UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

~~[X] Quarterly report Under Section 13 or 15(d)of the Securities Exchange Act of 1934~~

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

For the quarterly period ended ~~September~~June 30, ~~2017.~~

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

2020.

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

Commission File Number: 000-13273

F ~~& M~~&M BANK ~~CORP.~~

CORP

Virginia		54-1280811
(State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~ incorporation or ~~Organization)~~organization)		(I.R.S. Employer Identification No.)

P. O. Box 1111
Timberville, Virginia		22853
(Address of Principal Executive Offices)		(Zip Code)

~~P. O. Box 1111~~

~~Timberville, Virginia 22853~~

~~(Address of Principal Executive Offices) (Zip Code)~~

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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 ☐

I~~ndicate~~

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files. Yes ☒ No ☐

I~~ndicate~~

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 ~~definition~~the definitions of “large accelerated ~~filer”,~~filer,” “accelerated ~~filer”,~~filer,” “smaller reporting ~~company”~~company,” and ~~“an emerging~~“emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one)~~

Large accelerated filer	☐	Accelerated filer	☐ ☒
Non-accelerated filer	☐~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☒
		Emerging growth company	☐

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

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

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

Class		Outstanding at ~~November 10, 2017~~August 4, 2020
Common Stock, par value - $5 -	~~3,269,052~~	3,196,103 shares

F & M BANK CORP.

Index

			Page
~~Part I~~	~~Financial Information~~	3
Part I	Financial Information		3
~~Item 1.~~	~~Financial Statements~~	3
Item 1.	Financial Statements		3

	Consolidated Balance Sheets – ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019		3

	Consolidated Statements of Income – Three MonthsEnded ~~September~~June 30, ~~2017~~2020 and ~~2016~~ 2019		4

	Consolidated Statements of Income – ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		5

	Consolidated Statements of Comprehensive Income – Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		6

	Consolidated Statements of Changes in Stockholders’ Equity – ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		7

	Consolidated Statements of Cash Flows – ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	8	9

	Notes to Consolidated Financial Statements	9	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34	38

Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	48	53

Item 4.	Controls and Procedures	48	53

Part II	Other Information	49	54

Item 1.	Legal Proceedings	49	54

Item 1a.	Risk Factors	49	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49	54

Item 3.	Defaults upon Senior Securities		54

Item 4.	Mine Safety Disclosures		54

Item 5.	Other Information		54

Item 6.	Exhibits		54

Signatures			55

Certifications

See Notes to Consolidated Financial Statements


~~Item 3.~~	~~Defaults Upon Senior Securities~~	492

~~Item 4.~~	~~Mine Safety Disclosures~~	49Table of Contents

~~Item 5.~~	~~Other Information~~	49

~~Item 6.~~	~~Exhibits~~	49

~~Signatures~~		50

~~Certifications~~

Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(~~dollars~~Dollars in thousands, except ~~share and~~ per share data)

September 30,

December 31,

2017

2016*

(Unaudited)

Assets

Cash and due from banks
$8,801
$7,755
Money market funds
  945
  674
Federal funds sold
  -
  7,926
Cash and cash equivalents
  9,746
  16,355
Securities:


Held to maturity – fair value of $125 in 2017 and 2016
  125
  125
Available for sale
  22,682
  24,783
Other investments
  13,600
  14,567
Loans held for sale
  58,177
  62,735
Loans held for investment
  619,960
  591,636
Less: allowance for loan losses
  (6,942)
  (7,543)
Net loans held for investment
  613,018
  584,093



Other real estate owned
  2,148
  2,076
Bank premises and equipment, net
  12,716
  10,340
Interest receivable
  1,845
  1,785
Goodwill
  3,113
  2,670
Bank owned life insurance
  13,841
  13,513
Other assets
  12,674
  11,847
Total assets
$763,685
$744,889



Liabilities


Deposits:


Noninterest bearing
$156,922
$146,617
Interest bearing
  405,458
  390,468
Total deposits
  562,380
  537,085



Short-term debt
  42,128
  40,000
Accrued liabilities
  17,181
  16,885
Long-term debt
  50,840
  64,237
Total liabilities
  672,529
  658,207



Stockholders’ Equity


Preferred Stock $5 par value, 400,000 shares authorized, 324,150 and 327,350


     Issued and outstanding for September 30, 2017 and December 31, 2016, respectively
  7,529
  7,609
Common stock, $5 par value, 6,000,000 shares authorized,


     3,268,956 and 3,270,315 shares issued and outstanding


     for September 30, 2017 and December 31, 2016, respectively
  16,345
  16,352
Additional paid in capital – common stock
  10,621
  10,684
Retained earnings
  59,233
  54,509
Noncontrolling interest in consolidated subsidiaries
  594
  693
Accumulated other comprehensive loss
  (3,166)
  (3,165)
Total stockholders’ equity
  91,156
  86,682
Total liabilities and stockholders’ equity
$763,685
$744,889

	June 30,			December 31,
	2020			2019*
	*(Unaudited)*
Assets
Cash and due from banks	$	16,947		$	8,119
Money market funds and interest-bearing deposits in other banks		1,203			1,126
Federal funds sold		68,548			66,559
Cash and cash equivalents		86,698			75,804
Securities:
Held to maturity, at amortized cost – fair value of $125 and $124 in 2020 and 2019, respectively		125			124
Available for sale, at fair value		81,044			4,366
Other investments		12,212			13,525
Loans held for sale, at fair value		90,602			66,798
Loans held for investment		661,529			603,425
Less: allowance for loan losses		(10,033	)		(8,390	)
Net loans held for investment		651,496			595,035

Other real estate owned, net		1,160			1,489
Bank premises and equipment, net		18,295			18,931
Bank premises held for sale		520			-
Interest receivable		2,640			2,044
Goodwill		2,884			2,884
Bank owned life insurance		20,345			20,050
Other assets		13,581			12,949
Total assets	$	981,602		$	813,999
Liabilities
Deposits:
Noninterest bearing	$	225,130		$	168,715
Interest bearing		541,522			472,994
Total deposits		766,652			641,709

Short-term debt		-			10,000
Other liabilities		22,307			17,514
Long-term debt		100,585			53,201
Total liabilities		889,544			722,424
Commitments and contingencies		-			-
Stockholders’ Equity
Preferred Stock $25 par value, 400,000 shares authorized, 206,660 issued and outstanding for June 30, 2020 and December 31, 2019		4,592			4,592
Common stock, $5 par value, 6,000,000 shares authorized, 3,195,938 and 3,208,498 shares issued and outstanding for June 30, 2020 and December 31, 2019, respectively.		15,980			16,042
Additional paid in capital – common stock		6,744			7,510
Retained earnings		68,018			66,008
Non-controlling interest in consolidated subsidiaries		-			634
Accumulated other comprehensive loss		(3,276	)		(3,211	)
Total stockholders’ equity		92,058			91,575
Total liabilities and stockholders’ equity	$	981,602		$	813,999

*~~2016 Derived~~2019 derived from audited consolidated financial statements.

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

(~~dollars~~Dollars in thousands)

(Unaudited)

Three Months Ended

September 30,

Interest and Dividend income

2017

2016

Interest and fees on loans held for investment
$8,221
  7,542
Interest and fees on loans held for sale
  329
  550
Interest from money market funds and federal funds sold
  41
  11
Interest on debt securities – taxable
  97
  112
Total interest and dividend income
  8,688
  8,215



Interest expense


       Interest on deposits
  698
  609
       Interest from short-term debt
  14
  9
       Interest from long-term debt
  318
  352
Total interest expense
  1,030
  970



Net interest income
  7,658
  7,245



Provision for Loan Losses
  -
  -
Net Interest Income After Provision for Loan Losses
  7,658
  7,245



Noninterest income


Service charges on deposit accounts
  359
  336
Investment services and insurance income, net
  169
  112
        Mortgage banking income, net
  861
  694
        Title insurance income
  247
  -
Income on bank owned life insurance
  112
  119
        Low income housing partnership losses
  (201)
  (183)
        ATM and check card fees
  353
  328
        Other operating income
  245
  129
Total noninterest income
  2,145
  1,535



Noninterest expense


Salaries
  3,194
  2,471
Employee benefits
  689
  699
Occupancy expense
  281
  215
Equipment expense
  224
  183
FDIC insurance assessment
  20
  113
       Other real estate owned, net
  (4)
  19
       Marketing expense
  147
  128
       Legal and professional fees
  78
  100
      ATM and check card fees
  183
  184
      Telecommunication and data processing expense
  370
  309
      Directors fees
  117
  46
      Bank franchise tax
  167
  170
       Other operating expenses
  793
  823
Total noninterest expense
  6,259
  5,460



Income before income taxes
  3,544
  3,320
Income tax expense
  946
  654
Net Income
  2,598
  2,666
        Net income attributable to noncontrolling interest
  48
  64
Net Income attributable to F & M Bank Corp.
$2,550
$2,602
        Dividends paid/accumulated on preferred stock
  103
  128
Net income available to common stockholders
$2,447
$2,474

Per Common Share Data

Net income – basic
$.75
$.75
Net income – diluted
  .70
$.70
Cash dividends on common stock
$.24
$.20
Weighted average common shares outstanding – basic
  3,270,969
  3,286,756
Weighted average common shares outstanding – diluted
  3,632,607
  3,731,156

	Three Months Ended
	June 30,
*Interest and Dividend income*	2020			2019
Interest and fees on loans held for investment	$	8,544		$	9,107
Interest and fees on loans held for sale		323			497
Interest from money market funds and federal funds sold		24			40
Interest on debt securities – taxable		101			138
Total interest and dividend income		8,992			9,782

*Interest expense*
Total interest on deposits		1,159			1,258
Interest from short-term debt		-			216
Interest from long-term debt		226			252
Total interest expense		1,385			1,726

*Net interest income*		7,607			8,056

*Provision for Loan Losses*		800			1,600
*Net Interest Income After Provision for Loan Losses*		6,807			6,456

*Noninterest income*
Service charges on deposit accounts		225			417
Investment services and insurance income, net		173			171
Mortgage banking income, net		1,971			815
Title insurance income		472			406
Income on bank owned life insurance		136			149
Low income housing partnership losses		(224	)		(213	)
ATM and check card fees		462			529
Other operating income		143			201
Total noninterest income		3,358			2,475

*Noninterest expense*
Salaries		2,932			2,633
Employee benefits		1,202			1,444
Occupancy expense		305			291
Equipment expense		290			294
FDIC insurance assessment		94			84
Other real estate owned, net		121			25
Marketing expense		174			139
Legal and professional fees		132			196
ATM and check card fees		270			213
Telecommunication and data processing expense		542			426
Directors fees		113			102
Bank franchise tax		189			152
Impairment on long lived assets		19			-
Other operating expenses		901			1,093
Total noninterest expense		7,284			7,092

*Income before income taxes*		2,881			1,839
Income tax expense		211			153
*Net Income*		2,670			1,686
Net income attributable to non-controlling interest		43			51
*Net Income attributable to F & M Bank Corp.*	$	2,627		$	1,635
Dividends paid/accumulated on preferred stock		66			79
*Net income available to common stockholders*	$	2,561		$	1,556

*Per Common Share Data*
Net income – basic	$	.80		$	.49
Net income – diluted	$	.77		$	.47
Cash dividends on common stock	$	.26		$	.25
Weighted average common shares outstanding – basic		3,194,282			3,200,119
Weighted average common shares outstanding – diluted		3,400,942			3,447,148

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

(~~dollars~~Dollars in thousands)

(Unaudited)

Nine Months Ended

September 30,

Interest and Dividend income

2017

2016

Interest and fees on loans held for investment
$23,830
$22,064
Interest and fees on loans held for sale
  774
  1,451
Interest from money market funds and federal funds sold
  116
  25
Interest on debt securities – taxable
  234
  253
Total interest and dividend income
  24,954
  23,793



Interest expense


       Total interest on deposits
  1,947
  1,757
       Interest from short-term debt
  46
  35
       Interest from long-term debt
  868
  853
Total interest expense
  2,861
  2,645



Net interest income
  22,093
  21,148



Provision for Loan Losses
  -
  -
Net Interest Income After Provision for Loan Losses
  22,093
  21,148



Noninterest income


Service charges on deposit accounts
  1,010
  842
Investment services and insurance income
  530
  317
        Mortgage banking income, net
  1,974
  1,891
        Title insurance income
  668
  -
Income on bank owned life insurance
  336
  356
        Low income housing partnership losses
  (587)
  (548)
        ATM and check card fees
  1,034
  1,020
        Gain on prepayment of long-term debt
  504
  -
        Loss on sale of other investments
  (42)
  -
        Other operating income
  513
  238
Total noninterest income
  5,940
  4,116



Noninterest expense


Salaries
  8,502
  7,161
Employee benefits
  2,467
  2,113
Occupancy expense
  776
  643
Equipment expense
  613
  569
FDIC insurance assessment
  200
  338
       Other real estate owned, net
  22
  72
       Marketing expense
  404
  396
       Legal and professional fees
  253
  293
      ATM and check card fees
  529
  518
      Telecommunication and data processing expense
  1,045
  861
      Directors fees
  360
  254
      Bank franchise tax
  491
  480
       Other operating expenses
  2,464
  2,176
Total noninterest expense
  18,126
  15,874



Income before income taxes
  9,907
  9,390
Income tax expense
  2,633
  2,187
Net Income
  7,274
  7,203
        Net income attributable to noncontrolling interest
  51
  154
Net Income attributable to F & M Bank Corp.
$7,223
$7,049
        Dividends paid/accumulated on preferred stock
  312
382
Net income available to common stockholders
$6,911
$6,667

Per Common Share Data

Net income – basic
$2.11
$2.03
Net income – diluted
  1.99
$1.89
Cash dividends on common stock
$.69
$.58
Weighted average common shares outstanding – basic
  3,271,863
  3,286,165
Weighted average common shares outstanding – diluted
  3,634,856
  3,730,565

	Six Months Ended
	June 30,
*Interest and Dividend income*	2020			2019
Interest and fees on loans held for investment	$	16,996		$	18,194
Interest and fees on loans held for sale		593			823
Interest from money market funds and federal funds sold		321			53
Interest on debt securities – taxable		192			243
Total interest and dividend income		18,102			19,313

*Interest expense*
Total interest on deposits		2,611			2,359
Interest from short-term debt		41			419
Interest from long-term debt		439			446
Total interest expense		3,091			3,224

*Net interest income*		15,011			16,089

*Provision for Loan Losses*		2,300			3,050
*Net Interest Income After Provision for Loan Losses*		12,711			13,039

*Noninterest income*
Service charges on deposit accounts		586			803
Investment services and insurance income		358			322
Mortgage banking income, net		2,900			1,345
Title insurance income		843			682
Income on bank owned life insurance		287			296
Low income housing partnership losses		(447	)		(427	)
ATM and check card fees		895			898
Other operating income		365			346
Total noninterest income		5,787			4,265

*Noninterest expense*
Salaries		5,944			5,466
Employee benefits		2,224			2,634
Occupancy expense		572			571
Equipment expense		596			563
FDIC insurance assessment		189			166
Other real estate owned, net		140			299
Marketing expense		304			287
Legal and professional fees		281			350
ATM and check card fees		513			406
Telecommunication and data processing expense		1,079			788
Directors fees		229			204
Bank franchise tax		384			283
Impairment of long-lived assets		19			-
Other operating expenses		1,930			2,105
Total noninterest expense		14,404			14,122
*Income before income taxes*		4,094			3,182
Income tax expense		173			232
*Net Income*		3,921			2,950
Net income attributable to non-controlling interest		105			29
*Net Income attributable to F & M Bank Corp.*	$	3,816		$	2,921
Dividends paid/accumulated on preferred stock		132			157
*Net income available to common stockholders*	$	3,684		$	2,764
*Per Common Share Data*
Net income – basic	$	1.15		$	.86
Net income – diluted	$	1.11		$	.84
Cash dividends on common stock		.52			.50
Weighted average common shares outstanding – basic		3,199,183			3,200,119
Weighted average common shares outstanding – diluted		3,428,782			3,474,569

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Comprehensive Income

(~~dollars~~Dollars in thousands)

(Unaudited)

Nine Months Ended

Three Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net Income:

    Net Income – F & M Bank Corp
$7,223
$7,049
$2,550
$2,602
    Net income attributable to noncontrolling interest
  51
  154
  48
  64
Total Net Income:
  7,274
  7,203
  2,598
  2,666





Unrealized holding gains (losses) on available-for-sale securities
  (2)
  32
  -
  (6)
    Tax Effect
  1
  ( 10)
  -
  2
    Unrealized holding gain (loss), net of tax
  (1)
  22
  -
  (4)
Total other comprehensive income (loss)
  (1)
  22
  -
  (4)





Comprehensive income
$7,273
$7,225
$2,598
$2,662

	Six Months Ended June 30,					Three Months Ended June 30,
	2020			2019		2020			2019

Net Income	$	3,816		$	2,921	$	2,627		$	1,635

Other comprehensive (loss) income:
Unrealized holding (losses) gains on available-for sale securities		(82	)		113		(33	)		80
Tax effect		17			24		7			17
Unrealized holding (losses) gains, net of tax		(65	)		89		(26	)		63

Total other comprehensive (loss) income		(65	)		89		(26	)		63

Comprehensive income attributable to F&M Bank Corp.	$	3,751		$	3,010	$	2,601		$	1,698

Comprehensive income (loss) attributable to noncontrolling interests	$	105		$	29	$	43		$	51

Total comprehensive income	$	3,856		$	3,039	$	2,644		$	1,749

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(~~dollars~~Dollars in thousands)

(Unaudited)

Nine Months Ended

September 30,

2017

2016

Balance, beginning of period
$86,682
$82,950



Comprehensive income


Net income – F & M Bank Corp
  7,223
  7,049
Net income (loss) attributable to noncontrolling interest
  51
  154
Other comprehensive income (loss)
  (1)
  22
Total comprehensive income
  7,273
  7,225



Minority interest capital distributions
  (149)
  (74)
Issuance of common stock
  150
  132
Repurchase of common stock
  (199)
  (421)
Repurchase of preferred stock
  (101)
  -
Dividends paid
  (2,500)
  (2,287)
Balance, end of period
$91,156
$87,525

Three Months Ended June 30, 2020 and 2019.

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

*Balance March 31, 2019*	$	5,592	$	16,019		$	7,707		$	66,063		$	537	$	(3,943	)	$	91,975
Net income		-		-			-			1,635			51		-			1,686
Other comprehensive income		-		-			-			-			-		63			63
Dividends on preferred stock ($1.488 per share)		-		-			-			(158	)		-		-			(158	)
Dividends on common stock ($.80 per share)		-		-			-			(799	)		-		-			(799	)
Common stock repurchased (22,583 shar		-		(124	)		(642	)		-			-		-			(766	)
Common stock issued (7,494 shares)		-		12			62			-			-		-			74

*Balance, June 30, 2019*	$	5,592	$	15,907		$	7,127		$	66,741		$	588	$	(3,880	)	$	92,075

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

*Balance March 31, 2020*	$	4,592	$	15,962	$	7,184		$	66,297		$	649		$	(3,250	)	$	91,434
Net income		-		-		-			2,627			43			-			2,670
Other comprehensive income		-		-		-			-						(26	)		(26	)
Distributions to noncontrolling interest												(130	)					(130	)
Dividends on preferred stock ($1.488 per share)		-		-		-			(66	)		-			-			(66	)
Dividends on common stock ($.26 per share)		-		-		-			(840	)		-			-			(840	)
Purchase of noncontrolling interest		-		-		(488	)		-			(562	)		-			(1,050	)
Common stock issued (3,474 shares)		-		18		48			-			-			-			66

*Balance, June 30, 2020*	$	4,592	$	15,980	$	6,744		$	68,018		$	-		$	(3,276	)	$	92,058

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Six Months Ended June 30, 2020 and 2019.

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

*Balance, December 31, 2018*	$	5,672		$	16,066		$	7,987		$	65,596		$	559		$	(3,969	)	$	91,911
Net Income		-			-			-			2,921			29			-			2,950
Other comprehensive income		-			-			-			-			-			89			89
Dividends on preferred stock ($1.28 per share)		-			-			-			(157	)		-			-			(157	)
Dividends on common stock ($1.20 per share)		-			-			-			(1,619	)		-			-			(1,619	)
Preferred converted to Common (2,000 pfd shares)		(50	)		11			39			-			-			-			-
Common stock repurchased (49,446 shares)		-			(190	)		(997	)		-			-			-			(1,187	)
Common stock issued (7,542 shares)		-			20			109			-			-			-			129
Preferred stock repurchased (1,200 shares)		(30	)		-			(11	)		-			-			-			(41	)

*Balance, June 30, 2019*	$	5,592		$	15,907		$	7,127		$	66,741		$	588		$	(3,880	)	$	92,075

*Balance, December 31, 2019*	$	4,592		$	16,042		$	7,510		$	66,008		$	634		$	(3,211	)	$	91,575
Net Income		-			-			-			3,816			105			-			3,921
Other comprehensive income		-			-			-			-			-			(65	)		(65	)
Distributions to noncontrolling interest														(177	)					(177	)
Dividends on preferred stock ($1.28 per share)		-			-			-			(132	)		-			-			(132	)
Dividends on common stock ($.52 per share)		-			-			-			(1,674	)		-			-			(1,674	)
Purchase of noncontrolling interest		-			-			(488	)		-			(562	)		-			(1,050	)
Common stock repurchased (18,472 shares)		-			(92	)		(381	)		-			-			-			(473	)
Common stock issued (5,912 shares)		-			30			103			-			-			-			133
Preferred stock repurchased		-			-			-			-			-			-			-

*Balance, June 30, 2020*	$	4,592		$	15,980		$	6,744		$	68,018		$	-		$	(3,276	)	$	92,058

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Cash Flows

(~~dollars~~Dollars in thousands)

(Unaudited)

Nine Months Ended
September 30,

2017

2016

Cash flows from operating activities

Net income
$7,223
$7,049
Reconcile net income to net cash provided by (used in) operating activities:


Depreciation
  660
  602
Amortization of securities
  2
  105
Proceeds from loans held for sale originated
  61,310
  65,553
Loans held for sale originated
  (59,250)
  (66,706)
Gain on sale of loans held for sale originated
  (1,876)
  (2,075)
Gain on prepayment of long-term debt
  (504)
  -
Increase in interest receivable
  (60)
  29
Increase in other assets
  (336)
  (66)
Decrease in accrued liabilities
  (422)
  (1,167)
Amortization of limited partnership investments
  587
  548
Income from life insurance investment
  (336)
  (356)
Loss on sale of other investments
  42
  -
Loss on sale and valuation adjustments for other real estate owned
  -
  20
Net cash provided by (used in) operating activities
  7,040
  3,536



Cash flows from investing activities


Purchase of investments available for sale and other investments
  (61,432)
  (26,109)
Purchase of title insurance company
  (304)
  -
Proceeds from maturity of investments available for sale
  63,811
  12,175
Proceeds from the sale of investments
  55
  -
Net increase in loans held for investment
  (29,070)
  (35,837)
Net decrease (increase) in loans held for sale participations
  4,373
  (22,131)
Other real estate improvements
  (7)

Proceeds from the sale of other real estate owned
  80
  623
Net purchase of property and equipment
  (3,036)
  (2,403)
Net cash used in investing activities
  (25,530)
  (73,682)



Cash flows from financing activities


Net change in deposits
  25,295
  33,154
Net change in short-term debt
  2,128
  26,275
Dividends paid in cash
  (2,500)
  (2,287)
Proceeds from issuance of common stock
  150
  132
Proceeds from issuance of long-term debt
  -
  20,000
Repurchase of preferred stock
  (101)
  -
Repurchase of common stock
  (199)
  (421)
Repayments of long-term debt
  (12,892)
  (3,070)
Net cash provided by financing activities
  11,881
  73,783



Net (decrease) increase in Cash and Cash Equivalents
  (6,609)
  3,637
Cash and cash equivalents, beginning of period
  16,355
  8,519
Cash and cash equivalents, end of period
$9,746
$12,156
Supplemental Cash Flow information:


Cash paid for:


Interest
$2,850
$2,633
           Taxes
  3,495
  2,300
Supplemental non-cash disclosures:


Transfer from loans to other real estate owned
  145
  592
Change in unrealized gain (loss) on securities available for sale
  (2)
  -

	Six Months Ended June 30,
	2020			2019
*Cash flows from operating activities*
Net income	$	3,816		$	2,921
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		639			603
Amortization of intangibles		26			41
Amortization of securities		12			1
Proceeds from loans held for sale originated		80,574			55,011
Loans held for sale originated		(95,369	)		(53,685	)
Gain on sale of loans held for sale originated		(2,400	)		(1,326	)
Provision for loan losses		2,300			3,050
(Increase) in interest receivable		(596	)		(69	)
(Increase) in other assets		(420	)		(752	)
Increase in other liabilities		4,264			1,372
Amortization of limited partnership investments		447			427
Income from life insurance investment		(303	)		(296	)
(Gain) loss on the sale of fixed assets		(14	)		10
Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale		150			274
Net cash (used in) provided by operating activities		(6,874	)		7,582
*Cash flows from investing activities*
Purchase of investments available for sale and other investments		(79,003	)		(2,054	)
Proceeds from maturity of investments available for sale		2,230			59
Proceeds from the redemption of restricted stock, net		866			-
Purchase of investments held to maturity		(125	)		-
Proceeds from maturity of investments held to maturity		125			-
Net (increase) decrease in loans held for investment		(58,761	)		92
Net (increase) in loans held for sale participations		(6,609	)		(22,496	)
Proceeds from the sale of fixed assets		34			-
Proceeds from the sale of other real estate owned		199			260
Cash paid for noncontrolling interest		(806	)		-
Net purchase of property and equipment		(563	)		(1,428	)
Net cash (used) in investing activities		(142,413	)		(25,567	)
*Cash flows from financing activities*
Net change in deposits		124,943			17,145
Net change in short-term debt		(10,000	)		(116	)
Dividends paid in cash		(1,806	)		(1,776	)
Proceeds from issuance of common stock		133			129
Repurchase of preferred stock		-			(41	)
Repurchase of common stock		(473	)		(1,187	)
Issuance of long-term debt		59,603			10,000
Repayments of long-term debt		(12,219	)		(2,301	)
Net cash provided by financing activities		160,181			21,853
*Net increase in Cash and Cash Equivalents*		10,894			3,868
*Cash and cash equivalents, beginning of period*		75,804			10,912
*Cash and cash equivalents, end of period*	$	86,698		$	14,780
*Supplemental Cash Flow information:*
Cash paid for: Interest	$	3,106		$	3,201
Taxes		275			-
*Supplemental non-cash disclosures:*
Change in unrealized (loss) gain on securities available for sale		(82	)		113
Right of Use asset and lease liability, upon adoption		-			1,034
Bank premises and equipment transferred to held for sale		520			-
Liability to former noncontrolling interest for remainder of purchase price		244			-

See ~~notes~~Notes to ~~unaudited consolidated financial statements.~~

Consolidated Financial Statements

Table of Contents

Notes to the Consolidated Financial Statements

Note 1.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC (dba F&M Mortgage), (net of ~~noncontrolling~~non-controlling interest) and VSTitle, LLC ~~(net of noncontrolling interest)~~ and were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). On May 1, 2020 the Bank purchased the noncontrolling interest of VBS Mortgage, LLC. Accordingly, these financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2020. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 (the ~~“2016~~“2019 Form 10-K”).

During the second quarter of 2020, the Company purchased the minority interest in F&M Mortgage.

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

Nature of Operations

~~F & M Bank Corp. (the “Company”),~~

The Company, through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily located in Rockingham, Shenandoah, Page and Augusta Counties in Virginia. Services are provided at ~~thirteen~~eleven (as of August 1, 2020) branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, ~~Inc~~Inc. (FMFS), ~~VBS~~F&M Mortgage, ~~LLC (VBS),~~ and VSTitle, LLC (VST). ~~The Company purchased a majority interest VSTitle, a title company headquartered in Harrisonburg, VA with offices in Harrisonburg, Fishersville and Charlottesville, VA on January 1, 2017.~~

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, ~~goodwill, other than temporary impairment,~~fair value, and pension accounting and the valuation of foreclosed real estate.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.

Risk and Uncertainties

The coronavirus (“COVID-19”) spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operating businesses in March with branch lobby closings, operations and administrative staff working remotely and the use of virtual meetings. These changes will likely affect our operations throughout the remainder of 2020, although the extent and significance are unknown. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial condition include the nature and duration of the long-term effect on our borrowers’ ability to repay. Accordingly, significant estimates used in the preparation of our financial statements including those associated with evaluations of goodwill for impairment, and allowance for loan losses may be subject to adjustments in future periods.

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.

Table of Contents

Note 1.

Summary of Significant Accounting Policies, continued

Earnings per Share

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

calculation for the three and six month periods ended June 30, 2020 and 2019.

Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.

The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:

(dollars in thousands)

For the
Nine months ended

For the Three months Ended

For the
Nine months ended

For the
Three months ended

September 30, 2017

September 30, 2017

September 30, 2016

September 30, 2016

Earnings available to common stockholders:

Net income
$7,274
$2,598
$7,203
$2,666
Noncontrolling interest income (loss)
  51
  48
  154
  64
Preferred stock dividends
  312
  103
  382
  128
Net income available to common stockholders
$6,911
$2,447
$6,667
$2,474

	For the Six months ended		For the Three months ended		For the Six months ended		For the Three months ended
	June 30, 2020		June 30, 2020		June 30, 2019		June 30, 2019
Earnings available to com mon stockholders:
Net income	$	3,921	$	2,670	$	2,950	$	1,686
Non-controlling interest income (loss)		105		43		29		51
Preferred stock dividends		132		66		157		79
Net income available to common stockholders	$	3,684	$	2,561	$	2,764	$	1,556

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

Nine months ended
September 30, 2017

Nine months ended
September 30, 2016

Income

Shares

Per Share Amounts

Income

Shares

Per Share Amounts

Basic EPS
$6,911
  3,271,863
$2.11
$6,667
  3,286,165
$2.03
Effect of Dilutive Securities:






     Convertible Preferred Stock
  312
  362,993
  (0.12)
  382
  444,400
  (0.14)
Diluted EPS
$7,223
  3,634,856
$1.99
$7,049
  3,730,565
$1.89

Three months ended
September 30, 2017

Three months ended
September 30, 2016

Income

Shares

Per Share Amounts

Income

Shares

Per Share Amounts

Basic EPS
$2,447
  3,270,969
$.75
$2,474
  3,286,756
$.75
Effect of Dilutive Securities:






     Convertible Preferred Stock
  103
  361,638
  (0.05)
  128
  444,400
  (0.05)
Diluted EPS
$2,550
  3,632,607
$.70
$2,602
  3,731,156
$.70

	Six months ended June 30, 2020							Six months ended June 30, 2019
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	3,684		3,199,183	$	1.15		$	2,764		3,200,119	$	.86
Effect of Dilutive Securities:
Convertible Preferred Stock		132		229,599		(.04	)		157		274,450		(.02	)
Diluted EPS	$	3,816		3,428,782	$	1.11		$	2,921		3,474,569	$	.84

	Three months ended June 30, 2020							Three months ended June 30, 2019
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	2,561		3,194,282	$	.80		$	1,556		3,200,119	$	.49
Effect of Dilutive Securities:
Convertible Preferred Stock		66		206,660		(.04	)		79		247,029		(.02	)
Diluted EPS	$	2,627		3,400,942	$	.77		$	1,635		3,447,148	$	.47

Table of Contents

Note 2.

Investment Securities

Investment securities available for sale are carried in the consolidated balance sheets at their approximate fair value. Investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

September 30, 2017

U. S. Treasuries
$125
$-
$-
$125
December 31, 2016




U. S. Treasuries
$125
$-
$-
$125

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2020
U. S. Treasuries	$	125	$	-	$	-	$	125
December 31, 2019
U. S. Treasuries	$	124	$	-	$	-	$	124

The amortized cost and fair value of securities available for sale are as follows:

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

September 30, 2017

U. S. Treasuries
$22,001
$-
$3
$21,998
Mortgage-backed obligations of federal agencies
  539
  10
  -
  549
Equity securities
  135
  -
  -
  135
Total Securities Available for Sale
$22,675
$10
$3
$22,682





December 31, 2016




U. S. Treasuries
$24,005
$9
$-
$24,014
Mortgage-backed obligations of federal agencies
  634
  -
  -
  634
Equity securities
  135
  -
  -
  135
Total Securities Available for Sale
$24,774
$9
$-
$24,783

~~Note 2.~~

~~Investment Securities, continued~~

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2020
U. S. Treasuries	$	3,000	$	-	$	-		$	3,000
U. S. Government sponsored enterprises		21,003		5		-			21,008
Securities issued by States and political subdivisions in the U.S.		8,876		86		(11	)		8,951
Mortgage-backed obligations of federal agencies		45,211		10		(225	)		44,996
Corporate debt security		3,045		44		-			3,089
Total Securities Available for Sale	$	81,135	$	145	$	(236	)	$	81,044

December 31, 2019
U. S. Government sponsored enterprises	$	2,000	$	-	$	(11	)	$	1,989
Mortgage-backed obligations of federal agencies		317		2		-			319
Corporate debt security		2,059		-		(1	)		2,058
Total Securities Available for Sale	$	4,376	$	2	$	(12	)	$	4,366

The amortized cost and fair value of securities at ~~September~~June 30, ~~2017,~~2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities Held to Maturity

Securities Available for Sale

Amortized

Fair

Amortized

Fair

(dollars in thousands)

Cost

Value

Cost

Value

Due in one year or less
$-
$-
$22,001
$21,998
Due after one year through five years
  125
  125
  -
  -
Due after five years
  -
  -
  539
  549
Due after ten years
  -
  -
  135
  135
Total
$125
$125
$22,675
$22,682

	Securities Held to Maturity				Securities Available for Sale
	Amortized		Fair		Amortized		Fair
(dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	125	$	125	$	3,000	$	3,000
Due after one year through five years		-		-		18,551		18,601
Due after five years		-		-		16,019		16,029
Due after ten years		-		-		43,565		43,414
Total	$	125	$	125	$	81,135	$	81,044

There were no ~~gains or losses on~~ sales of available for sale securities in the ~~three month~~first or ~~nine month periods ended September 30, 2017~~second quarters of 2020 or ~~2016. There~~2019. Securities held that are U.S. Agency and Government Sponsored Entities and Agency MBS which carry an implicit government guarantee and are not subject to other than temporary impairment evaluation. Other securities were ~~also~~reviewed for impairment and there were no securities with other than temporary impairment.

Table of Contents

Note 2. Investment Securities, continued

A summary of unrealized losses (in thousands) and the ~~three months ended September~~length of time in a continuous loss position, by security type of June 30, ~~2017, the treasury securities~~2020 and December 31, 2019 were ~~in an unrealized loss position. There were no securities in an unrealized loss positions for more than twelve months~~ as follows:

	Less than 12 Months					More than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
Securities issued by States and political subdivisions in the U.S.	$	21,008	$	(11	)	$	-	$	-	$	21,008	$	(11	)
Mortgage-backed obligations of federal agencies		44,996		(225	)		-		-		44,996		(225	)
Total	$	66,004	$	(236	)	$	-	$	-	$	66,004	$	(236	)

	Less than 12 Months					More than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2019
U. S. Government sponsored enterprises	$	1,989	$	(11	)	$	-	$	-	$	1,989	$	(11	)
Corporate debt security		2,058		(1	)		-		-		2,058		(1	)
Total	$	4,047	$	(12	)	$	-	$	-	$	4,047	$	(12	)

As of ~~September~~June 30, ~~2017.~~

~~Other~~2020, other investments consist of investments in ~~nineteen~~twenty low-income housing and historic equity partnerships (carrying basis of ~~$7,607,198)~~$8,082), stock in the Federal Home Loan Bank (carrying basis ~~$4,523,700)~~$2,526 and various other investments (carrying basis ~~$1,469,572)~~$1,604). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of ~~September~~June 30, ~~2017.~~2020. At ~~September~~June 30, ~~2017,~~2020, the Company was committed to invest an additional ~~$4,231,047~~$2,831 in ~~nine~~six low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in ~~accrued~~other liabilities on the consolidated balance sheet. ~~During the first quarter of 2017, both Farmers & Merchants Financial Services and VBS Mortgage ended their relationship with Bankers Title Virginia resulting in a consolidated loss of $41,914.~~

The Company does not have any pledged securities.

Note 3.

Loans

(dollars in thousands)

2017

2016

Construction/Land Development
$74,313
$76,172
Farmland
  15,578
  12,901
Real Estate
  177,786
  172,758
Multi-Family
  8,504
  7,605
Commercial Real Estate
  155,510
  150,061
Home Equity – closed end
  11,189
  11,453
Home Equity – open end
  55,461
  54,420
Commercial & Industrial – Non-Real Estate
  38,050
  31,306
Consumer
  7,328
  6,643
Dealer Finance
  73,567
  65,495
Credit Cards
  2,674
  2,822
Total
$619,960
$591,636

As of June 30, 2020, we had executed 922 modifications allowing principal and interest deferrals of no more than 6 months in connection with COVID-19 relief. Of those, 155 of those modifications remain in deferral as of June 30, 2020 with balances of $24.5 million. These modifications and deferrals were not considered troubled debt restructurings pursuant to interagency guidance issued in March 2020 and the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

Loans held for investment outstanding at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are summarized as follows:

(dollars in thousands)	2020		2019
Construction/Land Development	$	73,783	$	77,131
Farmland		36,966		29,718
Real Estate		172,205		178,267
Multi-Family		6,065		5,364
Commercial Real Estate		128,763		129,850
Home Equity – closed end		9,069		9,523
Home Equity – open end		46,510		47,774
Commercial & Industrial – Non-Real Estate		90,103		33,535
Consumer		10,072		10,165
Dealer Finance		85,257		78,976
Credit Cards		2,736		3,122
Total	$	661,529	$	603,425

The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling ~~$213,184,000~~$170,970 and ~~$199,401,000~~$178,253 as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. The Company maintains a blanket lien on certain loans in its ~~entire~~ residential real estate, ~~portfolio and certain~~ commercial and home equity ~~loans.~~

portfolios.

Table of Contents

Note 3.

Loans, continued

September 30, 2017

December 31, 2016

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

Impaired loans without a valuation allowance:

     Construction/Land Development
$4,784
$5,140
$-
$3,296
$3,652
$-
     Farmland
  1,983
  1,983
  -
  -
  -
  -
     Real Estate
  740
  740
  -
  768
  768
  -
     Multi-Family
  -
  -
  -
  -
  -
  -
     Commercial Real Estate
  300
  300
  -
  1,958
  1,958
  -
     Home Equity – closed end
  -
  -
  -
  -
  -
  -
     Home Equity – open end
  -
  347
  -
  -
  347
  -
     Commercial & Industrial – Non-Real Estate
  162
  162
  -
  170
  170
  -
     Consumer
  9
  9
  -
  13
  13
  -
     Credit cards
  -
  -
  -
  -
  -
  -
     Dealer Finance
  25
  25
  -
  -
  -
  -

  8,003
  8,706

  6,205
  6,908

Impaired loans with a valuation allowance






     Construction/Land Development
  5,619
  5,619
  2,054
  6,592
  6,592
  1,853
     Farmland
  -
  -
  -
  -
  -
  -
     Real Estate
  1,192
  1,192
  214
  1,206
  1,206
  221
     Multi-Family
  -
  -
  -
  -
  -
  -
     Commercial Real Estate
  -
  -
  -
  952
  952
  60
     Home Equity – closed end
  -
  -
  -
  -
  -
  -
     Home Equity – open end
  -
  -
  -
  -
  -
  -
     Commercial & Industrial – Non-Real Estate
  -
  -
  -
  -
  -
  -
     Consumer
  -
  -
  -
  -
  -
  -
     Credit cards
  -
  -
  -
  -
  -
  -
     Dealer Finance
  48
  48
  12
  87
  87
  20

  6,859
  6,859
  2,280
  8,837
  8,837
  2,154
Total impaired loans
$14,862
$15,565
$2,280
$15,042
$15,745
$2,154

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

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

Loans held for sale consists of loans originated by ~~VBS~~F&M Mortgage for sale in the secondary market, and the Bank’s commitment to purchase residential mortgage loan participations from Northpointe Bank. The volume of loans purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 were ~~$58,177,450~~$90,602 and ~~$62,734,803,~~$66,798, respectively.

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

	June 30, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment(1)		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Construction/Land Development	$	1,428	$	1,428	$	-	$	2,042	$	2,042	$	-
Farmland		-		-		-		-		-		-
Real Estate		4,899		4,899		-		5,131		5,131		-
Multi-Family		-		-		-		-		-		-
Commercial Real Estate		2,298		2,298		-		1,302		1,302		-
Home Equity – closed end		703		703		-		716		716		-
Home Equity – open end		-		-		-		-		-		-
Commercial & Industrial – Non-Real Estate		14		14		-		17		17		-
Consumer		-		-		-		-		-		-
Credit cards		-		-		-		-		-		-
Dealer Finance		42		42		-		79		79		-
	$	9,384	$	9,384		-	$	9,287	$	9,287	$	-
Impaired loans with a valuation allowance
Construction/Land Development		356		356		3		1,036		2,061		85
Farmland		1,774		1,774		110		1,933		1,933		537
Real Estate		9,619		9,619		617		10,404		10,404		569
Multi-Family		-		-		-		-		-		-
Commercial Real Estate		2,840		2,840		515		638		638		213
Home Equity – closed end		-		-		-		-		-		-
Home Equity – open end		151		151		13		151		151		151
Commercial & Industrial – Non-Real Estate		-		-		-		192		192		192
Consumer		1		1		-		4		4		1
Credit cards		-		-		-		-		-		-
Dealer Finance		131		131		12		136		136		7
		14,872		14,872		1,270		14,494		15,519		1,755
Total impaired loans	$	24,256	$	24,256	$	1,270	$	23,781	$	24,806	$	1,755

______________

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

Table of Contents

Note 3.

Loans Held for Investment, continued

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

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Average Recorded

Interest Income

Average Recorded

Interest Income

Average Recorded

Interest Income

Average Recorded

Interest Income

Investment

Recognized

Investment

Recognized

Investment

Recognized

Investment

Recognized

Impaired loans without a valuation allowance:

     Construction/Land Development
$5,414
$14
$2,649
$15
$4,870
$64
$2,009
$32
     Farmland
  1,921
  -
  -
  -
  1,900
  -
  -
  -
     Real Estate
  743
  8
  778
  8
  746
  25
  860
  28
     Multi-Family
  -
  -
  -
  -
  -
  -
  -
  -
     Commercial Real Estate
  200
  9
  993
  77
  167
  12
  674
  79
     Home Equity – closed end
  -
  -
  -
  -
  -
  -
  -
  -
     Home Equity – open end
  347
  -
  964
  (35)
  347
  -
  1,167
  8
     Commercial & Industrial – Non-Real Estate
  164
  2
  174
  2
  165
  8
  177
  2
     Consumer and credit cards
  10
  -
  7
  2
  10
  -
  12
  -
     Dealer Finance
  23
  1
  24
  (1)
  22
  2
  15
  1

  8,822
  34
  5,589
  68
  8,227
  111
  4,914
  150
Impaired loans with a valuation allowance:








     Construction/Land Development
$5,640
$75
$8,429
$112
$6,215
$215
$9,761
$212
     Farmland
  -
  -
  -
  -
  -
  -
  -
  -
     Real Estate
  1,194
  10
  1,214
  14
  1,196
  41
  994
  40
     Multi-Family
  -
  -
  -
  -
  -
  -
  -
  -
     Commercial Real Estate
  -
  -
  958
  14
  -
  -
  944
  42
     Home Equity – closed end
  -
  -
  -
  -
  -
  -
  -
  -
     Home Equity – open end
  -
  -
  1,234
  (5)
  -
  -
  1,322
  14
     Commercial & Industrial – Non-Real Estate
  -
  -
  14
  (1)
  -
  -
  14
  -
     Consumer and credit card
  -
  -
  -
  -
  -
  -
  -
  -
     Dealer Finance
  59
  1
  72
  -
  59
  2
  72
  3

  6,893
  86
  11,921
  134
  7,470
  258
  13,107
  311
Total Impaired Loans
$15,715
$120
$17,510
$202
$15,697
$369
$18,021
$461

	Three Months Ended June 30,										Six Months Ended June 30,
	2020					2019					2020				2019
	Average Recorded		Interest Income			Average Recorded		Interest Income			Average Recorded		Interest Income		Average Recorded		Interest Income
	Investment		Recognized			Investment		Recognized			Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Construction/Land Development	$	1,518	$	15		$	2,011	$	84		$	1,736	$	40	$	2,195	$	123
Farmland		352		-			1,942		1			352		-		1,942		1
Real Estate		5,258		60			2,013		(7	)		5,015		136		2,020		22
Multi-Family		-		-			-		-			-		-		-		-
Commercial Real Estate		1,883		29			1,901		189			1,800		49		4,076		228
Home Equity – closed end		-		21			360		-			358		21		360		-
Home Equity �� open end		-		-			-		-			-		-		-		-
Commercial & Industrial – Non-Real Estate		101		-			12		-			16		-		-		-
Consumer and credit cards		21		-			-		-			21		-		12		-
Dealer Finance		14		1			45		(1	)		40		2		33		-
		9,147		126			8,284		266			9,338		248		10,638		374
Impaired loans with a valuation allowance:
Construction/Land Development	$	356	$	-		$	2,651	$	(27	)	$	696	$	-	$	3,445	$	31
Farmland		964		178			-		-			967		184		-		-
Real Estate		9,695		122			417		58			10,012		262		419		65
Multi-Family		-		-			-		-			-		-		-		-
Commercial Real Estate		2,338		21			4,152		(104	)		1,739		49		2,056		33
Home Equity – closed end		429		(10	)		-		41			76		-		-		41
Home Equity – open end		76		2			-		-			76		4		-		-
Commercial & Industrial – Non-Real Estate		35		(1	)		-		2			96		-		-		1
Consumer and credit card		67		-			5		-			68		-		6		-
Dealer Finance		964		1			176		5			955		5		194		9
		14,924		313			7,401		(25	)		14,685		504		6,120		180
Total Impaired Loans	$	24,071	$	439		$	15,685	$	241		$	24,023	$	752	$	16,758	$	554

Table of Contents

Note 3.

Loans, continued

The following table presents the aging of the recorded investment of past due loans (dollars in thousands) as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~

30-59 Days Past due

60-89 Days Past Due

Greater than 90 Days

Total Past Due

Current

Total Loan Receivable

Non-Accrual Loans

Recorded Investment >90 days & accruing

September 30, 2017

Construction/Land Development
$62
$1,692
$2,372
$4,126
$70,187
$74,313
$2,788
$-
Farmland
  -
  1,984
  -
  1,984
  13,594
  15,578
  -
  -
Real Estate
  2,250
  1,202
  536
  3,988
  173,798
  177,786
  1,714
  -
Multi-Family
  -
  -
  -
  -
  8,504
  8,504
  -
  -
Commercial Real Estate
  840
  287
  -
  1,127
  154,383
  155,510
  -
  -
Home Equity – closed end
  273
  5
  -
  278
  10,911
  11,189
  -
  -
Home Equity – open end
  488
  100
  173
  761
  54,700
  55,461
  436
  -
Commercial & Industrial – Non- Real Estate
  264
  110
  481
  855
  37,195
  38,050
  481
  -
Consumer
  13
  23
  5
  41
  7,287
  7,328
  5
  -
Dealer Finance
  1,052
  287
  148
  1,487
  72,080
  73,567
  238
  -
Credit Cards
  16
  16
  -
  32
  2,642
  2,674
  -
  -
Total
$5,258
$5,706
$3,715
$14,679
$605,281
$619,960
$5,662
$-

30-59 Days Past due

60-89 Days Past Due

Greater than 90 Days)

Total Past Due

Current

Total Loan Receivable

Non-Accrual Loans

Recorded Investment >90 days & accruing

December 31, 2016

Construction/Land Development
$73
$101
$2,175
$2,349
$73,823
$76,172
$2,805
$-
Farmland
  -
  -
  -
  -
  12,901
  12,901
  -
  -
Real Estate
  2,135
  746
  774
  3,655
  169,103
  172,758
  1,399
  81
Multi-Family
  -
  -
  -
  -
  7,605
  7,605
  -
  -
Commercial Real Estate
  139
  -
  -
  139
  149,922
  150,061
  -
  -
Home Equity – closed end
  101
  -
  32
  133
  11,320
  11,453
  32
  -
Home Equity – open end
  484
  -
  69
  553
  53,867
  54,420
  279
  -
Commercial & Industrial – Non- Real Estate
  313
  5
  -
  318
  30,988
  31,306
  70
  -
Consumer
  35
  4
  6
  45
  6,598
  6,643
  -
  -
Dealer Finance
  797
  187
  183
  1,167
  64,328
  65,495
  178
  26
Credit Cards
  18
  4
  -
  22
  2,800
  2,822
  -
  -
Total
$4,095
$1,047
$3,239
$8,381
$583,255
$591,636
$4,763
$107

~~At September~~2019:

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loan Receivable		Non-Accrual Loans		Recorded Investment >90 days & accruing
June 30, 2020
Construction/Land Development	$	-	$	-	$	374	$	374	$	73,409	$	73,783	$	414	$	-
Farmland		-		26		-		26		36,940		36,966		1,774		-
Real Estate		1,421		366		558		2,345		169,860		172,205		734		-
Multi-Family		-		-		-		-		6,065		6,065		-		-
Commercial Real Estate		-		156		-		156		128,607		128,763		1,125		-
Home Equity – closed end		-		-		31		31		9,038		9,069		-		31
Home Equity – open end		179		8		217		404		46,106		46,510		240		-
Commercial & Industrial – Non- Real Estate		25		-		-		25		90,078		90,103		7		-
Consumer		20		1		-		21		10,051		10,072		-		-
Dealer Finance		839		139		24		1,002		84,255		85,257		135		6
Credit Cards		22		-		-		22		2,714		2,736		-		-
Total	$	2,506	$	696	$	1,204	$	4,406	$	657,123	$	661,529	$	4,429	$	37

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loan Receivable		Non-Accrual Loans		Recorded Investment >90 days & accruing
December 31, 2019
Construction/Land Development	$	117	$	45	$	1,255	$	1,417	$	75,714	$	77,131	$	1,301	$	-
Farmland		27		-		1,933		1,960		27,758		29,718		1,933		-
Real Estate		2,440		1,035		837		4,312		173,955		178,267		420		619
Multi-Family		-		-		-		-		5,364		5,364		-		-
Commercial Real Estate		563		-		137		700		129,150		129,850		900		-
Home Equity – closed end		-		-		-		-		9,523		9,523		-		-
Home Equity – open end		429		296		15		740		47,034		47,774		-		15
Commercial & Industrial – Non- Real Estate		726		4		-		730		32,805		33,535		203		-
Consumer		89		14		-		103		10,062		10,165		1		-
Dealer Finance		1,943		400		198		2,541		76,435		78,976		249		84
Credit Cards		31		-		4		35		3,087		3,122		-		4
Total	$	6,365	$	1,794	$	4,379	$	12,538	$	590,887	$	603,425	$	5,007	$	722

On June 30, ~~2017 and December 31, 2016,~~2020 other real estate owned did not include any foreclosed residential real estate and December 31, 2019 included ~~$711,000 and $565,000~~$133 of foreclosed residential real estate. The Company has ~~$93,000~~$878 of consumer mortgages for which foreclosure is in process ~~at September~~on June 30, ~~2017 and $40,000 at December 31, 2016.~~

2020.

Nonaccrual loans ~~at September~~on June 30, ~~2017 and September 30, 2016,~~2020 would have earned approximately ~~$109,000 and $54,000, respectively,~~$52 in interest income for the quarter had they been accruing loans.

Table of Contents

Note 4.

Allowance for Loan Losses

A summary of changes in the allowance for loan losses (dollars in thousands) for ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 is as follows:

September 30, 2017

Beginning Balance

Charge-offs

Recoveries

Provision

Ending Balance

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Allowance for loan losses:

Construction/Land Development
$3,381
$-
$-
$(213)
$3,168
$2,054
$1,114
Farmland
  34
  -
  -
  (4)
  30
  -
  30
Real Estate
  843
  -
  2
  (105)
  740
  214
  526
Multi-Family
  23
  -
  -
  (2)
  21
  -
  21
Commercial Real Estate
  705
  -
  11
  (165)
  551
  -
  551
Home Equity – closed end
  75
  8
  25
  (20)
  72
  -
  72
Home Equity – open end
  470
  25
  -
  (85)
  360
  -
  360
Commercial & Industrial – Non-Real Estate
  586
  31
  66
  (249)
  372
  -
  372
Consumer
  78
  34
  11
  55
  110
  -
  110
Dealer Finance
  1,289
  1,395
  816
  751
  1,461
  12
  1,449
Credit Cards
  59
  69
  30
  37
  57
  -
  57
Total
$7,543
$1,562
$961
$-
$6,942
$2,280
$4,662

December 31, 2016

Beginning Balance

Charge-offs

Recoveries

Provision

Ending Balance

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Allowance for loan losses:

Construction/Land Development
$4,442
$356
$7
$(712)
$3,381
$1,853
$1,528
Farmland
  95
  -
  -
  (61)
  34
  -
  34
Real Estate
  806
  23
  4
  56
  843
  221
  622
Multi-Family
  71
  -
  -
  (48)
  23
  -
  23
Commercial Real Estate
  445
  19
  135
  144
  705
  -
  705
Home Equity – closed end
  174
  8
  -
  (91)
  75
  -
  75
Home Equity – open end
  634
  370
  120
  86
  470
  60
  410
Commercial & Industrial – Non-Real Estate
  1,055
  293
  267
  (443)
  586
  -
  586
Consumer
  108
  37
  19
  (12)
  78
  -
  78
Dealer Finance
  836
  1,081
  417
  1,117
  1,289
  20
  1,269
Credit Cards
  115
  74
  54
  (36)
  59
  -
  59
Total
$8,781
$2,261
$1,023
$-
$7,543
$2,154
$5,389

June 30, 2020	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	1,190	$	7	$	-	$	254		$	1,437	$	3	$	1,435
Farmland		668		-		-		(333	)		335		110		225
Real Estate		1,573		36		4		396			1,937		617		1,319
Multi-Family		20		-		-		36			56		-		56
Commercial Real Estate		1,815		-		-		1,106			2,921		515		2,406
Home Equity – closed end		42		-		-		18			60		-		61
Home Equity – open end		457		-		-		(25	)		434		13		422
Commercial & Industrial – Non-Real Estate		585		64		10		(154	)		377		-		377
Consumer		186		67		38		279			436		-		433
Dealer Finance		1,786		971		465		685			1,965		12		1,952
Credit Cards		68		59		30		38			77		-		78
Total	$	8,390	$	1,204	$	547	$	2,300		$	10,033	$	1,270	$	8,764

December 31, 2019	Beginning Balance		Charge-offs		Recoveries		Provision		Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	2,094	$	2,319	$	50	$	1,365	$	1,190	$	85	$	1,105
Farmland		15		-		-		653		668		537		131
Real Estate		292		32		4		1,309		1,573		569		1,004
Multi-Family		10		-		-		10		20		-		20
Commercial Real Estate		416		677		16		2,060		1,815		213		1,602
Home Equity – closed end		13		1		2		28		42		-		42
Home Equity – open end		126		126		1		456		457		151		306
Commercial & Industrial – Non-Real Estate		192		127		81		439		585		192		393
Consumer		70		116		44		188		186		1		185
Dealer Finance		1,974		2,118		1,144		786		1,786		7		1,779
Credit Cards		38		110		29		111		68		-		68
Total	$	5,240	$	5,626	$	1,371	$	7,405	$	8,390	$	1,755	$	6,635

Table of Contents

Note 4.

Allowance for Loan Losses, continued

September 30, 2017

Loan Receivable

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Construction/Land Development
$74,313
$10,403
$63,910
Farmland
  15,578
  1,983
  13,595
Real Estate
  177,786
  1,932
  175,854
Multi-Family
  8,504
  -
  8,504
Commercial Real Estate
  155,510
  300
  155,210
Home Equity – closed end
  11,189
  -
  11,189
Home Equity –open end
  55,461
  -
  55,461
Commercial & Industrial – Non-Real Estate
  38,050
  162
  37,888
Consumer
  7,328
  9
  7,319
Dealer Finance
  73,567
  73
  73,494
Credit Cards
  2,674
  -
  2,674
Total
$619,960
$14,862
$605,098

The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~

December 31, 2016

Loan Receivable

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Construction/Land Development
$76,172
$9,888
$66,284
Farmland
  12,901
  -
  12,901
Real Estate
  172,758
  1,974
  170,784
Multi-Family
  7,605
  -
  7,605
Commercial Real Estate
  150,061
  2,910
  147,151
Home Equity – closed end
  11,453
  -
  11,453
Home Equity –open end
  54,420
  -
  54,420
Commercial & Industrial – Non-Real Estate
  31,306
  170
  31,136
Consumer
  6,643
  13
  6,630
Dealer Finance
  65,495
  87
  65,408
Credit Cards
  2,822
  -
  2,822
Total
$591,636
$15,042
$576,594

2019:

June 30, 2020	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	73,783	$	1,784	$	71,999
Farmland		36,966		1,774		35,192
Real Estate		172,205		14,518		157,687
Multi-Family		6,065		-		6,065
Commercial Real Estate		128,763		5,138		123,625
Home Equity – closed end		9,069		703		8,366
Home Equity –open end		46,510		151		46,359
Commercial & Industrial – Non-Real Estate		90,103		14		90,089
Consumer		10,072		1		10,071
Dealer Finance		85,257		173		85,084
Credit Cards		2,736		-		2,736

Total	$	661,529	$	24,256	$	637,273

December 31, 2019	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	77,131	$	3,078	$	74,053
Farmland		29,718		1,933		27,785
Real Estate		178,267		15,535		162,732
Multi-Family		5,364		-		5,364
Commercial Real Estate		129,850		1,940		127,910
Home Equity – closed end		9,523		716		8,807
Home Equity –open end		47,774		151		47,623
Commercial & Industrial – Non-Real Estate		33,535		209		33,326
Consumer		10,165		4		10,161
Dealer Finance		78,976		215		78,761
Credit Cards		3,122		-		3,122

Total	$	603,425	$	23,781	$	579,644

Table of Contents

Note 4.

Allowance for Loan Losses, continued

The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands) as of ~~September~~June 30, ~~2107~~2020 and December 31, ~~2016:~~

September 30, 2017

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
$-
$730
$12,931
$36,673
$10,285
$4,989
$8,705
$-
$74,313
Farmland
  64
  333
  3,897
  4,459
  4,348
  494
  1,983
  -
  15,578
Real Estate
  -
  1,404
  53,245
  95,135
  19,963
  5,285
  2,754
  -
  177,786
Multi-Family
  -
  249
  2,898
  5,177
  180
  -
  -
  -
  8,504
Commercial Real Estate
  -
  2,811
  43,962
  97,798
  9,312
  1,040
  587
  -
  155,510
Home Equity – closed end
  -
  130
  3,815
  4,499
  1,298
  1,442
  5
  -
  11,189
Home Equity – open end
  84
  2,612
  16,619
  31,730
  3,771
  142
  503
  -
  55,461
Commercial & Industrial (Non-Real Estate)
  277
  1,460
  15,039
  19,061
  1,368
  322
  523
  -
  38,050
Consumer (excluding dealer)
  47
  362
  2,640
  415
  1,187
  2,202
  475
  -
  7,328
Total
$472
$10,091
$155,046
$294,947
$51,712
$15,916
$15,535
$-
$543,719

Credit Cards

Dealer Finance

Performing
$2,674
$73,329
Non performing
-
238
Total
$2,674
$73,567

2019:

June 30, 2020	Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development	$	-	$	146	$	12,664	$	39,099	$	8,487	$	12,390	$	997	$	-	$	73,783
Farmland		59		489		12,922		15,974		5,080		668		1,774		-		36,966
Real Estate		-		2,459		43,527		77,176		27,790		4,196		17,057		-		172,205
Multi-Family		-		-		1,095		3,612		1,358		-		-		-		6,065
Commercial Real Estate		-		1,898		31,680		63,007		6,770		21,934		3,474		-		128,763
Home Equity – closed end		-		176		2,703		3,669		1,240		1,250		31		-		9,069
Home Equity – open end		-		1,732		18,693		20,907		3,616		826		736		-		46,510
Commercial & Industrial (Non-Real Estate)		113		1,508		8,965		13,148		65,037		1,279		53		-		90,103
Consumer (excluding dealer)		3		191		3,870		4,270		1,729		9		-		-		10,072
Total	$	175	$	8,599	$	136,119	$	240,862	$	121,107	$	42,552	$	24,122	$	-	$	573,536

	Credit Cards		Dealer Finance
Performing	$	2,736	$	85,109
Non-performing		-		148
Total	$	2,736	$	85,257

Table of Contents

Note 4.

Allowance for Loan Losses, continued

December 31, 2016

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
$-
$1,478
$10,870
$43,863
$8,399
$2,473
$9,089
$-
$76,172
Farmland
  65
  -
  3,073
  3,456
  4,446
  1,861
  -
  -
  12,901
Real Estate
  -
  1,149
  62,168
  74,242
  28,266
  4,680
  2,253
  -
  172,758
Multi-Family
  -
  311
  3,009
  4,099
  186
  -
  -
  -
  7,605
Commercial Real Estate
  -
  2,793
  32,986
  91,157
  19,181
  1,840
  2,104
  -
  150,061
Home Equity – closed end
  -
  150
  3,966
  4,139
  1,746
  1,414
  38
  -
  11,453
Home Equity – open end
  124
  1,724
  16,415
  30,974
  4,547
  125
  511
  -
  54,420
Commercial & Industrial (Non-Real Estate)
  1,375
  1,267
  6,827
  19,530
  2,198
  39
  70
  -
  31,306
Consumer (excluding dealer)
  67
  174
  1,837
  607
  1,242
  2,252
  466
  -
  6,643
Total
$1,631
$9,046
$141,151
$272,065
$70,211
$14,684
$14,531
$-
$523,319

Credit Cards

Dealer Finance

Performing
$2,822
$65,291
Non performing
-
204
Total
$2,822
$65,495

December 31, 2019	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	$	-	$	615	$	21,904	$	41,693	$	8,218	$	2,434	$	2,267	$	-	$	77,131
Farmland		60		363		9,479		13,754		2,942		1,188		1,932		-		29,718
Real Estate		-		1,900		48,308		81,371		23,876		5,635		17,177		-		178,267
Multi-Family		-		-		1,327		3,711		153		173		-		-		5,364
Commercial Real Estate		-		2,465		40,227		67,626		14,139		4,397		996		-		129,850
Home Equity – closed end		-		189		2,999		3,816		1,154		1,365		-		-		9,523
Home Equity – open end		17		1,965		17,789		22,705		3,769		1,198		331		-		47,774
Commercial & Industrial (Non-Real Estate)		142		2,042		12,818		15,035		2,877		373		248		-		33,535
Consumer (excluding dealer)		6		170		3,476		4,726		1,729		56		2		-		10,165
Total	$	225	$	9,709	$	158,327	$	254,437	$	58,857	$	16,819	$	22,953	$	-	$	521,327

	Credit Cards		Dealer Finance
Performing	$	3,118	$	78,529
Non-performing		4		447
Total	$	3,122	$	78,976

Description of internal loan grades:

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

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

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

Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must be covered through additional ~~long term~~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.

~~Note 4.~~

~~Allowance for Loan Losses, continued~~

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.

Table of Contents

Note 4. Allowance for Loan Losses, continued

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

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

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

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

Note 5.

Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31^st as the measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in ~~2017.~~

2020.

The following is a summary of net periodic pension costs for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~

(dollars in thousands)

Nine Months Ended

Three Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 20, 2016

Service cost
$522
$474
$174
$158
Interest cost
  365
  340
  122
  113
Expected return on plan assets
  (638)
  (641)
  (213)
  (214)
Amortization of prior service cost
  (11)
  (11)
  (4)
  (4)
Amortization of net (gain) or loss
  213
  167
  71
  56
Net periodic pension cost
$451
$329
$150
$109

2019:

	Six Months Ended						Three Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Service cost	$	404		$	369		$	202		$	184
Interest cost		209			274			105			137
Expected return on plan assets		(367	)		(403	)		(183	)		(201	)
Amortization of prior service cost		(6	)		(8	)		(3	)		(4	)
Amortization of net loss		111			141			55			7
Net periodic pension cost	$	351		$	373		$	176		$	187

Note 6.

Fair Value

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

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

Table of Contents

Note 6. Fair Value, continued

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.~~

~~Note 6.~~

~~Fair Value, continued~~

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

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

Securities

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

~~Derivatives~~

Loans Held for Sale

During the second quarter of 2020, simultaneous with the purchase of the minority interest in F&M Mortgage, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s loans held for sale 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 is classified as Level 2. At December 31, 2019, these loans were carried at the lower of cost or estimated fair value on an aggregate basis as determined by outstanding commitments from investors. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

Derivative assets – IRLCs

Beginning with the second quarter of 2020, simultaneous with the purchase of the minority interest in F&M Mortgage, the Company elected to recognize 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. The fair value of interest rate lock commitments was considered immaterial at December 31, 2019.

Table of Contents

Note 6. Fair Value, continued

Derivative Asset/Liability – Forward Sale Commitments

Beginning with the second quarter of 2020, simultaneous with the purchase of the minority interest in F&M Mortgage, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.

Derivative Asset/Liability – Indexed Certificate of Deposit

The Company’s derivatives, which are associated with the Indexed Certificate of Deposit (ICD) product once offered, are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs.

This product is no longer offered, however there are a few certificates of deposits that have not matured.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):

September 30, 2017

Total

Level 1

Level 2

Level 3

U. S. Treasuries
$21,998
$21,998
$-
$-
Mortgage-backed obligations of federal agencies
  549
  -
  549
  -
Equity securities
  135
  -
  135
  -
Total securities available for sale
$22,682
$21,998
$684
  -

December 31, 2016

Total

Level 1

Level 2

Level 3

U. S. Treasuries
$24,014
$24,014
$-
$-
Mortgage-backed obligations of federal agencies
  634
  -
  634
  -
Equity securities
  135
  -
  135
  -
Total securities available for sale
$24,783
$24,014
$769
  -

June 30, 2020	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale	$	90,602	$	-	$	90,602	$	-
IRLC		1,012		-		1,012		-
U. S. Treasury securities		3,000		-		3,000		-
U. S. Government sponsored enterprises		21,008		-		21,008		-
Securities issued by States and political subdivisions in the U. S.		8,951		-		8,951		-
Mortgage-backed obligations of federal agencies		44,996		-		44,996		-
Corporate debt securities		3,089		-		3,089		-
Assets at Fair Value	$	172,658	$	-	$	172,658	$	-

Liabilities:
Derivatives - ICD	$	45	$	-	$	45	$	-
Forward sales commitments		554		-		554		-
Liabilities at Fair Value	$	599	$	-	$	599	$	-

December 31, 2019	Total		Level 1		Level 2		Level 3
Assets:
U. S. Government sponsored enterprises	$	1,989	$	-	$	1,989	$	-
Mortgage-backed obligations of federal agencies		319		-		319		-
Other debt securities		2,058		-		2,058		-
Assets at Fair Value	$	4,366	$	-	$	4,366	$	-

Derivatives - ICD	$	72	$	-	$	72	$	-
Liabilities at Fair Value	$	72	$	-	$	72	$	-

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

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

~~Loans Held for Sale~~

Loans held for sale are short-term loans purchased at par for resale to investors at the par value of the loan and loans originated by VBS for sale in the secondary market. Loan participations are generally repurchased within 15 days. Loans originated for sale by VBS are recorded at lower of cost or market. No market adjustments were required at September 30, 2017 or December 31, 2016; therefore, loans held for sale were carried at cost. Because of the short-term nature and fixed repurchase price, the book value of these loans approximates fair value at September 30, 2017 and December 31, 2016.

Table of Contents

Note 6.

Fair Value, continued

Impaired Loans

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

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

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

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

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.

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

September 30, 2017

Total

Level 1

Level 2

Level 3

     Construction/Land Development
$3,565
  -
  -
$3,565
     Real Estate
  978
  -
  -
  978
     Dealer Finance
  36
  -
  -
  36
Impaired loans
$4,579
  -
  -
$4,579

December 31, 2016

Total

Level 1

Level 2

Level 3

     Construction/Land Development
$4,739
  -
  -
$4,739
     Real Estate
  985
  -
  -
  985
     Commercial Real Estate
  892
  -
  -
  892
     Dealer Finance
  67
  -
  -
  67
Impaired loans
$6,683
  -
  -
$6,683

June 30, 2020	Total		Level 1		Level 2		Level 3

Construction/Land Development	$	353	$	-	$	-	$	353
Farmland		1,664		-		-		1,664
Real Estate		9,002		-		-		9,002
Commercial Real Estate		2,325		-		-		2,325
Consumer		1		-		-		1
Home Equity – open end		138		-		-		138
Dealer Finance		119		-		-		119
Impaired loans	$	13,602	$	-	$	-	$	13,602

December 31, 2019	Total		Level 1		Level 2		Level 3

Construction/Land Development	$	951		-		-	$	951
Farmland		1,396		-		-		1,396
Real Estate		9,835		-		-		9,835
Commercial Real Estate		425		-		-		425
Consumer		3		-		-		3
Dealer Finance		129		-		-		129
Impaired loans	$	12,739	$	-	$	-	$	12,739

Table of Contents

Note 6.

Fair Value, continued

The following table presents information about Level 3 Fair Value Measurements for ~~September~~June 30, ~~2017:~~

	~~Fair Value at September 30, 2017~~	~~Valuation Technique~~	~~Significant Unobservable Inputs~~	~~Range~~
~~(dollars in thousands)~~
~~Impaired Loans~~	$~~4,579~~	~~Discounted appraised value~~	~~Discount for selling costs and marketability~~	~~3%-19% (Average 5.1%)~~

2020:

	Fair Value at June 30, 2020		Valuation Technique	Significant Unobservable Inputs	Range
(dollars in thousands)
Impaired Loans	$	13,602	Discounted appraised value	Discount for selling costs and marketability	3%-45% (Average 23.58%)

	Fair Value at December 31, 2019		Valuation Technique	Significant Unobservable Inputs	Range
(dollars in thousands)
Impaired Loans	$	12,739	Discounted appraised value	Discount for selling costs and marketability	0%-58.98% (Average 24.04%)

Assets Held for Sale

Assets held for sale were transferred from bank premises at the lower of cost less accumulated depreciation or fair value at the date of transfer. The ~~following table presents information about~~Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level ~~3 Fair Value Measurements~~2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for ~~December 31, 2016:~~

	~~Fair Value at December 31, 2016~~	~~Valuation Technique~~	~~Significant Unobservable Inputs~~	~~Range~~
~~(dollars in thousands)~~
~~Impaired Loans~~	$~~6,683~~	~~Discounted appraised value~~	~~Discount for selling costs and marketability~~	~~2%-50% (Average 4.7%)~~

sale a s nonrecurring Level 3.

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 following table summarizes the Company’s other real estate owned and assets held for sale that were measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands).

September 30, 2017

Total

Level 1

Level 2

Level 3

Other real estate owned
$2,148
-
-
$2,148

December 31, 2016

Total

Level 1

Level 2

Level 3

Other real estate owned
$2,076
-
-
$2,076

June 30, 2020	Total		Level 1		Level 2		Level 3

Other real estate owned	$	1,160	$	-	$	-	$	1,160
Assets held for sale	$	520	$	-	$	520	$	-

December 31, 2019	Total		Level 1		Level 2		Level 3

Other real estate owned	$	1,489	$	-	$	-	$	1,489

The following table presents information about Level 3 Fair Value Measurements for ~~September~~June 30, ~~2017:~~

2020:

	Fair Value at June 30, 2020		Valuation Technique	Significant Unobservable Inputs	Range
(dollars in thousands)
Other real estate owned	$	1,160	Discounted appraised value	Discount for selling costs	6%-10% (Average 8%)

	~~Fair Value at September 30, 2017~~	~~Valuation Technique~~	~~Significant Unobservable Inputs~~	~~Range~~
~~(dollars in thousands)~~
~~Other real estate owned~~	$~~2,148~~	~~Discounted appraised value~~	~~Discount for selling costs~~	~~5%-15% (Average 8%)~~25

Table of Contents

Note 6. Fair Value, continued

The following table presents information about Level 3 Fair Value Measurements for December 31, ~~2016:~~

	~~Fair Value at December 31, 2016~~	~~Valuation Technique~~	~~Significant Unobservable Inputs~~	~~Range~~
~~(dollars in thousands)~~
~~Other real estate owned~~	$~~2,076~~	~~Discounted appraised value~~	~~Discount for selling costs~~	~~5%-15% (Average 8%)~~

~~The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:~~

~~Cash and Cash Equivalents~~

~~The carrying amounts approximate fair value.~~

~~Note 6.~~

~~Fair Value, continued~~

~~Securities~~

The fair values of securities, excluding restricted stock, are determined by quoted market prices or dealer quotes. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments adjusted for differences between the quoted instruments and the instruments being valued. The carrying value of restricted securities and other investments approximates fair value and are therefore excluded from the following table.

~~Loans Held for Sale~~

~~Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.~~

~~Loans Held for Investment~~

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate – commercial, real estate – construction, real estate – mortgage, credit card and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, as well as estimates for prepayments. The estimate of maturity is based on the Company’s historical experience with repayments for loan classification, modified, as required, by an estimate of the effect of economic conditions on lending.

Fair value for significant nonperforming loans is based on estimated cash flows which are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are determined within management’s judgment, using available market information and specific borrower information.

~~Bank-Owned Life Insurance~~

Bank-owned life insurance represents insurance policies on certain officers of the Company. The cash values of the policies are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates fair value.

~~Deposits~~

The fair value of demand and savings deposits is the amount payable on demand. The fair value of fixed maturity term deposits and certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities.

~~Short-Term Debt~~

The carrying amounts of short-term debt maturing within 90 days approximate their fair values. Fair values of any other short-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of debt.

~~Long-Term Debt~~

~~The fair value of the Company’s long-term debt is estimated using discounted cash flow analyses based on the Company’s incremental borrowing rates for similar types of debt arrangements.~~

~~Accrued Interest~~

~~The carrying amounts of accrued interest approximate fair value.~~

~~Note~~2019:

	Fair Value at December 31, 2019		Valuation Technique	Significant Unobservable Inputs	Range
(dollars in thousands)
Other real estate owned	$	1,489	Discounted appraised value	Discount for selling costs	5%-10% (Average 8%)

Note 7. Disclosures ~~About~~about Fair Value of Financial Instruments

Fair Value Measurements at September 30, 2017 Using

(dollars in thousands)

Carrying Amount

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Fair Value at September 30, 2017

Assets:

Cash and cash equivalents
$9,746
$9,746
$-
$-
$9,746
Securities
  22,807
  21,998
  809
  -
  22,807
Loans held for sale
  58,177
  -
  58,177
  -
  58,177
Loans held for investment, net
  613,018
  -
  -
  642,322
  642,322
Interest receivable
  1,845
  -
  1,845
  -
  1,845
Bank owned life insurance
  13,841
  -
  13,841
  -
  13,841
Total
$719,434
$31,744
$74,672
$642,322
$762,338
Liabilities:





Deposits
$562,380
$-
$398,229
$165,926
$564,155
Short-term debt
  42,128
  -
  42,128
  -
  42,128
Long-term debt
  50,840
  -
  -
  50,943
  50,943
Interest payable
  239
  -
  239
  -
  239
Total
$655,587
$-
$440,596
$216,869
$657,465

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2020 and December 31, 2019. Fair values for June 30, 2020 and December 31, 2019 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

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

Fair Value Measurements at December 31, 2016 Using

(dollars in thousands)

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, 2016

Assets:

Cash and cash equivalents
$16,355
$16,355
$-
$-
$16,355
Securities
  24,908
  24,014
  894
  -
  24,908
Loans held for sale
  62,735
  -
  62,735
  -
  62,735
Loans held for investment, net
  584,093
  -
  -
  598,991
  598,991
Interest receivable
  1,785
  -
  1,785
  -
  1,785
Bank owned life insurance
  13,513
  -
  13,513
  -
  13,513
Total
$703,389
$40,369
$78,927
$598,991
$718,287
Liabilities:





Deposits
$537,085
$-
$379,857
$158,073
$537,930
Short-term debt
  40,000
  -
  40,000
  -
  40,000
Long-term debt
  64,237
  -
  -
  63,945
  63,945
Interest payable
  228
  -
  228
  -
  228
Total
$641,550
$-
$420,085
$222,018
$642,103

	Fair Value Measurements at June 30, 2020 Using
(dollars in thousands)	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 June 30, 2020
Assets:
Cash and cash equivalents	$	86,698	$	86,698	$	-	-		$	86,698
Securities		81,169		-		81,169		-		81,169
Loans held for sale		90,602		-		90,602		-		90,602
Loans held for investment, net		651,496		-		-		638,433		638,433
Interest receivable		2,640		-		2,640		-		2,640
Bank owned life insurance		20,345		-		20,345		-		20,345
Total	$	932,920	$	86,698	$	194,756	$	638,433	$	919,887
Liabilities:
Deposits	$	766,652	$	-	$	639,064	$	131,165	$	770,229
Short-term debt		-		-		-		-		-
Long-term debt		100,585		-		-		101,717		101,717
Interest payable		338		-		338		-		338
Total	$	867,575	$	-	$	639,402	$	232,882	$	872,284

Table of Contents

Note 7. Disclosures About Fair Value of Financial Instruments, continued

	Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)	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, 2019
Assets:
Cash and cash equivalents	$	75,804	$	75,804	$	-	$	-	$	75,804
Securities		4,490		-		4,490		-		4,490
Loans held for sale		66,798		-		66,798		-		66,798
Loans held for investment, net		595,035		-		-		580,903		580,903
Interest receivable		2,044		-		2,044		-		2,044
Bank owned life insurance		20,050		-		20,050		-		20,050
Total	$	764,221	$	75,804	$	93,382	$	580,903	$	750,089
Liabilities:
Deposits	$	641,709	$	-	$	504,522	$	139,713	$	644,235
Short-term debt		10,000		-		10,000		-		10,000
Long-term debt		53,201		-		-		53,543		53,543
Interest payable		354		-		354		-		354
Total	$	705,264	$	-	$	514,876	$	193,256	$	708,132

Note 8.

Troubled Debt Restructuring

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, there ~~was one~~were two loan ~~modification~~modifications that ~~was~~were considered to be troubled debt ~~restructuring. This loan~~restructurings. One of these loans was modified during the three months ended June 30, ~~2017, there were no~~2020 and one loan ~~modifications~~modification that would be considered a troubled debt restructuring was modified during the first ~~or third quarters~~quarter of ~~2017.~~2020. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

September 30, 2017

Pre-Modification

Post-Modification

(dollars in thousands)

Outstanding

Outstanding

Troubled Debt Restructurings

Number of Contracts

Recorded Investment

Recorded Investment

Consumer
1
$18
$18
Total
1
$18
$18

~~At September~~

	June 30, 2020
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
(dollars in thousands) Troubled Debt Restructurings	Number of Contracts		Recorded Investment		Recorded Investment

Consumer		2	$	11	$	11
Total		2	$	11	$	11

Table of Contents

Note 8. Troubled Debt Restructuring, continued

On June 30, ~~2017,~~2020, there was one loan restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past ~~due, or when a charge off or foreclosure occurs.~~

due.

	June 30, 2020
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
(dollars in thousands) Troubled Debt Restructurings	Number of Contracts		Recorded Investment		Recorded Investment

Consumer		1	$	3	$	3
Total		1	$	3	$	3

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, there were ~~seven~~nine loan modifications that were considered to be troubled debt ~~restructurings, however since then one has paid off~~restructurings. Seven of these loans were modified during the three months ended June 30, 2019 and ~~one was charged off.~~

Nine Months ended September 30, 2016

Pre-Modification

Post-Modification

(dollars in thousands)

Outstanding

Outstanding

Number of Contracts

Recorded Investment

Recorded Investment

Troubled Debt Restructurings

Real Estate
  2
$142
$142
Consumer
  3
  33
  33
Total
  5
$175
$175

~~During~~two loan modifications that would be considered a troubled debt restructuring were modified during the first quarter ~~ended September 30, 2016, there was one loan modification that was considered~~of 2019. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be ~~troubled debt restructuring.~~

Three Months ended September 30, 2016

Pre-Modification

Post-Modification

(dollars in thousands)

Outstanding

Outstanding

Number of Contracts

Recorded Investment

Recorded Investment

Troubled Debt Restructurings

Consumer
1
$6
$6
Total
1
$6
$6

applied as payments to bring the loan(s) current, or any combination thereof.

	Six months ended June 30, 2019
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
(dollars in thousands) Troubled Debt Restructurings	Number of Contracts		Recorded Investment		Recorded Investment

Commercial Real Estate		1	$	182	$	182
Real Estate		1		193		193
Home Equity		1		720		720
Commercial and Industrial		1		23		23
Consumer		5		35		35
Total		9	$	1,153	$	1,153

On June 30, 2019, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.

Note 9.

Accumulated Other Comprehensive Loss

The balances in accumulated other comprehensive loss are shown in the following tables for ~~September~~June 30, ~~2017~~2020 and ~~2016:~~

(dollars in thousands)

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at December 31, 2016
$6
$(3,171)
$(3,165)
  Change in unrealized securities gains (losses), net of tax
  (1)
  -
  (1)
  Change in unfunded pension liability, net of tax
  -
  -
  -
Balance at September 30, 2017
$5
$(3,171)
$(3,166)

(dollars in thousands)

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at December 31, 2015
$3
$(2,683)
$(2,680)
  Change in unrealized securities gains, net of tax
  22
  -
  22
  Change in unfunded pension liability, net of tax
  -
  -
  -
Balance at September 30, 2016
$25
$(2,683)
$(2,658)

2019:

(dollars in thousands)	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(7	)	$	(3,204	)	$	(3,211	)
Change in unrealized securities gains (losses), net of tax		(65	)		-			(65	)
Balance at June 30, 2020	$	(72	)	$	(3,204	)	$	(3,276	)

(dollars in thousands)	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2018	$	(94	)	$	(3,875	)	$	(3,969	)
Change in unrealized securities gains (losses), net of tax		89			-			89
Balance at June 30, 2019	$	(5	)	$	(3,875	)	$	(3,880	)

There were no reclassifications adjustments reported on the consolidated statements of income during the three or ~~nine~~six months ~~periods~~ ended ~~September~~June 30, ~~2017~~2020 or ~~2016.~~

2019.

Table of Contents

Note 10.

Business Segments

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

The following tables represent revenues and expenses by segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~

June 30, 2019.

	Six Months Ended June 30, 2020
	F&M Bank		F&M Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	18,036	$	120	$	80	$	-	$	-		$	(134	)	$	18,102
Service charges on deposits		586		-		-		-		-			-			586
Investment services and insurance income		-		-		368		-		-			(10	)		358
Mortgage banking income, net		-		2,900		-		-		-			-			2,900
Title insurance income		-		-		-		843		-			-			843
Other operating income (loss)		1,097		56		-		-		(53	)		-			1100
Total income (loss)		19,719		3,076		448		843		(53	)		(144	)		23889
Expenses:
Interest Expense	$	3,111	$	114	$	-	$	-	$	-		$	(134	)	$	3,091
Provision for loan losses		2,300		-		-		-		-			-			2,300
Salary and benefit expense		6,366		1,151		157		494		-			-			8,168
Other operating expenses		5,724		352		28		127		15			(10	)		6,236
Total expense		17,501		1,617		185		621		15			(144	)		19,795
Net income (loss) before taxes		2,218		1,459		263		222	��	(68	)		-			4,094
Income tax expense		190		-		39		-		(56	)		-			173
Net income (loss)		2,028		1,459		224		222		(12	)		-			3,921
Net income attributable to non-controlling interest		-		105		-		-		-			-			105
Net Income attributable to F & M Bank Corp.	$	2,028	$	1,354	$	224	$	222	$	(12	)	$	-		$	3816
Total Assets	$	983,611	$	25,546	$	7,875	$	3,855	$	92,418		$	(131,702	)	$	981,602
Goodwill	$	2,670	$	47	$	-	$	3	$	164		$	-		$	2,884

Table of Contents

	Three months ended June 30, 2020
	F&M Bank		F&M Mortgage		TEB Life/FMFS		VS Title			Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	8,965	$	84	$	36	$	-		$	-		$	(93	)	$	8,992
Service charges on deposits		225		-		-		-			-			-			225
Investment services and insurance income		-		-		178		-			-			(5	)		173
Mortgage banking income, net		-		1,971		-		-			-			-			1,971
Title insurance income		-		-		-		472			-			-			472
Other operating income (loss)		516		54		-		-			(53	)		-			517
Total income (loss)		9,706		2,109		214		472			(53	)		(98	)		12,350
Expenses:
Interest Expense		1,392		86		-		-			-			(93	)	$	1,385
Provision for loan losses		800		-		-		-			-			-			800
Salary and benefit expense		3,200		626		72		236			-			-			4,134
Other operating expenses		2,937		134		18		62			4			(5	)		3,150
Total expense		8,329		846		90		298			4			(98	)		9,469
Net income (loss) before taxes		1,377		1,263		124		174			(57	)		-			2,881
Income tax expense		260		-		21		-			(70	)		-			211
Net income (loss)		1,117		1,263		103		174			13			-			2,670
Net income attributable to non-controlling interest		-		43		-		(11	)		11			-			43
Net Income attributable to F & M Bank Corp.	$	1,117	$	1,220	$	103	$	185		$	2		$	-		$	2,627

Table of Contents

Note 10.

Business Segments, continued

Nine Months Ended September 30, 2017

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income
$24,815
$97
$112
$-
$-
$(70)
$24,954
Service charges on deposits
  1,010
  -
  -
  -
  -
  -
  1,010
Investment services and insurance income
  1
  -
  529
  -
  -
  -
  530
Mortgage banking income, net
  -
  1,974
  -
  -
  -
  -
  1,974
Title insurance income
  -
  -
  -
  668
  -
  -
  668
Income from bank owned life insurance
  336
  -
  -
  -
  -
  -
  336
Low income housing partnership losses
  (587)
  -
  -
  -
  -
  -
  (587)
ATM and check card fees
  1,034
  -
  -
  -
  -
  -
  1,034
Gain on prepayment of long-term debt
  504
  -
  -
  -
  -
  -
  504
Loss on investments
  -
  (40)
  (2)
  -
  -
  -
  (42)
Other operating income
  513
  -
  -
  -
  -
  -
  513
Total income
  27,626
  2,031
  639
  668
  -
  (70)
  30,894
Expenses:







Interest Expense
  2,866
  65
  -
  -
  -
  (70)
  2,861
Provision for loan losses
  -
  -
  -
  -
  -
  -
  -
Salary expense
  6,781
  1,035
  341
  345
  -
  -
  8,502
Employee benefit expense
  2,245
  168
  -
  54
  -
  -
  2,467
Occupancy expense
  624
  115
  -
  37
  -
  -
  776
Equipment expense
  551
  39
  -
  23
  -
  -
  613
FDIC insurance assessment
  200
  -
  -
  -
  -
  -
  200
Other real estate owned, net
  22
  -
  -
  -
  -
  -
  22
Marketing expense
  352
  42
  6
  4
  -
  -
  404
Legal and professional fees
  246
  7
  -
  -
  -
  -
  253
ATM and check card fees
  526
  3
  -
  -
  -
  -
  529
Telecom and data processing expense
  967
  78
  -
  -
  -
  -
  1,045
Directors fees
  315
  45
  -
  -
  -
  -
  360
Bank franchise Tax
  491
  -
  -
  -
  -
  -
  491
Other operating expenses
  2,127
  262
  17
  54
  4
  -
  2,464
Total expense
  18,313
  1,859
  364
  517
��4
  (70)
  20,987
Income tax expense (benefit)
  2,603
  -
  83
  -
  (53)
  -
  2,633
Net income
$6,710
$172
$192
$151
$49
$-
$7,274
Net income attributable to noncontrolling interest
  -
  51
  -
  -
  -
  -
  51
Net Income attributable to F & M Bank Corp.
$6,710
$121
$192
$151
$49
$-
$7,223
Total Assets
$750,048
$6,309
$6,644
$443
$91,362
$(91,121)
$763,685
Goodwill
$2,670
$103
$-
$-
$340
$-
$3,113

	Six Months Ended June 30, 2019
	F&M Bank		VBS Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	19,254	$	68	$	75	$	-	$	-		$	(84	)	$	19,313
Service charges on deposits		803		-		-		-		-			-			803
Investment services and insurance income		-		-		325		-		-			(3	)		322
Mortgage banking income, net		-		1,345		-		-		-			-			1,345
Title insurance income		-		-		-		682		-			-			682
Other operating income (loss)		1,110		28		-		-		(24	)		(1	)		1,113
Total income (loss)		21,167		1,441		400		682		(24	)		(88	)		23,578
Expenses:
Interest Expense		3,233		75		-		-		-			(84	)		3,224
Provision for loan losses		3,050		-		-		-		-			-			3,050
Salary and benefit expense		6,576		917		150		457		-			-			8,100
Other operating expenses		5,489		354		28		124		31			(4	)		6,022
Total expense		18,348		1,346		178		581		31			(88	)		20,396
Net income (loss) before taxes		2,819		95		222		101		(55	)		-			3,182
Income tax expense		158		-		33		-		41			-			232
Net income (loss)	$	2,661	$	95	$	189	$	101	$	(96	)	$	-		$	2,950
Net income attributable to non-controlling interest		-		29		-		24		(24	)		-			29
Net Income attributable to F & M Bank Corp.	$	2,661	$	66	$	189	$	77	$	(72	)	$	-		$	2,921
Total Assets	$	809,712	$	11,210	$	7,332	$	1,615	$	91,674		$	(114,594	)	$	806,949
Goodwill	$	2,670	$	47	$	-	$	3	$	164		$	-		$	2,884

Table of Contents

Note 10.

Business Segments, continued

Three Months Ended September 30, 2017

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income
$8,644
$32
$37
$-
$-
$(25)
$8,688
Service charges on deposits
  359
  -
  -
  -
  -
  -
  359
Investment services and insurance income
  -
  -
  169
  -
  -
  -
  169
Mortgage banking income, net
  -
  861
  -
  -
  -
  -
  861
Title insurance income
  -
  -
  -
  247
  -
  -
  247
Income from bank owned life insurance
  113
  -
  -
  -
  -
  -
  113
Low income housing partnership losses
  (201)
  -
  -
  -
  -
  -
  (201)
ATM and check card fees
  352
  -
  -
  -
  -
  -
  352
Gain on prepayment of long-term debt
  -
  -
  -
  -
  -
  -
  -
Loss on investments
  -
  -
  -
  -
  -
  -
  -
Other operating income
  246
  -
  -
  -
  -
  -
  246
Total income
  9,513
  893
  206
  247
  -
  (25)
  10,834
Expenses:







Interest Expense
  1,032
  24
  -
  -
  -
  (25)
  1,031
Provision for loan losses
  -
  -
  -
  -
  -
  -
  -
Salary expense
  2,326
  586
  107
  175
  -
  -
  3,194
Employee benefit expense
  722
  1
  -
  (34)
  -
  -
  689
Occupancy expense
  221
  48
  -
  12
  -
  -
  281
Equipment expense
  192
  20
  -
  12
  -
  -
  224
FDIC insurance assessment
  20
  -
  -
  -
  -
  -
  20
Other real estate owned, net
  (3)
  -
  -
  -
  -
  -
  (3)
Marketing expense
  136
  8
  2
  2
  -
  -
  148
Legal and professional fees
  75
  3
  -
  -
  -
  -
  78
ATM and check card fees
  182
  1
  -
  -
  -
  -
  183
Telecom and data processing expense
  342
  28
  -
  -
  -
  -
  370
Directors fees
  105
  11
  -
  -
  -
  -
  116
Bank franchise Tax
  166
  -
  -
  -
  -
  -
  166
Other operating expenses
  767
  2
  4
  20
  -
  -
  793
Total expense
  6,283
  732
  113
  187
  -
  (25)
  7,290
Income tax expense (benefit)
  933
  -
  30
  -
  (17)
  -
  946
Net income
$2,297
$161
$63
$60
$17
$-
$2,598
Net income attributable to noncontrolling interest
  -
  48
  -
  -
  -
  -
  48
Net Income attributable to F & M Bank Corp.
$2,297
$113
$63
$60
$17
$-
$2,550

~~Note 10.~~

~~Business Segments, continued~~

Nine Months Ended September 30, 2016

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income
$23,653
$30
$114
$-
$-
$(4)
$23,793
Service charges on deposits
  842
  -
  -
  -
  -
  -
  842
Investment services and insurance income
  1
  -
  316
  -
  -
  -
  317
Mortgage banking income, net
  -
  1,891
  -
  -
  -
  -
  1,891
Income from bank owned life insurance
  356
  -
  -
  -
  -
  -
  356
Low income housing partnership losses
  (548)
  -
  -
  -
  -
  -
  (548)
ATM and check card fees
  1,020
  -
  -
  -
  -
  -
  1,020
Gain on prepayment of long-term debt
  -
  -
  -
  -
  -
  -
  -
Loss on investments
  -
  -
  -
  -
  -
  -
  -
Other operating income
  238
  -
  -
  -
  -
  -
  238
Total income
  25,562
  1,921
  430
  -
  -
  (4)
  27,909
Expenses:







Interest Expense
  2,649
  -
  -
  -
  -
  (4)
  2,645
Provision for loan losses
  -
  -
  -
  -
  -
  -
  -
Salary expense
  6,117
  823
  221
  -
  -
  -
  7,161
Employee benefit expense
  1,927
  186
  -
  -
  -
  -
  2,113
Occupancy expense
  552
  91
  -
  -
  -
  -
  643
Equipment expense
  536
  33
  -
  -
  -
  -
  569
FDIC insurance assessment
  338
  -
  -
  -
  -
  -
  338
Other real estate owned, net
  72
  -
  -
  -
  -
  -
  72
Marketing expense
  356
  39
  1
  -
  -
  -
  396
Legal and professional fees
  286
  7
  -
  -
  -
  -
  293
ATM and check card fees
  514
  4
  -
  -
  -
  -
  518
Telecom and data processing expense
  795
  66
  -
  -
  -
  -
  861
Directors fees
  234
  20
  -
  -
  -
  -
  254
Bank franchise Tax
  480
  -
  -
  -
  -
  -
  480
Other operating expenses
  2,011
  138
  26
  -
  1
  -
  2,176
Total expense
  16,867
  1,407
  248
  -
  1
  (4)
  18,519
Income tax expense (benefit)
  2,353
  -
  48
  -
  (214)
  -
  2,187
Net income
$6,342
$514
$134
$-
$213
$-
$7,203
Net income attributable to noncontrolling interest
  -
  154
  -
  -
  -
  -
  154
Net Income attributable to F & M Bank Corp.
$6,342
$360
$134
$-
$213
$-
$7,049
Total Assets
$736,642
$2,492
$6,315
$-
$87,369
$(87,526)
$745,292
Goodwill
$2,670
$-
$-
$-
$-
$-
$2,670

~~Note 10.~~

~~Business Segments, continued~~

Three Months Ended September 30, 2016

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income
$8,160
$17
$39
$-
$-
$(1)
$8,215
Service charges on deposits
  336
  -
  -
  -
  -
  -
  336
Investment services and insurance income
  -
  -
  112
  -
  -
  -
  112
Mortgage banking income, net
  -
  694
  -
  -
  -
  -
  694
Income from bank owned life insurance
  119
  -
  -
  -
  -
  -
  119
Low income housing partnership losses
  (183)
  -
  -
  -
  -
  -
  (183)
ATM and check card fees
  328
  -
  -
  -
  -
  -
  328
Other operating income
  129
  -
  -
  -
  -
  -
  129
Total income
  8,889
  711
  151
  -
  -
  (1)
  9,750
Expenses:







Interest Expense
  971
  -
  -
  -
  -
  (1)
  970
Provision for loan losses
  -
  -
  -
  -
  -
  -
  -
Salary expense
  2,094
  295
  82
  -
  -
  -
  2,471
Employee benefit expense
  628
  71
  -
  -
  -
  -
  699
Occupancy expense
  185
  30
  -
  -
  -
  -
  215
Equipment expense
  181
  2
  -
  -
  -
  -
  183
FDIC insurance assessment
  113
  -
  -
  -
  -
  -
  113
Other real estate owned, net
  19
  -
  -
  -
  -
  -
  19
Marketing expense
  120
  6
  2
  -
  -
  -
  128
Legal and professional fees
  98
  2
  -
  -
  -
  -
  100
ATM and check card fees
  183
  1
  -
  -
  -
  -
  184
Telecom and data processing expense
  286
  23
  -
  -
  -
  -
  309
Directors fees
  42
  4
  -
  -
  -
  -
  46
Bank franchise Tax
  170
  -
  -
  -
  -
  -
  170
Other operating expenses
  755
  63
  5
  -
  -
  -
  823
Total expense
  5,845
  497
  89
  -
  -
  (1)
  6,430
Income tax expense (benefit)
  770
  -
  16
  -
  (132)
  -
  654
Net income
$2,274
$214
$46
$-
$132
$-
$2,666
Net income attributable to noncontrolling interest
  -
  64
  -
  -
  -
  -
  64
Net Income attributable to F & M Bank Corp.
$2,274
$150
$46
$-
$132
$-
$2,602

	Three Months Ended June 30, 2019
	F&M Bank		VBS Mortgage		TEB Life/FMFS		VS Title		Parent Only			Eliminations			F&M Bank Corp. Consolidated
Revenues:
Interest Income	$	9,754	$	43	$	41	$	-	$	-		$	(56	)	$	9,782
Service charges on deposits		417		-		-		-		-			-			417
Investment services and insurance income		-		-		174		-		-			(3	)		171
Mortgage banking income, net		-		815		-		-		-			-			815
Title insurance income		-		-		-		406		-			-			406
Other operating income (loss)		665		28		-		-		(27	)		-			666
Total income (loss)		10,836		886		215		406		(27	)		(59	)		12,257
Expenses:
Interest Expense		1,732		50		-		-		-			(56	)		1,726
Provision for loan losses		1,600		-		-		-		-			-			1,600
Salary and benefit expense		3,285		489		69		234		-			-			4,077
Other operating expenses		2,739		177		16		62		24			(3	)		3,015
Total expense		9,356		716		85		296		24			(59	)		10,418
Net income (loss) before taxes		1,480		170		130		110		(51	)		-			1,839
Income tax expense		112		-		19		-		22			-			153
Net income (loss)	$	1,368	$	170	$	111	$	110	$	(73	)	$	-		$	1,686
Net income attributable to non-controlling interest		-		51		-		27		(27	)		-			51
Net Income attributable to F & M Bank Corp.	$	1,368	$	119	$	111	$	83	$	(46	)	$	-		$	1,635

Note 11.

Debt

Short-term Debt

The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (FHLB) short term borrowings to support the loans held for sale participation program and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. ~~Short-term~~There was no short term debt ~~totaled $42,128,000~~ at ~~September~~June 30, ~~2017~~2020 and ~~has increased $2,128,000 from $40 million~~$10,000 at December 31, ~~2016; the total of increase was in Federal funds purchased.~~

2019.

Long-term Debt

The Company utilizes the FHLB advance program to fund loan growth and provide liquidity. The interest rates on long-term debt are fixed at the time of the advance and range from ~~1.16%~~.80% to 2.56%; the weighted average interest rate was ~~1.86%~~1.82% at June 30, 2020 and ~~1.80%~~1.85% at ~~September 30, 2017 and~~ December 31, ~~2016, respectively. The~~2019.The balance of these obligations at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 were ~~$50,661,000~~$40,982 and ~~$63,982,000~~$53,197 respectively. ~~The Company recognized a gain of $504,000 on prepayment of two FHLB advances totaling $10,000,000 during the first quarter of 2017 and there were no additional borrowings in 2017.~~ FHLB advances include a ~~$5,000,000 line~~$6,000 letter of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.

~~In addition,~~

The Company utilized the ~~Company has~~Federal Reserve Paycheck Protection Program Liquidity Facility to fund the Paycheck Protection Program (“PPP”) loans funded in the second quarter. This funding facility is secured by the PPP loans and interest is set at a fixed rate of .35%.On June 30, 2020 the balances totaled $59,603; there were no borrowings under this program on December 31, 2019.

VSTitle, LLC had a note payable to purchase ~~a lot adjacent to one of the Bank branches for $170,000 at September 30, 2017~~vehicles that ~~is payable in two remaining annual payments on January 1, 2018 and 2019. There was $255,000 outstanding on this note~~totaled $4 at December 31, ~~2016.~~

VS 2019 and was paid off by June 30, 2020.

Table of Contents

Note 12. Revenue Recognition

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

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Investment Services and Insurance Income

Investment services and insurance income primarily consists of commissions received on mutual funds and other investment sales.Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.

Title ~~LLC~~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.

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Note 12. Revenue Recognition, continued

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2020 and 2019.

	Six Months Ended June 30,				Three Months Ended June 30,
	2020		2019		2020		2019

Noninterest Income (in thousands)
In-scope of Topic 606:
Service Charges on Deposits	$	586	$	803	$	225	$	417
Investment Services and Insurance Income		358		322		173		171
Title Insurance Income		843		682		472		406
ATM and check card fees		894		898		462		529
Other		283		281		123		153
Noninterest Income (in-scope of Topic 606)		2,964		2,986		1,455		1,676
Noninterest Income (out-of-scope of Topic 606)		2,823		1,279		1,903		799
Total Noninterest Income	$	5,787	$	4,265	$	3,358	$	2,475

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 June 30, 2020 and December 31, 2019, 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 ~~note payable for vehicle purchases~~contract with a ~~balance~~customer if these costs are expected to be recovered. The incremental costs of ~~$9,000~~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.

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Note 13. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842.The Company elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.03 million at ~~September~~the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability 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)	June 30, 2020
Lease Liabilities	$	882
Right-of-use assets		867
Weighted average remaining lease term		4.58
Weighted average discount rate		3.46	%

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Lease cost (in thousands)
Operating lease cost	$	25	$	32	$	58	$	64
Total lease cost	$	25	$	32	$	58	$	64

Cash paid for amounts included in the measurement of lease liabilities	$	31	$	38	$	69	$	75

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

	As of
	June 30, 2020
Six months ending December 31, 2020	$	52
Twelve months ending December 31, 2021		127
Twelve months ending December 31, 2022		129
Twelve months ending December 31, 2023		93
Twelve months ending December 31, 2024		92
Thereafter		611
Total undiscounted cash flows	$	1,104
Discount		222
Lease liabilities	$	882

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Note 14. Mortgage Banking and Derivatives

Loans Held for Sale

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage Company, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. During the second quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale (LHFS) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business total $20.0 million as of June 30, ~~2017.~~

2020 of which $19.8 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2. These loans were previously carried as of December 31, 2019 at the lower of cost or estimated fair value on an aggregate basis as determined by outstanding commitments from investors and totaled $3.0 million.

Interest Rate Lock Commitments and Forward Sales Commitments

The Company, through F&M Mortgage Company, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (IRLCs). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation. The Company determines the fair value of the IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate loan commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at June 30, 2020, and totaled $1.0 million, with a notional amount of $43.8 million and total positions of 207. The fair value of the IRLCs was considered immaterial at December 31, 2019. Changes in fair value are recorded as a component of “Mortgage banking, net” in the Consolidated Income Statement for the period ended June 30, 2020. The Company’s IRLCs are classified as Level 2. At June 30, 2020 and December 31, 2019, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

During the second quarter of 2020, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments is reported in “Other Liabilities” in the Consolidated Balance Sheet at June 30, 2020, and totaled $554 thousand, with a notional amount of $63.8 million and total positions of 286.

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Note 15. Subsequent Events

On July 29, 2020, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreement”) with certain institutional accredited investors pursuant to which the Company sold and issued $5.0 million in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030 (the “2030 Notes and, together with the 2027 Notes, the “Notes”).Raymond James & Associates, Inc. served as the sole placement agent.

The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning on July 31, 2022 through maturity, the 2027 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2027 Notes will mature on July 31, 2027.

The 2030 Notes will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the 2030 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2030 Notes will mature on July 31, 2030.

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

F & M Bank Corp. ~~(Company)~~(“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),~~(“Bank”). TEB Life Insurance Company ~~(TEB) and~~(“TEB”), Farmers & Merchants Financial Services ~~(FMFS)~~(“FMFS”) and VBS Mortgage LLC (dba F&M Mortgage) are ~~wholly-owned~~wholly owned subsidiaries of the Bank. ~~The Bank also holds a majority ownership in VBS Mortgage LLC (VBS) and~~ F & M Bank Corp. holds a majority ownership in ~~VS Title~~VSTitle LLC ~~(VST).~~

(“VST”), with the remaining minority interest owned by F&M Mortgage.

The Bank is a full service commercial bank offering a wide range of banking and financial services through its ~~thirteen~~eleven (as of August 1, 2020) branch offices as well as its loan production office located in Penn Laird, VAVirginia (which specializes in providing automobile financing through a network of automobile dealers)~~. TEB~~.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. ~~VBS~~F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Fishersville, and Woodstock, ~~VA. VS Title~~Virginia. VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, ~~VA.~~

Virginia.

The Company’s primary trade area services customers in Rockingham County, Shenandoah County, Page County and Augusta County.

Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s December 31, ~~2016~~2019 Form 10-K.

Forward-Looking Statements

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

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

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

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. ~~A variety~~The Company’s financial position and results of ~~factors could affect~~operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The faircarrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the ~~investment portfolio is based on period end valuations but~~application of these policies could result in material changes ~~daily with~~in the ~~market.~~ Company’s consolidated financial position and/or results of operations.

In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

Following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses

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

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

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

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

Critical Accounting Policies (continued)

Fair Value

The estimate of fair value involves the ~~Allowance~~use of (1) quoted prices for ~~Loan Losses discussion~~identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the ~~Management Discussion~~market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and ~~Analysis.~~

~~Goodwill~~parameters are not fully available, management’s judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and ~~Intangibles~~

~~ASC 805 “Business Combinations” and ASC 350 “Intangibles” require that~~ the ~~acquisition method~~potential materiality of ~~accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies~~ the criteria for the initial recognition and measurement of intangible assets separate from goodwill. ASC 350 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of ASC 350 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators areamounts involved result in ~~evidence. ASC 350 also requires that reporting units be~~this item being identified ~~for the purpose of assessing potential future impairments of goodwill.~~

~~At September 30, 2017, preliminary goodwill of $443,000 was reported for the purchase of VSTitle, LLC. This amount is subject to change after expert evaluation.~~

as critical.

Pension Plan Accounting

The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated obligation include discount rates, expected return on assets, mortality rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company’s financial condition and results of operations. As a result, accounting for the Company’s pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical.

~~Item 2.~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~

~~Critical Accounting Policies (continued)~~

~~Securities~~

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment. The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When criteria (a) and (b) are met, the entity will recognize the credit component of other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than- temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

Other Real Estate Owned (OREO)

OREO is held for sale and represents real estate acquired through or in lieu of foreclosure. OREO is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The Company’s policy is to carry OREO on its balance sheet at ~~the lower of cost or~~ fair value less estimated costs to ~~sell. If~~sell; however, a property’s value will not be written up above its net fair value at foreclosure.If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

~~Overview~~

~~Net income for the nine months ended September 30, 2017 was $7,223,000 or $1.99 per diluted share, compared to $7,049,000 or $1.89~~

COVID-19

The World Health Organization declared a global pandemic in the ~~same period~~first quarter of 2020 due to the spread of the coronavirus (“COVID-19”) around the globe. As a result, the state of Virginia issued a stay at home order in ~~2016,~~March requiring all nonessential businesses to shut down and nonessential workers to stay home. The Company, while considered an ~~increase~~essential business, implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies are closed , and the Company is utilizing drive through windows and courier service to handle transactions, new accounts are opened electronically with limited in person contact for document signing and verification of ~~2.47%. During~~identification, and lenders are taking applications by appointment with limited in person contact as well.

The Small Business Administration (“SBA”) implemented the ~~nine months ended September 30, 2017, noninterest income increased 44.31% and noninterest expense increased 14.19%~~Paycheck Protection Program (“PPP”) to support small business operations with loans during the ~~same period. Net~~shutdown and into the following months. The Company has worked diligently to support both our customers and noncustomers within our footprint with these loans. As of August 3, 2020, we had processed 704 PPP loans for a total of $62.8 million through the SBA program, with expected fee income ~~from Bank operations adjusted~~related to these loans of $2.4 million. These fees will be recognized over the life of the associated loans.

The Company is funding PPP loans through the Federal Reserve’s PPP liquidity facility (“PPPLF”); this facility allows Banks to borrow funds to support the PPP program at a rate of .35%, reduce the leverage ratio reported by the amount of the debt and maintain liquidity for ~~income from Parent activities is as follows:~~

In thousands

2017

2016

Net Income from Bank Operations
$7,023
$6,836
Income from Parent Company Activities (2017 includes VSTitle)
200
213
Net Income for the nine months ended September 30
$7,223
$7,049

~~During~~core loan growth and investment opportunities. As of August 3, 2020, the ~~three months ended September 30, 2017, net income was $2,550,000 or $.70 per diluted share, compared to $2,602,000 or $.70 in~~Company had borrowed $59.9 million under the ~~same period in 2016, a decrease of 2.00%. In the three months ended September 30, 2017, noninterest income increased 39.80% and noninterest expense increased 14.63%.~~

In thousands

2017

2016

Net Income from Bank Operations
$2,473
$2,470
Income from Parent Company Activities (2017 includes VSTitle)
77
132
Net Income for the three months ended September 30
$2,550
$2,602

PPPLF program.

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

COVID-19, continued

While the impact of COVID-19 is uncertain at this time, at the end of the quarter data indicated that the economy is in a recession. Many foreign countries and states in the United States continue to be under restriction as far as employment, recreation and gatherings. Unemployment claims remain at record highs with estimates to go higher.

The Company is closely monitoring the effects of the pandemic on our customers. Management is focused on assessing the risks in our loan portfolio and working with our customers to minimize losses. Additional resources have been allocated to analyze higher risk segments in our loan portfolio, monitor and track loan payment deferrals and customer status.

The industries most likely to be affected by COVID-19, which include lodging, food service, assisted living facilities, recreation, multi-family, retail, childcare and education services, have been identified and reviewed. Management determined there is a concentration in low-end budget hotels that may not be in a competitive position when lodging and travel re-opens. There are also a couple of large recreational facilities that are closed and will miss the summer camp season.There were approximately $87 million in closed/restricted businesses that are considered non-essential and multi-family may struggle with collecting rents from tenants.

As of August 3, 2020, we had executed 1,001 modifications allowing principal and interest deferrals on outstanding loan balances of $108.3 million in connection with the COVID-19 related needs. These modifications, 70% of which were short-term dealer loan modifications, were no more than 6 months in duration and were consistent with regulatory guidance and the CARES Act. As of August 3, 2020, 138 loans remain in deferral with a balance of $24.4 million, all other modified loans have made payment.

The table below shows the impacted industries identified by management, the percent of the loan portfolio and the loan deferrals in those categories as of June 30, 2020:

Loan Category	Loan Balance (in thousands)		Percent of Total Loans Held for Investment			Number of Extensions		Dollar amount of Extension
Construction	$	32,103		4.85	%		2	$	9,457
Land development		9,941		1.50	%		1		219
Commercial owner occupied		23,753		3.59	%		8		3,428
Commercial owner occupied -office		8,226		1.24	%		-		-
Commercial owner occupied -campgrounds		5,266		0.80	%		3		3,428
Commercial owner occupied -restaurants		4,934		0.75	%		5		2,857
Commercial owner occupied -school		973		0.15	%		-		-
Commercial owner occupied - church		5,996		0.91	%		1		1,121
Commercial nonowner occupied - other		16,039		2.42	%		9		2,587
Commercial hotel/motel		14,623		2.21	%		13		13,020
Commercial assisted living		2,656		0.40	%		-		-
Commercial nonowner occupied -retail		22,397		3.39	%		8		13,208
Consumer - auto, truck, motorcycle		82,702		12.50	%		731		8,630
Consumer other		6,646		1.00	%		40		227
Poultry Farm		14,166		2.14	%		2		295
Raw Farm Land		11,102		1.68	%		2		1,355
Multifamily		6,065		0.92	%		2		982
Farmland residential		2,271		0.34	%		-		-
Municipals		5,623		0.85	%		-		-

	$	275,482		41.64	%		827	$	60,814

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

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

~~The increase~~ (Continued)

COVID-19, continued

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

Overview (Dollars in ~~noninterest~~thousands)

Net income ~~of $1,824,000~~ for the ~~nine-month~~six months ended June 30, 2020 was $3,816 or $1.11 per diluted share, compared to $2,921 or $0.84 in the same period ~~and $611,000 for the three-month period ended September 30, 2017~~in 2019, an increase of 30.64%. This is primarily due to the gain on prepayment of FHLB debt of $504,000 (first quarter) and the acquisition of VS Title LLC which contributed $668,000 for the year to date 2017. Exclusive of the FHLB debt gain, noninterest income increased 32.07% for the nine month period. During the nine month perioda $895 increase compared to the first ~~nine~~six months of ~~2016, other areas of increase are service charges on deposits ($168,000), mortgage banking income ($83,000) and investment services and insurance ($213,000). For~~2019. During the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020, noninterest income increased ~~39.80%, with increase primarily related to VS Title~~33.22% and ~~mortgage banking.~~

~~Noninterest expense for the nine months ended September 30, 2017 increased $2,252,000 as compared to 2016. For the three months ended September 30, 2017~~ noninterest expense increased ~~$799,000. Expenses increased in~~2.00% during the ~~areas of salaries and benefits ($1,695,000), occupancy expense ($133,000) and telecommunications and data processing ($184,000) for the nine months ended September 30, 2017.~~ same period.

During the three months ended ~~September~~June 30, ~~2017 areas~~2020, net income was $2,627 or $0.76 per diluted share, compared to $1,635 or $.47 in the same period in 2019, an increase of ~~increase were salary and benefits ($566,000), equipment expense ($78,000) and telecommunications and data processing ($61,000)~~60.67%. ~~Increases in salaries and benefits relate to normal salary increases, additional staff to support new branch locations and growth at VBS Mortgage, increased cost~~

Results of ~~insurance and the acquisition of VSTitle. Occupancy and telecommunications and data processing also increased as a result of branching activities.~~

Operations

As shown in Table I, ~~on page 46,~~ the ~~2017~~2020 year to date tax equivalent net interest income ~~increased $984,000~~decreased $1,074 or ~~4.64%~~6.66% compared to the same period in ~~2016. The~~2019.The tax equivalent adjustment to net interest income totaled ~~$107,000~~$42 for the first ~~nine~~six months of ~~2017. The~~2020.The yield on earning assets ~~increased .18%~~decreased .96%, while the cost of funds ~~increased .06%~~decreased .17% compared to the same period in ~~2016.~~

2019.

The three months ended ~~September~~June 30, ~~2017~~2020 tax equivalent net interest income ~~increased $434,000~~decreased $444 or ~~5.98%~~5.50% compared to the same period in ~~2016. The~~2019.The tax equivalent adjustment to net interest income totaled ~~$37,000~~$24 for the three ~~months.~~

months ended June 30, 2019.

Year to date, the combination of the ~~increase~~decrease in yield on assets and the ~~increase~~decrease in cost of funds coupled with changes in balance sheet leverage ~~has~~ resulted in the net interest margin ~~increasing~~decreasing to ~~4.47% at September~~3.75% for the six months ended June 30, ~~2017, an increase~~2020, a decrease of 1482 basis points when compared to the same period in ~~2016. The net interest margin for~~2019.For the three months ended ~~September~~June 30, ~~2017 of 4.48% is an increase from 4.23% for~~2020, the ~~three months ended September 30, 2016. The growth is driven by increases~~net interest margin decreased 91 basis points when compared to the same period in ~~yield and balance sheet mix. A~~2019.A schedule of the net interest margin for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 can be found in Table ~~I on page 46.~~

GAAP Financial Measurements:
(Dollars in thousands).

September 30, 2017

September 30, 2016

Nine Months

Three Months

Nine Months

Three Months

         Interest Income – Loans
$24,604
$8,550
$23,515
$8,092
Interest Income - Securities and Other Interest-Earnings Assets
  350
  138
  278
  123
         Interest Expense – Deposits
  1,947
  698
  1,757
  609
         Interest Expense - Other Borrowings
  914
  332
  888
  361
Total Net Interest Income
  22,093
  7,658
  21,148
  7,245
Non-GAAP Financial Measurements:




Add: Tax Benefit on Tax-Exempt Interest Income – Loans
  107
  37
  68
  16
Total Tax Benefit on Tax-Exempt Interest Income
  107
  37
  68
  16
Tax-Equivalent Net Interest Income
$22,200
$7,695
$21,216
$7,261

The following table provides detail on the components of tax equivalent net interest income:

GAAP Financial Measurements: (Dollars in thousands).	June 30, 2020				June 30, 2019
	Six Months		Three Months		Six Months		Three Months
Interest Income – Loans	$	17,589	$	8,867	$	19,017	$	9,604
Interest Income - Securities and Other Interest-Earnings Assets		513		125		296		178
Interest Expense – Deposits		2,611		1,159		2,359		1,258
Interest Expense - Other Borrowings		480		226		865		468
Total Net Interest Income		15,011		7,607		16,089		8,056

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans		42		24		38		19
Total Tax Benefit on Tax-Exempt Interest Income		42		24		38		19
Tax-Equivalent Net Interest Income	$	15,053	$	7,631	$	16,127	$	8,075

Table of Contents

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

Results of Operations, continued

The Interest Sensitivity Analysis contained in Table II ~~on page 47~~ indicates the Company is in an asset sensitive position in the one year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately ~~44.04%~~41.27% of rate sensitive assets and ~~34.49%~~32.26% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively ~~flat yield curve, management~~low rate environment, Management has ~~kept~~continued to decrease deposit ~~rates low.~~rates. The growth in earning assets and the growth in noninterest bearing accounts has resulted in ~~the decrease~~an increase in the positive GAP position in the one year time period.

~~Item 2.~~

~~Management's Discussion~~

The increase in noninterest income of $1,522 for the six-month period June 30, 2020 compared to the same period in 2019 is due primarily to growth in mortgage banking income ($1,555), and ~~Analysis~~title insurance income ($161). The increase in noninterest income of ~~Financial Condition~~$883 for the three months ended June 30, 2020 is primarily due to growth in mortgage banking income ($1,156). Increase in mortgage banking income was primarily due to the purchase of noncontrolling interest and ~~Results~~increased business due to the low rate environment.

Noninterest expense for the six months ended June 30, 2020 increased $282 as compared to 2020.Expenses increased in the areas of ~~Operations (Continued)~~

ATM and card processing ($107), telecommunication and data processing expense ($291) and Bank franchise tax ($101) and were offset by savings in other real estate owned ($159) and legal and professional expense ($69).For the three months ended June 30, 2020 noninterest expense increased $192.Areas of increase were salary and benefits ($57), other real estate owned ($96) and telecommunication and data processing expense ($116).Increases in ATM and card processing are due to change in vendor and increased card usage. Telecommunication and data processing relate to new lending product and increase in remote processing. Bank franchise tax is due to growth.

Balance Sheet

Federal Funds Sold and Interest Bearing Bank Deposits

The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at ~~1.00%~~0.00% to ~~1.25%~~0.25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. ~~Balances~~The Company held $68,548 and $66,559 in federal funds sold ~~have decreased~~at June 30, 2020 and ~~interest~~December 31, 2019, respectively.Growth in excess funds is due to strong deposit growth, the Company is deploying these funds into the investment portfolio during 2020.Interest bearing bank deposits have ~~remained flat~~increased by $77 since year ~~end due to changes in the composition of the balance sheet~~.

end.

Securities

The Company’s securities portfolio serves to assist the Company with asset liability ~~management and to provide tax benefits.~~

management.

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

As of ~~September~~June 30, ~~2017,~~2020, the fair value of securities available for sale ~~exceeded~~was below their cost by ~~$7,000.~~$91. The portfolio is made up of primarily ~~U.S.Treasury securities with~~agencies and mortgage backed obligations of federal agencies, as well as Securities issued by States and political subdivisions in the U.S. and Corporate debt securities. The average maturity is 5.56 years. Efforts to deploy excess funds in an ~~average portfolio life~~uncertain rate environment has resulted in a mixture of ~~just over three years. This short average life results in less portfolio volatility and positions the Bank to redeploy assets in response to rising rates.~~maturities. There are ~~$22,000,000 in~~$3 of securities that will mature in ~~2017.~~

2020.

In reviewing investments as of ~~September~~June 30, ~~2017 and December 31, 2016,~~2020, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.

Table of Contents

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

Loan Portfolio

The Company operates in a predominately rural area that includes the counties of Rockingham, Page, Shenandoah and Augusta in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area.

~~Lending is geographically diversified within the service area. The Company has~~ There are no loan concentrations ~~within the portfolio in construction and development lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.~~

as defined by regulatory guidelines.

Loans Held for Investment of ~~$619,960,000~~$661,529 increased ~~$28,324,000~~$58,104 at ~~September~~June 30, ~~2017~~2020 compared to December 31, ~~2016. The following categories experienced growth:~~2019.Loan growth was concentrated in the commercial non-real estate (PPP loans), farmland ~~real estate, multi-family, commercial and industrial, consumer~~ and dealer ~~finance.~~

finance segments of the portfolio.

Loans Held for Sale totaled ~~$58,177,000~~$90,602 at ~~September~~June 30, ~~2017, a decrease~~2020, an increase of ~~$4,558,000~~$23,804 compared to December 31, ~~2016. The~~2019.The Northpointe participation loan program ~~has experienced a decline in volume in 2017 due~~as well as F&M mortgage loans are typically subject to seasonal fluctuations, both have increased since year end with the ~~mortgage environment.~~

~~Item 2.~~

~~Management's Discussion and Analysis~~largest portion being Northpointe. June also reflects the adoption of ~~Financial Condition and Results of Operations (Continued)~~

~~Loan Portfolio (continued)~~

fair value accounting for the entire loans held for sale portfolio.

Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled ~~$5,662,000~~$4,466 at ~~September~~June 30, ~~2017~~2020 compared to ~~$4,870,000~~$5,729 at December 31, ~~2016. Loans added~~2019.The decrease in nonperforming loans from year end is primarily due to one commercial relationship which was refinanced outside of the Company due to the sale of the collateral, another relationship improved and was removed from nonaccrual ~~since December 31, 2016 were past~~during the first quarter. The balance also decreased due ~~and were not specifically reviewed for impairment as they were below~~to payments received on the ~~impairment review threshold.~~loan on nonaccrual basis during the second quarter. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses and what has previously been charged off, management believes the ~~bank~~Bank is generally well secured and continues to actively work with its customers to effect payment.

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Company held ~~$2,148,000~~$1,160 and ~~$2,076,000~~$1,489 of real estate which was acquired through foreclosure, respectively.

Table of Contents

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

Loan Portfolio, continued

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

September 30,
2017

December 31,
2016

Nonaccrual Loans

     Real Estate
$4,502
$4,204
     Commercial
  481
  70
     Home Equity
  436
  311
     Other
  243
  178

  5,662
  4,763



Loans past due 90 days or more (excluding nonaccrual)


     Real Estate
  -
  81
     Commercial
  -
  -
     Home Equity
  -
  -
     Other
  -
  26

  -
  107



Total Nonperforming loans
$5,662
$4,870



Restructured Loans current and performing:


      Real Estate
  7,714
  8,641
      Commercial
  162
  1,121
      Home Equity
  -
  -
       Other
  64
  76



Nonperforming loans as a percentage of loans held for investment
  .91%
  .82%



Net charge offs to total loans held for investment
  .10%
  .21%



Allowance for loan and lease losses to nonperforming loans
  122.61%
  154.89%

~~Item 2.~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~

	June 30, 2020			December 31, 2019
*Nonaccrual Loans*
Real Estate	$	1,148		$	1,721
Commercial		2,906			3,036
Home Equity		240			-
Other		135			250
	$	4,429		$	5,007
*Loans past due 90 days or more (excluding nonaccrual)*
Real Estate		-			619
Commercial		-			-
Home Equity		31			15
Other		6			88
		37			722
Total Nonperforming loans	$	4,466		$	5,729

Restructured Loans current and performing:
Real Estate	$	2,999		$	3,644
Commercial		1,935			1,223
Home Equity		703			716
Other		128			167

Nonperforming loans as a percentage of loans held for investment		.68	%		.95	%
Net charge offs to total loans held for investment¹		.20	%		.71	%
Allowance for loan and lease losses to nonperforming loans		224.65	%		146.45	%

¹ – Annualized for six month period ended June 30, 2020

Allowance for Loan Losses

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

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

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

~~With the exception~~

Table of Contents

Item 2. Management's Discussion and Analysis of ~~Dealer finance loans, loans~~Financial Condition and Results of Operations (Continued)

Allowance for Loan Losses, continued

Loans that are not ~~impaired~~reviewed for impairment are categorized by call report code into unimpaired and classified loans. For both unimpaired and classified loans an estimate is calculated based on actual loss experience over the last ~~five~~two years. ~~Due to the rapid turnover in the~~The classified Dealer finance ~~portfolio,~~loans are given a ~~two-year loss rate is utilized in that category as management feels this lookback period properly reflects the losses currently inherent in the portfolio. The Company monitors the net losses~~higher risk factor for ~~this division~~past due and ~~adjusts~~adverse risk ratings based on ~~how~~back testing of the ~~portfolio performs since the department was established in 2012.~~ risk factors.

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

The allowance for loan losses of ~~$6,942,000~~$10,033 at ~~September~~June 30, ~~2017~~2020 is equal to ~~1.12%~~1.52% of loans held for ~~investment.~~investment, or 1.67% of loans held for investment excluding PPP loans. This compares to an allowance of ~~$7,543,000 (1.27%~~$8,390 (1.39%) at December 31, ~~2016. The company has~~2019.The Company experienced a ~~decline~~decrease in ~~historical losses and improvements in~~nonperforming loans during the first half of 2020.A previously identified impaired loan totaling $900 million was refinanced outside of the bank due to the sale of the collateral. Another loan moved from nonaccrual status to accrual status based on repayment history. One relationship totaling $1,545 was added to the loans reviewed for impairment, with $0 required reserve. Past due loans decreased during first half 2020. Due to COVID-19, however the bank increased the qualitative ~~factors since year end. There has been an increase~~factor for the economy and concentrations in ~~past dues~~industries specifically affected by the virus. The bank increased the environmental factor for COVID-19's negative impact on the economy, such as government shut-down of businesses, a state wide stay at home order, record high weekly unemployment filings, and supply chain disruptions due to the world wide shut-downs. Additionally, the bank analyzed the loan portfolio for industries most likely to be affected by COVID-19, such as hotels, restaurants, recreations facilities, assisted living facilities, retail establishments, childcare and education facilities, and multi-family properties. Based on the Bank’s loans in these industry segments, the ~~prior and current quarters, several of which have expected payments in the fourth quarter and several loans (63%~~environmental factor was increased for four segments of the ~~past due increase) are reviewed for impairment. Past due and loans with adverse risk ratings receive additional allocations in~~loan portfolio. As a result, the ~~allowance~~Bank recorded a $2,300 provision for loan ~~loss calculation. Increases to nonaccrual have been minimal with a majority of the increase coming from cyclical increases on a development property. No~~ losses in excess of impairment reserves are expected on nonaccrual and TDR loans. Historical losses have continued their downward trend since the end of 2015; therefore, representing the majority of the decline in the allowance for loan losses. Due to these factors, management did not fund the allowance in the first ~~nine~~six months of ~~2017.~~

~~Net charge-offs at September 30, 2017 totaled $601,000 which is equivalent~~2020. Management will continue to ~~.10% of total~~monitor nonperforming and past due loans ~~outstanding. At December 31, 2016, net charge-offs totaled $1,238,000~~and will make necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or ~~.21% of total loans outstanding.~~

~~Item 2.~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~

cash flow expectations.

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits at ~~September~~June 30, ~~2017~~2020 have increased ~~$25,295,000~~$124,943 since December 31, ~~2016. Noninterest~~2019.Noninterest bearing deposits increased ~~$10,305,000~~$56,415 while interest bearing increased ~~$14,990,000. The~~$68,528.The increase in deposits ~~is consistent with 2016 in that deposits grew substantially~~ in the ~~second half~~first six months is due to a focus on deposit growth as an organization as well as proceeds from PPP loans that are in deposit accounts of the ~~year.~~ Bank. The Bank ~~also~~ participates in the ~~CDARS and the ICS programs.~~ CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep) ~~are~~programs. These programs, ~~that allows~~CDARS for certificates of deposit and ICS for demand and savings, allow the ~~bank~~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. ~~The CDARS program also allows the Bank to purchase funds through its One-Way Buy program.~~ At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019 the Company had a total of ~~$1.3 million~~$515 and $514 in CDARS ~~funding. The Company had $17.1 million~~funding and ~~$12.1 million~~$39,346 and $25.714 in ICS funding, ~~at September 30, 2017 and December 31, 2016,~~ respectively.

Short-term borrowings

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (FHLB), and short-term fixed rate FHLB borrowings. Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale and also to finance the increase in short-term residential and commercial construction loans. As of ~~September~~June 30, ~~2017,~~2020, there were no short-term ~~debt consisted of $20,000,000 in FHLB~~borrowings. This compared to short-term borrowings ~~$20,000,000~~of $10,000 at December 31, 2019, all of which were FHLB short term advances. There were no balances in FHLB daily rate credit ~~and $2,128,000 in federal funds purchased. This compared to FHLB short-term borrowings of $40,000,000~~ at June 30, 2020 or December 31, ~~2016. There were no balances in federal funds purchased or daily rate credit at December 31, 2016.~~

2019.

Table of Contents

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

Long-term borrowings

Borrowings from the FHLB continue to be an important source of funding. The Company’s subsidiary bank borrows funds on a fixed rate basis. These borrowings are used to ~~fund loan growth~~support the Bank’s lending program and ~~also assist~~allow the Bank ~~in matching the maturity of its fixed rate real estate loan portfolio with the maturity of its debt and thus reduce its exposure~~ to manage interest rate ~~changes. During~~risk by laddering maturities and matching funding terms to the ~~first quarter~~terms of ~~2017,~~various types in the ~~Company recognized a $504,000 gain on prepayment of two~~loan portfolio. FHLB long term advances ~~totaling $10 million~~totaled $40,982 and $53,196 on June 30, 2020 and December 31, 2019, respectively.

Borrowings from the Federal Reserve Paycheck Protection Program Liquidity Facility were utilized to fund the Paycheck Protection Program (“PPP”) loans originated in the second quarter. The Company’s subsidiary bank borrows funds on a fixed rate basis and secured by PPP loans; the maturity of the borrowings matches the maturity of the PPP loans. On June 30, 2020, the balances totaled $59,603; there were no ~~new~~ borrowings ~~during the nine months ended September~~under this program on December 31, 2019.

VS Title, LLC has a vehicle loan with a balance of $0 at June 30, ~~2017.~~

~~Item 2.~~

~~Management's Discussion~~2020 and ~~Analysis of Financial Condition and Results of Operations (Continued)~~

$4 at December 31, 2019.

Capital

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

In March 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital)~~. At September~~.At June 30, ~~2017,~~2020, the Bank had Common Equity Tier I capital of ~~13.90%~~12.79%, Tier I capital of ~~13.90%~~12.79% of risk weighted assets and combined Tier I and II capital of ~~14.98%~~14.04% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December ~~30, 2016,~~31, 2019, the Bank had Common Equity Tier I capital of ~~13.86%~~13.30%, Tier I capital of ~~13.86%~~13.30% of risk weighted assets and combined Tier I and II capital of ~~15.08%~~14.55% of risk weighted assets. ~~Regulatory minimums at this date were 4.5%, 6% and 8%, respectively.~~ The Bank has maintained capital levels far above the minimum ~~requirements throughout the year.~~requirements. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital.

In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial condition. At ~~September~~June 30, ~~2017 and December 31, 2016,~~2020, the Bank reported a leverage ratio of ~~12.16% and 11.83%~~10.09%, ~~respectively, which~~compared to 10.89% at December 31, 2019.The Bank's leverage ratio was ~~also~~ substantially above the minimum. The Bank also reported a capital conservation buffer of ~~6.98%~~6.04% at ~~September~~June 30, ~~2017~~2020 and ~~7.08%~~6.55% at December 31, ~~2016. The~~2019.The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments. ~~Beginning January 1, 2016, a~~The capital conservation buffer ~~of 0.625% became effective. The capital conservations buffer for 2017 is 1.25% and will gradually be increased through~~was fully phased in on January 1, 2019 at 2.5%.

Community Bank Leverage Ratio

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to ~~2.5%.~~

reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

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

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

Table of Contents

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

Liquidity

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

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

Additionally, the Bank can utilize the Federal Reserve Paycheck Protection Program Loan Facility.

Interest Rate Sensitivity

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

As of ~~September~~June 30, ~~2017,~~2020, the Company had a cumulative Gap Rate Sensitivity Ratio of ~~19.55%~~18.33% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.

A summary of asset and liability repricing opportunities is shown in Table ~~II, on page 47.~~

~~Item 2.~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~

II.

Effect of Newly Issued Accounting Standards

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements by gathering data on current lease agreements and analyzed the capital impact of expected right of use assets that will be recorded. No changes are expected regarding total lease expense.

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

During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the ~~statement~~set-up stage with expectations of ~~cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017,~~running parallel in 2020 and ~~interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of~~all data has been archived under the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

current model.

Table of Contents

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Effect of Newly Issued Accounting Standards, continued

~~During~~

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

~~During January 2017, the FASB issued ASU No.~~ 2017-04, “Intangibles –- Goodwill and Other (Topic 350): - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ~~The amendments~~ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in ~~this ASU simplify how~~the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity ~~is required~~will record an impairment charge based on that difference. The impairment charge will be limited to ~~test~~the amount of goodwill ~~for impairment by eliminating Step 2 from~~allocated to that reporting unit. The standard eliminates the ~~goodwill impairment test. Step 2 measures~~prior requirement to calculate a goodwill impairment ~~loss~~charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of ~~a reporting unit’s~~ goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. ~~An entity still has~~ASU 2017-04 was effective for the ~~option~~Company on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to ~~perform~~ the ~~qualitative assessment~~Disclosure Requirements for ~~a reporting unit~~Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to ~~determine if~~add disclosures regarding changes in unrealized gains and losses, the ~~quantitative impairment test is necessary. Public business entities that~~range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are ~~U.S. Securities and Exchange Commission (SEC) filers should adopt the~~also removed or modified. The amendments ~~in this ASU~~are effective for ~~annual or interim goodwill impairment tests in~~ fiscal years beginning after December 15, ~~2019.~~2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is ~~permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~permitted. The ~~Company does not expect the~~ adoption of ASU ~~2017-04 to~~2018-13 did not have a material impact on ~~its~~the Company’s consolidated financial statements.

~~During March 2017,~~

In August 2018, the FASB issued ASU ~~2017-07, “Compensation —~~ 2018-14, “Compensation—Retirement ~~Benefits (Topic 715)~~Benefits—Defined Benefit Plans—General (Subtopic 715-20): ~~Improving~~Disclosure Framework—Changes to the ~~Presentation~~Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of ~~Net Periodic Pension Cost~~the reasons for significant gains and ~~Net Periodic Postretirement Benefit Cost.”~~losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in ~~this ASU require an employer~~paragraph 715-20-50-3, which state that ~~offers~~the following information for defined benefit pension plans ~~other postretirement~~should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans ~~or other types~~with PBOs in excess of ~~benefits accounted~~plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for ~~under Topic 715 to report the service cost component~~plans with ABOs in excess of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable.plan assets. The amendments are effective for ~~annual periods beginning~~fiscal years ending after December 15, ~~2017, including interim periods within those annual periods.~~2020. Early adoption is permitted. The Company does not expect the adoption of ASU ~~2017-07~~2018-14 to have a material impact on its consolidated financial statements.

~~During March 2017,~~

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

In December 2019, the FASB issued ASU ~~2017~~‐~~08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310~~‐~~20), Premium Amortization on Purchased Callable Debt Securities.~~2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ~~amendments~~ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in ~~this~~Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU ~~shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption~~is part of the ~~standard, premiums on these qualifying callable debt securities will be amortized~~FASB’s simplification initiative to ~~the earliest call date. Discounts on purchased debt securities will continue~~make narrow-scope simplifications and improvements to ~~be accreted to maturity. The~~accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, ~~2018,~~2020, and interim periods within those fiscal years.Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

Table of Contents

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

Effect of Newly Issued Accounting Standards, continued

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company does not expect the adoption of ASU 2017‐~~08 to have a material impact on its consolidated financial statements.~~

~~Item 2.~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~

~~Effect of Newly Issued Accounting Standards, continued~~

~~During May 2017, the FASB issued ASU 2017~~‐09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company does not expect ASU 2017‐~~09 will have an impact on the Company’s consolidated financial statements.~~

During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU ~~2017~~‐122020-01 will have on its consolidated financial statements.

On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date The rule change excludes from the definition of “accelerated filer” entities with public float of less than $700 million and less than $100 million in annual revenues. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K.Nonaccelerated filers also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for nonaccelerated filers.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grands a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. The COVID-19 discussion following the Critical Accounting Policies at the beginning of the Management’s Discussion and Analysis and notes 1 and 3 provide more details on what the Company is doing to prepare for the impact.

In March 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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.

Table of Contents

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

Existence of Securities and Exchange Commission Web Site

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

TABLE I

F & M BANK CORP.

Net Interest Margin Analysis

(on a fully taxable equivalent basis)

(Dollar Amounts in Thousands)

Nine Months Ended

Nine Months Ended

Three Months Ended

Three Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Average

Income/

Average

Income/

Average

Income/

Average

Income/

Average

Balance4

Expense
��

Rates5

Balance4

Expense

Rates

Balance4

Expense

Rates

Balance4

Expense

Rates5

Interest income

     Loans held for investment1,2
$599,198
$23,937
  5.34%
$561,347
$22,162
  5.27%
$611,426
$8,258
  5.36%
$570,252
$7,575
  5.27%
     Loans held for sale
  36,026
  774
  2.87%
  68,145
  1,430
  2.80%
  45,007
  329
  2.90%
  84,165
  540
  2.55%
     Federal funds sold
  15,780
  108
  .92%
  6,402
  22
  .46%
  11,131
  37
  1.32%
  8,863
  10
  .45%
     Interest bearing deposits
  1,594
  8
  .67%
  778
  2
  .34%
  2,569
  4
  .62%
  594
  -
  -
     Investments












Taxable 3
  11,211
  234
  2.79%
  17,388
  245
  1.88%
  11,195
  97
  3.44%
  16,576
  106
  2.50%
Partially taxable
  125
  -
  -
  125
  -
  -
  125
  -
  -
  125
  -
  -
     Total earning assets
$663,934
$25,061
  5.05%
$654,185
$23,861
  4.87%
$681,453
$8,725
  5.08%
$680,575
$8,231
  4.80%
Interest Expense












     Demand deposits
  119,318
  393
  .44%
  111,516
  371
  .44%
  119,179
  140
  .47%
  114,850
  126
  .44%
     Savings
  112,803
  379
  .45%
  97,803
  322
  .44%
  114,864
  131
  .46%
  102,757
  114
  .44%
     Time deposits
  157,579
  1,175
  1.00%
  161,025
  1,064
  .88%
  161,487
  427
  1.05%
  158,572
  369
  .92%
     Short-term debt
  21,217
  46
  .29%
  39,406
  35
  .12%
  32,832
  14
  .16%
  45,881
  9
  .08%
     Long-term debt
  53,968
  868
  2.15%
  53,512
  853
  2.13%
  51,169
  319
  2.47%
  65,412
  352
  2.13%
     Total interest bearing liabilities
$464,885
$2,861
  .82%
$463,262
$2,645
  .76%
$479,531
$1,031
  .85%
$487,472
$970
  .79%













Tax equivalent net interest income

$22,200


$21,216


$7,694


$7,261














Net interest margin


  4.47%


  4.33%


  4.48%


  4.23%

1 ~~Interest income on loans includes loan fees.~~

2 ~~Loans held for investment include nonaccrual loans.~~

3 ~~An incremental income tax rate of 34% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.~~

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

5 ~~Average rates have been annualized.~~

	Six Months Ended							Six Months Ended							Three Months Ended							Three Months Ended
	June 30, 2020							June 30, 2019							June 30, 2020							June 30, 2019
			Income/		Average					Income/		Average					Income/		Average					Income/		Average
Average	Balance^2,4		Expense		Rates			Balance^2,4		Expense		Rates			Balance^2,4		Expense		Rates			Balance^2,4		Expense		Rates
*Interest income*
Loans held for investment^1,2	$	634,715	$	17,039		5.40	%	$	646,045	$	18,232		5.69	%	$	659,875	$	8,570		5.22	%	$	646,880	$	9,126		5.66	%
Loans held for sale		43,308		588		2.93	%		47,421		823		3.50	%		47,045		318		2.72	%		57,257	��	497		3.48	%
Federal funds sold		114,477		317		.56	%		3,697		43		2.35	%		134,335		23		.07	%		6,000		25		1.67	%
Interest bearing deposits		1,032		3		.58	%		831		9		2.18	%		785		-		-			816		4		1.97	%
Investments
Taxable ³		14,843		174		2.36	%		13,788		243		3.55	%		19,740		83		1.69	%		14,034		139		3.97	%
Partially taxable		123		1		1.63	%		123		1		1.64	%		125		-		-			124		-		-
Tax exempt		1,114		22		3.97	%		-		-		-			2,228		22		3.97	%		-		-		-
Total earning assets	$	806,612	$	18,144		4.52	%	$	711,905	$	19,351		5.48	%	$	864,133	$	9,016		4.20	%	$	725,111	$	9,791		5.42	%
*Interest Expense*
Demand deposits		98,507		134		.27	%		88,981		101		.23	%		103,312		71		.28	%		90,194		54		.24	%
Savings		273,765		1,310		.96	%		196,311		1,082		1.11	%		290,762		516		.71	%		200,351		598		1.20	%
Time deposits		134,579		1,167		1.74	%		151,431		1,176		1.57	%		132,656		572		1.73	%		149,866		606		1.62	%
Short-term debt		3,571		41		2.31	%		32,953		419		2.56	%		-		-		-			34,208		216		2.53	%
Long-term debt		61,829		439		1.43	%		47,326		446		1.90	%		78,088		226		1.16	%		47,767		252		2.12	%
Total interest bearing liabilities	$	572,251	$	3,091		1.09	%	$	517,002	$	3,224		1.26	%	$	604,818	$	1,385		.92	%	$	522,386	$	1,726		1.33	%

Tax equivalent net interest income			$	15,053						$	16,127						$	7,631						$	8,075

Net interest margin						3.75	%						4.57	%						3.55	%						4.47	%

____________

¹	Interest income on loans includes loan fees.
²	Loans held for investment include nonaccrual loans.
³	Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.
⁴	Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

Table of Contents

TABLE II

F & M BANK CORP.

Interest Sensitivity Analysis

~~September~~

June 30, ~~2017~~

2020

(Dollars In Thousands)

The following table presents the Company’s interest sensitivity.

0 – 3

4 – 12

– 5

Over 5

Not

Months

Months

Years

Years

Classified

Total

Uses of funds

Loans

Commercial
$35,015
$31,260
$123,304
$28,063
$-
$217,642
Installment
  4,206
  1,291
  60,608
  14,790
  -
  80,895
Real estate loans for investments
  92,354
  61,061
  160,463
  4,871
  -
  318,749
Loans held for sale
  58,177
  -
  -
  -
  -
  58,177
Credit cards
  2,674
  -
  -
  -
  -
  2,674
Interest bearing bank deposits
  945
  -
  -
  -
  -
  945
Federal funds sold
  -
  -
  -
  -
  -
  -
Investment securities
  21,998
  125
  -
  549
  135
  22,807
Total
$215,369
$93,737
$344,375
$48,273
$135
$701,889







Sources of funds






Interest bearing demand deposits
$-
$33,236
$71,407
$19,086
$-
$123,729
Savings deposits
  -
  23,515
  70,547
  23,516
  -
  117,578
Certificates of deposit $100,000 and over
  3,250
  18,551
  38,335
  -
  -
  60,136
Other certificates of deposit
  12,730
  33,996
  57,289
  -
  -
  104,015
Short-term borrowings
  42,128
  -
  -
  -
  -
  42,128
Long-term borrowings
  1,107
  3,407
  35,701
  10,625
  -
  50,840
Total
$59,215
$112,705
$273,279
$53,227
$-
$498,426







Discrete Gap
$156,154
$(18,968)
$71,096
$(4,954)
$135
$203,463







Cumulative Gap
$156,154
$137,186
$208,282
$203,328
$203,463








Ratio of Cumulative Gap to Total Earning Assets
  22.25%
  19.55%
  29.67%
  28.97%
  28.99%

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

*Uses of funds*
Loans
Commercial	$	51,703		$	17,195		$	160,847		$	32,152		$	-		$	261,897
Installment		1,624			1,324			73,065			19,316			-			95,329
Real estate loans for investments		93,846			40,787			145,295			21,639			-			301,567
Loans held for sale		90,602			-			-			-			-			90,602
Credit cards		2,736			-			-			-			-			2,736
Interest bearing bank deposits		1,203			-			-			-			-			1,203
Federal funds sold		68,548			-			-			-			-			68,548
Investment securities		3,000			125			59,001			19,043			-			81,169
Total		313,262			59,431			438,208			92,150			-			903,051

*Sources of funds*
Interest bearing demand deposits		-			22,622			67,868			22,622			-			113,112
Savings deposits		-			117,485			160,864			21,688			-			300,037
Certificates of deposit		14,094			44,016			69,412			851			-			128,373
Short-term borrowings		-			-			-			-			-			-
Long-term borrowings		6,107			2,821			81,032			10,625			-			100,585
Total		20,201			186,944			379,176			55,786			-			642,107

Discrete Gap		293,061			(127,513	)		59,032			36,364			-			260,944

Cumulative Gap	$	293,061		$	165,548		$	224,580		$	260,944		$	260,944

Ratio of Cumulative Gap to Total Earning Assets		32.45	%		18.33	%		24.87	%		28.90	%		28.90	%

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of ~~September~~June 30, ~~2017. In~~2020.In preparing the above table, no assumptions were made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can reprice. Investment securities included in the table consist of securities held to maturity and securities available for sale. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. Proceeds from the redemption of investments and deposits are included in the period of maturity. Estimated maturities of deposits, which have no stated maturity dates, were derived from ~~guidance contained in FDICIA 305.~~

regulatory guidance.

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures ~~About~~about Market Risk

~~Not Applicable~~

The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provide management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2019 in the Company’s 2019 Form 10-K, Item 7A or Part II.

Item 4.

Controls and Procedures

~~Evaluation~~

Management assessed the Company’s system of ~~Disclosure Controls and Procedures~~

~~As a result~~internal control over financial reporting as of June 30, 2020. This assessment was conducted based on the Committee of Sponsoring Organizations (“COSO”) of the ~~enactment~~Treadway Commission “Internal Control — Integrated Framework (2013).” Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of June 30, 2020. Management’s assessment concluded that there was no material weakness within the Company’s internal control structure as of June 30, 2020.

Because of the ~~Sarbanes-Oxley Act~~inherent limitations in all control systems, the Company believes that no system of ~~2002, issuers such~~controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

Other than as F & M Bank Corp. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is recorded , processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

~~As required, we will evaluate the effectiveness of these disclosure controls and procedures on a quarterly basis, and most recently did so as of the end of the period covered by this report.~~

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) of the Act),set forth above, there have ~~concluded that the Company’s disclosure controls and procedures are effective for purposes of Rule 13(a)-15(b).~~

~~Changes in Internal Controls~~

~~The findings of the internal auditor are presented to management of the Bank and to the Audit Committee of the Company. During the period covered by this report, there were~~been no changes to the Company’s internal controls over financial reporting ofthat occurred during the ~~Company~~quarter ended June 30, 2020 that have materially affected, or are ~~reasonably~~reasonable likely to ~~materially~~material affect, on the Company’s internal ~~controls~~control over financial reporting.

Table of Contents

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 –~~

~~There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds –None~~

~~Item 3.~~

~~Defaults Upon Senior Securities – None~~

~~Item 4.~~

~~Mine Safety Disclosures None~~

~~Item 5.~~

~~Other Information – None~~

~~Item 6.~~

~~Exhibits~~

~~(a)~~

~~Exhibits~~

~~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).~~

~~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 Sabanes-Oxley Act of 2002 (filed herewith).~~

~~101~~

The following materials from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

Item 1.	Legal Proceedings

	There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.

Item 1a.	Risk Factors	Not required

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

Item 3.	Defaults Upon Senior Securities	None

Item 4.	Mine Safety Disclosures	None

Item 5.	Other Information	None

Item 6.	Exhibits

(a)

Exhibits

	10.1		F&M Bank Corp. 2020 Incentive Plan

	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 10Q for the period ended June 30, 2020, formatted in Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

	104		The cover page from F&M Bank Corp.’s Quarterly Report on Form 10Q for the period ended June 30, 2020, formatted in Inline XBRL (included with Exhibit 101)

Table of Contents

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.


August 11, 2020		/s/ Mark C. Hanna
		Mark C. Hanna
		President and Chief Executive Officer

	~~By:~~	~~/s/Dean W. Withers~~
		~~Dean W. Withers~~
		~~Title~~

	~~By:~~	/s/ Carrie A. Comer
		Carrie A. Comer
		~~Senior~~ Executive Vice President and Chief Financial Officer

~~November 14, 2017~~

	September 30,	December 31,
	2017	2016*
	(Unaudited)
Assets
Cash and due from banks	$8,801	$7,755
Money market funds	945	674
Federal funds sold	-	7,926
Cash and cash equivalents	9,746	16,355
Securities:
Held to maturity – fair value of $125 in 2017 and 2016	125	125
Available for sale	22,682	24,783
Other investments	13,600	14,567
Loans held for sale	58,177	62,735
Loans held for investment	619,960	591,636
Less: allowance for loan losses	(6,942)	(7,543)
Net loans held for investment	613,018	584,093

Other real estate owned	2,148	2,076
Bank premises and equipment, net	12,716	10,340
Interest receivable	1,845	1,785
Goodwill	3,113	2,670
Bank owned life insurance	13,841	13,513
Other assets	12,674	11,847
Total assets	$763,685	$744,889

Liabilities
Deposits:
Noninterest bearing	$156,922	$146,617
Interest bearing	405,458	390,468
Total deposits	562,380	537,085

Short-term debt	42,128	40,000
Accrued liabilities	17,181	16,885
Long-term debt	50,840	64,237
Total liabilities	672,529	658,207

Stockholders’ Equity
Preferred Stock $5 par value, 400,000 shares authorized, 324,150 and 327,350
Issued and outstanding for September 30, 2017 and December 31, 2016, respectively	7,529	7,609
Common stock, $5 par value, 6,000,000 shares authorized,
3,268,956 and 3,270,315 shares issued and outstanding
for September 30, 2017 and December 31, 2016, respectively	16,345	16,352
Additional paid in capital – common stock	10,621	10,684
Retained earnings	59,233	54,509
Noncontrolling interest in consolidated subsidiaries	594	693
Accumulated other comprehensive loss	(3,166)	(3,165)
Total stockholders’ equity	91,156	86,682
Total liabilities and stockholders’ equity	$763,685	$744,889

	Three Months Ended
	September 30,
Interest and Dividend income	2017	2016
Interest and fees on loans held for investment	$8,221	7,542
Interest and fees on loans held for sale	329	550
Interest from money market funds and federal funds sold	41	11
Interest on debt securities – taxable	97	112
Total interest and dividend income	8,688	8,215

Interest expense
Interest on deposits	698	609
Interest from short-term debt	14	9
Interest from long-term debt	318	352
Total interest expense	1,030	970

Net interest income	7,658	7,245

Provision for Loan Losses	-	-
Net Interest Income After Provision for Loan Losses	7,658	7,245

Noninterest income
Service charges on deposit accounts	359	336
Investment services and insurance income, net	169	112
Mortgage banking income, net	861	694
Title insurance income	247	-
Income on bank owned life insurance	112	119
Low income housing partnership losses	(201)	(183)
ATM and check card fees	353	328
Other operating income	245	129
Total noninterest income	2,145	1,535

Noninterest expense
Salaries	3,194	2,471
Employee benefits	689	699
Occupancy expense	281	215
Equipment expense	224	183
FDIC insurance assessment	20	113
Other real estate owned, net	(4)	19
Marketing expense	147	128
Legal and professional fees	78	100
ATM and check card fees	183	184
Telecommunication and data processing expense	370	309
Directors fees	117	46
Bank franchise tax	167	170
Other operating expenses	793	823
Total noninterest expense	6,259	5,460

Income before income taxes	3,544	3,320
Income tax expense	946	654
Net Income	2,598	2,666
Net income attributable to noncontrolling interest	48	64
Net Income attributable to F & M Bank Corp.	$2,550	$2,602
Dividends paid/accumulated on preferred stock	103	128
Net income available to common stockholders	$2,447	$2,474

Per Common Share Data
Net income – basic	$.75	$.75
Net income – diluted	.70	$.70
Cash dividends on common stock	$.24	$.20
Weighted average common shares outstanding – basic	3,270,969	3,286,756
Weighted average common shares outstanding – diluted	3,632,607	3,731,156

	Nine Months Ended
	September 30,
Interest and Dividend income	2017	2016
Interest and fees on loans held for investment	$23,830	$22,064
Interest and fees on loans held for sale	774	1,451
Interest from money market funds and federal funds sold	116	25
Interest on debt securities – taxable	234	253
Total interest and dividend income	24,954	23,793

Interest expense
Total interest on deposits	1,947	1,757
Interest from short-term debt	46	35
Interest from long-term debt	868	853
Total interest expense	2,861	2,645

Net interest income	22,093	21,148

Provision for Loan Losses	-	-
Net Interest Income After Provision for Loan Losses	22,093	21,148

Noninterest income
Service charges on deposit accounts	1,010	842
Investment services and insurance income	530	317
Mortgage banking income, net	1,974	1,891
Title insurance income	668	-
Income on bank owned life insurance	336	356
Low income housing partnership losses	(587)	(548)
ATM and check card fees	1,034	1,020
Gain on prepayment of long-term debt	504	-
Loss on sale of other investments	(42)	-
Other operating income	513	238
Total noninterest income	5,940	4,116

Noninterest expense
Salaries	8,502	7,161
Employee benefits	2,467	2,113
Occupancy expense	776	643
Equipment expense	613	569
FDIC insurance assessment	200	338
Other real estate owned, net	22	72
Marketing expense	404	396
Legal and professional fees	253	293
ATM and check card fees	529	518
Telecommunication and data processing expense	1,045	861
Directors fees	360	254
Bank franchise tax	491	480
Other operating expenses	2,464	2,176
Total noninterest expense	18,126	15,874

Income before income taxes	9,907	9,390
Income tax expense	2,633	2,187
Net Income	7,274	7,203
Net income attributable to noncontrolling interest	51	154
Net Income attributable to F & M Bank Corp.	$7,223	$7,049
Dividends paid/accumulated on preferred stock	312	382
Net income available to common stockholders	$6,911	$6,667

Per Common Share Data
Net income – basic	$2.11	$2.03
Net income – diluted	1.99	$1.89
Cash dividends on common stock	$.69	$.58
Weighted average common shares outstanding – basic	3,271,863	3,286,165
Weighted average common shares outstanding – diluted	3,634,856	3,730,565

	Nine Months Ended September 30,
	2017	2016
Cash flows from operating activities
Net income	$7,223	$7,049
Reconcile net income to net cash provided by (used in) operating activities:
Depreciation	660	602
Amortization of securities	2	105
Proceeds from loans held for sale originated	61,310	65,553
Loans held for sale originated	(59,250)	(66,706)
Gain on sale of loans held for sale originated	(1,876)	(2,075)
Gain on prepayment of long-term debt	(504)	-
Increase in interest receivable	(60)	29
Increase in other assets	(336)	(66)
Decrease in accrued liabilities	(422)	(1,167)
Amortization of limited partnership investments	587	548
Income from life insurance investment	(336)	(356)
Loss on sale of other investments	42	-
Loss on sale and valuation adjustments for other real estate owned	-	20
Net cash provided by (used in) operating activities	7,040	3,536

Cash flows from investing activities
Purchase of investments available for sale and other investments	(61,432)	(26,109)
Purchase of title insurance company	(304)	-
Proceeds from maturity of investments available for sale	63,811	12,175
Proceeds from the sale of investments	55	-
Net increase in loans held for investment	(29,070)	(35,837)
Net decrease (increase) in loans held for sale participations	4,373	(22,131)
Other real estate improvements	(7)
Proceeds from the sale of other real estate owned	80	623
Net purchase of property and equipment	(3,036)	(2,403)
Net cash used in investing activities	(25,530)	(73,682)

Cash flows from financing activities
Net change in deposits	25,295	33,154
Net change in short-term debt	2,128	26,275
Dividends paid in cash	(2,500)	(2,287)
Proceeds from issuance of common stock	150	132
Proceeds from issuance of long-term debt	-	20,000
Repurchase of preferred stock	(101)	-
Repurchase of common stock	(199)	(421)
Repayments of long-term debt	(12,892)	(3,070)
Net cash provided by financing activities	11,881	73,783

Net (decrease) increase in Cash and Cash Equivalents	(6,609)	3,637
Cash and cash equivalents, beginning of period	16,355	8,519
Cash and cash equivalents, end of period	$9,746	$12,156
Supplemental Cash Flow information:
Cash paid for:
Interest	$2,850	$2,633
Taxes	3,495	2,300
Supplemental non-cash disclosures:
Transfer from loans to other real estate owned	145	592
Change in unrealized gain (loss) on securities available for sale	(2)	-

(dollars in thousands)	For the Nine months ended	For the Three months Ended	For the Nine months ended	For the Three months ended
	September 30, 2017	September 30, 2017	September 30, 2016	September 30, 2016
Earnings available to common stockholders:
Net income	$7,274	$2,598	$7,203	$2,666
Noncontrolling interest income (loss)	51	48	154	64
Preferred stock dividends	312	103	382	128
Net income available to common stockholders	$6,911	$2,447	$6,667	$2,474

	Nine months ended September 30, 2017			Nine months ended September 30, 2016
	Income	Shares	Per Share Amounts	Income	Shares	Per Share Amounts
Basic EPS	$6,911	3,271,863	$2.11	$6,667	3,286,165	$2.03
Effect of Dilutive Securities:
Convertible Preferred Stock	312	362,993	(0.12)	382	444,400	(0.14)
Diluted EPS	$7,223	3,634,856	$1.99	$7,049	3,730,565	$1.89

	Three months ended September 30, 2017			Three months ended September 30, 2016
	Income	Shares	Per Share Amounts	Income	Shares	Per Share Amounts
Basic EPS	$2,447	3,270,969	$.75	$2,474	3,286,756	$.75
Effect of Dilutive Securities:
Convertible Preferred Stock	103	361,638	(0.05)	128	444,400	(0.05)
Diluted EPS	$2,550	3,632,607	$.70	$2,602	3,731,156	$.70

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
September 30, 2017
U. S. Treasuries	$125	$-	$-	$125
December 31, 2016
U. S. Treasuries	$125	$-	$-	$125

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
September 30, 2017
U. S. Treasuries	$22,001	$-	$3	$21,998
Mortgage-backed obligations of federal agencies	539	10	-	549
Equity securities	135	-	-	135
Total Securities Available for Sale	$22,675	$10	$3	$22,682

December 31, 2016
U. S. Treasuries	$24,005	$9	$-	$24,014
Mortgage-backed obligations of federal agencies	634	-	-	634
Equity securities	135	-	-	135
Total Securities Available for Sale	$24,774	$9	$-	$24,783

	Securities Held to Maturity		Securities Available for Sale
	Amortized	Fair	Amortized	Fair
(dollars in thousands)	Cost	Value	Cost	Value
Due in one year or less	$-	$-	$22,001	$21,998
Due after one year through five years	125	125	-	-
Due after five years	-	-	539	549
Due after ten years	-	-	135	135
Total	$125	$125	$22,675	$22,682

	September 30, 2017			December 31, 2016
		Unpaid			Unpaid
	Recorded	Principal	Related	Recorded	Principal	Related
	Investment	Balance	Allowance	Investment	Balance	Allowance
Impaired loans without a valuation allowance:
Construction/Land Development	$4,784	$5,140	$-	$3,296	$3,652	$-
Farmland	1,983	1,983	-	-	-	-
Real Estate	740	740	-	768	768	-
Multi-Family	-	-	-	-	-	-
Commercial Real Estate	300	300	-	1,958	1,958	-
Home Equity – closed end	-	-	-	-	-	-
Home Equity – open end	-	347	-	-	347	-
Commercial & Industrial – Non-Real Estate	162	162	-	170	170	-
Consumer	9	9	-	13	13	-
Credit cards	-	-	-	-	-	-
Dealer Finance	25	25	-	-	-	-
	8,003	8,706		6,205	6,908
Impaired loans with a valuation allowance
Construction/Land Development	5,619	5,619	2,054	6,592	6,592	1,853
Farmland	-	-	-	-	-	-
Real Estate	1,192	1,192	214	1,206	1,206	221
Multi-Family	-	-	-	-	-	-
Commercial Real Estate	-	-	-	952	952	60
Home Equity – closed end	-	-	-	-	-	-
Home Equity – open end	-	-	-	-	-	-
Commercial & Industrial – Non-Real Estate	-	-	-	-	-	-
Consumer	-	-	-	-	-	-
Credit cards	-	-	-	-	-	-
Dealer Finance	48	48	12	87	87	20
	6,859	6,859	2,280	8,837	8,837	2,154
Total impaired loans	$14,862	$15,565	$2,280	$15,042	$15,745	$2,154

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	Average Recorded	Interest Income	Average Recorded	Interest Income	Average Recorded	Interest Income	Average Recorded	Interest Income
	Investment	Recognized	Investment	Recognized	Investment	Recognized	Investment	Recognized
Impaired loans without a valuation allowance:
Construction/Land Development	$5,414	$14	$2,649	$15	$4,870	$64	$2,009	$32
Farmland	1,921	-	-	-	1,900	-	-	-
Real Estate	743	8	778	8	746	25	860	28
Multi-Family	-	-	-	-	-	-	-	-
Commercial Real Estate	200	9	993	77	167	12	674	79
Home Equity – closed end	-	-	-	-	-	-	-	-
Home Equity – open end	347	-	964	(35)	347	-	1,167	8
Commercial & Industrial – Non-Real Estate	164	2	174	2	165	8	177	2
Consumer and credit cards	10	-	7	2	10	-	12	-
Dealer Finance	23	1	24	(1)	22	2	15	1
	8,822	34	5,589	68	8,227	111	4,914	150
Impaired loans with a valuation allowance:
Construction/Land Development	$5,640	$75	$8,429	$112	$6,215	$215	$9,761	$212
Farmland	-	-	-	-	-	-	-	-
Real Estate	1,194	10	1,214	14	1,196	41	994	40
Multi-Family	-	-	-	-	-	-	-	-
Commercial Real Estate	-	-	958	14	-	-	944	42
Home Equity – closed end	-	-	-	-	-	-	-	-
Home Equity – open end	-	-	1,234	(5)	-	-	1,322	14
Commercial & Industrial – Non-Real Estate	-	-	14	(1)	-	-	14	-
Consumer and credit card	-	-	-	-	-	-	-	-
Dealer Finance	59	1	72	-	59	2	72	3
	6,893	86	11,921	134	7,470	258	13,107	311
Total Impaired Loans	$15,715	$120	$17,510	$202	$15,697	$369	$18,021	$461

	30-59 Days Past due	60-89 Days Past Due	Greater than 90 Days	Total Past Due	Current	Total Loan Receivable	Non-Accrual Loans	Recorded Investment >90 days & accruing
September 30, 2017
Construction/Land Development	$62	$1,692	$2,372	$4,126	$70,187	$74,313	$2,788	$-
Farmland	-	1,984	-	1,984	13,594	15,578	-	-
Real Estate	2,250	1,202	536	3,988	173,798	177,786	1,714	-
Multi-Family	-	-	-	-	8,504	8,504	-	-
Commercial Real Estate	840	287	-	1,127	154,383	155,510	-	-
Home Equity – closed end	273	5	-	278	10,911	11,189	-	-
Home Equity – open end	488	100	173	761	54,700	55,461	436	-
Commercial & Industrial – Non- Real Estate	264	110	481	855	37,195	38,050	481	-
Consumer	13	23	5	41	7,287	7,328	5	-
Dealer Finance	1,052	287	148	1,487	72,080	73,567	238	-
Credit Cards	16	16	-	32	2,642	2,674	-	-
Total	$5,258	$5,706	$3,715	$14,679	$605,281	$619,960	$5,662	$-

	30-59 Days Past due	60-89 Days Past Due	Greater than 90 Days)	Total Past Due	Current	Total Loan Receivable	Non-Accrual Loans	Recorded Investment >90 days & accruing
December 31, 2016
Construction/Land Development	$73	$101	$2,175	$2,349	$73,823	$76,172	$2,805	$-
Farmland	-	-	-	-	12,901	12,901	-	-
Real Estate	2,135	746	774	3,655	169,103	172,758	1,399	81
Multi-Family	-	-	-	-	7,605	7,605	-	-
Commercial Real Estate	139	-	-	139	149,922	150,061	-	-
Home Equity – closed end	101	-	32	133	11,320	11,453	32	-
Home Equity – open end	484	-	69	553	53,867	54,420	279	-
Commercial & Industrial – Non- Real Estate	313	5	-	318	30,988	31,306	70	-
Consumer	35	4	6	45	6,598	6,643	-	-
Dealer Finance	797	187	183	1,167	64,328	65,495	178	26
Credit Cards	18	4	-	22	2,800	2,822	-	-
Total	$4,095	$1,047	$3,239	$8,381	$583,255	$591,636	$4,763	$107

September 30, 2017	Beginning Balance	Charge-offs	Recoveries	Provision	Ending Balance	Individually Evaluated for Impairment	Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$3,381	$-	$-	$(213)	$3,168	$2,054	$1,114
Farmland	34	-	-	(4)	30	-	30
Real Estate	843	-	2	(105)	740	214	526
Multi-Family	23	-	-	(2)	21	-	21
Commercial Real Estate	705	-	11	(165)	551	-	551
Home Equity – closed end	75	8	25	(20)	72	-	72
Home Equity – open end	470	25	-	(85)	360	-	360
Commercial & Industrial – Non-Real Estate	586	31	66	(249)	372	-	372
Consumer	78	34	11	55	110	-	110
Dealer Finance	1,289	1,395	816	751	1,461	12	1,449
Credit Cards	59	69	30	37	57	-	57
Total	$7,543	$1,562	$961	$-	$6,942	$2,280	$4,662

September 30, 2017	Loan Receivable	Individually Evaluated for Impairment	Collectively Evaluated for Impairment
Construction/Land Development	$74,313	$10,403	$63,910
Farmland	15,578	1,983	13,595
Real Estate	177,786	1,932	175,854
Multi-Family	8,504	-	8,504
Commercial Real Estate	155,510	300	155,210
Home Equity – closed end	11,189	-	11,189
Home Equity –open end	55,461	-	55,461
Commercial & Industrial – Non-Real Estate	38,050	162	37,888
Consumer	7,328	9	7,319
Dealer Finance	73,567	73	73,494
Credit Cards	2,674	-	2,674
Total	$619,960	$14,862	$605,098

September 30, 2017	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	$-	$730	$12,931	$36,673	$10,285	$4,989	$8,705	$-	$74,313
Farmland	64	333	3,897	4,459	4,348	494	1,983	-	15,578
Real Estate	-	1,404	53,245	95,135	19,963	5,285	2,754	-	177,786
Multi-Family	-	249	2,898	5,177	180	-	-	-	8,504
Commercial Real Estate	-	2,811	43,962	97,798	9,312	1,040	587	-	155,510
Home Equity – closed end	-	130	3,815	4,499	1,298	1,442	5	-	11,189
Home Equity – open end	84	2,612	16,619	31,730	3,771	142	503	-	55,461
Commercial & Industrial (Non-Real Estate)	277	1,460	15,039	19,061	1,368	322	523	-	38,050
Consumer (excluding dealer)	47	362	2,640	415	1,187	2,202	475	-	7,328
Total	$472	$10,091	$155,046	$294,947	$51,712	$15,916	$15,535	$-	$543,719

September 30, 2017	Total	Level 1	Level 2	Level 3

U. S. Treasuries	$21,998	$21,998	$-	$-
Mortgage-backed obligations of federal agencies	549	-	549	-
Equity securities	135	-	135	-
Total securities available for sale	$22,682	$21,998	$684	-

		Fair Value Measurements at September 30, 2017 Using
(dollars in thousands)	Carrying Amount	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Fair Value at September 30, 2017
Assets:
Cash and cash equivalents	$9,746	$9,746	$-	$-	$9,746
Securities	22,807	21,998	809	-	22,807
Loans held for sale	58,177	-	58,177	-	58,177
Loans held for investment, net	613,018	-	-	642,322	642,322
Interest receivable	1,845	-	1,845	-	1,845
Bank owned life insurance	13,841	-	13,841	-	13,841
Total	$719,434	$31,744	$74,672	$642,322	$762,338
Liabilities:
Deposits	$562,380	$-	$398,229	$165,926	$564,155
Short-term debt	42,128	-	42,128	-	42,128
Long-term debt	50,840	-	-	50,943	50,943
Interest payable	239	-	239	-	239
Total	$655,587	$-	$440,596	$216,869	$657,465

	September 30, 2017
		Pre-Modification	Post-Modification
(dollars in thousands)		Outstanding	Outstanding
Troubled Debt Restructurings	Number of Contracts	Recorded Investment	Recorded Investment

Consumer	1	$18	$18
Total	1	$18	$18

	Nine Months ended September 30, 2016
		Pre-Modification	Post-Modification
(dollars in thousands)		Outstanding	Outstanding
	Number of Contracts	Recorded Investment	Recorded Investment
Troubled Debt Restructurings
Real Estate	2	$142	$142
Consumer	3	33	33
Total	5	$175	$175

	Three Months ended September 30, 2016
		Pre-Modification	Post-Modification
(dollars in thousands)		Outstanding	Outstanding
	Number of Contracts	Recorded Investment	Recorded Investment
Troubled Debt Restructurings
Consumer	1	$6	$6
Total	1	$6	$6

(dollars in thousands)	Unrealized Securities Gains (Losses)	Adjustments Related to Pension Plan	Accumulated Other Comprehensive Loss
Balance at December 31, 2016	$6	$(3,171)	$(3,165)
Change in unrealized securities gains (losses), net of tax	(1)	-	(1)
Change in unfunded pension liability, net of tax	-	-	-
Balance at September 30, 2017	$5	$(3,171)	$(3,166)

	Nine Months Ended September 30, 2017
	F&M Bank	VBS Mortgage	TEB Life/FMFS	VS Title	Parent Only	Eliminations	F&M Bank Corp. Consolidated
Revenues:
Interest Income	$24,815	$97	$112	$-	$-	$(70)	$24,954
Service charges on deposits	1,010	-	-	-	-	-	1,010
Investment services and insurance income	1	-	529	-	-	-	530
Mortgage banking income, net	-	1,974	-	-	-	-	1,974
Title insurance income	-	-	-	668	-	-	668
Income from bank owned life insurance	336	-	-	-	-	-	336
Low income housing partnership losses	(587)	-	-	-	-	-	(587)
ATM and check card fees	1,034	-	-	-	-	-	1,034
Gain on prepayment of long-term debt	504	-	-	-	-	-	504
Loss on investments	-	(40)	(2)	-	-	-	(42)
Other operating income	513	-	-	-	-	-	513
Total income	27,626	2,031	639	668	-	(70)	30,894
Expenses:
Interest Expense	2,866	65	-	-	-	(70)	2,861
Provision for loan losses	-	-	-	-	-	-	-
Salary expense	6,781	1,035	341	345	-	-	8,502
Employee benefit expense	2,245	168	-	54	-	-	2,467
Occupancy expense	624	115	-	37	-	-	776
Equipment expense	551	39	-	23	-	-	613
FDIC insurance assessment	200	-	-	-	-	-	200
Other real estate owned, net	22	-	-	-	-	-	22
Marketing expense	352	42	6	4	-	-	404
Legal and professional fees	246	7	-	-	-	-	253
ATM and check card fees	526	3	-	-	-	-	529
Telecom and data processing expense	967	78	-	-	-	-	1,045
Directors fees	315	45	-	-	-	-	360
Bank franchise Tax	491	-	-	-	-	-	491
Other operating expenses	2,127	262	17	54	4	-	2,464
Total expense	18,313	1,859	364	517	��4	(70)	20,987
Income tax expense (benefit)	2,603	-	83	-	(53)	-	2,633
Net income	$6,710	$172	$192	$151	$49	$-	$7,274
Net income attributable to noncontrolling interest	-	51	-	-	-	-	51
Net Income attributable to F & M Bank Corp.	$6,710	$121	$192	$151	$49	$-	$7,223
Total Assets	$750,048	$6,309	$6,644	$443	$91,362	$(91,121)	$763,685
Goodwill	$2,670	$103	$-	$-	$340	$-	$3,113

	Three Months Ended September 30, 2017
	F&M Bank	VBS Mortgage	TEB Life/FMFS	VS Title	Parent Only	Eliminations	F&M Bank Corp. Consolidated
Revenues:
Interest Income	$8,644	$32	$37	$-	$-	$(25)	$8,688
Service charges on deposits	359	-	-	-	-	-	359
Investment services and insurance income	-	-	169	-	-	-	169
Mortgage banking income, net	-	861	-	-	-	-	861
Title insurance income	-	-	-	247	-	-	247
Income from bank owned life insurance	113	-	-	-	-	-	113
Low income housing partnership losses	(201)	-	-	-	-	-	(201)
ATM and check card fees	352	-	-	-	-	-	352
Gain on prepayment of long-term debt	-	-	-	-	-	-	-
Loss on investments	-	-	-	-	-	-	-
Other operating income	246	-	-	-	-	-	246
Total income	9,513	893	206	247	-	(25)	10,834
Expenses:
Interest Expense	1,032	24	-	-	-	(25)	1,031
Provision for loan losses	-	-	-	-	-	-	-
Salary expense	2,326	586	107	175	-	-	3,194
Employee benefit expense	722	1	-	(34)	-	-	689
Occupancy expense	221	48	-	12	-	-	281
Equipment expense	192	20	-	12	-	-	224
FDIC insurance assessment	20	-	-	-	-	-	20
Other real estate owned, net	(3)	-	-	-	-	-	(3)
Marketing expense	136	8	2	2	-	-	148
Legal and professional fees	75	3	-	-	-	-	78
ATM and check card fees	182	1	-	-	-	-	183
Telecom and data processing expense	342	28	-	-	-	-	370
Directors fees	105	11	-	-	-	-	116
Bank franchise Tax	166	-	-	-	-	-	166
Other operating expenses	767	2	4	20	-	-	793
Total expense	6,283	732	113	187	-	(25)	7,290
Income tax expense (benefit)	933	-	30	-	(17)	-	946
Net income	$2,297	$161	$63	$60	$17	$-	$2,598
Net income attributable to noncontrolling interest	-	48	-	-	-	-	48
Net Income attributable to F & M Bank Corp.	$2,297	$113	$63	$60	$17	$-	$2,550

In thousands	2017	2016
Net Income from Bank Operations	$7,023	$6,836
Income from Parent Company Activities (2017 includes VSTitle)	200	213
Net Income for the nine months ended September 30	$7,223	$7,049

	September 30, 2017	December 31, 2016
Nonaccrual Loans
Real Estate	$4,502	$4,204
Commercial	481	70
Home Equity	436	311
Other	243	178
	5,662	4,763

Loans past due 90 days or more (excluding nonaccrual)
Real Estate	-	81
Commercial	-	-
Home Equity	-	-
Other	-	26
	-	107

Total Nonperforming loans	$5,662	$4,870

Restructured Loans current and performing:
Real Estate	7,714	8,641
Commercial	162	1,121
Home Equity	-	-
Other	64	76

Nonperforming loans as a percentage of loans held for investment	.91%	.82%

Net charge offs to total loans held for investment	.10%	.21%

Allowance for loan and lease losses to nonperforming loans	122.61%	154.89%

	0 – 3	4 – 12	– 5	Over 5	Not
	Months	Months	Years	Years	Classified	Total
Uses of funds
Loans
Commercial	$35,015	$31,260	$123,304	$28,063	$-	$217,642
Installment	4,206	1,291	60,608	14,790	-	80,895
Real estate loans for investments	92,354	61,061	160,463	4,871	-	318,749
Loans held for sale	58,177	-	-	-	-	58,177
Credit cards	2,674	-	-	-	-	2,674
Interest bearing bank deposits	945	-	-	-	-	945
Federal funds sold	-	-	-	-	-	-
Investment securities	21,998	125	-	549	135	22,807
Total	$215,369	$93,737	$344,375	$48,273	$135	$701,889

Sources of funds
Interest bearing demand deposits	$-	$33,236	$71,407	$19,086	$-	$123,729
Savings deposits	-	23,515	70,547	23,516	-	117,578
Certificates of deposit $100,000 and over	3,250	18,551	38,335	-	-	60,136
Other certificates of deposit	12,730	33,996	57,289	-	-	104,015
Short-term borrowings	42,128	-	-	-	-	42,128
Long-term borrowings	1,107	3,407	35,701	10,625	-	50,840
Total	$59,215	$112,705	$273,279	$53,227	$-	$498,426

Discrete Gap	$156,154	$(18,968)	$71,096	$(4,954)	$135	$203,463

Cumulative Gap	$156,154	$137,186	$208,282	$203,328	$203,463

Ratio of Cumulative Gap to Total Earning Assets	22.25%	19.55%	29.67%	28.97%	28.99%