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, 2018
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 every Interactive Data File required to be submitted
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 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, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Emerging growth company ☐
Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The registrant’s Common Stock is quoted on the OTC Market’s OTCQX tier under the symbol FMBM. The aggregate market value
of the 2,893,997 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2018 was
approximately $111,274,169 based on the closing sales price of $38.45 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 11, 2019, there were 3,210,562 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2019 (the “Proxy
Statement”).
Table of Contents
PART I
Page
Item 1
Business .............................................................................................................................................................. 2
Item 1A Risk Factors ........................................................................................................................................................ 9
Item 1B Unresolved Staff Comments…………………………………………………..……………………………16
Item 2
Properties………………………………………………………………………………………….………..16
Item 3
Legal Proceedings ............................................................................................................................................. 16
Item 4 Mine Safety Disclosures ................................................................................................................................... 17
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities……………….……………………………………………………………………...……17
Item 6
Selected Financial Data .................................................................................................................................... 19
Item 7 Management’s Discussion and Analysis of Financial Condition
and Results of Operations ............................................................................................................................. 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......................................................................... 42
Item 8
Financial Statements and Supplementary Data…………….. ......................................................................... 43
Item 9
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................................................................................................... 98
Item 9A Controls and Procedures ................................................................................................................................... 98
Item 9B Other Information ............................................................................................................................................. 99
PART III
Item 10 Directors, Executive Officers and Corporate Governance .............................................................................. 99
Item 11
Executive Compensation .................................................................................................................................. 99
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 99
Item 13 Certain Relationships and Related Transactions, and Director Independence ............................................... 99
Item 14
Principal Accounting Fees and Services .......................................................................................................... 99
PART IV
Item 15
Exhibits, Financial Statement Schedules ....................................................................................................... 100
Item 16
Form 10-K Summary……………………………………………………………………………………...101
Signatures .......................................................................................................................................................................... 102
PART I
Item 1. Business
General
F & M Bank Corp. (the “Company” or “we”), incorporated in Virginia in 1983, is a one bank holding company under
the Bank Holding Company Act of 1956 that has elected to become a financial holding company. The Company owns
100% of the outstanding stock of its banking subsidiary, Farmers & Merchants Bank (“Bank”) and a majority interest in
VSTitle, 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
(DBA F&M Mortgage “F&M Mortgage”).
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. F&M Mortgage was incorporated
on May 11, 1999. The Bank purchased a majority interest in F&M Mortgage on November 3, 2008 and the Company
purchased a majority interest in VST on January 1, 2017. F&M 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. F&M Mortgage originates conventional
and government sponsored mortgages through their offices in Harrisonburg, Woodstock and Fishersville. VST 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 located 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, 2018, the Bank had 172 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, marketplace lenders and other financial technology
firms, 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 bank
holding companies, 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 bank holding company and 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 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 permitted activities of a bank holding company are limited to managing or controlling banks, furnishing
services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve
Board determines by regulation or order to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding
companies, such as the Company, may engage in any activity, or acquire and retain the shares of a company
engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by
the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally (as solely determined by the Federal Reserve Board), without prior approval of the Federal Reserve
Board. Activities that are financial in nature include but are not limited to securities underwriting and dealing,
insurance underwriting, and making merchant banking investments.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 payment of 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. Effective January 1, 2015, the Federal Reserve, the Federal Deposit Insurance Company
(FDIC) and the Office of the Comptroller of the Currency (OCC) adopted a new rule that substantially amended the
regulatory risk-based capital rules applicable to us. The final rule implemented 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 and refines the definition of what constitutes "capital" for purposes of calculating
these ratios. The minimum capital requirements currently applicable to the Bank 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%; (iii) a total capital ratio of 8%;
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 on January 1, 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%. 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, 2018, were 13.65% and 11.79%, 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 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.
As directed by the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth
Act”), on November 21, 2018, the federal banking regulators jointly issued a proposed rule that would permit
qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9%
“community bank leverage ratio.” A qualifying bank that has chosen the proposed framework would not be
required to calculate the existing risk-based and leverage capital requirements and would be considered to have met
the capital ratio requirements to be “well capitalized” under prompt corrective action rules, provided it has a
community bank leverage ratio greater than 9%. This proposed rule has not been finalized and, as a result, the
content and scope of any final rule, and its impact on the Bank (if any), cannot be determined at this time.
Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy
Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the
Company, are not subject to consolidated regulatory capital requirements
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. 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.
In May 2018, the Economic Growth Act was enacted to modify or remove certain regulatory financial reform rules
and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act
maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the
regulatory framework for small depository institutions with assets of less than $10 billion, such as the Bank, and for
large banks with assets of more than $50 billion.
Among other matters, the Economic Growth Act expands the definition of qualified mortgages which may be held
by a financial institution with total consolidated assets of less than $10 billion, exempts community banks from the
Volcker Rule, and includes additional regulatory relief regarding regulatory examination cycles, call reports,
mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Economic Growth Act will ultimately
be applied to us or what specific impact the Economic Growth Act and implementing rules and regulations will have
on community banks
6
PART I, continued
Item 1. Business, continued
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.
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, 2018, 2017, and 2016:
Period
Class of Service
Percentage of Total Revenues
December 31, 2018
Interest and fees on loans held for investment
December 31, 2017
Interest and fees on loans held for investment
December 31, 2016
Interest and fees on loans held for investment
78.42%
77.35%
79.02%
7
PART I, continued
Item 1. Business, continued
Executive Officers of the Company
Mark C. Hanna, 50, has served as President/CEO of the Bank since July 1, 2018. Prior to that he served as President
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, 57, 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, 49, 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.
Stephanie E. Shillingburg, 57, 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.
Edward Strunk, 62, 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, 42, 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.
Barton E. Black, 48, has served as Executive Vice President and Chief Strategy & Risk Officer of the Bank and the
Company since March 1, 2019. Prior to joining the company, he served as Managing Director at Strategic Risk
Associates, a financial services consulting company based in Virginia from August 2012 through February 2019.
8
PART I, continued
Item 1A. Risk Factors, continued
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, foreclosures 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.
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.
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, 2018, approximately 77% 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 and dealer 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.
9
PART I, continued
Item 1A. Risk Factors, continued
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, 2018, we had approximately $98
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.
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 could be
required to pay higher insurance premiums to the FDIC, which would reduce our earnings.
10
PART I, continued
Item 1A. Risk Factors, continued
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 amended 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%; (iii) a total capital ratio of 8%; and (iv) a Tier 1
leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5% above the new regulatory
minimum capital ratios, which is phased in as of January 1, 2019 Including this buffer, we effectively are subject to
the following minimum ratios beginning January 1, 2019: (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%. 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.
While the recently passed Economic Growth Act requires that federal banking regulators establish a simplified
leverage capital framework for smaller banks, 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.
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 and other non-bank competitors.
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. In addition, credit unions have been able to increasingly expand their
membership definitions and, because they enjoy a favorable tax status, may be able to offer more attractive loan and
deposit pricing. To a limited extent, we compete with other providers of financial services, such as money market
mutual funds, brokerage firms, consumer finance companies, marketplace lenders and other financial technology
firms, 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.
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.
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.
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.
12
PART I, continued
Item 1A. Risk Factors, continued
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.
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 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, any of 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. For example,
a new accounting standard referred to as current expected credit loss, or CECL, will be effective for our fiscal year
beginning January 1, 2020, and will substantially change how we calculate our allowance for loan losses. To
implement the new standard, the Company will incur costs related to data collection and documentation, technology
and training. Although the Company is currently unable to reasonably estimate the impact of the new standard on its
financial statements, adoption of the new standard could necessitate, among other things, higher loan loss reserve
levels, and the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan
losses during the quarter in which the standard becomes effective. If the Company is required to materially increase
the level of the allowance for loan losses or incurs additional expenses to determine the appropriate level of the
allowance for loan losses, such changes could adversely affect the Company’s capital levels, financial condition and
results of operations.
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 and other firms to better serve customers and to reduce costs. The pace of technological changes
has increase in the “Fintech” environment, in which industry changing products and services are often introduced and
adopted including innovative ways that customers can make payments, access products, and manage accounts. 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, which could entail significant time,
resources and additional risk to develop or adopt, 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.
14
PART I, continued
Item 1A. Risk Factors, continued
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 resulted in a reduction in
our federal corporate tax rate from 35% to 21% beginning in 2018, which has had and is expected to continue 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. 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 2019, 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.
The Bank may be required to transition from the use of the London Interbank Offered Rate (“LIBOR”)
index in the future.
The Bank has certain variable-rate loans indexed to LIBOR to calculate the loan interest rate. The United Kingdom
Financial Conduct Authority, which regulates LIBOR, has announced that the continued availability of the LIBOR
on the current basis is not guaranteed after 2021. It is impossible to predict whether and to what extent banks will
continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR
may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may
become acceptable alternatives to LIBOR, and it is impossible to predict the effect of any such alternatives on the
value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, subordinated notes, or other securities
or financial arrangements. The implementation of a substitute index or indices for the calculation of interest rates
under the Bank’s loan agreements with borrowers or other financial arrangements may cause the Bank to incur
significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the
substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the
appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material
adverse effect on the Bank’s results of operations.
15
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, 2018.
Item 2. Properties
The locations of F & M Bank Corp. and its subsidiaries are shown below.
Corporate Offices 205 South Main Street Timberville, VA 22853
Timberville Branch 165 New Market Road 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
Edinburg Branch 120 South Main Street Edinburg, VA 22824
Woodstock Branch 161 South Main Street Woodstock, VA 22664
Crossroads Branch 80 Cross Keys Road Harrisonburg, VA 22801
Coffman’s Corner Branch 2030 Legacy Lane Harrisonburg, VA 22801
Luray Branch 700 East Main Street Luray, VA 22835
Myers Corner Branch 30 Gosnell Crossing Staunton, VA 24401
North Augusta Branch 2813 North Augusta Street Staunton, VA 22401
Craigsville Branch 125 W. Craig Street Craigsville, VA 24430
Grottoes Branch 200 Augusta Avenue Grottoes, VA 24441
Dealer Finance Division 4759 Spotswood Trail Penn Laird, VA 22846
F&M Mortgage offices are located at:
Harrisonburg Office 2040 Deyerle Avenue, Suite 107 Harrisonburg, VA 22801
Fishersville Office 19 Myers Corner Drive, Suite 105 Staunton, VA 24401
Woodstock Office 161 South Main Street Woodstock, VA 22664
VSTitle offices are located at:
Harrisonburg Office 410 Neff Avenue Harrisonburg, VA 22801
Fishersville Office 1707 Jefferson Highway Fishersville, VA 22939
Charlottesville Office 154 Hansen Rd., Suite 202-C Charlottesville, VA 22911
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. The
Woodstock office of F&M Mortgage is leased from F&M Bank. All office of VST are leased.
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.
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.
16
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 (dollars in thousands)
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. Any over-the-counter market quotations reflect iner-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. With
its inclusion on the OTCQX Markets, there are now several active market makers for FMBM stock.
Transfer Agent and Registrar
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
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, 2013, and the reinvestment of dividends.
Total Return Performance
F & M Bank Corp.
Russell 2000 Index
SNL Bank Index
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Period Ending
Index
F & M Bank Corp.
Russell 2000 Index
SNL Bank Index
12/31/13
100.00
100.00
100.00
12/31/14
109.35
104.89
111.79
12/31/15
131.74
100.26
113.69
12/31/16
156.15
121.63
143.65
12/31/17
204.67
139.44
169.64
12/31/18
191.92
124.09
140.98
17
PART II, continued
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities (dollars in thousands), continued
Recent Stock Prices and Dividends
Dividends to common shareholders totaled $3,890 and $2,972 in 2018 and 2017, respectively. In addition to regular
dividends totaling $1.00 per share, a special dividend of $.20 per share was paid in 2018 to mark the Bank’s 110th
anniversary. Preferred stock dividends were $413 and $415 in 2018 and 2017, respectively. Regular quarterly dividends
have been declared for at least 26 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 44.78% (including special dividend) in 2018, compared to 35.74% in 2017.
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
On October 20, 2016, the Company’s Board of Directors approved a plan to repurchase up to 150,000 shares of
common stock. Shares repurchased through the end of 2018 totaled 71,422 shares; of this amount, 49,448 were
repurchased in 2018 at an average price of $36.04 per share.
The number of common shareholders was approximately 2,083 as of March 4, 2019. 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.
2018
Stock Price Range
Quarter
Low
High
Per Share
Dividends
Declared
2017
Stock Price Range
Low
High
1st
2nd
3rd
4th
$ 33.00
34.50
36.00
30.00
$ 35.50 $ .45
.25
.25
.25
$ 1.20
40.00
38.50
36.00
Total
$ 26.50
27.50
29.20
30.02
$ 28.45
29.35
32.00
34.50
Per Share
Dividends
Declared
$ .22
.23
.24
.25
.94
$
18
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
2018
2017
2016
20156
20146
$ 36,708
4,832
31,876
2,930
28,946
8,770
(767)
26,744
10,205
1,110
(10)
$ 9,085
$ 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
$ 2.68
$ 2.53
1.20
26.84
$ 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
$ 780,253
638,799
55,910
21,844
591,325
40,116
40,218
91,911
3,238
3,596
1.19%
9.89%
4.65%
65.50%
44.78%
$ 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
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%
12.03%
.82%
1.31%
1.62%
.58%
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%
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. Noninterest expense excludes amortization of intangibles. Ratio for 2015 and 2014 reflects
reclassification of F&M Mortgage 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 for 2015 and 2016 does not reflect the reclassification of F&M Mortgage to report gross income/expense
rather than net
19
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands)
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. 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.
20
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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 property securing the loan 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 loans and lines of credit. 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.
21
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary F&M
Mortgage. These loans are funded by F&M Mortgage 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 2018, the division had total loans outstanding of $98 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 “Contingencies”, which requires that losses be accrued
when they are probable of occurring and estimable and (ii) ASC 310, “Receivables”, which requires that losses be
accrued based on the differences between the value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance. 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 dealer loan portfolio; the findings of
internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviewer.
These factors, as well as historical losses and current economic and business conditions, are used in developing
estimated loss factors used in the calculations.
22
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), continued
Allowance for Loan Losses, continued
Allowances for loan losses 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 at January 1, 2002. As of December
31, 2008, the Company recognized $31 in additional goodwill related to the purchase of 70% ownership in VBS
Mortgage. In 2017, the Company recognized $211 in goodwill and $285 in intangibles related to the purchase of
VST. The intangibles related to the VST purchase are amortized over periods up to 15 years with $53 recorded in
2018. In 2018, the Company recognized $3 in goodwill and $72 in intangibles related to the purchase of a small title
company by VST. The intangible asset related to the purchase are amortized over 10 years.
The goodwill is not amortized but is tested for impairment at least annually. Based on this testing, there were no
impairment charges for 2018, 2017 or 2016.
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 opportunities 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.
23
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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 benefit 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.
24
PART II, continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), continued
Overview
The Company’s net income for 2018 totaled $9,085 or $2.68 per common share basic, an increase of 83% from $9,010
or $2.63 a share in 2017. Return on average equity decreased in 2018 to 9.89% versus 10.01% in 2017, and the return on
average assets decreased from 1.21% in 2017 to 1.19% in 2018.
Reference the five-year summary of selected financial data.
Changes in Net Income per Common Share (Basic)
Prior Year Net Income Per Common Share (Basic)
$ 2.63 $ 2.77
2018
to 2017
2017
to 2016
Change from differences in:
Net interest income
Provision for loan losses
Noninterest income, excluding securities gains
Security gains (losses), net
Noninterest expenses
Income taxes
Effect of preferred stock dividend
Change in average shares outstanding
Total Change
Net Income Per Common Share (Basic)
Net Interest Income
.52
(.90)
.03
.01
(.63)
.99
.00
.03
.05
$ 2.68 $ 2.63
.52
-
1.36
(.01)
(1.66)
(.38)
.02
.01
(.14)
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 5.56% from 2017 to 2018 following an increase of 5.77% from 2016 to 2017. 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 2018 was $31,957 representing an increase of $1,615 or 5.32%
over the prior year. A 5.78% increase in 2017 versus 2016 resulted in total tax equivalent net interest income of $30,342.
In this discussion and in the tabular analysis of net interest income performance, entitled “Consolidated Average
Balances, Yields and Rates,”, 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 following table.
Tax equivalent income on earning assets increased $2,550 in 2018 compared to 2017. Loans held for investment,
expressed as a percentage of total earning assets, increased in 2018 to 92.72% as compared to 90.29% in 2017. During
2018, yields on earning assets increased 23 basis points (BP), primarily due to rate increases during 2018 specifically in
real estate loans, investments and federal funds sold. The average cost of interest bearing liabilities increased 19BP in
2018, following an increase of 6BP in 2017. The increase in 2018 is due to increased cost of deposits and debt as rates
increased.
25
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans
Total Tax Benefit on Tax-Exempt Interest Income
Tax-Equivalent Net Interest Income
Interest Income
2018
2017
2016
$ 36,129
579
3,425
1,407
31,876
$ 33,591 $ 31,740
410
504
2,380
2,688
1,219
1,209
28,551
30,198
81
81
$ 31,957
144
132
132
144
$ 30,342 $ 28,683
Tax equivalent interest income increased $2,550 or 7.45% in 2018, after increasing 6.06% or $1,957 in 2017. Overall,
the yield on earning assets increased .23%, from 5.12% to 5.35%. Average loans held for investment grew during 2018,
with average loans outstanding increasing $33,217 to $637,478. Average real estate loans increased 4.04%, commercial
loans increased 2.93% and consumer installment loans increased 15.97% 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 due to the growth in the loan portfolio, with commercial loans contributing the most interest
income growth and rate increases experienced during the year.
Interest Expense
Interest expense increased $935 or 23.99% during 2018, which followed a 8.28% increase or $298 in 2017. The average
cost of funds of 1.02% increased 19BP compared to 2017, which followed an increase of 6BP in 2017 compared to 2016.
Average interest bearing liabilities increased $7,577 or 1.62% in 2018 following a relatively flat 2017. Changes in the
cost of funds attributable to rate and volume variances are in a following table.
The analysis on the next page reveals an increase in the net interest margin to 4.65% in 2018 from 4.53% in 2017,
primarily due to changes in balance sheet leverage and increased interest rates during the year.
26
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands),
Continued
Consolidated Average Balances, Yields and Rates1
Balance
2018
Interest
Rate
Balance
2017
Interest
Rate
Balance
2016
Interest
Rate
ASSETS
Loans2
Commercial
Real estate
Consumer
Loans held for investment4
Loans held for sale
Investment securities3
Fully taxable
Partially taxable
$ 187,999 $ 9,754
5.19% $ 176,389
312,435
105,288 7,425 7.05% 90,787 _ 6,470 7.13% 78,524
5.19% $ 182,646 $ 9,475
330,828
16,678 5.04%
17,967 5.22%
344,191
$ 8,362
4.74%
15,781 5.05%
5,805 7.39%
637,478
29,971
35,146
1,064
5.52%
3.48%
604,261
37,008
32,623
1,112
5.40%
3.00%
567,348
68,438
29,948
1,924
5.28%
2.81%
13,702
10,886
124 2 1.61% 125
457 3.34%
338 3.10%
- -
15,714
125
372 2.37%
- -
Total investment securities
13,826
459
3.32%
11,011
338
3.07%
15,839
372
2.37%
Interest bearing deposits in banks
Federal funds sold
Total Earning Assets
924
1.62% 1,512
15
5,364 105 1.96% 15,475
687,563 36,789 5.35% 669,267
10
.66%
727
156 1.01% 7,195
5.12% 659,547
34,239
Allowance for loan losses
Nonearning assets
Total Assets
(6,416)
82,732
$ 763,879
(6,793)
81,552
$ 744,026
(8,162)
63,205
$ 714,590
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand –interest bearing
Savings
Time deposits
$ 128,086 $ 814 .64% $ 121,095 $ 538 .44% $ 113,525
516
100,298
1,634 1.02% 160,221
114,489
161,635 2,067 1.28% 159,415
121,711 544
.45%
.45%
3
.41%
35 .49%
4.89%
32,282
$ 499 .44%
441
.44%
1,440 .90%
Total interest bearing deposits
411,432
3,425 .83%
394,999
2,688 .68%
374,044
2,380
.64%
Short-term debt
Long-term debt
24,336
20,398
456
40,210 951 2.37% 53,004
1.87%
63
37,716
1,146 2.16% 56,253
.31%
55
.15%
1,164 2.07%
Total interest bearing liabilities
475,978 4,832 1.02% 468,401
3,897 .83% 468,013
3,599 .77%
Noninterest bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
161,860
34,138
671,976
91,903
153,640
31,936
653,977
90,049
141,180
19,824
629,017
85,572
Total liabilities and stockholders’ equity
$ 763,879
$ 744,026
$ 714,590
Net interest earnings
$ 31,957
$ 30,342
$ 28,683
Net yield on interest earning assets (NIM)
4.65%
4.53%
4.34%
Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate of 21% in 2018 and 34% in 2017 and 2016.
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.
27
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
The following table illustrates the effect of changes in volumes and rates.
2018 Compared to 2017
Increase (Decrease)
2017 Compared to 2016
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
$ 1,794
(211)
87
-
729
163
32
-
2,523 $ 1,949 $ 726
72
(884)
(48)
$ 2,675
(812)
119
-
(114)
-
80
-
(34)
-
Interest bearing deposits in banks
Federal funds sold
Total Interest Income
(4)
(102)
1,564
9
51
984
5
(51)
2,548
3
40
994
4
81
963
7
121
1,957
Interest expense
Deposits
Demand - interest bearing
Savings
Time deposits
Short-term debt
Long-term debt
Total Interest Expense
Net Interest Income
31
32
251
245
(4)
182
276
28
433
33
62
(7)
6
13
201
39
75
194
12
(276)
50
1,514
393
381
81
(195)
885 935
99
(25)
(67)
(4)
1,613 $ 998
33
8
49
(18)
298
302
$ 661 $ 1,659
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.
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, F&M Mortgage’s income was reclassified to report gross income and gross expenses in the
appropriate income statement categories rather than netting in noninterest income, the 2016 income statements were
reclassified to be comparative.
Noninterest income, exclusive of security gains or losses and FHLB prepayment gain, increased 8.88% or $715, in 2018,
following an increase of 27.59% in 2017. In 2017, the Company recognized a FHLB prepayment gain of $504 which
was recorded in noninterest income. The 2018 increase is due to growth in the gross revenue of VST Title, F & M
Financial services and F&M Mortgage and service charges on deposit accounts. The losses on low income housing
projects increased of 22.72% in 2018, an amount that is more consistent with our historical average, after a decrease of
14.5% for 2017 due to recognition of $162,000 in gains related to a fund that was dissolved.
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. There were no other security transactions in 2018, 2017 or 2016 which resulted in a
gain or loss.
28
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Noninterest Expense
Noninterest expenses increased from $24,719 in 2017 to $26,744 in 2018, a 8.19% increase. Salary and benefits
increased 10.65% to $16,436 in 2018 following an increase of 16.05% in 2017. This increase was the result of normal
salary increases, additions to executive staff, overlapping positions during CEO transition and increasing benefit costs
(specifically pension expense). Occupancy and Equipment expenses increased $289 or 15.45% due to the growth in
our branch network following an increase of 16.72% in 2017. All other operating expenses increased $154 in 2018,
following a $1,125 increase in 2017. Total noninterest expense as a percentage of average assets totaled 3.50%, 3.32%,
and 2.98%, in 2018, 2017 and 2016, respectively. With the growth in branches and executive position changes 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 2.81%, 2.80% and 2.84% 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 and third-party 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 totaled $2,930 compared
to $0 for 2017 and 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 nonperforming loans compared to the prior year end. However due
to collection efforts in the fourth quarter nonperforming loans decreased verses second and third quarter 2018. Exclusive
of nonaccrual loans, past due loans and adversely risk rated loans decreased during 2018. The decline in past due loans
and adversely risk rated loans reduced the allowance for loan losses. The allowance was also reduced due to improved
real estate conditions. 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
Net loan charge-offs were $3,734 in 2018 and $1,499 in 2017. The increase in charge-offs is primarily related to one
large commercial relationship ($4.3 million) that was written down from $5.8 million based on the current impaired
value of the collateral. The relationship remains on nonaccrual and is included in impaired loans without a specific
reserve. At this time, management expects no additional loss on this relationship, but continue to monitor it closely.
Net charge-offs as a percentage of loans held for investment totaled .58% and .24% in 2018 and 2017, respectively.
The commercial real estate charge-off percentage is the largest category at .24% of loans held for investment and
dealer finance was .19%. As stated in the most recently available Uniform Bank Performance Report (UPBR), peer
group loss averages were .08% in 2018 and .10% in 2017. 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 3.58% during the year to $780,253, an increase of $26,983 from $753,270 in 2017. Loans held
for investment grew $21,825, Loans held for sale increased $16,135, premises and equipment increased $1,872, Bank
owned life insurance increased $5,514, investments decreased $19,399, and other asset categories experienced modest
fluctuations. Average earning assets increased 2.73% or $18,296 to $687,563 at December 31, 2018. 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 and federal funds sold. Deposits grew $22,148 and other liabilities
increased $4,199 in 2018. Average interest bearing deposits increased $16,433 for 2018 or 4.16%, with increases in
interest-bearing demand accounts, savings accounts and time deposits. The Company continues to utilize its assets
well, with 90.01% of average assets consisting of earning assets.
29
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Investment Securities
Total securities decreased $19,399 or 47.04% in 2018 to $21,844 at December 31, 2018 from $41,243 at December 31,
2017. Average balances in investment securities increased 25.57% in 2018 to $13,826. At year end, 2.01% 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 3.32% for 2018, up from 3.07%
in 2017.
There were no Other Than Temporary Impairments (OTTI) write-downs in 2018, 2017 or 2016. In 2017, the Company
recognized a $42 loss on exit of the Banker’s Title investment; there were no security gains or losses in 2018, 2017 or
2016.
The composition of securities at December 31 was:
2018
2017
2016
(Dollars in thousands)
Available for Sale1
U.S. Treasury and Agency
Mortgage-backed obligations of federal
agencies2
Equity securities3
Total
Held to Maturity
U.S. Treasury and Agency
Total
$ 7,886
403
$ 27,978
502
$ 24,014
634
-
8,289
135
28,615
135
24,783
123
123
125
125
125
125
Other Equity Investments
Total Securities
14,567
12,503
13,432
$ 21,844 $ 41,243 $ 39,475
1
2
3
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.
Transferred to other equity investments on January 1, 2018 upon adoption of ASU 2016-01.
Maturities and weighted average yields of securities at December 31, 2018 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
Total
Debt Securities Held to
Maturity
$ -
$ 7,886
2.06%
$ -
403
2.44%
$ -
-
$ 7,886
403
2.06%
2.44%
$ -
$ 7,886
2.06% $ 403
2.44%
$ -
$ 8,289
2.08%
U.S. Treasury & Agency
Total
$ -
$ -
$ 123
$ 123
1.61%
1.61%
$ -
$ -
$ -
$ -
$ 123
$ 123
1.61%
1.61%
30
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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 $638,799 at December 31, 2018 compared with $616,974
at December 31, 2017. 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 .16% during 2018 to $210,058. Real estate
mortgages increased $5,623 or 2.24%. Growth has included a variety of loan and collateral types including owner
occupied residential real estate and residential rental properties. Construction loans decreased $9,961 or 13.91%. 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 loans increased $25,790 or 31.66%. 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 $97,523. Credit card balances increased
$245 to $3,184 but are a minor component of the loan portfolio. The following table presents the changes in the loan
portfolio over the previous five years categorized in business segments, rather than regulatory call report as in footnote.
(Dollars in thousands)
2018
2017
December 31
2016
2015
2014
Real estate – mortgage
Real estate – construction
Consumer
Commercial
Agricultural
Multi-family residential
Credit cards
Other
Total Loans
$ 256,514
61,659
107,248
179,476
20,917
9,665
3,184
136
$ 638,799
$ 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
The following table shows the Company’s loan maturity and interest rate sensitivity as of December 31, 2018:
(Dollars in thousands)
Commercial and
agricultural loans
Multi-family residential
Real Estate – mortgage
Real Estate – construction
Consumer – dealer/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
$ 65,783
1,305
97,762
38,028
$ 105,487 $ 29,123 $ 200,393
9,665
256,514
61,659
110,568
$ 211,014 $ 363,074 $ 64,711 $ 638,799
-
4,328
9,521
21,739
8,360
154,424
14,110
80,693
8,136
$ 22,554 $ 92,432 $ 44,926 $ 159,912
188,460
478,887
$ 211,014 $ 363,074 $ 64,711 $ 638,799
270,642
19,785
31
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Analysis of Loan Portfolio, continued
Residential real estate loans are made for a period up to 30 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 77% 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 2016 and 2017, with more than moderate improvement experienced in 2018 with increases in sales
prices, reduction in inventory and reduction in days on the market. 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 of 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, 2018, 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 still accruing. Nonaccrual loans
are loans on which interest accruals have been suspended or discontinued permanently. The Company would have
earned approximately $333 in additional interest income in 2018 had the loans on nonaccrual status been current and
performing. Nonperforming loans totaled $10,205 at December 31, 2018 compared to $7,102 at December 31, 2017.
At December 31, 2018, there were $800 of loans 90 days or more past due and accruing. Nonperforming loans have
increased approximately $3,103 since December 31, 2017. Of the increase, $4.3 million relates to one relationship
that has been reviewed for impairment and a previously established specific reserve of $1.5 million was charged-off
in the fourth quarter of 2018. This charge-off is the primary reason for the increase in net charge-offs in 2018
compared to 2017 and is also the primary reason for the decline in the allowance coverage ratio for nonperforming
loans. Several problem loans were resolved just prior to year end.
Approximately 97% of these nonperforming loans are secured by real estate and were in the process of collection.
The Bank believes that it is generally well secured and continues to actively work with its customers to effect payment.
As of December 31, 2018, the Company holds $2,443 of real estate which was acquired through foreclosure.
32
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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
2018
2017
2016
2015
2014
$ 3,804 $ 5,628 $ 4,204 $ 5,698 $ 5,481
5,172
269
160
726
-
63
599
451
226
143
-
-
70
311
178
81
-
-
109
40
108
272
25
107
1,179
153
161
0
0
0
11
55
26
67
1
Total Nonperforming loans
$ 10,205 $ 7,102 $ 4,870 $ 6,526 $ 6,975
Restructured Loans current and performing:
Real Estate
Commercial
Home Equity
Other
6,574
7,710
8,641
8,713
3,913
1,249
-
205
-
-
78
1,121
-
76
1,463 518
1,414
91
290
22
Nonperforming loans as a percentage of loans held for investment
1.60%
1.15%
.82%
1.20%
1.35%
Net Charge Offs to Total Loans Held for Investment
.58%
.24%
.21%
.04%
.33%
Allowance for loan and lease losses to nonperforming loans
51.34%
85.10% 154.89% 134.55% 125.09%
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, 2018, 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.
33
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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 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.
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 reviews the allowance for loan loss calculation and approves the loan loss provision for each quarter
based on this evaluation.
The allowance for loan losses of $5,240 at December 31, 2018 is equal to .82% of total loans held for investment.
This compares to an allowance of $6,044 or .98% at December 31, 2017 and 1.27% at December 31, 2016. The
charge-off of $1.5 million previously mentioned resulted in a decline in our allowance percentage of approximately
22%. If this amount had remained in our allowance at December 31, 2018 our allowance to total loan percentage
would have been approximately 1.06%. Management believes the charge-off was proper and prudent given valuation
of the collateral confirmed the loss and the loan was collateral dependent. 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. All 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. In 2018, the company
experienced little change in historical charge-off rates with 2018 replacing 2013 in the five-year look back. The local
economy and real estate market continued showing improvement, as did local unemployment. Declines in past due
loans and adversely risk rated loans also resulted in a decrease in the allowance for loan losses. 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 $3,735 in 2018 which is equivalent to .58% 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.
34
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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)
2018
2017
2016
2015
2014
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 held for investment
$ 6,044
2,930
$ 7,543
-
$ 8,781
-
$ 8,725
300
$ 8,184
2,250
489
-
99
-
1,546
3
-
573
51
2,083
76
4,920
122
-
12
-
1
4
8
91
41
861
46
1,186
(3,734)
$ 5,240
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
.82%
.98%
1.27%
1.61%
1.68%
Net loan losses to loans held for investment
.58%
.24%
.21%
.04%
.33%
35
Construction/Land
Development
Real Estate
Commercial,
Financial and
Agricultural
Dealer Finance
Consumer
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2018
2017
2016
2015
2014
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
$ 2,094
39.97% $ 2,547
42.14% $ 3,381
44.82% $ 4,442
50.59% $ 4,738
54.30%
292
633
5.56%
719
11.90%
843
11.18%
806
9.18%
623
7.14%
12.08%
863
14.28%
1,348
17.88%
1,666
18.97%
1,337
15.33%
4.00%
3.92%
1,974
37.67%
1,440
23.83%
1,289
17.09%
836
108
2.06%
200
3.31%
136
1.80%
223
9.52%
2.54%
349
1,336
15.31%
Home Equity
139
2.66%
275
4.55%
545
7.22%
808
9.20%
342
Total
$ 5,240
100.00% $ 6,044
100.00% $ 7,543
100.00% $ 8,781
100.00% $ 8,725
100.00%
Loan Losses and the Allowance for Loan Losses, continued
Deposits and Borrowings
The average deposit balances and average rates paid for 2018, 2017 and 2016 were as follows:
Average Deposits and Rates Paid (Dollars in thousands)
2018
December 31,
2017
2016
Average
Balance
Rate
Average
Balance
Rate
Average
Balance
Rate
Noninterest-bearing
$ 161,860
$ 153,640
$ 141,180
Interest-bearing:
Interest Checking
Savings Accounts
Time Deposits
Total interest-bearing deposits
Total deposits
$ 128,086
121,711
161,635
411,432
573,292
.64%
.45%
1.28%
.83%
.60%
$ 121,095
114,489
159,415
394,999
$ 548,639
.44%
.45%
1.03%
.68%
.49%
$ 113,525
100,298
160,221
374,044
$ 515,224
.44%
.44%
.90%
.64%
.46%
Average noninterest-bearing demand deposits, which are comprised of checking accounts, increased $8,220 or 5.35%
from $153,640 during 2017 to $161,860 during 2018. Average interest-bearing deposits, which include interest
checking accounts, money market accounts, regular savings accounts and time deposits, increased $16,433 or 4.16%
from $394,999 at December 31, 2017 to $411,432 at December 31, 2018. Total average interest checking (including
money market) account balances increased $6,991 or 5.77% from $121,095 at December 31, 2017 to $128,086 at
December 31, 2018. Total average savings account balances increased $7,222 or 6.31% from $114,489 at
December 31, 2017 to $121,711 at December 31, 2018.
Average time deposits increased $2,220 or 1.39% from $159,415 at December 31, 2017 to $161,635 at December 31,
2018.
36
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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
2018
2017
$ 1,885
5,838
9,262
34,667
$ 4,392
7,212
11,410
37,606
$ 51,652
$ 60,620
Non-deposit borrowings include federal funds purchased, Federal Home Loan Bank (FHLB) borrowings, (both short
term and long term), a note to purchase real estate and VST debt. Non-deposit borrowings are an important source of
funding for the Bank. These sources assist in managing short and long-term funding needs, often at rates that are more
favorable than raising additional funds within the deposit portfolio.
Borrowings from the 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 had no additional long-term borrowings in 2018 or 2017 and $20,000 in 2016. Repayment of amortizing
and fixed maturity loans through FHLB totaled $9,515 during 2018. These long-term loans carry an average rate of
1.96% at December 31, 2018.
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, 2018
Federal funds purchased
FHLB Short term advances
FHLB long term advances and other debt
Total
$ 10,116
30,000
7,014
-
20,365
$ 47,130 $ 20,365
$ - $ -
-
9,714
$ - $ 10,116
30,000
-
40,218
3,125
$ 9,714 $ 3,125 $ 80,334
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.
37
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Deposits and Borrowings, continued
Stockholders’ Equity
Total stockholders' equity increased $636 or .70% in 2018. Net income totaled $9,085, net of noncontrolling interest of
$10, issuance of common stock totaled $266, pension adjustment of $247. Capital was reduced by common and preferred
dividends totaling $4,303, decreases in other comprehensive income of $74 related to unrealized losses on available for
sale securities, repurchases of common stock of $1,782, repurchase of preferred stock $2,788 and minority interest
distributions of $25. As of December 31, 2018, book value per common share was $26.84 compared to $25.73 as of
December 31, 2017. Dividends are paid to stockholders on a quarterly basis in uniform amounts unless unexpected
fluctuations in net income indicate a change to this policy is needed.
Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The
rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity's investments, the
more capital it is required to maintain. The Bank is required to maintain these minimum capital levels. Beginning in
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, 2018, the Bank had Common Equity Tier I capital of 13.65%, Tier I capital
of 13.65% of risk weighted assets and combined Tier I and II capital of 14.44% of risk weighted assets. 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, 2018, the Bank reported a leverage ratio of 11.79%. The Bank's leverage ratio was also
substantially above the minimum. The Bank also reported a capital conservation buffer of 6.44% at December 31,
2018. The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic
cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in
order to avoid restrictions on capital distributions and other payments. The capital conservations buffer was fully
phased in on January 1, 2019 at 2.5%.
38
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), 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 .12% in 2018 following an increase of .19% in 2017. This increase is due to increases in interest
rates in 2018, loan growth and the growth in noninterest bearing deposits to support loan growth. In December 2018, the
Federal Open Market Committee elected to raise the short-term rates target .25% to 2.25 to 2.50% 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 $25,460 for 2018. 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, 2018. 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 11.39% of total earning assets, compared to 21.36% in 2017. Approximately 38.09% of rate
sensitive assets and 36.55% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less
than one year) decreased $36,646 during the year, while total earning assets increased $17,737. The increase is attributed
to growth in loans held for sale of $16,135. Growth in the loans held for investment portfolio was concentrated in real
estate secured loans, commercial and the Dealer Finance division. Short term deposits increased $17,485 and short term
borrowings increased $12,320. Increases are due to growth in core deposits from a money market special and growth in
short term borrowings to support the loans held for sale program. Management has raised deposit rates during to 2018
to spur deposit growth.
39
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Market Risk Management, continued
The following GAP analysis shows the time frames as of December 31, 2018, 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
$ 126,131
55,910
-
-
3,184
1,390
$ 81,699 $ 363,074 $ 64,711
-
-
-
-
-
-
-
8,009
-
-
-
-
403
-
-
$ - $ 635,615
55,910
-
-
-
8,412
-
-
3,184
- 1,390
Total
186,615
81,699
371,083
65,114
-
704,511
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
- 55,559
- 22,366
15,290
28,799
7,181
11,730
92,471
67,096
30,895
61,971
18,456
22,365
-
-
-
166,486
- 111,827
53,366
-
102,500
-
18,911
122,014
252,433
40,821
-
434,179
40,116
1,107
-
-
-
5,907
30,079
3,125
40,116
-
- 40,218
60,134
126,481
127,921
(46,222)
282,512
88,571
43,946
21,168
-
-
514,513
189,998
Cumulative Gap
As a % of Earning Assets
126,481
17.95%
80,259
11.39%
168,830
23.96%
189,998
26.97%
189,998
26.97%
•
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.
40
PART II, Continued
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in
thousands), Continued
Quarterly Results (unaudited)
The table below lists the Company’s quarterly performance for the years ended December 31, 2018 and 2017:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net Income after Provision for loan losses
Non Interest income
Non Interest expense
Income before taxes
Income tax expense
Noncontrolling interest (income) expense
Net Income
Preferred dividend
Net Income available to common
2018
Fourth
Third
Second
First
Total
$ 9,675 $ 9,328 $ 18,962 $ 8,743 $ 36,708
1,434
1,304
1,115
979
4,832
8,241
8,024
7,847
7,764
31,876
450
450
1,350
680
2,930
7,791
7,574
6,497
7,084
28,946
2,124
2,147
1,999
1,733
8,003
6,665
6,969
6,633
6,477
26,744
3,250
2,752
1,863
2,340
10,205
320
252
159
379
1,110
(20)
15
(16)
11
(10)
2,910
2,515
1,688
1,972
9,085
103
103
104
103
413
$ 2,807 $ 2,412 $ 1,584 $ 1,869 $ 8,672
Net Income Per Average Common Share Basic
$ 0.87 $ 0.75 $ 0.49
$ 0.57 $ 2.68
Fourth
Third
Second
First
Total
2017
Interest and dividend income
$ 9,141
$ 8,688
$ 8,256
$ 8,010
$ 34,095
Interest expense
Net interest income
Provision for loan losses
1,036
1,030
925
906
3,897
8,105
7,658
7,331
7,104
30,198
- - - - -
Net Income after Provision for loan losses
8,105
7,658
7,331
7,104
30,198
Non Interest income
Non Interest expense
Income before taxes
Income tax expense
1,820
2,145
1,882
2,045
7,892
6,489
6,259
6,017
5,954
24,719
3,436
3,544
3,196
3,195
13,371
1,698
946
809
877
4,330
Noncontrolling interest (income) expense
49
(48)
(59)
27
(31)
Net Income
Preferred dividend
1,787
2,550
2,328
2,345
9,010
103
103
105
104
415
Net Income available to common
$ 1,684
$ 2,447
$ 2,223
$ 2,241
$ 8,595
Net Income Per Average Common Share Basic
$ 0.52
$ 0.75
$ 0.68
$ 0.68
$ 2.63
Note that fourth quarter 2017 includes the one time deferred tax asset write down due to the Tax Cuts and Jobs Act.
41
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, 2018 and 2017:
Rate Shift (bp)
Net Income
Net Interest Income
Net Interest Margin
2018
2017
2018
2017
2018
2017
300
200
100
(-)100
(-)200
15,842
16,084
39,418
38,622
5.62%
5.71%
14,610
14,832
38,044
36,904
5.43%
5.46%
13,125
13,414
36,389
34,959
5.20%
5.18%
9,482
12,291
32,326
33,418
4.64%
4.96%
7,618
11,999
30,249
33,017
4.34%
4.90%
See accompanying Notes to the Consolidated Financial Statements.
42
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, 2018 and 2017
2018
2017
Assets
Cash and due from banks
Money market funds
Federal funds sold
Cash and cash equivalents
Securities:
Held to maturity, at amortized cost - fair value of $123 and $125 in 2018 and
2017, respectively
Available for sale, at fair value
Other investments
Loans held for sale
Loans held for investment
Less: allowance for loan losses
Net loans held for investment
Other real estate owned, net
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
Stockholders’ Equity
Preferred Stock $25 par value, 400,000 shares authorized, 249,860 and 324,150 shares
issued and outstanding at December 31, 2018 and 2017, respectively
Common stock $5 par value, 6,000,000 shares authorized, 3,213,132 and 3,255,036
shares issued and outstanding at December 31, 2018 and 2017, 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
See accompanying Notes to the Consolidated Financial Statements.
43
$ 9,522 $ 10,622
1,285
- -
11,907
10,912
1,390
123
125
8,289
13,432
55,910
638,799
(5,240)
633,559
28,615
12,503
39,775
616,974
(6,044)
610,930
1,984
2,443
15,894
17,766
2,007
2,078
2,881
2,884
13,950
19,464
13,393
12,699
$ 780,253 $ 753,270
$ 157,146 $ 162,233
406,944
434,179
569,177
591,325
40,116
16,683
40,218
688,342
25,296
17,789
49,733
661,995
-
-
5,672
7,529
16,275
16,066
10,225
7,987
60,814
65,596
574
559
(4,142)
(3,969)
91,911
91,275
$ 780,253 $ 753,270
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Income (dollars in thousands, except per share data)
For the years ended 2018, 2017 and 2016
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
Interest Expense
Total interest on deposits
Interest from short-term debt
Interest from long-term debt
Total interest expense
Net Interest Income
2018
2017
2016
$ 35,065
1,064
120
459
36,708
$ 32,479
1,112
166
338
34,095
$ 29,816
1,924
38
372
32,150
3,425
456
951
4,832
31,876
2,688
63
1,146
3,897
30,198
2,380
55
1,164
3,599
28,551
Provision for Loan Losses
Net Interest Income After Provision for Loan Losses
2,930
28,946
-
30,198
-
28,551
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
Noninterest Expenses
Salaries
Employee benefits
Occupancy expense
Equipment expense
FDIC insurance assessment
Other real estate owned, net
Director’s fees
Data processing expense
Advertising expense
Legal and professional expense
Bank Franchise tax
Other operating expenses
Total noninterest expenses
Income before income taxes
Income Tax Expense
Net Income
1,496
4,505
2,242
527
-
-
(767)
8,003
1,360
4,137
2,109
449
504
(42)
(625)
7,892
1,174
3,006
1,657
476
-
-
(731)
5,582
12,622
3,714
1,116
1,044
294
(31)
468
2,197
622
597
522
3,579
26,744
11,482
3,372
1,035
836
190
76
517
2,176
509
356
657
9,986
2,814
868
735
388
86
486
2,151
604
400
651
3,513
24,719
2,103
21,272
10,205
13,371
12,861
1,110
9,095
4,330
9,041
3,099
9,762
Net Income attributable to noncontrolling interests
Net Income attributable to F & M Bank Corp.
(10)
(194)
(31)
9,085 $ 9,010 $ 9,568
Dividends paid/accumulated on preferred stock
Net income available to common stockholders
413
$ 8,672
415
$ 8,595
487
$ 9,081
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
$ 2.68 $ 2.63 $ 2.77
$ 2.53 $ 2.48 $ 2.57
$ 1.20 $ .94 $ .80
3,282,335
3,716,591
3,238,177
3,596,017
3,269,713
3,631,984
See accompanying Notes to the Consolidated Financial Statements.
44
F & M BANK CORP.
Consolidated Statements of Comprehensive Income (dollars in thousands)
For the years ended 2018, 2017 and 2016
Years Ended December 31,
2017
2018
2016
Net Income
$ 9,095 $ 9,041 $ 9,762
Other comprehensive income (loss):
Pension plan adjustment
Tax effect
Pension plan adjustment, net of tax
Unrealized holding gains (losses)
on available-for-sale securities
Tax effect
Unrealized holding gains (losses), net of tax
Total other comprehensive income (loss)
Total comprehensive income
Comprehensive income attributable to noncontrolling
interests
313
(66)
247
(414)
141
(273)
(738)
251
(487)
(94)
20
(74)
173
3
(34)
(1)
12
2
(22)
(485)
(295)
$ 9,268 $ 8,746 $ 9,277
$ (10)
$ (31)
$ (194)
Comprehensive income attributable to F&M Bank Corp.
$ 9,258 $ 8,715 $ 9,083
See accompanying Notes to the Consolidated Financial Statements.
45
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, 2018, 2017 and 2016
Preferred
Common
Stock
Stock
Additional
Paid in
Capital
Retained
Noncontrolling Comprehensive
Earnings
Interest
Loss
Total
Accumulated
Other
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)
$ 9,425
$ 16,427
-
$ 11,149
-
-
-
-
-
-
-
-
-
-
(112)
37
-
(466)
146
(145)
-
-
-
-
-
-
$ 48,056
$ 573
$ (2,680)
$ 82,950
9,568
-
-
(487)
(2,628)
-
-
194
-
(74)
-
-
-
-
-
9,762
(485)
(485)
-
-
-
-
-
(74)
(487)
(2,628)
(578)
183
-
-
-
(1,961)
Preferred stock repurchased (72,650 shares)
(1,816)
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
-
-
-
-
-
-
-
-
-
-
-
(110)
33
-
-
(602)
164
(21)
-
9,010
-
-
(415)
(2,972)
-
-
31
-
(150)
-
-
-
-
-
(295)
-
-
-
-
-
9,041
(295)
(150)
(415)
(2,972)
(712)
197
-
682
-
-
-
(682)
(101)
-
Balance, December 31, 2017
Net Income
Other comprehensive income
Distributions to noncontrolling interest
Dividends on preferred stock ($1.28 per share)
Dividends on common stock ($1.20 per share)
Common stock repurchased (49,446 shares)
Common stock issued (7,542 shares)
$ 7,529
-
-
-
-
-
-
-
Preferred stock repurchased (74,290 shares)
1,857)
$ 16,275
$ 10,225
$ 60,814
$ 574
$ (4,142)
$ 91,275
-
-
-
-
-
-
-
-
-
-
(247)
38
(1,535)
228
-
(931)
9,085
-
-
(413)
(3,890)
-
-
10
-
(25)
-
-
-
-
-
173
-
-
-
-
-
9,095
173
(25)
(413)
(3,890)
(1,782)
266
-
-
-
(2,788)
Balance, December 31, 2018
$ 5,672
$ 16,066
$ 7,987
$ 65,596
$ 559
$ (3,969)
$ 91,911
See accompanying Notes to the Consolidated Financial Statements.
46
F & M Bank Corp. and Subsidiaries
Consolidated Statements of Cash Flows (dollars in thousands)
For the years ended December 31, 2018, 2017 and 2016
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
Benefit (expense) for deferred taxes
(Increase) in interest receivable
(Increase) in other assets
(Decrease) increase in accrued liabilities
Amortization of limited partnership investments
Gain on sale of fixed assets
Loss on sale of investments
(Gain) loss on sale and valuation adjustments of other real estate
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 (increase) decrease in loans held for sale participations
Net purchase of property and equipment
Purchase of bank owned life insurance
Purchase of title company
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
Distributions to non-controlling interest
Proceeds from issuance of common stock
Repurchase of preferred stock
Repurchase of common stock
Repayments of long-term debt
Net Cash Provided by (used in) Financing Activities
2018
2017
2016
$ 9,095
$ 9,041
$ 9,762
1,137
66
2
94,129
(2,222)
(91,806)
2,930
55
(71)
(772)
(797)
767
(9)
-
(94)
(527)
11,883
21,897
-
(3,361)
-
(26,065)
(16,236)
(3,000)
(5,000)
(75)
141
(31,699)
22,148
14,820
(4,303)
-
(25)
266
(2,788)
(1,782)
(9,515)
18,821
930
53
-
84,698
(2,331)
(85,828)
-
(222)
(222)
(1,025)
1,498
625
-
42
44
(449)
6,854
86,741
55
(89,428)
(2)
(27, 068)
26 421
(6,484)
-
(549)
827
-
109
103,784
(2,778)
(97,451)
-
9
(76)
(564)
1,690
731
-
-
19
(476)
15,586
32,218
-
(47,137)
(24)
(49,386)
(8,483)
(3,553)
-
281
( 10,033)
623
(75,742)
32,092
(14,704)
(3,387)
-
(150)
197
(712)
(101)
(14,504)
(1,269)
42,415
15,046
(3,115)
20,000
(74)
183
(1,961)
(578)
(3,924)
67,992
Net (Decrease) Increase in Cash and Cash Equivalents
(995)
(4,448)
7,836
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
11,907
10,912
16,355
$ 11,907
8,519
$ 16,355
Supplemental Cash Flow information:
Cash paid for:
Interest
Income taxes
Supplemental non-cash disclosures:
Transfers from loans to other real estate owned
Unrealized gain (loss) on securities available for sale, net
Minimum pension liability adjustment, net
$ 4,744
1,957
$ 3,866
4,460
$ 3,573
2,300
506
(74)
247
231
(22)
(273)
566
2
(487)
See accompanying Notes to the Consolidated Financial Statements.
47
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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. 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, F&M Mortgage, LLC and VSTitle, 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 & Merchants Bank, TEB Life Insurance
Company, Farmers & Merchants Financial Services, Inc., F&M Mortgage, LLC, (net of noncontrolling interest) and
VSTitle, 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
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent
and ability to held them to maturity. Debt securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value, the unrealized holding gains and losses are reported in
other comprehensive income, net of tax. Equity securities are carried at fair value, with changes in fair value reported in
net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, in any, plus
or minus changes resulting from observable price changes in orderly transaction for the identical or a similar investment.
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.
48
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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. The
Company had no other than temporary impairment in 2018, 2017 or 2016.
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.
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.
On January 1, 2018, the Company adopted the new accounting standard for Financial Instruments, which 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. At December 31, 2018,
equity securities of $135 are included in other investments on the Company’s consolidated balance sheet. These
securities were included in the available for sale portfolio at December 31, 2017.
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.
49
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes, continued
The results for the year ended December 31, 2017 included 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 lowered 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 required 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 2018. 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 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.
50
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans Held for Investment, continued
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.
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.
51
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans Held for Sale
These loans consist of fixed rate loans made through the Company’s subsidiary, F&M Mortgage, and loans purchased
from Northpointe Bank, Grand Rapids, MI.
F&M 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. F&M
Mortgage 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. F&M Mortgage 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. F&M Mortgage
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, 2018 and 2017.
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 2018, 2017, or 2016. 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. At December 31, 2018 and 2017, there was $3,544 and $3,645,
respectively, of these loans included in loans held for sale on the Company’s consolidated balance sheet.
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, 2018, and 2017, there were
$52,366 and $36,130 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 $8.03 million in loans classified as TDRs that are
current and performing as of December 31, 2018, and $7.8 million as of December 31, 2017.
52
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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.
53
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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 2018 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, 2018, 2017, and 2016.
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 2018, 2017, and 2016 were $622, $509, and $604, 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.
54
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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.
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
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involved uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets of
particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
55
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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. 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,
2018
For the year ended
December 31,
2017
December 31,
2016
Net Income
$ 9,095
$ 9,041 $ 9,762
Minority interest attributable to noncontrolling interest
(10)
(31)
(194)
Dividends paid/accumulated on preferred stock
(413)
(415)
(487)
Net Income Available to Common Stockholders
$ 9,081
The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for
the periods indicated:
$ 8,595
$ 8,672
December 31, 2018
Year ended
December 31, 2017
December 31, 2016
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
$ 8,672 3,238,177 $ 2.68
$ 8,595
3,269,713
$ 2.63 $ 9,081
3,282,335
$ 2.77
413
357,841
(.15)
415
362,271
(0.15)
487
434,256
(0.20)
Dollars in
thousands
Basic EPS
Effect of Dilutive
Securities:
Convertible
Preferred Stock
Diluted EPS
$ 9,085 3,596,017 $ 2.53 $ 9,010
3,631,984
$ 2.48 $ 9,568
3,716,591
$ 2.57
56
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements
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 FASB
made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic
842, Leases.”) and ASU 2018-11 (“Leases (Topic 842): Targeted Improvements.”) Among these amendments is the
provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new
leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption
date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in
which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases).
The adoption of this standard on January 1, 2019 did not have a material effect on the Bank’s/Company’s consolidated
financial statements or The effect of adopting this standard on January 1, 2019 was an approximate $1.03 million
increase in assets and liabilities on our consolidated balance sheet.
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 has chosen a vendor and is in the process
of supplying data to the model and will run “shadow” in 2019 along with current allowance for loan loss model.
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to
test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill
impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that
goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option
to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments
in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial
statements.
57
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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.
‐
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. This ASU was further amended in October 2018 by ASU 2018-16, which
adds the Overnight Index Swap rate as a U.S. benchmark interest rate. 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 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.
In June 2018, the FASB issued ASU 2018-07, “Compensation- Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting.” The amendments expand the scope of Topic 718 to include share-
based payments issued to non-employees for goods or services, which were previously excluded. The amendments
will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments
are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—
Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure
requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative
description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified.
The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively.
Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact
on its consolidated financial statements.
58
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements, continued
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—
General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit
Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or
other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure
requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans
with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to
changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph
715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The
projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the
accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The
amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company
does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.
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, 2018 and 2017.
NOTE 4
SECURITIES:
The amortized cost and fair value, with unrealized gains and losses, of securities held to maturity were as follows:
December 31, 2018
U. S. Treasuries
December 31, 2017
U. S. Treasuries
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 123
$ -
$ - $ 123
$ 125
$ -
$ - $ 125
The amortized cost and fair value of securities available for sale are as follows:
December 31, 2018
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Total Securities Available for Sale
December 31, 2017
U. S. Treasuries
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Equity securities1
Total Securities Available for Sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 7,999
409
-
-
$ 8,408 $ -
113
6
$ 119
7,886
403
$ 8,289
$ 19,998 $ -
-
-
-
$ 9
7,999
508
135
$ 28,640
$ -
19
6
-
$ 25
$ 19,998
7,980
502
135
$ 28,615
1 Transferred to other investments on January 1, 2018 upon adoption of ASU 2016-01
59
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 4
SECURITIES (CONTINUED):
The amortized cost and fair value of securities at December 31, 2018, 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
$ - $ - $ -
$ -
Due after one year through five years
123
123
7,999 7,886
Due after five years through ten years
-
-
409
403
Due after ten years
Total
-
- -
-
$ 123 $ 123 $ 8,408 $ 8,289
There were no sales of debt or equity securities during 2018, 2017 or 2016. There were no pledged securities at December
31, 2018 or 2017.
Other investments consist of investments in twenty-one low-income housing and historic equity partnerships (carrying
basis of $8,139), stock in the Federal Home Loan Bank (carrying basis of $3,688), and various other investments
(carrying basis of $1,605). The interests in the low-income housing and historic equity partnerships have limited
transferability and the interests in the other stocks, except for $135, are restricted as to sales. The market values of these
securities are estimated to approximate their carrying values as of December 31, 2018. At December 31, 2018, the
Company was committed to invest an additional $4,327 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, 2018 were as follows:
Less than 12 Months
Unrealized
Losses
Fair
Value
More than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
December 31, 2018
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Total
$ - $ - $ 7,886 $ (113) $ 7,886 $ (113)
-
(6)
$ - $ - $ 8,289 $ (119) $ 8,289 $ (119)
(6)
403
403
-
December 31, 2017
U. S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Total
Less than 12 Months
Unrealized
Losses
Fair
Value
More than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$ 3,981 $ (19)
(6)
502
$ (25)
$ 4,483
$ - $ 3,981 $ (19)
$ -
-
(6)
-
$ - $ - $ 4,483 $ (25)
502
As of December 31, 2017, there were no securities in an unrealized loss position.
60
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018, the Company had four agencies and a mortgage backed security that were temporarily impaired due to rising
interest rates not the credit quality of the security. All of these securities had been in an unrealized loss position for
exactly twelve months. The Company did not recognize any other-than-temporary impairment losses in 2018, 2017 or
2016.
NOTE 5
LOANS:
Loans held for investment as of December 31, 2018, and 2017 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
2017
2018
$ 71,620
$ 61,659
13,606
17,030
184,546
192,278
10,298
9,665
148,906
147,342
11,606
11,039
54,739
53,197
36,912
36,021
6,633
9,861
75,169
97,523
2,939
3,184
$ 638,799 $ 616,974
The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of
Atlanta totaling $186,673 and $218,323 as of December 31, 2018, and 2017, 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 F&M Mortgage for sale in the secondary market, and the Bank’s
commitment to purchase residential mortgage loan participations from Northpointe Bank. The volume of loans
purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which
affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage
loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of
December 31, 2018, and 2017 were $55,910 and $39,775, respectively.
61
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 5
LOANS (CONTINUED):
The following is a summary of information pertaining to impaired loans:
December 31, 2018
December 31, 2017
Unpaid
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
$ 2,414
$ 2,414
1,941
1,932
-
1,941
1,932
-
6,176
6,176
-
-
-
-
-
-
-
-
-
-
$ - $ 4,352
1,984
$ 5,269
$ -
-
1,273
-
-
-
-
-
-
-
-
-
8
6,229
-
-
1,984
1,273
-
6,229
-
347
-
8
-
-
-
-
-
-
-
-
32
32
-
31
31
-
12,495
12,495
-
13,877
15,141
-
- -
-
-
4,871
1,627
4,998
4,998
1,661
4,311
-
422
-
-
-
422
-
1,500
-
-
-
-
8
-
-
8
-
7
-
-
-
-
-
2
-
-
1,188
1,188
-
209
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
194
194
10
47
47
12
4,935
6,995
1,646
6,233
6,233
1,882
$ 17,430 $ 19,490
$ 1,646 $ 20,110 $ 21,374
$ 1,882
The Recorded Investment is defined as the principal balance less principal payments and charge-offs.
62
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018
December 31, 2017
Average
Recorded
Investment
Interest
Income
Average
Recorded
Interest
Income
Recognized
Investment
Recognized
$ 3,586
$ 89
$ 4,969
$ 382
1,963
80
1,921
62
1,542
98
878
57
-
2,304
-
-
-
-
-
-
286
-
-
-
1,682
-
347
-
-
124
10
-
-
-
44
-
-
-
-
-
28
5
24
3
9,423
558
9,955
548
6,352
-
554
-
4,167
91
-
23
-
-
5,911
-
1,194
-
-
258
-
49
-
-
-
-
-
-
-
-
10
-
-
1
-
-
-
-
-
-
-
-
-
-
206
14
56
3
11,289
129
7,161
310
$ 20,712 $ 687
$ 17,116 $ 858
63
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 5
LOANS (CONTINUED):
The following table presents the aging of the recorded investment of past due loans:
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
$ 290
$ -
$ 1,767
$ 2,057 $ 59,602 $ 61,659 $ 2,327
$ -
-
3,074
-
479
-
-
677
-
189
-
-
1,729
-
5,073
12
-
5,480
-
5,741
12
17,030
186,798
9,665
141,601
11,027
17,030
192,278
9,665
147,342
11,039
148
40
171
22
320
80
639
142
52,558
35,879
53,197
36,021
-
1,477
-
5,074
-
269
98
-
726
-
-
12
51
-
89
2,763
50
$ 6,933
26
337
11
$ 1,433
3
96
9,743
118
94,327
3,196
70
3,114
$ 17,455 $ 621,344
9
$ 9,089
9,861
97,523
3,184
$ 638,799
5
155
-
2
9
-
$ 9,405 $ 800
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
$ 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
36,173
54,739
36,912
-
1,720
-
-
3
448
599
-
143
-
-
-
-
-
43
1,300
30
$ 5,683
5
252
8
$ 7,904
-
189
6,585
48
73,428
1,741
39
2,900
$ 19,108 $ 597,866
1
$ 5,521
-
6,633
54
75,169
2,939
1
$ 616,974 $ 6,904 $ 198
-
226
-
December 31, 2018
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, 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
64
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of changes in the allowance for loan losses (in thousands) for the years ended December 31, 2018 and 2017
is as follows:
December 31, 2018
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
$ 2,547 $ 489 $ 122 $ (86) $ 2,094 $ 1,627 $ 467
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
- -
99
-
1,546
3
-
573
12
-
1
4
8
91
41
861
(10)
(340)
(9)
1,479
(54)
(91)
337
15
292
10
416
13
126
192
(68)
1,756
70
1,974
- 15
7
-
-
-
285
10
416
13
- 126
-
2
10
192
68
1,964
148
1,440
51
2,083
52 76 46 16
38 - 38
$ 6,044 $ 4,920 $ 1,186 $ 2,930 $ 5,240 $ 1,646 $ 3,594
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
-
-
-
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
65
25
719
19
482
66
209
337
34
843
23
705
75
470
586
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018 and 2017:
December 31, 2018
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
$ 61,659 $ 6,725
1,941
2,354
-
6,176
-
-
-
8
17,030
192,278
9,665
147,342
11,039
53,197
36,021
9,861
97,523
3,184
$ 638,799
-
$17,430
$ 54,934
15,089
189,924
9,665
141,166
11,039
53,197
36,021
9,853
97,297
3,184
$ 621,369
226
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
$ 9,350
$ 71,620
1,984
13,606
2,461
184,546
-
10,298
6,229
148,906
-
11,606
-
54,739
-
36,912
8
6,633
78
75,169
2,939
-
$ 616,974 $ 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
66
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018 and 2017:
December 31, 2018
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
$ - $ 1,148
-
1,644
62
-
-
$ 15,857 $ 29,301 $ 9,353 $ - $ 6,000
1,941
4,608
-
6,376
106,387
6,604
4,953
55,429
2,895
3,205
22,679
166
493
1,531
-
2,437
44,065
81,916
11,564
2,286
5,074
-
-
31
3,245
5,842
1,909
-
60
1,554
19,464
27,347
4,157
223
193
2,291
17,144
13,254
2,704
337
$ -
-
-
-
$ 61,659
17,030
192,278
9,665
-
-
-
-
147,342
11,039
53,197
36,021
12
392
98
190
27
$ 342 $ 9,295
-
2,648
$165,700 $ 282,219 $ 57,537 $ 4,870
5,192
1,800
9,861
4
$ 18,129 $ - $538,092
-
Credit Cards Dealer Finance
$ 3,175 $ 97,368
155
$ 3,184 $ 97,523
9
67
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 6
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
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
-
1,512
228
63
-
-
$ 12,974
3,153
53,764
4,780
$ 30,197 $ 9,165 $ 3,520
494
4,660
-
4,120
101,606
5,111
3,793
19,734
179
$ 15,074 $ -
-
-
-
1,983
3,270
-
$ 71,620
13,606
184,546
10,298
-
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
-
-
-
148,906
11,606
54,739
262
13,297
1,595
19,442
1,480
207
629
-
36,912
34
490
$ 594 $ 9,638
2,226
2,254
$156,496 $ 286,057 $ 49,652 $13,324
1,065
88
476
6,633
$ 23,105 $ - $538,866
-
Credit Cards Dealer Finance
$ 2,938 $ 75,116
53
$ 2,939 $ 75,169
1
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.
68
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018, the Bank modified 21 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, 2018
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Real Estate
Commercial
Consumer
Total
1
2
18
21
$ 742
1,248
$ 183
$ 2,173
$ 742
1,248
$ 183
$ 2,173
69
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 7
TROUBLED DEBT RESTRUCTURING (CONTINUED):
As of December 31, 2018, there were 5 loans restructured in the previous twelve months, in default. A restructured
loan is considered in default when it becomes 30 days past due.
(dollars in thousands)
Troubled Debt Restructurings
Number of Contracts
December 31, 2018
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Real Estate
Consumer
Total
2 $ 142
3
12
5 $ 154
$ 142
12
$ 154
During the twelve months ended December 31, 2017, 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.
(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 30 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
2
1,502
3 $ 1,569
1,502
$ 1,569
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
2018
2017
3,887
14,370
10,438
28,695
(10,929)
$ 17,766
$ 3,883
12,384
9,454
25,721
(9,827)
$ 15,894
Depreciation of $1,137 in 2018, $930 in 2017, and $827 in 2016 were charged to operations.
70
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 9
OTHER REAL ESTATE OWNED:
The table below reflects other real estate owned (OREO) activity for 2018 and 2017:
Other Real Estate Owned
2018
2017
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
$ 1,984 $ 2,076
231
600
2
-
(281)
(132)
(44)
(9)
$ 2,443 $ 1,984
Activity in the valuation allowance was as follows:
Balance as of January 1
Provision (recoveries) charged/(credited) to expense
Reductions from sales of real estate owned
Balance as of December 31
(Income) expenses related to foreclosed assets include:
Net loss (gain) on sales
Gain on foreclosure
Provision/(recoveries) for unrealized losses
Operating expenses, net of rental income
(Income) expenses related to foreclosed assets
2018
2017
$ 885
(23)
(1)
$ 861
$ 885
-
-
$ 885
2018
2017
2016
$ 9
$ 44 $ 19
(94)
-
-
(10)
-
-
67
32
64
$ (31) $ 76 $ 86
At December 31, 2018, the balance of real estate owned includes $375 of foreclosed residential real estate properties
recorded as a result of obtaining physical possession of the property. At December 31, 2018, the recorded investment of
consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in
process is $518.
NOTE 10
DEPOSITS:
Time deposits that meet or exceed the FDIC insurance limit of $250 at year end 2018 and 2017 were $13,464 and $13,637.
At December 31, 2018, the scheduled maturities of time deposits are as follows:
2018
2019
2020
2021
2022 and after
Total
$ 62,999
50,775
23,990
7,174
10,928
$ 155,866
71
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 11
SHORT-TERM DEBT:
Short-term debt, all maturing within 12 months, as of December 31, 2018 and 2017 is summarized as follows:
Maximum Outstanding
at any Month End
Outstanding
At
Average
Balance
Year End Outstanding
Yield
2018
Federal funds purchased
FHLB short term
Totals
2017
Federal funds purchased
FHLB short term
Totals
$ 11,906 $ 10,116 $ 1,399
22,937
$ 40,116 $ 24,336
30,000
46,000
$ 8,964 $ 5,296 $ 97
20,301
$ 25,296 $ 20,398
20,000
50,000
2.51%
1.83%
1.87%
.17%
.30%
.31%
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, 2018, the Company had unsecured lines of credit with correspondent banks totaling $41,000, which
may be used in the management of short-term liquidity, on which $10,116 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 1.27% to 2.56%; the weighted average interest rate was
1.96% and 1.86% at December 31, 2018 and December 31, 2017, respectively. The balance of these obligations at
December 31, 2018 and 2017 were $40,125 and $49,554 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 2018 or 2017. FHLB advances include a $6,000 letter 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, 2018, were as follows:
2019
2020
2021
2022
2023
Thereafter
Total
$ 6,928
14,429
5,929
2,714
7,000
3,125
$ 40,125
In addition, the Company has a note payable to purchase a lot adjacent to one of the Bank branches for $85 at December
31, 2018 that is payable in remaining annual payments on January 1, 2019. There was $170 outstanding on this note at
December 31, 2017.
VSTitle, LLC has a note payable for vehicle purchases with a balance of $8 and $9 at December 31, 2018 and 2017,
respectively.
72
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 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
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
Net unrealized loss on securities available for sale
Unfunded pension benefit obligation
Total Assets
Deferred Tax Liabilities:
Unearned low income housing credits
Depreciation
Prepaid pension
Goodwill tax amortization
Total Liabilities
Net Deferred Tax Asset (included in Other Assets on Balance Sheet)
2018
2016
2017
$ 1,155 $ 3,671 $ 3,046
53
(152)
(55)
-
811
-
(55)
53
659
$ 1,110 $ 4,330 $ 3,099
2018
2017
$ 1,096 $ 1,265
3
3
546
564
203
279
108
13
173
173
5
25
1,030
1,096
$ 3,183 $ 3,399
2018
2017
$ 158 $ 180
340
403
849
1,010
559
564
2 089
1,974
$ 1,209 $ 1,310
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
2018
2017
2016
$ 2,104
$ 4,511
$ 4,307
-
(49)
(146)
(774)
-
(25)
$ 1,110
-
(59)
(212)
(633)
811
(88)
$ 4,330
6
(41)
(217)
(896)
-
(60)
$ 3,099
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 2015.
73
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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
2018, 2017 and 2016:
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
2018
2017
2016
$ 15,103
768
497
(1,562)
(587)
$ 14,219
$ 12,475
696
487
1,620
(175)
$ 15,103
$ 10,944
632
453
872
(426)
$ 12,475
$ 11,678
$ 12,032
$ 13,645
780
1,788
(613)
-
-
-
(426)
(175)
(587)
$ 12,445
$ 12,032
$ 13,645
$ (1,774) $ (1,458) $ (443)
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.
74
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
Defined Benefit Pension Plan, continued
2018
2017
2016
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
$ 3,131 $ 3,760 $ 4,361
(4,804)
1,633
(5,218)
1,096
(4,905)
1,030
$ (4,932)
27
$ (4,905)
1,030
$ (3,875)
$ (5,260)
42
(5,218)
1,096
$ (4,122)
$ (4,861)
57
(4,804)
1,633
$ (3,171)
$ (12,475)
$ (15,103)
$ (14,219)
12,032
13,645
12,445
4,861
5,260
4,932
(57)
(42)
(27)
$ 3,131 $ 3,760 $ 4,361
$ 768 $ 696 $ 632
452
487
496
(854)
(851)
(923)
(15)
(15)
(15)
223
284
303
$ 629 $ 601 $ 438
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)
$ (328) $ 399 $ 724
15
15
15
$ (313) $ 414 $ 739
$ 316 $ 1,015 $ 1,177
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)
75
$ 10,992 $ 10,760 $ 8,789
$ 10,983 $ 10,750 $ 8,780
4.25%
4.00%
7.50%
3.00%
13
4.00%
3.50%
7.25%
3.00%
12
3.50%
4.25%
7.25%
3.00%
12
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
Funding Policy
Due to the current funding status of the plan, the Company did not make a contribution in 2018, 2017 or 2016. The net
periodic pension cost of the plan for 2019 will be approximately $745. Due to recent retirements, the Company expects
to be obligated for payments to former employees that will result in the plan being subject to a settlement accounting
charge in 2019. This amount is measured on a quarterly basis by plan actuaries and will change based on additional
retirements that may occur as well as market values of the plan assets. While the total amount of the settlement accounting
charge for 2019 is not known at this time, we expect that the amount will range between $600 and $800 as an additional
pension expense in 2019.
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, 2018, and 2017 were 58% equity and 42% fixed and 61% equity and
39% fixed, respectively.
Estimated Future Benefit Payments, which reflect expected future service, as appropriate, as of December 31, 2018,
are as follows:
2019
2020
2021
2022
2022
2024-2028
$ 2,685
604
394
1,542
894
7,483
$ 13,602
76
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 14
EMPLOYEE BENEFITS (CONTINUED):
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, 2018 the
Company contributed $443 in 2018, $430 in 2017, and $407 in 2016 to the Plan and charged this expense to operations.
The shares held by the ESOP totaled 203,147 and 194,018 at December 31, 2018 and 2017, respectively.
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% (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 $283, $263 and $242 in 2018, 2017 and 2016, 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 2018, $125 in 2017
and $125 in 2016. A liability is accrued for the obligation under the plan and totaled $3,170 and $3,377 at December 31,
2018 and 2017, 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
$466 and $443 for December 31, 2018 and 2017, respectively.
NOTE 15
CONCENTRATIONS OF CREDIT:
The Company had cash deposits in other commercial banks in excess of FDIC insurance limits totaling $2,195 and $1,798
at December 31, 2018 and 2017, 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, 2018, approximately 77% of the loan portfolio was secured by
real estate.
77
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018 and 2017, the Company
had the following commitments outstanding:
Commitments to extend credit
Standby letters of credit
2018
2017
$ 169,863 $ 170,798
1,533
2,119
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.
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. F&M Mortgage leased its building until December of 2017 and therefore
recorded lease expense in 2017 and 2016. 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 $249, $355 and $291 for 2018, 2017 and 2016, respectively. As of December 31, 2018, the required
lease payments for the next five years were as follows:
2019
2020
2021
2022
2023
Thereafter
$ 155
128
110
105
93
114
Mortgage Banking Derivatives
Commitments to fund certain mortgage loans originated by F&M Mortgage (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 F&M Mortgage 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,
2018 and 2017, and were not recorded on the Company’s balance sheet.
78
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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, 2018, 2017 and 2016.
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
2018
2017
$ 184 $ 184
59
44
79
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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
2018
2017
$ 20,377 $ 7,486
6,803
5,785
10,403
169
(5,766)
(4,315)
$ 20,565 $ 20,377
Deposits of executive officers and directors and their affiliates were $4,110 and $7,757 on December 31, 2018 and
2017 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, 2019,
approximately $8,140 was available for dividend distribution without permission of the Board of Governors. Dividends
paid by the Bank to the Company totaled $8,874 in 2018, $5,000 in 2017 and $5,000 in 2016.
NOTE 20
FAIR VALUE MEASUREMENTS:
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be used to measure fair values:
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:
80
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 20
FAIR VALUE MEASUREMENTS (CONTINUED):
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.
The following tables present the balances of financial assets measured at fair value on a recurring basis as of December
31, 2018, and 2017 (dollars in thousands):
December 31, 2018
U.S. Government sponsored enterprises
Mortgage-backed obligations of federal agencies
Total securities available for sale
Derivatives
Level 1
Level 2
Level 3
Total
-
- $ 7,886
$ 7,886
-
403
-
403
$ 8,289 $ - $ 8,289
$ -
$ 44 $ - $ 44 $ -
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 securities1
Total securities available for sale
Derivatives
$ 19,998 $ 19,998 $ - $ -
7,980
-
-
7,980
502
-
-
502
-
135
135
-
$ -
$ 28,615 $ 19,998 $ 8,617
$ -
$ 59 $ - $ 59
1 Transferred to other investments on January 1, 2018 upon adoption of ASU 2016-01
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to
the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs
of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded
at fair value on a nonrecurring basis in the financial statements:
Loans Held for Sale
Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan and loans
originated by F&M Mortgage for sale in the secondary market. Loan participations are generally repurchased within
15 days. Loans originated for sale by F&M Mortgage are recorded at lower of cost or market. No market adjustments
were required at December 31, 2018 or 2017; 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, 2018,
and 2017.
81
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it
is probable that all amounts due will not be collected according to the contractual terms of the loan agreement.
Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If
an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan
losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated
Statements of Income.
The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable
market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable
market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a
Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows,
which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt
restructure.
Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of
real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate.
The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations.
The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation
approach. 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, 2018, and 2017, 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, 2018
Total
Level 1
Level 2
Level 3
Construction/Land Development
Real Estate
Consumer
Dealer Finance
Impaired loans
$ 2,684
415
6
184
$ 3,289
-
-
-
-
- $ 2,684
-
415
6
-
184
- $ 3,289
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
82
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED):
The following table presents information about Level 3 Fair Value Measurements for December 31, 2018 and 2017:
Fair Value at
December 31, 2018
Valuation Technique
Significant Unobservable Inputs
Range
Impaired Loans $ 3,289 Discounted appraised value Discount for selling costs and
marketability
2%-9% (Average
4.21%)
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%)
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, 2018
Total
Level 1
Level 2
Level 3
Other real estate owned
$ 2,443
December 31, 2017
Total
Level 1
Other real estate owned
$ 1,984
-
-
- $ 2,443
Level 2
Level 3
- $ 1,984
The following table presents information about Level 3 Fair Value Measurements for December 31, 2018 and 2017:
Fair Value at
December 31, 2018
Valuation Technique
Significant Unobservable
Inputs
Range
Other real estate owned $ 2,443 Discounted appraised value Discount for selling costs
5%-15% (Average 8%)
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%)
83
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED)
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s
financial instruments as of December 31, 2018 and 2017. For short-term financial assets such as cash and cash
equivalents and short-term liabilities, the carrying amount is a reasonable estimate of fair value due to the relatively
short time between the origination of the instrument and its expected realization. For financial liabilities such as
noninterest bearing demand, interest bearing demand and savings deposits, the carrying amount is a reasonable
estimate of fair value due to these products having no stated maturity. Fair values for December 31, 2018 are estimated
under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and
Measurement of Financial Assets and Financial Liabilities.” Fair values for December 31, 2017 are estimated under
the guidance in effect for that period, which did not require use of the exit price notion.
The estimated fair values, and related carrying amounts (in thousands), of the Company’s financial instruments are
as follows:
Fair Value Measurements at December 31, 2018 Using
Carrying
Amount
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Fair Value at
December 31, 2018
(dollars in thousands)
Assets:
Cash and cash equivalents
$ 10,912
$ 10,912 $ - $ - $ 10,912
Securities
Loans held for sale
8,412
55,910
-
8,412
-
-
55,910
-
Loans held for investment, net
633,559
-
-
613,717
Interest receivable
2,078
-
2,078
-
8,412
55,910
613,717
2,078
Bank owned life insurance
19,464
- 19,464
- 19,464
Total
Liabilities:
Deposits
Short-term debt
Long-term debt
Interest payable
Total
$ 730,335
$ 10,912 $ 85,864
$ 613,717 $ 710,493
$591,325
$ - $ 441,319
$ 153,848 $ 595,167
40,116
40,218
-
40,116
-
40,116
-
-
39,609
39,609
348
- 348
- 348
$ 672,007 $ - $ 481,783
$ 193,457 $ 675,240
84
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 20 FAIR VALUE MEASUREMENTS (CONTINUED)
(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, 2017
Cash and cash equivalents
$ 11,907
$ 11,907 $ - $ - $ 11,907
Securities
28,740
19,998
8,742
-
Loans held for sale
39,775
-
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
85
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
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 not 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 fully phased in on 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 was
fully phased in at 2.50% January 1, 2019. The capital conservation buffer for 2018 was 1.875% and for 2017 was
1.25%. 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, 2018 and 2017, 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, 2018
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
$ 95,597
90,357
90,357
90,357
14.44% $ 52,955
39,717
13.65%
29,787
13.65%
30,659
11.79%
8.00%
6.00%
4.50%
4.00%
$ 66,194
52,955
43,026
38,324
10.00%
8.00%
6.50%
5.00%
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%
86
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 22
BUSINESS SEGMENTS:
December 31, 2018
F&M Bank
F&M
Mortgage
TEB
Life/FMFS
VSTitle
Parent
Only
Eliminations
F&M Bank Corp.
Consolidated
Revenues:
Interest Income
$ 36,550 $ 139
$ 144
$ - $ -
$ (125)
$ 36,708
Service charges on deposits
1,496
Investment services and insurance income
Mortgage banking income, net
Title insurance income
-
-
-
-
-
2,348
-
-
918
-
-
-
-
-
-
-
-
(19)
- (36)
1,294
-
-
1,496
899
2,312
1,294
Other operating income
2,002
-
-
- -
- 2,002
Total income
Expenses:
Interest Expense
Provision for loan losses
Salaries and benefits
40,048
2,487
1,062
1,294
-
(180)
44,711
4,839
2,930
118
-
-
-
-
-
13,153
1,783
578
922
-
-
-
(125)
-
-
4,832
2,930
16,436
Other operating expenses
9,448
553
57
220
49
(19)
10,308
Total expense
30,370
2,454
635
1,142
49
(144)
34,506
Income before income taxes
9,678
33
427
152
(49)
(36)
10,205
Income tax expense (benefit)
1,021
-
57
-
32
-
1,110
Net income
$ 8,657
$ 33
$ 370
$ 152
$ (81)
$ (36) $ 9,095
Net income attributable to noncontrolling
interest
Net Income attributable to F & M Bank
Corp.
Total Assets
-
10
-
36
-
(36)
10
$ 8,657
$ 23
$ 370
$ 116
$ (81)
$ -
$ 9,085
$ 782,782
$ 7,449
$ 7,237
$ 458
$ 91,582 $ (109,255)
$ 780,253
Goodwill
$ 2,670 $ 48
$ -
$ 2
$ 164
$ -
$ 2,884
87
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 22
BUSINESS SEGMENTS CONTINUED:
F&M Bank
F&M
Mortgage
TEB
Life/FMFS
VSTitle
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 investments
$ 33,904 $ 125
$ 148
$ - $ -
$ (82)
$ 34,095
1,360
1
-
-
504
-
-
-
2,269
-
-
-
772
-
-
-
(40)
(2)
-
-
-
1,162
-
-
-
-
-
-
-
-
-
(18)
(49)
-
-
-
1,360
755
2,220
1,162
504
(42)
Other operating income
2,128
1
-
- 162
(358) 1,933
Total income
Expenses:
Interest Expense
Provision for loan losses
Salaries and benefits
37,897
2,355
918
1,162
162
(507)
41,987
3,904
-
75
-
-
-
-
-
12,092
1,557
474
731
-
-
-
(82)
-
-
3,897
-
14,854
Other operating expenses
8,942
618
51
226
46
(18)
9,865
Total expense
24,938
2,250
525
957
46
(100)
28,616
Income before income taxes
12,959
105
393
205
116
(407)
13,371
Income tax expense (benefit)
4,316
-
109
-
(95)
-
4,330
Net income
$ 8,643 $ 105
$ 284
$ 205
$ 211
$ (407) $ 9,041
Net income attributable to noncontrolling
interest
Net Income attributable to F & M Bank
Corp.
Total Assets
-
31
-
49
-
(49)
31
$ 8,643
$ 74
$ 284
$ 156
$ 211
$ (358)
$ 9,010
$ 754,375
$ 7,018
$ 6,749 $ 1,067
$ 90,964 $ (106,903)
$ 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, 2018 and 2017
NOTE 22
BUSINESS SEGMENTS CONTINUED:
December 31, 2016
F&M Bank
VBS
Mortgage
TEB
Life/FMFS
Parent
Only
Eliminations
F&M Bank Corp.
Consolidated
Revenues:
Interest Income
$ 31,949 $ 55
$ 152 $ -
$ (6)
$ 32,150
Service charges on deposits
Investment services and insurance income
Mortgage banking income, net
1,174
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, 2018 and 2017
NOTE 23
PARENT COMPANY ONLY FINANCIAL STATEMENTS:
Balance Sheets
December 31, 2018 and 2017
Assets
Cash and cash equivalents
Investment in subsidiaries
Other investments
Income tax receivable (including due from subsidiary)
Goodwill and intangibles
Total Assets
Liabilities
Deferred income taxes
Accrued expenses
Total Liabilities
Stockholders’ Equity
Preferred stock par value $25 per share, 400,000 shares authorized,
249,860 and 324,150 issued and outstanding at December 31, 2018 and
2017, respectively.
Common stock par value $5 per share, 6,000,000 shares authorized,
3,213,132 and 3,255,036 shares issued and outstanding for 2018 and
2017, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
2018
2017
$ 749 $ 917
88,967
89,418
135
135
565
946
327
380
$ 91,575 $ 90,964
177
151
72
86
$ 223 $ 263
$ 5,672 $ 7,529
16,066
16,275
10,225
7,987
60,814
65,596
(4,142)
(3,969)
91,352
90,701
$ 91,575 $ 90,964
Statements of Income
For the years ended December 31, 2018, 2017 and 2016
Income
Dividends from affiliate
Net limited partnership income (loss)
Total Income
2018
2017
2016
$ 8,874 $ 5,000 $ 5,000
-
162
-
5,000
5,162
8,874
Expenses
Total Expenses
Net income before income tax expense (benefit)
and undistributed subsidiary net income
49
47
1
8,825
5,115
4,999
Income Tax Expense (Benefit)
32
(95)
(249)
Income before undistributed subsidiary net income
Undistributed subsidiary net income
Net Income F&M Bank Corp.
8,793
292
$ 9,085
5,210
5,248
4,320
3,800
$ 9,010 $ 9,568
90
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2076
NOTE 23
PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED):
Statements of Cash Flows
For the years ended December 31, 2018, 2017 and 2016
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
Increase in other assets
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
2018
2017
2016
$ 9,085 $ 9,010
$ 9,568
(292)
(3)
(328)
(23)
8,439
(3,800)
(112)
(1,256)
(77)
3,765
(4,320)
5
-
(535)
4,718
-
-
-
(2,788)
(1,782)
266
(4,303)
(8,607)
(101)
(712)
197
(3,387)
(4,003)
(1,961)
(577)
183
(3,115)
(5,470)
Net (decrease) increase in Cash and Cash Equivalents
(168)
(238)
(752)
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
917
1,155
$ 749 $ 917
1,907
$ 1,155
NOTE 24
INVESTMENT IN F&M MORTGAGE, LLC
On November 3, 2008, the Bank acquired a 70% ownership interest in VBS Mortgage, LLC (DBA F&M Mortgage).
F&M Mortgage originates both conventional and government sponsored mortgages for sale in the secondary market.
Accordingly, the Company consolidated the assets, liabilities, revenues and expenses of F&M Mortgage and reflected
the issued and outstanding interest not held by the Company in its consolidated financial statements as noncontrolling
interest.
91
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 25
INVESTMENT IN VSTITLE, LLC
On January 1, 2017, the Company acquired a 76% ownership interest in VSTitle, LLC (VST). VST provides title
insurance services to the customers in our market area, including F&M Mortgage and the Bank. F&M 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. January 1, 2018
VST purchased a small title company in Harrisonburg.
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, 2015
Change in unrealized securities gains (losses), net of tax
Unrealized
Securities Gains
(Losses)
4
2
Accumulated
Other
Adjustments
Comprehensive
Related to
Loss
Pension Plan
(2,684)
(2,680)
- 2
Change in unfunded pension liability, net of tax
- (487)
(487)
Balance at December, 31, 2016
Change in unrealized securities gains (losses), net of tax
$ 6
(26)
$ (3,171)
$ (3,165)
- (26)
Change in unfunded pension liability, net of tax
- (951)
(951)
Balance at December, 31, 2017
$ (20)
$ (4,122)
$ (4,142)
Change in unrealized securities gains (losses), net of tax
(74)
- (74)
Change in unfunded pension liability, net of tax
- 247
247
Balance at December, 31, 2018
$ (94)
$ (3,875)
$ (3,969)
There were no reclassifications adjustments reported on the consolidated statements of income during 2016, 2017 or
2018.
NOTE 27 REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic
606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a
material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening
retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are
presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance
with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and
securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights,
financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is
applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity
and insurance commissions. However, the recognition of these revenue streams did not change significantly upon
adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers.
Noninterest revenue streams in-scope of Topic 606 are discussed below.
92
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 27 REVENUE RECOGNITION, CONTINUED
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and
public checking accounts), overdraft fees, monthly service fees, check orders, and other deposit account related fees.
The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and
the related revenue recognized, over the period in which the service is provided. Check orders and other deposit
account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied,
and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily
received immediately or in the following month through a direct charge to customers’ accounts.
Investment Services and Insurance Income
Investment services and insurance income primarily consists of commissions received on mutual funds and other
investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date,
which is when the Company has satisfied its performance obligation.
Title Insurance Income
VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate
transaction is completed.
ATM and Check Card Fees
ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services
income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned
whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM
fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder
uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit
and credit card transactions, in addition to account management fees.
Other
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other
service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon
receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time,
revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges
include revenue from processing wire transfers, online payment fees, cashier’s checks, mobile banking fees and other
services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied,
and related revenue recognized, when the services are rendered or upon completion. Payment is typically received
immediately or in the following month.
93
F & M Bank Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (dollars in thousands)
December 31, 2018 and 2017
NOTE 27 REVENUE RECOGNITION, CONTINUED
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606,
for December 31, 2018, 2017 and 2016. Noninterest income out-of-scope of Topic 606 in 2017 included onetime
gains on prepayment of debt of $504.
Noninterest Income
In-scope of Topic 606:
Service Charges on Deposits
$ 1,496
$ 1,359
$ 1,174
Nine Months Ended December 31,
2018
2017
2016
Investment Services and Insurance Income
901
755
Title Insurance Income
ATM and check card fees
Other
1,293
1,161
1,537
1,387
-
525
490
-
441
2565
Noninterest Income (in-scope of Topic 606)
5,752
5,153
4,180
Noninterest Income (out-of-scope of Topic 606)
2,251
2,739
1,402
Total Noninterest Income
$ 8,003 $ 7,892 $ 5,582
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays
consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract
liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received
payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on
transactional activity. Consideration is often received immediately or shortly after the Company satisfies its
performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue
contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2018
and 2017, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into
expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.
The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer
that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company
utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset
that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption
of Topic 606, the Company did not capitalize any contract acquisition cost.
94
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, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes
in 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, 2018 and 2017, 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, 2018, 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 14, 2019 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 14, 2019
95
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,
2018, 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, 2018, 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, 2018 and 2017, and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity and cash flows for the years then ended of the Company, and the related
notes to the consolidated financial statements, and our report dated March 14, 2019 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 Management’s Report on 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 14, 2019
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, 2018 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, 2018 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, 2018. 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, 2018.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 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 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 2019 Annual Meeting of Shareholders
to be held May 11, 2019 (“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.”
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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 43 thru 97:
Consolidated Balance Sheets - December 31, 2018 and 2017 ..................................................................................... 43
Consolidated Statements of Income - Years ended December 31, 2018, 2017 and 2016 ............................................ 44
Consolidated Statements of Comprehensive Income - Years ended December 31, 2018,
2017 and 2016 .......................................................................................................................................................... 45
Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2018,
2017 and 2016……………………………………………………………………………………………………....46
Consolidated Statements of Cash Flows - Years ended December 31, 2018,
2017 and 2016 .......................................................................................................................................................... 47
Notes to the Consolidated Financial Statements .......................................................................................................... 48
Reports of Independent Registered Public Accounting Firms ..................................................................................... 96
(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
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-
10.2
10.3
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, 2018, 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).
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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 Neil W.
Hayslett, 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/ Mark C. Hanna
Mark C. Hanna
Director and Chief Executive Officer
By:
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President and Chief Financial Officer
March 14, 2019
March 14, 2019
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/ Dean W. Withers
Dean W. Withers
/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
Director
Director
Director
Date
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
Director, Chair
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
Director
Director
Director
Director
102
Exhibit 21 List of Subsidiaries of the Registrant
Farmers & Merchants Bank (incorporated in Virginia)
VSTitle, 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, DBA F&M Mortgage (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 14, 2019, 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, 2018.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 14, 2019
Exhibit 31.1
104
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, Mark C. Hanna, 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 14, 2019
/s/ Mark C. Hanna
Mark C. Hanna
Chief Executive 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.
105
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 14, 2019
/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.
106
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, 2018 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/ Mark C. Hanna
Mark C. Hanna
Chief Executive Officer
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President & Chief Financial Officer
March 14, 2019
107