance Percentage
Balance Percentage
Balance Percentage
of Loans
in Each
Category
of Loans
in Each
Category
of Loans
in Each
Category
of Loans
in Each
Category
of Loans
in Each
Category
Construction/Land
Development
Real Estate
Commercial,
Financial and
Agricultural
Consumer
Home Equity
Total
$ 2,547
42.14% $ 3,381
44.82% $ 4,442
50.59% $ 4,738
54.30% $ 4,007
48.96%
719
11.90%
843
11.18%
806
9.18%
623
7.14%
400
4.89%
863
14.28%
1,348
17.88%
1,666
18.97%
1,337
15.33%
2,239
27.36%
1,640
27.13%
1,426
18.90%
1,059
12.06%
1,685
19.31%
905
11.06%
275
4.55%
545
7.22%
808
9.20%
342
3.92%
633
7.73%
$ 6,044
100.00% $ 7,543
100.00% $ 8,781
100.00% $ 8,725
100.00%
$ 8,184
100.00%
Deposits and Borrowings
The average deposit balances and average rates paid for 2017, 2016 and 2015 were as follows:
Average Deposits and Rates Paid (Dollars in thousands)
2017
Average
Balance
December 31,
2016
2015
Rate
Average
Balance
Rate
Average
Balance
Rate
Noninterest-bearing
$ 153,640
$ 141,180
$ 125,665
Interest-bearing:
Interest Checking
Savings Accounts
Time Deposits:
CDARS
All other
Total interest-bearing
Total deposits
$ 121,095
114,489
.44%
.45%
$ 113,525
100,298
.44%
.44%
$ 112,334
76,491
.48%
.28%
1,247
158,168
394,999
$ 548,639
.56%
1.03%
.68%
.49%
1,253
158,968
374,044
$ 515,224
.88%
.90%
.64%
.46%
11,247
160,582
360,654
$ 486,319
.18%
.86%
.60%
.44%
Average noninterest-bearing demand deposits, which are comprised of checking accounts, increased $12,460,000 or
8.83% from $141,180,000 during 2016 to $153,640,000 during 2017. Average interest-bearing deposits, which include
interest checking accounts, money market accounts, regular savings accounts and time deposits, increased
$20,955,000 or 5.60% from $374,044,000 at December 31, 2016 to $394,999,000 at December 31, 2017. Total
average interest checking (including money market) account balances increased $7,570,000 or 6.67% from
$113,525,000 at December 31, 2016 to $121,095,000 at December 31, 2017. Total average savings and money
market account balances increased $14,191,000 or 14.15% from $100,298,000 at December 31, 2016 to $114,489,000
at December 31, 2017.
Average time deposits decreased $806,000 or .50% from $160,221,000 at December 31, 2016 to $159,415,000 at
December 31, 2017.
35
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Deposits and Borrowings, continued
The maturity distribution of certificates of deposit of $100,000 or more is as follows:
(Actual Dollars in thousands)
Less than 3 months
3 to 6 months
6 to 12 months
1 year to 5 years
Total
2017
2016
$ 4,392
7,212
11,410
37,606
$ 2,379
4,332
7,624
36,534
$ 60,620
$ 50,869
Non-deposit borrowings include federal funds purchased and Federal Home Loan Bank (FHLB) borrowings, (both short
term and long term). Non-deposit borrowings are an important source of funding for the Bank. These sources assist in
managing short and long-term funding needs, often at rates that are more favorable than raising additional funds within
the deposit portfolio.
Borrowings from the FHLB are used to support the Bank’s lending program and allow the Bank to manage interest
rate risk by laddering maturities and matching funding terms to the terms of various loan types in the loan portfolio.
The Company did not borrow long term FHLB loans during 2017. This compares to $20,000,000 borrowed in 2016
and $40,000,000 in 2015. Repayment of amortizing and fixed maturity loans through FHLB totaled $14,429,000
during 2017, including prepayment of $10,000,000 resulting in a prepayment gain of $504,000. These long-term
loans carry an average rate of 1.86% at December 31, 2017.
Contractual Obligations and Scheduled Payments (dollars in thousands)
Less than
One Year
One Year Through Three Years Through
Three Years
Five Years
More than
Five Years
Total
December 31, 2017
Federal funds purchased
FHLB Short term advances
FHLB long term advances
Total
$ 5,296
20,000
9,429
-
21,357
$ 34,725 $ 21,357
$ - $ -
-
8,643
$ - $ 5,296
20,000
-
49,554
10,125
$ 8,643 $ 10,125 $ 74,850
See Note 11 (Short Term Debt) and Note 12 (Long Term Debt) to the Consolidated Financial Statements for a discussion
of the rates, terms, and conversion features on these advances
36
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Deposits and Borrowings, continued
Stockholders’ Equity
Total stockholders' equity increased $4,593,000 or 5.30% in 2017. Net income totaled $9,010,000, noncontrolling
interest net income totaled $31,000, issuance of common stock totaled $197,000 and capital was reduced by dividends
of $3,387,000, decreases in other comprehensive income of $295,000, repurchases of common stock of $712,000,
repurchase of preferred stock $101,000 and minority interest distributions of $150,000. As of December 31, 2017, book
value per common share was $25.73 compared to $24.18 as of December 31, 2016. Dividends are paid to stockholders
on a quarterly basis in uniform amounts unless unexpected fluctuations in net income indicate a change to this policy is
needed.
The Company adopted ASU 2018-02 which allows financial statement preparers an option to reclassify stranded tax
effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the
change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded.
Therefore retained earnings has been adjusted by $682,000 for reflect these changes.
Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The
rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity's investments, the
more capital it is required to maintain. The Bank is required to maintain these minimum capital levels. 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 December 31, 2017, the Bank had Common Equity Tier I capital of 14.43%, Tier I capital of
14.43% of risk weighted assets and combined Tier I and II capital of 15.41% of risk weighted assets. Regulatory
minimums at this date were 4.5%, 6% and 8%, respectively. The Bank has maintained capital levels far above the
minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies
are empowered to require the Bank to raise additional capital and/or reallocate present capital.
In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The
leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a
minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial
condition. At December 31, 2017, the Bank reported a leverage ratio of 12.07%. The Bank's leverage ratio was also
substantially above the minimum. The Bank also reported a capital conservation buffer of 7.41% at December 31,
2017. 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. Beginning January 1, 2016, a capital
conservation buffer of 0.625% became effective. The capital conservations buffer for 2017 is 1.25% and will
gradually be increased through January 1, 2019 to 2.5%.
37
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Market Risk Management
Most of the Company’s net income is dependent on the Bank’s net interest income. Rapid changes in short-term interest
rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances
exist between the maturities or repricing of interest bearing liabilities and interest earning assets. The Company’s net
interest margin increased .19% in 2017 following a decrease of .09% in 2016. This increase is due to increases in interest
rates in 2017, loan growth and the growth in noninterest bearing deposits to support loan growth. In December 2017, the
Federal Open Market Committee elected to raise the short-term rates target .25% to 1.25 to 1.50% due to expanding
economic activity.
Net interest income is also affected by changes in the mix of funding that supports earning assets. For example, higher
levels of non-interest bearing demand deposits and leveraging earning assets by funding with stockholder’s equity would
result in greater levels of net interest income than if most of the earning assets were funded with higher cost interest-
bearing liabilities, such as certificates of deposit.
Liquid assets, which include cash and cash equivalents, federal funds sold, interest bearing deposits and short term
investments averaged $40,189,000 for 2017. The Bank historically has had a stable core deposit base and, therefore,
does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should
not have a significant effect on liquidity. The Bank's membership in the Federal Home Loan Bank has historically
provided liquidity as the Bank borrows money that is repaid over a five to ten-year period and uses the money to make
fixed rate loans. The matching of the long-term receivables and liabilities helps the Bank reduce its sensitivity to interest
rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed. There are no off-
balance sheet items that will impair future liquidity.
The following table depicts the Company’s interest rate sensitivity, as measured by the repricing of its interest sensitive
assets and liabilities as of December 31, 2017. As the notes to the table indicate, the data was based in part on assumptions
as to when certain assets or liabilities would mature or reprice. The analysis indicates an asset sensitive one-year
cumulative GAP position of 21.36% of total earning assets, compared to 23.71% in 2016. Approximately 44.40% of rate
sensitive assets and 32.83% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less
than one year) decreased $11,305,000 during the year, while total earning assets decreased $1,106,000. The decrease is
attributed to a decrease in loans held for sale of $22,960,000 and a decrease in federal funds sold of $7,926,000 which
were offset by growth in loans held for investment of $25,221,000 and investments of $3,832,000. Growth in the loans
held for investment portfolio was concentrated in real estate secured loans, commercial and the Dealer Finance division.
Short term liabilities increased $5,059,000, while total interest bearing liabilities decreased $12,732,000. The decrease in
short term liabilities is due to the decreased demand in the loans held for sale program. Management has raised deposit
rates minimally in 2017.
38
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Market Risk Management, continued
The following GAP analysis shows the time frames as of December 31, 2017, in which the Company’s assets and
liabilities are subject to repricing:
(Dollars in thousands)
Rate Sensitive Assets:
Loans held for investment
Loans held for sale
Federal funds sold
Investment securities
Credit cards
Interest bearing bank deposits
1-90
Days
91-365
Days
1-5
Years
Over 5
Years
Not
Classified
Total
$ 136,692
39,775
-
20,123
2,939
1,285
$ 96,166 $ 333,030 $ 48,147
-
-
502
-
-
-
-
7,980
-
-
-
-
-
-
-
$ - $ 614,035
39,775
-
-
-
28,740
135
-
2,939
- 1,285
Total
200,814
104,146
333,030
48,649
135
686,774
Rate Sensitive Liabilities:
Interest bearing demand deposits
Savings deposits
Certificates of deposit $100,000 and over
Other certificates of deposit
Total Deposits
Short-term debt
Long-term debt
Total
Discrete Gap
- 32,473
- 24,144
17,223
32,095
4,192
13,313
69,810
72,434
39,205
59,242
18,668
24,145
-
-
120,951
-
- 120,723
60,620
-
104,650
-
17,505
105,935
240,691
42,813
-
406,944
25,296
1,192
-
8,322
-
30,094
-
10,125
-
25,296
- 49,733
43,993
156,821
114,257
(10,111)
270,785
62,245
52,938
(4,289)
-
135
481,973
204,801
Cumulative Gap
As a % of Earning Assets
156,821
22.83%
146,710
21.36%
208,955
30.43%
204,666
29.80%
204,801
29.82%
•
In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run off. Loan
principal payments are included in the earliest period in which the loan matures or can be repriced. Principal
payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing.
Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated
maturities on deposits which have no stated maturity dates were derived from guidance contained in FDICIA 305.
39
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Quarterly Results (unaudited)
The table below lists the Company’s quarterly performance for the years ended December 31, 2017 and 2016:
(Dollars in thousands)
Fourth
Third
Second
First
Total
2017
Interest and Dividend Income
Interest Expense
$
9,141 $
1,036
8,688 $
1,030
8,256 $
925
8,010 $
906
Net Interest Income
Provision for Loan Losses
8,105
-
7,658
-
Net Interest Income after Provision
for Loan Losses
Non-Interest Income
Non-Interest Expense
8,105
7,658
1,820
6,489
2,145
6,259
7,331
-
7,331
1,882
6,017
34,095
3,897
30,198
-
7,104
-
7,104
30,198
2,045 7,892
5,954
24,719
Income before income taxes
Income Tax Expense
Noncontrolling interest (income)/expense 49 (48) (59) 27 (31)
3,544
3,195
877
3,196
809
3,436
1,698
13,371
4,330
946
Net Income
$
1,787 $
2,550 $
2,328 $
2,345 $
9,010
Net Income Per Average
Common Share Basic $
.52 $
.75 $
.68 $
.68 $
2.63
Note that fourth quarter 2017 includes the one time deferred tax asset write down due to the Tax Cuts and Jobs Act.
(Dollars in thousands)
Fourth
Third
Second
First
Total
2016
Interest and Dividend Income
Interest Expense
$
8,387 $
954
8,198 $
969
7,931 $
862
7,634 $ 32,150
3,599
814
Net Interest Income
Provision for Loan Losses
7,433
-
7,229
-
7,069
-
6,820
-
28,551
-
Net Interest Income after Provision
for Loan Losses
7,433
7,229
7,069
6,820
28,551
Non-Interest Income
Non-Interest Expense
1,054
2,843
6,806 4,962
986
4,772
699 5,582
21,272
4,732
12,861
Income before income taxes
Income Tax Expense
3,099
Noncontrolling interest (40) (64) (86) (4) (194)
3,321
3,470
912
3,283
839
2,787
693
655
Net Income
$
2,518 $
2,602 $
2,358 $
2,090 $
9,568
Net Income Per Average
Common Share Basic $
.74 $
.75 $
.68 $
.60 $
2.77
40
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
The Company considers interest rate risk to be a significant risk and has systems in place to measure the exposure of net
interest income and fair values to movement in interest rates. Among the tools available to management is interest rate
sensitivity analysis, which provides information related to repricing opportunities. Interest rate shock simulations
indicate potential economic loss due to future interest rate changes. Shock analysis is a test that measures the effect of a
hypothetical, immediate and parallel shift in interest rates. The following table shows the results of a rate shock and the
effect on net income, net interest income and net interest margin. The information is an excerpt from our Interest Rate
Risk model run as of November 30, 2017 and 2016:
Rate Shift (bp)
Net Income
Net Interest Income
Net Interest Margin
2017
2016
2017
2016
2017
2016
300
200
100
(-)100
(-)200
16,084
14,583
38,622
35,480
5.71%
5.21%
14,832
13,118
36,904
33,492
5.46%
4.96%
13,414
11,507
34,959
31,306
5.18%
4.61%
12,291
10,458
33,418
29,883
4.96%
4.41%
11,999
10,319
33,017
29,694
4.90%
4.38%
See accompanying Notes to the Consolidated Financial Statements.
41
Item 8. Financial Statements and Supplementary Data
F & M Bank Corp. and Subsidiaries
Consolidated Balance Sheets (dollars in thousands, except per share data)
As of December 31, 2017 and 2016
Assets
Cash and due from banks
Money market funds
Federal funds sold
Cash and cash equivalents
Securities:
Held to maturity - fair value of $125 in 2017 and 2016
Available for sale
Other investments
Loans held for sale
Loans held for investment
Less: allowance for loan losses
Net loans held for investment
Other real estate owned
Bank premises and equipment, net
Interest receivable
Goodwill
Bank owned life insurance
Other assets
Total Assets
Liabilities
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Short-term debt
Accrued liabilities
Long-term debt
Total Liabilities
Commitments and contingencies
2017
2016
$ 10,622 $ 7,755
1,285
674
7,926
-
16,355
11,907
125
28,615
12,503
39,775
616,974
(6,044)
610,930
125
24,783
14,567
62,735
591,636
(7,543)
584,093
2,076
1,984
10,340
15,894
1,785
2,007
2,670
2,881
13,513
13,950
12,699
11,847
$ 753,270 $ 744,889
$ 162,233 $ 146,617
390,468
406,944
537,085
569,177
25,296
17,789
49,733
661,995
40,000
16,885
64,237
658,207
Stockholders’ Equity
Preferred Stock $25 par value, 400,000 shares authorized, 324,150 and 327,350 shares
issued and outstanding at December 31, 2017 and 2016, respectively
Common stock $5 par value, 6,000,000 shares authorized, 3,255,036 and 3,270,315
shares issued and outstanding at December 31, 2017 and 2016, respectively
Additional paid in capital – common stock
Retained earnings
Noncontrolling interest in consolidated subsidiaries
Accumulated other comprehensive loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
7,529
7,609
16,275
16,352
10,225
10,684
60,814
54,509
574
693
(4,142)
(3,165)
86,682
91,275
$ 753,270 $ 744,889
See accompanying Notes to the Consolidated Financial Statements.
42
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income (dollars in thousands, except per share data)
For the years ended 2017, 2016 and 2015
Interest and Dividend Income
Interest and fees on loans held for investment
Interest from loans held for sale
Interest from money market funds and federal funds sold
Interest from debt securities – taxable
Total interest and dividend income
2017
2016
2015
$ 32,479
1,112
166
338
34,095
$ 29,816
1,924
38
372
32,150
$ 27,957
1,099
21
327
29,404
Interest Expense
Total interest on deposits
Interest from short-term debt
Interest from long-term debt
Total interest expense
Net Interest Income
Provision for Loan Losses
2,688
63
1,146
3,897
2,380
55
1,164
3,599
2,153
69
654
2,876
30,198
28,551
26,528
-
-
300
Net Interest Income After Provision for Loan Losses
30,198
28,551
26,228
Noninterest Income
Service charges on deposit accounts
Insurance, other commissions and mortgage banking, net
Other operating income
Income from bank owned life insurance
Gain on prepayment of long term debt
Loss on sale of other investments
Low income housing partnership losses
Total noninterest income
1,360
4,137
2,109
449
504
(42)
(625)
7,892
1,174
3,006
1,657
476
-
-
(731)
5,582
963
2,575
1,401
473
-
-
(619)
4,793
Noninterest Expenses
Salaries
Employee benefits
Occupancy expense
Equipment expense
FDIC insurance assessment
Other real estate owned, net
Other operating expenses
Total noninterest expenses
Income before income taxes
Income Tax Expense
Net Income
11,482
3,372
1,035
836
190
76
9,986
2,814
868
735
388
86
9,018
2,439
801
715
587
566
5,428
19,554
7,728
24,719
6,395
21,272
13,371
12,861
11,467
4,330
3,099
2,886
9,041
9,762
8,581
Net Income attributable to noncontrolling interests
Net Income attributable to F & M Bank Corp.
(31)
(164)
(194)
$ 9,010 $ 9,568 $ 8,417
Dividends paid/accumulated on preferred stock
Net income available to common stockholders
Per Common Share Data
Net income - basic
Net income - diluted
Cash dividends on common stock
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
415
$ 8,595
487
$ 9,081
510
$ 7,907
$ 2.63 $ 2.77 $ 2.40
$ 2.48 $ 2.57 $ 2.25
$ .94 $ .80 $ .73
3,290,812
3,735,212
3,282,335
3,716,591
3,269,713
3,631,984
See accompanying Notes to the Consolidated Financial Statements.
43
F & M BANK CORP.
Consolidated Statements of Comprehensive Income (dollars in thousands)
For the years ended 2017, 2016 and 2015
Years Ended December 31,
2016
2015
2017
Net Income
$ 9,041 $ 9,762 $ 8,581
Other comprehensive income (loss):
Pension plan adjustment
Tax effect
Pension plan adjustment, net of tax
Unrealized holding gains
on available-for-sale securities
Tax effect
Unrealized holding gains, net of tax
Total other comprehensive income (loss)
Total comprehensive income
Comprehensive income attributable to noncontrolling
interests
(414)
141
(273)
(738)
251
(487)
(537)
183
(354)
2
3
(34)
(1)
(1)
12
1
2
(22)
(295)
(353)
(485)
$ 8,746 $ 9,277 $ 8,228
$ (31) $ (194) $ (164)
Comprehensive income attributable to F&M Bank Corp.
$ 8,715 $ 9,083 $ 8,064
See accompanying Notes to the Consolidated Financial Statements.
44
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except share
and per share data)
For the years ended December 31, 2017, 2016 and 2015
Accumulated
Other
Comprehensive
Preferred
Common
Stock
Stock
Additional
Paid in
Capital
Retained
Noncontrolling
Income
Earnings
Interest
(Loss)
Total
$ 9,425
$ 16,459
$ 11,260
$ 42,554
$ 426
$ (2,327)
$ 77,797
8,417
164
(353)
(17)
(510)
(2,405)
(67)
(223)
8,581
(353)
(17)
(510)
(2,405)
(290)
35
112
-
-
-
147
$ 9,425
$ 16,427
$ 11,149
$ 48,056
9,568
$ 573
194
$ (2,680)
$ 82,950
9,762
Balance December 31, 2014
Net income
Other comprehensive loss
Distributions to noncontrolling interest
Dividends on preferred stock ($1.275 per share)
Dividends on common stock ($.73 per share)
Common stock repurchased (13,277 shares)
Common stock issued (6,916 shares)
Balance December 31, 2015
Net income
Other comprehensive loss
Distributions to noncontrolling interest
Dividends on preferred stock ($1.488 per share)
Dividends on common stock ($.80 per share)
Common stock repurchased (22,583 shares)
Common stock issued (7,494 shares)
Preferred stock repurchased (72,650 shares)
(1,816)
(112)
37
(466)
146
(145)
(74)
(487)
(2,628)
(485)
(485)
(74)
(487)
(2,628)
(578)
183
(1,961)
Balance, December 31, 2016
$ 7,609
$ 16,352
$ 10,684
$ 54,509
$ 693
$ (3,165)
$ 86,682
Net income
Other comprehensive loss
Distributions to noncontrolling interest
Dividends on preferred stock ($1.28 per share)
Dividends on common stock ($.94 per share)
Common stock repurchased (21,984 shares)
Common stock issued (6,705 shares)
Preferred stock repurchased (3,200 shares)
(80)
Stranded tax effect of Tax Cuts and Jobs Act
9,010
31
(295)
(150)
(415)
(2,972)
9,041
(295)
(150)
(415)
(2,972)
(712)
197
(101)
682
(682)
-
(110)
33
(602)
164
(21)
Balance, December 31, 2017
$ 7,529
$ 16,275
$ 10,225
$ 60,814
$ 574
$ (4,142)
$ 91,275
See accompanying Notes to the Consolidated Financial Statements.
45
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows (dollars in thousands)
For the years ended December 31, 2017, 2016 and 2015
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization of intangibles
Amortization of securities
Proceeds from sale of loans held for sale originated
Gain on sale of loans held for sale originated
Loans held for sale originated
Provision for loan losses
(Expense) benefit for deferred taxes
(Increase) in interest receivable
Increase in other assets
Increase in accrued liabilities
Amortization of limited partnership investments
Loss on sale of investments
Loss on sale and valuation adjustments of other real estate owned
Income from life insurance investment
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Proceeds from maturities of securities available for sale
Proceeds from sales of other investments
Purchases of securities available for sale and other investments
Capital improvements to other real estate owned
Net increase in loans held for investment
Net decrease (increase) in loans held for sale participations
Net purchase of property and equipment
Proceeds from sale of other real estate owned
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net change in deposits
Net change in short-term debt
Dividends paid in cash
Proceeds from long-term debt
Proceeds from issuance of common stock
Repurchase of preferred stock
Repurchase of common stock
Repayments of long-term debt
Net Cash (Used in) Provided by Financing Activities
2017
2016
2015
$ 9,010
$ 9,568
$ 8,417
930
53
-
67,517
(2,331)
(68,647)
-
(222)
(222)
(1,693)
1,498
625
42
44
(449)
6,155
86,741
55
(89,428)
(2)
(27, 068)
26 421
(6,484)
281
( 9,484)
32,092
(14,704)
(3,387)
-
197
(712)
(101)
(14,504)
(1,119)
827
-
109
73,112
(2,778)
(66,779)
-
9
(76)
(444)
1,690
731
-
19
(476)
15,512
32,218
-
(47,137)
(24)
(49,386)
(8,483)
(3,553)
623
(75,742)
42,415
15,046
(3,115)
20,000
183
(1,961)
(578)
(3,924)
68,066
727
-
147
77,662
(2,297)
(77,152)
300
341
(34)
(457)
1,480
627
-
489
(473)
9,777
8,243
-
(12,040)
-
(25,892)
(42,637)
(1,811)
688
(73,449)
3,165
10,596
(2,915)
40,000
147
-
(290)
(1,714)
48,989
Net (Decrease) Increase in Cash and Cash Equivalents
(4,448)
7,836
(14,683)
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Supplemental Cash Flow information:
Cash paid for:
Interest
Income taxes
Supplemental non-cash disclosures:
Transfers from loans to other real estate owned
Loans originated for the sale of other real estate owned
Unrealized gain (loss) on securities available for sale
Minimum pension liability adjustment
16,355
$ 11,907
8,519
23,202
$ 16,355
$ 8,519
$ 3,866
4,460
$ 3,573
2,300
$ 2,854
1,500
231
-
(26)
(952)
566
-
2
(487)
125
(328)
1
(354)
See accompanying Notes to the Consolidated Financial Statements.
46
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 1
NATURE OF OPERATIONS:
F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a
charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state-chartered bank,
the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The
Bank provides services to customers located mainly in Rockingham, Shenandoah, Page and Augusta Counties in
Virginia, and the adjacent county of Hardy, West Virginia. Services are provided at thirteen branch offices and a Dealer
Finance Division loan production office. The Company offers insurance, mortgage lending, title insurance and financial
services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc, VBS Mortgage,
LLC (VBS) and VS Title, LLC.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting
principles and to accepted practice within the banking industry. The following is a summary of the more significant
policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Farmers and Merchants Bank, TEB Life Insurance
Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC, (net of noncontrolling interest) and VS
Title, LLC. Significant inter-company accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America ("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. 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds whose initial maturity is ninety days or less and
Federal funds sold.
Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to
maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums
and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and
losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The Company has no securities classified as trading.
The Company follows the accounting guidance related to recognition and presentation of other-than-temporary
impairment. The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery
and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would
not be considered other-than-temporarily impaired, unless there is a credit loss. When criteria (a) and (b) are met, the
entity will recognize the credit component of other-than-temporary impairment of a debt security in earnings and the
remaining portion in other comprehensive income.
47
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Securities, continued
For held-to-maturity debt securities, the amount of other-than-temporary impairment recorded in other comprehensive
income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the
remaining life of the security on the basis of the timing of future estimated cash flows of the security.
For equity securities, when the Company has decided to sell an impaired available-for-sale security and the Company
does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed
other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an
impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.
Other Investments
The Company periodically invests in low income housing partnerships whose primary benefit is the distribution of federal
income tax credits to partners. The Company recognizes these benefits and the cost of the investments over the life of
the partnership (usually 15 years). In addition, state and federal historic rehabilitation credits are generated from some
of the partnerships. Amortization of these investments is prorated based on the amount of benefits received in each year
to the total estimated benefits over the life of the projects. The effective yield method is used to record the income
statement effects of these investments.
Other Investment Securities
Due to the nature and restrictions placed on the Company's investment in common stock of the Federal Home Loan Bank
of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond, these securities are considered restricted and carried
at cost.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income
tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law
to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of
the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are
recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax
assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms
examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position
that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of
tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has
full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-
than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is
subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of
evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The results for the year ended December 31, 2017 include the effect of the Tax Cuts and Jobs Act (the Tax Act), which
was signed into law on December 22, 2017. Among other things, the Tax Act permanently lowers the federal corporate
income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%, effective January 1, 2018.
As a result of the reduction of the federal corporate tax rate, U.S. GAAP requires companies to re-measure their deferred
tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income (loss),
as of the date of the Tax Act’s enactment and record the corresponding effects in income tax expense in the fourth quarter
of 2017. The Company recognized a $811 reduction in the value of its net deferred tax asset and recorded a corresponding
incremental income tax expense in the Company’s consolidated statement of income for 2017. The Company’s
evaluation of the effect of the Tax Act is considered a preliminary estimate and is subject to refinement for up to one
year. No material adjustment is anticipated.
48
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes, continued
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
Loans Held for Investment
The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans, particularly commercial and residential
mortgages. The ability of the Company’s debtors to honor their contracts is largely dependent upon the real estate and
general economic conditions in the Company’s market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off,
generally are reported at their outstanding unpaid principal balance adjusted for the allowance for loan losses, and any
unearned income. Interest income is accrued on the unpaid principal balance. The accrual of interest on loans is
generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of
collection. Loans are typically charged off when the loan is 120 days past due, unless secured and in process of
collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest
is considered doubtful.
The Company’s loans are grouped into eleven segments: construction/land development, farmland, real estate, multi-
family, commercial real estate, home equity – closed end, home equity – open end, commercial & industrial – non-
real estate, consumer, credit cards and dealer finance. Each segment is subject to certain risks that influence the
establishment of pricing, loan structures, approval requirements, reserves, and ongoing credit management. The
Company does not segregate the portfolio further.
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.
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.
Multifamily loans are loans secured by multi-unit residential property. These loans are subject to risks associated with
the value of the underlying property as well as the successful operation and management of the property.
Real estate loans are for consumer residential 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.
The commercial real estate segment includes loans secured by commercial real estate occupied by the owner/borrower,
and 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.
The Company’s home-equity loan portfolios (closed end and open end) carry 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.
49
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans Held for Investment, continued
Commercial and industrial non-real estate loans are secured by collateral other than real estate or are unsecured. Credit
risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business
bankruptcy trends, interest rates, and borrower repayment ability and collateral value (if secured).
Consumer non-real estate includes non-dealer financed automobile loans and other consumer loans. Certain consumer
loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. 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.
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.
Dealer finance lending generally carries certain risks associated with the values of the collateral and borrower’s ability
to repay the loan. The Company focuses its dealer finance lending on used vehicles where substantial depreciation
has already occurred thereby minimizing the risk of significant loss of collateral values in the future.
Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against
interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying
for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.
A loan is considered past due when a payment of principal or interest or both is due but not paid. Management closely
monitors past due loans in timeframes of 30-59 days, 60-89 days, and 90 or more days past due.
These policies apply to all loan portfolio segments.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the
loan agreement. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present
value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price,
or the fair value of the collateral if the loan is collateral dependent. Troubled debt restructurings are considered
impaired loans.
Loans Held for Sale
These loans consist of fixed rate loans made through the Company’s subsidiary, VBS Mortgage, and loans purchased
from Northpointe Bank, Grand Rapids, MI.
50
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans Held for Sale, continued
VBS Mortgage originates conforming mortgage loans for sale in the secondary market. These loans consist primarily of
fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of the investors. VBS
enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock
commitments).
The period of time between issuance of a loan commitment and sale of the loan generally ranges from two to three
weeks. VBS protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by
committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed
the interest rate risk on the loan. As a result, the Company is not generally exposed to significant losses nor will it
realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between
the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate
lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments
and best efforts contracts are not actively traded in stand-alone markets. VBS determines the fair value of rate lock
commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while
taking into consideration the probability that the loan will be funded. The fair value of rate lock commitments and best
efforts contracts was considered immaterial at December 31, 2017 and 2016. The average time on the line is two or
three weeks. These loans are pre-sold with servicing released and no interest is retained after the loans are
sold. Because of the short holding period, these loans are carried at the lower of cost or market and no market
adjustments were deemed necessary in 2017, 2016, or 2015. Gains on sales of loans and commission expense are
recognized at the loan closing date and are included in mortgage banking income, net on the Company’s consolidated
income statement.
The Bank participates in a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking
corporation. Pursuant to the terms of a participation agreement, the Bank purchases participation interests in loans made
by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage
loan originators located throughout the United States. A takeout commitment is in place at the time the loans are
purchased. The Bank has participated in similar arrangements since 2003 as a higher yielding alternative to federal funds
sold or investment securities. These loans are short-term, residential real estate loans that have an average life in our
portfolio of approximately two weeks. The Bank holds these loans during the period of time between loan closing and
when the loan is paid off by the ultimate secondary market purchaser. As of December 31, 2017, and 2016, there were
$36,130 and $62,550 million of these loans included in loans held for sale on the Company’s consolidated balance sheet.
Troubled Debt Restructuring
In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant
a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt
restructuring ("TDR"). Management strives to identify borrowers in financial difficulty early and work with them to
modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may
include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the
economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new
terms that provide for a reduction of either interest or principal, management measures any impairment on the
restructuring as noted above for impaired loans. The Company has $7.8 million in loans classified as TDRs that are
current and performing as of December 31, 2017, and $9.8 million as of December 31, 2016.
51
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Allowance for Loan and Losses
The allowance for loan losses represents management’s estimate of probable losses inherent in the Company’s loan
portfolio. A provision for estimated losses is charged to earnings to establish and maintain the allowance for loan
losses at a level reflective of the estimated credit risk. When management determines that a loan balance or portion of
a loan balance is not collectible, the loss is charged against the allowance. Subsequent recoveries, if any, are credited
to the allowance.
Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the
loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and
other risk factors. Management evaluates the allowance each quarter through a methodology that estimates losses on
individual impaired loans and evaluates the effect of numerous factors on the credit risk of each segment of loans.
The Company’s allowance for loan losses has two basic components: the general allowance and the specific allowance.
Each of these components is determined based upon estimates and judgments. The general allowance uses historical loss
experience as an indicator of future losses, along with various qualitative factors, including levels and trends in
delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in
underwriting standards, experience of lending staff, economic conditions, and portfolio concentrations.
Except for credit card and dealer finance loans, all loans are assigned an internal risk rating based on certain credit quality
indicators. Credit card, consumer and dealer finance loans are monitored based on payment activity. Loss rates are
amplified for loans with adverse risk ratings that are not considered impaired. In the general allowance, the historical loss
rate is combined with the qualitative factors, resulting in an adjusted loss factor for each segment of loans. The period-
end balances for each loan segment are multiplied by the adjusted loss factor. Historical loss rates are combined with
qualitative factors resulting in an adjusted loss factor for each segment. Specific allowances are established for
individually-evaluated impaired loans based on the excess of the loan balance relative to the fair value of the collateral,
if the loan is deemed collateral dependent.
Management believes that the allowance for loan losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary based on changes in economic
conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their judgments about information available to them at the
time of their examination.
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.
52
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Bank Premises and Equipment
Land is carried at cost and bank premises and equipment are stated at cost less accumulated depreciation. Depreciation
is charged to income over the estimated useful lives of the assets on a combination of the straight-line and accelerated
methods. The ranges of the useful lives of the premises and equipment are as follows:
Premises and Improvements
Furniture and Equipment
10 - 40 years
5 - 20 years
Maintenance, repairs, and minor improvements are charged to operations as incurred. Gains and losses on dispositions
are reflected in other income or expense.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets under ASC 805, “Business Combinations” and ASC 350,
“Intangibles”, respectively. Goodwill is subject to at least an annual assessment for impairment by applying a fair
value-based test. Additionally, acquired intangible assets are separately recognized if the benefit of the assets can be
sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The Company recorded
goodwill and intangible assets in 2017 related to the purchase of VS Title which was valued by an independent third
party. The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets
acquired. Impairment testing is performed annually, as well as when an event triggering impairment may have
occurred. The Company performs its annual analysis as of December 31 each fiscal year. Accounting guidance permits
preliminary assessment of qualitative factors to determine whether a more substantial impairment testing is required.
The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of
goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. No
indicators of impairment were identified during the years ended December 31, 2017, 2016, and 2015.
Pension Plans
The Bank has a qualified noncontributory defined benefit pension plan which covers all full-time employees hired prior
to April 1, 2012. The benefits are primarily based on years of service and earnings. The Company complies with ASC
325-960 “Defined Benefit Pension Plans” which requires recognition of the over-funded or under-funded status of
pension and other postretirement benefit plans on the balance sheet. Under ASC 325-960, gains and losses, prior service
costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit
cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Total advertising costs
included in other operating expenses for 2017, 2016, and 2015 were $507, $496, and $452, respectively.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain employees. Bank owned life insurance is recorded at
the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
53
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put
presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return
specific assets.
Comprehensive Income
Comprehensive income is shown in a two-statement approach, the first statement presents total net income and its
components followed by a second statement that presents all the components of other comprehensive income such as
unrealized gains and losses on available for sale securities and changes in the funded status of a defined benefit pension
plan.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income (“AOCI”). The Company early adopted this new standard in the current year. ASU 2018-02
requires reclassification from AOCI to retained earnings for stranded tax effects resulting from the impact of the newly
enacted federal corporate tax rate on items included in AOCI. The amount of the reclassification in 2017 was $682.
Derivative Financial Instruments
Under ASC 815, the gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as
the offsetting gain or loss on the hedging item attributable to the risk being hedged, is recognized currently in earnings
in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a
cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The
ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge
and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities
identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria
discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value
recorded in income. Derivative hedge contracts must meet specific effectiveness tests. Changes in fair value of the
derivative financial instruments must be effective at offsetting changes in the fair value of the hedging items due to the
designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged
asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If
periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed
out and settled or classified as a trading activity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will have a material effect on the consolidated financial
statements.
Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements and Disclosures,” for financial
assets and financial liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements.
54
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Reclassifications
Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the
current year. The reclassification adjustments related to our consolidation of VBS and the classification of individual
line items in a manner consistent with the rest of the Company on the income statement. These reclassifications had
no impact on net income or earnings per share.
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. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to
include the number of additional common shares that would have been outstanding if the dilutive common shares had
been issued. The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per common share
calculation.
Net income available to common stockholders represents consolidated net income adjusted for preferred dividends
declared.
The following table provides a reconciliation of net income to net income available to common stockholders for the
periods presented:
Dollars in thousands
Earnings Available to Common Stockholders:
December 31,
2017
For the year ended
December 31,
2016
December 31,
2015
Net Income
$ 9,041 $ 9,762 $ 8,581
Minority interest attributable to noncontrolling interest
31
194
164
Dividends paid/accumulated on preferred stock
415
487
510
Net Income Available to Common Stockholders
$ 8,595 $ 9,081 $ 7,907
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for
the periods indicated:
December 31, 2017
Year ended
December 31, 2016
December 31, 2015
Net Income
Available to
Common
Stockholders
Weighted
Average
Shares
Per
Share
Amounts
Net Income
Available to
Common
Stockholders
Weighted
Average
Shares
Per
Share
Amounts
Net Income
Available to
Common
Stockholders
Weighted
Average
Shares
Per
Share
Amounts
$ 8,595
3,269,713
$ 2.63 $ 9,081
3,282,335
$ 2.77
$ 7,907
3,290,812
$ 2.40
415
362,271
(0.15)
487
434,256
(0.20)
510
444,400
(0.15)
Dollars in
thousands
Basic EPS
Effect of Dilutive
Securities:
Convertible
Preferred Stock
Diluted EPS
$ 9,010
3,631,984
$ 2.48 $ 9,568
3,716,591
$ 2.57 $ 8,417
3,735,212 $ 2.25
55
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU
revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The
original guidance has been amended through subsequent accounting standard updates that resulted in technical
corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended,
is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-
specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with
financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the
guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly
excluded from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full
retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the
earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to
retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The
Company plans to adopt this guidance on the effective date, January 1, 2018 via the modified retrospective approach.
The Company is in the process of completing its assessment the impact that adoption of ASU 2014-09 will have on
its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other
things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the
requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this
ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The Company is currently assessing the impact that adoption of ASU 2016-01 will have on
its consolidated financial statements by contracting with a third party vendor.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments
in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term
leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising
from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is
largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the
lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct
financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or
entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach would not require any transition accounting for leases that expired before the earliest
comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The
Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements by
gathering data on current lease agreements and analyzing the capital impact of expected right of use assets that will
be recorded. No changes are expected regarding total lease expense.
56
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements, continued
During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative
Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change
in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of
itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria remain
intact. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in
an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its
consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the
requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of
ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained
earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods
that the investment had been held. The amendments require that the equity method investor add the cost of acquiring
the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity
method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon
qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition,
the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified
for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated
other comprehensive income at the date the investment becomes qualified for use of the equity method. The
amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the
level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is
permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated
financial statements.
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require
the measurement of all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations
will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation
techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full
amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale
debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for
SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For
public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020. 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 that is researching methods and models.
57
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements, continued
During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The amendments are effective for public business entities for
fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should
be applied using a retrospective transition method to each period presented. If retrospective application is impractical
for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of
the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does
not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the
Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a
business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a
“set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and
processes that a seller uses in operating a set are not required if market participants can acquire the set and continue
to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the
screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an
input and a substantive process that together significantly contribute to the ability to create output and (2) remove the
evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist
entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are
effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.
The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required
at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated
financial statements.
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to
test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill
impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that
goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option
to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments
in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Public
business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2020. 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.
During March 2017, the FASB issued ASU 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this
ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types
of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same
line item(s) as other compensation costs arising from services rendered during the period. The other components of
net periodic benefit cost are required to be presented in the income statement separately from the service cost
component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line
item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible
for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning
after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The
Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial
statements.
58
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements, continued
‐
‐
08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic
During March 2017, the FASB issued ASU 2017
310
20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the
amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard,
premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on
purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective
basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and
provide the disclosures required for a change in accounting principle. Given the composition of our securities portfolio,
the Company does not expect that adoption of ASU 2017
08 will have a material impact on its consolidated financial
statements.
‐
09, “Compensation – Stock Compensation (Topic 718): Scope of
During May 2017, the FASB issued ASU 2017
Modification Accounting.” The amendments provide guidance on determining which changes to the terms and
conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The
amendments are effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for
which financial statements have not yet been issued. Given the Company historically has not issued stock based
compensation, the Company does not expect the adoption of ASU 2017
09 will have a material impact on its
consolidated financial statements.
‐
‐
During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement
guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic
results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will
also be simplified upon implementation of this update. The amendments are effective for annual periods, including
interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted,
including adoption in any interim period. The Company does not expect the adoption of ASU 2017-12 to have a
material impact on its consolidated financial statements.
During February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The
amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated
other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective
for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or
retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Cuts and Jobs Act is recognized. The Company has elected to reclassify the stranded income tax effects
from the Tax Cuts and Jobs Act in the consolidated financial statements for the period ending December 31, 2017.
The amount of this reclassification in 2017 was $811.
59
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 3
CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a percentage of deposits. Due to the deposit
reclassification procedures implemented by the Bank, there is no Federal Reserve Bank reserve requirement for the years
ended December 31, 2017 and 2016.
NOTE 4
SECURITIES:
The amortized cost and fair value, with unrealized gains and losses, of securities held to maturity were as follows:
December 31, 2017
U. S. Treasuries
December 31, 2016
U. S. Treasuries
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 125
$ - $ - $ 125
$ 125
$ - $ - $ 125
The amortized cost and fair value of securities available for sale are as follows:
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2017
U. S. Treasuries
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal
agencies
$ 19,998
$ - $ -
$ 19,998
7,999
-
19
7,980
508
-
6
502
Equity securities
135
-
- 135
Total Securities Available for Sale
$ 28,640 $ - $ 25 $ 28,615
December 31, 2016
U. S. Treasuries
Mortgage-backed obligations of federal
agencies
$ 24,005
$ 9 $ -
$ 24,014
634
-
-
634
Equity securities
135
-
- 135
Total Securities Available for Sale
$ 24,774 $ 9
$ - $ 24,783
60
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 4
SECURITIES (CONTINUED):
The amortized cost and fair value of securities at December 31, 2017, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Securities Held to Maturity
Securities Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair Value
Due in one year or less
$ 125 $ 125 $ 19,998
$ 19,998
Due after one year through five years
-
-
7,999 7,980
Due after five years through ten years
-
-
508
502
Due after ten years
Total
-
- 135
135
$ 125 $ 125 $ 28,640 $ 28,615
There were no sales of debt or equity securities during 2017, 2016 or 2015.
There were no pledged securities at December 31, 2017 or 2016.
Other investments consist of investments in twenty low-income housing and historic equity partnerships (carrying basis
of $7,406), stock in the Federal Home Loan Bank (carrying basis of $3,627), and various other investments (carrying
basis of $1,470). The interests in the low-income housing and historic equity partnerships have limited transferability
and the interests in the other stocks are restricted as to sales. The market values of these securities are estimated to
approximate their carrying values as of December 31, 2017. At December 31, 2017, the Company was committed to
invest an additional $4,231 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 balance sheet.
The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the Company through
readily saleable financial instruments. The portfolio includes fixed rate bonds, whose prices move inversely with rates
and variable rate bonds. At the end of any accounting period, the investment portfolio has unrealized gains and losses.
The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes for
other than temporary impairment. The primary concern in a loss situation is the credit quality of the business behind the
instrument. Bonds deteriorate in value due to credit quality of the individual issuer and changes in market conditions.
A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type of
December 31, 2017 were as follows:
Less than 12 Months
More than 12 Months
Total
Fair
Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
December 31, 2017
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal
agencies
$ 3,981 $ (19) $ - $ - $ 3,981 $ (19)
502
(6)
-
-
502
(6)
Total
$ 4,483 $ (25)
$ - $ - $ 4,483 $ (25)
As of December 31, 2016, there were no securities in an unrealized loss position.
61
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 4
SECURITIES (CONTINUED):
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently
when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than the cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery of fair value. The Company does not intend to sell these securities and it is more likely than
not that the Company will not be required to sell these securities before recovery of their amortized cost. As of December
31, 2017, the Company had two agencies and a mortgage backed security that were temporarily impaired due to rising
interest rates not the credit quality of the security. There were no securities that had been in an unrealized loss position
for more than twelve months. The Company did not recognize any other-than-temporary impairment losses in 2017, 2016
or 2015.
NOTE 5
LOANS:
Loans held for investment as of December 31, 2017, and 2016 were as follows:
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-Real Estate
Consumer
Dealer Finance
Credit Cards
Total
2016
2017
$ 76,172
$ 71,620
12,901
13,606
172,758
184,546
7,605
10,298
150,061
148,906
11,453
11,606
54,420
54,739
31,306
36,912
6,643
6,633
65,495
75,169
2,822
2,939
$ 616,974 $ 591,636
The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of
Atlanta totaling $218,323 and $199,401 as of December 31, 2017, and 2016, respectively. The Company maintains a
blanket lien on its entire residential real estate portfolio and certain commercial and home equity loans.
Loans held for sale consists of loans originated by VBS Mortgage for sale in the secondary market, and the Bank’s
commitment to purchase residential mortgage loan Participations from Northpointe Bank. The volume of loans
purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which
affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage
loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of
December 31, 2017, and 2016 were $39,775 and $62,735, respectively.
62
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 5
LOANS (CONTINUED):
The following is a summary of information pertaining to impaired loans (in thousands), as of December 31, 2017 and
2016:
December 31, 2017
Unpaid
December 31, 2016
Unpaid
Recorded
Principal
Related
Recorded
Principal
Related
Investment
Balance
Allowance
Investment
Balance
Allowance
Impaired loans without a valuation allowance:
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-Real Estate
Consumer
Credit cards
Dealer Finance
Impaired loans with a valuation allowance
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-Real Estate
Consumer
Credit cards
Dealer Finance
Total impaired loans
$ 4,352 $ 5,269
1,984
1,273
-
1,984
1,273
-
6,229
6,229
-
-
-
8
-
-
347
-
8
-
$ - $ 3,296
-
$ 3,652
$ -
-
768
-
1,958
-
347
-
768
-
-
-
-
-
-
-
-
170
13
1,958
-
-
-
-
-
-
-
-
170
13
-
-
-
-
-
-
31
31
-
-
-
-
13,877
15,141
-
6,205
6,908
-
4,998
-
1,188
-
-
4,998
1,661
6,592
6,592
1,853
-
1,188
-
-
-
209
-
-
1,206
1,206
-
952
-
952
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
221
-
60
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
47
47
12
87
87
20
6,233
6,233
1,882
8,837
8,837
2,154
$ 20,110 $ 21,374
$ 1,882 $ 15,042
$ 15,745
$ 2,154
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
63
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 5
LOANS (CONTINUED):
The following is a summary of the average investment and interest income recognized for impaired loans (dollars in
thousands):
Impaired loans without a valuation allowance:
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-Real Estate
Consumer
Credit cards
Dealer Finance
Impaired loans with a valuation allowance
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-Real Estate
Consumer
Credit cards
Dealer Finance
Total impaired loans
December 31, 2017
December 31, 2016
Average
Recorded
Investment
Interest
Income
Average
Recorded
Interest
Income
Recognized
Investment
Recognized
$ 4,969 $ 382
$ 2,547
$ 10
1,921
62
878
57
-
1,682
-
347
124
10
-
-
44
-
-
-
-
-
-
778
-
1,087
-
-
10
-
114
-
964
2
174
11
-
2
-
-
24
3
14
1
9,955
548
5,911
-
1,194
-
-
258
-
49
-
-
5,575
8,525
-
1,215
-
959
-
-
-
-
-
-
-
-
-
969
14
-
139
291
-
10
-
57
-
-
-
-
-
-
-
-
56
3
77
1
7,161
310
11,759
359
$ 17,116 $ 858
$ 17,334 $ 498
64
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 5
LOANS (CONTINUED):
The following table presents the aging of the recorded investment of past due loans (in thousands) as of December 31,
2017 and 2016:
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
$ 167
$ 5,459
$ 3,908
$ 9,534 $ 62,086 $ 71,620 $ 3,908
$ -
-
2,858
179
544
-
-
1,954
-
-
25
-
560
-
-
-
-
5,372
179
544
25
13,606
179,174
10,119
148,362
11,581
13,606
184,546
10,298
148,906
11,606
454
108
165
36
268
595
887
739
53,852 54,739
36,173
36,912
-
1,720
-
-
3
448
599
-
143
-
-
-
-
-
43
1,300
30
$ 5,683
5
252
8
$ 7,904
-
189
48
1,741
39
$ 19,108 $ 597,866 $ 616,974
-
6,585
6,633
73,428
54
75,169
2,900 2,939 - 1
$ 6,904 $ 198
-
226
1
$ 5,521
December 31, 2017
Construction/Land
Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed
end
Home Equity – open end
Commercial & Industrial
– Non- Real Estate
Consumer
Dealer Finance
Credit Cards
Total
30-59
Days Past
due
60-89
Days
Past
Due
Greater
than 90
Days)
Total Past
Due
Current
Total Loan
Receivable
Recorded
Investment
>90 days
&
accruing
Non-
Accrual
Loans
$ 73 $ 101
$ 2,175
$ 2,349
$ 73,823 $ 76,172
$ 2,805 $ -
-
2,135
-
139
101
-
746
-
-
-
-
774
-
-
32
484
-
313
5
69
-
-
3,655
-
139
133
553
318
12,901
169,103
7,605
149,922
11,320
53,867
30,988
12,901
172,758
7,605
150,061
11,453
54,420
31,306
-
1,399
-
-
32
279
70
-
81
-
-
-
-
-
4
35
187
797
4
18
$ 4,095 $ 1,047
6
183
-
$ 3,239
45
1,167
22
$ 8,381
6,643
6,598
65,495
64,328
2,822
2,800
$ 583,255 $ 591,636
-
178
-
26
- -
$ 4,763 $ 107
December 31, 2016
Construction/Land
Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed
end
Home Equity – open end
Commercial & Industrial
– Non- Real Estate
Consumer
Dealer Finance
Credit Cards
Total
65
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses (in thousands) for the years ended December 31, 2017 and 2016
is as follows:
December 31, 2017
Allowance for loan losses:
Beginning
Balance
Charge-
offs
Recoveries
Provision
for Loan
Losses
Ending
Balance
Individually
Evaluated
for
Impairment
Collectively
Evaluated
for
Impairment
Construction/Land Development
$ 3,381 $ 620 $ - $ (214) $ 2,547 $ 1,661 $ 886
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-
Real Estate
Consumer
Dealer Finance
Credit Cards
Total
34
843
23
705
75
470
586
-
-
-
7
26
179
- -
(9)
2
-
13
(126)
(6)
(236)
25 (27)
53
72
28
(288)
(142)
178
1,143 814
25
719
19
482
66
209
337
148
1,440
- 25
209
-
-
-
510
19
482
66
- 209
-
-
12
337
148
1,428
78
1,289
136
1,806
59
98
37
54
52 -
52
$ 7,543 $ 2,872 $ 1,373 $ - $ 6,044 $ 1,882 $ 4,162
December 31, 2016
Allowance for loan losses:
Beginning
Balance
Charge-
offs
Recoveries
Provision
for Loan
Losses
Ending
Balance
Individually
Evaluated
for
Impairment
Collectively
Evaluated
for
Impairment
Construction/Land Development
$ 4,442 $ 356 $ 7 $ (712) $ 3,381 $ 1,853 $ 1,528
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity – open end
Commercial & Industrial – Non-
Real Estate
Consumer
Dealer Finance
Credit Cards
Total
95
806
71
445
174
634
1,055
108
836
- - (61)
23
-
19
8
370
293
37
1,081
4
-
135
56
(48)
144
- (91)
120
267
19
417
86
(443)
(12)
1,117
34
843
23
705
75
470
586
78
1,289
- 34
221
-
-
-
60
-
-
20
622
23
705
75
410
586
78
1,269
115
74
54
(36)
59 -
59
$ 8,781 $ 2,261 $ 1,023 $ - $ 7,543 $ 2,154 $ 5,389
66
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 6
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table presents the recorded investment in loans (in thousands) based on impairment method as of
December 31, 2017 and 2016:
December 31, 2017
Loan Receivable
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity –open end
Commercial & Industrial – Non-Real Estate
Consumer
Dealer Finance
Credit Cards
Total
December 31, 2016
Construction/Land Development
Farmland
Real Estate
Multi-Family
Commercial Real Estate
Home Equity – closed end
Home Equity –open end
Commercial & Industrial – Non-Real Estate
Consumer
Dealer Finance
Credit Cards
Total
$ 71,620
13,606
184,546
10,298
148,906
11,606
54,739
36,912
6,633
75,169
2,939
$ 616,974
$ 9,350
1,984
2,461
-
6,229
-
-
-
8
78
-
$ 20,110
$ 62,270
11,622
182,085
10,298
142,677
11,606
54,739
36,912
6,625
75,091
2,939
$ 596,864
Loan Receivable
$ 76,172
12,901
172,758
7,605
150,061
11,453
54,420
31,306
6,643
65,495
2,822
$ 591,636
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
$ 9,888
-
1,974
-
2,910
-
-
170
13
87
-
$ 15,042
$ 66,284
12,901
170,784
7,605
147,151
11,453
54,420
31,136
6,630
65,408
2,822
$ 576,594
67
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 6
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table shows the Company’s loan portfolio broken down by internal loan grade (in thousands) as of
December 31, 2017 and 2016:
December 31, 2017
Construction/Land
Development
Farmland
Real Estate
Multi-Family
Commercial Real
Estate
Home Equity –
closed end
Home Equity – open
end
Commercial &
Industrial (Non-Real
Estate)
Consumer (excluding
dealer)
Total
Performing
Non performing
Total
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
$ - $ 690 $ 12,974
3,153
53,764
4,780
-
1,512
228
63
-
-
$ 30,197 $ 9,165 $ 3,520 $ 15,074
1,983
3,270
-
4,120
101,606
5,111
3,793
19,734
179
494
4,660
-
-
3,525
45,384
89,195
9,012
634
1,156
-
-
3,535
5,410
1,279
1,379
235
1,598
17,383
30,888
3,945
176
3
514
$ -
-
-
-
$ 71,620
13,606
184,546
10,298
-
-
-
148,906
11,606
54,739
262
13,297
1,595
19,442
1,480
207
629
-
36,912
490
34
$ 594 $ 9,638
2,254
2,226
$156,496 $ 286,057 $ 49,652 $13,324
1,065
88
6,633
476
$ 23,105 $ - $538,866
-
Credit Cards Dealer Finance
$ 2,938 $ 75,116
53
$ 2,939 $ 75,169
1
68
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 6
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
December 31, 2016
Construction/Land
Development
Farmland
Real Estate
Multi-Family
Commercial Real
Estate
Home Equity –
closed end
Home Equity – open
end
Commercial &
Industrial (Non-Real
Estate)
Consumer (excluding
dealer)
Total
Performing
Non performing
Total
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
$ - $ 1,478 $ 10,870
3,073
62,168
3,009
-
1,149
311
65
-
-
$ 43,863 $ 8,399 $ 2,473
1,861
4,680
-
3,456
74,242
4,099
4,446
28,266
186
$ 9,089 $ -
-
-
-
2,253
-
-
$ 76,172
12,901
172,758
7,605
-
2,793
32,986
91,157
19,181
1,840
2,104
-
150
3,966
4,139
1,746
1,414
124
1,724
16,415
30,974
4,547
125
38
511
-
-
-
150,061
11,453
54,420
1,375
1,267
6,827
19,530
2,198
39
70
-
31,306
67
174
$ 1,631 $ 9,046
1,837
2,252
$141,151 $ 272,065 $ 70,211 $14,684
1,242
607
466
6,643
$ 14,531 $ - $523,319
-
Credit Cards Dealer Finance
$ 2,822 $ 65,291
204
$ 2,822 $ 65,495
-
Description of internal loan grades:
Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and
recognized management capabilities.
Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent
credit, above average asset quality and liquidity.
Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or
business) is stable with good future trends. Credit is very good.
Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual
expenses or capital expenses must by covered through additional long term debt. Employment (or business)
stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid
judgments or collection items appearing on credit report.
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.
69
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 6
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Grade 6 – Watch: Loans are currently protected but are weak due to negative balance sheet or income
statement trends. There may be a lack of effective control over collateral or the existence of documentation
deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other
reasons supporting this classification include adverse economic or market conditions, pending litigation or
any other material weakness. Existing loans that become 60 or more days past due are placed in this category
pending a return to current status.
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is
possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or
terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the borrower and there is the likelihood that
collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is
considered collectible as to both principal and interest, primarily because of collateral coverage, however, if
the deficiencies are not corrected quickly; there is a probability of loss.
Grade 8 – Doubtful: Loans having all the characteristics of a substandard credit, but available information
indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It
may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be
placed on non-accrual status when any portion is classified doubtful.
Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming
when payments of principal and interest are past due 90 days or more.
NOTE 7
TROUBLED DEBT RESTRUCTURING:
In the determination of the allowance for loan losses, management considers troubled debt restructurings and
subsequent defaults in these restructurings by adjusting the loan grades of such loans, which are considered in the
qualitative factors within the allowance for loan loss methodology. Defaults resulting in charge-offs affect the
historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves
may be established on restructured loans which are evaluated individually for impairment.
During the twelve months ended December 31, 2017, the Bank modified 3 loans that were considered to be troubled
debt restructurings. These modifications include rate adjustments, revisions to amortization schedules, suspension of
principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current,
or any combination thereof.
(dollars in thousands)
Troubled Debt Restructurings
Number of Contracts
December 31, 2017
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Consumer
Total
3
3
$ 32 $ 32
$ 32 $ 32
As of December 31, 2017, there were 3 loans restructured in the previous twelve months, in default. A restructured
loan is considered in default when it becomes 90 days past due.
(dollars in thousands)
Troubled Debt Restructurings
Number of Contracts
December 31, 2017
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Real Estate
Construction/Land Development
Total
$ 67 $ 67
1
1,502
2
3 $ 1,569
1,502
$ 1,569
70
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 7
TROUBLED DEBT RESTRUCTURING (CONTINUED):
During the twelve months ended December 31, 2016, the Bank modified 6 loans that were considered to be troubled
debt restructurings. These modifications 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.
(in thousands)
Troubled Debt Restructurings
Number of Contracts
Real Estate
Consumer
Total
December 31, 2016
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
2
4
6
$ 141
39
$ 180
$ 141
39
$ 180
As of December 31, 2016, there were no loans restructured in the previous twelve months, in default. A restructured
loan is considered in default when it becomes 90 days past due.
NOTE 8
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment as of December 31 are summarized as follows:
Land
Buildings and improvements
Furniture and equipment
Less - accumulated depreciation
Net
2017
2016
$ 3,883
12,384
9,454
25,721
(9,827)
$ 15,894
$ 3,091
7,877
8,257
19,225
(8,885)
$ 10,340
Provisions for depreciation of $930 in 2017, $827 in 2016, and $727 in 2015 were charged to operations.
71
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 9
OTHER REAL ESTATE OWNED:
The table below reflects other real estate owned (OREO) activity for 2017 and 2016:
Other Real Estate Owned
2017
2016
Balance as of January 1
Loans transferred to OREO
Capital improvements
Sale of OREO
Write down of OREO or losses on sale
Balance as of December 31
$ 2,076 $ 2,128
566
231
24
2
(623)
(281)
(44)
(19)
$ 1,984 $ 2,076
At December 31, 2017, the balance of real estate owned includes $207 of foreclosed residential real estate properties
recorded as a result of obtaining physical possession of the property. At December 31, 2017, the recorded investment of
consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in
process is $103.
NOTE 10
DEPOSITS:
Time deposits that meet or exceed the FDIC insurance limit of $250 at year end 2017 and 2016 were $13,637 and $7,841.
At December 31, 2017, the scheduled maturities of time deposits are as follows:
2018
2019
2020
2021
2022 and after
Total
$ 66,749
51,434
30,151
9,296
7,640
$ 165,270
NOTE 11
SHORT-TERM DEBT:
Short-term debt, all maturing within 12 months, as of December 31, 2017 and 2016 is summarized as follows:
Maximum Outstanding
at any Month End
Outstanding
At
Average
Balance
Year End Outstanding
Yield
2017
Federal funds purchased
FHLB short term
Totals
2016
Federal funds purchased
FHLB short term
Securities sold under agreements to repurchase
Totals
.17%
.30%
.31%
.98%
.12%
.25%
.15%
$ 8,964 $ 5,296 $ 97
20,301
$ 25,296 $ 20,398
20,000
50,000
$ 11,421 $ -
40,000
-
$ 637
34,740
2,133
$ 40,000 $ 37,510
50,000
4,272
72
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 11
SHORT-TERM DEBT (CONTINUED)
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.
Securities sold under repurchase agreements are secured transactions with customers and generally mature the day
following the date sold. This product was discontinued in 2017.
As of December 31, 2017, the Company had unsecured lines of credit with correspondent banks totaling $41,000, which
may be used in the management of short-term liquidity, in which $5,296 was outstanding.
NOTE 12
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
1.86% and 1.80% at December 31, 2017 and December 31, 2016, respectively. The balance of these obligations at
December 31, 2017 and 2016 were $49,554 and $63,982 respectively. The Company recognized a gain of $504 on
prepayment of two FHLB advances totaling $10,000 during the first quarter of 2017 and there were no additional
borrowings in 2017. FHLB advances include a $5,000 line of credit at FHLB that is pledged to the Commonwealth of
Virginia to secure public funds.
The maturities of long-term Federal Home Loan Bank long term debt as of December 31, 2017, were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$ 9,428
6,929
14,429
5,929
2,714
10,125
$ 49,554
In addition, the Company has a note payable to purchase a lot adjacent to one of the Bank branches for $170 at December
31, 2017 that is payable in two remaining annual payments on January 1, 2018 and 2019. There was $255 outstanding
on this note at December 31, 2016.
VS Title, LLC has a note payable for vehicle purchases with a balance of $9 at December 31, 2017.
NOTE 13
INCOME TAX EXPENSE:
The components of income tax expense were as follows:
Current expense
Deferred expense (benefit)
Adjustments to deferred tax asset due to change in federal tax rate
Total deferred (benefit) expense
Total Income Tax Expense
73
2015
2017
2016
$ 3,671 $ 3,046 $ 3,227
(152)
53
(341)
811
-
-
(341)
53
659
$ 4,330 $ 3,099 $ 2,886
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 13
INCOME TAX EXPENSE (CONTINUED):
The components of deferred taxes as of December 31, were as follows:
Deferred Tax Assets:
Allowance for loan losses
Split Dollar Life Insurance
Nonqualified deferred compensation
Low income housing partnerships losses
Core deposit amortization
Other real estate owned
Unfunded pension benefit obligation
Total Assets
Deferred Tax Liabilities:
Unearned low income housing credits
Depreciation
Prepaid pension
Goodwill tax amortization
Net unrealized gain (loss) on securities available for sale
Total Liabilities
Net Deferred Tax Asset (included in Other Assets on Balance Sheet)
2017
2016
$ 1,265 $ 2,354
4
3
856
546
94
203
165
108
280
173
1,096
1,633
$ 3,394 $ 5,386
2017
2016
$ 180 $ 307
437
340
1,840
1,010
901
559
3
(5)
2 084
3,488
$ 1,310 $ 1,898
The following table summarizes the differences between the actual income tax expense and the amounts computed using
the federal statutory tax rates:
Tax expense at federal statutory rates
Increases (decreases) in taxes resulting from:
State income taxes, net of federal benefit
Partially tax-exempt income
Tax-exempt income
LIH and historic credits
Deferred Tax Asset rate change
Other
Total Income Tax Expense
2017
2016
2015
$ 4,511
$ 4,307
$ 3,843
-
(59)
(212)
(633)
811
(88)
$ 4,330
6
(41)
(217)
(896)
8
(46)
(223)
(701)
(60)
$ 3,099
5
$ 2,886
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no
liability related to uncertain tax positions in accordance with accounting guidance related to income taxes.
The Company and its subsidiaries file federal income tax returns and state income tax returns. With few exceptions,
the Company is no longer subject to federal or state income tax examinations by tax authorities for years before 2014.
74
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 14
EMPLOYEE BENEFITS:
Defined Benefit Pension Plan
The Company has a qualified noncontributory defined benefit pension plan which covers substantially all of its
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 following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets for
2017, 2016 and 2015:
Change in Benefit Obligation
Benefit obligation, beginning
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation, ending
Change in Plan Assets
Fair value of plan assets, beginning
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets, ending
Funded status at the end of the year
2017
2016
2015
$ 12,475
696
487
1,620
(175)
$ 15,103
$ 10,944
632
453
872
(426)
$ 12,475
$ 10,777
648
411
(137)
(754)
$ 10,945
$ 11,678
$ 12,032
780
1,788
-
-
(426)
(175)
$ 13,645
$ 12,032
$ (1,458) $ (443)
$ 11,684
(1)
750
(755)
$ 11,678
$ 733
The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 20, “Fair Value
Measurements” to the Consolidated Financial Statements. The valuations are based on third party data received as of
the balance sheet date. All plan assets are considered Level 1 assets, as quoted prices exist in active markets for
identical assets.
75
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
Defined Benefit Pension Plan, continued
2017
2016
2015
Amount recognized in the Consolidated Balance Sheet
Prepaid benefit cost
Unfunded pension benefit obligation under ASC 325-960
Deferred taxes
Amount recognized in accumulated other
comprehensive income (loss)
Net loss
Prior service cost
Amount recognized
Deferred taxes
Amount recognized in accumulated comprehensive income
Prepaid benefit detail
Benefit obligation
Fair value of assets
Unrecognized net actuarial loss
Unrecognized prior service cost
Prepaid (accrued) benefits
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost
$ 3,760 $ 4,361 $ 4,799
(4,065)
1,382
(5,218)
1,096
(4,804)
1,633
$ (5,260)
42
(5,218)
1,096
$ (4,122)
$ (4,861)
57
(4,804)
1,633
$ (3,171)
$ (4,137)
72
(4,065)
1,382
$ (2,683)
$ (10,945)
$ (12,475)
$ (15,103)
11,678
12,032
13,645
4,138
4,861
5,260
(72)
(57)
(42)
$ 3,760 $ 4,361 $ 4,799
$ 696 $ 632 $ 648
411
452
487
(839)
(854)
(851)
(15)
(15)
(15)
181
223
284
$ 601 $ 438 $ 386
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss)
Net loss
Amortization of prior service cost
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other
comprehensive income (loss)
$ 399 $ 724 $ 522
15
15
15
$ 414 $ 739 $ 537
$ 1,015 $ 1,177 $ 923
Additional disclosure information
Accumulated benefit obligation
Vested benefit obligation
Discount rate used for net pension cost
Discount rate used for disclosure
Expected return on plan assets
Rate of compensation increase
Average remaining service (years)
76
$ 10,760 $ 8,789 $ 7,601
$ 10,750 $ 8,780 $ 7,539
4.00%
4.25%
7.50%
3.00%
13
4.25%
4.00%
7.50%
3.00%
13
4.00%
3.50%
7.25%
3.00%
12
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
Funding Policy
Due to the current funding status of the plan, the Company did not make a contribution in 2017 or 2016. The Company’s
contributions for 2015 was $750,000. The net periodic pension cost of the plan for 2018 will be approximately $629.
Long-Term Rate of Return
The Company, as plan sponsor, selects the expected long-term rate of return on assets assumption in consultation with
investment advisors and the plan actuary. This rate is intended to reflect the average rate of earnings expected to be
earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially
with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the trust.
Undue weight is not given to recent experience, which may not continue over the measurement period, with higher
significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this
purpose, the plan is assumed to continue in force and not terminate during the period during which the assets are
invested. However, consideration is given to the potential impact of current and future investment policy, cash flow
into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the
extent such expenses are not explicitly estimated within periodic cost).
Asset Allocation
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return,
with a targeted asset allocation of 39% fixed income and 61% equity. The Investment Manager selects investment fund
managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the
implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively
managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
The pension plan’s allocations as of December 31, 2017, and 2016 were 61% equity and 39% fixed and 61% equity and
39% fixed, respectively.
Estimated Future Benefit Payments, which reflect expected future service, as appropriate, as of December 31, 2017,
are as follows:
2018
2019
2020
2021
2022
2023-2027
$ 1,862
698
264
179
2,867
7,151
$ 13,021
Employee Stock Ownership Plan (ESOP)
The Company sponsors an ESOP which provides stock ownership to substantially all employees of the Company. The
Plan provides total vesting upon the attainment of five years of service. Contributions to the plan are made at the
discretion of the Board of Directors and are allocated based on the compensation of each employee relative to total
compensation paid by the Company. All shares issued and held by the Plan are considered outstanding in the computation
of earnings per share. Dividends on Company stock are allocated and paid to participants at least annually. Shares of
Company stock, when distributed, have restrictions on transferability. For the plan year ending September 30, 2017 the
Company contributed $430 in 2017, $407 in 2016, and $270 in 2015 to the Plan and charged this expense to operations.
The shares held by the ESOP totaled 194,018 and 190,271 at December 31, 2017 and 2016, respectively.
77
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2016 and 2015
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
401(K) Plan
The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 20 percent of
their salary on a pretax basis, subject to certain IRS limits. Under the Federal Safe Harbor rules employees are
automatically enrolled at 3% (in the third year this increases by 1% per year up to 6%) of their salary unless elected
otherwise. The Company matches one hundred percent of the first 1% contributed by the employee and fifty percent
from 2% to 6% of employee contributions. Vesting in the contributions made by the Company is 100% after two years
of service. Contributions under the plan amounted to $263, $242 and $212 in 2017, 2016 and 2015, respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for several of its key employees and directors. The
Company may make annual contributions to the plan, and the employee or director has the option to defer a portion of
their salary or bonus based on qualifying annual elections. Contributions to the plan totaled $125 in 2017, $125 in 2016
and $110 in 2015. A liability is accrued for the obligation under the plan and totaled $3,377 and $2,767 at December 31,
2017 and 2016, respectively.
Investments in Life Insurance Contracts
The Bank currently offers a variety of benefit plans to all full-time employees. While the costs of these plans are generally
tax deductible to the Bank, the cost has been escalating greatly in recent years. To help offset escalating benefit costs and
to attract and retain qualified employees, the Bank purchased Bank Owned Life Insurance (BOLI) contracts that will
provide benefits to employees during their lifetime. Dividends received on these policies are tax-deferred and the death
benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are very favorable when compared
to other long-term investments which the Bank might make. The accrued liability related to the BOLI contracts was
$443 and $412 for December 31, 2017 and 2016, respectively.
NOTE 15
CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks in excess of FDIC insurance limits totaling $1,798 and $680
at December 31, 2017 and 2016, respectively.
The Company grants commercial, residential real estate and consumer loans to customers located primarily in the
northwestern portion of the State of Virginia. There were no loan concentration areas greater than 25% of capital.
Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the
financial condition of the borrower. As of December 31, 2017, approximately 80% of the loan portfolio was secured by
real estate.
NOTE 16
COMMITMENTS:
The Company makes commitments to extend credit in the normal course of business and issues standby letters of credit
to meet the financing needs of its customers. The amount of the commitments represents the Company's exposure to
credit loss that is not included in the consolidated balance sheet. As of the December 31, 2017 and 2016, the Company
had the following commitments outstanding:
Commitments to extend credit
Standby letters of credit
2017
2016
$ 170,798 $ 148,060
1,089
1,533
The Company uses the same credit policies in making commitments to extend credit and issue standby letters of credit
as it does for the loans reflected in the consolidated balance sheet.
78
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 16
COMMITMENTS (CONTINUED):
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Collateral required, if any, upon extension of credit is based on management's
credit evaluation of the borrower’s ability to pay. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment.
The Bank leases four of its branch offices and its loan production office under long term lease arrangements which had
initial terms of either three, five or ten years. VBS leased its building until December of 2017 and therefore recorded
lease expense in 2017, 2016 and 2015. VST leases three of its offices, the lease expense is included in the following
disclosure as well as future lease payments. The North Augusta Branch and the Dealer Finance division office are leases
with related parties. The Company considers these lease agreements to be arm’s length transactions.
Lease expense was $355, $291 and $281 for 2017, 2016 and 2015, respectively. As of December 31, 2017, the required
lease payments for the next five years were as follows:
2018
2019
2020
2021
2022
$ 177
150
128
110
105
NOTE 17 ON BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Derivative Financial Instruments
The Company has stand alone derivative financial instruments in the form of forward option contracts. These transactions
involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value
of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited
to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents
the fair value of the derivative instruments, is reflected on the Company’s balance sheet as derivative assets and derivative
liabilities.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these
agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and
monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with
primary dealers.
Derivative instruments are generally either negotiated Over-the-Counter (OTC) contracts or standardized contracts
executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two
counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and
maturity.
The Company issues to customer’s certificates of deposit with an interest rate that is derived from the rate of return on
the stock of the companies that comprise The Dow Jones Industrial Average. In order to manage the interest rate risk
associated with this deposit product, the Company has purchased a series of forward option contracts. These contracts
provide the Company with a rate of return commensurate with the return of The Dow Jones Industrial Average from the
time of the contract until maturity of the related certificates of deposit. These contracts are accounted for as fair value
hedges. Because the certificates of deposit can be redeemed by the customer at any time and the related forward options
contracts cannot be cancelled by the Company, the hedge is not considered effective. The ineffective portion of the gain
or loss on the derivative instrument, if any, is recognized currently in earnings. There was no ineffective portion included
in the consolidated income statement for the years ended December 31, 2017, 2016 and 2015.
79
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 17 ON BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
(CONTINUED):
At December 31, the information pertaining to the forward option contracts, included in other assets and other liabilities
on the balance sheet, is as follows:
Notional amount
Fair value of contracts, included in other assets
Mortgage Banking Derivatives
2017
2016
$ 184 $ 190
26
59
Commitments to fund certain mortgage loans originated by VBS (rate lock commitments) to be sold into the secondary
market and best efforts commitments for the future delivery of mortgage loans to third party investors are considered
derivatives. It is the practice of VBS to enter into best efforts commitments for the future delivery of residential
mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of
changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are
not designated hedge relationships. The fair value of the mortgage banking derivatives were estimated based on
changes in interest rates from the date of the commitments and were considered immaterial at December 31, 2017 and
2016, and were not recorded on the Company’s balance sheet.
NOTE 18
TRANSACTIONS WITH RELATED PARTIES:
During the year, executive officers and directors (and companies controlled by them) were customers of and had
transactions with the Company in the normal course of business. Management believes these transactions were made on
substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
Loan transactions with related parties are shown in the following schedule:
Total loans, beginning of year
New loans
Relationship change
Repayments
Total loans, end of year
2017
2016
$ 7,486 $ 7,180
4,701
6,803
611
10,403
(4,315)
(5,006)
$ 20,377 $ 7,486
Deposit of executive officers and directors and their affiliates were $7,757 and $4,524 on December 31, 2017 and
2016 respectively. Management believes these deposits were made under the same terms available to other customers
of the bank.
NOTE 19
DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
The principal source of funds of F & M Bank Corp. is dividends paid by the Farmers & Merchants Bank. The Federal
Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal
Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net
income of the current year and (2) income net of dividends for the preceding two years. As of January 1, 2018,
approximately $13,705 was available for dividend distribution without permission of the Board of Governors. Dividends
paid by the Bank to the Company totaled $5,000 in 2017, $5,000 in 2016 and $2,500 in 2015.
80
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20
FAIR VALUE MEASUREMENTS:
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.
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, such as U. S. Treasuries. 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.
81
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20
FAIR VALUE MEASUREMENTS (CONTINUED):
The following tables present the balances of financial assets measured at fair value on a recurring basis as of December
31, 2017, and 2016 (dollars in thousands):
December 31, 2017
Total
Level 1
Level 2
Level 3
U. S. Treasuries
U.S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Equity securities
Total securities available for sale
$ 19,998 $ 19,998 $ - $ -
7,980
-
-
7,980
502
-
-
502
-
135
135
-
-
$ 28,615 $ 19,998 $ 8,617
December 31, 2016
Total
Level 1
Level 2
Level 3
U. S. Treasuries
Mortgage-backed obligations of federal agencies
Equity securities
Total securities available for sale
$ 24,014 $ 24,014 $ - $ -
-
-
-
634
-
634
135
-
135
$ 24,783 $ 24,014 $ 769
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to
the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs
of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded
at fair value on a nonrecurring basis in the financial statements:
Loans Held for Sale
Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan and loans
originated by VBS for sale in the secondary market. Loan participations are generally repurchased within 15
days. Loans originated for sale by VBS are recorded at lower of cost or market. No market adjustments were required
at December 31, 2017 or 2016; 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 approximates fair value at December 31, 2017, and 2016.
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.
82
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
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. The Company discounts appraised value by estimated selling costs to arrive at net fair value. Appraisals
conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized
as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the
net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values
for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
As of December 31, 2017, and 2016, the fair value measurements for impaired loans with specific allocations were
primarily based upon the fair value of the collateral.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring
basis during the period (dollars in thousands):
December 31, 2017
Total
Level 1
Level 2
Level 3
Construction/Land Development
Real Estate
Dealer Finance
Impaired loans
$ 3,337
979
35
$ 4,351
-
-
-
-
- $ 3,337
-
979
-
35
- $ 4,351
December 31, 2016
Total
Level 1
Level 2
Level 3
Construction/Land Development
Real Estate
Commercial Real Estate
Dealer Finance
Impaired loans
$ 4,739
985
892
67
$ 6,683
-
-
-
-
-
- $ 4,739
-
985
-
892
-
67
- $ 6,683
The following table presents information about Level 3 Fair Value Measurements for December 31, 2017 and 2016:
Fair Value at
December 31, 2017
Valuation Technique
Significant Unobservable Inputs
Range
Impaired Loans $ 4,351 Discounted appraised value Discount for selling costs and
marketability
3%-19% (Average
5.5%)
Fair Value at
December 31, 2016
Valuation Technique
Significant Unobservable Inputs
Range
Impaired Loans $ 6,683 Discounted appraised value Discount for selling costs and
marketability
2%-50% (Average
4.7%)
83
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
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 three input. If current
appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is
received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a
realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
The Company markets other real estate owned both independently and with local realtors. Properties marketed by
realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by
selling costs.
The following table summarizes the Company’s other real estate owned that were measured at fair value on a
nonrecurring basis during the period.
December 31, 2017
Total
Level 1
Level 2
Level 3
Other real estate owned
$ 1,984
December 31, 2016
Total
Level 1
Other real estate owned
$ 2,076
-
-
- $ 1,984
Level 2
Level 3
- $ 2,076
The following table presents information about Level 3 Fair Value Measurements for December 31, 2017 and 2016:
Fair Value at
December 31, 2017
Valuation Technique
Significant Unobservable
Inputs
Range
Other real estate owned $ 1,984 Discounted appraised value Discount for selling costs
5%-15% (Average 8%)
Fair Value at
December 31, 2016
Valuation Technique
Significant Unobservable
Inputs
Range
Other real estate owned $ 2,076 Discounted appraised value Discount for selling costs
5%-15% (Average 8%)
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial
instruments:
Cash and Due from Bank, and Interest-Bearing Deposits
The carrying amounts approximate fair value.
Securities
The fair values of securities, excluding restricted stock, are determined by quoted market prices or dealer quotes. The
fair value of certain state and municipal securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar instruments adjusted for differences
between the quoted instruments and the instruments being valued. The carrying value of restricted securities and other
investments approximates fair value and are therefore excluded from the following table.
Loans Held for Sale
Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.
84
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type
such as commercial, real estate – commercial, real estate – construction, real estate – mortgage, credit card and other
consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, as well as
estimates for prepayments. The estimate of maturity is based on the Company’s historical experience with repayments
for loan classification, modified, as required, by an estimate of the effect of economic conditions on lending.
Fair value for significant nonperforming loans is based on estimated cash flows which are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows
and discount rates are determined within management’s judgment, using available market information and specific
borrower information.
Bank-Owned Life Insurance
Bank-owned life insurance represents insurance policies on officers of the Company. The cash values of the policies
are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value,
which approximates fair value.
Deposits
The fair value of demand and savings deposits is the amount payable on demand. The fair value of fixed maturity term
deposits and certificates of deposit is estimated using the rates currently offered for deposits with similar remaining
maturities.
Short-Term Debt
The carrying amounts of short-term debt maturing within 90 days approximate their fair values. Fair values of any
other short-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing
rates for similar types of debt.
Long-Term Debt
The fair value of the Company’s long-term debt is estimated using discounted cash flow analyses based on the
Company’s incremental borrowing rates for similar types of debt arrangements.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
85
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
The estimated fair values, and related carrying amounts (in thousands), of the Company’s financial instruments are
as follows:
(dollars in thousands)
Assets:
Carrying
Amount
Fair Value Measurements at December 31, 2017 Using
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Fair Value at
December 31, 2016
Cash and cash equivalents
$ 11,907
$ 11,907 $ - $ - $ 11,907
Securities
Loans held for sale
28,740
39,775
19,998
8,742
-
-
39,775
-
Loans held for investment, net
610,930
-
-
646,703
Interest receivable
2,007
-
2,007
-
28,740
39,775
646,703
2,007
Bank owned life insurance
13,950
- 13,950
- 13,950
Total
Liabilities:
Deposits
Short-term debt
Long-term debt
Interest payable
Total
$ 707,309
$ 31,905 $ 64,474
$ 646,703 $ 743,082
$569,177
$ - $ 403,907
$ 167,210 $ 571,117
25,296
49,733
-
25,296
-
-
-
49,869
25,296
49, 869
260
- 260
- 260
$ 644,466 $ - $ 429,463
$ 217,079 $ 646,542
(dollars in thousands)
Assets:
Carrying
Amount
Fair Value Measurements at December 31, 2016 Using
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Fair Value at
December 31, 2016
Cash and cash equivalents
$ 16,355
$ 16,355 $ - $ - $ 16,355
Securities
Loans held for sale
24,908
62,735
24,014
894
-
-
62,735
-
Loans held for investment, net
584,093
-
-
598,991
Interest receivable
1,785
-
1,785
-
24,908
62,735
598,991
1,785
Bank owned life insurance
13,513
- 13,513
- 13,513
Total
Liabilities:
Deposits
Short-term debt
Long-term debt
Interest payable
Total
$ 703,389
$ 40,369 $ 78,927
$ 598,991 $ 718,287
$537,085
$ - $ 379,857
$ 158,073 $ 537,930
40,000
64,237
-
40,000
-
-
-
63,945
40,000
63,945
228
- 228
- 228
$ 641,550 $ - $ 420,085
$ 222,018 $ 642,103
86
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 21
REGULATORY MATTERS
The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s
Small Bank Holding Company Policy Statement issued in February 2015 and is no longer obligated to report
consolidated regulatory capital. The Bank is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain
off balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel
III rules) became effective January 1, 2015, with full compliance of all the requirements being phased in over a multi-
year schedule and becoming fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a
capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer
is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2017 was 1.25% and for
2016 was 0.625%. The net unrealized gain on securities available for sale and the unfunded pension liability are not
included in computing regulatory capital.
Quantitative measures established by regulation, to ensure capital adequacy, require the Bank to maintain minimum
amounts and ratios. These ratios are defined in the regulations and the amounts are set forth in the table below.
Management believes, as of December 31, 2017 and 2016, that the Bank meets all capital adequacy requirements to
which they are subject.
As of the most recent notification from the Federal Reserve Bank Report of Examination, the subsidiary bank was
categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that notification that management believes have changed the
institution’s category.
The actual capital ratios for the Bank are presented in the following table (dollars in thousands):
December 31, 2017
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
Minimum Capital
Requirement
Minimum to be Well Capitalized Under
Prompt Corrective Action Provisions
Total risk-based ratio
Tier 1 risk-based ratio
Common equity tier 1
Total assets leverage ratio
$ 95,563
89,519
89,519
89,519
15.41% $ 49,614
37,211
14.43%
27,908
14.43%
29,656
12.07%
8.00%
6.00%
4.50%
4.00%
$ 62,018
49,614
40,312
37,070
10.00%
8.00%
6.50%
5.00%
December 31, 2016
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
Minimum Capital
Requirement
Minimum to be Well Capitalized Under
Prompt Corrective Action Provisions
Total risk-based ratio
Tier 1 risk-based ratio
Common equity tier 1
Total assets leverage ratio
$ 93,519
85,976
85,976
85,976
15.08% $ 49,615
37,212
13.86%
27,909
13.86%
29,065
11.83%
8.00%
6.00%
4.50%
4.00%
$ 62,019
49,615
40,312
36,331
10.00%
8.00%
6.50%
5.00%
87
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 22
BUSINESS SEGMENTS:
F&M Bank
VBS
Mortgage
TEB
Life/FMFS
VS Title
Parent
Only
Eliminations
F&M Bank Corp.
Consolidated
December 31, 2017
Revenues:
Interest Income
Service charges on deposits
Investment services and insurance income
Mortgage banking income, net
Title insurance income
Gain on prepayment of long-term debt
Loss on sale of investments
$ 33,904 $ 125
$ 148
$ - $ -
$ (82)
$ 34,095
1,360
1
-
-
504
-
-
-
2,220
279
-
(40)
-
772
-
-
-
(2)
-
-
-
883
-
-
-
-
-
-
-
-
-
(18)
-
-
-
-
1,360
755
2,220
1,162
504
(42)
Other operating income
2,128
-
-
- 162
(357) 1,933
Total income
Expenses:
Interest Expense
Provision for loan losses
Salaries and benefits
37,897
2,584
918
883
162
(457)
41,987
3,904
-
75
-
-
-
-
-
12,092
1,733
474
555
-
-
-
(82)
-
-
3,897
-
14,854
Other operating expenses
8,942
672
51
172
46
(18)
9,865
Total expense
24,938
2,480
525
727
46
(100)
28,616
Income before income taxes
12,959
104
393
156
116
(357)
13,371
Income tax expense (benefit)
4,316
-
109
-
(95)
-
4,330
Net income
$ 8,643 $ 104
$ 284
$ 156
$ 211
$ (357) $ 9,041
Net income attributable to noncontrolling
interest
Net Income attributable to F & M Bank
Corp.
Total Assets
-
31
-
-
-
-
31
$ 8,643
$ 73
$ 284
$ 156
$ 211
$ (357)
$ 9,010
$ 754,375
$ 7,018
$ 6,749
$ 811
$ 90,964 $ (106,647)
$ 753,270
Goodwill
$ 2,670 $ 47
$ -
$ -
$ 164
$ -
$ 2,881
88
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 22
BUSINESS SEGMENTS CONTINUED:
December 31, 2016
F&M Bank
VBS
Mortgage
TEB
Life/FMFS
VS Title
Parent
Only
Eliminations
F&M Bank Corp.
Consolidated
Revenues:
Interest Income
$ 31,949 $ 55
$ 152
$ - $ -
$ (6)
$ 32,150
Service charges on deposits
1,174
Investment services and insurance income
Mortgage banking income, net
Title insurance income
Gain on prepayment of long-term debt
Loss on investments
1
-
-
-
-
-
-
2,565
-
-
-
-
470
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(30)
-
-
-
-
1,174
441
2,565
-
-
-
Other operating income
2,353
-
-
- -
(951)
1,402
Total income
Expenses:
Interest Expense
Provision for loan losses
Salaries and benefits
35,477
2,620
622
-
-
(987)
37,732
3,605
-
-
-
-
-
11,123
1,387
290
-
-
-
-
-
-
(6)
-
-
3,599
-
12,800
Other operating expenses
8,139
586
66
-
1
(320)
8,472
Total expense
22,867
1,973
356
-
1
(326)
24,871
Income before income taxes
12,610
647
266
-
(1)
(661)
12,861
Income tax expense (benefit)
3,290
-
58
-
(249)
-
3,099
Net income
$ 9,320 $ 647
$ 208 $ -
$ 248
$ (661) $ 9,762
Net income attributable to noncontrolling
interest
Net Income attributable to F & M Bank
Corp.
Total Assets
-
194
-
-
-
-
194
$ 9,320
$ 453
$ 208
$ -
$ 248
$ (661)
$ 9,568
$ 748,273
$ 7,487
$ 6,476 $ -
$ 87,449 $ (104,796)
$ 744,889
Goodwill
$ 2,670 $ -
$ -
$ -
$ -
$ -
$ 2,670
89
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 22
BUSINESS SEGMENTS CONTINUED:
Revenues:
Interest Income
Service charges on deposits
Investment services and insurance income
Mortgage banking income, net
Title insurance income
Gain on prepayment of long-term debt
Loss on investments
F&M Bank
VBS
Mortgage
TEB
Life/FMFS
VS Title
Parent
Only
Eliminations
F&M Bank Corp.
Consolidated
December 31, 2015
$ 29,206 $ 51
$ 152
$ - $ -
$ (5)
$ 29,404
963
2
-
-
-
-
-
-
2,066
-
-
-
-
522
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(14)
-
-
-
-
963
510
2,066
-
-
-
Other operating income
2,142
-
-
- 5 (893)
1,254
Total income
Expenses:
Interest Expense
Provision for loan losses
Salaries and benefits
32,313
2,117
674
-
5
(912)
34,197
2,881
300
-
-
-
-
10,056
1,103
298
-
-
-
-
-
-
(5)
-
-
2,876
300
11,457
Other operating expenses
7,887
466
35
-
21
(312)
8,097
Total expense
21,124
1,569
333
-
21
(317)
22,730
Income before income taxes
11,189
548
341
-
(16)
(595)
11,467
Income tax expense (benefit)
2,948
-
129
-
(191)
-
2,886
Net income
$ 8,241 $ 548
$ 212 $ -
$ 175
$ (595) $ 8,581
Net income attributable to noncontrolling
interest
Net Income attributable to F & M Bank
Corp.
Total Assets
-
164
-
-
-
-
164
$ 8,241
$ 384
$ 212
$ -
$ 175
$ (595)
$ 8,417
$ 669,968
$ 2,180
$ 6,269 $ -
$ 84,897 $ (97,957)
$ 665,357
Goodwill
$ 2,670 $ -
$ -
$ -
$ -
$ -
$ 2,670
90
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 23
PARENT COMPANY ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31, 2017 and 2016
Assets
Cash and cash equivalents
Investment in subsidiaries
Securities available for sale
Income tax receivable (including due from subsidiary)
Goodwill and intangibles
Total Assets
Liabilities
Income tax payable (including due from subsidiary)
Deferred income taxes
Accrued expenses
Demand obligations for low income housing investment
Total Liabilities
Stockholders’ Equity
Preferred stock par value $5 per share, 400,000 shares authorized,
324,150 and 327,350 issued and outstanding at December 31, 2017 and
2016, respectively.
Common stock par value $5 per share, 6,000,000 shares authorized,
3,255,036 and 3,270,315 shares issued and outstanding for 2016 and
2015, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
2017
2016
$ 917 $ 1,155
85,481
88,967
135
135
-
565
380
-
$ 90,964 $ 86,771
$ - $ 313
307
177
-
86
-
162
$ 263 $ 782
$ 7,529 $ 7,609
16,275
16,352
10,225
60,814
(4,142)
90,701
$ 90,964
10,684
54,509
(3,165)
85,989
$ 86,771
Statements of Income
For the years ended December 31, 2017, 2016 and 2015
2017
2016
2015
Income
Dividends from affiliate
Net limited partnership income (loss)
Total Income
Expenses
Total Expenses
$ 5,000 $ 5,000 $ 2,500
5
-
162
2,505
5,000
5,162
47
1
21
Net income before income tax expense (benefit)
and undistributed subsidiary net income
5,115
4,999
2,484
Income Tax Expense (Benefit)
(95)
(249)
(191)
Income before undistributed subsidiary
net income
5,210
5,248
2,675
Undistributed subsidiary net income
3,800
4,320
5,742
Net Income F&M Bank Corp.
$ 9,010 $ 9,568 $ 8,417
91
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 23
PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED):
Statements of Cash Flows
For the years ended December 31, 2017, 2016 and 2015
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed subsidiary income
Deferred tax (benefit) expense
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repurchase of preferred stock
Repurchase of common stock
Proceeds from issuance of common stock
Dividends paid in cash
Net Cash Used in Financing Activities
2017
2016
2015
$ 9,010 $ 9,568 $ 8,417
(3,800)
(112)
(1,256)
(77)
3,765
(4,320)
5
-
(535)
4,718
(5,742)
(81)
1,300
(143)
3,751
-
-
-
(101)
(712)
197
(3,387)
(4,003)
(1,961)
(577)
183
(3,115)
(5,470)
(289)
146
(2,915)
(3,058)
Net (Decrease) increase in Cash and Cash Equivalents
(238)
(752)
693
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
1,155
1,214
$ 917 $ 1,155 $ 1,907
1,907
NOTE 24
INVESTMENT IN VBS MORTGAGE, LLC
On November 3, 2008, the Bank acquired a 70% ownership interest in VBS Mortgage, LLC (formerly Valley Broker
Services, DBA VBS Mortgage). VBS originates both conventional and government sponsored mortgages for sale in the
secondary market. Accordingly, the Company consolidated the assets, liabilities, revenues and expenses of VBS
Mortgage, LLC and reflected the issued and outstanding interest not held by the Company in its consolidated financial
statements as noncontrolling interest.
92
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2017 and 2016
NOTE 25
INVESTMENT IN VS TITLE, LLC
On January 1, 2017, the Bank acquired a 76% ownership interest in VS Title, LLC (VST). VST provides title insurance
services to the customers in our market area, including VBS Mortgage and the Bank. VBS Mortgage is the minority
owner in VST and accordingly, the Company consolidated the assets, liabilities, revenues and expenses of VST, however
there is no noncontrolling interest reflected as the 24% is included in VBS Mortgage’s income.
NOTE 26 ACCUMULATED OTHER COMPREHENSIVE LOSS
The balances in accumulated other comprehensive loss are shown in the following table:
dollars in thousands
Balance at December, 31, 2014
Change in unrealized securities gains (losses), net of tax
Change in unfunded pension liability, net of tax
Unrealized
Securities Gains
(Losses)
3
1
- (354)
Accumulated
Other
Adjustments
Comprehensive
Related to
Loss
Pension Plan
(2,330)
(2,327)
- 1
(354)
Balance at December, 31, 2015
Change in unrealized securities gains (losses), net of tax
Change in unfunded pension liability, net of tax
4
2
- (487)
(2,684)
(2,680)
- 2
(487)
Balance at December, 31, 2016
$ 6
$ (3,171)
$ (3,165)
Change in unrealized securities gains (losses), net of tax
(26)
- (26)
Change in unfunded pension liability, net of tax
- (951)
(951)
Balance at December, 31, 2017
$ (20)
$ (4,122)
$ (4,142)
There were no reclassifications adjustments reported on the consolidated statements of income during 2015, 2016 or
2017.
93
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
F&M Bank Corp.
Timberville, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of F&M Bank Corp. and subsidiaries (the Company)
as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 16, 2018 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’s auditor since 2016.
Winchester, Virginia
March 16, 2018
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
F&M Bank Corp.
Timberville, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited F&M Bank Corp. and subsidiaries' (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated
statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended of the
Company and our report dated March 16, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Report of
Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Yount, Hyde & Barbour, P.C., Winchester, Virginia March 16, 2018
95
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
F & M Bank Corp. and Subsidiaries
Timberville, Virginia
We have audited the accompanying consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows of F&M Bank Corp. and Subsidiaries (the “Company”) for the year ended
December 31, 2015. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results
of F&M Bank Corp. and Subsidiaries’ results of operations and cash flows for the year ended December 31, 2015, in
conformity with generally accepted accounting principles in the United States of America.
/s/ Elliott Davis, PLLC
Raleigh, North Carolina
March 29, 2016
96
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. The Company, under the supervision and with the participation of management,
including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017 to ensure
that information required to be disclosed by the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms and is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over
financial reporting during the Company’s quarter ended December 31, 2017 that have materially affected, or are
reasonably likely to materially affect, the Company’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.
Management’s Report on Internal Control over Financial Reporting. Management is responsible for the preparation
and fair presentation of the financial statements included in the annual report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America and reflect
management’s judgements and estimates concerning effects of events and transactions that are accounted for or
disclosed.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting.
The Company's internal control over financial reporting includes those policies and procedures that pertain to the
Company's ability to record, process, summarize and report reliable financial data. Management recognizes that there
are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility
of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control
over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that the Company's internal control over financial reporting is effective, management regularly
assesses such controls and did so most recently for its financial reporting as of December 31, 2017. This assessment
was based on criteria for effective internal control over financial reporting described in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO, 2013) of the Treadway Commission. Based
on this assessment, management believes the Company maintained effective internal control over financial reporting
as of December 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited
by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm which also audited the Company’s
consolidated financial statements included in this Annual Report on Form 10-K. Yount, Hyde & Barbour’s attestation
report on the Company’s internal control over financial reporting is included in Item 8 “Financial Statements and
Supplemental Data” on this Form 10-K.
97
Item 9A. Controls and Procedures, continued
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's
accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is
comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for
the appointment and compensation of the independent registered public accounting firm and approves decisions
regarding the appointment or removal of the Company Auditor. It meets periodically with management, the
independent registered public accounting firm and the internal auditors to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and
monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's
financial reports. The independent registered public accounting firm and the internal auditors have full and unlimited
access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial
reporting, and any other matter which they believe should be brought to the attention of the Audit Committee. The
Company's independent registered public accounting firm has also issued an attestation report on the effectiveness of
internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding directors, executive officers and the audit committee financial expert is incorporated by
reference from the Company’s definitive proxy statement for the Company’s 2018 Annual Meeting of Shareholders
to be held May 12, 2018 (“Proxy Statement”), under the captions “Election of Directors,” “Board of Directors and
Committees,” and “Executive Officers.”
Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the
Company is incorporated by reference from the Proxy Statement under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance.”
The Company has adopted a broad based code of ethics for all employees and directors. The Company has also adopted
a code of ethics tailored to senior officers who have financial responsibilities. A copy of the codes may be obtained
without charge by request from the corporate secretary.
Item 11. Executive Compensation
This information is incorporated by reference from the Proxy Statement under the caption “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information is incorporated by reference from the Proxy Statement under the caption “Ownership of Company
Common Stock” and “Executive Compensation” and from Item 5 of this 10-K.
Item 13. Certain Relationships and Related Transactions, and Directors Independence
This information is incorporated by reference from the Proxy Statement under the caption “Interest of Directors and
Officers in Certain Transactions.”
Item 14. Principal Accounting Fees and Services
This information is incorporated by reference from the Proxy Statement under the caption “Principal Accounting
Fees.”
98
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following financial statements are filed as a part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent auditors of the Company are in Part II,
Item 8 on pages 38 thru 89:
Consolidated Balance Sheets - December 31, 2017 and 2016 ..................................................................................... 42
Consolidated Statements of Income - Years ended December 31, 2017, 2016 and 2015 ............................................ 43
Consolidated Statements of Comprehensive Income - Years ended December 31, 2017,
2016 and 2015 .......................................................................................................................................................... 44
Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2017,
2016 and 2015……………………………………………………………………………………………………....45
Consolidated Statements of Cash Flows - Years ended December 31, 2017,
2016 and 2015 .......................................................................................................................................................... 46
Notes to the Consolidated Financial Statements .......................................................................................................... 47
Reports of Independent Registered Public Accounting Firms ..................................................................................... 94
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as a part of this form 10-K:
Exhibit No.
3.1
3.2
3.2
10.1
Restated Articles of Incorporation of F & M Bank Corp., incorporated herein by reference from F & M Bank
Corp.’s, Quarterly Report on Form 10-Q, filed November 14, 2013.
Articles of Amendment to the Articles of Incorporation of F&M Bank Corp. designating the Series A
Preferred Stock incorporated herein by reference from F&M Bank Corp,’s current report on Form 8-K filed
December 4, 2014.
Amended and Restated Bylaws of F & M Bank Corp., incorporated herein by reference from F & M Bank
Corp.’s, Annual Report on Form 10-K, filed March 8, 2002.
Change in Control Severance Plan, incorporated herein by reference from Exhibit 10.1 to F&M Bank Corp.’s
Registration Statement on Form S-1, filed December 22, 2010.
VBA Executives Deferred Compensation Plan for Farmers & Merchants Bank, incorporated herein by
reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.
VBA Directors Non-Qualified Deferred Compensation Plan for Farmers & Merchants Bank, incorporated
herein by reference from F & M Bank Corp.’s Annual Report on Form 10-K, filed March 28, 2014.
Subsidiaries of the Registrant
21.0
Consent of Yount, Hyde & Barbour, P.C.
23.1
Consent of Elliott Davis, PLLC
23.2
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
10.3
10.2
101
Oxley Act of 2002.
The following materials from F&M Bank Corp.’s Annual Report on Form 10-K for the year ended December
31, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv)
Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows
and (vi) related notes (furnished herewith).
99
PART IV
Item 16 Form 10-K Summary
Not Required
Shareholders may obtain, free of charge, a copy of the exhibits to this Report on Form 10-K by writing Larry A.
Caplinger, Corporate Secretary, at F & M Bank Corp., P.O. Box 1111, Timberville, VA 22853 or our website at
www.fmbankva.com.
100
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
F & M Bank Corp.
(Registrant)
By:
/s/ Dean W. Withers
Dean W. Withers
Director and Chief Executive Officer
By:
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President and Chief Financial Officer
March 16, 2018
March 16, 2018
Date
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and as of the date indicated.
Signature
/s/ Larry A. Caplinger
Larry A. Caplinger
/s/ John N. Crist
John N. Crist
/s/ Ellen R. Fitzwater
Ellen R. Fitzwater
/s/ Daniel J. Harshman
Daniel J. Harshman
/s/ Richard S. Myers
Richard S. Myers
/s/ Michael W. Pugh
Michael W. Pugh
/s/ Christopher S. Runion
Christopher S. Runion
/s/ Ronald E. Wampler
Ronald E. Wampler
/s/ E. Ray Burkholder
E. Ray Burkholder
/s/ Peter H. Wray
Peter H. Wray
Title
Director
Director
Date
March 16, 2018
March 16, 2018
Director, Chair
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
Director
Director
Director
Director
Director
Director
Director
102
Exhibit 21 List of Subsidiaries of the Registrant
Farmers & Merchants Bank (incorporated in Virginia)
VST Title, LLC (a Virginia Limited Liability Company)
TEB Life Insurance Company (incorporated in Arizona), a subsidiary of Farmers & Merchants Bank
Farmers & Merchants Financial Services (incorporated in Virginia), a subsidiary of Farmers & Merchants Bank
VBS Mortgage, LLC (a Virginia Limited Liability Company), a subsidiary of Farmers & Merchants Bank
103
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-160715) on Form
S-3 and Form S-8 (No. 333-159074) of F&M Bank Corp. and subsidiaries of our reports, dated March
16, 2018, relating to our audits of the consolidated financial statements and internal control over
financial reporting, appearing in the Annual Report on Form 10-K of F&M Bank Corp. and subsidiaries
for the year ended December 31, 2017.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 16, 2018
104
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
F & M Bank Corp. and Subsidiaries
Timberville, Virginia
We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-
160715) and Form S-8 (File No. 333-159074) of F&M Bank Corp. of our report dated March 29, 2016,
relating to our audit of the consolidated financial statements for the year ended December 31, 2015,
which appear in the Annual Report on Form 10-K of F&M Bank Corp. and Subsidiaries for the year ended
December 31, 2017.
/s/ Elliott Davis, PLLC
Raleigh, North Carolina
March 16, 2018
105
Exhibit 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Dean W. Withers, certify that:
1.
I have reviewed this annual report on Form 10-K of F & M Bank Corp.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and as of a date within 90 days prior to the
filing date of this quarterly report (the “Evaluation Date”); and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal controls over financial reporting.
Date: March 16, 2018
/s/ Dean W. Withers
Dean W. Withers
Chief Executive Officer
106
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been
provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange
Commission or its staff upon request.
107
Exhibit 31.2
CERTIFICATION
CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Carrie A. Comer, certify that:
1.
I have reviewed this annual report on Form 10-K of F & M Bank Corp.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and as of a date within 90 days prior to the
filing date of this quarterly report (the “Evaluation Date”); and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal controls over financial reporting.
Date: March 16, 2018
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been
provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange
Commission or its staff upon request.
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Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of F & M Bank Corp. (the “Company”) on Form 10-K for the period ending
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C.
§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: 1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2) the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company as of and for the periods covered in the Report.
/s/ Dean W. Withers
Dean W. Withers
Chief Executive Officer
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President & Chief Financial Officer
March 16, 2018
109