F&M BANK CORP - Quarter Report: 2023 March (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 March 31, 2023

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

Commission File Number: 000-13273

F&M BANK CORP.

Virginia

54-1280811

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

P. O. Box 1111

Timberville, Virginia 22853

(Address of Principal Executive Offices) (Zip Code)

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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

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

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

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

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

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

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

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

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

Class		Outstanding at April 30, 2023
Common Stock, par value ‑ $5 per share		3,476,500 shares

F & M BANK CORP.

Index

		Page

Part I	Financial Information	3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets – March 31, 2023 and December 31, 2022	3

	Consolidated Statements of Income – Three Months Ended March 31, 2023 and 2022	4

	Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2023 and 2022	5

	Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2023 and 2022	6

	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2023 and 2022	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	48

Part II	Other Information	49

Item 1.	Legal Proceedings	49

Item 1a.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

Signatures		51

Certifications

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Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	March 31,			December 31,
	2023			2022*
	*(Unaudited)*
Assets
Cash and due from banks	$	17,568		$	17,926
Money market funds and interest-bearing deposits in other banks		982			687
Federal funds sold		12,723			16,340
Cash and cash equivalents		31,273			34,953

Securities:
Held to maturity, at amortized cost – fair value of $114 and $112 in 2023 and 2022, respectively		125			125
Less: allowance for credit losses		-			-
Held to maturity, net		125			125
Available for sale, at fair value		388,248			392,095
Other investments		10,587			11,317
Loans held for sale, at fair value		1,242			1,373
Loans held for investment, net of deferred fees and costs		756,920			743,604
Less: allowance for credit losses		(8,546	)		(7,936	)
Net loans held for investment		748,374			735,668

Bank premises and equipment, net		19,971			19,587
Interest receivable		4,165			3,995
Goodwill		3,082			3,082
Bank owned life insurance		23,727			23,554
Other assets		22,081			20,153
Total Assets	$	1,252,875		$	1,245,902
Liabilities
Deposits:
Noninterest bearing	$	284,060		$	293,596
Interest bearing		821,175			789,781
Total deposits		1,105,235			1,083,377

Short-term debt		55,000			70,000
Long-term debt		6,901			6,890
Other liabilities		13,104			14,843
Total liabilities		1,180,240			1,175,110

Commitments and contingencies

Stockholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized, 200,000 designated, 3,482,745 and
3,456,237 shares issued and outstanding (41,192 and 26,456 unvested restricted shares)		17,207			17,149
Additional paid in capital		10,693			10,577
Retained earnings		82,031			83,078
Accumulated other comprehensive loss		(37,296	)		(40,012	)
Total stockholders’ equity		72,635			70,792
Total liabilities and stockholders’ equity	$	1,252,875		$	1,245,902

*2022 derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2023			2022
*Interest and Dividend income*
Interest and fees on loans held for investment	$	10,854		$	7,510
Interest and fees on loans held for sale		22			29
Interest from money market funds and federal funds sold		84			25
Interest on debt securities		2,014			1,497
Total interest and dividend income		12,974			9,061

*Interest expense*
Total interest on deposits		4,042			845
Interest from short-term debt		992			-
Interest from long-term debt		112			159
Total interest expense		5,146			1,004

*Net interest income*		7,828			8,057

*Provision for (Recovery of) Credit Losses*		-			(450	)
*Net Interest Income After Provision for (Recovery of) Credit Losses*		7,828			8,507

*Noninterest income*
Service charges on deposit accounts		225			307
Investment services and insurance income		333			251
Mortgage banking income		234			742
Title insurance income		248			473
Income on bank owned life insurance		179			171
Low income housing partnership losses		(205	)		(204	)
ATM and check card fees		627			563
Other operating income		243			180
Total noninterest income		1,884			2,483

*Noninterest expense*
Salaries		3,861			3,637
Employee benefits		1,043			1,288
Occupancy expense		335			340
Equipment expense		295			286
FDIC insurance assessment		145			116
Advertising expense		218			178
Legal and professional fees		225			208
ATM and check card fees		319			298
Telecommunication and data processing expense		707			901
Directors fees		157			164
Bank franchise tax		168			174
Other operating expenses		1,235			960
Total noninterest expense		8,708			8,550

*Income before income taxes*		1,004			2,440
Income tax benefit		(51	)		(88	)
*Net Income*	$	1,055		$	2,528
*Per Common Share Data*
Net income	$	0.30		$	0.74
Cash dividends on common stock		0.26			0.26
Weighted average common shares outstanding		3,462,698			3,434,892

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2023			2022

Net Income	$	1,055		$	2,528

Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for sale securities		3,438			(18,049	)
Tax effect		(722	)		3,790
Unrealized holding gains (losses), net of tax		2,716			(14,259	)

Total other comprehensive income (loss)		2,716		$	(14,259	)

Total comprehensive income (loss)	$	3,771		$	(11,731	)

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Three Months Ended March 31, 2023 and 2022.

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

*Balance, December 31, 2021*	$	17,071	$	10,127		$	78,350		$	(5,092	)	$	100,456
Net income		-		-			2,528			-			2,528
Other comprehensive (loss)		-		-			-			(14,259	)		(14,259	)
Dividends on common stock ($0.26 per share)		-		-			(892	)		-			(892	)
Common stock issued		13		67			-			-			80
Vesting of time based stock awards issued at date of grant		26		29			-			-			55
Stock-based compensation expense		-		17			-			-			17
*Balance, March 31, 2022*	$	17,110	$	10,240		$	79,986		$	(19,351	)	$	87,985

*Balance December 31, 2022*	$	17,149	$	10,577		$	83,078		$	(40,012	)	$	70,792
Net income		-		-			1,055			-			1,055
Cumulative effect adjustment due to the adoption of ASC 326, net of tax		-		-			(1,203	)		-			(1,203	)
Other comprehensive income		-		-			-			2,716			2,716
Dividends on common stock ($0.26 per share)		-		-			(899	)		-			(899	)
Common stock issued		18		63			-			-			81
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		40		(11	)		-			-			29
Stock-based compensation expense		-		64			-			-			64
*Balance, March 31, 2023*	$	17,207	$	10,693		$	82,031		$	(37,296	)	$	72,635

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2023			2022
*Cash flows from operating activities*
Net income	$	1,055		$	2,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		276			283
Amortization of intangibles		8			9
Amortization of securities		3,461			6,174
Proceeds from loans held for sale		31,451			39,724
Loans held for sale originated		(30,748	)		(36,881	)
Gain on sale of loans held for sale		(572	)		(435	)
Recovery of credit losses		-			(450	)
Increase in interest receivable		(170	)		(228	)
Decrease (increase) in deferred taxes		9			(189	)
Decrease in taxes payable		(38	)		-
Decrease in other assets		(2,302	)		(12	)
Decrease in accrued expenses		(2,486	)		(318	)
Amortization of limited partnership investments		205			204
Amortization of debt issuance costs		11			-
Income from life insurance investment		(179	)		(171	)
(Gain) on the sale of fixed assets		(9	)		-
Stock-based compensation expense		64			17
Net cash provided by operating activities		36			10,255
*Cash flows from investing activities*
Purchase of investments available for sale and other investments		-			(85,163	)
Proceeds from maturity of investments available for sale		3,825			3,000
Proceeds from (investment in) the redemption of restricted stock, net		624			(136	)
Investment in limited partnership		(100	)		-
Net (increase) decrease in loans held for investment		(13,483	)		2,952
Proceeds from the sale of fixed assets		33			-
Net purchase of property and equipment		(684	)		(1,904	)
Net cash (used in) investing activities		(9,785	)		(81,251	)
*Cash flows from financing activities*
Net change in deposits		21,858			32,000
Net change in short-term debt		(15,000	)		-
Dividends paid in cash		(899	)		(892	)
Proceeds from issuance of common stock		110			135
Repayments of long-term debt		-			8
Net cash provided by financing activities		6,069			31,251
*Net decrease in Cash and Cash Equivalents*		(3,680	)		(39,745	)
*Cash and cash equivalents, beginning of period*		34,953			88,121
*Cash and cash equivalents, end of period*	$	31,273		$	48,376
*Supplemental Cash Flow information:*
Cash paid for: Interest	$	4,765		$	1,244
Taxes		360			-
*Supplemental non-cash disclosures:*
Change in unrealized loss on securities available for sale	$	3,438		$	(18,049	)
Cumulative effect of the adoption of ASC 326		1,524			-

See Notes to Consolidated Financial Statements

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Notes to the Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

Use of Estimates

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

Reclassification

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

Nature of Operations

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

Cash and Cash Equivalents

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

Accounting Standards Adopted in 2023

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

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

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

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material.

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

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was immaterial at March 31, 2023 and was excluded from the estimate of credit losses.

The state and local governments securities held by the Company are highly rated by major rating agencies. As a result, no allowance for credit losses was recorded on held to maturity at March 31, 2023.

Allowance for Credit Losses – Available for Sale Securities

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

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

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

Accrued interest receivable on available for sale debt securities totaled $1.4 million at March 31, 2023 and was excluded from the estimate of credit losses.

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Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.7 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

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

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

Allowance for Credit Losses – Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for Credit Losses – Unfunded Commitments

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

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

Earnings per Share

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

Recent Accounting Pronouncements

Accounting Standards adopted in 2023:

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

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

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

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

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

Accounting Standards Pending Adoption:

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

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

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

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

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

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

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

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.

Note 2. Investment Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2023
U. S. Treasury	$	125	$	-	$	11	$	114
December 31, 2022
U. S. Treasury	$	125	$	-	$	13	$	112

There is no allowance for credit losses on held to maturity securities. At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the quarter ended March 31, 2023.

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

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2023
U.S. Treasury	$	39,908	$	-	$	2,706	$	37,202
U.S. Agency		143,477		-		11,978		131,499
Municipal bonds		42,463		93		3,577		38,979
Mortgage-backed securities		179,715		109		25,180		154,644
Corporate		30,550		1		4,627		25,924
Total Securities Available for Sale	$	436,113	$	203	$	48,068	$	388,248

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
December 31, 2022
U.S. Treasury	$	39,902	$	-	$	3,259	$	36,643
U.S. Agency		143,473		-		13,725		129,748
Municipal bonds		46,331		27		4,160		42,198
Mortgage-backed securities		183,044		77		26,246		156,875
Corporate		30,550		-		3,919		26,631
Total Securities Available for Sale	$	443,300	$	104	$	51,309	$	392,095

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

The amortized cost and fair value of securities at March 31, 2023, by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Held to Maturity				Securities Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	125	$	114	$	21,010	$	20,412
Due after one year through five years		-		-		187,096		172,416
Due after five years		-		-		78,775		67,580
Due after ten years		-		-		149,232		127,840
Total	$	125	$	114	$	436,113	$	388,248

There were no sales of available for sale securities in the first quarter of 2023 or 2022.

The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position at March 31, 2023 (dollars in thousands):

	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2023
U.S. Treasury	$	4,868	$	134	$	32,335	$	2,572	$	37,203	$	2,706
U.S. Agency		4,762		238		126,737		11,740		131,499		11,978
Municipal bonds		2,421		179		30,935		3,398		33,356		3,577
Mortgage-backed securities		2,657		61		147,904		25,119		150,561		25,180
Corporate		7,829		1,121		18,094		3,506		25,923		4,627
Total	$	22,537	$	1,733	$	356,005	$	46,335	$	378,542	$	48,068

Unrealized losses at March 31, 2023 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

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

	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2022
U.S. Treasury	$	9,657	$	362	$	26,987	$	2,897	$	36,644	$	3,259
U.S. Agency		13,914		1,083		115,835		12,642		129,749		13,725
Municipal bonds		21,805		1,426		18,710		2,734		40,515		4,160
Mortgage-backed securities		32,823		2,429		119,892		23,817		152,715		26,246
Corporate		16,252		2,198		10,379		1,721		26,631		3,919
Total	$	94,451	$	7,498	$	291,803	$	43,811	$	386,254	$	51,309

As of March 31, 2023, other investments consist of investments in thirteen low-income housing and historic equity partnerships (carrying basis of $5.7 million), stock in the Federal Home Loan Bank of Atlanta (“FHLB’) (carrying basis $2.97 million) and various other investments (carrying basis $1.9 million). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of March 31, 2023. At March 31, 2023, the Company was committed to invest an additional $775 thousand in three low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in other liabilities on the consolidated balance sheet. The Company does not have any pledged securities.

Note 3. Loans and Allowance for Credit Losses

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

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

	March 31, 2023
1-4 Family residential construction	$	28,774
Other construction, land development and land		40,472
Secured by farmland		74,322
Home equity – open end		46,434
Real estate		161,022
Home Equity – closed end		4,563
Multifamily		10,042
Owner-occupied commercial real estate		91,595
Other commercial real estate		103,392
Agricultural loans		11,849
Commercial and industrial		45,307
Credit Cards		3,256
Automobile loans		114,549
Other consumer loans		15,681
Municipal loans		6,248
Gross loans		757,506
Unamortized net deferred loan fees		(586	)
Less allowance for credit losses		8,546
Net loans	$	748,374

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	December 31, 2022
Construction/Land Development	$	68,671
Farmland		74,322
Real Estate		153,281
Multi-Family		9,622
Commercial Real Estate		195,163
Home Equity – closed end		4,707
Home Equity – open end		46,928
Commercial & Industrial – Non-Real Estate		56,625
Consumer		6,488
Dealer Finance		125,125
Credit Cards		3,242
Gross loans		744,174
Unamortized net deferred loan fees		(570	)
Less allowance for credit losses		7,936
Net loans	$	735,668

The Company has pledged loans held for investment as collateral for borrowings with the FHLB totaling $248.8 million and $209.8 million as of March 31, 2023 and December 31, 2022, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial, agricultural farmland, and home equity portfolios.

Nonaccrual and Past Due Loans

The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2023 (dollars in thousands):

	Accruing Loans 30-59 Days Past due		Accruing Loans 60-89 Days Past due		Accruing Loans 90 Days or More Past due		Nonaccrual Loans		Accruing Current Loans			Total Loans
March 31, 2023
1-4 Family residential construction	$	589	$	-	$	-	$	-	$	28,185		$	28,774
Other construction, land development and land		-		-		-		33		40,439			40,472
Secured by farmland		-		-		-		984		73,338			74,322
Home equity – open end		204		331		-		24		45,875			46,434
Real estate		1,880		-		-		421		158,721			161,022
Home Equity – closed end		-		-		-		-		4,563			4,563
Multifamily		-		-		-		-		10,042			10,042
Owner-occupied commercial real estate		171		-		-		-		91,424			91,595
Other commercial real estate		71		-		-		-		103,321			103,392
Agricultural loans		-		-		-		88		11,761			11,849
Commercial and industrial		7		93		30		-		45,177			45,307
Credit Cards		25		4		9		-		3,218			3,256
Automobile loans		808		251		-		193		113,297			114,549
Other consumer loans		67		13		-		-		15,601			15,681
Municipal loans		-		-		-		-		6,248			6,248
Gross loans		3,822		692		39		1,743		751,210			757,506
Less: Unamortized net deferred loan fees		-		-		-		-		(586	)		(586	)
Loans held for investment	$	3,822	$	692	$	39	$	1,743	$	750,654		$	756,920

There were $1.7 million and $2.2 million in nonaccrual loans at March 31, 2023 and December 31, 2022, respectively. The Company would have earned $28 thousand in the first quarter of 2023 and $54 thousand in the first quarter of 2022, if interest on the nonaccrual loans had been accrued.

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The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2022 (dollars in thousands):

	Accruing Loans 30-59 Days Past due		Accruing Loans 60-89 Days Past due		Accruing Loans 90 Days or More Past Due		Nonaccrual Loans		Accruing Current Loans			Total Loans
December 31, 2022
Construction/Land Development	$	477	$	539	$	-	$	21	$	67,634		$	68,671
Farmland		85		18		-		1,458		72,761			74,322
Real Estate		1,807		226		-		419		150,829			153,281
Multi-Family		-		-		-		-		9,622			9,622
Commercial Real Estate		234		82		-		-		194,847			195,163
Home Equity – closed end		3		-		-		-		4,704			4,707
Home Equity – open end		385		177		-		-		46,366			46,928
Commercial & Industrial – Non- Real Estate		104		-		31		101		56,389			56,625
Consumer		11		11		-		15		6,451			6,488
Dealer Finance		1,117		225		5		210		123,568			125,125
Credit Cards		51		9		2		-		3,180			3,242
Less: Unamortized net deferred loan fees		-		-		-		-		(570	)		(570	)
Loans held for investment	$	4,274	$	1,287	$	38	$	2,224	$	735,781		$	743,604

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated (dollars in thousands).

	CECL						Incurred Loss
	March 31, 2023						December 31, 2022
	Nonaccrual loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
1-4 Family residential construction	$	-	$	-	$	-	$	-
Other construction, land development and land		33		-		33		21
Secured by farmland		984		-		984		1,458
Home equity – open end		24		-		24		-
Real estate		421		-		421		419
Home Equity – closed end		-		-		-		-
Multifamily		-		-		-		-
Owner-occupied commercial real estate		-		-		-		-
Other commercial real estate		-		-		-		-
Agricultural loans		88		-		88		88
Commercial and industrial		-		-		-		13
Credit Cards		-		-		-		-
Automobile loans		193		-		193		210
Other consumer loans		-		-		-		15
Municipal loans		-		-		-		-
Total loans	$	1,743	$	-	$	1,743	$	2,224

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The following table represents the accrued interest receivables written off by reversing interest income during the three months ended March 31, 2023 (dollars in thousands):

	For the Three Months Ended March 31, 2023
1-4 Family residential construction	$	-
Other construction, land development and land		-
Secured by farmland		-
Home equity – open end		-
Real estate		-
Home Equity – closed end		-
Multifamily		-
Owner-occupied commercial real estate		-
Other commercial real estate		-
Agricultural loans		-
Commercial and industrial		-
Credit Cards		-
Automobile loans		2
Other consumer loans		-
Municipal loans		-
Total loans	$	2

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Credit Quality Indicators

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023 (dollars in thousands):

	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
1-4 Family residential construction
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	27,443	$	27,443
Watch		642		-		-		-		-		-		250		892
Substandard		-		-		-		-		-		-		439		439
Total 1-4 Family residential construction		642		-		-		-		-		-		28,132		28,774
Current period gross write-offs		-		-		-		-		-		-		-		-

Other construction, land development and land
Pass		3,375		5,312		6,194		1,917		3,006		5,823		13,853		39,480
Watch		-		-		-		-		-		268		170		438
Substandard		-		521		-		-		-		33		-		554
Total Other construction, land development and land		3,375		5,833		6,194		1,917		3,006		6,124		14,023		40,472
Current period gross write-offs		-		-		-		-		-		-		-		-

Secured by farmland
Pass		890		13,597		14,991		28,307		3,387		7,090		4,157		72,419
Watch		-		-		-		-		-		919		-		919
Substandard		-		-		315		-		-		652		17		984
Total Secured by farmland		890		13,597		15,306		28,307		3,387		8,661		4,174		74,322
Current period gross write-offs		-		-		-		-		-		-		-		-

Home equity – open end
Pass		370		-		-		-		-		144		44,321		44,835
Watch		-		-		-		-		-		-		1,525		1,525
Substandard		-		-		-		-		-		-		74		74
Total Home equity - open end		370		-		-		-		-		144		45,920		46,434
Current period gross write-offs		-		-		-		-		-		-		-		-

Real estate
Pass		12,125		43,827		15,316		12,515		6,850		59,446		-		150,079
Watch		-		-		-		507		156		6,217		-		6,880
Substandard		-		-		547		-		1,233		2,283		-		4,063
Total Real estate		12,125		43,827		15,863		13,022		8,239		67,946		-		161,022
Current period gross write-offs		-		-		-		-		-		-		-		-

Home Equity – closed end
Pass		134		408		127		1,148		507		1,848		-		4,172
Watch		-		-		-		-		-		378		-		378
Substandard		-		-		-		-		13		-		-		13
Total Home Equity - closed end		134		408		127		1,148		520		2,226		-		4,563
Current period gross write-offs		-		-		-		-		-		-		-		-

Multifamily
Pass		-		2,765		1,449		935		-		1,640		3,145		9,934
Watch		-		-		-		-		-		108		-		108
Substandard		-		-		-		-		-		-		-		-
Total Multifamily		-		2,765		1,449		935		-		1,748		3,145		10,042
Current period gross write-offs		-		-		-		-		-		-		-		-

Owner-occupied commercial real estate
Pass		1,228		18,761		18,693		7,405		3,720		24,781		6,921		81,509
Watch		-		-		-		-		41		2,135		-		2,176
Substandard		-		-		-		-		6,398		1,214		298		7,910
Total Owner-occupied commercial real estate		1,228		18,761		18,693		7,405		10,159		28,130		7,219		91,595
Current period gross write-offs		-		-		-		-		-		-		-		-

Other commercial real estate
Pass		2,642		31,221		13,182		5,194		3,942		36,496		1,840		94,517
Watch		-		-		-		-		-		8,539		249		8,788
Substandard		-		-		-		-		-		87		-		87
Total Other commercial real estate		2,642		31,221		13,182		5,194		3,942		45,122		2,089		103,392
Current period gross write-offs		-		-		-		-		-		-		-		-

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	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
Agricultural loans
Pass		914		3,595		678		653		13		103		5,641		11,597
Watch		-		-		-		-		-		-		-		-
Substandard		-		62		44		11		-		-		135		252
Total Agricultural loans		914		3,657		722		664		13		103		5,776		11,849
Current period gross write-offs		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		2,450		10,002		5,386		2,409		1,098		774		19,860		41,979
Watch		-		-		66		-		-		2		3,212		3,280
Substandard		-		-		14		30		-		4		-		48
Total 1-4 Commercial and industrial		2,450		10,002		5,466		2,439		1,098		780		23,072		45,307
Current period gross write-offs		-		-		-		-		-		-		-		-

Credit Cards
Pass		-		-		-		-		-		-		3,247		3,247
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		9		9
Total Credit cards		-		-		-		-		-		-		3,256		3,256
Current period gross write-offs		-		-		-		-		-		-		5		5

Automobile loans
Pass		17,288		50,785		27,514		11,900		4,271		2,064		-		113,822
Watch		-		151		165		76		55		72		-		519
Substandard		-		79		93		17		6		13		-		208
Total Automobile loans		17,288		51,015		27,772		11,993		4,332		2,149		-		114,549
Current period gross write-offs		-		103		177		68		2		12		-		362

Other consumer loans
Pass		2,124		7,365		3,531		1,573		618		132		307		15,650
Watch		-		14		5		1		5		6		-		31
Substandard		-		-		-		-		-		-		-		-
Total Other consumer loans		2,124		7,379		3,536		1,574		623		138		307		15,681
Current period gross write-offs		-		16		-		1		1		-		-		18

Municipal loans
Pass		-		236		1,070		1,158		1,285		2,499		-		6,248
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Municipal loans		-		236		1,070		1,158		1,285		2,499		-		6,248
Current period gross write-offs		-		-		-		-		-		-		-		-

Total loans		44,182		188,701		109,380		75,756		36,604		165,770		137,113		757,506
Less: Unamortized net deferred loan fees																(586	)
Loans held for investment																756,920

Current period gross write-offs		-		119		177		68		3		12		5		385

Under the adoption of ASC 326, the Company consolidated their internal risk ratings 1 through 5 into a pass category. Doubtful loans are charged off; dealer finance loans utilize the updated credit quality indicators. Credit cards are classified as pass or substandard. The credit quality indicators for watch and substandard remain unchanged.

Description of the Company’s credit quality indicators under CECL:

Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

Grade 6 – Watch: Loans are currently protected but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

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

Credit cards are classified as pass or substandard. A credit card is substandard when payments of principal and interest are past due 90 days or more.

The following table shows the Company’s loan portfolio broken down by internal loan grade as of December 31, 2022 (dollars in thousands):

December 31, 2022	Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development	$	-	$	4	$	11,112	$	42,684	$	13,116	$	1,213	$	542	$	-	$	68,671
Farmland		155		269		11,373		38,051		22,069		947		1,458		-		74,322
Real Estate		-		553		27,003		86,269		28,560		6,950		3,946		-		153,281
Multi-Family		-		-		963		5,116		3,430		113		-		-		9,622
Commercial Real Estate		-		3,097		55,662		72,779		41,749		13,878		7,998		-		195,163
Home Equity – closed end		-		48		1,065		2,560		639		382		13		-		4,707
Home Equity – open end		27		1,272		18,671		23,207		2,091		1,611		49		-		46,928
Commercial & Industrial - Non-Real Estate		10		516		12,934		26,310		15,613		911		331		-		56,625
Consumer (excluding dealer)		33		286		2,965		3,105		68		16		15		-		6,488
Gross loans	$	225	$	6,045	$	141,748	$	300,081	$	127,335	$	26,021	$	14,352	$	-	$	615,807
Less: Unamortized net deferred loan fees																		(570	)
Total																	$	615,237

	Credit Cards		Dealer Finance
Performing	$	3,240	$	124,910
Nonperforming		2		215
Total	$	3,242	$	125,125

Description of internal loan grades under Incurred Loss:

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

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

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

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

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

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

Collateral Dependent Disclosures

The Company designates individually evaluated loans as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

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The following table presents an analysis of collateral-dependent loans of the Company as of March 31, 2023 (dollars in thousands):

	March 31, 2023
	Real Estate		Business/Other Assets
1-4 Family residential construction	$	-	$	-
Other construction, land development and land		520		-
Secured by farmland		-		-
Home equity – open end		-		-
Real estate		-		-
Home Equity – closed end		-		-
Multifamily		-		-
Owner-occupied commercial real estate		-		-
Other commercial real estate		-		-
Agricultural loans		-		-
Commercial and industrial		-		-
Credit Cards		-		-
Automobile loans		-		-
Other consumer loans		-		-
Municipal loans		-		-
Total loans	$	520	$	-

Allowance for Credit Losses

The following table (dollars in thousands) summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2023 under the CECL methodology.

	December 31, 2022		Adjustment for adoption of ASU 2016-13			Charge-offs		Recoveries		Provision for credit losses		March 31, 2023
1-4 Family residential construction	$	324	$	109		$	-	$	-	$	-	$	433
Other construction, land development and land		694		602			-		-		-		1,296
Secured by farmland		571		311			-		-		-		882
Home equity – open end		446		(189	)		-		-		-		257
Real estate		1,389		(184	)		-		-		-		1,205
Home Equity – closed end		39		96			-		-		-		135
Multifamily		71		182			-		-		-		253
Owner-occupied commercial real estate		992		280			-		-		-		1,272
Other commercial real estate		1,023		(582	)		-		-		-		441
Agricultural loans		80		(58	)		-		-		-		22
Commercial and industrial		368		338			-		1		-		707
Credit Cards		68		26			5		1		-		90
Automobile loans		1,790		(257	)		362		210		-		1,381
Other consumer loans		81		103			18		6		-		172
Municipal loans		-		-			-		-		-		-
Total loans	$	7,936	$	777		$	385	$	218	$	-	$	8,546

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Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods (dollars in thousands).

March 31, 2022	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	977	$	-	$	-	$	(275	)	$	702	$	-	$	702
Farmland		448		-		-		4			452		-		452
Real Estate		1,162		-		-		2			1,164		113		1,051
Multi-Family		29		-		-		6			35		-		35
Commercial Real Estate		2,205		-		-		(112	)		2,093		456		1,637
Home Equity – closed end		41		-		-		(2	)		39		-		39
Home Equity – open end		407		-		129		(162	)		374		-		374
Commercial & Industrial – Non-Real Estate		288		1		30		(7	)		310		-		310
Consumer		520		21		11		13			523		-		523
Dealer Finance		1,601		204		152		85			1,634		13		1,621
Credit Cards		70		12		7		(2	)		63		-		63
Total	$	7,748	$	238	$	329	$	(450	)	$	7,389	$	582	$	6,807

The following tables presents, as of March 31, 2023 and December 31, 2022 segregated by loan portfolio segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above (dollars in thousands).

	March 31, 2023
	Loan Balances						Allowance for Credit Losses - Loans
	Loans Individually Evaluated		Loans Collectively Evaluated		Total		Loans Individually Evaluated		Loans Collectively Evaluated		Total
1-4 Family residential construction	$	-	$	28,774	$	28,774	$	-	$	433	$	433
Other construction, land development and land		520		39,952		40,472		228		1,068		1,296
Secured by farmland		-		74,322		74,322		-		882		882
Home equity – open end		-		46,434		46,434		-		257		257
Real estate		-		161,022		161,022		-		1,205		1,205
Home Equity – closed end		-		4,563		4,563		-		135		135
Multifamily		-		10,042		10,042		-		253		253
Owner-occupied commercial real estate		-		91,595		91,595		-		1,272		1,272
Other commercial real estate		-		103,392		103,392		-		441		441
Agricultural loans		-		11,849		11,849		-		22		22
Commercial and industrial		-		45,307		45,307		-		707		707
Credit Cards		-		3,256		3,256		-		90		90
Automobile loans		-		114,549		114,549		-		1,381		1,381
Other consumer loans		-		15,681		15,681		-		172		172
Municipal loans		-		6,248		6,248		-		-		-
Total loans	$	520	$	756,986	$	757,506	$	228	$	8,318	$	8,546

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December 31, 2022	Loan Receivable			Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	68,671		$	853	$	67,818
Farmland		74,322			2,079		72,243
Real Estate		153,281			3,260		150,021
Multi-Family		9,622			-		9,622
Commercial Real Estate		195,163			9,111		186,052
Home Equity – closed end		4,707			-		4,707
Home Equity –open end		46,928			-		46,928
Commercial & Industrial – Non-Real Estate		56,625			-		56,625
Consumer		6,488			-		6,488
Dealer Finance		125,125			62		125,063
Credit Cards		3,242			-		3,242
Gross Loans		744,174			15,365		728,809
Less: Unamortized net deferred loan fees		(570	)		-		(570	)
Total	$	743,604		$	15,365	$	728,239

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all substandard loans greater than $500 thousand and all troubled debt restructurings. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

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The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022 (dollars in thousands):

	December 31, 2022
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment(1)		Balance		Allowance		Investment
Impaired loans with no related allowance recorded:
Construction/Land Development	$	332	$	332	$	-	$	474
Farmland		2,535		2,079		-		2,137
Real Estate		1,882		1,882		-		2,107
Multi-Family		-		-		-		-
Commercial Real Estate		8,131		8,131		-		8,851
Home Equity – closed end		-		-		-		-
Home Equity – open end		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-
Consumer		-		-		-		-
Credit cards		-		-		-		-
Dealer Finance		7		7		-		11
		12,887		12,431		-		13,580
Impaired loans with an allowance recorded:
Construction/Land Development		521		521		228		261
Farmland		-		-		-		-
Real Estate		1,378		1,378		92		1,466
Multi-Family		-		-		-		-
Commercial Real Estate		980		980		11		1,935
Home Equity – closed end		-		-		-		-
Home Equity – open end		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-
Consumer		-		-		-		-
Credit cards		-		-		-		-
Dealer Finance		55		55		13		62
		2,934		2,934		344		3,724
Total impaired loans	$	15,821	$	15,365	$	344	$	17,304

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

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The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three-month periods ended March 31, 2022 (dollars in thousands):

	March 31, 2022
	Average Recorded		Interest Income
	Investment		Recognized
Impaired loans with no related allowance recorded:
Construction/Land Development	$	641	$	6
Farmland		2,251		70
Real Estate		2,566		33
Multi-Family		-		-
Commercial Real Estate		9,763		186
Home Equity – closed end		74		-
Home Equity – open end		-		-
Commercial & Industrial – Non-Real Estate		-		-
Consumer		3		-
Credit Cards		-		-
Dealer Finance		14		-
		15,312		295
Impaired loans with an allowance recorded:
Construction/Land Development	$	-	$	-
Farmland		-		-
Real Estate		1,334		16
Multi-Family		-		-
Commercial Real Estate		4,624		42
Home Equity – closed end		-		-
Home Equity – open end		-		-
Commercial & Industrial – Non-Real Estate		-		-
Consumer		-		-
Credit Card		-		-
Dealer Finance		75		1
		6,033		59
Total Impaired Loans	$	21,345	$	354

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a remaining life model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the real estate loans included in the “combination” tables, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.

There were no loans modified to borrowers experiencing financial difficulty in the three months ended March 31, 2023. Additionally, there were no loans that had a payment default during the quarter that were modified in the previous 12 months.

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The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months (dollars in thousands):

	Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
1-4 Family residential construction	$	-	$	-	$	-
Other construction, land development and land		-		-		-
Secured by farmland		-		-		-
Home equity – open end		-		-		-
Real estate		180		-		-
Home Equity – closed end		-		-		-
Multifamily		-		-		-
Owner-occupied commercial real estate		-		-		-
Other commercial real estate		-		-		-
Agricultural loans		-		-		-
Commercial and industrial		-		-		-
Credit Cards		-		-		-
Automobile loans		23		-		-
Other consumer loans		-		-		-
Municipal loans		-		-		-
Total loans	$	203	$	-	$	-

The following table shows, by modification type, TDRs that occurred during 2022 (dollars in thousands):

	December 31, 2022
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Extended maturity		3	$	44	$	44
Change in terms		1		162		162
Total		4	$	206	$	206

Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans and are discussed above. The allowance for credit losses for unfunded loan commitments of $747 thousand at March 31, 2023 is separately classified on the balance sheet within Other Liabilities.

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The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023 (dollars in thousands).

	Total Allowance for Credit Losses – Unfunded Commitments
Balance, December 31, 2022	$	-
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		747
Provision for unfunded commitments		-
Balance, March 31, 2023	$	747

Note 4. Mortgage Banking and Derivatives

Loans Held for Sale

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company uses fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business totaled $1.2 million as of March 31, 2023 of which $1.2 million 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, 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 March 31, 2023, and totaled $99 thousand, with a notional amount of $13.1 million and total positions of 40. The fair value of the IRLCs were reported in the “Other liabilities” in the Consolidated Balance Sheet at December 31, 2022 and totaled $92 thousand, with a notional amount of $12.2 million and total positions of 38. Changes in fair value are recorded as a component of “Mortgage banking income” in the Consolidated Income Statement for the period ended March 31, 2023 and 2022. The Company’s IRLCs are classified as Level 2. At March 31, 2023 and December 31, 2022, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

The Company uses fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at March 31, 2023 and totaled $43 thousand, with a notional amount of $14.5 million and total positions of 45. The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at December 31, 2022 and totaled $186 thousand, with a notional amount of $13.6 million and total positions of 43.

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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 plan was amended on February 15, 2023 to stop the accrual of future benefits. The following is a summary of net periodic pension costs for the three month periods ended March 31, 2023 and 2022 (dollars in thousands):

	Three Months Ended
	March 31, 2023			March 31, 2022
Service cost	$	-		$	190
Interest cost		92			104
Expected return on plan assets		(130	)		(195	)
Amortization of net loss		-			58
Net periodic pension cost	$	(38	)	$	157

Note 6. Stock-Based Compensation

The Company granted stock awards to directors and employees under the Company’s 2020 Stock Incentive Plan. On March 7, 2023 the Bank’s Compensation Committee awarded 23,556 shares with a fair value of $526 thousand to selected employees. These shares vest 25% over each of the next four years. The Committee also awarded 1,309 shares with a fair value of $29 thousand to directors that vested upon issuance. There were 6,974 shares vested, less 96 shares netted for taxes, during the three months ended March 31, 2023. Unrecognized compensation expense related to the nonvested restricted stock as of March 31, 2023 totaled $980 thousand.

Note 7. Fair Value

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

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

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

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

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

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

Securities

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

Loans Held for Sale

The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

Derivative assets – IRLCs

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2.

Derivative Asset/Liability – Forward Sale Commitments

The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 (dollars in thousands):

			Fair Value Measurements Using:
	Balance at March 31, 2023		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	1,242	$	-	$	1,242	$	-
U.S. Treasury		37,202		-		37,202		-
U.S. Agency		131,499		-		131,499		-
Municipal bonds		38,979		-		38,979		-
Mortgage-backed securities		154,644		-		154,644		-
Corporate		25,924		-		25,924		-
IRLC		99		-		99		-
Forward Sales Commitments		43		-		43		-
Assets at Fair Value	$	389,632	$	-	$	389,632	$	-

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			Fair Value Measurements Using:
	Balance at December 31, 2022		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	1,373	$	-	$	1,373	$	-
U.S. Treasury		36,643		-		36,643		-
U.S. Agency		129,748		-		129,748		-
Municipal bonds		42,198		-		42,198		-
Mortgage-backed securities		156,875		-		156,875		-
Corporate		26,631		-		26,631		-
Forward sales commitments		186		-		186		-
Assets at Fair Value	$	393,654	$	-	$	393,654	$	-

Liabilities:
IRLC	$	92	$	-	$	92	$	-
Liabilities at Fair Value	$	92	$	-	$	92	$	-

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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

Collateral Dependent Loans with an ACL

In accordance with ASC 326, we maydetermine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

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

			Fair Value Measurements Using:
Collateral dependent loans with an ACL	Balance at March 31, 2023		Level 1		Level 2		Level 3
Other construction, land development and land	$	292	$	-	$	-	$	292
Total collateral dependent loans with an ACL	$	292	$	-	$	-	$	292

			Fair Value Measurements Using:
Impaired Loans	Balance at December 31, 2022		Level 1		Level 2		Level 3
Construction/Land Development	$	293	$	-	$	-	$	293
Real Estate		1,286		-		-		1,286
Commercial Real Estate		969		-		-		969
Dealer Finance		42		-		-		42
Total Impaired loans	$	2,590	$	-	$	-	$	2,590

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The following table presents information about Level 3 Fair Value Measurements for March 31, 2023 and December 31, 2022 (dollars in thousands):

		Fair Value at March 31, 2023	Valuation Technique	Significant Unobservable Inputs	Range
Collateral Dependent Loans	$	292 thousand	Discounted appraised value	Discount for selling costs and marketability	62%

		Fair Value at December 31, 2022	Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	2,590 thousand	Discounted appraised value	Discount for selling costs and marketability	10.00%-33.00% (Average 19.00%)

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 March 31, 2023 or December 31, 2022.

Note 8. Disclosures about Fair Value of Financial Instruments

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2023 and December 31, 2022. Fair values for March 31, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.

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

			Fair Value Measurements at March 31, 2023 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at March 31, 2023
Assets:
Cash and cash equivalents	$	31,273	$	31,273	$	-	$	-	$	31,273
Securities available for sale		388,248		-		388,248		-		388,248
Securities held to maturity		125		-		114		-		114
Loans held for sale		1,242		-		1,242		-		1,242
Loans held for investment, net		756,920		-		-		737,427		737,427
Interest receivable		4,165		-		4,165		-		4,165
Bank owned life insurance		23,727		-		23,727		-		23,727
IRLC		99		-		99		-		99
Forward sales commitments		43		-		43		-		43
Total	$	1,205,842	$	31,273	$	417,638	$	737,427	$	1,186,338
Liabilities:
Deposits	$	1,105,235	$	-	$	1,103,119	$	-	$	1,103,119
Short-term debt		55,000		-		-		55,000		55,000
Long-term debt		6,901		-		-		6,755		6,755
Interest payable		676		-		676		-		676
Total	$	1,167,812	$	-	$	1,103,795	$	61,755	$	1,165,550

			Fair Value Measurements at December 31, 2022 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at December 31, 2022
Assets:
Cash and cash equivalents	$	34,953	$	34,953	$	-	$	-	$	34,953
Securities		392,220		-		392,220		-		392,220
Loans held for sale		1,373		-		1,373		-		1,373
Loans held for investment, net		743,604		-		-		720,806		720,806
Interest receivable		3,995		-		3,995		-		3,995
Bank owned life insurance		23,554		-		23,554		-		23,554
Forward sales commitments		186		-		186		-		186
Total	$	1,199,885	$	34,953	$	421,328	$	720,806	$	1,177,087
Liabilities:
Deposits	$	1,083,377	$	-	$	1,080,909	$	-	$	1,080,909
Short-term debt		70,000		-		-		70,000		70,000
Long-term debt		6,890		-		-		6,778		6,778
IRLC		92		-		92		-		92
Interest payable		295		-		295		-		295
Total	$	1,160,654	$	-	$	1,081,296	$	76,778	$	1,158,074

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Note 9. Accumulated Other Comprehensive Loss

The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).

	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2022	$	(40,452	)	$	439		$	(40,012	)
Change in unrealized securities gains, net of tax expense of $722		2,716			-			2,716
Balance at March 31, 2023	$	(37,736	)	$	439		$	(37,296	)

	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2021	$	(1,801	)	$	(3,291	)	$	(5,092	)
Change in unrealized securities losses, net of tax benefit of $3,790		(14,259	)		-			(14,259	)
Balance at March 31, 2022	$	(16,060	)	$	(3,291	)	$	(19,351	)

There were no reclassifications adjustments reported on the consolidated statements of income during the three months ended March 31, 2023 or 2022.

Note 10. Debt

Short-term Debt

The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to support loans growth and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. There was $55.0 million in short-term debt at March 31, 2023 and $70.0 million short-term debt at December 31, 2022.

Long-term Debt

On July 29, 2020, the Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030. The note 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 will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at March 31, 2023.

Note 11. 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 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.

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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.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2023 and 2022 (dollars in thousands).

	Three Months Ended March 31
	2023		2022
Noninterest Income
In-scope of Topic 606:
Service Charges on Deposits	$	225	$	307
Investment Services and Insurance Income		333		251
Title Insurance Income		248		473
ATM and check card fees		627		563
Other		74		157
Noninterest Income (in-scope of Topic 606)		1,507		1,751
Noninterest Income (out-of-scope of Topic 606)		377		732
Total Noninterest Income	$	1,884	$	2,483

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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 March 31, 2023 and December 31, 2022, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

Note 12. Leases

The Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

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

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

	March 31, 2023
Lease Liabilities	$	851
Right-of-use assets	$	837
Weighted average remaining lease term (years)	2.27 years
Weighted average discount rate		3.28	%

	For the Three Months Ended March 31,
	2023		2022
Operating lease cost	$	40	$	153
Total lease cost	$	40	$	153
Cash paid for amounts included in the measurement of lease liabilities	$	58	$	181

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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):

	March 31, 2023
Nine months ending December 31, 2023	$	131
Twelve months ending December 31, 2024		166
Twelve months ending December 31, 2025		122
Twelve months ending December 31, 2026		69
Twelve months ending December 31, 2027		56
Thereafter		462
Total undiscounted cash flows	$	1,006
Discount		155
Lease liabilities	$	851

Note 13. Subsequent Events

On April 10, 2023, the Board of Directors of the Company appointed Aubrey Michael (Mike) Wilkerson as Chief Executive Officer of the Company and the Bank and Barton E. Black as President of the Company and the Bank, both effective April 10, 2023. Mr. Wilkerson also has been appointed to the Board of Directors of the Company and the Bank, effective April 10, 2023. Mr. Wilkerson previously served as Executive Vice President/Chief Lending Officer, and Mr. Black previously served as Executive Vice President/Chief Operating Officer of the Company and the Bank. They succeed Mark C. Hanna, whose separation from the Company and resignation as a director was effective April 10, 2023. Mr. Hanna served as President and Chief Executive Officer of the Company and the Bank.

On April 26, 2023, the Board of Directors declared a first quarter dividend of $0.26 per share, payable on May 30, 2023, to stockholders of record as of May 15, 2023.

On April 27, 2023 the Bank purchased property at 141 East Market Street in Harrisonburg, Virginia. This location will expand the Bank’s service offerings and customer support and accommodate future growth. The property has banking history, serving as the location of the headquarters of the former Rockingham Bank and as a branch or office location for its successors.

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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.The Company held a majority ownership in VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage, until the Company purchased F&M Mortgage’s minority interest in VST on January 3, 2022.

The Bank is a full-service commercial bank offering a wide range of banking and financial services through its thirteen branch offices as well as its loan production office located in Penn Laird, Virginia (which specializes in providing automobile financing through a network of automobile dealers). TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides brokerage services and property/casualty insurance to customers of the Bank. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, Woodstock, and Winchester, Virginia. VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, Virginia.

The Company’s primary trade area services customers in the counties of Rockingham, Shenandoah, Frederick 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 Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

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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. 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: 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, consumer spending and savings habits, geopolitical conditions, and exposure to fraud, negligence, computer theft and cyber-crime, and other factors described in Item 1A., “Risk Factors,” in the Company’s 2022 Form 10-K.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of March 31, 2023 were unchanged from the policies disclosed in the 2022 Form 10-K within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for the adoption of ASC 326. See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.

Overview

Net income for the first quarter of 2023 was $1.1 million or $0.30 per share, compared to $2.5 million or $0.74 per share for first quarter 2022. Interest income for the three months ended March 31, 2023, increased $3.9 million over the prior year first quarter, due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $5.1 million for the first quarter, up $4.1 million over first quarter 2022.

During first quarter 2023, there was no provision for credit losses while a recovery of loan losses of $450 thousand was recorded in first quarter 2022. Effective January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326)” which changed the methodology used in the calculation of allowance for loan losses from the incurred loss method to the current expected credit loss model (“CECL”). As a result of the adoption, the Company recorded a one-time adjustment to increase the allowance for credit losses on loans (“ACLL”) of $777 thousand and established a reserve for unfunded commitments of $749 thousand. The accounting standard requires the one-time adoption adjustment to be offset against retained earnings and any future adjustments to be charged to provision expense. At March 31, 2023, the ACLL totaled $8.5 million or 1.13% of gross loans.

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Results of Operations

Net Interest Income

For first quarter 2023, net interest income totaled $7.8 million, a decrease of $229 thousand from the first quarter of 2022, resulting in a decrease in our net interest margin by 0.06%. Interest income and fees on loans were $3.3 million higher due to higher rates on variable rate loans and $97.4 million in loan growth since first quarter 2022. Income from cash and securities was $576 thousand higher due to increased interest rates.

Interest expense increased by $4.1 million to $5.1 million mostly due to higher market interest rates and an increase in the average balances of short-term debt. During the fourth quarter of 2022 and first quarter of 2023, rates paid on money market and time deposits increased significantly resulting in $3.2 million more in interest expense on deposits. The increase in market interest rate also caused a shift in the deposit mix to higher-cost accounts. Short-term borrowings were used to augment deposits to fund loan growth in the fourth quarter which increased short-term borrowings expense to $992 thousand from $0 last year.

The net interest margin was 2.76% and 2.82% for the three months ended March 31, 2023 and 2022, respectively. The lower net interest margin was due to higher cost of funds, partially offset by higher yields on interest-earning assets.

The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three months ended March 31, 2023 and 2022 (dollars in thousands):

	Three Months Ended March 31, 2023							Three Months Ended March 31, 2022
	Average Balance⁵		Income/Expense		Average Rates¹			Average Balance⁵		Income/ Expense		Average Rates¹
*Interest income*
Loans held for investment^2,3	$	749,790	$	10,866		5.88	%	$	656,099	$	7,522		4.65	%
Loans held for sale		1,308		22		6.82	%		3,683		29		3.19	%
Federal funds sold		6,376		74		4.71	%		64,813		24		0.15	%
Interest bearing deposits		748		10		5.42	%		2,845		1		0.14	%
Investments
Taxable		381,915		1,908		2.03	%		423,751		1,444		1.38	%
Partially taxable		-		-					125		1		1.62	%
Tax exempt⁴		15,052		134		3.61	%		10,250		67		2.65	%
Total earning assets	$	1,155,189	$	13,014		4.57	%	$	1,161,566	$	9,088		3.17	%
*Interest Expense*
Demand deposits		168,781		674		1.62	%		188,344		103		0.22	%
Savings		500,988		2,977		2.41	%		492,458		503		0.41	%
Time deposits		121,600		391		1.30	%		122,471		239		0.79	%
Federal funds purchased		354		5		5.73	%		-		-
Short-term debt		71,111		987		5.63	%		-		-
Long-term debt		6,895		112		6.59	%		21,776		159		2.96	%
Total interest bearing liabilities	$	869,729	$	5,146		2.40	%	$	825,049	$	1,004		0.49	%

Tax equivalent net interest income			$	7,868						$	8,084

Net interest margin						2.76	%						2.82	%

^{________________________}

¹ Annualized.

² Interest income on loans includes loan fees.

³ Loans held for investment include nonaccrual loans.

⁴Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.

⁵Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

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The following table reconciles tax equivalent net interest income, which is not a measurement under GAAP, to net interest income (dollars in thousands):

GAAP Financial Measurements:	March 31, 2023		March 31, 2022
Interest Income – Loans	$	10,876	$	7,539
Interest Income - Securities and Other Interest-Earnings Assets		2,098		1,522
Interest Expense – Deposits		4,042		845
Interest Expense - Other Borrowings		1,104		159
Total Net Interest Income	$	7,828	$	8,057

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities		40		27
Total Tax Benefit on Tax-Exempt Interest Income		40		27
Tax-Equivalent Net Interest Income	$	7,868	$	8,084

Noninterest Income

Noninterest income totaled $1.9 million for first quarter 2023, which was a decrease of $599 thousand from the first three months of 2022. The primary reason for the decrease in noninterest income from 2022 was a reduction of $508 thousand in mortgage banking income. There were fewer mortgage loans sold on the secondary market due to an overall decrease in volume and, a shift in production from the 30-year fixed rate product to variable rate products which were retained in the Bank’s loan portfolio. The overall decline in mortgage banking activity also negatively impacted VSTitle income which declined by $225 thousand from the first quarter of 2022 to the same quarter in 2023. Service charges on deposit accounts decreased by $82 thousand due to a change in the method used to charge NSF and Overdraft fees. These decreases were partially offset by increases of $82 thousand in investment and insurance income and $64 thousand in ATM and debit card interchange income.

Noninterest Expense

Noninterest expenses totaled $8.7 million in first quarter 2023, compared to $8.6 million in the first quarter of 2022. The year-over-year increases were spread over several categories of noninterest expenses including salary and employee benefits expense, professional fees, and data processing fees. The increase in salary expense resulted from an increase in the minimum wage paid by the Bank in August 2022 and a one-time severance accrual made during the quarter. These amounts were partially offset by a decrease in pension expense of $195 thousand.

Income Taxes

For the three months ended March 31, 2023 and March 31, 2022, income tax benefit was $51 thousand and $88 thousand, respectively, and the effective income tax rate was 5.1% and 3.6%, respectively. Our effective tax rate differs from the 21% federal statutory rate due to the impact of various permanent tax differences, including tax-exempt income from municipal securities, BOLI income, tax credits from low-income housing tax credit investments, and the vesting of other stock-based compensation.

Balance Sheet

Overview

On March 31, 2023, assets totaled $1.25 billion, an increase of $7.0 million from December 31, 2022. Total loans increased by $13.3 million during the quarter to $756.9 million, including increases of $7.6 million in 1-to-4 family variable rate mortgage loans and $6.1 million in dealer financing loans. Investment securities decreased by $4.6 million due to paydowns on U.S. Agency mortgage-backed securities and the maturity of a $3.8 million municipal security. During the quarter, the unrealized loss on the bond portfolio improved by $3.4 million, improving the Company’s tangible common equity ratio from 5.13% at December 31, 2022, to 5.26% at March 31, 2023.

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Securities Available for Sale (“AFS”)

Our AFS securities portfolio is reported at fair value, which is determined based on market prices of similar instruments. Total securities available for sale were $388.2 million at March 31, 2023, compared to $392.1 million at December 31, 2022. This represents a decrease of $3.8 million or 1.0%. The average balance during the first quarter of 2023 was $397.0 million, compared to $434.1 million during the first quarter of 2022. The average AFS securities portfolio represented 34.4% and 37.4% of average earning assets in first quarters 2023 and 2022, respectively. The year-over-year decrease in average AFS securities is primarily due to the decline in the market value of the securities of $27.4 million coupled with normal paydowns of mortgage-backed securities and municipal bond maturities.

Net unrealized losses related to the fair value of securities AFS decreased $3.4 million in the first quarter of 2023 to $47.9 million, from $51.2 million at December 31, 2022 . The portfolio is made up of primarily U.S. Treasury, U.S Agency and mortgage-backed securities issued by federal agencies, as well as securities issued by municipal bonds and corporate debt securities. The unrealized loss is driven by the increase in market interest rates, not credit quality. The average maturity of the portfolio is 5.08 years.

Loan Portfolio

The local economy that the Company operates in benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. The Bank also makes automobile and recreational vehicle loans through its Dealer Finance division.

Loans Held for Investment of $756.9 million increased $13.3 million during the three months ended March 31, 2023 compared to $743.6 million at December 31, 2022. As a percentage of average earning assets, average loans were 64.9% for the quarter ended March 31, 2023, compared with 56.5% for the quarter ended March 31, 2022.

Loans Held for Sale totaled $1.2 million on March 31, 2023, a decrease of $131 thousand compared to $1.4 million at December 31, 2022. Loans Held for Sale consists of F&M Mortgage loans, which are subject to changes in interest rates, seasonal fluctuations, and refinance activity. Most of the mortgage loans held for sale have been precommitted to investors, which minimizes the interest rate risk.

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses and the reserve for unfunded commitments. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. The amount of the reserve for unfunded commitments considers the probability that those commitment will fund.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.

The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 25 which reflects activity in the allowance for credit losses.

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At March 31, 2023, the allowance for credit losses on loans (“ACLL”) reflected a day one CECL impact of $777 thousand which was charged to retained earnings, and $167 thousand in net charge-offs during the first quarter. The provision for credit losses was $0 for the first quarter of 2023, compared to a recovery of loan losses of $450 thousand for first quarter last year. There was no provision for credit losses in the first quarter 2023 because the growth in the portfolio was offset by a decrease in the quantitative factors. Collateral values are stable in the Company’s market, so the factor for real estate values on collateral dependent loans was decreased. Additionally, the avian flu cases in the fourth quarter did not spread through our market area and affect our agricultural loans and loans secured by farmland.

Nonperforming Assets

Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled $1.8 million on March 31, 2023 compared to $2.3 million at December 31, 2022.

A summary of credit ratios for nonaccrual loans is as follows (dollars in thousands):

	March 31, 2023			December 31, 2022
Allowance for credit losses on loans	$	8,546		$	7,936
Nonperforming loans	$	1,782		$	2,262
Total loans	$	756,920		$	743,604

Allowance for credit losses to total loans		1.13	%		1.07	%
Nonperforming loans to total loans		0.24	%		0.30	%
Coverage ratio, allowance for credit losses to nonperforming loans		479.57	%		350.84	%

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 were $1.11 billion and $1.08 billion at March 31, 2023 and December 31, 2022 respectively. Noninterest bearing deposits decreased $9.5 million while interest bearing deposits increased $31.4 million. Total deposits increased $21.9 million from the end of 2022, as the Bank was able to attract deposits by offering higher rates on money market and time deposit accounts and opening insured cash sweep (“ICS”) accounts for new and existing customers.

The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. At March 31, 2023 and December 31, 2022 the Company had a total of $241 thousand in CDARS accounts; and, $97.1 million and $77.6 million in ICS accounts, respectively. At March 31, 2023, 11.45% of the Company’s total deposits were uninsured deposits.

Short-term borrowings

The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short-term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the needs of the Company. There were $55.0 million and $70.0 million of FHLB advances at March 31, 2023 and December 31, 2022, respectively. The increase in deposits allowed us to reduce the FHLB advances during the first quarter of 2023.

Long-term borrowings

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Capital

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At March 31, 2023, the Bank is in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.

The Bank’s leverage ratio was 8.28%, its common equity Tier 1 and Tier 1 capital ratios were both 12.21%, its total capital ratio was 13.18% and the capital conservation buffer was 5.18% at March 31, 2023.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected not to phase in the effect of CECL on regulatory capital.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. The Company’s most liquid assets are unrestricted cash and cash equivalents, federal funds sold, loans held for sale, and unpledged available for sale investment securities. Our primary source of funding is deposits. If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and brokered deposits, as well as loan and investment securities sales.

As of March 31, 2023, the Bank had total credit availability with the FHLB of $373.5 million, or 30% of total assets, and $161.1 million in lendable collateral. At March 31, 2023, we had $55.0 million in FHLB term borrowings and a $15.0 million letter of credit to provide collateral for our public deposits, which leaves $91.1 million in available lendable collateral. In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) to provide any U.S. federally insured depository institution, including the Bank, with a line a credit equal to the par value of securities pledged to the BTFP. Advances from the BTFP may be requested by the Bank for up to one year until March 31, 2024. The Bank did not pledge securities to, or borrow from, the BTFP during the first quarter 2023.

As of March 31, 2023, liquid assets totaled $420.8 million or 33.6% of total assets. When combined with our unused borrowing capacity, the combined readily available liquidity was approximately $511.8 million, with a coverage ratio of 405% to uninsured and uncollateralized deposits.

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The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets. At March 31, 2023, total wholesale funding was $71.3 million or 5.69% of total assets.

Interest Rate Sensitivity

Market risk is the sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, and equity prices. The Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority of their assets. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets.

The Company manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.

The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:

Change in Prime Rate	% Change in Net Interest Income
+ 300 basis points		24.8	%
+ 200 basis points		16.9	%
+ 100 basis points		8.7	%
- 100 basis points		-2.8	%
- 200 basis points		-6.6	%
- 300 basis points		-11.0	%
- 400 basis points		-20.9	%

Market value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of all assets minus the market value of all liabilities. The change in net market value over different rate environments is an indication of the longer-term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.

The following table reflects the change in net market value over different rate environments (dollars in thousands):

Change in Prime Rate		$ Change in Net Market Value
+ 300 basis points		$702
+ 200 basis points		-$633
+ 100 basis points		-$1,153
- 100 basis points		-$6,711
- 200 basis points		-$14,548
- 300 basis points		-$22,402
- 400 basis points		-$35,100

Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance.

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The Company uses a variety of traditional and on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the “gap” between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components.

An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At March 31, 2023, the Company had $XX.X million in assets repricing than liabilities subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.

Existence of Securities and Exchange Commission Web Site

The Securities and Exchange Commission (“SEC”) maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the SEC and the address is http: //www.sec.gov.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required

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 March 31, 2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 2 to the consolidated interim financial statements, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II Other Information

Item 1.	Legal Proceedings 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 For information regarding factors that could affect the Company's results of operations, financial condition, or liquidity, see the risk factors discussed in Part I, Item 1A, of the Company’s 2022 Form 10-K. See also "Forward-Looking Statements," included in Part I, Item 2, of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s 2022 Form 10-K.

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

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Item 6. Exhibits

(a)	Exhibits
	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 March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (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 March 31, 2023, formatted in Inline XBRL (included with Exhibit 101)

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	F & M BANK CORP.

	By:	/s/ Aubrey M. Wilkerson
		Aubrey M. Wilkerson Chief Executive Officer

	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell Executive Vice President and Chief Financial Officer
May 15, 2023