F&M Bank Corp 10-Q for FY2023 Q3
F&M Bank Corp (FMBM)
About this 10-Q
F&M Bank Corp filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $1.02M
- down 55.8% from net income of $2.3M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For the quarterly period ended
Commission File Number:
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(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at November 3, 2023 |
|
F & M BANK CORP.
Index
| 2 |
| Table of Contents |
Part I Financial Information
Item 1 Financial Statements
F & M BANK CORP.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
|
| September 30, |
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| December 31, |
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| 2023 |
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| 2022* |
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| (Unaudited) |
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Assets |
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Cash and due from banks |
| $ |
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| $ |
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Money market funds and interest-bearing deposits in other banks |
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Federal funds sold |
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Cash and cash equivalents |
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Securities: |
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Held to maturity, at amortized cost – fair value of $ |
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Less: allowance for credit losses |
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Held to maturity, net |
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Available for sale, at fair value |
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Other investments |
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Loans held for sale, at fair value |
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Loans held for investment, net of deferred fees and costs |
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Less: allowance for credit losses |
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Net loans held for investment |
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Bank premises and equipment, net |
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Interest receivable |
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Goodwill |
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Bank owned life insurance |
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Other assets |
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Total Assets |
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| $ |
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Liabilities |
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Deposits: |
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Noninterest bearing |
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| $ |
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Interest bearing |
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Total deposits |
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Short-term debt |
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Long-term debt |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies |
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Shareholders’ Equity |
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Common stock, $ |
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Additional paid in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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| ( | ) |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
| $ |
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| $ |
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*2022 derived from audited consolidated financial statements.
See Notes to Consolidated Financial Statements
| 3 |
| Table of Contents |
F & M BANK CORP.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
|
| Three Months Ended |
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|
| September 30, |
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Interest and Dividend income |
| 2023 |
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| 2022 |
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Interest and fees on loans held for investment |
| $ |
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| $ |
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Interest and fees on loans held for sale |
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Interest from money market funds and federal funds sold |
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Interest on debt securities |
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Total interest and dividend income |
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Interest expense |
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Total interest on deposits |
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Interest from short-term debt |
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Interest from long-term debt |
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Total interest expense |
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Net interest income |
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Provision for Credit Losses |
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Net Interest Income After Provision for Credit Losses |
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Noninterest income |
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Service charges on deposit accounts |
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Investment services and insurance income |
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Mortgage banking income |
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Title insurance income |
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Income on bank owned life insurance |
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Low-income housing partnership losses |
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ATM and check card fees |
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Other operating income |
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Total noninterest income |
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Noninterest expense |
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Salaries |
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Employee benefits |
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Occupancy expense |
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Equipment expense |
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FDIC insurance assessment |
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OREO expenses |
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Advertising expense |
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Legal and professional fees |
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ATM and check card fees |
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Telecommunication and data processing expense |
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Directors fees |
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Bank franchise tax |
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Other operating expenses |
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Total noninterest expense |
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Income before income taxes |
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Income tax (benefit) expense |
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| ( | ) |
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Net Income |
| $ |
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| $ |
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Per Common Share Data |
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Net income |
| $ |
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| $ |
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Cash dividends on common stock |
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Weighted average common shares outstanding |
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See Notes to Consolidated Financial Statements
| 4 |
| Table of Contents |
F & M BANK CORP.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
Interest and Dividend income |
| 2023 |
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| 2022 |
| ||
Interest and fees on loans held for investment |
| $ |
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| $ |
| ||
Interest and fees on loans held for sale |
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Interest from money market funds and federal funds sold |
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Interest on debt securities |
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Total interest and dividend income |
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Interest expense |
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Total interest on deposits |
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Interest from short-term debt |
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Interest from long-term debt |
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Total interest expense |
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Net interest income |
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Provision for Credit Losses |
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Net Interest Income After Provision for Credit Losses |
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Noninterest income |
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Service charges on deposit accounts |
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Investment services and insurance income |
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Mortgage banking income |
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Title insurance income |
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Income on bank owned life insurance |
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Low-income housing partnership losses |
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| ( | ) |
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| ( | ) |
ATM and check card fees |
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Net investment securities losses |
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| ( | ) | |
Other operating income |
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Total noninterest income |
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Noninterest expense |
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Salaries |
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Employee benefits |
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Occupancy expense |
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Equipment expense |
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FDIC insurance assessment |
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OREO expense |
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Advertising expense |
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Legal and professional fees |
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ATM and check card fees |
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Telecommunication and data processing expense |
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Directors fees |
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Bank franchise tax |
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Other operating expenses |
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Total noninterest expense |
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Income before income taxes |
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Income tax (benefit) expense |
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| ( | ) |
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Net Income |
| $ |
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| $ |
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Per Common Share Data |
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Net income |
| $ |
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| $ |
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Cash dividends on common stock |
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Weighted average common shares outstanding |
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See Notes to Consolidated Financial Statements
| 5 |
| Table of Contents |
F & M BANK CORP.
Consolidated Statements of Comprehensive Loss
(Dollars in thousands)
(Unaudited)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2023 |
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| 2022 |
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| 2023 |
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| 2022 |
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Net Income |
| $ |
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| $ |
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| $ |
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| $ |
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Other comprehensive loss: |
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Unrealized holding losses on available-for sale securities |
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Tax effect |
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Unrealized holding losses, net of tax |
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Less: |
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Reclassifications adjustment for losses included in net income |
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Tax effect |
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Realized losses on sale of available-for sale securities, net |
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Total other comprehensive loss |
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Total comprehensive loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
See Notes to Consolidated Financial Statements
| 6 |
| Table of Contents |
F & M BANK CORP.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands)
(Unaudited)
Three Months Ended September 30, 2023 and 2022.
|
| Common Stock |
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| Additional Paid in Capital |
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| Retained Earnings |
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| Accumulated Other Comprehensive Loss |
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| Total |
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Balance June 30, 2022 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Net income |
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Other comprehensive loss |
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| ( | ) |
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Dividends on common stock ($.26 per share) |
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Common stock issued |
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Stock-based compensation expense |
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Balance, September 30, 2022 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Balance June 30, 2023 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Net income |
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Other comprehensive loss |
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| ( | ) |
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Dividends on common stock ($.26 per share) |
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| ( | ) |
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Common stock issued |
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Stock-based compensation expense |
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Balance, September 30, 2023 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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See Notes to Consolidated Financial Statements
| 7 |
| Table of Contents |
F & M BANK CORP.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, 2023 and 2022.
|
| Common Stock |
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| Additional Paid in Capital |
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| Retained Earnings |
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| Accumulated Other Comprehensive Loss |
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| Total |
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| |||||
Balance, December 31, 2021 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Net Income |
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Other comprehensive loss |
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| ( | ) |
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Dividends on common stock ($.78 per share) |
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Common stock issued |
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Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |
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Stock-based compensation expense |
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Balance, September 30, 2022 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Balance December 31, 2022 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Net income |
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Cumulative effect adjustment due to the adoption of ASC 326, net of tax |
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| ( | ) |
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| ( | ) | |||
Other comprehensive loss |
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| ( | ) |
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| ( | ) | |||
Dividends on common stock ($.78 per share) |
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| ( | ) |
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Common stock issued |
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Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |
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| ( | ) |
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Stock-based compensation expense |
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Balance, September 30, 2023 |
| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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See Notes to Consolidated Financial Statements
| 8 |
| Table of Contents |
F & M BANK CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
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| Nine Months Ended September 30, |
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| 2023 |
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| 2022 |
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Cash flows from operating activities |
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Net income |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of intangibles |
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Amortization of securities |
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Proceeds from loans held for sale |
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Loans held for sale originated |
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Gain on sale of loans held for sale |
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Provision for credit losses |
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Increase in interest receivable |
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(Increase) decrease in deferred taxes |
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(Increase) decrease in other assets |
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Decrease in accrued expenses |
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Amortization of limited partnership investments |
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Amortization of debt issuance costs |
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Income from life insurance investment |
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| ( | ) |
Gain on life insurance investment |
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Loss on the sale of investment securities |
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Gain on the sale of fixed assets |
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Stock-based compensation expense |
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Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchase of investments available for sale and other investments |
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Proceeds from maturity of investments available for sale |
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Proceeds from the sale of investments available for sale |
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Investment in restricted stock, net |
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Investment in limited partnership |
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Net increase in loans held for investment |
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Proceeds from life insurance investment |
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Proceeds from the sale of fixed assets |
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Net purchase of property and equipment |
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Proceeds from the sale of other real estate owned |
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Net cash (used in) investing activities |
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Cash flows from financing activities |
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Net change in deposits |
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Net change in short-term debt |
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Dividends paid in cash |
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Proceeds from issuance of common stock |
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Repayments of long-term debt |
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Net cash provided by financing activities |
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Net decrease in Cash and Cash Equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
| $ |
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| $ |
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Supplemental Cash Flow information: |
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Cash paid for: Interest |
| $ |
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Taxes |
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Supplemental non-cash disclosures: |
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Change in unrealized loss on securities available for sale |
| $ |
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| $ | ( | ) | |
Cumulative effect of the adoption of ASC 326 |
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Transfer from loans to other real estate owned |
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See Notes to Consolidated Financial Statements
| 9 |
| Table of Contents |
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of F&M Bank Corp. (the “Company”), Farmers & Merchants Bank (the “Bank”), TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services, Inc. (“FMFS”), VBS Mortgage, LLC (dba “F&M Mortgage”), and VSTitle, LLC (“VST”), with all significant intercompany accounts and transactions eliminated.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to accepted practices within the banking industry.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses.
Reclassification
Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.
Nature of Operations
The Company, through its subsidiary Farmers & Merchants Bank, operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank provides services to customers primarily in the counties of Rockingham, Shenandoah, Augusta, and Frederick, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in Virginia. Services are provided at fourteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., F&M Mortgage, and VSTitle, LLC.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits. Generally, federal funds are purchased and sold on an overnight basis.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments “ASC 326”. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
| 10 |
| Table of Contents |
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined there was no allowance for credit losses on available for sale securities.
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
Allowance for Credit Losses – Held to Maturity Securities
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was immaterial at September 30, 2023 and was excluded from the estimate of credit losses.
The state and local governments securities held by the Company are highly rated by major rating agencies. As a result, no allowance for credit losses was recorded on held to maturity securities at September 30, 2023.
Allowance for Credit Losses – Available for Sale Securities
For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.
Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to the available for sale portfolio.
Accrued interest receivable on available for sale debt securities totaled $
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $
| 11 |
| Table of Contents |
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company utilizes a Qualitative Scorecard (“scorecard”) to adjust the historical loss information, as necessary, to reflect the Company’s expectations about the future. For each segment, the scorecard calculates the difference between the quantitative expected credit loss and the high watermark average remaining maturity loss rates. This difference is the maximum qualitative adjustment that can be applied to that segment. Due to the low number of losses in the Bank’s portfolio, in particular during the great financial crisis from 2008-2012, a number of pool sets will leverage peer data to calculate the overall loss rate. The Company believes that in order to provide a reasonable and supportable loss rate, data representative of losses during a financial downturn will provide a better representation of the perceived risk in the portfolio. In determining how to apply the weightings for the various qualitative factors, management assessed which factors would have the highest impact on potential loan losses. The economy and problem loan trends were determined to have the most significant effect on the estimated losses. The most influential factor on potential loan losses are economic conditions, with a weighting of 20%-25%. The Company will evaluate the weighting applied to each pool on an annual basis.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a remaining life methodology:
1-4 family residential construction. Construction loans are subject to general risks from changing housing market trends and economic conditions that may impact demand for completed properties, availability of building materials, and the costs of completion. Changes in construction costs and interest rates may impact the borrower’s ability to service the debt. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to-value ratios for the collateral.
Other construction, land development and land. Construction and land development loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to-value ratios for the collateral.
Secured by farmland. Farmland loans are loans secured by agricultural property. These loans are subject to risks associated with the value of the underlying farmland and the cash flows of the borrower’s farming operations.
Home equity - open end. The home-equity loan portfolio carries risks associated with the creditworthiness of the borrower and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value at origination, experienced underwriting, and requiring standards for appraisers.
| 12 |
| Table of Contents |
Real estate. Real estate loans are for consumer residential 1-4 family real estate where the credit quality is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, and local housing market trends and interest rates. Risks specific to a borrower are determined by previous repayment history, loan-to-value ratios, and debt-to-income ratios.
Home equity - closed end. The home-equity closed-end loan portfolio carries risks associated with the creditworthiness of the borrower, changes in loan-to-value ratios, and subordinate lien positions. The Company manages these risks through policies and procedures such as limiting loan-to-value at origination, experienced underwriting, and requiring standards for appraisers.
Multifamily. Multifamily loans are loans secured by multi-unit residential property. These loans are subject to risks associated with the value of the underlying property, availability of rental units, as well as the successful operation and management of the property.
Owner-occupied commercial real estate. The commercial real estate segment includes loans secured by commercial real estate occupied by the owner/borrower. Loans in this segment are impacted by economic risks from changing commercial real estate markets, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.
Other commercial real estate. The other commercial real estate segment includes loans secured by commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for commercial buildings, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.
Agriculture loans. Agriculture loans are secured by agricultural equipment or are unsecured. Credit risk for these loans is subject to economic conditions, generally monitored by local agricultural/farming trends, interest rates, and borrower repayment ability and collateral value (if secured).
Commercial and industrial. Commercial and industrial loans are secured by collateral other than real estate or are unsecured. Credit risk for these loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, and borrower repayment ability and collateral value (if secured).
Credit cards. Credit card loan portfolios carry risks associated with the creditworthiness of the borrower and changes in the economic environment. The Company manages these risks through policies and procedures such as experienced underwriting, maximum debt-to-income ratios, and minimum borrower credit scores.
Automobile loans. Automobile loans generally carry certain risks associated with the values of the collateral and borrower’s ability to repay the loan. Lending on new and used vehicles is subject to the risk of changing values in the availability of vehicles and the resale value.
Other consumer loans. Other consumer loans may be secured or unsecured. Credit risk stems primarily from the borrower’s ability to repay. If the loan is secured, the Company analyzes loan-to-value ratios. All consumer non-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates.
Municipal loans. Municipal loans are unsecured loans generally made to local towns within the Bank’s trade area. Credit risk is based on the cash flow and management of the local town’s budgets.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate.
| 13 |
| Table of Contents |
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
Earnings per Share
Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends.
Recent Accounting Pronouncements
Accounting Standards adopted in 2023:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments, was $1.5 million. The adjustment net of tax recorded to shareholders’ equity totaled $1.2 million. See Note 1 for additional details of adoption of this standard.
In March 2022, the FASB issued Accounting Standards Update ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.
In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of ASU 2022-01 did not have a material impact on the Company’s consolidated financial statements.
| 14 |
| Table of Contents |
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The adoption of ASU 2021-08 did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Pending Adoption:
In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
In August 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification® Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective on a prospective basis for all joint ventures with a formation date on or after January 1, 2025. Early adoption of ASU No. 2023-05 is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply ASU No. 2023-05 either prospectively or retrospectively. The Company does not expect the adoption of ASU 2023-05 to have a material impact on its consolidated financial statements.
In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
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In March 2023, the FASB issued ASU No. 2023-01, “Leases (Topic 842): Common Control Arrangements”. These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2023-01 to have a material impact on its consolidated financial statements.
In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of U.S. dollar LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company transitioned all loan agreements, other than SWAP loans, away from LIBOR during 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation of transition away from LIBOR by the swap holder.
In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.
The Company transitioned all loan agreements, other than SWAP loans, away from LIBOR during 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation of transition away from LIBOR by the swap holder.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.
| 16 |
| Table of Contents |
Note 2. Investment Securities
The amortized cost and estimated fair value of securities held to maturity along with gross unrealized gains and losses are summarized as follows (dollars in thousands):
|
|
|
| Gross |
|
| Gross |
|
|
| ||||||
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U. S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
There is no allowance for credit losses on held to maturity securities. At September 30, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the quarter ended September 30, 2023.
The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized as follows (dollars in thousands):
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Securities Available for Sale |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Securities Available for Sale |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
There was no allowance for credit losses on available for sale securities.
The amortized cost and fair value of securities at September 30, 2023, by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| Securities Held to Maturity |
|
| Securities Available for Sale |
| ||||||||||
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
| ||||
Due in one year or less |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Due after one year through five years |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due after five years |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due after ten years |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 17 |
| Table of Contents |
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):
|
| Three Months Ended September 30, 2023 |
|
| Nine Months Ended September 30, 2023 |
| ||
Realized gains (losses): |
|
|
|
|
|
| ||
Gross realized gains |
| $ |
|
| $ |
| ||
Gross realized losses |
|
|
|
|
|
| ||
Net realized (losses) |
| $ |
|
| $ |
| ||
Proceeds from sales of securities |
| $ |
|
| $ |
| ||
|
| Three Months Ended September 30, 2022 |
|
| Nine Months Ended September 30, 2022 |
| ||
Realized gains (losses): |
|
|
|
|
|
| ||
Gross realized gains |
| $ |
|
| $ |
| ||
Gross realized (losses) |
|
|
|
|
| ( | ) | |
Net realized (losses) |
| $ |
|
| $ | ( | ) | |
Proceeds from sales of securities |
| $ |
|
| $ |
| ||
The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position at September 30, 2023 (dollars in thousands):
|
| Less than 12 Months |
|
| More than 12 Months |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Unrealized losses at September 30, 2023 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.
The following table shows the gross unrealized losses and estimated fair value of available sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022 (dollars in thousands):
|
| Less than 12 Months |
|
| More than 12 Months |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Treasury |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
| 18 |
| Table of Contents |
As of September 30, 2023, other investments consist of investments in twelve low-income housing and historic equity partnerships (carrying basis of $
The Company has pledged securities with a par value of $
Note 3. Loans and Allowance for Credit Losses
Under adoption of ASC 326, there were changes to certain loan segments to better differentiate credit characteristics and align with our ACL model. Construction/land development was split into two segments: 1-4 family residential construction and other construction, land development and land. Commercial real estate was also split into two segments: owner-occupied commercial real estate and other commercial real estate. Commercial and industrial – non-real estate was divided into agricultural loans, commercial and industrial loans, and municipal loans. Dealer finance was consolidated with other automobile loans.
The following is a summary of the major categories of total loans outstanding at September 30, 2023 and December 31, 2022 (dollars in thousands):
September 30, 2023 |
| |||
1-4 Family residential construction |
| $ |
| |
Other construction, land development and land |
|
|
| |
Secured by farmland |
|
|
| |
Home equity – open end |
|
|
| |
Real estate |
|
|
| |
Home Equity – closed end |
|
|
| |
Multifamily |
|
|
| |
Owner-occupied commercial real estate |
|
|
| |
Other commercial real estate |
|
|
| |
Agricultural loans |
|
|
| |
Commercial and industrial |
|
|
| |
Credit Cards |
|
|
| |
Automobile loans |
|
|
| |
Other consumer loans |
|
|
| |
Municipal loans |
|
|
| |
Gross loans |
|
|
| |
Unamortized net deferred loan fees |
|
| ( | ) |
Less allowance for credit losses |
|
|
| |
Net loans |
| $ |
| |
| 19 |
| Table of Contents |
|
| December 31, 2022 |
| |
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 |
|
|
| |
Gross loans |
|
|
| |
Unamortized net deferred loan fees |
|
| ( | ) |
Less allowance for credit losses |
|
|
| |
Net loans |
| $ |
| |
The Company has pledged loans held for investment as collateral for borrowings with the FHLB totaling $
Nonaccrual and Past Due Loans
The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2023 (dollars in thousands):
|
| Accruing Loans 30-59 Days Past due |
|
| Accruing Loans 60-89 Days Past due |
|
| Accruing Loans 90 Days or More Past due |
|
| Nonaccrual Loans |
|
| Accruing Current Loans |
|
| Total Loans |
| ||||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
1-4 Family residential construction |
| $ |
|
| $ |
|
| $ | - |
|
| $ |
|
| $ |
|
| $ |
| |||||
Other construction, land development and land |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Secured by farmland |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Home equity – open end |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Real estate |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Home Equity – closed end |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Multifamily |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Owner-occupied commercial real estate |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Other commercial real estate |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Agricultural loans |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Commercial and industrial |
|
|
|
|
|
|
|
| 25 |
|
|
|
|
|
|
|
|
|
| |||||
Credit Cards |
|
|
|
|
|
|
|
| 4 |
|
|
|
|
|
|
|
|
|
| |||||
Automobile loans |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Other consumer loans |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Municipal loans |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Gross loans |
|
| 4,678 |
|
|
| 256 |
|
|
| 29 |
|
|
|
|
|
|
|
|
|
| |||
Less: Unamortized net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||
Loans held for investment |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
| 20 |
| Table of Contents |
The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2022 (dollars in thousands):
|
| Accruing Loans 30-59 Days Past due |
|
| Accruing Loans 60-89 Days Past due |
|
| Accruing Loans 90 Days or More Past Due |
|
| Nonaccrual Loans |
|
| Accruing Current Loans |
|
| Total Loans |
| ||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Construction/Land Development |
| $ |
|
| $ |
|
| $ | - |
|
| $ |
|
| $ |
|
| $ |
| |||||
Farmland |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Real Estate |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Multi-Family |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Commercial Real Estate |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Home Equity – closed end |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Home Equity – open end |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Commercial & Industrial – Non- Real Estate |
|
|
|
|
|
|
|
| 31 |
|
|
|
|
|
|
|
|
|
| |||||
Consumer |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||||
Dealer Finance |
|
|
|
|
|
|
|
| 5 |
|
|
|
|
|
|
|
|
|
| |||||
Credit Cards |
|
|
|
|
|
|
|
| 2 |
|
|
|
|
|
|
|
|
|
| |||||
Less: Unamortized net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||
Loans held for investment |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
There were $
The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated (dollars in thousands). Information for September 30, 2023 is presented under CECL, while information for December 31, 2022 is presented in accordance with the previously applicable incurred loss methodology.
|
| CECL |
|
| Incurred Loss |
| ||||||||||
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Nonaccrual loans with No Allowance |
|
| Nonaccrual Loans with an Allowance |
|
| Total Nonaccrual Loans |
|
| Nonaccrual Loans |
| ||||
1-4 Family residential construction |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Other construction, land development and land |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured by farmland |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Home equity – open end |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Home Equity – closed end |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Multifamily |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Owner-occupied commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Agricultural loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Automobile loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other consumer loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 21 |
| Table of Contents |
The following table represents the accrued interest receivables written off by reversing interest income during the three and nine months ended September 30, 2023 (dollars in thousands):
|
| For the Three Months Ended September 30, 2023 |
|
| For the Nine Months Ended September 30, 2023 |
| ||
1-4 Family residential construction |
| $ |
|
| $ |
| ||
Other construction, land development and land |
|
|
|
|
|
| ||
Secured by farmland |
|
|
|
|
|
| ||
Home equity – open end |
|
|
|
|
|
| ||
Real estate |
|
|
|
|
|
| ||
Home Equity – closed end |
|
|
|
|
|
| ||
Multifamily |
|
|
|
|
|
| ||
Owner-occupied commercial real estate |
|
|
|
|
|
| ||
Other commercial real estate |
|
|
|
|
|
| ||
Agricultural loans |
|
|
|
|
|
| ||
Commercial and industrial |
|
|
|
|
|
| ||
Credit Cards |
|
|
|
|
|
| ||
Automobile loans |
|
|
|
|
|
| ||
Other consumer loans |
|
|
|
|
|
| ||
Municipal loans |
|
|
|
|
|
| ||
Total loans |
| $ |
|
| $ |
| ||
| 22 |
| Table of Contents |
Credit Quality Indicators
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023 (dollars in thousands):
|
| Term Loans by Year of Origination |
|
|
|
|
| |||||||||||||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| Prior |
|
| Revolving |
|
| Total |
| ||||||||
1-4 Family residential construction |
| |||||||||||||||||||||||||||||||
Pass |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total 1-4 Family residential construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction, land development and land | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Other construction, land development and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by farmland | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Secured by farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity – open end | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Home equity - open end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity – closed end | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Home Equity - closed end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Multifamily |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied commercial real estate | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Owner-occupied commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial real estate | ||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total Other commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| 23 |
| Table of Contents |
|
| Term Loans by Year of Origination |
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| Prior |
|
| Revolving |
|
| Total |
| |||||||||||
Agricultural loans |
| ||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Agricultural loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Commercial and industrial | |||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total 1-4 Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Credit Cards | |||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Credit cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Automobile loans | |||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Automobile loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other consumer loans | |||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Other consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Municipal loans | |||||||||||||||||||||||||||||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Municipal loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Current period gross write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||||
Less: Unamortized net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||
Loans held for investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||
Current period gross write-offs |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||||
Under the adoption of ASC 326, the Company consolidated its internal risk ratings 1 through 5 into a pass category. Doubtful loans are charged off; dealer finance loans utilize the updated credit quality indicators. Credit cards are classified as pass or substandard. The credit quality indicators for watch and substandard remain unchanged.
Description of the Company’s credit quality indicators under CECL:
Pass: Loans in all classes that are part of the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
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.
| 24 |
| Table of Contents |
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.
Credit cards are classified as pass or substandard. A credit card is substandard when payments of principal and interest are past due 90 days or more.
The following table shows the Company’s loan portfolio broken down by internal loan grade as of December 31, 2022 (dollars in thousands):
December 31, 2022 |
| Grade 1 Minimal Risk |
|
| Grade 2 Modest Risk |
|
| Grade 3 Average Risk |
|
| Grade 4 Acceptable Risk |
|
| Grade 5 Marginally Acceptable |
|
| Grade 6 Watch |
|
| Grade 7 Substandard |
|
| Grade 8 Doubtful |
|
| Total |
| |||||||||
Construction/Land Development |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Multi-Family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Home Equity – closed end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Home Equity – open end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Commercial & Industrial - Non-Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Consumer (excluding dealer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Gross loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||
Less: Unamortized net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| |
|
| Credit Cards |
|
| Dealer Finance |
| ||
Performing |
| $ |
|
| $ |
| ||
Nonperforming |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
Description of internal loan grades under Incurred Loss:
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.
| 25 |
| Table of Contents |
Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.
Grade 6 – Watch: Loans are currently protected but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.
Grade 8 – Doubtful: 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.
Collateral Dependent Disclosures
The collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
| 26 |
| Table of Contents |
The following table presents an analysis of collateral-dependent loans of the Company as of September 30, 2023 (dollars in thousands):
|
| September 30, 2023 |
| |||||
|
| Real Estate |
|
| Business/ Other Assets |
| ||
1-4 Family residential construction |
| $ |
|
| $ |
| ||
Other construction, land development and land |
|
|
|
|
|
| ||
Secured by farmland |
|
|
|
|
|
| ||
Home equity – open end |
|
|
|
|
|
| ||
Real estate |
|
|
|
|
|
| ||
Home Equity – closed end |
|
|
|
|
|
| ||
Multifamily |
|
|
|
|
|
| ||
Owner-occupied commercial real estate |
|
|
|
|
|
| ||
Other commercial real estate |
|
|
|
|
|
| ||
Agricultural loans |
|
|
|
|
|
| ||
Commercial and industrial |
|
|
|
|
|
| ||
Credit Cards |
|
|
|
|
|
| ||
Automobile loans |
|
|
|
|
|
| ||
Other consumer loans |
|
|
|
|
|
| ||
Municipal loans |
|
|
|
|
|
| ||
Total loans |
| $ |
|
| $ |
| ||
Allowance for Credit Losses
The following tables summarize the activity related to the allowance for credit losses for the nine months ended September 30, 2023 under the CECL methodology (dollars in thousands).
ACL for Loans
|
| December 31, 2022 |
|
| Adjustment for adoption of ASU 2016-13 |
|
| Charge-offs |
|
| Recoveries |
|
| Provision for loan credit losses |
|
| September 30, 2023 |
| ||||||
1-4 Family residential construction |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Other construction, land development and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Secured by farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Home equity – open end |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Real estate |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Home Equity – closed end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Multifamily |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||||
Owner-occupied commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||||
Other commercial real estate |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||
Agricultural loans |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Automobile loans |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
| 27 |
| Table of Contents |
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods (dollars in thousands).
September 30, 2022 |
| Beginning Balance |
|
| Charge-offs |
|
| Recoveries |
|
| Provision |
|
| Ending Balance |
|
| Individually Evaluated for Impairment |
|
| Collectively Evaluated for Impairment |
| |||||||
Allowance for 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 |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||
The following tables presents, as of September 30, 2023 and December 31, 2022 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above (dollars in thousands).
|
| September 30, 2023 |
| |||||||||||||||||||||
|
| Loan Balances |
|
| Allowance for Credit Losses - Loans |
| ||||||||||||||||||
|
| Loans Individually Evaluated |
|
| Loans Collectively Evaluated |
|
| Total |
|
| Loans Individually Evaluated |
|
| Loans Collectively Evaluated |
|
| Total |
| ||||||
1-4 Family residential construction |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Other construction, land development and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Secured by farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Home equity – open end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Home Equity – closed end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Multifamily |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner-occupied commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Agricultural loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Automobile loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
| 28 |
| Table of Contents |
December 31, 2022 |
| 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 |
|
|
|
|
|
|
|
|
| |||
Gross Loans |
|
|
|
|
|
|
|
|
| |||
Less: Unamortized net deferred loan fees |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Total |
| $ |
|
| $ |
|
| $ |
| |||
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.
| 29 |
| Table of Contents |
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022 (dollars in thousands):
|
| December 31, 2022 |
| |||||||||||||
|
|
|
|
| Unpaid |
|
|
|
| Average |
| |||||
|
| Recorded |
|
| Principal |
|
| Related |
|
| Recorded |
| ||||
|
| Investment(1) |
|
| Balance |
|
| Allowance |
|
| Investment |
| ||||
Impaired loans with no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
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 an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
1The Recorded Investment is defined as the original principal balance less principal payments, charge-offs and nonaccrual payments applied to principal.
| 30 |
| Table of Contents |
The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the nine-month period ended September 30, 2022 (dollars in thousands):
|
| Nine Months Ended September, 30, 2022 |
| |||||
|
| Average Recorded |
|
| Interest Income |
| ||
|
| Investment |
|
| Recognized |
| ||
Impaired loans with no related allowance recorded: |
|
|
|
|
|
| ||
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 an allowance recorded: |
|
|
|
|
|
|
|
|
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 Card |
|
|
|
|
|
| ||
Dealer Finance |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Total Impaired Loans |
| $ |
|
| $ |
| ||
Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a remaining life model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
| 31 |
| Table of Contents |
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
There were no loans modified to a borrower experiencing financial difficulty in the three months ended September 30, 2023. There was one loan modified to a borrower experiencing financial difficulty in the nine months ended September 30, 2023 (see table below, dollars in thousands). There were no loans that had a payment default during the quarter that were modified in the previous 12 months.
|
| Nine months ending September 30, 2023 |
| |||||
|
| Term Extension |
| |||||
|
| Amortized Cost |
|
| Weighted Average Term Extension (Months) |
| ||
Automobile loans |
| $ |
|
|
|
| ||
Total loans |
| $ |
|
|
|
| ||
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months (dollars in thousands):
|
| Payment Status (Amortized Cost Basis) |
| |||||||||
|
| Current |
|
| 30-89 Days Past Due |
|
| 90+ Days Past Due |
| |||
1-4 Family residential construction |
| $ | - |
|
| $ | - |
|
| $ | - |
|
Other construction, land development and land |
|
| - |
|
|
| - |
|
|
| - |
|
Secured by farmland |
|
| - |
|
|
| - |
|
|
| - |
|
Home equity – open end |
|
| - |
|
|
| - |
|
|
| - |
|
Real estate |
|
| - |
|
|
|
|
|
| - |
| |
Home Equity – closed end |
|
| - |
|
|
| - |
|
|
| - |
|
Multifamily |
|
| - |
|
|
| - |
|
|
| - |
|
Owner-occupied commercial real estate |
|
| - |
|
|
| - |
|
|
| - |
|
Other commercial real estate |
|
| - |
|
|
| - |
|
|
| - |
|
Agricultural loans |
|
| - |
|
|
| - |
|
|
| - |
|
Commercial and industrial |
|
| - |
|
|
| - |
|
|
| - |
|
Credit Cards |
|
| - |
|
|
| - |
|
|
| - |
|
Automobile loans |
|
|
|
|
| - |
|
|
| - |
| |
Other consumer loans |
|
| - |
|
|
| - |
|
|
| - |
|
Municipal loans |
|
| - |
|
|
| - |
|
|
| - |
|
Total loans |
| $ |
|
| $ |
|
| $ | - |
| ||
The following table shows, by modification type, TDRs that occurred during 2022 (dollars in thousands):
|
| December 31, 2022 |
| |||||||||
|
| Number of Contracts |
|
| Pre-Modification Outstanding Recorded Investment |
|
| Post-Modification Outstanding Recorded Investment |
| |||
Extended maturity |
|
|
|
| $ |
|
| $ |
| |||
Change in terms |
|
|
|
|
|
|
|
|
| |||
Total |
|
|
|
| $ |
|
| $ |
| |||
Unfunded Commitments
The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans and are discussed above. The allowance for credit losses for unfunded loan commitments of $
| 32 |
| Table of Contents |
The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the nine months ended September 30, 2023 (dollars in thousands).
|
| Total Allowance for Credit Losses – Unfunded Commitments |
| |
Balance, December 31, 2022 |
| $ |
| |
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13 |
|
|
| |
Provision for credit losses |
|
|
| |
Balance, September 30, 2023 |
| $ |
| |
Note 4. Mortgage Banking and Derivatives
Loans Held for Sale
The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company uses fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business totaled $
Interest Rate Lock Commitments and Forward Sales Commitments
The Company, through F&M Mortgage, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (IRLCs). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment).
The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation. The Company determines the fair value of the IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate loan commitments will close.
The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2023, and totaled $
The Company uses fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2023 and totaled $
| 33 |
| Table of Contents |
Note 5. Employee Benefit Plan
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31st as the measurement date for the defined benefit pension plan. The plan was amended on February 15, 2023 to stop the accrual of future benefits. The following is a summary of net periodic pension costs for the three and nine month periods ended September 30, 2023 and 2022 (dollars in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2023 |
|
| September 30, 2022 |
|
| September 30, 2023 |
|
| September 30, 2022 |
| ||||
Service cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Expected return on plan assets |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Amortization of prior service cost |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net periodic pension cost |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Note 6. Stock-Based Compensation
The Company granted stock awards to directors and employees under the Company’s 2020 Stock Incentive Plan. On March 7, 2023 the Bank’s Compensation Committee awarded
Note 7. Fair Value
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
Level 1 – |
| Valuation is based on quoted prices in active markets for identical assets and liabilities. |
Level 2 – |
| Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. |
Level 3 – |
| Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. |
| 34 |
| Table of Contents |
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.
Loans Held for Sale
The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.
Derivative assets – IRLCs
The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2.
Derivative Asset/Liability – Forward Sale Commitments
The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.
| 35 |
| Table of Contents |
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (dollars in thousands):
|
|
|
| Fair Value Measurements Using: |
| |||||||||||
|
| Balance at September 30, 2023 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans held for sale, F&M Mortgage |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
IRLC |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward Sales Commitments |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets at Fair Value |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
| Fair Value Measurements Using: |
| |||||||||||
|
| Balance at December 31, 2022 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans held for sale, F&M Mortgage |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Agency |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets at Fair Value |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLC |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Liabilities at Fair Value |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
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:
Collateral Dependent Loans with an ACL
In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
| 36 |
| Table of Contents |
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):
|
|
|
| Fair Value Measurements Using: |
| |||||||||||
Collateral dependent loans with an ACL |
| Balance at September 30, 2023 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Other construction, land development and land |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total collateral dependent loans with an ACL |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
| Fair Value Measurements Using: |
| |||||||||||
Impaired Loans |
| Balance at December 31, 2022 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Construction/Land Development |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dealer Finance |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Impaired loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
The following table presents information about Level 3 Fair Value Measurements for September 30, 2023 and December 31, 2022 (dollars in thousands):
|
| Fair Value at September 30, 2023 |
|
| Valuation Technique |
| Significant Unobservable Inputs |
| Range |
| ||
Collateral Dependent Loans |
| $ |
|
|
|
|
| |||||
|
| Fair Value at December 31, 2022 |
|
| Valuation Technique |
| Significant Unobservable Inputs |
| Range | ||
Impaired Loans |
| $ |
|
|
|
| |||||
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
The Company markets other real estate owned and assets held for sale 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 Company did not have any other real estate owned as of September 30, 2023 or December 31, 2022.
Note 8. Disclosures about Fair Value of Financial Instruments
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022. Fair values for September 30, 2023 and December 31, 2022 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.”
| 37 |
| Table of Contents |
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows (dollars in thousands):
|
|
|
|
| Fair Value Measurements at September 30, 2023 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 September 30, 2023 |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for investment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Bank owned life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
IRLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Short-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
|
|
|
|
| Fair Value Measurements at December 31, 2022 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, 2022 |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for investment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Bank owned life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Short-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
IRLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
| 38 |
| Table of Contents |
Note 9. Accumulated Other Comprehensive Loss
The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).
|
| For the three months ended September 30, 2023 |
| |||||||||
|
| Unrealized Securities Gains (Losses) |
|
| Adjustments Related to Pension Plan |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at June 30, 2023 |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
Change in unrealized securities gains (losses), net of tax benefit of $1,442 |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Balance at September 30, 2023 |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
|
| For the three months ended September 30, 2022 |
| |||||||||
|
| Unrealized Securities Gains (Losses) |
|
| Adjustments Related to Pension Plan |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at June 30, 2022 |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Change in unrealized securities gains (losses), net of tax benefit of $2,075 |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Balance at September 30, 2022 |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
| For the nine months ended September 30, 2023 |
| |||||||||
|
| Unrealized Securities Gains (Losses) |
|
| Adjustments Related to Pension Plan |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at December 31, 2022 |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
Change in unrealized securities gains, net of tax expense of $701 |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Balance at September 30, 2023 |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
|
| For the nine months ended September 30, 2022 |
| |||||||||
|
| Unrealized Securities Gains (Losses) |
|
| Adjustments Related to Pension Plan |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at December 31, 2021 |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Change in unrealized securities losses, net of tax benefit of $10,417 |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20 |
|
|
|
|
|
|
|
|
| |||
Balance at September 30, 2022 |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
There were no reclassifications adjustments reported on the consolidated statements of income during the three and nine months ended September 30, 2023.
Note 10. Debt
Short-term Debt
The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to support loans growth 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. There was $
| 39 |
| Table of Contents |
Long-term Debt
On July 29, 2020, the Company sold and issued to an institutional accredited investor $
Note 11. Revenue Recognition
Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Substantially all the Company’s revenue is generated from contracts with customers. 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 guidance. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), 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.
| 40 |
| Table of Contents |
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands).
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
In-scope of Topic 606: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Service Charges on Deposits |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Investment Services and Insurance Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Title Insurance Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
ATM and check card fees |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest Income (in-scope of Topic 606) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest Income (out-of-scope of Topic 606) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Noninterest Income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
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 September 30, 2023 and December 31, 2022, 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.
Note 12. Leases
The Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
| 41 |
| Table of Contents |
The following tables present information about the Company’s leases (dollars in thousands):
|
| September 30, 2023 |
| |
Lease Liabilities |
| $ |
| |
Right-of-use assets |
| $ |
| |
Weighted average remaining lease term (years) |
|
| ||
Weighted average discount rate |
|
| % | |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Operating lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cash paid for amounts included in the measurement of lease liabilities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):
|
| September 30, 2023 |
| |
Three months ending December 31, 2023 |
| $ |
| |
Twelve months ending December 31, 2024 |
|
|
| |
Twelve months ending December 31, 2025 |
|
|
| |
Twelve months ending December 31, 2026 |
|
|
| |
Twelve months ending December 31, 2027 |
|
|
| |
Thereafter |
|
|
| |
Total undiscounted cash flows |
| $ |
| |
Discount |
|
|
| |
Lease liabilities |
| $ |
| |
Note 13. Subsequent Events
On October 23, 2023 the Bank filed documents for the dissolution of TEB Life Insurance Company with the Arizona Corporation Commission. TEB has made accommodations to extinguish all remaining insurance obligations and has no insurance obligations by direct writing. The Bank plans for the dissolution to be finalized by December 31, 2023.
On November 7, 2023 the Company announced
| 42 |
| Table of Contents |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
F & M Bank Corp. (“Company”), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary, Farmers & Merchants Bank (“Bank”). TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services (“FMFS”) and VBS Mortgage LLC (dba “F&M Mortgage”) are wholly owned subsidiaries of the Bank. The Company held a majority ownership in VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage, until the Company purchased F&M Mortgage’s minority interest in VST on January 3, 2022.
The Bank is a full-service commercial bank offering a wide range of banking and financial services through its fourteen branch offices as well as its loan production office located in Penn Laird, Virginia (which specializes in providing automobile financing through a network of automobile dealers). TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides brokerage services and property/casualty insurance to customers of the Bank. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, Woodstock, and Winchester, Virginia. VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, Virginia.
The Company’s primary trade area services customers in the counties of Rockingham, Shenandoah, Augusta and Frederick, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester.
Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part 1, Item 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).
Caution Regarding Forward-Looking Statements
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgments of the Company and its management about future events. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, those described in described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, and the following:
| · | 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 market area, as well as general economic, market, or business conditions; |
|
|
|
| · | An insufficient allowance for credit losses as a result of inaccurate assumptions; |
|
|
|
| · | Our ability to maintain our “well-capitalized” regulatory status; |
|
|
|
| · | Changes in our competitive position, competitive actions by other financial institutions, financial technology firms and others, the competitive nature of the financial services industry and our ability to compete effectively in our banking markets; |
|
|
|
| · | Our ability to manage growth; |
|
|
|
| · | Our potential growth, including our entrance or expansion into new markets, the need for sufficient capital to support that growth, difficulties or disruptions expanding into new markets or integrating the operations of acquired branches or business, and the inability to obtain the expected benefits of such growth; |
| 43 |
| Table of Contents |
| · | 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; |
|
|
|
| · | The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB, or other accounting standards setting bodies; |
|
|
|
| · | Geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad; |
|
|
|
| · | Other factors identified in reports the Company files with the SEC from time to time; and |
|
|
|
| · | Other circumstances, many of which are beyond our control. |
All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. 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. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.
The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of September 30, 2023 were unchanged from the policies disclosed in the 2022 Form 10-K within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for the adoption of ASC 326. See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.
Results of Operations
Third Quarter Income Statement Highlights
Net income for the current quarter was $1.0 million or $0.29 per share, an increase of $777,000 from the second quarter and a decrease of $1.3 million from the third quarter 2022. The increase from the second quarter was due to an increase in net interest income of $220,000 and a decrease in noninterest expense of $1.3 million, which included an accrual for a potential one-time severance payment to a former officer in the amount of $764,000 in the second quarter. The decrease from the third quarter of 2022 is attributable to a $1.1 million decrease in net interest income.
Net interest income for the current quarter was $8.0 million, an increase of $220,000 from the second quarter 2023 and a decrease of $1.1 million from third quarter 2022. Interest income for the three months ended September 30, 2023, was $14.6 million, an increase of $1.0 million from second quarter 2023 and $3.6 million over the prior year third quarter, due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $6.6 million from $5.9 million in the prior quarter and $1.9 million from the same period in 2022.
During third quarter 2023, the Bank recorded a $620,000 provision for credit losses due to loan growth of $29.3 million and $193,000 in net charge-offs. A provision for credit losses of $539,000 was recorded in second quarter 2023, compared to no provision for credit losses in third quarter 2022. At September 30, 2023, the Allowance for Credit Losses for loans (ACL) totaled $9.2 million or 1.14% of loans held for investment.
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| Table of Contents |
Noninterest income totaled $2.5 million for the quarter, a decrease from the second quarter of $225,000 and an increase of $245,000 from the third quarter of 2022. The decrease from last quarter was due to a one time gain on bank owned life insurance of $363,000 in the second quarter, offset by increases of $67,000 in title insurance income, $19,000 in investment services and insurance income, and $154,000 in other operating income. The increase from third quarter 2022 is primarily due to increases in other operating income of $201,000, title insurance income of $68,000, investment services and insurance income of $58,000, and ATM and check card fees of $44,000. These increases were offset by a decrease of $130,000 in mortgage banking income. There were fewer mortgage loans sold on the secondary market as a result of an overall decrease in loan volume and a shift in production from the 30-year fixed rate product to variable rate products which were retained in the Bank’s loan portfolio.
Noninterest expense totaled $8.9 million in third quarter 2023, down $1.3 million from the linked quarter and up $50,000 from third quarter 2022. The decrease from second quarter 2023 was driven by reductions in salary expense of $809,000, employee benefits of $187,000, legal and professional fees of $212,000, and telecommunication expense of $117,000. There was little change from third quarter 2022 as decreases of $124,000 in salaries, $277,000 in employee benefits, and $68,000 in telecommunications were offset by increases of $352,000 in other operating expenses, $66,000 in advertising expenses, and $63,000 in equipment expenses.
Year-to-Date Income Statement Highlights
Year-to-date net income was $2.3 million or $0.67 per share compared to $6.6 million or $1.92 per share for the same period in 2022. The decrease is due to a decline in net interest income of $2.6 million, an increase in the provision for credit losses of $1.0 million, a decrease of $294,000 in noninterest income (excluding securities losses) and an increase in noninterest expense of $1.3 million. There were no securities gains or losses in the first nine months of 2023 compared to a $97,000 loss recorded in 2022.
Net interest income for the nine months ended September 30, 2023 was $23.6 million, a decrease of $2.6 million from the first nine months of 2022. Interest income was $41.2 million, an increase of $11.1 million from 2022 due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $17.6 million from $3.9 million.
In 2023, the Bank recorded a $1.2 million provision for credit losses. This is $1.0 million higher than the provision for loan losses recorded in the first nine months of 2022. The higher provision expense is due to loan growth and net charge-offs in the indirect auto portfolio.
Noninterest income totaled $7.6 million for the first nine months of 2023, which was a decrease of $197,000 from the first nine months of 2022. The primary reason for the decrease was a reduction of $1.0 million in mortgage banking income. Lower mortgage banking activity also negatively impacted title insurance income which declined by $146,000 from the first nine months of 2022 compared to the same period in 2023. Service charges on deposit accounts decreased by $81,000 due to a change that was made in August 2022 in the method used to charge insufficient funds and overdraft fees. Additionally, there was a $97,000 loss on investment securities in 2022 that was not repeated in 2023. These decreases were partially offset by increases of $216,000 in investment and insurance income, $460,000 in bank owned life insurance income (including the previously mentioned gain of $363,000), ATM and check card fees of $148,000, and $140,000 in other operating income.
Noninterest expenses totaled $28.3 million for the first nine months of 2023, compared to $27.0 million in 2022. The increase was primarily due to an increase in salary expense related to the previously mentioned accrual for a potential one-time severance payment. Other increases were spread over professional fees of $290,000, equipment expense of $220,000 for the installation of new ATMs, and other noninterest expenses of $751,000. These amounts were partially offset by a decrease in employee benefits of $668,000 and lower telecommunication and data processing expense of $279,000 resulting from the renegotiation of the contract with the Bank’s core system provider.
For the nine months ended September 30, 2023 and September 30, 2022, there was an income tax benefit of $526,000 and income tax expense of $280,000, respectively. The Company’s effective tax rate differs from the 21% federal statutory rate due to the impact of various permanent tax differences, including tax-exempt income from municipal securities, bank owned life insurance income, including gains, tax credits from low-income housing tax credit investments, and the vesting of other stock-based compensation.
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| Table of Contents |
Net Interest Income and Net Interest Margin
For the first nine months of 2023, tax equivalent net interest income1 totaled $23.7 million, a decrease of $2.6 million from the first nine months of 2022, resulting in a decrease in our net interest margin by 0.35%. Interest income and fees on loans held for investment were $10.5 million higher due to higher rates on variable rate loans and growth of $92.3 million in average loans held for sale since September 30, 2022. Income from interest bearing deposits and securities was $665,000 higher due to increased interest rates.
Interest expense increased by $13.7 million in the first nine months of 2023 to $17.6 million at September 30, 2023, mostly due to higher market interest rates and increases in the average balances of deposits and short-term debt. Beginning in the fourth quarter of 2022 and continuing through the second quarter of 2023, rates paid on money market and time deposits increased significantly. The increase in market interest rates also caused a shift in the deposit mix to higher-cost accounts. Short-term borrowings were used to augment deposits to fund loan growth which increased short-term borrowings expense to $2.2 million from $204,000 last year.
The net interest margin was 2.67% and 3.11% for the three months ended September 30, 2023 and 2022, respectively. The lower net interest margin was due to higher cost of funds, partially offset by higher yields on interest-earning assets.
_____________
1 Tax equivalent net interest income is a non-GAAP financial measure. For more information, see “Non-GAAP Financial Measures” below.”
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| Table of Contents |
The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):
|
| Nine Months Ended September 30, 2023 |
|
| Nine Months Ended September 30, 2022 |
|
| Three Months Ended September 30, 2023 |
|
| Three Months Ended September 30, 2022 |
| ||||||||||||||||||||||||||||||||||||
|
| Average Balance 5 |
|
| Income/ Expense |
|
| Average Rates1 |
|
| Average Balance5 |
|
| Income/ Expense |
|
| Average Rates1 |
|
| Average Balance5 |
|
| Income/ Expense |
|
| Average Rates1 |
|
| Average Balance5 |
|
| Income/ Expense |
|
| Average Rates1 |
| ||||||||||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Loans held for investment2,3,4 |
| $ | 767,673 |
|
| $ | 34,930 |
|
|
| 6.08 | % |
| $ | 675,420 |
|
| $ | 24,423 |
|
|
| 4.83 | % |
| $ | 787,983 |
|
| $ | 12,537 |
|
|
| 6.31 | % |
| $ | 696,539 |
|
| $ | 8,894 |
|
|
| 5.07 | % |
Loans held for sale |
|
| 1,700 |
|
|
| 66 |
|
|
| 5.19 | % |
|
| 4,099 |
|
|
| 90 |
|
|
| 2.94 | % |
|
| 1,454 |
|
|
| 19 |
|
|
| 5.18 | % |
|
| 4,380 |
|
|
| 29 |
|
|
| 2.63 | % |
Federal funds sold |
|
| 5,031 |
|
|
| 187 |
|
|
| 4.97 | % |
|
| 26,605 |
|
|
| 82 |
|
|
| 0.41 | % |
|
| 4,390 |
|
|
| 54 |
|
|
| 4.88 | % |
|
| 8,451 |
|
|
| 47 |
|
|
| 2.21 | % |
Interest bearing deposits |
|
| 758 |
|
|
| 31 |
|
|
| 5.47 | % |
|
| 1,789 |
|
|
| 5 |
|
|
| 0.37 | % |
|
| 811 |
|
|
| 13 |
|
|
| 6.36 | % |
|
| 188 |
|
|
| 1 |
|
|
| 2.11 | % |
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 391,589 |
|
|
| 5,718 |
|
|
| 1.95 | % |
|
| 440,419 |
|
|
| 5,282 |
|
|
| 1.60 | % |
|
| 385,734 |
|
|
| 1,900 |
|
|
| 1.95 | % |
|
| 447,944 |
|
|
| 1,947 |
|
|
| 1.72 | % |
Partially taxable 4 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 125 |
|
|
| 1 |
|
|
| 1.07 | % |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 125 |
|
|
| - |
|
|
| - |
|
Tax exempt 4 |
|
| 14,291 |
|
|
| 400 |
|
|
| 3.74 | % |
|
| 12,081 |
|
|
| 301 |
|
|
| 3.33 | % |
|
| 14,391 |
|
|
| 134 |
|
|
| 3.69 | % |
|
| 12,917 |
|
|
| 134 |
|
|
| 4.12 | % |
Total earning assets |
| $ | 1,181,042 |
|
| $ | 41,332 |
|
|
| 4.68 | % |
| $ | 1,160,538 |
|
| $ | 30,184 |
|
|
| 3.48 | % |
| $ | 1,194,763 |
|
| $ | 14,657 |
|
|
| 4.87 | % |
| $ | 1,170,544 |
|
| $ | 11,052 |
|
|
| 3.75 | % |
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
| 172,077 |
|
|
| 2,414 |
|
|
| 1.88 | % |
|
| 182,383 |
|
|
| 453 |
|
|
| 0.33 | % |
|
| 168,159 |
|
|
| 864 |
|
|
| 2.04 | % |
|
| 186,614 |
|
|
| 247 |
|
|
| 0.53 | % |
Savings |
|
| 506,190 |
|
|
| 9,921 |
|
|
| 2.62 | % |
|
| 505,759 |
|
|
| 1,917 |
|
|
| 0.51 | % |
|
| 509,642 |
|
|
| 3,526 |
|
|
| 2.74 | % |
|
| 512,414 |
|
|
| 897 |
|
|
| 0.69 | % |
Time deposits |
|
| 151,338 |
|
|
| 2,734 |
|
|
| 2.42 | % |
|
| 120,975 |
|
|
| 690 |
|
|
| 0.76 | % |
|
| 180,400 |
|
|
| 1,421 |
|
|
| 3.13 | % |
|
| 121,907 |
|
|
| 234 |
|
|
| 0.76 | % |
Federal funds purchased |
|
| 727 |
|
|
| 32 |
|
|
| 5.88 | % |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 961 |
|
|
| 15 |
|
|
| 6.19 | % |
|
| - |
|
|
| - |
|
|
| - |
|
Short-term debt |
|
| 57,901 |
|
|
| 2,185 |
|
|
| 5.05 | % |
|
| 16,403 |
|
|
| 204 |
|
|
| 1.66 | % |
|
| 50,250 |
|
|
| 687 |
|
|
| 5.42 | % |
|
| 30,880 |
|
|
| 158 |
|
|
| 2.03 | % |
Long-term debt |
|
| 6,906 |
|
|
| 343 |
|
|
| 6.64 | % |
|
| 15,772 |
|
|
| 628 |
|
|
| 5.32 | % |
|
| 6,917 |
|
|
| 115 |
|
|
| 6.60 | % |
|
| 9,334 |
|
|
| 345 |
|
|
| 14.66 | % |
Total interest bearing liabilities |
| $ | 895,139 |
|
| $ | 17,629 |
|
|
| 2.63 | % |
| $ | 841,292 |
|
| $ | 3,892 |
|
|
| 0.62 | % |
| $ | 916,329 |
|
| $ | 6,628 |
|
|
| 2.87 | % |
| $ | 861,149 |
|
| $ | 1,881 |
|
|
| 0.87 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent net interest income |
|
|
|
|
| $ | 23,703 |
|
|
|
|
|
|
|
|
|
| $ | 26,292 |
|
|
|
|
|
|
|
|
|
| $ | 8,029 |
|
|
|
|
|
|
|
|
|
| $ | 9,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
| 2.68 | % |
|
|
|
|
|
|
|
|
|
| 3.03 | % |
|
|
|
|
|
|
|
|
|
| 2.67 | % |
|
|
|
|
|
|
|
|
|
| 3.11 | % |
_____________________
1 Annualized.
2 Interest income on loans includes loan fees.
3 Loans held for investment includes nonaccrual loans.
4 Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.
5 Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.
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| Table of Contents |
Non-GAAP Financial Measures
This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow.
The following table reconciles tax equivalent net interest income, which is not a measurement under GAAP, to net interest income (dollars in thousands):
|
| September 30, 2023 |
|
| September 30, 2022 |
| ||||||||||
|
| Nine Months |
|
| Three Months |
|
| Nine Months |
|
| Three Months |
| ||||
Interest Income – Loans |
| $ | 34,962 |
|
| $ | 12,544 |
|
| $ | 24,474 |
|
| $ | 8,910 |
|
Interest Income - Securities and Other Interest-Earnings Assets |
|
| 6,252 |
|
|
| 2,073 |
|
|
| 5,608 |
|
|
| 2,102 |
|
Interest Expense – Deposits |
|
| 15,069 |
|
|
| 5,811 |
|
|
| 3,060 |
|
|
| 1,378 |
|
Interest Expense - Other Borrowings |
|
| 2,560 |
|
|
| 817 |
|
|
| 832 |
|
|
| 503 |
|
Total Net Interest Income |
| $ | 23,585 |
|
| $ | 7,989 |
|
| $ | 26,190 |
|
| $ | 9,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities |
|
| 118 |
|
|
| 40 |
|
|
| 102 |
|
|
| 40 |
|
Total Tax Benefit on Tax-Exempt Interest Income |
|
| 118 |
|
|
| 40 |
|
|
| 102 |
|
|
| 40 |
|
Tax-Equivalent Net Interest Income |
| $ | 23,703 |
|
| $ | 8,029 |
|
| $ | 26,292 |
|
| $ | 9,171 |
|
During the first nine months of 2023, the unrealized loss on the bond portfolio increased by $3.3 million, decreasing the Company’s tangible common equity ratio from 5.13% at December 31, 2022, to 4.99% at September 30, 2023. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders' equity by consolidated total average assets, after reducing both amounts by average goodwill and other intangible assets. The TCE ratio is not required by GAAP or by bank regulations but is a metric used by management to evaluate the adequacy of the Company's capital levels. Since there is no authoritative requirement to calculated the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible average assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.
Balance Sheet Review
Overview
On September 30, 2023, assets totaled $1.28 billion, an increase of $36.5 million over December 31, 2022. Total loans increased by $62.0 million to $805.6 million, including increases primarily of $29.0 million in 1-to-4 family variable rate mortgage loans, $15.6 million in dealer financing loans, $7.7 million in owner-occupied commercial real estate loans, and $6.7 million in agricultural loans. Investment securities decreased by $19.8 million due to paydowns on U.S. Agency mortgage-backed securities and expected bond maturities.
Securities Available for Sale (“AFS”)
Our AFS securities portfolio is reported at fair value, which is determined based on market prices of similar instruments. The portfolio is made up of primarily U.S. Treasury, U.S Agency and mortgage-backed securities issued by federal agencies, as well as municipal bonds and corporate debt securities. Total securities available for sale were $372.3 million at September 30, 2023, compared to $392.1 million at December 31, 2022. This represents a decrease of $19.8 million or 5.04%. The average balance during the first nine months of 2023 was $405.9 million, compared to $452.6 million during the first nine months of 2022. The average AFS securities portfolio represented 34.4% and 39.0% of average earning assets in the first nine months of 2023 and 2022, respectively. The year-over-year decrease in average AFS securities is primarily due to maturities and normal paydowns of mortgage-backed securities and municipal bond maturities. There are $19.4 million of scheduled maturities and paydowns expected in the last quarter of 2023 and $93.7 million in 2024.
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| Table of Contents |
Net unrealized losses related to the fair value of securities AFS increased $3.3 million in the first nine months of 2023 to $54.5 million, from $51.2 million at December 31, 2022 . The unrealized loss is driven by the increase in market interest rates, not credit quality. The average maturity of the portfolio is 4.74 years.
Loan Portfolio
The local economy that the Company operates in benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. The Bank also makes automobile and recreational vehicle loans through its Dealer Finance division.
Loans Held for Investment of $805.6 million increased $62.0 million during the nine months ended September 30, 2023 compared to $743.6 million at December 31, 2022. As a percentage of average earning assets, average loans were 65.0% for the nine months ended September 30, 2023, compared with 58.2% for the nine months ended September 30, 2022.
Loans Held for Sale totaled $2.0 million on September 30, 2023, an increase of $654,000 compared to $1.4 million at December 31, 2022. Loans Held for Sale consists of F&M Mortgage loans, which are subject to changes in interest rates, seasonal fluctuations, and refinance activity. All the mortgage loans held for sale have been precommitted to investors, which minimizes the interest rate risk.
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses and the reserve for unfunded commitments. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. The amount of the reserve for unfunded commitments considers the probability that those commitments will fund.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank’s external loan review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 28 which reflects activity in the allowance for credit losses.
At September 30, 2023, the allowance for credit losses on loans (“ACLL”) reflected a day one CECL impact of $777,000 which was charged to retained earnings, $704,000 in net charge-offs, and a provision for credit losses on loans of $1.2 million. The provision was primarily due to loan growth of $62.0 million and charge-offs in the automobile portfolio. Additionally, the provision for credit losses was increased by $2,000 due to a provision for unfunded commitments, for a net provision of $1.2 million. The provision for credit losses was $150,000 for the first nine months of 2022.
Management evaluated the qualitative factors and adjusted the factor for changes in the value of underlying collateral for collateral dependent loans for the real estate, commercial and industrial, and automobile segments. The local real estate market is active, with housing prices continuing to increase and days on the market remaining less than a week. As a result, no additional qualitative factor adjustment is needed. Commercial and industrial loans have not experienced declines in collateral values; therefore, this segment does not need an additional qualitative factor adjustment. The used vehicle value index is expected to stabilize as a balance between buyers and sellers is achieved. As a result, the qualitative factor for automobile loans was reduced. No other adjustments to the qualitative factors were necessary.
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| Table of Contents |
Nonperforming Assets
Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $3.6 million at September 30, 2023 compared to $2.3 million at December 31, 2022.
A summary of credit ratios for nonaccrual loans is as follows (dollars in thousands):
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Allowance for credit losses on loans |
| $ | 9,166 |
|
| $ | 7,936 |
|
Nonperforming loans |
| $ | 3,586 |
|
| $ | 2,262 |
|
Total loans |
| $ | 805,602 |
|
| $ | 743,604 |
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to total loans |
|
| 1.14 | % |
|
| 1.07 | % |
Nonperforming loans to total loans |
|
| 0.45 | % |
|
| 0.30 | % |
Coverage ratio, allowance for credit losses to nonperforming loans |
|
| 255.61 | % |
|
| 350.84 | % |
Deposits and Other Borrowings
The Company's main source of funding is deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market, and certificates of deposit. Total deposits were $1.14 billion and $1.08 billion at September 30, 2023 and December 31, 2022, respectively. Noninterest bearing deposits decreased $16.4 million while interest bearing deposits increased $66.9 million. Total deposits increased $50.5 million from the end of 2022, as the Bank was able to attract deposits by offering higher rates on money market and time deposit accounts and opening insured cash sweep (“ICS”) accounts for new and existing customers.
The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. At September 30, 2023 and December 31, 2022 the Company had a total of $258,000 and $241,000, respectively, in CDARS accounts; and, $96.3 million and $77.6 million in ICS accounts, respectively. At September 30, 2023, 12.32% of the Company’s total deposits were uninsured deposits, calculated per Bank Call Report instructions.
Short-term borrowings
The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to 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 needs of the Company. There were $60.0 million and $70.0 million of FHLB advances at September 30, 2023 and December 31, 2022, respectively. The increase in deposits allowed us to reduce the FHLB advances during the first nine months of 2023.
Long-term borrowings
On July 29, 2020, the Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated note due July 31, 2030. The note initially bears interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at September 30, 2023.
Capital
The Company and the Bank are subject to various regulatory capital requirements administered by 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 Company’s and 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.
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Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.
Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At September 30, 2023, the Bank is in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.
The Bank’s leverage ratio was 8.20%, its common equity Tier 1 and Tier 1 capital ratios were both 11.68%, its total capital ratio was 12.69% and the capital conservation buffer was 4.67% at September 30, 2023.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected not to phase in the effect of CECL on regulatory capital.
Liquidity
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. The Company’s most liquid assets are unrestricted cash and cash equivalents, federal funds sold, loans held for sale, and unpledged available for sale investment securities. Our primary source of funding is deposits. If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and brokered deposits, as well as loan and investment securities sales.
As of September 30, 2023, the Bank had total credit availability with the FHLB of $383.1 million, or 30% of total assets, and $170.9 million in lendable collateral. At September 30, 2023, we had $60.0 million in FHLB term borrowings and a $15.0 million letter of credit to provide collateral for our public deposits, which leaves $95.9 million in available lendable collateral.
In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) to provide any U.S. federally insured depository institution, including the Bank, with a line a credit equal to the par value of securities pledged to the BTFP. Advances from the BTFP may be requested by the Bank for up to one year until March 31, 2024. The Bank has securities pledged to the BTFP with a par value of $222.5 million at September 30, 2023; the Bank has not borrowed from the BTFP in 2023.
The Company’s on-balance sheet asset liquidity includes cash and cash equivalents, unpledged investment securities and loans held for sale, which totaled $206.4 million at September 30, 2023, down from $428.4 million at December 31, 2022. The decrease is due to pledging securities to the BTFP. Combining unused borrowing capacity through the FHLB of $95.9 million, through the BTFP of $222.5 million, and on-balance sheet liquidity of $206.4 million, produces readily available liquidity of approximately $524.8 million, with a coverage ratio of 372% to uninsured and uncollateralized deposits.
The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets. At September 30, 2023, total wholesale funding was $69.6 million or 5.43% of total assets.
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Interest Rate Sensitivity
Market risk is the sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, and equity prices. The Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority its assets. 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 manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.
The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:
Change in Prime Rate |
| % Change in Net Interest Income |
| |
+ 400 basis points |
|
| -18.74 | % |
+ 300 basis points |
|
| -12.59 | % |
+ 200 basis points |
|
| -7.56 | % |
+ 100 basis points |
|
| -3.26 | % |
- 100 basis points |
|
| 2.76 | % |
- 200 basis points |
|
| 6.22 | % |
- 300 basis points |
|
| 9.83 | % |
- 400 basis points |
|
| 13.08 | % |
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net economic value is the market value of all assets minus the market value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.
The following table reflects the change in net economic value over different rate environments (dollars in thousands):
Change in Prime Rate |
| % Change in Net Economic Value |
| |
+ 400 basis points |
|
| -13.60 | % |
+ 300 basis points |
|
| -9.11 | % |
+ 200 basis points |
|
| -5.32 | % |
+ 100 basis points |
|
| -2.41 | % |
- 100 basis points |
|
| 1.43 | % |
- 200 basis points |
|
| 1.85 | % |
- 300 basis points |
|
| -0.74 | % |
- 400 basis points |
|
| -11.24 | % |
Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance.
The Company uses a variety of traditional and on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the “gap” between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components.
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An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At September 30, 2023, the Company had $170.3 million more in liabilities repricing than assets subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II Other Information
Item 1. | Legal Proceedings |
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| There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject. | |
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Item 1a. | Risk Factors |
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| For information regarding factors that could affect the Company's results of operations, financial condition, or liquidity, see the risk factors discussed in Part I, Item 1A, of the Company’s 2022 Form 10-K. See also "Forward-Looking Statements," included in Part I, Item 2, of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s 2022 Form 10-K. | |
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Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | None |
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Item 3. | Defaults Upon Senior Securities | None |
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Item 4. | Mine Safety Disclosures | None |
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Item 5. | Other Information | None |
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Item 6. | Exhibits |
(a) Exhibits
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith). | |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith). | |
| ||
101 |
| The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith). |
104 |
| The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in Inline XBRL (included with Exhibit 101) |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| F & M BANK CORP. |
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| /s/ Aubrey M. Wilkerson |
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| Aubrey M. Wilkerson Chief Executive Officer |
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| /s/ Lisa F. Campbell |
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| Lisa F. Campbell Executive Vice President and Chief Financial Officer |
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November 14, 2023
| 56 |
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Aubrey M. Wilkerson, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; |
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| 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; |
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| 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; |
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| 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: |
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| (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; |
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| (b) | Designed such internal controls over financial reporting, or caused such internal controls 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; |
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| (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 |
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| (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 officer 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 functions): |
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| (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 |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Dated: November 14, 2023 | /s/ Aubrey M. Wilkerson |
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| Aubrey M. Wilkerson |
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| Chief Executive Officer |
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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.
EXHIBIT 31.2
CERTIFICATION OF 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, Lisa F. Campbell, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.; |
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| 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; |
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| 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; |
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| 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: |
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| (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; |
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| (b) | Designed such internal controls over financial reporting, or caused such internal controls 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; |
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| (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 |
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| (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 officer 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 functions): |
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| (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 |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Dated: November 14, 2023 | /s/ Lisa F. Campbell |
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| Lisa F. Campbell |
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| Executive Vice President & Chief Financial Officer |
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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.
EXHIBIT 32
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
The undersigned, as the Chief Executive Officer and Executive Vice President and Chief Financial Officer of F & M Bank Corp., respectively, certify that, to the best of each such individual’s knowledge and belief, the Quarterly Report on Form 10-Q for the period ended September 30, 2023, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of F & M Bank Corp. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
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| /s/ Aubrey M. Wilkerson |
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| Aubrey M. Wilkerson Chief Executive Officer |
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| /s/ Lisa F. Campbell |
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| Lisa F. Campbell Executive Vice President and Chief Financial Officer |
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November 14, 2023