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

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

~~[ ]~~March 31, 2023

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

Commission File Number: 000-13273

~~F & M BANK CORP.~~

F&M BANK CORP.

Virginia

54-1280811

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

P. O. Box 1111

Timberville, Virginia 22853

(Address of Principal Executive Offices) (Zip Code)

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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

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

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

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~~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~~April 30, 2023
Common Stock, par value -‑ $5 per share	~~3,269,052~~	3,476,500 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 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022		3

	Consolidated Statements of Income – Three MonthsEnded ~~September 30, 2017~~March 31, 2023 and ~~2016~~ 2022		4

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

	Consolidated Statements of Comprehensive Income (Loss) – Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	6	5

	Consolidated Statements of Changes in Stockholders’ Equity – ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	7	6

	Consolidated Statements of Cash Flows – ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	8	7

	Notes to Consolidated Financial Statements	9	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34	40

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

Item 4.	Controls and Procedures		48

Part II	Other Information		49

Item 1.	Legal Proceedings		49

Item 1a.	Risk Factors		49

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

Item 3.	Defaults upon Senior Securities		49

Item 4.	Mine Safety Disclosures		49

Item 5.	Other Information		49

Item 6.	Exhibits		50

Signatures			51

Certifications


~~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

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

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

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

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

Commitments and contingencies

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

*~~2016 Derived~~2022 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
	March 31,
	2023			2022
*Interest and Dividend income*
Interest and fees on loans held for investment	$	10,854		$	7,510
Interest and fees on loans held for sale		22			29
Interest from money market funds and federal funds sold		84			25
Interest on debt securities		2,014			1,497
Total interest and dividend income		12,974			9,061

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

*Net interest income*		7,828			8,057

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

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

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

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

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

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Comprehensive Income

(Loss)

(~~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

	Three Months Ended March 31,
	2023			2022

Net Income	$	1,055		$	2,528

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

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

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

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

Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

~~Consolidated Statements of Comprehensive Income~~

~~(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

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

~~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 March 31, 2023 and 2022.

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

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

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

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

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)
  -

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

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

Consolidated Financial Statements

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Notes to the Consolidated Financial Statements

Note 1.

Summary of Significant Accounting Policies

Principles of Consolidation

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

The accounting and reporting policies of ~~noncontrolling interest) and were prepared in accordance with~~the Company conform to accounting principles generally accepted in the United States of America (“~~U.S.~~ GAAP”) ~~for~~and to accepted practices within the ~~interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all~~banking industry.

Use of the information and footnotes required by U. S. GAAP for complete financial statements. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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 (the “2016 Form 10-K”).

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

~~Nature of Operations~~

F & M Bank Corp. (the “Company”), through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily located in Rockingham, Shenandoah, Page and Augusta Counties in Virginia. Services are provided at thirteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc (FMFS), VBS 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~~

Estimates

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

credit losses.

Reclassification

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

~~Note 1.~~

~~Summary~~

Nature of ~~Significant~~ Operations

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

Cash and Cash Equivalents

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

Accounting ~~Policies, continued~~

Standards Adopted in 2023

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

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

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

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

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

Allowance for Credit Losses – Held to Maturity Securities

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

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

Allowance for Credit Losses – Available for Sale Securities

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

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

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

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

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Loans

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

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

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

Allowance for Credit Losses – Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for Credit Losses – Unfunded Commitments

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

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

Earnings per Share

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

~~Net income available~~as the holder is entitled to ~~common stockholders represents consolidated net income adjusted~~full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends.

Recent Accounting Pronouncements

Accounting Standards adopted in 2023:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for ~~preferred dividends declared.~~

~~The following table provides a reconciliation of net income to net income available to common stockholders~~financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for ~~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

~~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

~~Note 2.~~

~~Investment Securities~~

~~Investment securities~~ available for sale ~~are carried~~securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments, was $1.5 million. The adjustment net of tax recorded to stockholders’ equity totaled $1.2 million. See Note 1 for additional details of adoption of this standard.

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

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

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

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

Accounting Standards Pending Adoption:

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

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

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

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

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

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

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

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

Note 2. Investment Securities

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

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

There is no allowance for credit losses on held to maturity securities. At March 31, 2023, the ~~consolidated balance sheets at their amortized cost at September~~Company had no securities held-to-maturity that were past due 30 ~~2017 and December~~days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the quarter ended March 31, ~~2016 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

2023.

Table of Contents

The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized 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~~

follows (dollars in thousands):

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

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

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

The amortized cost and fair value of securities at ~~September 30, 2017,~~March 31, 2023, by contractual maturity are shown ~~below.~~below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities Held to Maturity

Securities Available for Sale

Amortized

Fair

Amortized

Fair

(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
	Cost		Value		Cost		Value
Due in one year or less	$	125	$	114	$	21,010	$	20,412
Due after one year through five years		-		-		187,096		172,416
Due after five years		-		-		78,775		67,580
Due after ten years		-		-		149,232		127,840
Total	$	125	$	114	$	436,113	$	388,248

There were no ~~gains or losses on~~ sales of available for sale securities in the ~~three month~~first quarter of 2023 or ~~nine month periods ended September 30, 2017 or 2016. There~~2022.

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

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

Unrealized losses at March 31, 2023 were ~~also no securities with other than temporary impairment.~~

Ingenerally attributable to changes in market interest rates and interest spread relationships since the ~~three months ended September 30, 2017, the treasury~~investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

Table of Contents

The following table shows the gross unrealized losses and estimated fair value of available sale securities and held to maturity securities aggregated by category and length of time that securities have been in ana continuous unrealized loss ~~position. There were no securities~~position at December 31, 2022 (dollars in ~~an unrealized loss positions for more than twelve months as~~thousands):

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

As of ~~September 30, 2017.~~

~~Other~~March 31, 2023, other investments consist of investments in ~~nineteen~~thirteen low-income housing and historic equity partnerships (carrying basis of ~~$7,607,198)~~$5.7 million), stock in the Federal Home Loan Bank of Atlanta (“FHLB’) (carrying basis ~~$4,523,700)~~$2.97 million) and various other investments (carrying basis ~~$1,469,572)~~$1.9 million). The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of ~~September 30, 2017.~~March 31, 2023. At ~~September 30, 2017,~~March 31, 2023, the Company was committed to invest an additional ~~$4,231,047~~$775 thousand in ~~nine~~three low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in ~~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

Loans ~~held~~and Allowance for ~~investment~~Credit Losses

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

The following is a summary of the major categories of total loans outstanding at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016 are summarized as follows:~~

2022 (dollars in thousands):

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

Table of Contents

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

The Company has pledged loans held for investment as collateral for borrowings with the ~~Federal Home Loan Bank of Atlanta~~FHLB totaling ~~$213,184,000~~$248.8 million and ~~$199,401,000~~$209.8 million as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, respectively. The Company maintains a blanket lien on certain loans in its ~~entire~~ residential real estate, ~~portfolio and certain~~ commercial, agricultural farmland, and home equity ~~loans.~~

~~Note 3.~~

portfolios.

Nonaccrual and Past Due 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~~table shows the aging of ~~information pertaining to impaired loans~~the Company’s loan portfolio, by class, at March 31, 2023 (dollars in ~~thousand)~~thousands):

~~The Recorded Investment is defined as the original principal balance less principal payments, charge-offs~~

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

There were $1.7 million and $2.2 million in nonaccrual ~~payments applied to principal.~~

~~Loans held for sale consists of~~ loans originated by VBS 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 30, 2017at March 31, 2023 and December 31, ~~2016 were $58,177,450~~2022, respectively. The Company would have earned $28 thousand in the first quarter of 2023 and ~~$62,734,803, respectively.~~

~~Note 3.~~

~~Loans Held for Investment, continued~~

$54 thousand in the first quarter of 2022, if interest on the nonaccrual loans had been accrued.

Table of Contents

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

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

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

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

Table of Contents

The following table represents the accrued interest receivables written off by reversing interest income ~~recognized for impaired loans~~during the three months ended March 31, 2023 (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

~~Note 3.~~

~~Loans, continued~~

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

Table of Contents

Credit Quality Indicators

The following table presents the ~~aging of the recorded investment of past due loans (dollars in thousands) as of September 30, 2017 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 30, 2017 and December 31, 2016, other real estate owned included $711,000 and $565,000 of foreclosed residential real estate. The Company has $93,000 of consumer mortgages for which foreclosure is in process at September 30, 2017 and $40,000 at December 31, 2016.

~~Nonaccrual loans at September 30, 2017 and September 30, 2016, would have earned approximately $109,000 and $54,000, respectively, in interest income had they been accruing loans.~~

~~Note 4.~~

~~Allowance for Loan Losses~~

~~A summary of changes in the allowance for loan losses (dollars in thousands) for September 30, 2017 and December 31, 2016 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

~~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~~Company’s recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023 (dollars in thousands) ~~based on impairment method~~:

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

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

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

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

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

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

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

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

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

Table of Contents

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

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

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

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

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

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

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

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

Under the adoption of ASC 326, the Company consolidated their internal risk ratings 1 through 5 into a pass category. Doubtful loans are charged off; dealer finance loans utilize the updated credit quality indicators. Credit cards are classified as ~~of September 30, 2017~~pass or substandard. The credit quality indicators for watch 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

~~Note 4.~~

~~Allowance for Loan Losses, continued~~

~~The following table shows~~substandard remain unchanged.

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

Pass: Loans in all classes that comprise the commercial and consumer portfolio ~~broken down by internal loan grade (dollars in thousands) as of September 30, 2107 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

~~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

~~Description of internal loan grades:~~

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

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

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

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

~~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~~segments that are ~~currently past due on obligations or~~not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with ~~unpaid, undisputed judgments.~~

the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

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

Table of Contents

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

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

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

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

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

Description of internal loan grades under Incurred Loss:

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

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

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

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

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Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

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

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

Collateral Dependent Disclosures

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

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

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

Allowance for Credit Losses

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

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

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

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

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

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

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

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

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

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

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

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

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

Modifications Made to Borrowers Experiencing Financial Difficulty

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

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

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

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

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

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

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

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

Unfunded Commitments

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

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

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

Note 4. Mortgage Banking and Derivatives

Loans Held for Sale

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company uses fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business totaled $1.2 million as of March 31, 2023 of which $1.2 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Interest Rate Lock Commitments and Forward Sales Commitments

The Company, through F&M Mortgage, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (IRLCs). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment).

The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation. The Company determines the fair value of the IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate loan commitments will close.

The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at March 31, 2023, and totaled $99 thousand, with a notional amount of $13.1 million and total positions of 40. The fair value of the IRLCs were reported in the “Other liabilities” in the Consolidated Balance Sheet at December 31, 2022 and totaled $92 thousand, with a notional amount of $12.2 million and total positions of 38. Changes in fair value are recorded as a component of “Mortgage banking income” in the Consolidated Income Statement for the period ended March 31, 2023 and 2022. The Company’s IRLCs are classified as Level 2. At March 31, 2023 and December 31, 2022, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

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

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Note 5.

Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31^st as the measurement date for the defined benefit pension plan. The ~~Bank does not expect~~plan was amended on February 15, 2023 to ~~contribute to~~stop the ~~pension plan in 2017.~~

accrual of future benefits. The following is a summary of net periodic pension costs for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2023 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

2022 (dollars in thousands):

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

Note 6.

Stock-Based Compensation

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

Note 7. Fair Value

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

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

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

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

~~Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.~~

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

~~Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.~~

~~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.

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

Securities

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

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

Derivative assets – IRLCs

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

Derivative Asset/Liability – Forward Sale Commitments

The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using ~~discounted cash flow analysis from observable-market based inputs, which~~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 ~~considered~~classified Level ~~2 inputs.~~

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 (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
  -

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

Table of Contents

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

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

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

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

Collateral Dependent Loans ~~Held~~with an ACL

In accordance with ASC 326, we maydetermine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for ~~Sale~~

~~Loans held~~expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for ~~sale~~credit losses are ~~short-term loans purchased at par for resale~~determined by analyzing the borrower’s ability to ~~investors at~~repay amounts owed, collateral deficiencies, the ~~par value~~relative risk grade of the loan and ~~loans originated by VBS for~~economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale 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.~~

~~Note 6.~~

~~Fair Value, continued~~

~~Impaired Loans~~

~~Loans~~collateral. In such cases, expected credit losses 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 discountedcollateral at the ~~current rate~~measurement date, adjusted for estimated selling costs if satisfaction of the loan ordepends on the ~~rate prior to modification if~~sale of the ~~loan is a troubled debt restructure.~~

~~Loans measured using~~collateral. We reevaluate 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~~supporting collateral ~~is real estate.~~dependent loans on a quarterly basis. The ~~Company bases collateral method~~ fair ~~valuation upon the “as-is” value of independent appraisals or evaluations.~~

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

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

Professional Appraisal Practice.

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

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

~~Note 6.~~

~~Fair Value, continued~~

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

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

Table of Contents

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

March 31, 2023 and December 31, 2022 (dollars in thousands):

		Fair Value at ~~September 30, 2017~~March 31, 2023	Valuation Technique	Significant Unobservable Inputs	Range
~~(dollars in thousands)~~
~~Impaired~~ Collateral Dependent Loans	$~~4,579~~	292 thousand	Discounted appraised value	Discount for selling costs and marketability	~~3%-19% (Average 5.1%)~~ 62%

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


		Fair Value at December 31, ~~2016~~2022	Valuation Technique	Significant Unobservable Inputs	Range
~~(dollars in thousands)~~
Impaired Loans	$~~6,683~~	2,590 thousand	Discounted appraised value	Discount for selling costs and marketability	~~2%-50%~~ 10.00%-33.00% (Average ~~4.7%~~19.00%)

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The Company markets other real estate owned and assets held for sale both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.

The ~~following table summarizes the Company’s~~Company did not have any other real estate owned ~~that were measured at fair value on a nonrecurring basis~~ as of ~~September 30, 2017 and~~March 31, 2023 or December 31, ~~2016 (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

~~The following table presents information~~2022.

Note 8. Disclosures about ~~Level 3 Fair Value Measurements for September 30, 2017:~~

	~~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%)~~

~~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 7. Disclosures 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 March 31, 2023 and December 31, 2022. Fair values for March 31, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.

Table of Contents

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

~~Note 8.~~

~~Troubled Debt Restructuring~~

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

During the nine months ended September 30, 2017, there was one loan modification that was considered to be troubled debt restructuring. This loan was modified during the three months ended June 30, 2017, there were no loan modifications that would be considered a troubled debt restructuring during the first or third quarters of 2017. 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 30, 2017, 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.

During the nine months ended September 30, 2016, there were seven loan modifications that were considered to be troubled debt restructurings, however since then one has paid off 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 the quarter ended September 30, 2016, there was one loan modification that was considered 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

thousands):

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

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

Table of Contents

Note 9.

Accumulated Other Comprehensive Loss

The ~~balances in~~following tables present components of accumulated other comprehensive loss ~~are shown~~for the periods stated (dollars in ~~the following tables for September 30, 2017 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)

thousands).

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

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

There were no reclassifications adjustments reported on the consolidated statements of income during the three months ended March 31, 2023 or ~~nine months periods ended September 30, 2017 or 2016.~~

2022.

Note 10.

~~Business Segments~~

The Company utilizes its subsidiaries to provide multiple business segments including retail banking, mortgage banking, title insurance services, investment services and credit life and accident and health insurance products related to lending. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage Banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from title insurance services, investment services and insurance products consist of commissions on products provided. The following tables represent revenues and expenses by segment for the three and nine months ended September 30, 2017 and 2016.

~~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

~~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

~~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~~FHLB short-term borrowings to support ~~the~~ loans ~~held for sale participation program~~growth and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. ~~Short-term~~There was $55.0 million in short-term debt ~~totaled $42,128,000~~ at ~~September 30, 2017~~March 31, 2023 and ~~has increased $2,128,000 from $40~~$70.0 million short-term debt at December 31, ~~2016;~~2022.

Long-term Debt

On July 29, 2020, the ~~total~~Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of ~~increase was~~6.00% fixed to floating rate subordinated notes due July 31, 2030. The note will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in ~~Federal~~arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at March 31, 2023.

Note 11. Revenue Recognition

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

Table of Contents

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 ~~purchased.~~

~~Long-term Debt~~

and other investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.

Title Insurance Income

VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate transaction is completed.

ATM and Check Card Fees

ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

Other

Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, online payment fees, cashier’s checks, mobile banking fees and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

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

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

Table of Contents

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2023 and December 31, 2022, the Company did not have any significant contract balances.

Contract Acquisition Costs

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

Note 12. Leases

The Company adopted ASU No. 2016-02 “Leases (Topic 842)” and ~~provide liquidity.~~all subsequent ASUs that modified Topic 842. The ~~interest rates on long-term debt~~Right-of-use assets and lease liabilities are ~~fixed~~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 ~~time~~Company’s incremental borrowing rate in effect at the commencement date of the ~~advance~~lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and ~~range~~are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from ~~1.16% to 2.56%;~~ the ~~weighted average interest rate was 1.86% and 1.80% at September 30, 2017 and December 31, 2016, respectively.~~ lessor.

The ~~balance~~Company’s long-term lease agreements are classified as operating leases. Certain of these ~~obligations at September 30, 2017~~leases offer the option to extend the lease term and December 31, 2016 were $50,661,000 and $63,982,000 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 of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.

~~In addition,~~ the Company has ~~a note payable to purchase a lot adjacent to one~~included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

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

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

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

Table of Contents

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

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

Note 13. Subsequent Events

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

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

On April 27, 2023 the Bank purchased property at 141 East Market Street in Harrisonburg, Virginia. This location will expand the Bank’s service offerings and customer support and accommodate future growth. The property has banking history, serving as the location of the headquarters of the former Rockingham Bank and as a branch or office location for ~~$170,000 at September 30, 2017 that is payable in two remaining annual payments on January 1, 2018 and 2019. There was $255,000 outstanding on this note at December 31, 2016.~~

~~VS Title, LLC has a note payable for vehicle purchases with a balance of $9,000 at September 30, 2017.~~

its successors.

Table of Contents

Item 2.

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

(dollars in thousands)

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~~Bank.The Company held a majority ownership in ~~VBS~~VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage, ~~LLC (VBS) and~~until the Company purchased F ~~& M Bank Corp. holds a majority ownership~~&M Mortgage’s minority interest in ~~VS Title LLC (VST).~~

VST on January 3, 2022.

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

and the cities of Harrisonburg, Staunton, Waynesboro and Winchester.

Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2022 (the “2022 Form ~~10-K.~~

10-K”).

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Forward-Looking Statements

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

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: 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, ~~and~~the financial strength of borrowers, consumer spending and savings ~~habits.~~

~~We do not update any forward-looking statements that may be made from time~~habits, geopolitical conditions, and exposure to ~~time by or on behalf~~fraud, negligence, computer theft and cyber-crime, and other factors described in Item 1A., “Risk Factors,” in the Company’s 2022 Form 10-K.

Critical Accounting Policies

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

~~Item 2.~~

~~Management's~~

The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of March 31, 2023 were unchanged from the policies disclosed in the 2022 Form 10-K within the section “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations (Continued)~~

~~Critical Accounting Policies~~

~~General~~

~~The Company’s financial statements are prepared in accordance with accounting principles generally accepted in~~Operations” except for the ~~United States~~adoption of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect 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 fair value of the investment portfolio is based on period end valuations but changes daily with the market. 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.

~~Allowance for Loan Losses~~

~~Allowances for loans are determined by applying estimated loss factors~~ASC 326. See Note 1 to the ~~portfolio based on management’s evaluation and “risk grading” of the loan portfolio. Specific allowances are typically provided on all impaired loans~~Consolidated Financial Statements in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposurePart I, Item 1 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 the Allowance for Loan Losses discussion in the Management Discussion and Analysis.~~

~~Goodwill and Intangibles~~

ASC 805 “Business Combinations” and ASC 350 “Intangibles” require that the acquisition method 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 are in evidence. ASC 350 also requires that reporting units be 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.~~

~~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 fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

additional information.

Overview

Net income for the ~~nine months ended September 30, 2017~~first quarter of 2023 was ~~$7,223,000~~$1.1 million or ~~$1.99~~$0.30 per ~~diluted~~ share, compared to ~~$7,049,000~~$2.5 million or ~~$1.89 in the same period in 2016, an increase of 2.47%. During the nine months ended September 30, 2017, noninterest~~$0.74 per share for first quarter 2022. Interest income ~~increased 44.31% and noninterest expense increased 14.19% during the same period. Net income from Bank operations adjusted~~ 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~~ the three months ended ~~September 30, 2017, net income~~March 31, 2023, increased $3.9 million over the prior year first quarter, due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $5.1 million for the first quarter, up $4.1 million over first quarter 2022.

During first quarter 2023, there was ~~$2,550,000 or $.70 per diluted share, compared to $2,602,000 or $.70~~no provision for credit losses while a recovery of loan losses of $450 thousand was recorded in first quarter 2022. Effective January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326)” which changed the methodology used in the ~~same period in 2016,~~calculation of allowance for loan losses from the incurred loss method to the current expected credit loss model (“CECL”). As a result of the adoption, the Company recorded a one-time adjustment to increase the allowance for credit losses on loans (“ACLL”) of $777 thousand and established a reserve for unfunded commitments of $749 thousand. The accounting standard requires the one-time adoption adjustment to be offset against retained earnings and any future adjustments to be charged to provision expense. At March 31, 2023, the ACLL totaled $8.5 million or 1.13% of gross loans.

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Results of Operations

Net Interest Income

For first quarter 2023, net interest income totaled $7.8 million, a decrease of ~~2.00%~~$229 thousand from the first quarter of 2022, resulting in a decrease in our net interest margin by 0.06%. InInterest income and fees on loans were $3.3 million higher due to higher rates on variable rate loans and $97.4 million in loan growth since first quarter 2022. Income from cash and securities was $576 thousand higher due to increased interest rates.

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

The net interest margin was 2.76% and 2.82% for the three months ended ~~September 30, 2017,~~March 31, 2023 and 2022, respectively. The lower net interest margin was due to higher cost of funds, partially offset by higher yields on interest-earning assets.

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

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

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

Net interest margin						2.76	%						2.82	%

^{________________________}

¹ Annualized.

² Interest income on loans includes loan fees.

³ Loans held for investment include nonaccrual loans.

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

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

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

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

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

Noninterest Income

Noninterest income totaled $1.9 million for first quarter 2023, which was a decrease of $599 thousand from the first three months of 2022. The primary reason for the decrease in noninterest income ~~increased 39.80%~~from 2022 was a reduction of $508 thousand in mortgage banking income. There were fewer mortgage loans sold on the secondary market due to an overall decrease in volume and, a shift in production from the 30-year fixed rate product to variable rate products which were retained in the Bank’s loan portfolio. The overall decline in mortgage banking activity also negatively impacted VSTitle income which declined by $225 thousand from the first quarter of 2022 to the same quarter in 2023. Service charges on deposit accounts decreased by $82 thousand due to a change in the method used to charge NSF and Overdraft fees. These decreases were partially offset by increases of $82 thousand in investment and insurance income and $64 thousand in ATM and debit card interchange income.

Noninterest Expense

Noninterest expenses totaled $8.7 million in first quarter 2023, compared to $8.6 million in the first quarter of 2022. The year-over-year increases were spread over several categories of noninterest expenses including salary and employee benefits expense, ~~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

~~Item 2.~~

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

~~Results of Operations~~

data processing fees. The increase in ~~noninterest~~salary expense resulted from an increase in the minimum wage paid by the Bank in August 2022 and a one-time severance accrual made during the quarter. These amounts were partially offset by a decrease in pension expense of $195 thousand.

Income Taxes

For the three months ended March 31, 2023 and March 31, 2022, income tax benefit was $51 thousand and $88 thousand, respectively, and the effective income tax rate was 5.1% and 3.6%, respectively. Our effective tax rate differs from the 21% federal statutory rate due to the impact of ~~$1,824,000~~various permanent tax differences, including tax-exempt income from municipal securities, BOLI income, tax credits from low-income housing tax credit investments, and the vesting of other stock-based compensation.

Balance Sheet

Overview

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

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Securities Available for Sale (“AFS”)

Our AFS securities portfolio is reported at fair value, which is determined based on market prices of similar instruments. Total securities available for sale were $388.2 million at March 31, 2023, compared to $392.1 million at December 31, 2022. This represents a decrease of $3.8 million or 1.0%. The average balance during the ~~nine-month period~~first quarter of 2023 was $397.0 million, compared to $434.1 million during the first quarter of 2022. The average AFS securities portfolio represented 34.4% and ~~$611,000 for the three-month period ended September 30, 2017~~37.4% of average earning assets in first quarters 2023 and 2022, respectively. The year-over-year decrease in average AFS securities is primarily due to the ~~gain on prepayment of FHLB debt of $504,000 (first quarter) and~~decline in the ~~acquisition of VS Title LLC which contributed $668,000 for the year to date 2017. Exclusive~~market value of the ~~FHLB debt gain, noninterest income increased 32.07% for the nine month period. During the nine month period compared to the first nine months~~securities of ~~2016, other areas~~$27.4 million coupled with normal paydowns of ~~increase are service charges on deposits ($168,000), mortgage banking income ($83,000)~~mortgage-backed securities and ~~investment services and insurance ($213,000). For the three months ended September 30, 2017 noninterest income increased 39.80%, with increase primarily~~municipal bond maturities.

Net unrealized losses related to ~~VS Title 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 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. During the three months ended September 30, 2017 areas of increase were salary and benefits ($566,000), equipment expense ($78,000) and telecommunications and data processing ($61,000). Increases in salaries and benefits relate to normal salary increases, additional staff to support new branch locations and growth at VBS Mortgage, increased cost of insurance and the acquisition of VSTitle. Occupancy and telecommunications and data processing also increased as a result of branching activities.

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

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

Year to date, the combination of the increase in yield on assets and the increase in cost of funds coupled with changes in balance sheet leverage has resulted in the net interest margin increasing to 4.47% at September 30, 2017, an increase of 14 basis points when compared to the same period in 2016. The net interest margin for the three months ended September 30, 2017 of 4.48% is an increase from 4.23% for the three months ended September 30, 2016. The growth is driven by increases in yield and balance sheet mix. A schedule of the net interest margin for the three and nine month periods ended September 30, 2017 and 2016 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:~~

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% of rate sensitive assets and 34.49% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively flat yield curve, management has kept deposit rates low. The growth in earning assets and the growth in noninterest bearing accounts has resulted in the decrease in the positive GAP position in the one year time period.

~~Item 2.~~

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

~~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% to 1.25% 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 in federal funds sold have decreased and interest bearing bank deposits have remained flat since year end due to changes in the composition of the balance sheet.

~~Securities~~

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

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

~~As of September 30, 2017,~~ the fair value of securities ~~available for sale exceeded their cost by $7,000.~~AFS decreased $3.4 million in the first quarter of 2023 to $47.9 million, from $51.2 million at December 31, 2022 . The portfolio is made up of primarily ~~U.S.Treasury~~U.S. Treasury, U.S Agency and mortgage-backed securities ~~with an~~issued by federal agencies, as well as securities issued by municipal bonds and corporate debt securities. The unrealized loss is driven by the increase in market interest rates, not credit quality. The average ~~portfolio life~~maturity 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. There are $22,000,000 in securities that will mature in 2017.

~~In reviewing investments as of September 30, 2017 and December 31, 2016, 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.~~

is 5.08 years.

Loan Portfolio

The local economy that 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 loan concentrations within the portfolio in construction~~Bank also makes automobile and ~~development lending. Management and the Board of Directors review this concentration and other potential areas of concentration quarterly.~~

recreational vehicle loans through its Dealer Finance division.

Loans Held for Investment of ~~$619,960,000~~$756.9 million increased ~~$28,324,000 at September 30, 2017~~$13.3 million during the three months ended March 31, 2023 compared to $743.6 million at December 31, ~~2016. The following categories experienced growth: farmland, real estate, multi-family, commercial and industrial, consumer and dealer finance.~~

2022. As a percentage of average earning assets, average loans were 64.9% for the quarter ended March 31, 2023, compared with 56.5% for the quarter ended March 31, 2022.

Loans Held for Sale totaled ~~$58,177,000 at September 30, 2017,~~$1.2 million on March 31, 2023, a decrease of ~~$4,558,000~~$131 thousand compared to $1.4 million at December 31, ~~2016.~~ 2022. Loans Held for Sale consists of F&M Mortgage loans, which are subject to changes in interest rates, seasonal fluctuations, and refinance activity. Most of the mortgage loans held for sale have been precommitted to investors, which minimizes the interest rate risk.

Provision for Credit Losses

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

Management has ~~experienced~~developed a ~~decline~~comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in ~~volume~~current loan-specific risk characteristics such as differences in ~~2017 due~~underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Allowance for Credit Losses - Loans" section of Note 1 to the ~~mortgage environment.~~

~~Item 2.~~

~~Management's Discussion~~Consolidated Financial Statements.

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

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At March 31, 2023, the allowance for credit losses on loans (“ACLL”) reflected a day one CECL impact of ~~Operations (Continued)~~

~~Loan Portfolio (continued)~~

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

Nonperforming Assets

Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled ~~$5,662,000 at September 30, 2017~~$1.8 million on March 31, 2023 compared to ~~$4,870,000~~$2.3 million at December 31, 2016. Loans added to nonaccrual since December 31, 2016 were past due and were not specifically reviewed for impairment as they were below the impairment review threshold. Although the potential exists for loan losses, management believes the bank is generally well secured and continues to actively work with its customers to effect payment. As of September 30, 2017 and December 31, 2016, the Company held $2,148,000 and $2,076,000 of real estate which was acquired through foreclosure, respectively.

~~The following is a~~2022.

A summary of ~~information pertaining to risk elements and nonperforming~~credit ratios for nonaccrual loans ~~(in~~is as follows (dollars 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)~~

~~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. 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 of Dealer finance loans, loans that are not impaired are categorized by call report code and an estimate is calculated based on actual loss experience over the last five years. Due to the rapid turnover in the Dealer finance portfolio, 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 for this division and adjusts based on how the portfolio performs since the department was established in 2012. 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 provision for each quarter based on this evaluation.

The allowance for loan losses of $6,942,000 at September 30, 2017 is equal to 1.12% of loans held for investment. This compares to an allowance of $7,543,000 (1.27%) at December 31, 2016. The company has experienced a decline in historical losses and improvements in the qualitative factors since year end. There has been an increase in past dues in the prior and current quarters, several of which have expected payments in the fourth quarter and several loans (63% of the past due increase) are reviewed for impairment. Past due and loans with adverse risk ratings receive additional allocations in the allowance 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 months of 2017.

Net charge-offs at September 30, 2017 totaled $601,000 which is equivalent to .10% of total loans outstanding. At December 31, 2016, net charge-offs totaled $1,238,000 or .21% of total loans outstanding.

~~Item 2.~~

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

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

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

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market, and certificates of deposit. Total deposits were $1.11 billion and $1.08 billion at ~~September 30, 2017 have increased $25,295,000 since~~March 31, 2023 and December 31, ~~2016.~~2022 respectively. Noninterest bearing deposits ~~increased $10,305,000~~decreased $9.5 million while interest bearing deposits increased ~~$14,990,000. The increase in~~$31.4 million. Total deposits ~~is consistent with 2016 in that~~increased $21.9 million from the end of 2022, as the Bank was able to attract deposits ~~grew substantially in the second half of the year.~~ by offering higher rates on money market and time deposit accounts and opening insured cash sweep (“ICS”) accounts for new and existing customers.

The Bank ~~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 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022 the Company had a total of ~~$1.3 million~~$241 thousand in CDARS ~~funding. The Company had $17.1~~accounts; and, $97.1 million and ~~$12.1~~$77.6 million in ICS ~~funding at September 30, 2017 and December~~accounts, respectively. At March 31, ~~2016, respectively.~~

2023, 11.45% of the Company’s total deposits were uninsured deposits.

Short-term borrowings

~~Short-term~~

The Company utilizes short-term debt ~~consists of federal~~such as Federal funds purchased ~~daily rate credit obtained from the Federal Home Loan Bank (FHLB),~~ and FHLB short-term ~~fixed rate FHLB borrowings.~~borrowings to provide liquidity. Federal funds purchased are unsecured overnight borrowings ~~obtained~~ from ~~the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the~~other financial institutions. 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 30, 2017,~~ short-term debt, ~~consisted of $20,000,000 in FHLB short-term borrowings, $20,000,000 in FHLB~~which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit ~~and $2,128,000 in federal funds purchased. This compared to FHLB short-term borrowings of $40,000,000 at December 31, 2016. There were no balances in federal funds purchased~~ or ~~daily rate credit at December 31, 2016.~~

~~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~~advance, depending on the needs of the Company. There were $55.0 million and $70.0 million of FHLB advances at March 31, 2023 and December 31, 2022, respectively. The increase in deposits allowed us to ~~fund loan growth and also assist~~reduce 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 interest rate changes. During~~FHLB advances during the first quarter of ~~2017,~~2023.

Long-term borrowings

On July 29, 2020, the Company ~~recognized a $504,000 gain~~sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030. The note will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on ~~prepayment~~July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of ~~two FHLB long term advances totaling $10~~issuance costs totaled $6.9 million ~~and there were no new borrowings during the nine months ended September 30, 2017.~~

~~Item 2.~~

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

at March 31, 2023.

Table of Contents

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

Quantitative measures established by regulation to ensure capital (referred to as supplementary capital). At September 30, 2017, the Bank had Common Equity Tier I capital of 13.90%, Tier I capital of 13.90% of risk weighted assets and combined Tier I and II capital of 14.98% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December 30, 2016, the Bank had Common Equity Tier I capital of 13.86%, Tier I capital of 13.86% of risk weighted assets and combined Tier I and II capital of 15.08% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered toadequacy require the Bank to ~~raise additional~~maintain capital ~~and/~~in order to meet certain capital ratios to be considered adequately capitalized or ~~reallocate present capital.~~

~~In addition,~~well capitalized under the regulatory ~~agencies have issued guidelines requiring~~framework for prompt corrective action. As of 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 increasemost recent formal notification from the ~~minimum requirement based upon an institution's overall financial condition. At September 30, 2017 and December 31, 2016,~~Federal Reserve, the Bank ~~reported~~was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a ~~leverage ratio of 12.16% and 11.83%, respectively, which was also substantially above the minimum. The Bank also reported~~requirement for all banking organizations to maintain a capital conservation buffer of ~~6.98% at September 30, 2017~~2.5% above the minimum risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and ~~7.08% at December 31, 2016.~~discretionary bonus payments to executive officers. The capital conservation buffer is ~~designed~~exclusively comprised of common equity Tier 1 capital, and it applies to ~~strengthen an institution’s financial resilience during economic cycles. Financial institutions are required~~each of the three risk-based capital ratios but not to ~~maintain a~~the leverage ratio. At March 31, 2023, the Bank is in compliance with the capital conservation buffer requirement and exceeded the minimum ~~buffer as required by~~common equity Tier 1, Tier 1, and total capital ratio, inclusive of the ~~Basel III final rules in order to avoid restrictions on capital distributions and other payments. Beginning January 1, 2016, a~~fully phased-in capital conservation buffer, of ~~0.625%~~7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.

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

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became ~~effective.~~effective in September 2020. The ~~capital conservations buffer for 2017 is 1.25% and will gradually be increased through~~Company implemented the CECL model commencing January 1, ~~2019~~2023, and elected not to ~~2.5%.~~

phase in the effect of CECL on regulatory capital.

Liquidity

Liquidity ~~is the~~represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. ~~Liquid~~The Company’s most liquid assets ~~include~~are unrestricted cash ~~interest-bearing deposits with banks,~~and cash equivalents, federal funds sold, ~~investments~~loans held for sale, and ~~loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its~~unpledged available for sale investment securities. Our primary source of funding is deposits. If additional liquidity ~~exposure. As a result~~is needed or otherwise desired as part of ~~the Company's~~our liquidity 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~~strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and brokered deposits, as well as loan and investment securities sales.

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

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

Table of Contents

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

Interest Rate Sensitivity

Market risk is the sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, and equity prices. The Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority of their assets. Rapid changes in short-term interest rates 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.

~~Interest Rate Sensitivity~~

~~In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of~~may lead to volatility in net interest income resulting in additional interest rate risk ~~assumed on~~to the ~~balance sheet. Managing this risk involves regular monitoring~~extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest ~~sensitive assets relative to interest sensitive liabilities over specific time intervals.~~ earning assets.

The Company ~~monitors its~~manages interest rate ~~sensitivity periodically~~risk through an asset and ~~makes adjustments as needed. There are no off balance sheet items that will impair future liquidity.~~

Asliability committee (“ALCO”) composed of ~~September 30, 2017, the Company had a cumulative Gap Rate Sensitivity Ratio~~members of ~~19.55%~~its Board of Directors and executive management. The ALCO is responsible 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 needsmonitoring and ~~competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors~~managing the Company’s interest rate risk and ~~has decided~~establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current ~~position~~and projected balances and rates. This method is ~~acceptable~~subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for ~~a well-capitalized community bank.~~

~~A summary~~portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of ~~asset~~earnings to changing interest rates. Interest rates on different assets and liability ~~repricing opportunities~~accounts move differently when the prime rate changes and is ~~shown~~reflected in ~~Table II,~~different rate scenarios.

The following table represents interest rate sensitivity on ~~page 47.~~

~~Item 2.~~

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

~~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 underCompany’s net interest income using different rate scenarios:

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

Market value simulation is used to calculate the 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 theestimated fair value of ~~financial instruments for disclosure purposes. 3) Requires separate presentation of financial~~ assets and ~~financial~~ liabilities ~~by measurement category and form~~over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of ~~financial asset (i.e., securities or loans and receivables). 4) Eliminates~~all assets minus the ~~requirement for public business entities to disclose~~market value of all liabilities. The change in net market value over different rate environments is an indication of 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,~~longer-term repricing risk 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.balance sheet. The ~~amendments in this ASU~~same assumptions 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 issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, 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 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.

~~Item 2.~~

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

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

During 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”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component 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 market value simulation as in the earnings simulation.

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

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

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

Table of Contents

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

An asset-sensitive balance sheet structure implies that assets, such as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

~~During March 2017, the FASB issued ASU 2017~~‐~~08, “Receivables—Nonrefundable Fees~~loans and ~~Other Costs (Subtopic 310~~‐20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities, will reprice faster than liabilities; consequently, net interest income should be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoptionpositively affected in an ~~interim period. Upon transition, entities~~increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should ~~apply~~be positively affected in a decreasing interest rate environment. At March 31, 2023, the ~~guidance on~~Company had $XX.X million in assets repricing than liabilities subject to repricing in one year. This is a ~~modified retrospective basis, with a cumulative-effect adjustment to retained earnings as~~one-day position that is continually changing and is not necessarily indicative 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 inour position at 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‐~~12 will have on its consolidated financial statements.~~

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

time.

Existence of Securities and Exchange Commission Web Site

The Securities and Exchange Commission (“SEC”) maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the ~~Commission, including F & M Bank Corp.~~SEC and the address is ~~(http:~~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.~~

~~TABLE II~~

~~F & M BANK CORP.~~

~~Interest Sensitivity Analysis~~

~~September 30, 2017~~

~~(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%

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities as of September 30, 2017. 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.

www.sec.gov.

Item 3.

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

Not ~~Applicable~~

required

Item 4.

Controls and Procedures

~~Evaluation of Disclosure Controls~~

The Company's management, including the Chief Executive Officer and ~~Procedures~~

~~As a result of~~Chief Financial Officer, evaluated the ~~enactment of the Sarbanes-Oxley Act of 2002, issuers such as F & M Bank Corp. that file periodic reports~~Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the ~~"Act"~~"Exchange Act") ~~are required to include in those reports certain information concerning~~, as of March 31, 2023. Based on this evaluation, the ~~issuer's controls~~Chief Executive Officer and ~~procedures for complying with~~Chief Financial Officer concluded that the ~~disclosure requirements of the federal securities laws. These~~Company's disclosure controls and procedures ~~include, without limitation, controls and procedures designed~~are effective to ensure that the information required to be disclosed by ~~an issuer~~the Company in the reports that it files or submits under the Exchange Act is recorded, , processed, summarized, and reported within the time periods specified inby the ~~Securities~~SEC and ~~Exchange Commission’s rules and forms and~~that such information is accumulated and communicated to ~~the issuer's~~ management including ~~its principal executive officer or officers~~the Chief Executive Officer and ~~principal financial officer or officers, or persons performing similar functions,~~the Chief Financial Officer, as appropriate to allow timely decisions regarding required ~~disclosure.~~

~~As required, we will evaluate~~disclosures. The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 2 to the ~~effectiveness~~consolidated interim financial statements, effective January 1, 2023. Related to the adoption of these ~~disclosure~~new accounting standards, the Company modified certain internal controls and ~~procedures on a quarterly basis,~~designed 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), 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 no changes to the~~implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company’s internal control over financial reporting ofduring the ~~Company~~three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, 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 1.	Legal Proceedings There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.

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

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

Item 3.	Defaults Upon Senior Securities	None

Item 4.	Mine Safety Disclosures	None

Item 5.	Other Information	None

Table of Contents

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).

(a)	Exhibits
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
	32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
	101	The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
	104	The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in Inline XBRL (included with Exhibit 101)

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.

	By:	/s/~~Dean W. Withers~~ Aubrey M. Wilkerson
		Aubrey M. Wilkerson Chief Executive Officer

	By:	~~Dean W. Withers~~ /s/ Lisa F. Campbell
		~~Title~~

	~~By:~~	~~/s/~~ ~~Carrie A. Comer~~
		~~Carrie A. Comer~~
		~~Senior~~Lisa F. Campbell Executive Vice President and Chief Financial Officer
May 15, 2023

~~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

	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

		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%