F&M BANK CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021.

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

Commission File Number: 000-13273

F&M BANK CORP

Virginia

54-1280811

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

P. O. Box 1111

Timberville, Virginia 22853

(Address of Principal Executive Offices) (Zip Code)

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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

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

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

Class		Outstanding at November 8, 2021
Common Stock, par value ‑ $5		3,391,197 shares

F & M BANK CORP.

Index

		Page

Part I	Financial Information	3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets – September 30, 2021 and December 31, 2020	3

	Consolidated Statements of Income – Three Months Ended September 30, 2021 and 2020	4

	Consolidated Statements of Income – Nine Months Ended September 30, 2021 and 2020	5

	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020	6

	Consolidated Statements of Changes in Stockholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020	7

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020	9

	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	53

Part II	Other Information	54

Item 1.	Legal Proceedings	54

Item 1a.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

Signatures		55

Certifications

Table of Contents

Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2021			2020*
	*(Unaudited)*
Assets
Cash and due from banks	$	11,969		$	11,181
Money market funds and interest-bearing deposits in other banks		2,942			1,244
Federal funds sold		165,666			65,983
Cash and cash equivalents		180,577			78,408

Securities:
Held to maturity, at amortized cost – fair value of $125 in 2021 and 2020, respectively		125			125
Available for sale, at fair value		271,445			106,899
Other investments		9,426			10,874
Loans held for sale, at fair value		3,610			14,307
Loans held for sale, participations		-			44,372
Loans held for investment, net of deferred fees and costs		655,831			661,329
Less: allowance for loan losses		(8,431	)		(10,475	)
Net loans held for investment		647,400			650,854

Bank premises and equipment, net		17,193			17,909
Bank premises held for sale		300			520
Interest receivable		2,579			2,727
Goodwill		3,082			2,884
Bank owned life insurance		22,714			22,647
Other assets		12,208			14,404
Total assets	$	1,170,659		$	966,930
Liabilities
Deposits:
Noninterest bearing	$	268,961		$	236,915
Interest bearing		761,331			581,667
Total deposits		1,030,292			818,582

Long-term debt		21,764			33,202
Other liabilities		16,925			19,517
Total liabilities		1,068,981			871,301
Commitments and contingencies		-			-
Stockholders’ Equity
Series A Preferred Stock $25 liquidation preference, 400,000 shares authorized, 205,327		4,558			4,558
shares issued and outstanding at September 30, 2021 and December 31, 2020
Common stock, $5 par value, 6,000,000 shares authorized, 200,000 designated, 3,211,574 and		16,058			16,017
3,203,372 shares issued and outstanding at September 30, 2021 and December 31, 2020
Additional paid in capital – common stock		7,113			6,866
Retained earnings		77,858			71,205
Accumulated other comprehensive loss		(3,909	)		(3,017	)
Total stockholders’ equity		101,678			95,629
Total liabilities and stockholders’ equity	$	1,170,659		$	966,930

*2020 derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

	Three Months Ended
	September 30,
*Interest and Dividend income*	2021			2020
Interest and fees on loans held for investment	$	8,201		$	8,345
Interest and fees on loans held for sale		24			384
Interest from money market funds and federal funds sold		55			15
Interest on debt securities		775			434
Total interest and dividend income		9,055			9,178

*Interest expense*
Total interest on deposits		851			1,074
Interest from long-term debt		238			350
Total interest expense		1,089			1,424

*Net interest income*		7,966			7,754

*(Recovery of) Provision for Loan Losses*		(235	)		1,000
*Net Interest Income After (Recovery of) Provision for Loan Losses*		8,201			6,754

*Noninterest income*
Service charges on deposit accounts		300			302
Investment services and insurance income, net		210			167
Mortgage banking income, net		1,176			1,621
Title insurance income		556			543
Income on bank owned life insurance		169			171
Low income housing partnership losses		(215	)		(223	)
ATM and check card fees		595			499
Other operating income		165			148
Total noninterest income		2,956			3,228

*Noninterest expense*
Salaries		3,655			3,470
Employee benefits		1,047			611
Occupancy expense		295			278
Equipment expense		292			296
FDIC insurance assessment		105			95
Other real estate owned, net		-			201
Advertising expense		221			136
Legal and professional fees		267			160
ATM and check card fees		276			264
Telecommunication and data processing expense		613			464
Directors fees		111			96
Bank franchise tax		180			174
Other operating expenses		1,439			1,159
Total noninterest expense		8,501			7,404

*Income before income taxes*		2,656			2,578
Income tax expense		319			372
*Net Income*	$	2,337		$	2,206
Dividends paid/accumulated on preferred stock		65			65
*Net income available to common stockholders*	$	2,272		$	2,141

*Per Common Share Data*
Net income – basic	$	0.71	$	0.67
Net income – diluted	$	0.66	$	0.65
Cash dividends on common stock		.26		.26
Weighted average common shares outstanding – basic		3,210,577		3,197,718
Weighted average common shares outstanding – diluted		3,415,904		3,404,378

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
*Interest and Dividend income*	2021			2020
Interest and fees on loans held for investment	$	24,588		$	25,341
Interest and fees on loans held for sale		161			977
Interest from money market funds and federal funds sold		99			336
Interest on debt securities		1,772			626
Total interest and dividend income		26,620			27,280

*Interest expense*
Total interest on deposits		2,464			3,685
Interest from short-term debt		-			41
Interest from long-term debt		762			789
Total interest expense		3,226			4,515

*Net interest income*		23,394			22,765

*(Recovery of) Provision for Loan Losses*		(2,210	)		3,300
*Net Interest Income After (Recovery of) Provision for Loan Losses*		25,604			19,465

*Noninterest income*
Service charges on deposit accounts		839			888
Investment services and insurance income, net		736			525
Mortgage banking income, net		3,874			4,521
Title insurance income		1,607			1,386
Income on bank owned life insurance		502			458
Low-income housing partnership losses		(646	)		(670	)
ATM and check card fees		1,715			1,394
Other operating income		770			513
Total noninterest income		9,397			9,015

*Noninterest expense*
Salaries		10,540			9,414
Employee benefits		3,319			2,835
Occupancy expense		933			850
Equipment expense		888			892
FDIC insurance assessment		309			284
Other real estate owned, net		-			341
Advertising expense		554			440
Legal and professional fees		712			441
ATM and check card fees		827			777
Telecommunication and data processing expense		1,735			1,543
Directors fees		369			325
Bank franchise tax		532			558
Impairment of long-lived assets		171			19
Other operating expenses		3,742			3,089
Total noninterest expense		24,631			21,808

*Income before income taxes*		10,370			6,672
Income tax expense		1,012			545
*Net Income*		9,358			6,127
Net income attributable to non-controlling interest		-			105
*Net Income attributable to F & M Bank Corp.*	$	9,358		$	6,022
Dividends paid/accumulated on preferred stock		196			197
*Net income available to common stockholders*	$	9,162		$	5,825

*Per Common Share Data*
Net income – basic	$	2.86	$	1.82
Net income – diluted	$	2.72	$	1.76
Cash dividends on common stock		.78		.78
Weighted average common shares outstanding – basic		3,207,916		3,198,691
Weighted average common shares outstanding – diluted		3,436,034		3,421,290

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2021			2020			2021			2020

Net Income attributable to F & M Bank Corp.	$	9,358		$	6,022		$	2,337		$	2,206

Other comprehensive (loss) income:
Unrealized holding (losses) gains on available-for sale securities		(1,129	)		220			(72	)		303
Tax effect		237			(46	)		15			(64	)
Unrealized holding (losses) gains, net of tax		(892	)		174			(57	)		239

Total other comprehensive (loss) income		(892	)		174			(57	)		239

Comprehensive income attributable to F&M Bank Corp.	$	8,466		$	6,196		$	2,280		$	2,445

Comprehensive income attributable to noncontrolling interests	$	-		$	105		$	-		$	-

Total comprehensive income	$	8,466		$	6,301		$	2,280		$	2,445

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Three Months Ended September 30, 2021 and 2020.

	Preferred Stock		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total

*Balance June 30, 2020*	$	4,592	$	15,980	$	6,744	$	68,018		$	(3,276	)	$	92,058
Net income		-		-		-		2,206			-			2,206
Other comprehensive income		-		-		-		-			239			239
Dividends on preferred stock ($.32 per share)		-		-		-		(65	)		-			(65	)
Dividends on common stock ($.26 per share)		-		-		-		(822	)		-			(822	)
Common stock issued (3,345 shares)		-		16		48		-			-			64

*Balance, September 30, 2020*	$	4,592	$	15,996	$	6.792	$	69,337		$	(3,037	)	$	93,680

*Balance June 30, 2021*	$	4,558	$	16,047	$	7,034	$	76,425		$	(3,852	)	$	100,212
Net income		-		-		-		2,337			-			2,337
Other comprehensive (loss)		-		-		-		-			(57	)		(57	)
Dividends on preferred stock ($.32 per share)		-		-		-		(65	)		-			(65	)
Dividends on common stock ($.26 per share)		-		-		-		(839	)		-			(839	)
Common stock issued (2,235 shares)		-		11		53		-			-			64
Common stock vested for Stock-based Compensation (5,180 shares)		-		-		26		-			-			26

*Balance, September 30, 2021*	$	4,558	$	16,058	$	7,113	$	77,858		$	(3,909	)	$	101,678

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Nine Months Ended September 30, 2021 and 2020.

	Preferred Stock		Common Stock			Additional Paid in Capital			Retained Earnings			Noncontrolling Interest			Accumulated Other Comprehensive Loss			Total

*Balance, December 31, 2019*	$	4,592	$	16,042		$	7,510		$	66,008		$	634		$	(3,211	)	$	91,575
Net Income		-		-			-			6,022			105			-			6,127
Other comprehensive income		-		-			-			-			-			174			174
Distributions to noncontrolling interest		-		-			-			-			(177	)		-			(177	)
Dividends on preferred stock ($1.28 per share)		-		-			-			(197	)		-			-			(197	)
Dividends on common stock ($.78 per share)		-		-			-			(2,496	)		-			-			(2,496	)
Purchase of noncontrolling interest		-		-			(488	)		-			(562	)		-			(1,050	)
Common stock repurchased (18,472 shares)		-		(92	)		(381	)		-			-			-			(473	)
Common stock issued (9,257 shares)		-		46			151			-			-			-			197

*Balance, September 30, 2020*	$	4,592	$	15,996		$	6,792		$	69,337		$	-		$	(3,037	)	$	93,680

*Balance, December 31, 2020*	$	4,558	$	16,017		$	6,866		$	71,205		$	-		$	(3,017	)	$	95,629
Net Income		-		-			-			9,358			-			-			9,358
Other comprehensive (loss)		-		-			-			-			-			(892	)		(892	)
Dividends on preferred stock ($.96 per share)		-		-			-			(196	)		-			-			(196	)
Dividends on common stock ($.78 per share)		-		-			-			(2,509	)		-			-			(2,509	)
Common stock issued (6,870 shares)		-		34			157			-			-			-			191
Common stock issued for Stock-based Compensation (1,332 shares)				7			29												36
Stock-based compensation expense		-		-			61			-			-			-			61

*Balance, September 30, 2021*	$	4,558	$	16,058		$	7,113		$	77,858		$	-		$	(3,909	)	$	101,678

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2021			2020
*Cash flows from operating activities*
Net income	$	9,358		$	6,022
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		891			940
Amortization of intangibles		53			42
Amortization of securities		739			120
Proceeds from loans held for sale originated		170,129			145,553
Loans held for sale originated		(155,044	)		(157,618	)
Gain on sale of loans held for sale originated		(4,388	)		(3,861	)
(Recovery of) Provision for loan losses		(2,210	)		3,300
Decrease (increase) in interest receivable		148			(727	)
(Increase) in deferred taxes		(138	)		(330	)
(Decrease) increase in taxes payable		(469	)		-
Decrease in other assets		2,040			554
(Decrease) increase in accrued expenses		(1,609	)		4,039
Amortization of limited partnership investments		658			670
Income from life insurance investment		(502	)		(458	)
(Gain) on the sale of fixed assets		-			(14	)
Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale		-			326
Impairment of long-lived assets		171			19
Net cash provided by (used in) operating activities		19,827			(1,423	)
*Cash flows from investing activities*
Purchase of investments available for sale and other investments		(179,735	)		(123,804	)
Proceeds from maturity of investments available for sale		13,321			21,185
Proceeds from the redemption of restricted stock, net		790			1,167
Purchase of investments held to maturity		-			(125	)
Proceeds from maturity of investments held to maturity		-			125
Net decrease (increase) in loans held for investment		5,664			(69,964	)
Net decrease (increase) in loans held for sale participations		44,372			(5,315	)
Proceeds from the sale of fixed assets		150			34
Proceeds from the sale of other real estate owned		-			997
Cash paid for noncontrolling interest		-			(806	)
Net purchase of property and equipment		(496	)		(648	)
Proceeds from life insurance benefits		421			-
Cash received in branch acquisition (net of cash paid)		13,946			-
Net cash (used) in investing activities		(101,567	)		(177,154	)
*Cash flows from financing activities*
Net change in deposits		197,764			151,827
Net change in short-term debt		-			(10,000	)
Dividends paid in cash		(2,705	)		(2,693	)
Proceeds from issuance of common stock		288			197
Repurchase of common stock		-			(473	)
Issuance of long-term debt		-			71,903
Repayments of long-term debt		(11,438	)		(18,838	)
Net cash provided by financing activities		183,909			191,923
*Net increase in Cash and Cash Equivalents*		102,169			13,346
*Cash and cash equivalents, beginning of period*		78,408			75,804
*Cash and cash equivalents, end of period*	$	180,577		$	89,150
*Supplemental Cash Flow information:*
Cash paid for: Interest	$	3,578		$	4,559
Taxes		2,012			445
*Supplemental non-cash disclosures:*
Change in unrealized (loss) on securities available for sale	$	(1,129	)	$	211
Bank premises and equipment transferred to held for sale	$	-		$	520
Liability to former noncontrolling interest for remainder of purchase price	$	-		$	244

Branch purchase:
Tangible assets acquired (net of cash received)	$	61		$	-
Identifiable intangible assets acquired	$	73		$	-
Liabilities assumed	$	14,044		$	-

See Notes to Consolidated Financial Statements

Table of Contents

Notes to the Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC (dba F&M Mortgage), and VSTitle, LLC and were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). On May 1, 2020 the Bank purchased the noncontrolling interest of VBS Mortgage, LLC and VSTitle, the minority interest for 2020 covers January 1 through March 31, 2020. Accordingly, these financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of Operations

The Company, through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily in the counties of Rockingham, Shenandoah, and Augusta, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in Virginia. Services are provided at twelve branch offices and a Dealer Finance Division. A loan production office in Winchester opened during second quarter 2021. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc. (“FMFS”), F&M Mortgage, and VSTitle, LLC (“VST”).

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and fair value. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.

Risk and Uncertainties

The coronavirus (“COVID-19”) pandemic spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operating businesses in March 2020 with branch lobby closings, operations and administrative staff working remotely and the use of virtual meetings. Branches reopened on April 12, 2021 for regular business hours and staff returned to their normal office locations. The continuing effects of COVID-19 will likely affect our operations throughout the remainder of 2021, although the extent and significance remain unknown. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may adversely affect our future earnings, cash flows and financial condition, including among others, credit losses resulting from financial stress on borrowers, decreased demand for products and operational failures. In addition, significant assumptions, judgments, and estimates used in the preparation of our financial statements, including those associated with evaluations of goodwill for impairment, and allowance for loan losses, may be subject to adjustments in future periods due to the rapidly changing, uncertain and unprecedented nature of the pandemic.

Table of Contents

Note 1. Summary of Significant Accounting Policies, continued

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.

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. In calculating diluted EPS, net income available to common stockholders is used as the numerator and the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per share calculation for the three and nine month periods ended September 30, 2021 and 2020.

Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared. The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented (dollars in thousands):

	For the Nine months ended		For the Three months ended		For the Nine months ended		For the Three months ended
	September 30, 2021		September 30, 2021		September 30, 2020		September 30, 2020
Earnings available to common stockholders:
Net income	$	9,358	$	2,337	$	6,127	$	2,206
Non-controlling interest income		-		-		105		-
Preferred stock dividends		196		65		197		65
Net income available to common stockholders	$	9,162	$	2,272	$	5,825	$	2,141

The following table shows the effect of dilutive preferred stock conversion on the Company's earnings per share for the periods indicated (dollars in thousands):

	Nine months ended September 30, 2021							Nine months ended September 30, 2020
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	9,162		3,207,916	$	2.86		$	5,825		3,198,691	$	1.82
Effect of Dilutive Securities:
Convertible Preferred Stock		196		228,118		(.14	)		197		222,599		(.06	)
Diluted EPS	$	9,358		3,436,034	$	2.72		$	6,022		3,421,290	$	1.76

	Three months ended September 30, 2021							Three months ended September 30, 2020
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	2,272		3,210,577	$	.71		$	2,141		3,197,718	$	.67
Effect of Dilutive Securities:
Convertible Preferred Stock		65		205,327		(.05	)		65		206,660		(.02	)
Diluted EPS	$	2,337		3,415,904	$	.66		$	2,206		3,404,378	$	.65

Table of Contents

Note 2. Investment Securities

Investment securities available for sale are carried in the consolidated balance sheets at their approximate fair value. Investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost at September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2021
U. S. Treasuries	$	125	$	-	$	-	$	125
December 31, 2020
U. S. Treasuries	$	125	$	-	$	-	$	125

The amortized cost and fair value of securities available for sale are as follows (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2021
U. S. Treasuries	$	29,771	$	2	$	279	$	29,494
U. S. Government sponsored enterprises		55,243		-		269		54,974
Securities issued by States and political subdivisions in the U.S.		29,854		452		12		30,294
Mortgage-backed obligations of federal agencies		139,176		628		722		139,082
Corporate debt security		17,512		410		321		17,601
Total Securities Available for Sale	$	271,556	$	1,492	$	1,603	$	271,445

December 31, 2020
U. S. Government sponsored enterprises	$	6,000	$	47	$	-	$	6,047
Securities issued by States and political subdivisions of the U.S.		17,177		515		-		17,692
Mortgage-backed obligations of federal agencies		73,422		502		153		73,771
Corporate debt securities		9,282		121		14		9,389
Total Securities Available for Sale	$	105,881	$	1,185	$	167	$	106,899

The amortized cost and fair value of securities at September 30, 2021, 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		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	125	$	125	$	10,304	$	10,358
Due after one year through five years		-		-		115,175		114,816
Due after five years		-		-		131,309		131,184
Due after ten years		-		-		14,768		15,087
Total	$	125	$	125	$	271,556	$	271,445

There were no sales of available for sale securities in the first three quarters of 2021 or 2020. Securities held that are U.S. Agency and Government Sponsored Entities and Agency MBS carry an implicit government guarantee and are not subject to other than temporary impairment evaluation. Other securities were reviewed for impairment. The majority of the securities that are in an unrealized loss positions are U.S. Government sponsored enterprises or mortgage-backed obligations of federal agencies. Three securities issued by States and political subdivisions in the U.S. were in an unrealized loss position for less than 12 months with minimal loss. Seven bank subordinated debt offerings were in a loss position for less than 7 months and totaled $321 thousand. The pricing services tend to not be exact on these offerings because of the marketability of the offering. The Company reviews the relevant ratios on each subordinated debt holding quarterly. No securities were determined to be other than temporarily impaired.

Table of Contents

Note 2. Investment Securities, continued

A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type of September 30, 2021 and December 31, 2020 were as follows:

	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2021
U. S. Government treasuries	$	24,496	$	279	$	-	$	-	$	24,496	$	279
U. S. Government sponsored enterprises		54,973		269		-		-		54,973		269
Securities issued by States and political subdivisions in the U.S.		4,988		12		-		-		4,988		12
Mortgage-backed obligations of federal agencies		68,183		623		8,718		99		76,901		722
Corporate debt security		5,979		321		-		-		5,979		321
Total	$	158,619	$	1,504	$	8,718	$	99	$	167,337	$	1,603

	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2020
U. S. Government sponsored enterprises	$	73,771	$	153	$	-	$	-	$	73,771	$	153
Corporate debt security		9,389		14		-		-		9,389		14
Total	$	83,160	$	167	$	-	$	-	$	83,160	$	167

As of September 30, 2021, other investments consist of investments in fifteen low-income housing and historic equity partnerships (carrying basis of $6,977), stock in the Federal Home Loan Bank (carrying basis $858) and various other investments (carrying basis $1,591). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of September 30, 2021. At September 30, 2021, the Company was committed to invest an additional $979 in five low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in other liabilities on the consolidated balance sheet. The Company does not have any pledged securities.

Note 3. Loans

During the pandemic, modifications allowing principal and interest deferrals were granted in connection with COVID-19 relief. These modifications and deferrals were not considered troubled debt restructurings pursuant to interagency guidance issued in March 2020 and the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. As of September 30, 2021 one loan remains in deferral status.

Loans held for investment outstanding at September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

	2021			2020
Construction/Land Development	$	70,102		$	71,467
Farmland		66,367			53,728
Real Estate		145,647			163,018
Multi-Family		4,632			5,918
Commercial Real Estate		156,504			142,516
Home Equity – closed end		6,365			8,476
Home Equity – open end		42,872			46,613
Commercial & Industrial – Non-Real Estate		48,133			65,470
Consumer		8,239			9,405
Dealer Finance		104,418			91,861
Credit Cards		2,790			2,857
Gross loans		656,069			661,329
Less: Deferred loan fees, net of costs		(238	)		-
Total	$	655,831		$	661,329

Table of Contents

Note 3. Loans, continued

The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $159,725 and $173,029 as of September 30, 2021 and December 31, 2020, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial and home equity portfolios.

Loans held for sale, at fair value consists of loans originated by F&M Mortgage for sale in the secondary market. The volume of loans fluctuates due to changes in secondary market rates, which affects demand for mortgage loans. Loans held for sale, participations consists of residential mortgage loan participations from Northpointe Bank. Loans held for sale as of September 30, 2021 and December 31, 2020 were $3,610 and $58,679, respectively.

The following is a summary of information pertaining to impaired loans (dollars in thousand):

	September 30, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment(1)		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Construction/Land Development	$	733	$	733	$	-	$	1,693	$	1,693	$	-
Farmland		2,371		2,371		-		-		-		-
Real Estate		2,977		2,977		-		6,648		6,648		-
Multi-Family		-		-		-		-		-		-
Commercial Real Estate		8,524		8,524		-		8,592		8,656		-
Home Equity – closed end		161		161		-		687		687		-
Home Equity – open end		-		-		-		151		151		-
Commercial & Industrial – Non-Real Estate		-		-		-		8		8		-
Consumer		-		-		-		-		-		-
Credit cards		-		-		-		-		-		-
Dealer Finance		15		15		-		8		8		-
		14,781		14,781		-		17,787		17,851		-
Impaired loans with a valuation allowance
Construction/Land Development		-		-		-		-		-		-
Farmland		-		-		-		1,737		1,737		370
Real Estate		1,180		1,180		169		7,143		7,143		365
Multi-Family		-		-		-		-		-		-
Commercial Real Estate		6,034		6,034		617		7,464		7,464		1,833
Home Equity – closed end		-		-		-		-		-		-
Home Equity – open end		-		-		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-		-		-
Consumer		-		-		-		1		1		1
Credit cards		-		-		-		-		-		-
Dealer Finance		103		103		14		147		147		15
		7,317		7,317		800		16,492		16,492		2,584
Total impaired loans	$	22,098	$	22,098	$	800	$	34,279	$	34,343	$	2,584

¹The Recorded Investment is defined as the original principal balance less principal payments, charge-offs and nonaccrual payments applied to principal.

Table of Contents

Note 3. Loans Held for Investment, continued

The following is a summary of the average investment and interest income recognized for impaired loans (dollars in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021				2020					2021				2020
	Average Recorded		Interest Income		Average Recorded		Interest Income			Average Recorded		Interest Income		Average Recorded		Interest Income
	Investment		Recognized		Investment		Recognized			Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Construction/Land Development	$	757	$	7	$	1,547	$	19		$	1,213	$	23	$	1,853	$	59
Farmland		2,376		9		-		-			1,186		117		-		-
Real Estate		3,016		39		4,908		78			4,813		126		5,024		214
Multi-Family		-		-		-		-			-		-		-		-
Commercial Real Estate		9,408		53		1,561		(19	)		8,558		176		1,063		30
Home Equity – closed end		415		5		701		5			424		16		708		26
Home Equity – open end		-		-		-		-			76		-		-		-
Commercial & Industrial – Non-Real Estate		1		-		13		1			4		-		14		1
Consumer		-		-		-		-			-		-		-		-
Credit Cards		-		-		-		-			-		-		-		-
Dealer Finance		16		-		30		(1	)		12		1		48		1
		15,989		113		8,760		83			16,286		459		8,710		331
Impaired loans with a valuation allowance:
Construction/Land Development	$	-	$	-	$	309	$	28		$	-	$	-	$	649	$	28
Farmland		-		-		1,763		35			869		-		1.842		219
Real Estate		1,399		-		9,456		119			4,162		32		9.849		381
Multi-Family		-		-		-		-			-		-		-		-
Commercial Real Estate		5,844		40		3,566		72			6,749		131		2.465		121
Home Equity – closed end		-		-		-		-			-		-		-		-
Home Equity – open end		-		-		151		2			-		-		151		6
Commercial & Industrial – Non-Real Estate		-		-		-		-			-		-		96		-
Consumer		-		-		1		-			1		-		3		-
Credit Card		-		-		-		-			-		-		-		-
Dealer Finance		110		2		142		4			125		7		145		9
		7,353		42		15,388		260			11,906		170		15.200		764
Total Impaired Loans	$	23,342	$	155	$	24,148	$	343		$	28,192	$	629	$	23.910	$	1,095

Table of Contents

Note 3. Loans, continued

The following table presents the aging of the recorded investment of past due loans (dollars in thousands) as of September 30, 2021 and December 31, 2020:

September 30, 2021	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current			Total Loan Receivable			Non-Accrual Loans		Recorded Investment >90 days & accruing
Construction/Land Development	$	61	$	39	$	-	$	100	$	70,002		$	70,102		$	267	$	-
Farmland		21		-		-		21		66,346			66,367			1,395		-
Real Estate		1,328		156		464		1,948		143,699			145,647			842		-
Multi-Family		-		-		-		-		4,632			4,632			-		-
Commercial Real Estate		-		108		-		108		156,396			156,504			2,877		-
Home Equity – closed end		-		-		-		-		6,365			6,365			-		-
Home Equity – open end		-		-		-		-		42,872			42,872			-		-
Commercial & Industrial – Non- Real Estate		21		40		-		61		48,072			48,133			-		-
Consumer		26		8		-		34		8,205			8,239			-		-
Dealer Finance		705		67		-		772		103,646			104,418			29		-
Credit Cards		14		-		20		34		2,756			2,790			-		20
Less: Deferred loan fees, net of costs		-		-		-		-		(238	)		(238	)		-		-
Total	$	2,176	$	418	$	484	$	3,078	$	652,753		$	655,831		$	5,410	$	20

December 31, 2020	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loan Receivable		Non-Accrual Loans		Recorded Investment >90 days & accruing
Construction/Land Development	$	2,557	$	-	$	-	$	2,557	$	68,910	$	71,467	$	251	$	-
Farmland		-		-		-		-		53,728		53,728		1,737		-
Real Estate		1,724		512		304		2,540		160,478		163,018		368		102
Multi-Family		-		-		-		-		5,918		5,918		-		-
Commercial Real Estate		554		-		920		1,474		141,042		142,516		3,820		-
Home Equity – closed end		3		30		-		33		8,443		8,476		-		-
Home Equity – open end		716		-		212		928		45,685		46,613		212		-
Commercial & Industrial – Non- Real Estate		95		44		-		139		65,331		65,470		3		-
Consumer		39		-		-		39		9,366		9,405		-		-
Dealer Finance		694		157		-		851		91,010		91,861		44		-
Credit Cards		45		-		-		45		2,812		2,857		-		-
Total	$	6,427	$	743	$	1,436	$	8,606	$	652,723	$	661,329	$	6,435	$	102

On September 30, 2021 and December 31, 2020, other real estate owned did not include any foreclosed residential real estate. The Company has $281 thousand of consumer mortgages for which foreclosure was in process on September 30, 2021.

Nonaccrual loans on September 30, 2021 would have earned approximately $67 thousand in interest income for the quarter had they been accruing loans.

Table of Contents

Note 4. Allowance for Loan Losses

A summary of changes in the allowance for loan losses (dollars in thousands) for September 30, 2021 and December 31, 2020 is as follows:

September 30, 2021	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	1,249	$	-	$	307	$	(631	)	$	925	$	-	$	925
Farmland		731		-		-		(262	)		469		-		469
Real Estate		1,624		-		34		(323	)		1,335		169		1,166
Multi-Family		54		-		-		(25	)		29		-		29
Commercial Real Estate		3,662		-		19		(945	)		2,736		617		2,119
Home Equity – closed end		55		-		-		(11	)		44		-		44
Home Equity – open end		463		-		13		(68	)		408		-		408
Commercial & Industrial – Non-Real Estate		363		-		30		(95	)		298		-		298
Consumer		521		18		20		3			526		-		526
Dealer Finance		1,674		746		520		146			1,594		14		1,580
Credit Cards		79		30		17		1			67		-		67
Total	$	10,475	$	794	$	960	$	(2,210	)	$	8,431	$	800	$	7,631

December 31, 2020	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	1,190	$	7	$	-	$	66		$	1,249	$	-	$	1,249
Farmland		668		-		-		63			731		370		361
Real Estate		1,573		158		7		202			1,624		365		1,259
Multi-Family		20		-		-		34			54		-		54
Commercial Real Estate		1,815		64		11		1,900			3,662		1,833		1,829
Home Equity – closed end		42		-		-		13			55		-		55
Home Equity – open end		457		34		3		37			463		-		463
Commercial & Industrial – Non-Real Estate		585		138		19		(103	)		363		-		363
Consumer		186		89		50		374			521		1		520
Dealer Finance		1,786		1,551		784		655			1,674		15		1,659
Credit Cards		68		123		75		59			79		-		79
Total	$	8,390	$	2,164	$	949	$	3,300		$	10,475	$	2,584	$	7,891

Table of Contents

Note 4. Allowance for Loan Losses, continued

The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of September 30, 2021 and December 31, 2020:

September 30, 2021	Loan Receivable			Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	70,102		$	733	$	69,369
Farmland		66,367			2,371		63,996
Real Estate		145,647			4,157		141,490
Multi-Family		4,632			-		4,632
Commercial Real Estate		156,504			14,558		141,946
Home Equity – closed end		6,365			161		6,204
Home Equity –open end		42,872			-		42,872
Commercial & Industrial – Non-Real Estate		48,133			-		48,133
Consumer		8,239			-		8,239
Dealer Finance		104,418			118		104,300
Credit Cards		2,790			-		2,790
Gross loans		656,069			22,098		633,971
Less: Deferred loan fees, net of costs		(238	)		-		(238	)
Total	$	665,831		$	22,098	$	633,733

December 31, 2020	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	71,467	$	1,693	$	69,774
Farmland		53,728		1,737		51,991
Real Estate		163,018		13,791		149,227
Multi-Family		5,918		-		5,918
Commercial Real Estate		142,516		16,056		126,460
Home Equity – closed end		8,476		687		7,789
Home Equity –open end		46,613		151		46,462
Commercial & Industrial – Non-Real Estate		65,470		8		65,462
Consumer		9,405		1		9,404
Dealer Finance		91,861		155		91,706
Credit Cards		2,857		-		2,857
Total	$	661,329	$	34,279	$	627,050

During the third quarter of 2021, Management changed the historical net charge off lookback period from two years to three years for all segments given recent asset quality trends and the impact of government programs in response to the COVID-19 pandemic on charge off experience. Management believes the three year lookback period is more indicative of the risk remaining in the loan portfolio.

This change and the effect on provision expense for the nine months ended September 30, 2021 and the allowance for loan losses at September 30, 2021 was as follows:

Table of Contents

Note 4. Allowance for Loan Losses, continued

	Calculated Provision Based on Current Methodology			Current Provision Based on Prior Methodology			Difference
Construction/Land Development	$	(631	)	$	(952	)	$	321
Farmland		(262	)		(262	)		-
Real Estate		(323	)		(325	)		2
Multi-Family		(25	)		(25	)		-
Commercial Real Estate		(945	)		(1,611	)		666
Home Equity – closed end		(11	)		(11	)		-
Home Equity – open end		(68	)		(102	)		34
Commercial & Industrial – Non-Real Estate		(95	)		(111	)		16
Consumer		3			(400	)		403
Dealer Finance		146			17			129
Credit Cards		1			(1	)		2
	$	(2,210	)	$	(3,783	)	$	1,573

The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands) as of September 30, 2021 and December 31, 2020:

September 30, 2021	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	$	-	$	6	$	8,747	$	41,664	$	17,535	$	1,883	$	267	$	-	$	70,102
Farmland		57		298		6,755		40,732		15,471		1,659		1,395		-		66,367
Real Estate		-		1,591		33,758		63,923		28,714		12,585		5,076		-		145,647
Multi-Family		-		-		1,590		1,748		1,164		130		-		-		4,632
Commercial Real Estate		-		4,543		32,466		61,433		30,433		14,847		12,782		-		156,504
Home Equity – closed end		-		64		1,253		3,244		715		1,089		-		-		6,365
Home Equity – open end		-		1,259		16,395		21,253		2,223		1,526		216		-		42,872
Commercial & Industrial -Non-Real Estate		-		716		9,425		21,316		16,086		569		21		-		48,133
Consumer (excluding dealer)		-		477		3,120		3,600		1,020		22		-		-		8,239
Gross Loans	$	57	$	8,954	$	113,509	$	258,913	$	113,361	$	34,310	$	19,757	$	-	$	548,861
Less: Deferred loan fees, net of costs																		(238	)
Total																	$	548,623

	Credit Cards		Dealer Finance
Performing	$	2,770	$	104,389
Non-performing		20		29
Total	$	2,790	$	104,418

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Note 4. Allowance for Loan Losses, continued

December 31, 2020	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	$	-	$	142	$	8,448	$	40,126	$	18,226	$	4,274	$	251	$	-	$	71,467
Farmland		58		459		11,707		26,899		11,846		1,022		1,737		-		53,728
Real Estate		-		2,283		39,223		66,698		32,302		6,977		15,535		-		163,018
Multi-Family		-		-		1,075		3,509		1,334		-		-		-		5,918
Commercial Real Estate		-		4,114		31,205		47,477		26,677		18,637		14,406		-		142,516
Home Equity – closed end		-		124		2,479		3,289		759		1,795		30		-		8,476
Home Equity – open end		-		1,705		17,716		22,014		3,171		1,477		530		-		46,613
Commercial & Industrial - Non-Real Estate		90		1,524		7,601		17,050		38,290		913		2		-		65,470
Consumer (excluding dealer)		-		173		3,461		3,975		1,790		6		-		-		9,405
Total	$	148	$	10,524	$	122,915	$	231,037	$	134,395	$	35,101	$	32,491	$	-	$	566,611

	Credit Cards		Dealer Finance
Performing	$	2,857	$	91,817
Non-performing		-		44
Total	$	2,857	$	91,861

Description of internal loan grades:

Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.

Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must be covered through additional long-term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

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.

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Note 4. Allowance for Loan Losses, continued

Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful: The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.

Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming when payments of principal and interest are past due 90 days or more.

Note 5. Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31^st as the measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in 2021.

The following is a summary of net periodic pension costs for the three and nine month periods ended September 30, 2021 and 2020 (dollars in thousands):

	Nine Months Ended						Three Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Service cost	$	648		$	606		$	216		$	202
Interest cost		285			314			95			105
Expected return on plan assets		(594	)		(55	)		(198	)		(18	)
Amortization of prior service cost		-			(9	)		-			(3	)
Amortization of net loss		216			166			72			55
Net periodic pension cost	$	555		$	1,022		$	185		$	341

Note 6. Fair Value

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.

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Note 6. Fair Value, continued

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

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.

Derivative Asset/Liability – Indexed Certificate of Deposit

The Company’s derivatives, which are associated with the Indexed Certificate of Deposit (ICD) product once offered, are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs. This product is no longer offered, however there are a few certificates of deposits that have not matured.

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Note 6. Fair Value, continued

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	3,610	$	-	$	3,610	$	-
IRLC		333		-		333		-
U. S. Treasury securities		29,494		-		29,494		-
U. S. Government sponsored enterprises		54,974		-		54,974		-
Securities issued by States and political subdivisions in the U. S.		30,294		-		30,294		-
Mortgage-backed obligations of federal agencies		139,082		-		139,082		-
Corporate debt securities		17,601		-		17,601		-
Forward Sales Commitments		145		-		145		-
Assets at Fair Value	$	275,533	$	-	$	275,533	$	-

Liabilities:
Derivatives - ICD	$	3	$	-	$	3	$	-
Liabilities at Fair Value	$	3	$	-	$	3	$	-

December 31, 2020	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	14,307	$	-	$	14,307	$	-
IRLC		816		-		816		-
U.S. Government sponsored enterprises		6,047		-		6,047		-
Securities issued by States and political subdivisions of the US		17,692		-		17,692		-
Mortgage-backed obligations of federal agencies		73,771		-		73,771		-
Corporate debt securities		9,389		-		9,389		-
Assets at Fair Value	$	122,022	$	-	$	122,022	$	-

Liabilities:
Derivatives – ICD	$	2	$	-	$	2	$	-
Forward Sales Commitments		60		-		60		-
Liabilities at Fair Value	$	62	$	-	$	62	$	-

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:

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

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Note 6. Fair Value, continued

Impaired Loans, continued

The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.

Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “liquidation” value of independent appraisals or evaluations.

The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company as observable market data is categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

As of September 30, 2021 and December 31, 2020, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):

September 30, 2021	Total		Level 1		Level 2		Level 3
Real Estate	$	1,011	$	-	$	-	$	1,011
Commercial Real Estate		5,417		-		-		5,417
Dealer Finance		89		-		-		89
Impaired loans	$	6,517	$	-	$	-	$	6,517

December 31, 2020	Total		Level 1		Level 2		Level 3
Farmland	$	1,367	$	-	$	-	$	1,367
Real Estate		6,778		-		-		6,778
Commercial Real Estate		5,631		-		-		5,631
Dealer Finance		132		-		-		132
Impaired loans	$	13,908	$	-	$	-	$	13,908

The following table presents information about Level 3 Fair Value Measurements for September 30, 2021 (dollars in thousands):

		Fair Value at September 30, 2021				Valuation Technique		Significant Unobservable Inputs		Range
Impaired Loans		$	6,517			Discounted appraised value		Discount for selling costs and marketability		6.77%-14.00% (Average 12.16%)

The following table presents information about Level 3 Fair Value Measurements for December 31, 2020 (dollars in thousands):

		Fair Value at December 31, 2020				Valuation Technique		Significant Unobservable Inputs		Range
Impaired Loans		$	13,908			Discounted appraised value		Discount for selling costs and marketability		9.25%-62.00% (Average 24.39%)

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Note 6. Fair Value, continued

Assets Held for Sale

Assets held for sale were transferred from bank premises at the lower of cost less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for sale a s nonrecurring Level 3.

September 30, 2021		Total				Level 1				Level 2				Level 3
Bank premises held for sale		$	300			$	-			$	300			$	-

December 31, 2020		Total				Level 1				Level 2				Level 3
Bank premises held for sale		$	520			$	-			$	520			$	-

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, 2021 and December 31, 2020.

Note 7. Disclosures about Fair Value of Financial Instruments

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2021 and December 31, 2020. Fair values for September 30, 2021 and December 31, 2020 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.

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Note 7. Disclosures about Fair Value of Financial Instruments (continued)

The estimated fair values, and related carrying amounts (dollars in thousands), of the Company’s financial instruments are as follows (dollars in thousands):

			Fair Value Measurements at September 30, 2021 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, 2021
Assets:
Cash and cash equivalents	$	180,577	$	180,577	$	-	$	-	$	180,577
Securities		271,570		-		271,570		-		271,570
Loans held for sale		3,610		-		3,610		-		3,610
IRLC		333		-		333		-		333
Loans held for investment, net		647,400		-		-		638,419		638,419
Interest receivable		2,579		-		2,579		-		2,579
Bank owned life insurance		22,714		-		22,714		-		22,714
Forward sales commitments		145		-		145		-		145
Total	$	1,128,928	$	180,577	$	300,951	$	638,419	$	1,119,947
Liabilities:
Deposits	$	1,030,292	$	-	$	918,546	$	130,382	$	1,048,928
Long-term debt		21,764		-		-		22,388		22,388
Interest payable		298		-		298		-		298
Total	$	1,052,354	$	-	$	918,844	$	152,770	$	1,071,614

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Note 8. Troubled Debt Restructuring

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which are considered in the qualitative factors within the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance for loan loss methodology. Additionally, specific reserves may be established on restructured loans which are evaluated individually for impairment.

During the nine months ended September 30, 2021, there were two loan modifications that were considered to be troubled debt restructurings. One of these loans was modified during the three months ended June 30, 2021 and one loan modification that would be considered a troubled debt restructuring was modified during the first quarter of 2021. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

Nine months ended September 30, 2021 (dollars in thousands):
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Farmland		1	$	976	$	976
Real Estate		1		109		109
Total		2	$	1,085	$	1,085

On September 30, 2021, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.

During the nine months ended September 30, 2020, there were four loan modifications that were considered to be troubled debt restructurings. Two of these loans was modified during the three months ended September 30, 2020 and two loan modifications considered a troubled debt restructuring were modified during the second quarter of 2020. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

Nine months ended September 30, 2020 (dollars in thousands):
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer		4	$	26	$	26

On September 30, 2020, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.

Note 9. Accumulated Other Comprehensive Loss

The balances in accumulated other comprehensive loss are shown in the following tables for September 30, 2021 and 2020 (dollars in thousands):

	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2020	$	804		$	(3,821	)	$	(3,017	)
Change in unrealized securities gains (losses), net of tax		(892	)		-			(892	)
Balance at September 30, 2021	$	(88	)	$	(3,821	)	$	(3,909	)

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Note 9. Accumulated Other Comprehensive Loss (continued)

	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(7	)	$	(3,204	)	$	(3,211	)
Change in unrealized securities gains (losses), net of tax		174			-			174
Balance at September 30, 2020	$	167		$	(3,204	)	$	(3,037	)

There were no reclassifications adjustments reported on the consolidated statements of income during the three or nine months ended September 30, 2021 or 2020.

Note 10. Business Segments

The Company utilizes its subsidiaries to provide multiple business segments including retail banking, mortgage banking, title insurance services, investment services and credit life and accident and health insurance products related to lending. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from title insurance services, investment services and insurance products consist of commissions on products provided. The Company purchased the noncontrolling interest of F&M Mortgage and VSTitle during the second quarter of 2020.

The following tables represent revenues and expenses by segment for the three and nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands).

	Nine Months Ended September 30, 2021
	F&M Bank			F&M Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	26,499		$	165	$	85	$	-	$	1		$	(130	)	$	26,620
Service charges on deposits		839			-		-		-		-			-			839
Investment services and insurance income		-			-		742		-		-			(6	)		736
Mortgage banking income, net		-			3,874		-		-		-			-			3,874
Title insurance income		-			-		-		1,607		-			-			1,607
Other operating income (loss)		2,334			121		-		-		(114	)		-			2,341
Total income (loss)		29,672			4,160		827		1,607		(113	)		(136	)		36,017
Expenses:
Interest Expense		2,690			115		-		-		551			(130	)		3,226
(Recovery of) loan losses		(2,210	)		-		-		-		-			-			(2,210	)
Salary and benefit expense		10,772			1,902		280		905		-			-			13,859
Other operating expenses		9,777			677		37		227		60			(6	)		10,772
Total expense		21,029			2,694		317		1,132		611			(136	)		25,647
Net income (loss) before taxes		8,643			1,466		510		475		(724	)		-			10,370
Income tax expense		1,199			-		107		-		(294	)		-			1,012
Net Income attributable to F & M Bank Corp.	$	7,444		$	1,466	$	403	$	475	$	(430	)	$	-		$	9,358
Total Assets	$	1,177,613		$	10,255	$	8,434	$	2,802	$	113,627		$	(142,072	)	$	1,170,659
Goodwill	$	2,868		$	47	$	-	$	3	$	164		$	-		$	3,082

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Note 10. Business Segments (continued)

	Three months ended September 30, 2021
	F&M Bank			F&M Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	9,010		$	41	$	26	$	-	$	1		$	(22	)	$	9,055
Service charges on deposits		300			-		-		-		-			-			300
Investment services and insurance income		-			-		213		-		-			(3	)		210
Mortgage banking income, net		-			1,176		-		-		-			-			1,176
Title insurance income		-			-		-		556		-			-			556
Other operating income (loss)		711			41		-		-		(38	)		-			714
Total income (loss)		10,021			1,258		239		556		(38	)		(25	)		12,011
Expenses:
Interest Expense		919			17		-		-		175			(22	)		1,089
(Recovery of) loan losses		(235	)		-		-		-		-			-			(235	)
Salary and benefit expense		3,660			620		99		323		-			-			4,702
Other operating expenses		3,477			213		18		73		21			(3	)		3,799
Total expense		7,821			850		117		396		196			(25	)		9,355
Net income (loss) before taxes		2,200			408		122		160		(234	)		-			2,656
Income tax expense		277			-		26		-		16			-			319
Net Income attributable to F & M Bank Corp.	$	1,923		$	408	$	96	$	160	$	(250	)	$	-		$	2,337

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Note 10. Business Segments, continued

	Nine Months Ended September 30, 2020
	F&M Bank		VBS Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	27,199	$	227	$	115	$	-	$	-		$	(261	)	$	27,280
Service charges on deposits		888		-		-		-		-			-			888
Investment services and insurance income		-		-		543		-		-			(18	)		525
Mortgage banking income, net		-		4,521		-		-		-			-			4,521
Title insurance income		-		-		-		1,386		-			-			1,386
Other operating income (loss)		1,668		126		-		-		(99	)		-			1,695
Total income (loss)		29,755		4,874		658		1,386		(99	)		(279	)		36,295
Expenses:
Interest Expense		4,419		235		-		-		-			(261	)		4,393
Provision for loan losses		3,300		-		-		-		122			-			3,422
Salary and benefit expense		9,623		1,655		231		740		-			-			12,249
Other operating expenses		8,622		691		42		190		32			(18	)		9,559
Total expense		25,964		2,581		273		930		154			(279	)		29,623
Net income (loss) before taxes		3,791		2,293		385		456		(253	)		-			6,672
Income tax expense		527		-		59		-		(41	)		-			545
Net income (loss)		3,264		2,293		326		456		(212	)		-			6,127
Net income attributable to non-controlling interest		-		105		-		-		-			-			105
Net Income attributable to F & M Bank Corp.	$	3,264	$	2,188	$	326	$	456	$	(212	)	$	-		$	6,022
Total Assets	$	1,019,005	$	24,589	$	7,911	$	4,664	$	105,633		$	(146,378	)	$	1,015,424
Goodwill	$	2,670	$	47	$	-	$	3	$	164		$	-		$	2,884

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Note 10. Business Segments, continued

	Three Months Ended September 30, 2020
	F&M Bank		VBS Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	9,163	$	107	$	35	$	-	$	-		$	(127	)	$	9,178
Service charges on deposits		302		-		-		-		-			-			302
Investment services and insurance income		-		-		176		-		-			(9	)		167
Mortgage banking income, net		-		1,621		-		-		-			-			1,621
Title insurance income		-		-		-		543		-			-			543
Other operating income (loss)		572		69		-		-		(46	)		-			595
Total income (loss)		10,037		1,797		211		543		(46	)		(136	)		12,406
Expenses:
Interest Expense		1,308		121		-		-		122			(127	)		1,424
Provision for loan losses		1,000		-		-		-		-			-			1,000
Salary and benefit expense		3,257		504		73		247		-			-			4,081
Other operating expenses		2,899		339		16		61		17			(9	)		3,223
Total expense		8,464		964		89		308		139			(136	)		9,828
Net income (loss) before taxes		1,573		833		122		235		(185	)		-			2,578
Income tax expense		337		-		20		-		15			-			372
Net income (loss)	$	1,236	$	833	$	102	$	235	$	(200	)	$	-		$	2,206
Net income attributable to F & M Bank Corp.	$	1,236	$	833	$	102	$	235	$	(200	)	$	-		$	2,206

Note 11. Debt

Short-term Debt

The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (FHLB) short term borrowings to support the loans held for sale participation program and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. There was no short-term debt at September 30, 2021 and December 31, 2020.

Long-term Debt

The Company utilizes the FHLB advance program to fund loan growth and provide liquidity. The interest rates on long-term debt are fixed at the time of the advance; the weighted average interest rate was .81% at September 30, 2021 and 1.47% at December 31, 2020. The balance of these obligations at September 30, 2021 and December 31, 2020 were $10,000 and $21,268 respectively. FHLB advances include a $6,000 letter of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.

On July 29, 2020, the Company sold and issued to certain institutional accredited investors $5,000 in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7,000 in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030 (the “2030 Notes”). The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning on July 31, 2022 through maturity, the 2027 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2027 Notes will mature on July 31, 2027. The 2030 Notes will initially bear 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 shall 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 2030 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2030 Notes will mature on July 31, 2030. The subordinated notes, net of issuance costs totaled $11,764 at September 30, 2021.

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Note 12. Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), 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.

Gains/Losses on sale of OREO

The Company records a gain or loss from the sale of OREO when the control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. The Company recorded no losses on the sale of OREO property in the nine months ended September 30, 2021 and $325 in losses in the nine months ended September 30, 2020, which is presented on the consolidated income statement as a noninterest expense and therefore, not reflected in the table below.

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Note 12. Revenue Recognition, continued

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands).

	Nine Months Ended September 30,				Three Months Ended September 30,
	2021		2020		2021		2020
Noninterest Income
In-scope of Topic 606:
Service Charges on Deposits	$	839	$	888	$	300	$	302
Investment Services and Insurance Income		736		525		210		167
Title Insurance Income		1,607		1,386		556		543
ATM and check card fees		1,715		1,394		595		499
Other		668		476		154		193
Noninterest Income (in-scope of Topic 606)		5,565		4,669		1,815		1,704
Noninterest Income (out-of-scope of Topic 606)		3,832		4,346		1,141		1,524
Total Noninterest Income	$	9,397	$	9,015	$	2,956	$	3,228

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, 2021 and December 31, 2020, 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 13. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The 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.

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Note 13. Leases (continued)

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases (dollars in thousands):

	September 30, 2021
Lease Liabilities	$	1,001
Right-of-use assets	$	984
Weighted average remaining lease term	3.57 years
Weighted average discount rate		2.97	%

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Lease cost
Operating lease cost	$	37	$	30	$	88	$	88
Total lease cost	$	37	$	30	$	88	$	88

Cash paid for amounts included in the measurement of lease liabilities	$	42	$	28	$	108	$	98

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, 2021
Three months ending December 31, 2021	$	42
Twelve months ending December 31, 2022		194
Twelve months ending December 31, 2023		135
Twelve months ending December 31, 2024		136
Twelve months ending December 31, 2025		98
Thereafter		588
Total undiscounted cash flows	$	1,193
Discount		192
Lease liabilities	$	1,001

Note 14. Mortgage Banking and Derivatives

Loans Held for Sale

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage Company, 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. During the second quarter of 2020, the Company elected to begin using 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 total $3,610 as of September 30, 2021 of which $3,610 is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Interest Rate Lock Commitments and Forward Sales Commitments

The Company, through F&M Mortgage Company, 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, 2021, and totaled $333, with a notional amount of $22,407 and total positions of 91. The fair value of the IRLCs at December 31, 2020 totaled $816, with a notional amount of $31,000 and total positions of 134. Changes in fair value are recorded as a component of “Mortgage banking income, net” in the Consolidated Income Statement for the period ended September 30, 2021. The Company’s IRLCs are classified as Level 2. At September 30, 2021 and December 31, 2020, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

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Note 14. Mortgage Banking and Derivatives (continued)

Interest Rate Lock Commitments and Forward Sales Commitments (continued)

During the second quarter of 2020, the Company elected to begin using 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, 2021 totaled $145, with a notional amount of $26,041 and total positions of 112. The fair value of forward sales commitments was reported in “Other Liabilities” in the Consolidated Balance Sheet at December 31, 2020 totaled $60, with a notional amount of $46,000 and total positions of 205.

Note 15. Stock-Based Compensation

The Company maintains the F & M Bank Corp. 2020 Stock Incentive Plan, which was designed to further the long-term stability and financial success of the Company by attracting and retaining personnel, including employees, directors, and consultants, through the use of stock and stock-based incentives. It was adopted by the Company’s Board, effective upon shareholder approval on May 2, 2020 and will expire on March 18, 2030. The plan provides for the granting of an option, restricted stock, restricted stock unit, stock appreciation right, or stock award to employees, directors, and consultants. It authorizes the issuance of up to 200,000 shares of the Company’s common stock.

The Company’s Stock Plan Committee administers the plan, identifies which participants will be granted awards, and determines the terms and conditions applicable to the awards. No shares were awarded during 2020. On March 5, 2021 the Company’s Stock Plan Committee awarded 15,832 shares with a fair value of $423,506 from this plan to selected employees. These shares vest 25% over each of the next four years. The Committee also awarded 1,332 shares with a fair value of $35,631 to directors. These shares will vest upon issuance.

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Note 16. Waynesboro Branch Acquisition

On April 26, 2021, the Bank acquired a branch from Carter Bankshares Inc. located in Waynesboro, VA. Pursuant to the transaction, the Bank acquired $14,229 thousand in deposits. In connection with its purchase of the branches, the Bank received a cash payment from Carter Bankshares Inc. of $13,758 thousand, which was net of a premium paid on deposits of $135 thousand. This acquisition provides the Bank with the opportunity to enhance its footprint in Augusta County market.

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date. The acquired assets and assumed liabilities of the Waynesboro branch was measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the Waynesboro branch. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Equipment was acquired based on the remaining book value from Carter Bankshares, Inc., which approximated fair value.

The statement of net assets acquired and the resulting goodwill recorded is presented in the following tables (dollars in thousands). As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable assets were recorded at the acquisition date fair value.

	Acquired Balances as Recorded by Carter Bankshares Inc.			Fair Value Adjustments			Acquired Balances as Recorded by Farmers & Merchants Bank
Cash and due from banks	$	188		$	-		$	188

Premises and equipment, net		11			-			11
Right-of-use asset		50			-			50
Core deposit intangible		-			73			73
Total assets	$	249		$	73		$	322

Deposits:
Noninterest-bearing	$	1,693		$	-		$	1,693
Interest-bearing		12,401			135			12,536
Total deposits		14,094			135			14,229

Lease Liability		50			-			50
Total liabilities	$	14,144		$	135		$	14,279

Net assets acquired	$	(13,895	)	$	(62	)	$	(13,957	)

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Note 16. Waynesboro Branch Acquisition (continued)

The following table summarizes the acquired assets and assumed liabilities in the purchase as of the acquisition date, and the resulting goodwill of $199 thousand resulting from the transaction (in thousands):

Assets acquired at fair value:
Cash and cash equivalents	$	188
Premises and equipment, net		11
Right-of-use asset		50
Core deposit intangible		73
Total fair value of assets acquired	$	322

Liabilities assumed at fair value:
Deposits	$	14,229
Lease liability		50
Total fair value of liabilities assumed	$	14,279

Net assets acquired at fair value	$	(13,957	)
Transaction consideration paid to Carter Bankshares Inc.	$	(13,758	)
Amount of goodwill resulting from acquisition	$	199

The total amount of goodwill arising from this transaction of $199 thousand is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

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Note 17. Subsequent Events

On September 1, 2021, the Company gave notice to our Preferred shareholders that we would redeem all Series A Preferred Stock on October 29, 2021. Shareholders could convert their shares to common stock at a conversion rate of $1.111 or redeem their shares for $25.00 per share.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)

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. F & M Bank Corp. holds a majority ownership in VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage.

The Bank is a full-service commercial bank offering a wide range of banking and financial services through its twelve 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). A loan production office opened in Winchester, Virginia in the second quarter of 2021. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides brokerage services and property/casualty insurance to customers of the Bank. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, and Woodstock, 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, and Augusta, 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 Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s December 31, 2020 Form 10-K.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Forward-Looking Statements

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events.

Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: rapidly changing uncertainties related to the COVID-19 pandemic, general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, the financial strength of borrowers, and consumer spending and savings habits.

We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 “Receivables”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company’s allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management’s estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the dealer loan portfolio; maturity of lending staff; the findings of internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviews. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Critical Accounting Policies (continued)

Allowances for loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the loan portfolio. Specific allowances, if required are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades and on all troubled debt restructurings. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Fair Value

The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management’s judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.

COVID-19

The World Health Organization declared a global pandemic in the first quarter of 2020 due to the spread of the coronavirus (“COVID-19”) around the globe. As a result, the state of Virginia issued a stay-at-home order in March requiring all nonessential businesses to shut down and nonessential workers to stay home. The Company, while considered an essential business, implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies were closed until April 12, 2021. The Company utilized drive through windows and courier service to handle transactions, new accounts were opened electronically with limited in person contact for document signing and verification of identification, and lenders were taking applications by appointment.

The Small Business Administration (“SBA”) implemented the Paycheck Protection Program (“PPP”) to support small business operations with loans during the pandemic. The Company worked diligently to support both our customers and noncustomers within our footprint with these loans. As of September 30, 2021, there were 123 PPP loans outstanding for a total of $11,606. The Company has recognized a total of $3,387 in fee income from the SBA for PPP loans with $1,881 recorded in 2021 and $1,506 recorded in 2020. These fees are recognized over the life of the associated loans or when the loan is paid or forgiven; unamortized fees at September 30, 2021 totaled $437.

COVID-19 continues to impact local, national, and foreign economies. Many foreign countries and states in the United States continue to be under restrictions for employment, recreation and gatherings. The unemployment rate has declined from the recent high in April 2020 but is still higher than the pre-pandemic level in February 2020.

The Company is closely monitoring the effects of the pandemic on our customers. Management is focused on assessing the risks in our loan portfolio and working with our customers to minimize losses. At the beginning of the pandemic, additional resources were allocated to analyze higher risk segments in our loan portfolio, monitor and track loan payment deferrals and customer status. As of September 30, 2021 the Company has identified customers impacted by the pandemic and incorporated them into the bank’s normal monitoring and tracking procedures.

As of August 3, 2021, the Company has discontinued granting deferrals related to COVID-19 under the CARES Act. One loan remains in deferral with a balance of $2,486.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

COVID-19 (Continued)

Based on the Company’s capital levels, conservative underwriting policies, low loan-to-deposit ratio, loan concentration diversification and rural operating environment, management believes that it is well positioned to support its customers and communities and to manage the economic risks and uncertainties associated with COVID-19 pandemic and remain adequately capitalized.

Given the rapidly changing and unprecedented nature of the pandemic, however, the Company could experience material and adverse effects on its business, including credit deterioration, operational disruptions, decreased demand for products and services, or other reasons. The extent to which the pandemic impacts the Company will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Overview (Dollars in thousands)

Net income for the nine months ended September 30, 2021 was $9,358 or $2.72 per diluted share, compared to $6,127 or $1.76 in the same period in 2020, an increase of 52.73%. This is a $3,231 increase compared to the first nine months of 2020. During the nine months ended September 30, 2021, noninterest income increased 4.24% and noninterest expense increased 12.94% during the same period.

During the three months ended September 30, 2021, net income was $2,337 or $0.68 per diluted share, compared to $2,206 or $0.65 in the same period in 2020, an increase of 5.94%.

Results of Operations

As shown in Table I, the 2021 year to date tax equivalent net interest income increased $652 or 2.86% compared to the same period in 2020. The tax equivalent adjustment to net interest income totaled $86 for the first nine months of 2021. The yield on earning assets decreased .72%, while the cost of funds decreased .36% compared to the same period in 2020.

The three months ended September 30, 2021 tax equivalent net interest income increased $220 or 2.83% compared to the same period in 2020. The tax equivalent adjustment to net interest income totaled $29 for the three months ended September 30, 2021.

Year to date, the combination of the decrease in yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage resulted in the net interest margin decreasing to 3.15% for the nine months ended September 30, 2021, a decrease of 45 basis points when compared to the same period in 2020. For the three months ended September 30, 2021, the net interest margin decreased 38 basis points when compared to the same period in 2020. A schedule of the net interest margin for the three- and nine-month periods ended September 30, 2021 and 2020 can be found in Table I.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Results of Operations (continued)

The following table provides detail on the components of tax equivalent net interest income (dollars in thousands):

GAAP Financial Measurements:	September 30, 2021				September 30, 2020
	Nine Months		Three Months		Nine Months		Three Months
Interest Income – Loans	$	24,749	$	8,225	$	26,318	$	8,728
Interest Income - Securities and Other Interest-Earnings Assets		1,871		830		962		450
Interest Expense – Deposits		2,464		851		3,685		1,074
Interest Expense - Other Borrowings		762		238		830		350
Total Net Interest Income	$	23,394	$	7,966	$	22,765	$	7,754

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities		86		29		63		21
Total Tax Benefit on Tax-Exempt Interest Income		86		29		63		21
Tax-Equivalent Net Interest Income	$	23,480	$	7,995	$	22,828	$	7,775

The Interest Sensitivity Analysis contained in Table II indicates the Company is in an asset sensitive position in the one-year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 39.72% of rate sensitive assets and 35.19% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively low rate environment, Management has continued to decrease deposit rates. The growth in earning assets and the growth in noninterest bearing accounts has resulted in an increase in the positive GAP position in the one-year time period.

The increase in noninterest income of $382 for the nine-month period September 30, 2021 compared to the same period in 2020 is due primarily to growth in investment services and insurance income ($211), title insurance income ($221), ATM and check card fees ($321), and gain on bank owned life insurance ($355); offset by a decrease in mortgage banking income ($647). The decrease in noninterest income of $272 for the three months ended September 30, 2021 is primarily due to a decrease in mortgage banking income ($445), offset by an increase in ATM and check card fees ($96) and insurance services and insurance income ($43).

Noninterest expense for the nine months ended September 30, 2021 increased $2,823 as compared to 2020. Expenses increased primarily in the areas of salaries and benefits ($1,610), legal and professional fees ($271), and telecommunication and data processing ($192) and other operating expenses ($653). Salary increases were due to expansion into the Winchester and Waynesboro markets; this also increased legal and professional fees and data processing expenses. Other operating expenses include loss on the sale of bank property ($112), donation of bank property ($162) and prepayment penalties on FHLB debt repayments ($228). The increase in noninterest expense of $1,097 for the three months ended September 30, 2021 is primarily due to increases in salaries ($621), legal and professional fees ($107), telecommunications and data processing expense ($149), and other operating expenses ($280).

Balance Sheet

Federal Funds Sold and Interest Bearing Bank Deposits

The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest-bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at 0.00% to 0.25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. The Company held $165,666 and $65,983 in federal funds sold at September 30, 2021 and December 31, 2020, respectively. Growth in excess funds is due to strong deposit growth, and the Company is deploying these funds into the investment portfolio and reducing debt. Interest bearing bank deposits have increased by $1,698 since year end from $1,244 to $2,942.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Securities

The Company’s securities portfolio serves to assist the Company with asset liability management. With the tremendous growth in deposits during the past twelve months, the Company has worked to strategically invest the excess funds into an investment portfolio. This has resulted in an increase in the investments available for sale of $164,546 since December 31, 2020.

The securities portfolio consists of investment securities commonly referred to as securities held to maturity and securities available for sale. Securities are classified as Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at fair value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders’ equity. The low-income housing projects included in other investments are held for the tax losses and credits that they provide.

As of September 30, 2021, the fair value of securities available for sale was below their cost by $111. The portfolio is made up of primarily treasuries, agencies and mortgage-backed obligations of federal agencies, as well as Securities issued by States and political subdivisions in the U.S. and Corporate debt securities. The average maturity is 5.23 years. Efforts to deploy excess funds in an uncertain rate environment has resulted in a mixture of maturities.

In reviewing investments as of September 30, 2021, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.

Loan Portfolio

The Company operates primarily in the counties of Rockingham, Shenandoah, and Augusta, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in western Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. There are no loan concentrations as defined by regulatory guidelines.

Loans Held for Investment of $655,831 decreased $5,498 on September 30, 2021 compared to $661,329 December 31, 2020. Loan growth in the commercial real estate, farmland and dealer finance segments of the portfolio was offset by declines in residential, multi-family real estate and PPP segments.

Loans Held for Sale totaled $3,610 on September 30, 2021, a decrease of $55,069 compared to $58,679 at December 31, 2020. At September 30, 2021 this balance is F&M mortgage loans, which are typically subject to seasonal fluctuations. The Company did not have any participation loans held for sale at September 30, 2021.

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 $5,430 on September 30, 2021 compared to $6,537 at December 31, 2020. The decrease in nonperforming loans from year end is primarily due to two commercial relationships which were paid off due to the sale of the collateral. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses and what has previously been charged off, management believes the Bank is generally well secured and continues to actively work with its customers to effect payment.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Loan Portfolio (continued)

The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):

	September 30, 2021		December 31, 2020
Nonaccrual Loans:
Construction/Land Development	$	267	$	251
Farmland		1,395		1,737
Real Estate		842		368
Multi-Family		-		-
Commercial Real Estate		2,877		3,820
Home Equity – Closed-end		-		-
Home Equity – Open-end		-		212
Commercial & Industrial – Non-Real Estate		-		3
Consumer		-		-
Dealer Finance		29		44
Credit Cards		-		-

Loans past due 90 days or more:
Construction/Land Development	$	-	$	-
Farmland		-		-
Real Estate		-		102
Multi-Family		-		-
Commercial Real Estate		-		-
Home Equity – Closed-End		-		-
Home Equity – Open-End		-		-
Commercial & Industrial – Non-Real Estate		-		-
Consumer		-		-
Dealer Finance		-		-
Credit Cards		20		-
Total Nonperforming loans	$	5,430	$	6,537

Restructured Loans current and performing:
Real Estate	$	2,152		$	2,989
Home Equity		161			687
Commercial		2,853			1,922
Consumer		117			150

Nonperforming loans as a percentage of loans held for investment		.83	%		.99	%
Net charge offs to total loans held for investment¹		(.03	)%		.18	%
Allowance for loan and lease losses to nonperforming loans		155.27	%		160.24	%

¹ – Annualized for nine month period ended September 30, 2021

Allowance for Loan Losses

The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence, and the value of the underlying collateral. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Allowance for Loan Losses (continued)

Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.

In evaluating the portfolio, loans are segregated by segment with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors.

Loans that are not reviewed for impairment are categorized by call report code into unimpaired and classified loans. For both unimpaired and classified loans an estimate is calculated based on actual loss experience over the last three years. The classified Dealer finance loans are given a higher risk factor for past due and adverse risk ratings based on back testing of the risk factors.

A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation.

The allowance for loan losses of $8,431 at September 30, 2021 is equal to 1.29% of loans held for investment, or 1.31% of loans held for investment excluding PPP loans. This compares to an allowance of $10,475 (1.58%) at December 31, 2020. As reflected in Note 4, the Company made a change in its allowance for loan losses methodology to increase the look back period on historical losses from two years to three years. This revised lookback period more accurately reflects the average loss history within the portfolio, as loss history during the most recent two years was impacted by government programs in response to the COVID-19 pandemic. There was a decrease in qualitative factors due to improvements in the unemployment rate.

Due to COVID-19, the Company had added or increased qualitative factors for the economy and concentrations in industries specifically affected by the virus. The Company continues to evaluate these factors in light of the changing effects the virus has on the economy, supply chains, and labor markets. The Company has experienced improvements in past dues and nonperforming loans since December 31, 2020. Past due loans have decreased $5,528 and nonperforming loans have decreased $1,107 since December 31, 2020. As a result, the Bank recorded a negative provision for loan losses of $235 in the three months ending September 30, 2021 and $2,210 for the nine months ending September 30, 2021. Management will continue to monitor the effects of COVID-19 and nonperforming and past due loans to make the necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or cash flow expectations.

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits at September 30, 2021 have increased $211,710 since December 31, 2020. Noninterest bearing deposits increased $32,046 while interest bearing increased $179,664. The increase in deposits in the first nine months is due to a focus on deposit growth as an organization as well as excess funds that customers are holding due to COVID. The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep) programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. At September 30, 2021 and December 31, 2020 the Company had a total of $256 and $257 in CDARS funding and $66,004 and $35,943 in ICS funding, respectively.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Short-term borrowings

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (“FHLB”), and short-term fixed rate FHLB borrowings. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale. As September 30, 2021 and December 31, 2020, there were no short-term borrowings due to excess liquidity.

Long-term borrowings

The Company’s subsidiary bank borrows funds on a fixed rate basis as needed. These borrowings are used to support the Bank’s lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various types in the loan portfolio. FHLB long term advances totaled $10,000 and $21,268 on September 30, 2021, and December 31, 2020, respectively.

Capital

The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.

In March 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At September 30, 2021, the Bank had Common Equity Tier I capital of 14.46% of risked weighted assets, Tier I capital of 14.46% of risk weighted assets and combined Tier I and II capital of 15.64% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December 31, 2020, the Bank had Common Equity Tier I capital of 13.55% of risk weighted assets, Tier I capital of 13.55% of risk weighted assets and combined Tier I and II capital of 14.81% of risk weighted assets. The Bank has maintained capital levels far above the minimum requirements. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital.

In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial condition. At September 30, 2021, the Bank reported a leverage ratio of 9.05%, compared to 9.93% at December 31, 2020. The Bank's leverage ratio was substantially above the minimum. The Bank also reported a capital conservation buffer of 7.64% at September 30, 2021 and 6.81% at December 31, 2020. The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Community Bank Leverage Ratio

The CBLR framework was made available for banks to use beginning in their March 31, 2020 Call Report; to date, the Company has elected not to adopt the CBLR framework.

The Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was temporarily modified under the CARES Act to provide relief to banks.

Liquidity

Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs.

Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution and with Pacific Coast Bankers Bank. The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. Additionally, the Bank can utilize the Federal Reserve Discount Window.

Interest Rate Sensitivity

In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off-balance sheet items that will impair future liquidity.

As of September 30, 2021, the Company had a cumulative Gap Rate Sensitivity Ratio of 14.66% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.

A summary of asset and liability repricing opportunities is shown in Table II.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Effect of Newly Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and is in the set-up stage with expectations of running parallel in 2022. All data has been archived under the current model.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 is in the process of transitioning away from LIBOR for its loan and other financial instruments.

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

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Effect of Newly Issued Accounting Standards, continued

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. For both public and private companies, the ASU is effective for fiscal years beginning after December 15, 2021. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2021.The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU 2019-12 was effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020-01 was effective for the Company on January 1, 2021.The adoption of ASU 2020-01 did not have a material impact on the Company’s consolidated financial statements.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)

Effect of Newly Issued Accounting Standards, continued

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Company on January 1, 2021. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. The COVID-19 discussion following the Critical Accounting Policies at the beginning of the Management’s Discussion and Analysis and note 3 provide more details on what the Company is doing to prepare for the impact.

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

Existence of Securities and Exchange Commission Web Site

The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including F & M Bank Corp. and the address is (http: //www.sec.gov).

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TABLE I

F & M BANK CORP.

Net Interest Margin Analysis

(on a fully taxable equivalent basis)

(Dollar Amounts in Thousands)

	Nine Months Ended September 30, 2021							Nine Months Ended September 30, 2020							Three Months Ended September 30, 2021							Three Months Ended September 30, 2020
	Average Balance		Income/ Expense		Average Rates¹			Average Balance		Income/ Expense		Average Rates¹			Average Balance		Income/ Expense		Average Rates¹			Average Balance		Income/ Expense		Average Rates¹
*Interest income*
Loans held for investment^2,3	$	668,826	$	24,646		4.93	%	$	651,111	$	25,391		5.21	%	$	660,837	$	8,244		4.95	%	$	684,849	$	8,361		4.86	%
Loans held for sale		5,139		161		4.19	%		45,678		977		2.86	%		-		-					56,302		384		2.71	%
Federal funds sold		137,715		99		0.10	%		105,652		333		0.42	%		180,285		55		0.12	%		88,195		15		0.07	%
Interest bearing deposits		1,949		1		0.07	%		1,080		3		0.37	%		3,220		1		0.12	%		1,177		1		0.34	%
Investments
Taxable ⁴		175,445		1,672		1.27	%		40,587		578		1.90	%		225,655		743		1.31	%		92,364		401		1.73	%
Partially taxable		125		1		1.07	%		125		2		2.13	%		125		-		-			125		1		3.18	%
Tax exempt		6,215		126		2.71	%		3,134		59		2.51	%		6,194		41		2.63	%		6,279		36		2.28	%
Total earning assets	$	995,414	$	26,706		3.59	%	$	847,367	$	27,343		4.31	%	$	1,076,316	$	9,084		3.35	%	$	929,291	$	9,199		3.94	%
*Interest Expense*
Demand deposits		133,827		185		0.18	%		102,902		224		0.29	%		152,828		78		0.20	%		111,832		90		0.32	%
Savings		392,741		1,189		0.40	%		287,730		1,779		0.83	%		439,957		451		0.41	%		315,354		469		0.59	%
Time deposits		130,567		1,090		1.12	%		132,349		1,682		1.70	%		131,156		322		0.97	%		127,937		515		1.60	%
Short-term debt		-		-		-			2,372		41		2.31	%		-		-		-			-		-		-
Long-term debt		31,160		762		3.27	%		81,881		789		1.29	%		29,401		238		3.21	%		102,878		350		1.35	%
Total interest bearing liabilities	$	688,295	$	3,226		0.63	%	$	607,234	$	4,515		0.99	%	$	753,342	$	1,089		0.57	%	$	658,001	$	1,424		0.86	%

Tax equivalent net interest income			$	23,480						$	22,828						$	7,995						$	7,775

Net interest margin						3.15	%						3.60	%						2.95	%						3.33	%

___________

¹	Annualized.
²	Interest income on loans includes loan fees.
³	Loans held for investment include 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 II

F & M BANK CORP.

Interest Sensitivity Analysis

September 30, 2021

(Dollars In Thousands)

The following table presents the Company’s interest sensitivity.

	0 – 3 Months			4 – 12 Months			1 – 5 Years			Over 5 Years			Not Classified			Total

*Uses of funds*
Loans
Commercial	$	110,372		$	20,996		$	112,068		$	32,200		$	-		$	275,636
Installment		2,322			1,370			80,013			28,952			-			112,657
Real estate loans for investments		71,910			44,373			137,862			10,841			-			264,986
Loans held for sale		3,610			-			-			-			-			3,610
Credit cards		2,790			-			-			-			-			2,790
Interest bearing bank deposits		2,942			-			-			-			-			2,942
Federal funds sold		165,666			-			-			-			-			165,666
Investment securities		125			10,358			114,816			146,271			-			271,570
Total		359,737			77,097			444,759			218,264			-			1,099,857

*Sources of funds*
Interest bearing demand deposits		-			30,453			91,360			30,454			-			152,267
Savings deposits		-			197,651			253,811			28,080			-			479,542
Certificates of deposit		13,108			34,375			82,027			12			-			129,522
Long-term borrowings		-			-			11,764			10,000			-			21,764
Total		13,108			262,479			438,962			68,546			-			783,095

Discrete Gap		346,629			(185,382	)		5,797			149,718			-			316,762

Cumulative Gap	$	346,629		$	161,247		$	167,044		$	316,762		$	316,762

Ratio of Cumulative Gap to Total Earning Assets		31.52	%		14.66	%		15.19	%		28.80	%		28.80	%

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2021. In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Investment securities included in the table consist of securities held to maturity and securities available for sale. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from regulatory guidance.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provide management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2020 in the Company’s 2020 Form 10-K, Item 7A or Part II.

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, 2021. 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 in SEC rules and forms. There were no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended September 30, 2021 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
	There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.

Item 1a.	Risk Factors	Not required

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None

Item 3.	Defaults Upon Senior Securities	None

Item 4.	Mine Safety Disclosures	None

Item 5.	Other Information	None

Item 6.	Exhibits

(a)	Exhibits

	4.1	Form of 2027 Subordinated Note (included as Exhibit 4.1 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).

	4.2	Form of 2030 Subordinated Note (included as Exhibit 4.2 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).

	10.1	Form of Subordinated Note Purchase Agreement (included as Exhibit 10.1 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

	32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

	101	The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

	104	The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, 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.

	/s/ Mark C. Hanna
	Mark C. Hanna
	President and Chief Executive Officer

	/s/ Carrie A. Comer
	Carrie A. Comer
	Executive Vice President and Chief Financial Officer

November 10, 2021