UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, ~~2022~~.2023

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

Commission File Number: 000-13273

F&M BANK CORP.

Virginia

54-1280811

(State or Other Jurisdiction of

(I.R.S. Employer

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~~Registrant's Telephone Number, Including Area Code)

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

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

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

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

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

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

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

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

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

Class		Outstanding at August ~~4, 2022~~9, 2023
Common Stock, par value ‑ $5 per share		~~3,453,393~~3,479,804 shares

F & M BANK CORP.

Index

			Page

Part I	Financial Information		3

Item 1.	Financial Statements		3

	Consolidated Balance Sheets – June 30, 2023 and December 31, 2022	3

	Consolidated Statements of Income – Three Months Ended June 30, 2023 and 2022	4

	Consolidated Statements of Income – Six Months Ended June 30, 2023 and 2022	5

	Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2023 and 2022	6

	Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended June, 2023 and 2022	7

	Consolidated Statements of Changes in Shareholders’ Equity – Six Months Ended June, 2023 and 2022	8

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2023 and 2022	9

	~~Consolidated Balance Sheets – June 30, 2022 and December 31, 2021~~		3

	~~Consolidated Statements of Income – Three Months Ended June 30, 2022 and 2021~~		4

	~~Consolidated Statements of Income – Six Months Ended June 30, 2022 and 2021~~		5

	~~Consolidated Statements of Comprehensive (Loss) Income – Three and Six Months Ended June 30, 2022 and 2021~~		6

	~~Consolidated Statements of Changes in Stockholders’ Equity – Three and Six Months Ended June 30, 2022 and 2021~~		7

	~~Consolidated Statements of Cash Flows – Six Months Ended June 30, 2022 and 2021~~		9

	Notes to Consolidated Financial Statements		10	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46	52

Item 4.	Controls and Procedures		46	52

Part II	Other Information		47

Item 1.	Legal Proceedings		47	53

Item 1a.	Risk Factors		47	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47	53

Item 3.	Defaults upon Senior Securities		47	53

Item 4.	Mine Safety Disclosures		47	53

Item 5.	Other Information		47	53

Item 6.	Exhibits		47	54

Signatures			48	55

Certifications

Table of Contents

Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	June 30,			December 31,			June 30,			December 31,
	2022			2021*			2023			2022*
	*(Unaudited)*						*(Unaudited)*
Assets
Cash and due from banks	$	13,556		$	8,516		$	16,992		$	17,926
Money market funds and interest-bearing deposits in other banks		268			2,938			119			687
Federal funds sold		3,430			76,667			19,394			16,340
Cash and cash equivalents		17,254			88,121			36,505			34,953

Securities:
Held to maturity, at amortized cost – fair value of $125 in 2022 and 2021, respectively		125			125
Held to maturity, at amortized cost – fair value of $115 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		446,823			403,882			384,651			392,095
Other investments		9,688			9,210			10,092			11,317
Loans held for sale, at fair value		5,449			4,887			881			1,373

Loans held for investment, net of deferred fees and costs		690,497			662,421			776,260			743,604
Less: allowance for loan losses		(7,798	)		(7,748	)
Less: allowance for credit losses								(8,769	)		(7,936	)
Net loans held for investment		682,699			654,673			767,491			735,668

Bank premises and equipment, net		18,901			17,063			24,132			19,587
Bank premises held for sale		300			300
Interest receivable		3,567			3,117			4,280			3,995
Goodwill		3,082			3,082			3,082			3,082
Bank owned life insurance		23,210			22,878			22,538			23,554
Other real estate owned		197			0
Other assets		20,257			12,004			24,593			20,153
Total Assets	$	1,231,552		$	1,219,342		$	1,278,370		$	1,245,902
Liabilities
Deposits:
Noninterest bearing	$	291,728		$	280,993		$	277,578		$	293,596
Interest bearing		808,482			799,302			859,534			789,781
Total deposits		1,100,210			1,080,295			1,137,112			1,083,377

Short-term debt		30,000			0			47,000			70,000
Long-term debt		11,788			21,772			6,911			6,890
Other liabilities		17,604			16,819			15,153			14,843
Total liabilities		1,159,602			1,118,886			1,206,176			1,175,110

Commitments and contingencies

Stockholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized, 200,000 designated, 3,453,393 and 3,430,175 shares issued and outstanding (29,238 and 15,869 unvested restricted shares)		17,121			17,071
Additional paid in capital – common stock		10,351			10,127
Shareholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized, 200,000 designated, 3,479,575 and 3,456,237 shares issued and outstanding (33,886 and 26,456 unvested restricted shares)								17,228			17,149
Additional paid in capital								10,822			10,577
Retained earnings		80,878			78,350			81,369			83,078
Accumulated other comprehensive loss		(36,400	)		(5,092	)		(37,225	)		(40,012	)
Total stockholders’ equity		71,950			100,456
Total liabilities and stockholders’ equity	$	1,231,552		$	1,219,342
Total shareholders’ equity								72,194			70,792
Total liabilities and shareholders’ equity							$	1,278,370		$	1,245,902

*~~2021~~2022 derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

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

(Unaudited)

	Three Months Ended						Three Months Ended
	June 30,						June 30,
*Interest and Dividend income*	2022			2021			2023			2022
Interest and fees on loans held for investment	$	7,993		$	8,217		$	11,517		$	7,993
Interest and fees on loans held for sale		32			37			25			32
Interest from money market funds and federal funds sold		14			29			66			14
Interest on debt securities		1,970			536			2,016			1,970
Total interest and dividend income		10,009			8,819			13,624			10,009

*Interest expense*
Total interest on deposits		837			818			5,216			837
Interest from short-term debt		46			0			523			46
Interest from long-term debt		124			251			116			124
Total interest expense		1,007			1,069			5,855			1,007

*Net interest income*		9,002			7,750			7,769			9,002

*Provision for (Recovery of) Loan Losses*		600			(1,250	)
*Net Interest Income After Provision for (Recovery of) Loan Losses*		8,402			9,000
*Provision for Credit Losses*								539			600
*Net Interest Income After Provision for Credit Losses*								7,230			8,402

*Noninterest income*
Service charges on deposit accounts		274			254			274			274
Investment services and insurance income, net		198			180
Mortgage banking income, net		637			1,027
Investment services and insurance income								355			453
Mortgage banking income								543			1,239
Title insurance income		366			595			377			366
Income on bank owned life insurance		173			165			622			173
Low income housing partnership losses		(204	)		(216	)		(206	)		(204	)
ATM and check card fees		632			600			672			632
Net investment securities (losses)		(97	)		0
Net investment security losses								-			(97	)
Other operating income		292			481			115			241
Total noninterest income		2,271			3,086			2,752			3,077

*Noninterest expense*
Salaries		3,965			3,589			5,019			4,719
Employee benefits		1,137			1,056			1,094			1,240
Occupancy expense		346			343			317			346
Equipment expense		314			319			456			329
FDIC insurance assessment		165			105			175			165
Advertising expense		228			197			276			228
Legal and professional fees		215			246			538			328
ATM and check card fees		335			294			276			335
Telecommunication and data processing expense		685			582			479			685
Directors fees		129			112			128			129
Bank franchise tax		158			179			152			158
Impairment on long lived assets		0			171
Other operating expenses		1,076			1,251			1,262			897
Total noninterest expense		8,753			8,444			10,172			9,559

*Income before income taxes*		1,920			3,642			(190	)		1,920
Income tax expense		131			422
Income tax (benefit) expense								(431	)		131
*Net Income*	$	1,789		$	3,220		$	241		$	1,789
Dividends paid/accumulated on preferred stock		0			66
*Net income available to common stockholders*	$	1,789		$	3,154

*Per Common Share Data*
Net income – basic	$	0.51		$	0.98
Net income – diluted	$	0.51		$	0.93
Net income							$	0.07		$	0.51
Cash dividends on common stock		0.26			0.26			0.26			0.26
Weighted average common shares outstanding – basic		3,452,711			3,207,978
Weighted average common shares outstanding – diluted		3,452,711			3,413,305
Weighted average common shares outstanding								3,478,304			3,452,711

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Income

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

(Unaudited)

	Six Months Ended						Six Months Ended
	June 30,						June 30,
*Interest and Dividend income*	2022			2021			2023			2022
Interest and fees on loans held for investment	$	15,503		$	16,387		$	22,371		$	15,503
Interest and fees on loans held for sale		61			137			47			61
Interest from money market funds and federal funds sold		39			44			150			39
Interest on debt securities		3,467			997			4,029			3,467
Total interest and dividend income		19,070			17,565			26,597			19,070

*Interest expense*
Total interest on deposits		1,682			1,613			9,258			1,682
Interest from short-term debt		46			0			1,515			46
Interest from long-term debt		283			524			228			283
Total interest expense		2,011			2,137			11,001			2,011

*Net interest income*		17,059			15,428			15,596			17,059

*Provision for (Recovery of) Loan Losses*		150			(1,975	)
*Net Interest Income After Provision for (Recovery of) Loan Losses*		16,909			17,403
*Provision for Credit Losses*								539			150
*Net Interest Income After Provision for Credit Losses*								15,057			16,909

*Noninterest income*
Service charges on deposit accounts		581			539			499			581
Investment services and insurance income, net		449			527
Mortgage banking income, net		1,379			2,699
Investment services and insurance income								862			704
Mortgage banking income								1,083			1,981
Title insurance income		839			1,051			625			839
Income on bank owned life insurance		344			333			801			344
Low-income housing partnership losses		(408	)		(431	)		(411	)		(408	)
ATM and check card fees		1,195			1,120			1,299			1,195
Net investment securities (losses)		(97	)		0
Net investment securities losses								-			(97	)
Other operating income		472			603			360			421
Total noninterest income		4,754			6,441			5,118			5,560

*Noninterest expense*
Salaries		7,602			6,885			9,361			8,356
Employee benefits		2,425			2,272			2,137			2,528
Occupancy expense		686			638			652			686
Equipment expense		600			596			781			624
FDIC insurance assessment		281			204			320			281
Advertising expense		406			333			494			406
Legal and professional fees		423			445			909			651
ATM and check card fees		633			551			595			633
Telecommunication and data processing expense		1,586			1,122			1,186			1,586
Directors fees		293			258			285			293
Bank franchise tax		332			352			320			332
Impairment of long-lived assets		0			171
Other operating expenses		2,036			2,303			2,321			1,733
Total noninterest expense		17,303			16,130			19,361			18,109

*Income before income taxes*		4,360			7,714			814			4,360
Income tax expense		43			693
Income tax (benefit) expense								(482	)		43
*Net Income*	$	4,317		$	7,021		$	1,296		$	4,317
Dividends paid/accumulated on preferred stock		0			131
*Net income available to common stockholders*	$	4,317		$	6,890

*Per Common Share Data*
Net income – basic	$	1.25		$	2.15		$	0.37		$	1.25
Net income – diluted	$	1.25		$	2.04
Cash dividends on common stock		0.52			0.52			0.52			0.52
Weighted average common shares outstanding – basic		3,443,850			3,206,534			3,470,501			3,443,850
Weighted average common shares outstanding – diluted		3,443,850			3,434,652

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~

(Dollars in thousands)

(Unaudited)

	Six Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021			2022			2021			2023		2022			2023		2022

Net Income	$	4,317		$	7,021		$	1,789		$	3,220		$	241	$	1,789		$	1,296	$	4,317

Other comprehensive (loss) income:
Unrealized holding (losses) gains on available-for sale securities		(39,727	)		(1,057	)		(21,678	)		353
Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for sale securities														90		(21,678	)		3,529		(39,727	)
Tax effect		8,342			222			4,552			(74	)		19		4,552			742		8,342
Unrealized holding (losses) gains, net of tax		(31,385	)		(835	)		(17,126	)		279
Unrealized holding gains (losses), net of tax														71		(17,126	)		2,787		(31,385	)

Less:
Reclassifications adjustment for losses included in net income		97			0			97			0			-		97			-		97
Tax effect		20			0			20			0			-		20			-		20
Realized losses on sale of available-for sale securities, net		77			0			77			0			-		77			-		77

Total other comprehensive (loss) income		(31,308	)		(835	)		(17,049	)		279
Total other comprehensive income (loss)														71		(17,049	)		2,787		(31,308	)

Total comprehensive income	$	(26,991	)	$	6,186		$	(15,260	)	$	3,499
Total comprehensive income (loss)													$	312	$	(15,260	)	$	4,083	$	(26,991	)

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in ~~Stockholders’~~Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

Three Months Ended June 30, ~~2022~~2023 and ~~2021.~~2022.

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

*Balance March 31, 2021*	$	4,558	$	16,036	$	6,956	$	74,108		$	(4,131	)	$	97,527
Net income		0		0		0		3,220			0			3,220
Other comprehensive income		0		0		0		0			279			279
Dividends on preferred stock ($.32 per share)		0		0		0		(66	)		0			(66	)
Dividends on common stock ($.26 per share)		0		0		0		(837	)		0			(837	)
Common stock issued (2,185 shares)		0		11		52		0			0			63
Stock-based compensation expense		0		0		26		0			0			26
*Balance, June 30, 2021*	$	4,558	$	16,047	$	7,034	$	76,425		$	(3,852	)	$	100,212
																Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
*Balance March 31, 2022*	$	0	$	17,110	$	10,240	$	79,986		$	(19,351	)	$	87,985		$	17,110	$	10,240	$	79,986		$	(19,351	)	$	87,985
Net income		0		0		0		1,789			0			1,789			-		-		1,789			-			1,789
Other comprehensive (loss)		0		0		0		0			(17,049	)		(17,049	)		-		-		-			(17,049	)		(17,049	)
Dividends on common stock ($.26 per share)		0		0		0		(897	)		0			(897	)		-		-		(897	)		-			(897	)
Common stock issued (2,185 shares)		0		11		53		0			0			64
Common stock issued																	11		53		-			-			64
Stock-based compensation expense		0		0		58		0			0			58			-		58		-			-			58
*Balance, June 30, 2022*	$	0	$	17,121	$	10,351	$	80,878		$	(36,400	)	$	71,950		$	17,121	$	10,351	$	80,878		$	(36,400	)	$	71,950

*Balance March 31, 2023*																$	17,207	$	10,693	$	82,031		$	(37,296	)	$	72,635
Net income																	-		-		241			-			241
Other comprehensive income																	-		-		-			71			71
Dividends on common stock ($.26 per share)																	-		-		(903	)		-			(903	)
Common stock issued																	21		61		-			-			82
Stock-based compensation expense																	-		68		-			-			68
*Balance, June 30, 2023*																$	17,228	$	10,822	$	81,369		$	(37,225	)	$	72,194

See Notes to Consolidated Financial Statements

Table of Contents

F & M BANK CORP.

Condensed Consolidated Statements of Changes in ~~Stockholders’~~Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

Six Months Ended June 30, ~~2022~~2023 and ~~2021.~~2022.

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

*Balance, December 31, 2020*	$	4,558	$	16,017	$	6,866	$	71,205		$	(3,017	)	$	95,629
Net Income		0		0		0		7,021			0			7,021
Other comprehensive (loss)		0		0		0		0			(835	)		(835	)
Dividends on preferred stock ($.64 per share)		0		0		0		(131	)		0			(131	)
Dividends on common stock ($.52 per share)		0		0		0		(1,670	)		0			(1,670	)
Common stock issued (4,635 shares)		0		23		104		0			0			127
Common stock issued for Stock-based Compensation (1,332 shares)		0		7		29		0			0			36
Stock-based compensation expense		0		0		35		0			0			35
*Balance, June 30, 2021*	$	4,558	$	16,047	$	7,034	$	76,425		$	(3,852	)	$	100,212

*Balance, December 31, 2021*	$	0	$	17,071	$	10,127	$	78,350		$	(5,092	)	$	100,456		$	17,071	$	10,127		$	78,350		$	(5,092	)	$	100,456
Net Income		0		0		0		4,317			0			4,317			-		-			4,317			-			4,317
Other comprehensive (loss)		0		0		0		0			(31,308	)		(31,308	)		-		-			-			(31,308	)		(31,308	)
Dividends on common stock ($.52 per share)		0		0		0		(1,789	)		0			(1,789	)		-		-			(1,789	)		-			(1,789	)
Common stock issued (4,784 shares)		0		24		120		0			0			144
Common stock issued for Stock-based Compensation (1,145 shares)		0		26		30		0			0			56
Common stock issued																	24		120			-			-			144
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes																	26		30			-			-			56
Stock-based compensation expense		0		0		74		0			0			74			-		74			-			-			74
*Balance, June 30, 2022*	$	0	$	17,121	$	10,351	$	80,878		$	(36,400	)	$	71,950		$	17,121	$	10,351		$	80,878		$	(36,400	)	$	71,950

*Balance December 31, 2022*																$	17,149	$	10,577		$	83,078		$	(40,012	)	$	70,792
Net income																	-		-			1,296			-			1,296
Cumulative effect adjustment due to the adoption of ASC 326, net of tax																	-		-			(1,203	)		-			(1,203	)
Other comprehensive income																	-		-			-			2,787			2,787
Dividends on common stock ($0.52 per share)																	-		-			(1,802	)		-			(1,802	)
Common stock issued																	39		124			-			-			163
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes																	40		(12	)		-			-			28
Stock-based compensation expense																	-		133			-			-			133
*Balance, June 30, 2023*																$	17,228	$	10,822		$	81,369		$	(37,225	)	$	72,194

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Six Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2023			2022
*Cash flows from operating activities*
Net income	$	4,317		$	7,021		$	1,296		$	4,317
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		562			595			665			562
Amortization of intangibles		19			33			15			19
Amortization of securities		13,690			495			7,148			13,690
Proceeds from loans held for sale originated		76,909			121,553
Proceeds from loans held for sale								63,681			76,909
Loans held for sale originated		(76,266	)		(112,965	)		(61,971	)		(76,266	)
Gain on sale of loans held for sale originated		(1,205	)		(3,136	)
Provision for (Recovery of) loan losses		150			(1,975	)
(Increase) decrease in interest receivable		(450	)		250
(Increase) in deferred taxes		(253	)		(189	)
(Decrease) in taxes payable		0			(469	)
Decrease in other assets		42			1,159
Increase (decrease) in accrued expenses		1,059			(505	)
Gain on sale of loans held for sale								(1,218	)		(1,205	)
Provision for credit losses								539			150
Decrease in interest receivable								(285	)		(450	)
Decrease (increase) in deferred taxes								2			(253	)
Decrease in taxes payable								(824	)		-
Decrease (increase) in other assets								(3,964	)		42
(Decrease) increase in accrued expenses								(411	)		1,059
Amortization of limited partnership investments		408			443			411			408
Amortization of debt issuance costs								21			16
Income from life insurance investment		(345	)		(333	)		(438	)		(345	)
(Gain) on life insurance investment								(363	)		-
Loss on the sale of investment securities		97			0			-			97
(Gain) on the sale of fixed assets		(10	)		0			(36	)		(10	)
Stock-based compensation expense		74			35			133			74
Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale		0			171
Net cash provided by operating activities		18,798			12,183			4,401			18,814
*Cash flows from investing activities*
Purchase of investments available for sale and other investments		(108,057	)		(92,006	)		-			(108,057	)
Proceeds from maturity of investments available for sale		3,000			8,699			3,825			3,000
Proceeds from the sale of investments available for sale		8,699			0			-			8,699
(Investment in) proceeds from the redemption of restricted stock, net		(886	)		395
Net (increase) decrease in loans held for investment		(28,373	)		600
Net decrease in loans held for sale participations		0			44,372
Proceeds from (investment in) the redemption of restricted stock, net								964			(886	)
Investment in limited partnership								(150	)		-
Net (increase) in loans held for investment								(33,167	)		(28,373	)
Proceeds from life insurance investment								1,729			-
Proceeds from the sale of fixed assets		27			0			93			27
Net purchase of property and equipment		(2,417	)		(288	)		(5,267	)		(2,417	)
Proceeds from life insurance benefits		0			421
Cash received in branch acquisition (net of cash paid)		0			13,946
Net cash (used in) investing activities		(128,007	)		(23,861	)		(31,973	)		(128,007	)
*Cash flows from financing activities*
Net change in deposits		19,915			122,816			53,735			19,915
Net change in short-term debt		30,000			0			(23,000	)		30,000
Dividends paid in cash		(1,789	)		(1,801	)		(1,802	)		(1,789	)
Proceeds from issuance of common stock		200			198			191			200
Amortization of debt issuance costs		16			16
Repayments of long-term debt		(10,000	)		(1,909	)		-			(10,000	)
Net cash provided by financing activities		38,342			119,285			29,124			38,326
*Net (decrease) increase in Cash and Cash Equivalents*		(70,867	)		107,607
*Net increase (decrease) in Cash and Cash Equivalents*								1,552			(70,867	)
*Cash and cash equivalents, beginning of period*		88,121			78,408			34,953			88,121
*Cash and cash equivalents, end of period*	$	17,254		$	186,015		$	36,505		$	17,254
*Supplemental Cash Flow information:*
Cash paid for: Interest	$	2,162		$	2,187		$	10,523		$	2,162
Taxes	$	0		$	1,537			360			-
*Supplemental non-cash disclosures:*
Change in unrealized (loss) on securities available for sale	$	(39,630	)	$	(1,057	)
Change in unrealized loss on securities available for sale							$	3,529		$	(39,630	)
Cumulative effect of the adoption of ASC 326								1,524			-
Transfer from loans to other real estate owned	$	197		$	0			-			197

Branch purchase:
Tangible assets acquired (net of cash received)	$	0		$	61
Identifiable intangible assets acquired	$	0		$	73
Liabilities assumed	$	0		$	14,044

See Notes to Consolidated Financial Statements

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Notes to the Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The ~~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 (dba F“F&M ~~Mortgage)~~Mortgage”), and VSTitle, LLC (“VST”), with all significant intercompany accounts and ~~were prepared in accordance with~~transactions eliminated.

The accounting and reporting policies of 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 of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021 (the “2021 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.banking industry.

~~Nature~~Use of ~~Operations~~

The Company, through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily in the counties of Rockingham, Shenandoah, and Augusta, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in Virginia. Services are provided at 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. (“FMFS”), F&M Mortgage, and VSTitle, LLC (“VST”).

~~Basis of Presentation~~Estimates

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

~~Risk and Uncertainties~~

The COVID-19 pandemic has had a disruptive impact on the U.S. and global economy since the first quarter of 2020. Since the pandemic is ongoing and dynamic, there are many uncertainties on the potential impacts to our customers, employees and vendors; as well as the economy as a whole. The Company carefully monitors economic impacts attributable to the COVID-19 pandemic and the potential impacts on the Company’s loan portfolio and their borrowers ability to repay their loans.

As the COVID-19 pandemic continues, its magnitude and duration remain uncertain. The risks and uncertainties resulting from the pandemic may adversely the Company’s future operational and financial performance; however, these remain highly uncertain and cannot be predicted.credit losses.

Reclassification

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

Nature of Operations

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

Cash and Cash Equivalents

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

Accounting Standards Adopted in 2023

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

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

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~~Note 1. Summary~~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 ~~Significant Accounting Policies, continued~~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 there was no allowance for credit losses on available for sale securities.

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

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was immaterial at June 30, 2023 and was excluded from the estimate of credit losses.

The state and local governments securities held by the Company are highly rated by major rating agencies. As a result, no allowance for credit losses was recorded on held to maturity at June 30, 2023.

Allowance for Credit Losses – Available for Sale Securities

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

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

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no allowance for credit loss related to the available for sale portfolio.

Accrued interest receivable on available for sale debt securities totaled $1.5 million at June 30, 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 $2.8 million at June 30, 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 are economic conditions, with a weighting of 20%-25%. The Company will evaluate the weighting applied to each pool on an annual basis.

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

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

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

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common ~~stockholders~~sthareholders by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per common share calculation. All of the Company’s outstanding preferred stock was redeemed by the Company for cash or converted to common stock during the fourth quarter of 2021. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends.

~~Net income~~Recent Accounting Pronouncements

Accounting Standards adopted in 2023:

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

For the Six
months ended

For the Three
months ended

For the Six
months ended

For the Three
months ended

June 30, 2022

June 30, 2022

June 30, 2021

June 30, 2021

Earnings available to common stockholders:

Net income

$ 4,317

$ 1,789

$ 7,021

$ 3,220

Preferred stock dividends

0

0

131

66

Net income available to common stockholders

$ 4,317

$ 1,789

$ 6,890

$ 3,154

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 ~~following table shows~~amendments eliminate the ~~effect of dilutive preferred stock conversion on~~accounting guidance for troubled debt restructurings by creditors that have adopted the ~~Company’s earnings per share~~CECL model and enhance the disclosure requirements for ~~the periods indicated (dollars in thousands):~~loan refinancings and restructurings made with borrowers experiencing financial difficulty.

Six months ended June 30, 2022

Six months ended June 30, 2021

Income

Weighted Average Shares

Per Share Amounts

Income

Weighted Average Shares

Per Share Amounts

Basic EPS

$ 4,317

3,443,850

$ 1.25

$ 6,890

3,206,534

$ 2.15

Effect of Dilutive Securities:

Convertible Preferred Stock

0

-

0

131

228,118

(0.11 )
Diluted EPS

$ 4,317

3,443,850

$ 1.25

$ 7,021

3,434,652

$ 2.04

Three months ended June 30, 2022

Three months ended June 30, 2021

Income

Weighted Average Shares

Per Share Amounts

Income

Weighted Average Shares

Per Share Amounts

Basic EPS

$ 1,789

3,452,711

$ 0.51

$ 3,154

3,207,978

$ 0.98

Effect of Dilutive Securities:

Convertible Preferred Stock

0

-

0

66

205,327

(0.05 )
Diluted EPS

$ 1,789

3,452,711

$ 0.51

$ 3,220

3,413,305

$ 0.93

1114
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In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of ASU 2022-01 did not have a material impact on the Company’s consolidated financial statements.
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 July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
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.
15
Table of Contents
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.
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.
The Company transitioned all loan agreements, other than SWAP loans, away from LIBOR during 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation of transition away from LIBOR by the swap holder.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.
Note 2.   Investment Securities

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

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

June 30, 2023

U. S. Treasury

$ 125

$ -

$ 10

$ 115

December 31, 2022

U. S. Treasury

$ 125

$ -

$ 13

$ 112

16
Table of Contents
There is no allowance for credit losses on held to maturity securities. At June 30, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the quarter ended June 30, 2023.
The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are carried in the consolidated balance sheets at their approximate fair value. Investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost at June 30, 2022 and December 31, 2021 aresummarized as follows (dollars in thousands):

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

June 30, 2022

U. S. Treasuries

$ 125

$ 0

$ 0

$ 125

December 31, 2021

U. S. Treasuries

$ 125

$ 0

$ 0

$ 125

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value

June 30, 2023

U.S. Treasury

$ 39,913

$ 1

$ 2,861

$ 37,053

U.S. Agency

143,480

1

11,899

131,582

Municipal bonds

42,423

72

3,509

38,986

Mortgage-backed securities

175,961

187

25,209

150,939

Corporate

30,550

-

4,459

26,091

Total Securities Available for Sale

$ 432,327

$ 261

$ 47,937

$ 384,651

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

~~The amortized cost and fair value of securities~~There was no allowance for credit losses on available for sale ~~are as follows (dollars in thousands):~~securities.

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

June 30, 2022

U.S. Government treasuries

$ 49,778

$ 0

$ 3,041

$ 46,737

U.S. Government sponsored enterprises

168,464

0

12,315

156,149

Securities issued by States and political subdivisions in the U.S.

47,416

0

3,730

43,686

Mortgage-backed obligations of federal agencies

192,525

106

21,601

171,030

Corporate debt security

30,550

640

1,969

29,221

Total Securities Available for Sale

$ 488,733

$ 746

$ 42,656

$ 446,823

December 31, 2021

U.S. Government treasuries

$ 29,847

$ 0

$ 365

$ 29,482

U.S. Government sponsored enterprises

134,466

0

752

133,714

Securities issued by States and political subdivisions of the U.S.

34,078

406

147

34,337

Mortgage-backed obligations of federal agencies

185,216

522

2,091

183,647

Corporate debt securities

22,555

372

225

22,702

Total Securities Available for Sale

$ 406,162

$ 1,300

$ 3,580

$ 403,882

The amortized cost and fair value of securities at June 30, ~~2022,~~2023, by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities Held to Maturity

Securities Available for Sale

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

Due in one year or less

$ 125

$ 125

$ 4,833

$ 4,789

Due after one year through five years

0

0

210,477

198,311

Due after five years

0

0

107,718

97,741

Due after ten years

0

0

165,705

145,982

Total

$ 125

$ 125

$ 488,733

$ 446,823

12
~~Table of Contents~~
~~Note 2. Investment Securities, continued~~

Securities Held to Maturity

Securities Available for Sale

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

Due in one year or less

$ 125

$ 115

$ 25,998

$ 25,322

Due after one year through five years

-

-

181,873

167,303

Due after five years

-

-

77,994

67,145

Due after ten years

-

-

146,462

124,881

Total

$ 125

$ 115

$ 432,327

$ 384,651

The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and six months ended June 30, ~~2022~~2023 and ~~2021~~2022 (dollars in thousands):

Three Months
Ended June 30,
2022

Six Month
Ended June 30,
2022

Realized gains (losses):

Gross realized gains

$ 0

$ 0

Gross realized losses

(97 )

0

Net realized (losses)

$ (97 )

$ 0

Proceeds from sales of securities

$ 8,699

$ 0

Three Months
Ended June 30,
2021

Six Months
Ended June 30,
2021

Realized gains (losses):

Gross realized gains

$ 0

$ 0

Gross realized (losses)

0

0

Net realized (losses)

$ 0

$ 0

Proceeds from sales of securities

$ 0

$ 0

Securities held that are U.S. Agency, Treasury, Government Sponsored Entities and Agency MBS carry an implicit government guarantee and are not subject to other than temporary impairment evaluation. Other securities were reviewed for impairment. The securities issued by States and political subdivisions in the U.S. were in an unrealized loss position for less than 12 months. Two bank subordinated debt offerings were in a loss position for 12 consecutive months and totaled $1,132 thousand. The pricing services tend to not be exact on these offerings because of the marketability of the offering. The Company reviews the relevant ratios on each subordinated debt holding quarterly. Because management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions, no declines are currently deemed to be other than temporary.
~~A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type of June 30, 2022 and December 31, 2021 were as follows:~~

Less than 12 Months

More than 12 Months

Total

Fair
Value

Unrealized Losses

Fair
Value

Unrealized Losses

Fair
Value

Unrealized Losses

June 30, 2022

U.S. Government treasuries

$ 38,025

$ 1,843

$ 8,711

$ 1,198

$ 46,736

$ 3,041

U.S. Government sponsored enterprises

134,269

9,201

21,880

3,114

156,149

12,315

Securities issued by States and political subdivisions in the U.S.

43,686

3,730

0

0

43,686

3,730

Mortgage-backed obligations of federal agencies

131,930

17,112

34,388

4,489

166,318

21,601

Corporate debt security

19,749

1,851

1,132

118

20,881

1,969

Total

$ 367,659

$ 33,737

$ 66,111

$ 8,919

$ 433,770

$ 42,656

Less than 12 Months

More than 12 Months

Total

Fair
Value

Unrealized Losses

Fair
Value

Unrealized Losses

Fair
Value

Unrealized Losses

December 31, 2021

U.S. Government treasuries

$ 29,481

$ 365

$ 0

$ 0

$ 29,481

$ 365

U.S. Government sponsored enterprises

93,714

752

0

0

93,714

752

Securities issued by State and political subdivisions in the U.S.

13,308

147

0

0

13,308

147

Mortgage-backed obligations of federal agencies

126,501

1,871

10,074

220

136,575

2,091

Corporate debt security

8,825

225

0

0

8,825

225

Total

$ 271,829

$ 3,360

$ 10,074

$ 220

$ 281,903

$ 3,850

Three Months Ended June 30, 2023

Six Month Ended June 30, 2023

Realized gains (losses):

Gross realized gains

$ -

$ -

Gross realized losses

-

-

Net realized (losses)

$ -

$ -

Proceeds from sales of securities

$ -

$ -

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

Realized gains (losses):

Gross realized gains

$ -

$ -

Gross realized (losses)

(97 )

(97 )
Net realized (losses)

$ (97 )

$ (97 )
Proceeds from sales of securities

$ 8,699

$ 8,699

1317
Table of Contents

~~Note 2. Investment Securities, continued~~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 June 30, 2023 (dollars in thousands):

Less than 12 Months

More than 12 Months

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

June 30, 2023

U.S. Treasury

$ -

$ -

$ 37,053

$ 2,861

$ 37,053

$ 2,861

U.S. Agency

-

-

131,582

11,899

131,582

11,899

Municipal bonds

-

-

33,382

3,509

33,382

3,509

Mortgage-backed securities

1,470

7

145,533

25,202

147,003

25,209

Corporate

5,802

898

20,289

3,561

26,091

4,459

Total

$ 7,272

$ 905

$ 367,839

$ 47,032

$ 375,111

$ 47,937

Unrealized losses at June 30, 2023 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.
The following table shows the gross unrealized losses and estimated fair value of available sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022 (dollars in thousands):

Less than 12 Months

More than 12 Months

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

December 31, 2022

U.S. Treasury

$ 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 June 30, ~~2022,~~2023, other investments consist of investments in ~~thirteen~~twelve low-income housing and historic equity partnerships (carrying basis of ~~$6,354)~~$5.5 million), stock in the Federal Home Loan Bank of Atlanta (“FHLB’) (carrying basis ~~$1,744)~~$2.64 million) and various other investments (carrying basis ~~$1,590)~~$1.95 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 June 30, ~~2022.~~2023. At June 30, ~~2022,~~2023, the Company was committed to invest an additional ~~$961~~$657 thousand in ~~four~~three low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in other liabilities on the consolidated balance sheet. ~~The Company does not have any pledged securities.~~
~~Note 3. Loans~~
~~Loans held for investment outstanding at June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):~~

2022

2021

Construction/Land Development

$ 71,212

$ 75,236

Farmland

72,573

66,344

Real Estate

133,747

139,552

Multi-Family

8,548

4,887

Commercial Real Estate

172,680

163,564

Home Equity – closed end

5,524

6,262

Home Equity – open end

44,267

44,247

Commercial & Industrial – Non-Real Estate

50,689

44,224

Consumer

8,852

8,036

Dealer Finance

119,758

107,346

Credit Cards

3,051

3,000

Gross loans

690,901

662,698

Less: Deferred loan fees, net of costs

(404 )

(277 )
Total

$ 690,497

$ 662,421

The Company has pledged ~~loans held for investment as collateral for borrowings~~securities with a par value of $225.4 million and market value of $197.4 million to the Federal ~~Home Loan~~Reserve Discount Window Bank Term Funding Program (“BTFP”). The BTFP was established in March 2023 to offer loans of ~~Atlanta totaling $161,729~~up to one year in length to banks, savings associations, credit unions, and ~~$163,326~~other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of ~~June 30, 2022 and December 31, 2021, respectively.~~all their depositors. The ~~Company maintains a blanket lien on certain loans in its residential real estate, commercial and home equity portfolios.~~
~~Loans held for sale, at fair value consists of loans originated by F&M Mortgage for sale in~~Bank has not borrowed from the secondary market. The volume of loans fluctuates due to changes in secondary market rates, which affects demand for mortgage loans. Loans held for sale as of June 30, 2022 and December 31, 2021 were $5,449 and $4,887, respectively.BTFP during 2023.
14
~~Table of Contents~~
~~Note 3. Loans, continued~~
~~The following is a summary of information pertaining to impaired loans (dollars in thousand):~~

June 30, 2022

December 31, 2021

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment⁽¹⁾

Balance

Allowance

Investment⁽¹⁾

Balance

Allowance

Impaired loans without a valuation allowance:

Construction/Land Development

$ 468

$ 468

$ 0

$ 645

$ 645

$ 0

Farmland

2,165

2,165

0

2,286

2,286

0

Real Estate

2,331

2,331

0

2,748

2,748

0

Multi-Family

0

0

-

-

-

-

Commercial Real Estate

8,058

8,058

-

8,494

8,494

-

Home Equity – closed end

-

-

-

147

147

-

Home Equity – open end

-

-

-

-

-

-

Commercial & Industrial – Non-Real Estate

-

-

-

-

-

-

Consumer

-

-

-

5

5

-

Credit cards

-

-

-

-

-

-

Dealer Finance

12

12

-

12

12

-

13,034

13,034

-

14,337

14,337

-

Impaired loans with a valuation allowance

Construction/Land Development

-

-

-

-

-

-

Farmland

-

-

-

-

-

-

Real Estate

1,546

1,546

34

1,172

1,172

119

Multi-Family

-

-

-

-

-

-

Commercial Real Estate

2,527

2,527

446

6,004

6,004

603

Home Equity – closed end

-

-

-

-

-

-

Home Equity – open end

-

-

-

-

-

-

Commercial & Industrial – Non-Real Estate

-

-

-

-

-

-

Consumer

-

-

-

-

-

-

Credit cards

-

-

-

-

-

-

Dealer Finance

77

77

3

95

95

14

4,150

4,150

483

7,271

7,271

736

Total impaired loans

$ 17,184

$ 17,184

$ 483

$ 21,608

$ 21,608

$ 736

¹~~The Recorded Investment is defined as the original principal balance less principal payments, charge-offs and nonaccrual payments applied to principal.~~
15
~~Table of Contents~~
~~Note 3. Loans Held for Investment, continued~~
~~The following is a summary of the average investment and interest income recognized for impaired loans (dollars in thousands):~~

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

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

$ 553

$ 4

$ 1,280

$ 3

$ 601

$ 10

$ 1,222

$ 16

Farmland

2,190

10

1,191

108

2,268

80

1,191

108

Real Estate

2,358

32

6,287

(52 )

2,654

65

3,985

87

Multi-Family

-

-

-

-

-

-

-

-

Commercial Real Estate

9,545

(31 )

9,940

102

8,291

155

5,558

123

Home Equity – closed end

-

-

674

6

81

-

684

11

Home Equity – open end

-

-

-

-

-

-

-

-

Commercial & Industrial – Non-Real Estate

-

-

4

-

-

-

7

-

Consumer

-

-

-

-

-

-

-

-

Credit Cards

-

-

-

-

-

-

-

-

Dealer Finance

14

1

15

1

14

1

17

1

14,660

16

19,391

168

13,909

311

12,664

346

Impaired loans with a valuation allowance:

Construction/Land Development

$ -

$ -

$ -

$ -

$ -

$ -

$ 131

$ -

Farmland

-

-

839

(59 )

-

-

876

-

Real Estate

1,521

18

1,621

22

1,363

34

5,456

32

Multi-Family

-

-

-

-

-

-

-

-

Commercial Real Estate

2,885

25

6,382

25

4,281

67

4,973

91

Home Equity – closed end

-

-

-

-

-

-

-

-

Home Equity – open end

-

-

-

-

-

-

76

-

Commercial & Industrial – Non-Real Estate

-

-

-

-

-

-

-

-

Consumer

-

-

-

-

-

-

1

-

Credit Card

-

-

-

-

-

-

-

-

Dealer Finance

66

3

124

2

90

4

135

5

4,472

46

8,966

(10 )

5,734

105

11,648

128

Total Impaired Loans

$ 19,132

$ 62

$ 28,357

$ 158

$ 19,643

$ 416

$ 24,312

$ 474

16
~~Table of Contents~~
~~Note 3. Loans, continued~~
~~The following table presents the aging of the recorded investment of past due loans (dollars in thousands) as of June 30, 2022 and December 31, 2021:~~
June 30, 2022

30-59 Days Past due

60-89 Days Past Due

Greater than 90 Days

Total Past Due

Current

Total Loan Receivable

Non-Accrual Loans

Recorded Investment >90 days & accruing

Construction/Land Development

$ 521

$ 28

$ 0

$ 549

$ 70,663

$ 71,212

$ 28

$ 0

Farmland

0

332

0

332

72,241

72,573

1,218

0

Real Estate

1,636

34

142

1,812

131,935

133,747

402

0

Multi-Family

0

0

0

0

8,548

8,548

0

0

Commercial Real Estate

0

0

108

108

172,572

172,680

108

0

Home Equity – closed end

0

105

0

105

5,419

5,524

0

0

Home Equity – open end

431

167

0

598

43,669

44,267

0

0

Commercial & Industrial – Non- Real Estate

180

22

41

243

50,446

50,689

0

41

Consumer

23

0

0

23

8,829

8,852

0

0

Dealer Finance

572

125

95

792

118,966

119,758

95

0

Credit Cards

12

20

13

45

3,006

3,051

0

13

Less: Deferred loan fees, net of costs

0

0

0

0

(404 )

(404 )

0

0

Total

$ 3,375

$ 833

$ 399

$ 4,584

$ 685,890

$ 690,497

$ 1,851

$ 55

December 31, 2021

30-59 Days Past due

60-89 Days Past Due

Greater than 90 Days

Total Past Due

Current

Total Loan Receivable

Non-Accrual Loans

Recorded Investment >90 days & accruing

Construction/Land Development

$ 360

$ 41

$ 38

$ 439

$ 74,797

$ 75,236

$ 302

$ 0

Farmland

0

0

0

0

66,344

66,344

1,320

0

Real Estate

1,254

89

395

1,738

137,814

139,552

827

0

Multi-Family

0

0

0

0

4,887

4,887

0

0

Commercial Real Estate

0

0

108

108

163,456

163,564

2,975

0

Home Equity – closed end

53

0

0

53

6,209

6,262

0

0

Home Equity – open end

471

216

0

687

43,560

44,247

0

0

Commercial & Industrial – Non- Real Estate

35

1

43

79

44,145

44,224

0

43

Consumer

9

67

0

76

7,960

8,036

1

0

Dealer Finance

694

91

16

801

106,545

107,346

40

0

Credit Cards

16

0

0

16

2,984

3,000

0

0

Less: Deferred loan fees, net of costs

0

0

0

0

(277 )

(277 )

0

0

Total

$ 2,892

$ 505

$ 600

$ 3,997

$ 658,424

$ 662,421

$ 5,465

$ 43

On June 30, 2022, other real estate owned included $197 of foreclosed residential real estate and on December 31, 2021, other real estate owned did not include any foreclosed residential real estate. The Company has $122 thousand of consumer mortgages for which foreclosure was in process on June 30, 2022.
~~Nonaccrual loans on June 30, 2022 would have earned approximately $28 thousand in interest income for the quarter had they been accruing loans.~~
17
~~Table of Contents~~
~~Note 4. Allowance for Loan Losses~~
~~A summary of changes in the allowance for loan losses (dollars in thousands) for June 30, 2022 and December 31, 2021 is as follows:~~
June 30, 2022

Beginning Balance

Charge-offs

Recoveries

Provision

Ending Balance

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Allowance for loan losses:

Construction/Land Development

$ 977

$ 0

$ 0

$ (97 )

$ 880

$ 0

$ 880

Farmland

448

0

0

71

519

0

519

Real Estate

1,162

17

0

(14 )

1,131

34

1,097

Multi-Family

29

0

0

25

54

0

54

Commercial Real Estate

2,205

0

0

98

2,303

446

1,857

Home Equity – closed end

41

0

0

(2 )

39

0

39

Home Equity – open end

407

0

130

(162 )

375

0

375

Commercial & Industrial – Non-Real Estate

288

36

32

100

384

0

384

Consumer

520

24

14

(148 )

362

0

362

Dealer Finance

1,601

523

337

272

1,687

3

1,684

Credit Cards

70

21

8

7

64

0

64

Total

$ 7,748

$ 621

$ 521

$ 150

$ 7,798

$ 483

$ 7,315

December 31, 2021

Beginning Balance

Charge-offs

Recoveries

Provision

Ending Balance

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Allowance for loan losses:

Construction/Land Development

$ 1,249

$ 0

$ 307

$ (579 )

$ 977

$ 0

$ 977

Farmland

731

0

0

(283 )

448

0

448

Real Estate

1,624

0

76

(538 )

1,162

119

1,043

Multi-Family

54

0

0

(25 )

29

0

29

Commercial Real Estate

3,662

0

19

(1,476 )

2,205

603

1,602

Home Equity – closed end

55

0

0

(14 )

41

-

41

Home Equity – open end

463

-

13

(69 )

407

-

407

Commercial & Industrial – Non-Real Estate

363

40

37

(72 )

288

-

288

Consumer

521

33

24

8

520

-

520

Dealer Finance

1,674

1,038

754

211

1,601

14

1,587

Credit Cards

79

54

29

16

70

-

70

Total

$ 10,475

$ 1,165

$ 1,259

$ (2,821 )

$ 7,748

$ 736

$ 7,012

18
Table of Contents

Note 4.3. Loans and Allowance for ~~Loan~~Credit Losses ~~continued~~

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 ~~table presents~~is a summary of the ~~recorded investment in~~major categories of total loans outstanding at June 30, 2023 and December 31, 2022 (dollars in thousands) ~~based on impairment method~~:

June 30, 2023

1-4 Family residential construction

$ 32,280

Other construction, land development and land

43,427

Secured by farmland

75,119

Home equity – open end

46,380

Real estate

169,955

Home Equity – closed end

5,305

Multifamily

7,963

Owner-occupied commercial real estate

91,387

Other commercial real estate

102,707

Agricultural loans

11,947

Commercial and industrial

44,802

Credit Cards

3,209

Automobile loans

120,871

Other consumer loans

15,488

Municipal loans

6,027

Gross loans

776,867

Unamortized net deferred loan fees

(607 )
Less allowance for credit losses

8,769

Net loans

$ 767,491

December 31, 2022

Construction/Land Development

$ 68,671

Farmland

74,322

Real Estate

153,281

Multi-Family

9,622

Commercial Real Estate

195,163

Home Equity – closed end

4,707

Home Equity – open end

46,928

Commercial & Industrial – Non-Real Estate

56,625

Consumer

6,488

Dealer Finance

125,125

Credit Cards

3,242

Gross loans

744,174

Unamortized net deferred loan fees

(570 )
Less allowance for credit losses

7,936

Net loans

$ 735,668

The Company has pledged loans held for investment as collateral for borrowings with the FHLB totaling $247.1 million and $209.8 million as of June 30, ~~2022~~2023 and December 31, ~~2021:~~2022, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial, agricultural farmland, and home equity portfolios.
June 30, 2022

Loan
Receivable

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Construction/Land Development

$ 71,212

$ 468

$ 70,744

Farmland

72,573

2,165

70,408

Real Estate

133,747

3,877

129,870

Multi-Family

8,548

0

8,548

Commercial Real Estate

172,680

10,585

162,095

Home Equity – closed end

5,524

0

5,524

Home Equity –open end

44,267

0

44,267

Commercial & Industrial – Non-Real Estate

50,689

0

50,689

Consumer

8,852

0

8,852

Dealer Finance

119,758

89

119,669

Credit Cards

3,051

0

3,051

Gross loans

690,901

17,184

673,717

Less: Deferred loan fees, net of costs

(404 )

0

(404 )
Total

$ 690,497

$ 17,184

$ 673,313

December 31, 2021

Loan
Receivable

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Construction/Land Development

$ 75,236

$ 645

$ 74,591

Farmland

66,344

2,286

64,058

Real Estate

139,552

3,920

135,632

Multi-Family

4,887

-

4,887

Commercial Real Estate

163,564

14,498

149,066

Home Equity – closed end

6,262

147

6,115

Home Equity –open end

44,247

-

44,247

Commercial & Industrial – Non-Real Estate

44,224

-

44,224

Consumer

8,036

5

8,031

Dealer Finance

107,346

107

107,239

Credit Cards

3,000

-

3,000

Gross loans

662,698

21,608

641,090

Less: Deferred loan fees, net of costs

(277 )

-

(277 )
Total

$ 662,421

$ 21,608

$ 640,813

19
Table of Contents

~~Note 4. Allowance for Loan Losses, continued~~
Nonaccrual and Past Due Loans

The following table shows the aging of the Company’s loan portfolio, ~~broken down~~ by ~~internal loan grade~~class, at June 30, 2023 (dollars in thousands) as:

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

June 30, 2023

1-4 Family residential construction

$ 440

$ -

$ -

$ -

$ 31,840

$ 32,280

Other construction, land development and land

164

520

-

30

42,713

43,427

Secured by farmland

-

-

-

986

74,133

75,119

Home equity – open end

240

-

-

228

45,912

46,380

Real estate

999

246

-

340

168,370

169,955

Home Equity – closed end

-

-

-

-

5,305

5,305

Multifamily

-

-

-

-

7,963

7,963

Owner-occupied commercial real estate

-

-

-

-

91,387

91,387

Other commercial real estate

923

65

-

-

101,719

102,707

Agricultural loans

-

-

-

88

11,859

11,947

Commercial and industrial

116

-

27

90

44,569

44,802

Credit Cards

18

9

2

-

3,180

3,209

Automobile loans

647

300

-

200

119,724

120,871

Other consumer loans

108

3

-

6

15,371

15,488

Municipal loans

-

-

-

-

6,027

6,027

Gross loans

3,655

1,143

29

1,968

770,072

776,867

Less: Unamortized net deferred loan fees

-

-

-

-

(607 )

(607 )
Loans held for investment

$ 3,655

$ 1,143

$ 29

$ 1,968

$ 769,465

$ 776,260

The following table shows the aging of ~~June 30, 2022 and~~the Company’s loan portfolio, by class, at December 31, ~~2021:~~2022 (dollars in thousands):

June 30, 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

$ 0

$ 5

$ 11,182

$ 39,977

$ 18,463

$ 1,557

$ 28

$ 0

$ 71,212

Farmland

55

283

9,519

42,734

16,916

1,848

1,218

0

72,573

Real Estate

0

694

26,840

65,846

27,333

8,598

4,436

0

133,747

Multi-Family

0

0

992

5,315

2,120

121

0

0

8,548

Commercial Real Estate

0

1,350

37,964

77,168

31,341

15,199

9,658

0

172,680

Home Equity – closed end

0

55

983

2,804

672

1,010

0

0

5,524

Home Equity – open end

0

1,346

17,430

21,853

1,927

1,494

217

0

44,267

Commercial & Industrial -Non-Real Estate

25

1,186

12,133

29,606

6,350

1,330

59

0

50,689

Consumer

26

368

3,451

4,769

171

67

0

0

8,852

Gross Loans

$ 106

$ 5,287

$ 120,494

$ 290,072

$ 105,293

$ 31,224

$ 15,616

$ 0

$ 568,092

Less: Deferred loan fees, net of costs

(404 )
Total

$ 567,688

Credit Cards

Dealer Finance

Performing

$ 3,038

$ 119,663

Non-performing

13

95

Total

$ 3,051

$ 119,758

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

20
Table of Contents

~~Note 4. Allowance for Loan Losses, continued~~There were $2.0 million and $2.2 million in nonaccrual loans at June 30, 2023 and December 31, 2022, respectively. The Company would have earned $66 thousand in the first six months of 2023 and $54 thousand in the first six months of 2022, if interest on the nonaccrual loans had been accrued.

December 31, 2021

Grade 1
Minimal Risk

Grade 2
Modest Risk

Grade 3
Average Risk

Grade 4
Acceptable Risk

Grade 5
Marginally Acceptable

Grade 6
Watch

Grade 7
Substandard

Grade 8
Doubtful

Total

Construction/Land Development

$ 0

$ 6

$ 9,952

$ 43,861

$ 19,457

$ 1,658

$ 302

$ 0

$ 75,236

Farmland

56

291

6,804

42,615

13,620

1,638

1,320

0

66,344

Real Estate

0

1,128

30,268

61,940

28,895

12,462

4,859

0

139,552

Multi-Family

0

0

1,021

2,586

1,154

126

0

0

4,887

Commercial Real Estate

0

2,124

36,308

72,414

35,444

4,428

12,846

0

163,564

Home Equity – closed end

0

61

1,268

3,103

762

1,068

0

0

6,262

Home Equity – open end

0

1,293

17,333

21,296

2,477

1,632

216

0

44,247

Commercial & Industrial - Non-Real Estate

0

1,001

7,562

21,527

13,538

533

63

0

44,224

Consumer

10

522

2,919

3,526

980

79

0

0

8,036

Gross loans

$ 66

$ 6,426

$ 113,435

$ 272,868

$ 116,327

$ 23,624

$ 19,606

$ -

$ 552,352

Less: Deferred loan fees, net of costs

(277 )
Total

$ 552,075

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

Credit Cards

Dealer Finance

Performing

$ 3,000

$ 107,330

Non-performing

-

16

Total

$ 3,000

$ 107,346

CECL

Incurred Loss

June 30, 2023

December 31, 2022

Nonaccrual loans with No Allowance

Nonaccrual Loans with an Allowance

Total Nonaccrual Loans

Nonaccrual Loans

1-4 Family residential construction

$ -

$ -

$ -

$ -

Other construction, land development and land

30

-

30

21

Secured by farmland

986

-

986

1,458

Home equity – open end

228

-

228

-

Real estate

340

-

340

419

Home Equity – closed end

-

-

-

-

Multifamily

-

-

-

-

Owner-occupied commercial real estate

-

-

-

-

Other commercial real estate

-

-

-

-

Agricultural loans

88

-

88

88

Commercial and industrial

90

-

90

13

Credit Cards

-

-

-

-

Automobile loans

200

-

200

210

Other consumer loans

6

-

6

15

Municipal loans

-

-

-

-

Total loans

$ 1,968

$ -

$ 1,968

$ 2,224

The following table represents the accrued interest receivables written off by reversing interest income during the three and six months ended June 30, 2023 (dollars in thousands):

For the Three Months Ended June 30, 2023

For the Six Months Ended June 30, 2023

1-4 Family residential construction

$ -

$ -

Other construction, land development and land

-

-

Secured by farmland

-

-

Home equity – open end

1

1

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

1

3

Other consumer loans

-

-

Municipal loans

-

-

Total loans

$ 2

$ 4

21
Table of Contents
Credit Quality Indicators
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of June 30, 2023 (dollars in thousands):

Term Loans by Year of Origination

2023

2022

2021

2020

2019

Prior

Revolving

Total

1-4 Family residential construction

Pass

$ -

$ -

$ -

$ -

$ -

$ -

$ 30,695

$ 30,695

Watch

642

-

-

-

-

-

503

1,145

Substandard

-

-

-

-

-

-

440

440

Total 1-4 Family residential construction

642

-

-

-

-

-

31,638

32,280

Current period gross write-offs

-

70

-

-

-

-

-

70

Other construction, land development and land
Pass

4,159

4,667

5,997

1,889

2,931

5,186

17,562

42,391

Watch

-

-

-

-

-

265

221

486

Substandard

-

520

-

-

-

30

-

550

Total Other construction, land development and land

4,159

5,187

5,997

1,889

2,931

5,481

17,783

43,427

Current period gross write-offs

-

-

-

-

-

-

-

-

Secured by farmland
Pass

2,055

13,699

14,321

27,916

2,556

6,739

5,133

72,419

Watch

-

-

-

-

799

915

-

1,714

Substandard

-

-

318

-

-

652

16

986

Total Secured by farmland

2,055

13,699

14,639

27,916

3,355

8,306

5,149

75,119

Current period gross write-offs

-

-

-

-

-

-

-

-

Home equity – open end
Pass

370

-

-

-

-

143

44,245

44,758

Watch

-

-

-

-

-

-

1,345

1,345

Substandard

-

-

-

-

-

-

277

277

Total Home equity - open end

370

-

-

-

-

143

45,867

46,380

Current period gross write-offs

-

-

-

-

-

-

-

-

Real estate
Pass

24,258

42,310

15,661

12,410

6,793

58,008

-

159,440

Watch

-

-

-

505

156

5,892

-

6,553

Substandard

-

-

545

-

1,226

2,191

-

3,962

Total Real estate

24,258

42,310

16,206

12,915

8,175

66,091

-

169,955

Current period gross write-offs

-

-

-

-

-

19

-

19

Home Equity – closed end
Pass

1,080

400

123

1,086

481

1,748

-

4,918

Watch

-

-

-

-

-

374

-

374

Substandard

-

-

-

-

13

-

-

13

Total Home Equity - closed end

1,080

400

123

1,086

494

2,122

-

5,305

Current period gross write-offs

-

-

-

-

-

-

-

-

Multifamily
Pass

-

2,749

1,431

926

-

1,616

1,137

7,859

Watch

-

-

-

-

-

104

-

104

Substandard

-

-

-

-

-

-

-

-

Total Multifamily

-

2,749

1,431

926

-

1,720

1,137

7,963

Current period gross write-offs

-

-

-

-

-

-

-

-

Owner-occupied commercial real estate
Pass

1,413

18,493

18,655

7,307

3,685

24,061

4,748

78,362

Watch

-

-

-

-

41

2,121

-

2,162

Substandard

-

-

-

-

6,361

1,204

3,298

10,863

Total Owner-occupied commercial real estate

1,413

18,493

18,655

7,307

10,087

27,386

8,046

91,387

Current period gross write-offs

-

-

-

-

-

-

-

-

Other commercial real estate
Pass

2,930

30,265

13,034

5,127

3,875

32,581

2,924

90,736

Watch

-

-

-

-

-

11,884

-

11,884

Substandard

-

-

-

-

-

87

-

87

Total Other commercial real estate

2,930

30,265

13,034

5,127

3,875

44,552

2,924

102,707

Current period gross write-offs

-

-

-

-

-

-

-

-

22
Table of Contents

Term Loans by Year of Origination

2023

2022

2021

2020

2019

Prior

Revolving

Total

Agricultural loans

Pass

2,036

2,865

661

481

4

57

5,568

11,672

Watch

-

-

-

38

-

-

149

187

Substandard

-

63

14

11

-

-

-

88

Total Agricultural loans

2,036

2,928

675

530

4

57

5,717

11,947

Current period gross write-offs

-

-

-

-

-

-

-

-

Commercial and industrial
Pass

3,493

9,454

6,193

2,153

963

492

18,845

41,593

Watch

-

-

62

-

-

-

2,471

2,533

Substandard

-

-

646

27

-

3

-

676

Total 1-4 Commercial and industrial

3,493

9,454

6,901

2,180

963

495

21,316

44,802

Current period gross write-offs

-

-

-

-

-

2

-

2

Credit Cards
Pass

-

-

-

-

-

-

3,207

3,207

Watch

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

2

2

Total Credit cards

-

-

-

-

-

-

3,209

3,209

Current period gross write-offs

-

-

-

-

-

-

18

18

Automobile loans
Pass

34,245

46,209

24,450

10,283

3,447

1,495

-

120,129

Watch

31

205

80

80

47

62

-

505

Substandard

-

86

105

30

5

11

-

237

Total Automobile loans

34,276

46,500

24,635

10,393

3,499

1,568

-

120,871

Current period gross write-offs

35

300

88

88

29

18

-

821

Other consumer loans
Pass

3,830

6,466

2,991

1,286

439

59

386

15,457

Watch

-

5

9

-

5

5

1

25

Substandard

-

6

-

-

-

-

-

6

Total Other consumer loans

3,830

6,477

3,000

1,286

444

64

387

15,488

Current period gross write-offs

-

16

1

1

3

2

-

23

Municipal loans
Pass

-

175

1,024

1,128

1,257

2,443

-

6,027

Watch

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

Total Municipal loans

-

175

1,024

1,128

1,257

2,443

-

6,027

Current period gross write-offs

-

-

-

-

-

-

-

-

Total loans

80,542

178,637

106,320

72,683

35,084

160,428

143,173

776,867

Less: Unamortized net deferred loan fees

(607
)
Loans held for investment

776,260

Current period gross write-offs

35

386

352

89

32

41

18

953

23
Table of Contents
Under the adoption of ASC 326, the Company consolidated their internal risk ratings 1 through 5 into a pass category. Doubtful loans are charged off; dealer finance loans utilize the updated credit quality indicators. Credit cards are classified as pass or substandard. The credit quality indicators for watch and substandard remain unchanged.
Description of the Company’s credit quality indicators under CECL:
Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
Grade 6 – Watch: Loans are currently protected but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.
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:~~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.
24
Table of Contents

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 beby covered through additional long-term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

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

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

21
~~Table of Contents~~
~~Note 4. Allowance for Loan Losses, continued~~
Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful: ~~The loan has~~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.

~~Note 5. Employee Benefit Plan~~Collateral Dependent Disclosures

The ~~Bank~~collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has ~~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~~adopted the practical expedient to measure the allowance for credit losses based on ~~years of service and earnings. The Company uses December 31~~^st as the ~~measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in 2022.~~
~~The following is a summary of net periodic pension costs for the three and six month periods ended June 30, 2022 and 2021 (dollars in thousands):~~

Six Months Ended

Three Months Ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Service cost

$ 380

$ 606

$ 190

$ 216

Interest cost

208

314

104

95

Expected return on plan assets

-

(55 )

-

(198 )
Amortization of prior service cost

(390 )

(9 )

(195 )

-

Amortization of net loss

116

166

58

72

Net periodic pension cost

$ 314

$ 1,022

$ 157

$ 185

~~Note 6. Fair Value~~
~~The~~ fair value of ~~a financial instrument~~collateral. The allowance for credit losses 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 arecalculated on an individual loan basis based on ~~estimates using present value or other valuation techniques.~~
~~Those techniques are significantly affected by~~ the ~~assumptions used, including~~shortfall between 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~~loan's collateral, which is adjusted for liquidation costs/discounts, 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.
22
~~Table of Contents~~
~~Note 6. Fair Value, continued~~
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
~~Level 1~~
–
~~Valuation is based on quoted prices in active markets for identical assets and liabilities.~~
~~Level 2~~
–
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
~~Level 3~~
–
~~Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.~~
~~The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:~~
~~Securities~~
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities.amortized cost. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.
~~Loans Held for Sale~~
The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.
~~Derivative assets – IRLCs~~
The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2.
~~Derivative Asset/Liability – Forward Sale Commitments~~
The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.
~~Derivative Asset/Liability – Indexed Certificate of Deposit~~
The Company’s derivatives, which are associated with the Indexed Certificate of Deposit (ICD) product once offered, are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs. This product is no longer offered and the remaining certificates of deposits matured in the three months ending June 30, 2022.
23
~~Table of Contents~~
~~Note 6. Fair Value, continued~~
~~The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (dollars in thousands):~~
June 30, 2022

Total

Level 1

Level 2

Level 3

Assets:

Loans held for sale, F&M Mortgage

$ 5,449

$ -

$ 5,449

$ -

U. S. Treasury securities

46,737

-

46,737

-

U. S. Government sponsored enterprises

156,149

-

156,149

-

Securities issued by States and political subdivisions in the U. S.

43,686

-

43,686

-

Mortgage-backed obligations of federal agencies

171,030

-

171,030

-

Corporate debt securities

29,221

-

29,221

-

Forward Sales Commitments

535

-

535

-

Assets at Fair Value

$ 452,807

$ -

$ 452,807

$ -

Liabilities:

IRLC

$ 273

$ -

$ 273

$ -

Liabilities at Fair Value

$ 273

$ -

$ 273

$ -

December 31, 2021

Total

Level 1

Level 2

Level 3

Assets:

Loans held for sale, F&M Mortgage

$ 4,887

$ -

$ 4,887

$ -

IRLC

258

-

258

-

U.S. Government treasuries

29,482

-

29,482

-

U.S. Government sponsored enterprises

133,714

-

133,714

-

Securities issued by States and political subdivisions of the US

34,337

-

34,337

-

Mortgage-backed obligations of federal agencies

183,647

-

183,647

-

Corporate debt securities

22,702

-

22,702

-

Forward sales commitments

112

-

112

-

Assets at Fair Value

$ 409,139

$ -

$ 409,139

$ -

Liabilities:

Derivatives – ICD

$ 3

$ -

$ 3

$ -

Liabilities at Fair Value

$ 3

$ -

$ 3

$ -

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:~~
~~Assets Held for Sale~~
Assets held for sale were transferred from bank premises at the lower of cost less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral exceeds the amortized cost, no allowance is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for sale as nonrecurring Level 3.
24
~~Table of Contents~~
~~Note 6. Fair Value, continued~~
~~Impaired Loans~~
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.
Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “liquidation” value of independent appraisals or evaluations. The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company as observable market data is categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
~~As of June 30, 2022 and December 31, 2021, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.~~
~~Other Real Estate Owned~~
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
The Company markets other real estate owned and assets held for sale both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.
The following table summarizes the Company’s other real estate owned and assets held for sale that were measured at fair value on a nonrecurring basis as of June 30, 2022 and December 31, 2021 (dollars in thousands).required.

25
Table of Contents

~~Note 6. Fair Value, continued~~
The following table ~~summarizes~~presents an analysis of collateral-dependent loans of the ~~Company’s financial assets that were measured at fair value on a nonrecurring basis during the period~~Company as of June 30, 2023 (dollars in thousands):

June 30, 2022

Total

Level 1

Level 2

Level 3

Real Estate

$ 1,512

$ -

$ -

$ 1,512

Commercial Real Estate

2,081

-

-

2,081

Dealer Finance

74

-

-

74

Impaired loans

$ 3,667

$ -

$ -

$ 3,667

Bank premises held for sale

$ 300

$ -

$ -

$ 300

Other real estate owned

$ 197

$ -

$ -

$ 197

December 31, 2021

Total

Level 1

Level 2

Level 3

Real Estate

$ 1,053

$ -

$ -

$ 1,053

Commercial Real Estate

5,401

-

-

5,401

Dealer Finance

81

-

-

81

Impaired loans

$ 6,535

$ -

$ -

$ 6,535

Bank premises held for sale

$ 300

$ -

$ -

$ 300

Other real estate owned

$ -

$ -

$ -

$ -

June 30, 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

$ -

~~The following table presents information about Level 3 Fair Value Measurements~~Allowance for ~~June 30, 2022 and December 31, 2021 (dollars in thousands):~~

Fair Value at
June 30, 2022

Valuation Technique

Significant Unobservable Inputs

Range
Impaired Loans

$
3,667

Discounted appraised value

Discount for selling costs and marketability

14.00%-32.92% (Average 22.97%)
Bank premises held for sale

300

Contract value

Discount for selling costs and marketability

n/a
Other real estate owned

197

Discounted appraised value

Discount for selling costs and marketability

6.00% (Average 6.00%)
~~Fair Value at December 31, 2021~~
~~Valuation~~ ~~Technique~~
~~Significant Unobservable Inputs~~
~~Range~~
~~Impaired Loans~~
$
~~6,535~~
~~Discounted appraised value~~
~~Discount for selling costs and marketability~~
~~11.76%-28.00% (Average 17.31%)~~
~~Bank premises held for sale~~
~~300~~
~~Contract value~~
~~Discount for selling costs and marketability~~
~~n/a~~
~~Other real estate owned~~
-
-
-
-
N~~ote 7. Disclosures about Fair Value of Financial Instruments~~Credit Losses

The ~~following presents the carrying amount, fair value~~ACL for loans and ~~placement~~unfunded commitments is summarized in the ~~fair value hierarchy of~~following tables (dollars in thousands) summarizes the ~~Company’s financial instruments as of~~activity related to the allowance for credit losses for the six months ended June 30, ~~2022 and December 31, 2021. Fair values for June 30, 2022 and December 31, 2021 are estimated~~2023 under the ~~exit price notion in accordance with the prospective adoption of ASU 2016-01, “~~~~Recognition and Measurement of Financial Assets and Financial Liabilities.~~CECL methodology.
ACL for Loans

December 31, 2022

Adjustment for adoption of ASU 2016-13

Charge-offs

Recoveries

Provision for loan & leases credit losses

June 30, 2023

1-4 Family residential construction

$ 324

$ 109

$ 70

$ 1

$ 121

$ 485

Other construction, land development and land

694

602

-

-

78

1,374

Secured by farmland

571

311

-

-

9

891

Home equity – open end

446

(189 )

-

-

-

257

Real estate

1,389

(184 )

19

-

74

1,260

Home Equity – closed end

39

96

-

-

22

157

Multifamily

71

182

-

-

(57 )

196

Owner-occupied commercial real estate

992

280

-

-

(35 )

1,237

Other commercial real estate

1,023

(582 )

-

-

(3 )

438

Agricultural loans

80

(58 )

-

-

-

22

Commercial and industrial

368

338

2

1

37

742

Credit Cards

68

26

18

7

5

88

Automobile loans

1,790

(257 )

821

406

337

1,455

Other consumer loans

81

103

23

27

(21 )

167

Municipal loans

-

-

-

-

-

-

Total loans

$ 7,936

$ 777

$ 953

$ 442

$ 567

$ 8,769

26
Table of Contents

N~~ote 7. Disclosures about Fair Value~~Prior to the adoption of ~~Financial Instruments, continued~~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).

June 30, 2022

Beginning Balance

Charge-offs

Recoveries

Provision

Ending Balance

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Allowance for loan losses:

Construction/Land Development

$ 977

$ -

$ -

$ (97 )

$ 880

$ -

$ 880

Farmland

448

-

-

71

519

-

519

Real Estate

1,162

17

-

(14 )

1,131

34

1,097

Multi-Family

29

-

-

25

54

-

54

Commercial Real Estate

2,205

-

-

98

2,303

446

1,857

Home Equity – closed end

41

-

-

(2 )

39

-

39

Home Equity – open end

407

-

130

(162 )

375

-

375

Commercial & Industrial – Non-Real Estate

288

36

32

100

384

-

384

Consumer

520

24

14

(148 )

362

-

362

Dealer Finance

1,601

523

337

272

1,687

3

1,684

Credit Cards

70

21

8

7

64

-

64

Total

$ 7,748

$ 621

$ 521

$ 150

$ 7,798

$ 483

$ 7,315

The ~~estimated fair values,~~following tables presents, as of June 30, 2023 and ~~related carrying amounts~~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)~~, of the Company’s financial instruments are as follows (dollars in thousands):~~.

Fair Value Measurements at June 30, 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
June 30, 2022

Assets:

Cash and cash equivalents

$ 17,254

$ 17,254

$ -

$ -

$ 17,254

Securities

446,948

-

446,948

-

446,948

Loans held for sale

5,449

-

5,449

-

5,449

Loans held for investment, net

690,497

-

-

676,687

676,687

Interest receivable

3,567

-

3,567

-

3,567

Bank owned life insurance

23,210

-

23,210

-

23,210

Forward sales commitments

535

-

535

-

535

Total

$ 1,187,460

$ 17,254

$ 479,709

$ 676,687

$ 1,173,650

Liabilities:

Deposits

$ 1,100,210

$ -

$ 980,822

$ 116,563

$ 1,097,385

Short-term debt

30,000

-

30,015

30,015

Long-term debt

11,788

-

-

11,890

11,890

IRLC

273

-

273

273

Interest payable

341

-

341

-

341

Total

$ 1,142,612

$ -

$ 981,436

$ 158,468

$ 1,139,904

Fair Value Measurements at December 31, 2021 Using

Carrying Amount

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Fair Value at December 31, 2021

Assets:

Cash and cash equivalents

$ 88,121

$ 88,121

$ -

$ -

$ 88,121

Securities

404,007

-

404,007

-

404,007

Loans held for sale

4,887

-

4,887

-

4,887

IRLC

258

-

258

-

258

Loans held for investment, net

662,421

-

-

652,096

652,096

Interest receivable

3,117

-

3,117

-

3,117

Bank owned life insurance

22,878

-

22,878

-

22,878

Forward sales commitments

112

-

112

-

112

Total

$ 1,185,801

$ 88,121

$ 435,259

$ 652,096

$ 1,175,476

Liabilities:

Deposits

$ 1,080,295

$ -

$ 956,439

$ 123,718

$ 1,080,157

Long-term debt

21,772

-

-

22,443

22,443

Interest payable

491

-

491

-

491

Total

$ 1,102,558

$ -

$ 956,930

$ 146,161

$ 1,103,091

~~Note 8. Troubled Debt Restructuring~~
~~As of June 30, 2022, the Company had TDRs totaling $4,205 with an estimated allowance of $124. As of December 31, 2021, the Company had TRDs totaling $5,138 with an estimated allowance of $167.~~

June 30, 2023

Loan Balances

Allowance for Credit Losses - Loans

Loans Individually Evaluated

Loans Collectively Evaluated

Total

Loans Individually Evaluated

Loans Collectively Evaluated

Total

1-4 Family residential construction

$ -

$ 32,280

$ 32,280

$ -

$ 485

$ 485

Other construction, land development and land

520

42,907

43,427

226

1,148

1,374

Secured by farmland

-

75,119

75,119

-

891

891

Home equity – open end

-

46,380

46,380

-

257

257

Real estate

-

169,955

169,955

-

1,260

1,260

Home Equity – closed end

-

5,305

5,305

-

157

157

Multifamily

-

7,963

7,963

-

196

196

Owner-occupied commercial real estate

-

91,387

91,387

-

1,237

1,237

Other commercial real estate

-

102,707

102,707

-

438

438

Agricultural loans

-

11,947

11,947

-

22

22

Commercial and industrial

-

44,802

44,802

-

742

742

Credit Cards

-

3,209

3,209

-

88

88

Automobile loans

-

120,871

120,871

-

1,455

1,455

Other consumer loans

-

15,488

15,488

-

167

167

Municipal loans

-

6,027

6,027

-

-

-

Total loans

$ 520

$ 776,347

$ 776,867

$ 226

$ 8,543

$ 8,769

27
Table of Contents

~~Note 8. Troubled Debt Restructuring, continued~~
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

~~Troubled debt restructurings include modifications~~Prior to the adoption of ~~interest rates, revisions~~ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable 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. All loans that are considered to be TDRs are reviewed for impairmentcollect all amounts due in accordance with the ~~Company’s ALLL methodology. The Company considers~~original contractual terms of the loan agreements. Impaired loans ~~placed~~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 ~~90 days past due~~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 ~~be nonperforming. There were no nonperforming TDRs at June 30, 2022 and December 31, 2021.~~
~~The following table shows, by modification type, TDRs that occurred during~~principal unless collectability of the ~~three and six months ended June 30, 2022 and 2021 (dollars~~principal amount was reasonably assured, in ~~thousands):~~which case interest was recognized on a cash basis.

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

No. of Contracts

Pre-Modification Outstanding Recorded Investment

Post- Modification Outstanding Recorded Investment

No. of Contracts

Pre-Modification Outstanding Recorded Investment

Post- Modification Outstanding Recorded Investment

Change in terms

-

$ -

$ -

1

$ 164

$ 164

Extended maturity

3

50

50

3

50

50

Total

3

$ 50

$ 50

4

$ 214

$ 214

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

No. of Contracts

Pre-Modification Outstanding Recorded Investment

Post- Modification Outstanding Recorded Investment

No. of Contracts

Pre-Modification Outstanding Recorded Investment

Post- Modification Outstanding Recorded Investment

Change in terms

1

$ 986

$ 986

2

$ 1,096

$ 1,096

Total

1

$ 986

$ 986

2

$ 1,096

$ 1,096

~~Note 9. Accumulated Other Comprehensive Loss~~
~~The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).~~

For the three months ended June 30, 2022

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at March 31, 2022

$ (16,060 )

$ (3,291 )

$ (19,351 )
Change in unrealized securities gains (losses), net of tax benefit of $4,512

(16,972 )

-

(16,972 )
Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20

(77 )

-

(77 )
Balance at June 30, 2022

$ (33,109 )

$ (3,291 )

$ (36,400 )

For the three months ended June 30, 2021

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at March 31, 2021

$ (310 )

$ (3,821 )

$ (4,131 )
Change in unrealized securities gains (losses), net of tax expense of $74

279

-

279

Balance at June 30, 2021

$ (31 )

$ (3,821 )

$ (3,852 )

28
Table of Contents

~~Note 9. Accumulated Other Comprehensive Loss, continued~~

For the six months ended June 30, 2022

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 gains (losses), net of tax benefit of $8,301

(31,231 )

-

(31,231 )
Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20

(77 )

-

(77 )
Balance at June 30, 2022

$ (33,109 )

$ (3,291 )

$ (36,400 )

For the six months ended June 30, 2021

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at December 31, 2020

$ 804

$ (3,821 )

$ (3,017 )
Change in unrealized securities gains (losses), net of tax benefit of $222

(835 )

-

(835 )
Balance at June 30, 2021

$ (31 )

$ (3,821 )

$ (3,852 )
~~During the three months ended June 30, 2022 there were security losses of $97, net of tax of $20, that were reclassified out of unrealized gains on available~~The following table presents loans individually evaluated for sale securities and reclassified into net investment security losses on the consolidated statements of income. There were no reclassifications adjustments reported on the consolidated statements of income during the three or six months ended June 30, 2021.
~~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 salesimpairment by class 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~~as of ~~commissions on products provided.~~
~~The following tables represent revenues and expenses by segment for the three and six months ended June 30,~~December 31, 2022 ~~and 2021~~ (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.

29
Table of Contents

~~Note 10. Business Segments, continued~~The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the six-month period ended June 30, 2022 (dollars in thousands):

Six Months Ended June 30, 2022

F&M Bank

F&M Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income

$ 19,019

$ 61

$ 15

$ -

$ 1

$ (26 )

$ 19,070

Service charges on deposits

581

-

-

-

-

-

581

Investment services and insurance income

-

-

454

-

-

(5 )

449

Mortgage banking income, net

-

1,379

-

-

-

-

1,379

Title insurance income

-

-

-

839

-

-

839

Other operating income

1,504

2

-

-

-

-

1,506

Total income (loss)

21,104

1,442

469

839

1

(31 )

23,824

Expenses:

Interest Expense

1,774

12

-

-

251

(26 )

2,011

Provision for loan losses

150

-

-

-

-

-

150

Salary and benefit expense

8,003

1,196

218

610

-

-

10,027

Other operating expenses

6,636

464

32

162

(13 )

(5 )

7,276

Total expense

16,563

1,672

250

772

238

(31 )

19,464

Net income (loss) before taxes

4,541

(230 )

219

67

(237 )

-

4,360

Income tax expense (benefit)

469

-

47

-

(473 )

-

43

Net Income (Loss) attributable to F&M Bank Corp.

$ 4,072

$ (230 )

$ 172

$ 67

$ 236

$ -

$ 4,317

Total Assets

$ 1,230,308

$ 9,499

$ 8,863

$ 4,635

$ 83,962

$ (105,715 )

$ 1,231,552

Goodwill

$ 2,868

$ -

$ -

$ 3

$ 211

$ -

$ 3,082

Three months ended June 30, 2022

F&M Bank

F&M Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income

$ 9,982

$ 32

$ 7

$ -

$ 1

$ (13 )

$ 10,009

Service charges on deposits

274

-

-

-

-

-

274

Investment services and insurance income

-

-

201

-

-

(3 )

198

Mortgage banking income, net

-

637

-

-

-

-

637

Title insurance income

-

-

-

366

-

-

366

Other operating income

796

-

-

-

-

-

796

Total income (loss)

11,052

669

208

366

1

(16 )

12,280

Expenses:

Interest Expense

900

6

-

-

114

(13 )

1,007

Provision for loan losses

600

-

-

-

-

-

600

Salary and benefit expense

4,056

623

114

309

-

-

5,102

Other operating expenses

3,308

250

11

79

6

(3 )

3,651

Total expense

8,864

879

125

388

120

(16 )

10,360

Net income (loss) before taxes

2,188

(210 )

83

(22 )

(119 )

-

1,920

Income tax expense

83

-

16

-

32

-

131

Net Income (Loss) attributable to F&M Bank Corp.

$ 2,105

$ (210 )

$ 67

$ (22 )

$ (151 )

$ -

$ 1,789

Six Months Ended June 30, 2022

Average Recorded

Interest Income

Investment

Recognized

Impaired loans with no related allowance recorded:

Construction/Land Development

$ 601

$ 10

Farmland

2,268

80

Real Estate

2,654

65

Multi-Family

-

-

Commercial Real Estate

8,291

155

Home Equity – closed end

81

-

Home Equity – open end

-

-

Commercial & Industrial – Non-Real Estate

-

-

Consumer

-

-

Credit Cards

-

-

Dealer Finance

14

1

13,909

311

Impaired loans with an allowance recorded:

Construction/Land Development

$ -

$ -

Farmland

-

-

Real Estate

1,363

34

Multi-Family

-

-

Commercial Real Estate

4,281

67

Home Equity – closed end

-

-

Home Equity – open end

-

-

Commercial & Industrial – Non-Real Estate

-

-

Consumer

-

-

Credit Card

-

-

Dealer Finance

90

4

5,734

105

Total Impaired Loans

$ 19,643

$ 416

30
Table of Contents

~~Note 10. Business Segments, continued~~Modifications Made to Borrowers Experiencing Financial Difficulty

Six Months Ended June 30, 2021

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income

$ 17,489

$ 124

$ 59

$ -

$ 1

$ (108 )

$ 17,565

Service charges on deposits

539

-

-

-

-

-

539

Investment services and insurance income

-

-

530

-

-

(3 )

527

Mortgage banking income, net

-

2,699

-

-

-

-

2,699

Title insurance income

-

-

-

1,051

-

-

1,051

Other operating income (loss)

1,621

80

-

-

(76 )

-

1,625

Total income (loss)

19,649

2,903

589

1,051

(75 )

(111 )

24,006

Expenses:

Interest Expense

1,771

98

-

-

376

(108 )

2,137

(Recovery of) loan losses

(1,975 )

-

-

-

-

-

(1,975 )
Salary and benefit expense

7,112

1,282

181

582

-

-

9,157

Other operating expenses

6,300

464

19

154

39

(3 )

6,973

Total expense

13,208

1,844

200

736

415

(111 )

16,292

Net income (loss) before taxes

6,441

1,059

389

315

(490 )

-

7,714

Income tax expense (benefit)

922

-

81

-

(310 )

-

693

Net Income (Loss) attributable to F&M Bank Corp.

$ 5,519

$ 1,059

$ 308

$ 315

$ (180 )

$ -

$ 7,021

Total Assets

$ 1,110,211

$ 13,969

$ 8,367

$ 3,049

$ 112,338

$ (142,959 )

$ 1,104,975

Goodwill

$ 2,868

$ 47

$ -

$ 3

$ 164

$ -

$ 3,082

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.

Three Months Ended June 30, 2021

F&M Bank

VBS Mortgage

TEB Life/FMFS

VS Title

Parent Only

Eliminations

F&M Bank Corp. Consolidated

Revenues:

Interest Income

$ 8,773

$ 52

$ 29

$ -

$ 1

$ (36 )

$ 8,819

Service charges on deposits

254

-

-

-

-

-

254

Investment services and insurance income

-

-

182

-

-

(2 )

180

Mortgage banking income, net

-

1,027

-

-

-

-

1,027

Title insurance income

-

-

-

595

-

-

595

Other operating income (loss)

1,028

57

-

-

(55 )

-

1,030

Total income (loss)

10,055

1,136

211

595

(54 )

(38 )

11,905

Expenses:

Interest Expense

895

32

-

-

178

(36 )

1,069

(Recovery of) loan losses

(1,250 )

-

-

-

-

-

(1,250 )
Salary and benefit expense

3,598

667

84

296

-

-

4,645

Other operating expenses

3,466

231

13

72

19

(2 )

3,799

Total expense

6,709

930

97

368

197

(38 )

8,263

Net income (loss) before taxes

3,346

206

114

227

(251 )

-

3,642

Income tax expense (benefit)

401

-

24

-

(3 )

-

422

Net Income (Loss) attributable to F&M Bank Corp.

$ 2,945

$ 206

$ 90

$ 227

$ (248 )

$ -

$ 3,220

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.
There was one loan modified to a borrower experiencing financial difficulty in the three and six months ended June 30, 2023 (see table below, dollars in thousands). There were no loans that had a payment default during the quarter that were modified in the previous 12 months.

Term Extension

Amortized Cost

Weighted Average Term Extension (Months)

Automobile loans

$ 23

3

Total loans

$ 23

3

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

160

17

-

Home Equity – closed end

-

-

-

Multifamily

-

-

-

Owner-occupied commercial real estate

-

-

-

Other commercial real estate

-

-

-

Agricultural loans

-

-

-

Commercial and industrial

-

-

-

Credit Cards

-

-

-

Automobile loans

44

-

-

Other consumer loans

-

-

-

Municipal loans

-

-

-

Total loans

$ 204

$ 17

$ -

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

31
Table of Contents

~~Note 11. Debt~~
~~Short-term Debt~~
The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (FHLB) short-term borrowings to support loans growth and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. There was $30,000 in short-term debt at June 30, 2022 and no short-term debt at December 31, 2021.
~~Long-term Debt~~
The Company also utilizes the FHLB advance program to fund loan growth and provide liquidity. The balance of these obligations at June 30, 2022 and December 31, 2021 were $0 and $10,000, respectively. The interest rates on long-term debt are fixed at the time of the advance; the weighted average interest rate was .81% at at December 31, 2021. FHLB advances include a $10,000 letter of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.
On July 29, 2020, the Company sold and issued to certain institutional accredited investors $5,000 in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7,000 in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030 (the “2030 Notes”). The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning on July 31, 2022 through maturity, the 2027 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2027 Notes will mature on July 31, 2027. The 2030 Notes will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the 2030 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2030 Notes will mature on July 31, 2030. The subordinated notes, net of issuance costs totaled $11,788 at June 30, 2022.
~~Note 12. Revenue Recognition~~
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
~~Service Charges on Deposit Accounts~~
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
~~Investment Services and Insurance Income~~
Investment services and insurance income primarily consists of commissions received on mutual funds and other investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.
~~Title Insurance Income~~
~~VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate transaction is completed.~~
32
~~Table of Contents~~
~~Note 12. Revenue Recognition, continued~~
~~ATM and Check Card Fees~~
ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
~~Other~~
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, online payment fees, cashier’s checks, mobile banking fees and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
~~Gains/Losses on sale of OREO~~Unfunded Commitments

The Company ~~records~~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 ~~gain or~~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 ~~from the sale of OREO when the control~~expense. The estimate includes consideration of the ~~property transfers to the buyer,~~likelihood that funding will occur, which ~~generally occurs at the time~~is based on a historical funding study derived from internal information, and an estimate of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. The Company recorded noexpected credit losses on commitments expected to be funded over its estimated life, which are the ~~sale~~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 ~~OREO property~~$719 thousand at June 30, 2023 is separately classified on the balance sheet within Other Liabilities.
The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended June 30, ~~2022 and 2021, which is presented on the consolidated income statement as a noninterest expense and therefore, not reflected in the table below.~~
~~The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2022 and 2021~~2023 (dollars in thousands).

Six Months Ended
June 30,

Three Months Ended
June 30,

2022

2021

2022

2021

Noninterest Income

In-scope of Topic 606:

Service Charges on Deposits

$ 581

$ 539

$ 274

$ 254

Investment Services and Insurance Income

449

527

198

180

Title Insurance Income

839

1,051

366

595

ATM and check card fees

1,195

1,120

632

600

Other

399

514

242

448

Noninterest Income (in-scope of Topic 606)

3,463

3,751

1,712

2,077

Noninterest Income (out-of-scope of Topic 606)

1,291

2,690

559

1,009

Total Noninterest Income

$ 4,754

$ 6,441

$ 2,271

$ 3,086

~~Contract Balances~~
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2022 and December 31, 2021, the Company did not have any significant contract balances.
33
~~Table of Contents~~

Total Allowance for Credit Losses – Unfunded Commitments

Balance, December 31, 2022

$ -

Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13

747

Recovery of credit losses

(28 )
Balance, June 30, 2023

$ 719

Note ~~12. Revenue Recognition, continued~~
~~Contract Acquisition Costs~~
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
~~Note 13. Leases~~
~~The Company adopted ASU No. 2016-02~~ ~~“Leases (Topic 842)”~~ ~~and all subsequent ASUs that modified Topic 842. The Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.~~
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
~~The following tables present information about the Company’s leases (dollars in thousands):~~

June 30, 2022

Lease Liabilities

$ 865

Right-of-use assets

$ 842

Weighted average remaining lease term (years)

2.97 years

Weighted average discount rate

3.10 %

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Operating lease cost

$ 47

$ 15

$ 94

$ 51

Total lease cost

$ 47

$ 15

$ 94

$ 51

Cash paid for amounts included in the measurement of lease liabilities

$ 53

$ 35

$ 105

$ 66

~~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):~~
~~June 30, 2022~~
~~Six months ending December 31, 2022~~
$ 79
~~Twelve months ending December 31, 2023~~
~~135~~
~~Twelve months ending December 31, 2024~~
~~136~~
~~Twelve months ending December 31, 2025~~
98
~~Twelve months ending December 31, 2026~~
70
~~Thereafter~~
~~518~~
~~Total undiscounted cash flows~~
$ ~~1,036~~
~~Discount~~
~~171~~
~~Lease liabilities~~
$ ~~865~~
34
~~Table of Contents~~
~~Note 14.~~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)~~(“LHFS”) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business ~~total $5,449~~totaled $881 thousand as of June 30, ~~2022~~2023 of which ~~$5,509~~$881 thousand 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 ~~Liabilities”~~Assets” in the Consolidated Balance Sheet at June 30, ~~2022,~~2023, and totaled ~~$273,~~$129 thousand, with a notional amount of ~~$24,826~~$11.6 million and total positions of ~~78.~~39. The fair value of the IRLCs were reported in the “Other liabilities” in the Consolidated Balance Sheet at December 31, ~~2021~~2022 and totaled ~~$258,~~$92 thousand, with a notional amount of ~~$18,801~~$12.2 million and total positions of ~~70.~~38. Changes in fair value are recorded as a component of “Mortgage banking ~~income, net”~~income” in the Consolidated Income Statement for the period ended June 30, ~~2022~~2023 and ~~2021.~~2022. The Company’s IRLCs are classified as Level 2. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.
32
Table of Contents

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 June 30, ~~2022~~2023 and totaled ~~$535,~~$29 thousand, with a notional amount of ~~$30,335~~$12.5 million and total positions of ~~95.~~43. The fair value of forward sales commitments was reported in “Other Assets” in the Consolidated Balance Sheet at December 31, ~~2021~~2022 and totaled ~~$112,~~$186 thousand, with a notional amount of ~~$23,721~~$13.6 million and total positions of ~~91.~~43.

Note ~~15.~~5. Employee Benefit Plan
The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31^st as the measurement date for the defined benefit pension plan. The plan was amended on February 15, 2023 to stop the accrual of future benefits. The following is a summary of net periodic pension costs for the three and six month periods ended June 30, 2023 and 2022 (dollars in thousands):

Three Months Ended

Six Months Ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Service cost

$ -

$ 190

$ -

$ 380

Interest cost

92

104

184

208

Expected return on plan assets

(130 )

-

(260 )

-

Amortization of prior service cost

-

(195 )

-

(390 )
Amortization of net loss

-

58

-

116

Net periodic pension cost

$ (38 )

$ 157

$ (76 )

$ 314

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, ~~2022~~2023 the ~~Company’s Stock Plan~~Bank’s Compensation Committee awarded ~~17,763~~23,556 shares with a fair value of ~~$547,989~~$526 thousand to selected employees. These shares vest 25% over each of the next four years. The Committee also awarded ~~1,145~~1,309 shares with a fair value of ~~$35,323~~$29 thousand to directors that vested upon issuance. There were ~~no restricted stock awards granted,~~6,974 shares vested, orless 96 shares netted for taxes, during the six months ended June 30, 2023. There were 7,706 shares forfeited ~~during~~in the three months ~~ending~~ended June 30, ~~2022.~~2023. Unrecognized compensation expense related to the nonvested restricted stock as of June 30, ~~2022~~2023 totaled ~~$780~~$724 thousand.

Note ~~16.~~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.
33
Table of Contents
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
Level 1 –
Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.
Loans Held for Sale
The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.
Derivative assets – IRLCs
The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2.
Derivative Asset/Liability – Forward Sale Commitments
The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.
34
Table of Contents
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 (dollars in thousands):

Fair Value Measurements Using:

Balance at
June 30, 2023

Level 1

Level 2

Level 3

Assets:

Loans held for sale, F&M Mortgage

$ 881

$ -

$ 881

$ -

U.S. Treasury

37,053

-

37,053

-

U.S. Agency

131,582

-

131,582

-

Municipal bonds

38,986

-

38,986

-

Mortgage-backed securities

150,939

-

150,939

-

Corporate

26,091

-

26,091

-

IRLC

129

-

129

-

Forward Sales Commitments

29

-

29

-

Assets at Fair Value

$ 385,690

$ -

$ 385,690

$ -

Fair Value Measurements Using:

Balance at December 31, 2022

Level 1

Level 2

Level 3

Assets:

Loans held for sale, F&M Mortgage

$ 1,373

$ -

$ 1,373

$ -

U.S. Treasury

36,643

-

36,643

-

U.S. Agency

129,748

-

129,748

-

Municipal bonds

42,198

-

42,198

-

Mortgage-backed securities

156,875

-

156,875

-

Corporate

26,631

-

26,631

-

Forward sales commitments

186

-

186

-

Assets at Fair Value

$ 393,654

$ -

$ 393,654

$ -

Liabilities:

IRLC

$ 92

$ -

$ 92

$ -

Liabilities at Fair Value

$ 92

$ -

$ 92

$ -

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
Collateral Dependent Loans with an ACL
In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
35
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):

Fair Value Measurements Using:

Collateral dependent loans with an ACL

Balance at June 30, 2023

Level 1

Level 2

Level 3

Other construction, land development and land

$ 294

$ -

$ -

$ 294

Total collateral dependent loans with an ACL

$ 294

$ -

$ -

$ 294

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

The following table presents information about Level 3 Fair Value Measurements for June 30, 2023 and December 31, 2022 (dollars in thousands):
Fair Value at   June 30, 2023
Valuation Technique
Significant Unobservable Inputs
Range
Collateral Dependent Loans
$ 294 thousand
Discounted appraised value
Discount for selling costs and marketability
62%
Fair Value at December 31, 2022
Valuation Technique
Significant Unobservable Inputs
Range
Impaired Loans
$ 2,590 thousand
Discounted appraised value
Discount for selling costs and marketability
10.00%-33.00% (Average 19.00%)
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
The Company markets other real estate owned and assets held for sale both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.
The Company did not have any other real estate owned as of June 30, 2023 or December 31, 2022.
Note 8. Disclosures about Fair Value of Financial Instruments
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2023 and December 31, 2022. Fair values for June 30, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.
36
Table of Contents
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows (dollars in thousands):

Fair Value Measurements at June 30, 2023 Using

Carrying Amount

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Fair Value at
June 30, 2023

Assets:

Cash and cash equivalents

$ 36,505

$ 36,505

$ -

$ -

$ 36,505

Securities available for sale

384,651

-

384,651

-

384,651

Securities held to maturity

125

-

115

-

115

Loans held for sale

881

-

881

-

881

Loans held for investment, net

776,260

-

-

749,716

749,716

Interest receivable

4,280

-

4,280

-

4,280

Bank owned life insurance

22,538

-

22,538

-

22,538

IRLC

129

-

129

-

129

Forward sales commitments

29

-

29

-

29

Total

$ 1,225,398

$ 36,505

$ 412,633

$ 749,716

$ 1,198,854

Liabilities:

Deposits

$ 1,137,112

$ -

$ 1,133,639

$ -

$ 1,133,639

Short-term debt

47,000

-

-

47,000

47,000

Long-term debt

6,911

-

-

6,645

6,645

Interest payable

773

-

773

-

773

Total

$ 1,191,796

$ -

$ 1,134,412

$ 53,645

$ 1,188,057

Fair Value Measurements at December 31, 2022 Using

Carrying Amount

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Fair Value at
December 31, 2022

Assets:

Cash and cash equivalents

$ 34,953

$ 34,953

$ -

$ -

$ 34,953

Securities

392,220

-

392,220

-

392,220

Loans held for sale

1,373

-

1,373

-

1,373

Loans held for investment, net

743,604

-

-

720,806

720,806

Interest receivable

3,995

-

3,995

-

3,995

Bank owned life insurance

23,554

-

23,554

-

23,554

Forward sales commitments

186

-

186

-

186

Total

$ 1,199,885

$ 34,953

$ 421,328

$ 720,806

$ 1,177,087

Liabilities:

Deposits

$ 1,083,377

$ -

$ 1,080,909

$ -

��
$ 1,080,909

Short-term debt

70,000

-

-

70,000

70,000

Long-term debt

6,890

-

-

6,778

6,778

IRLC

92

-

92

-

92

Interest payable

295

-

295

-

295

Total

$ 1,160,654

$ -

$ 1,081,296

$ 76,778

$ 1,158,074

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Note 9. Accumulated Other Comprehensive Loss
The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).

For the three months ended June 30, 2023

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at March 31, 2023

$ (37,735 )

$ 439

$ (37,296 )
Change in unrealized securities gains (losses), net of tax benefit of $19

71

-

71

Balance at June 30, 2023

$ (37,664 )

$ 439

$ (37,225 )

For the three months ended June 30, 2022

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at March 31, 2022

$ (16,060 )

$ (3,291 )

$ (19,351 )
Change in unrealized securities gains (losses), net of tax benefit of $4,512

(16,972 )

-

(16,972 )
Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20

(77 )

-

(77 )
Balance at June 30, 2022

$ (33,109 )

$ (3,291 )

$ (36,400 )

For the six months ended June 30, 2023

Unrealized Securities Gains (Losses)

Adjustments Related to Pension Plan

Accumulated Other Comprehensive Loss

Balance at December 31, 2022

$ (40,451 )

$ 439

$ (40,012 )
Change in unrealized securities gains, net of tax expense of $742

2,787

-

2,787

Balance at June 30, 2023

$ (37,664 )

$ 439

$ (37,225 )

For the six months ended June 30, 2022

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 $8,302

(31,231 )

-

(31,231 )
Reclassification for previously unrealized net losses recognized in net income, net of tax benefit of $20

(77 )

-

(77 )
Balance at June 30, 2022

$ (33,109 )

$ (3,291 )

$ (36,400 )
There were no reclassifications adjustments reported on the consolidated statements of income during the three and six months ended June 30, 2023.
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Note 10. Debt
Short-term Debt
The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to support loans growth and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. There was $47.0 million in short-term debt at June 30, 2023 and $70.0 million short-term debt at December 31, 2022.
On July 10, 2023 the Company paid off $2.0 million in short-term debt, and on July 31, 2023, the Company paid off an additional $10.0 million in short-term debt.
Long-term Debt
On July 29, 2020, the Company sold and issued to an institutional accredited investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030. The note will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.9 million at June 30, 2023.
Note 11. Revenue Recognition
Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Substantially all the Company’s revenue is generated from contracts with customers. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the guidance. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Investment Services and Insurance Income
Investment services and insurance income primarily consists of commissions received on mutual funds and other investment sales. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.
Title Insurance Income
VSTitle provides title insurance and real estate settlement services. Revenue is recognized at the time the real estate transaction is completed.
ATM and Check Card Fees
ATM and Check Card Fees are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
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Table of Contents
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 and six months ended June 30, 2023 and 2022 (dollars in thousands).

Three Months Ended
June 30,

Six Months Ended
June 30,

2023

2022

2023

2022

Noninterest Income

In-scope of Topic 606:

Service Charges on Deposits

$ 274

$ 274

$ 499

$ 581

Investment Services and Insurance Income

355

453

862

704

Title Insurance Income

377

366

625

839

ATM and check card fees

672

632

1,299

1,195

Other

286

242

360

399

Noninterest Income (in-scope of Topic 606)

1,964

1,967

3,645

3,718

Noninterest Income (out-of-scope of Topic 606)

788

1,110

1,473

1,842

Total Noninterest Income

$ 2,752

$ 3,077

$ 5,118

$ 5,560

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2023 and December 31, 2022, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
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Table of Contents
Note 12. Leases
The Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company’s leases (dollars in thousands):

June 30, 2023

Lease Liabilities

$ 811

Right-of-use assets

$ 795

Weighted average remaining lease term (years)

2.02 years

Weighted average discount rate

3.29 %

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

2023

2022

2023

2022

Operating lease cost

$ 43

$ 47

$ 83

$ 94

Total lease cost

$ 43

$ 47

$ 83

$ 94

Cash paid for amounts included in the measurement of lease liabilities

$ 47

$ 53

$ 105

$ 105

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):

        June 30, 2023

Six months ending December 31, 2023

$ 82

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

$ 957

Discount

146

Lease liabilities

$ 811

Note 13. Subsequent Events

On July 20, 2023, the Board of Directors declared a second quarter dividend of $0.26 per share, payable on August 29, ~~2022 the Company redeemed the $5,000 in subordinated notes described in Note 11~~2023, to shareholders of record as ~~the “2027 Notes.”~~of August 14, 2023.

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

F & M Bank Corp. (“Company”), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (“Bank”). TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services (“FMFS”) and VBS Mortgage LLC (dba F“F&M ~~Mortgage)~~Mortgage”) are wholly owned subsidiaries of the Bank. ~~F & M Bank Corp.~~The Company held a majority ownership in VSTitle LLC (“VST”), with the remaining minority interest owned by F&M Mortgage, until the Company purchased F&M Mortgage’s minority interest in VST on January 3, 2022.

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

The Company’s primary trade area services customers in the counties of Rockingham, Shenandoah, Augusta and ~~Augusta,~~Frederick, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester.

Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in 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, ~~2021~~2022 (the “2022 Form ~~10-K.~~10-K”).

Caution Regarding Forward-Looking Statements

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or ~~judgment~~judgments of the Company and its management about future events.
~~Although the Company believes that its expectations with respect to certain forward-looking~~ Forward-looking statements are based ~~upon reasonable~~on many assumptions ~~within the bounds~~and estimates and are not guarantees 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.~~performance. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: changing uncertainties related to the COVID-19 pandemic, general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changesthose described in the stock and bond markets, technology, the financial strength of borrowers, consumer spending and savings habits, geopolitical conditions, and exposure to fraud, negligence, computer theft and cyber-crime.
~~We do not update any forward-looking statements that may be made from time to time by or on behalf~~described in Item 1A, “Risk Factors,” of the ~~Company.~~Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, and the following:

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·
Changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;
·
The strength of the economy in our market area, as well as general economic, market, or business conditions;
·
An insufficient allowance for loan losses as a result of inaccurate assumptions;
·
Our ability to maintain our “well-capitalized” regulatory status;
·
Changes in our competitive position, competitive actions by other financial institutions, financial technology firms and others, the competitive nature of the financial services industry and our ability to compete effectively in our banking markets;
·
Our ability to manage growth;
·
Our potential growth, including our entrance or expansion into new markets, the need for sufficient capital to support that growth, difficulties or disruptions expanding into new markets or integrating the operations of acquired branches or business, and the inability to obtain the expected benefits of such growth;
·
Our exposure to operational risk;
·
Our ability to raise capital as needed by our business;
·
Changes in laws, regulations and the policies of federal or state regulators and agencies;
·
The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB, or other accounting standards setting bodies;
·
Geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
·
Other factors identified in reports the Company files with the SEC from time to time; and
·
Other circumstances, many of which are beyond our control.

~~Item 2. Management’s Discussion~~All forward-looking statements speak only as of the date on which such statements are made, and ~~Analysis~~the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of ~~Financial Condition and Results of Operations (dollars in thousands) (Continued)~~unanticipated events.

Critical Accounting Policies

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

The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of June 30, ~~2022~~2023 were unchanged from the policies disclosed in the ~~Company’s Annual Report on~~2022 Form 10-K ~~for the year ended December 31, 2021~~ within the section “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.”~~Operations” except for the adoption of ASC 326. See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.

~~Overview (Dollars in thousands)~~Results of Operations

Second Quarter Income Statement Highlights
Net income for current quarter was $241,000 or $0.07 per share, a decrease of $814,000 from the first quarter and a decrease of $1.5 million from the second quarter 2022. The decrease from the first quarter was due to an increase in the provision for credit losses of $539,000 and higher noninterest expenses resulting from an accrual for a potential one-time severance payment to a former officer in the amount of $764,000. The decrease from the second quarter of 2022 is attributable to a $1.2 million decrease in net interest income and the previously mentioned severance accrual.
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Table of Contents
Net interest income for the current quarter was $7.8 million, a decrease of $58,000 from the first quarter 2023 and a decrease of $1.2 million from the prior year. Interest income for the three months ended June 30, 2023, was $13.6 million, an increase of $651,000 from first quarter 2023 and $3.6 million over the prior year second quarter, due to higher loan volume and higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense to $5.9 million from $5.1 million from the prior quarter and $1.0 million from the same period in 2022
During second quarter 2023, the Bank recorded a $539,000 provision for credit losses and unfunded commitments due to loan growth of $19.3 million and $344,000 in net charge-offs. There was no provision recorded in the first quarter 2022 and a provision for loan losses of $600,000 recorded in second quarter 2022. At June 30, 2023, the Allowance for Credit Losses for loans (ACL) totaled $8.8 million or 1.13% of gross loans outstanding.
Noninterest income, excluding securities losses, totaled $2.8 million for the quarter, an increase from first quarter of $386,000 and a decrease from prior year of $325,000 which included a $97,000 securities loss. The increase from last quarter is due to a $363,000 gain from bank owned life insurance. The decrease from second quarter 2022 is primarily due to a decrease in mortgage banking income of $696,000. 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 decline in mortgage banking income was partially offset by an increase in income from bank owned life insurance of $449,000 which includes the gain mentioned previously and an increase of $40,000 in ATM and check card income.
Noninterest expense totaled $10.2 million in second quarter 2023, up $983,000 from the linked quarter and up $613,000 from second quarter 2022. The increase from first quarter 2023 was driven by a $677,000 increase in salaries expense, an increase of $167,000 in legal and professional fees and an increase of $131,000 in equipment expense. Salaries expense included the previously mentioned severance accrual of $764,000. The increase in equipment expense is attributable to new ATMs that were placed in service earlier this year. These categories also drove the increase in noninterest expense from second quarter 2022.
Year-to-Date Income Statement Highlights
Year-to-date net income was $1.3 million or $0.37 per share compared to $4.3 million or $1.25 per share in 2022. The decrease is due to a decline in net interest income of $1.5 million, an increase in the provision for credit losses of $389,000, a decrease of $539,000 in noninterest income (excluding securities losses) and increase in noninterest expense of $1.3 million. There were no securities gains or losses in the first six months over 2023 compared to a $97,000 loss recorded in 2022.
Net interest income for the six months ended June 30, ~~2022~~2023 was ~~$4,317 or $1.25 per share, compared to $6,890 or $2.04 in the same period in 2021,~~$15.6 million, a decrease of ~~37.34%. During~~$1.5 million from the ~~six months ended June 30,~~prior year. Interest income was $26.6 million, an increase of $7.5 million from 2022 ~~noninterest income decreased 26.19%~~due to higher loan volume and ~~noninterest~~higher interest rates. Higher rates on interest bearing deposits, specifically money market accounts and time deposits, coupled with interest paid on short-term borrowings, increased the Bank’s interest expense ~~increased 7.27% during the same period.~~to $11.0 million from $2.0 million.

~~During~~In 2023, the ~~three months ended June 30, 2022, net income was $1,789 or $0.51 per share, compared to $3,154 or $0.93~~Bank recorded a $539,000 provision for credit losses. This is $389,000 higher than the provision for loan losses recorded in ~~the same period in 2021, a decrease of 43.28%.~~
~~Results of Operations~~
As shown in Table I, the 2022 year to date tax equivalent net interest income increased $1,692 or 10.93% compared to the same period in 2021. The tax equivalent adjustment to net interest income totaled $118 for the first six months of 2022. The ~~yield~~higher provision expense is due to loan growth and net charge-offs.
Noninterest income, including net losses on ~~earning assets decreased .40%, while~~sale of securities, totaled $5.1 million for the ~~cost~~first six months of ~~funds decreased .17% compared~~2023, which was a decrease of $442 thousand from 2022. The primary reason for the decrease was a reduction of $898 thousand in mortgage banking income. Lower mortgage banking activity also negatively impacted title insurance income which declined by $214 thousand from the first half of 2022 to the same period in ~~2021.~~2023. Service charges on deposit accounts decreased by $82 thousand due to a change that was made in August 2022 in the method used to charge insufficient funds and overdraft fees. These decreases were partially offset by increases of $158 thousand in investment and insurance income and $104 thousand in ATM and debit card interchange income.
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Noninterest expenses totaled $19.4 million in the first six months of 2023, compared to $18.1 million in 2022. The increase was primarily due to an increase in salary expense related to the previously mentioned accrual for a potential one-time severance payment. Other increases were spread over professional fees, equipment expense for the installation of new ATMs, and other noninterest expenses. These amounts were partially offset by a decrease in pension expense of $195,000 and lower data processing expense of $400,000 resulting from the renegotiation of the contract with the Bank’s core system provider.

~~The three~~For the six months ended June 30, 2023 and June 30, 2022, there was an income tax ~~equivalent net interest~~benefit of $482,000 and income ~~increased $1,316 or 16.92% compared~~tax expense of $43,000, respectively. Our effective tax rate differs from the 21% federal statutory rate due to the ~~same period in 2021. The~~impact of various permanent tax ~~equivalent adjustment to~~differences, including tax-exempt income from municipal securities, BOLI income, including gains, tax credits from low-income housing tax credit investments, and the vesting of other stock-based compensation.
Net Interest Income and Net Interest Margin
For the first six months of 2023, net interest income totaled ~~$91~~$15.6 million, a decrease of $1.5 million from the first six months of 2022, resulting in a decrease in our net interest margin by 0.27%. Interest income and fees on loans were $6.9 million higher due to higher rates on variable rate loans and $85.8 million in loan growth since June 30, 2022. Income from interest bearing deposits and securities was $673,000 higher due to increased interest rates.
Interest expense increased by $9.0 million in the first six months of 2023 to $11.0 million at June 30, 2023, mostly due to higher market interest rates and an increase in the average balances of short-term debt.   Beginning in the fourth quarter of 2022 and continuing through the second quarter of 2023, rates paid on money market and time deposits increased significantly resulting in $7.6 million more in interest expense on deposits. The increase in market interest rates also caused a shift in the deposit mix to higher-cost accounts. Short-term borrowings were used to augment deposits to fund loan growth which increased short-term borrowings expense to $1.5 million from $46,000 last year.
The net interest margin was 2.66% and 3.13% for the three months ended June 30, ~~2022.~~
~~Year~~2023 and 2022, respectively. The lower net interest margin was due to ~~date, the combination of the decrease in yield on assets and the decrease in~~higher cost of funds, coupled with changes in balance sheet leverage resulted in the net interest margin decreasing to 2.97% for the six months ended June 30, 2022, a decrease of 30 basis points when compared to the same period in 2021. For the three months ended June 30, 2022, the net interest margin increased 3 basis points when compared to the same period in 2021 which reflects rate increases in the loan portfolio due to prime rate increases. A schedule of the net interest margin for the three- and six-month periods ended June 30, 2022 and 2021 can be found in Table I.partially offset by higher yields on interest-earning assets.

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The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):

Six Months Ended
June 30, 2023

Six Months Ended
June 30, 2022

Three Months Ended
June 30, 2023

Three Months Ended
June 30, 2022

Average Balance

Income/
Expense

Average Rates¹

Average Balance

Income/
Expense

Average Rates¹

Average Balance

Income/ Expense

Average Rates¹

Average Balance

Income/ Expense

Average Rates¹

Interest income

Loans held for investment^2,3,4

$ 757,217

$ 22,394

5.96 %

$ 666,748

$ 15,529

4.70 %

$ 764,531

$ 11,528

6.05 %

$ 666,957

$ 8,006

4.82 %
Loans held for sale

1,127

47

8.41 %

5,056

61

2.43 %

1,062

25

9.44 %

3,964

32

3.24 %
Federal funds sold

5,357

132

4.96 %

35,832

35

0.20 %

4,349

58

5.32 %

7,170

11

0.62 %
Interest bearing deposits

732

18

4.97 %

2,603

4

0.31 %

715

8

4.51 %

1,731

3

0.70 %
Investments

Taxable ⁴

394,449

3,818

1.95 %

444,939

3,335

1.51 %

391,958

1,910

1.95 %

464,506

1,890

1.63 %
Tax exempt

15,014

267

3.59 %

9,877

168

3.43 %

15,152

133

3.52 %

13,753

101

2.95 %
Total earning assets

$ 1,173,896

$ 26,676

4.58 %

$ 1,165,055

$ 19,132

3.31 %

$ 1,177,767

$ 13,662

4.65 %

$ 1,158,081

$ 10,043

3.48 %
Interest Expense

Demand deposits

174,069

1,550

1.80 %

183,235

206

0.23 %

179,299

876

1.96 %

181,766

103

0.23 %
Savings

504,436

6,395

2.56 %

502,376

1,020

0.41 %

507,847

3,418

2.70 %

507,341

517

0.41 %
Time deposits

136,566

1,313

1.94 %

120,501

456

0.76 %

151,369

922

2.44 %

118,552

217

0.73 %
Federal funds purchased

609

17

5.60 %

-

-

-

861

12

5.55 %

-

-

-

Short-term debt

61,790

1,498

4.89 %

9,451

46

0.98 %

52,571

511

3.90 %

18,798

46

0.98 %
Long-term debt

6,901

228

6.66 %

18,678

283

3.06 %

6,906

116

6.74 %

15,630

124

3.18 %
Total interest bearing liabilities

$ 884,371

$ 11,001

2.51 %

$ 834,241

$ 2,011

0.49 %

$ 898,853

$ 5,855

2.61 %

$ 842,087

$ 1,007

0.48 %

Tax equivalent net interest income

$ 15,675

$ 17,121

$ 7,807

$ 9,036

Net interest margin

2.69 %

2.96 %

2.66 %

3.13 %
___________________________
¹
Annualized.
²
Interest income on loans includes loan fees.
³
Loans held for investment include nonaccrual loans.
⁴
Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.
⁵
Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.
46
Table of Contents

~~Item 2.~~ ~~Management’s Discussion and Analysis of~~Non-GAAP Financial ~~Condition and Results of Operations (dollars in thousands) (Continued)~~Measures

~~Results~~This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of ~~Operations, continued~~such financial performance. The methodology for determining these non-GAAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow.

The following table ~~provides detail on the components of~~reconciles tax equivalent net interest income, which is not a measurement under GAAP, to net interest income (dollars in thousands):

GAAP Financial Measurements:

June 30, 2022

June 30, 2021

June 30, 2023

June 30, 2022

Six
Months

Three
Months

Six
Months

Three
Months

Six Months

Three Months

Six Months

Three Months

Interest Income – Loans

$ 15,564

$ 8,025

$ 16,524

$ 8,254

$ 22,418

$ 11,542

$ 15,564

$ 8,025

Interest Income - Securities and Other Interest-Earnings Assets

3,506

1,984

1,041

565

4,179

2,082

3,506

1,984

Interest Expense – Deposits

1,682

837

1,613

818

9,258

5,216

1,682

837

Interest Expense - Other Borrowings

329

170

524

251

1,743

639

329

170

Total Net Interest Income

$ 17,059

$ 9,002

$ 15,428

$ 7,750

$ 15,596

$ 7,769

$ 17,059

$ 9,002

Non-GAAP Financial Measurements:

Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities

118

91

57

27

79

38

62

34

Total Tax Benefit on Tax-Exempt Interest Income

118

91

57

27

79

38

62

34

Tax-Equivalent Net Interest Income

$ 17,177

$ 9,093

$ 15,485

$ 7,777

$ 15,675

$ 7,807

$ 17,121

$ 9,036

~~The decrease in noninterest income~~During the first half of ~~$1,687 for~~ the ~~six-month period ending June 30, 2022 compared to~~year, the same period in 2021 is due primarily to decreases in mortgage banking income ($1,320), title insurance income ($212), and other income ($131). The decrease in noninterest income of $815 for the three months ended June 30, 2022 is primarily due to decreases in mortgage banking income ($390), title insurance income ($229), and other income ($189). Mortgage banking income decreased in both the three and six-month periods due to a decrease in refinance and purchase activity at F&M Mortgage as the Federal Reserve increased interest rates. For both the six-month and three-month periods in 2021, other income included a gain on bank owned life insurance.
Noninterest expense for the six months ended June 30, 2022 increased $1,173 as compared to 2021. Increases in the areas of salaries and benefits ($870) and telecommunication and data processing ($464) were offset by decreases in impairment of long-lived assets ($171) and other expenses ($267). Expansion into the Winchester and Waynesboro markets, higher overall salaries, staff additions, and stock grant expense led to increased salary, benefits and data processing expenses. Other operating expenses for the six months ended June 30, 2021 included one-time expenses:unrealized loss on the ~~sale of bank property ($112), donation of bank property ($162) and prepayment penalties on FHLB debt repayments ($228), that were not incurred in 2022. The increase in noninterest expense of $309 for~~bond portfolio improved by $3.5 million, improving the ~~three months ended~~Company’s tangible common equity ratio from 5.13% at December 31, 2022, to 5.38% at June 30, ~~2022~~2023. The ratio of tangible common equity to tangible assets, or TCE ratio, is ~~primarily due to increases in salaries ($457) and telecommunications and data processing expense ($103), that were offset~~calculated by ~~decreases in impairment of long-lived~~dividing consolidated total common shareholders' equity by consolidated total average assets, ~~($171)~~after reducing both amounts by average goodwill and other ~~expenses ($175).~~intangible assets. The TCE ratio is not required by GAAP or by bank regulations but is a metric used by management to evaluate the adequacy of the Company's capital levels. Since there is no authoritative requirement to calculated the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible average assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.

Balance Sheet Review

~~Federal Funds Sold and Interest Bearing Bank Deposits~~Overview

On June 30, 2023, assets totaled $1.28 billion, an increase of $32.5 million over December 31, 2022. Total loans increased by $32.7 million to $776.3 million, including increases of $15.3 million in 1-to-4 family variable rate mortgage loans and $12.4 million in dealer financing loans. Investment securities decreased by $8.7 million due to paydowns on U.S. Agency mortgage-backed securities and expected bond maturities.
Securities Available for Sale (“AFS”)
Our AFS securities portfolio is reported at fair value, which is determined based on market prices of similar instruments. The ~~Company’s subsidiary bank invests a portion~~portfolio is made up of ~~its excess liquidity in either~~primarily U.S. Treasury, U.S Agency and mortgage-backed securities issued by federal ~~funds sold or interest-bearing bank deposits. Federal funds sold offer daily liquidity~~agencies, as well as securities issued by municipal bonds and ~~pay market rates of interest that at quarter end~~corporate debt securities. Total securities available for sale were benchmarked at 2.25% to 2.50% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. The Company held $3,430 and $76,667 in federal funds sold$384.7 million at June 30, ~~2022 and~~2023, compared to $392.1 million at December 31, ~~2021,~~2022. This represents a decrease of $7.4 million or 1.9%. The average balance during the first six months of 2023 was $409.5 million, compared to $454.8 million during the first six months of 2022. The average AFS securities portfolio represented 34.9% and 39.0% of average earning assets in the first six months of 2023 and 2022, respectively. ~~Growth~~The year-over-year decrease in ~~excess funds has been~~average AFS securities is primarily due to ~~strong deposit growth,~~maturities and normal paydowns of mortgage-backed securities and municipal bond maturities. There are $25.0 million of scheduled maturities and paydowns expected in the ~~decrease~~second half of 2023 and $93.9 million in 2024.
Net unrealized losses related to the fair value of securities AFS decreased $3.5 million in the first six months of 2023 to $47.7 million, from $51.2 million at December 31, ~~2021 to June 30,~~ 2022 ~~was due to~~. The unrealized loss is driven by the ~~Company deploying these funds into the investment portfolio. Interest bearing bank deposits have decreased by $2,670 since year end from $2,938 to $268 due to the~~increase in market interest rates, not credit quality. The average maturity of ~~certificates of deposit held at other banks.~~
~~Securities~~
~~The Company’s securities~~the portfolio serves to assist the Company with asset liability management. With the growth in deposits, the Company has worked to strategically invest the excess funds into the investment portfolio. This has resulted in an increase in the investments available for sale of $42,941 since December 31, 2021.is 4.80 years.

3847
Table of Contents

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)~~
~~Securities, continued~~Loan Portfolio

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 haslocal economy that the intent and ability to hold the securities to maturity. Held to maturity investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at fair value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders’ equity. The low-income housing projects included in other investments are held for the tax losses and credits that they provide.
As of June 30, 2022, the fair value of securities available for sale was below their cost by $41,910. The portfolio is made up of primarily treasuries, agencies and mortgage-backed obligations of federal agencies, as well as securities issued by States and political subdivisions in the U.S. and Corporate debt securities. The average maturity is 5.19 years. Efforts to deploy excess funds in an uncertain rate environment has resulted in a mixture of maturities.
In reviewing investments as of June 30, 2022, there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis.
~~Loan Portfolio~~
~~The~~ Company operates ~~primarily~~ in ~~the counties of Rockingham, Shenandoah, and Augusta, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in western Virginia. The local economy~~ benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. The Bank ~~has a concentration in real estate~~also makes automobile and recreational vehicle loans ~~secured by poultry farms as defined by regulatory guidelines.~~through its Dealer Finance division.

Loans Held for Investment of ~~$690,497~~$776.3 million increased ~~$28,076 on~~$32.7 million during the six months ended June 30, ~~2022~~2023 compared to ~~$662,421~~$743.6 million at December 31, ~~2021. Net~~2022. As a percentage of ~~PPP,~~average earning assets, average loans ~~grew $29,465 or 4.46% since December 31, 2021. Loan growth occurred in~~were 64.5% for the ~~multi-family, commercial real estate, commercial and industrial – non real estate, and dealer finance segments of~~six months ended June 30, 2023, compared with 57.2% for the ~~portfolio; while declines occurred in the construction, real estate and PPP segments.~~six months ended June 30, 2022.

Loans Held for Sale totaled ~~$5,449~~$881,000 on June 30, ~~2022, an increase~~2023, a decrease of ~~$562~~$492,000 compared to ~~$4,887~~$1.4 million at December 31, ~~2021. At June 30, 2022 this balance was~~2022. Loans Held for Sale consists of F&M ~~mortgage~~Mortgage loans, which are ~~typically~~ subject to changes in interest rates, seasonal fluctuations, and refinance activity. All the mortgage loans held for sale have been precommitted to investors, which minimizes the interest rate risk.
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses and the reserve for unfunded commitments. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. The amount of the reserve for unfunded commitments considers the probability that those commitments will fund.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank’s external loan review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 27 which reflects activity in the allowance for credit losses.
At June 30, 2023, the allowance for credit losses on loans (“ACLL”) reflected a day one CECL impact of $777,000 which was charged to retained earnings, $511,000 in net charge-offs, and a provision for credit losses on loans of $567,000. The provision was primarily due to loan growth of $19.3 million this quarter and charge-offs in the automobile portfolio. There were no changes in the qualitative factors this quarter. Additionally, the provision for credit losses on loans was reduced by $28,000 due to a benefit for unfunded commitments, for a net provision of $539,000. The provision for credit losses was $150,000 for the first six months of 2022.
Nonperforming Assets

Nonperforming loans include nonaccrual loans and loans 90 days or more past due.   Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled ~~$1,906~~$2.0 million on June 30, ~~2022~~2023 compared to ~~$5,508~~$2.3 million at December 31, 2021. The decrease in nonperforming loans from year end is primarily due to one loan paying off, one loan moving to accrual status, and amortization. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses, management believes the Bank is generally well secured and continues to actively work with its customers to effect payment.2022.
~~A summary of credit ratios for nonaccrual loans is as follows (in thousands):~~

June 30,
2022

December 31,
2021

Allowance for loan losses

$ 7,798

$ 7,748

Nonaccrual loans

$ 1,851

$ 5,465

Total Loans

$ 690,497

$ 662,421

Allowance for loan losses to Total Loans

1.13 %

1.17 %
Nonaccrual Loans to Total Loans

0.27 %

0.83 %
Allowance for loan losses to Nonaccrual loans

421.29 %

141.77 %

3948
Table of Contents

~~Item 2. Management’s Discussion and Analysis~~A summary of ~~Financial Condition and Results of Operations~~credit ratios for nonaccrual loans is as follows (dollars in thousands) ~~(Continued)~~:

June 30, 2023

December 31, 2022

Allowance for credit losses on loans

$ 8,769

$ 7,936

Nonperforming loans

$ 1,997

$ 2,262

Total loans

$ 776,260

$ 743,604

Allowance for credit losses to total loans

1.13 %

1.07 %
Nonperforming loans to total loans

0.26 %

0.30 %
Coverage ratio, allowance for credit losses to nonperforming loans

439.11 %

350.84 %

~~Allowance for Loan Losses~~Deposits and Other Borrowings

The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence, and the value of the underlying collateral. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
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 loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank’s watch list or schedule of classified loans.
In evaluating the portfolio, loans are segregated by segment with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry, and economic factors. Loans that are not reviewed for impairment are categorized by call report code and an estimate is calculated based on actual loss experience over the last three years.
A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation.
~~The allowance for loan losses of $7,798 at June 30, 2022 is equal to 1.13% of loans held for investment. This compares to an allowance of $7,748, or 1.17% at December 31, 2021.~~
Due to increasing interest rates, loan portfolio growth over the last 12 months, and deteriorating economic conditions, the qualitative reserve increased since December 31, 2021. This was offset by improvements in the unemployment rate, a decrease in historical loss rates, paydowns on individually impaired loans, and non-accrual loans returning to accruing status. The Company is monitoring the economic effects of increased inflation, building costs, and used car prices, as well as a rising interest rate environment. The Company continues to manage the classified, past due and non-performing loans. Classified loans (internally rated substandard or watch) increased from a total of $43,230 at December 31, 2021 to $46,840 at June 30, 2022, past due loans on accrual increased from $3,226 at December 31, 2021 to $4,107 at June 30, 2022, and non-performing loans decreased from $5,508 at December 31, 2021 to $1,906 at June 30, 2022. Management is closely monitoring the effects of economic conditions on the loan portfolio and makes adjustments to specific reserves, the environmental factors and the provision for loan losses as necessary.
~~Deposits and Other Borrowings~~
~~The Company’s~~Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the ~~Company’s~~Company's service area. Deposit accounts include demand deposits, savings, money market, and certificates of deposit. Total deposits were $1.14 billion and $1.08 billion at June 30, ~~2022 have increased $19,915 since~~2023 and December 31, ~~2021.~~2022 respectively. Noninterest bearing deposits ~~increased $10,735~~decreased $16.0 million while interest bearing deposits increased ~~$9,180. The increase in~~$69.8 million. Total deposits ~~is due~~increased $53.7 million from the end of 2022, as the Bank was able to ~~a focus~~attract deposits by offering higher rates on money market and time deposit ~~growth as an organization as well as excess funds that customers are holding due to the pandemic.~~ accounts and opening insured cash sweep (“ICS”) accounts for new and existing customers.
The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS ~~(Insured Cash Sweep)~~ programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess of FDIC limits and through reciprocal agreements with other network participating banks by offering FDIC insurance up to as much as $50 million in deposits. At June 30, ~~2022~~2023 and December 31, ~~2021~~2022 the Company had a total of ~~$257~~$241,000 in CDARS accounts; and, ~~$99,957~~$119.7 million and ~~$94,948~~$77.6 million in ICS accounts, respectively.
40
~~Table of Contents~~
~~Item 2. Management’s Discussion and Analysis~~ At June 30, 2023, 12.37% of ~~Financial Condition and Results of Operations (dollars in thousands) (Continued)~~the Company’s total deposits were uninsured deposits, calculated per Bank Call Report instructions.

Short-term borrowings

The Company utilizes short-term debt such as Federal funds purchased and FHLB short-term borrowings to provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short-term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the needs of the Company. ~~The Company utilized the short-term debt facilities at the~~There were $47.0 million and $70.0 million of FHLB ~~beginning in the first six months of 2022; the balance~~advances at June 30, ~~2022 totaled $30,000; there were no short-term borrowings at~~2023 and December 31, ~~2021.~~2022, respectively. The increase in deposits allowed us to reduce the FHLB advances. Subsequently, the Company paid off $12.0 million in FHLB advances in July 2023.

Long-term borrowings
The Company’s subsidiary bank borrows funds on a fixed rate basis as needed. These borrowings are used to support the Bank’s lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various types in the loan portfolio. FHLB long term advances totaled $10,000 on December 31, 2021; there were no long-term borrowings at June 30, 2022.

On July 29, 2020, the Company sold and issued to ~~certain~~an institutional accredited ~~investors $5,000 in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7,000~~investor $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, ~~2030 (the “2030 Notes”).~~2030. The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning on July 31, 2022 through maturity, the 2027 Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The 2027 Notes will mature on July 31, 2027. The 2030 Notesnote will initially bear interest at 6.00% per annum, beginning July 29, 2020 to but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate ~~shall~~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 ~~2030 Notes~~note may be redeemed, at the Company’s option, on any scheduled interest payment date. The ~~2030 Notes~~note will mature on July 31, 2030. The subordinated ~~notes,~~note, net of issuance costs totaled ~~$11,788~~$6.9 million at June 30, ~~2022.~~2023.

Capital

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

49
Table of Contents
~~At June 30, 2022, the Bank had Common Equity Tier I~~
Quantitative measures established by regulation to ensure capital of 13.00% of risked weighted assets, Tier I capital of 13.00% of risk weighted assets and combined Tier I and II capital of 13.97% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December 31, 2021, the Bank had Common Equity Tier I capital of 13.95% of risk weighted assets, Tier I capital of 13.95% of risk weighted assets and combined Tier I and II capital of 15.00% of risk weighted assets. The Bank has maintained capital levels far above the minimum requirements. In the unlikely event that such capital levels are not met, regulatory agencies are empowered 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.~~well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

~~In addition,~~Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the ~~regulatory agencies have issued guidelines requiring~~capital framework of the ~~maintenance~~Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital ~~leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum~~conservation buffer of ~~4% for this ratio but can increase~~2.5% above the minimum ~~requirement based upon an institution’s overall financial condition.~~risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At June 30, ~~2022,~~2023, the Bank ~~reported a leverage~~is in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of ~~8.41%~~the fully phased-in capital conservation buffer, of 7.00%, ~~compared to 8.62% at December 31, 2021.~~ 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 ~~substantially above~~8.24%, its common equity Tier 1 and Tier 1 capital ratios were both 11.86%, its total capital ratio was 12.83% and the ~~minimum. The Bank also reported a~~ capital conservation buffer ~~of 5.97%~~was 4.83% at June 30, 2022 and 7.00% at December 31, 2021. The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments.2023.

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

Liquidity ~~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 unpledged available for sale investment securities. Our primary source of funding is deposits. If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and brokered deposits, as well as loan and investment securities sales.
As of June 30, 2023, the Bank had total credit availability with the FHLB of $383.1 million, or 30% of total assets, and $175.3 million in lendable collateral. At June 30, 2023, we had $47.0 million in FHLB term borrowings and a $15.0 million letter of credit to provide collateral for our public deposits, which leaves $113.3 million in available lendable collateral.
In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) to provide any U.S. federally insured depository institution, including the Bank, with a line a credit equal to the par value of securities pledged to the BTFP. Advances from the BTFP may be requested by the Bank for up to one year until March 31, 2024.   During the second quarter 2023, the Bank pledged securities to the BTFP with a par value of $225.4 million; the Bank has not borrowed from the BTFP in 2023.
The Company’s on-balance sheet asset liquidity includes cash and cash equivalents, unpledged investment securities and loans ~~maturing within one year.~~held for sale, which totaled $223.8 million at June 30, 2023, down from $439.9 million at December 31, 2022. The ~~Company’s ability~~decrease is due to ~~obtain deposits~~pledging securities to the BTFP. Combining unused borrowing capacity through the FHLB of $113.3 million, through the BTFP of $225.4 million, and ~~purchase funds at favorable rates determines its~~on-balance sheet liquidity ~~exposure.~~of $223.8 million, produces readily available liquidity of approximately $562.5 million, with a coverage ratio of 395% to uninsured and uncollateralized deposits.
The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets. At June 30, 2023, total wholesale funding was $63.0 million or 4.93% of total assets.

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Table of Contents

~~Item 2. Management’s Discussion~~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 ~~Analysis~~equity prices. The Company’s primary component of ~~Financial Condition~~market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and ~~Results~~expense the Bank pays or receives on the majority of ~~Operations~~their assets. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets.
The Company manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.
The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:
Change in Prime Rate
% Change in Net Interest Income
+ 400 basis points
-17.97
%
+ 300 basis points
-11.49 %
+ 200 basis points
-6.49 %
+ 100 basis points
-2.31 %
- 100 basis points
1.88 %
- 200 basis points
4.41 %
- 300 basis points
6.61 %
- 400 basis points
8.47 %
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net economic value is the market value of all assets minus the market value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.
The following table reflects the change in net market value over different rate environments (dollars in thousands) ~~(Continued)~~:
Change in Prime Rate
% Change in Net Economic Value
+ 400 basis points
-7.85 %
+ 300 basis points
-4.04 %
+ 200 basis points
-1.37 %
+ 100 basis points
.13 %
- 100 basis points
-2.55 %
- 200 basis points
-5.17 %
- 300 basis points
-12.23 %
- 400 basis points
-14.60 %

~~Liquidity, continued~~
~~As a result of the Company’s~~Prudent balance sheet management ~~of liquid assets~~requires processes that monitor and ~~the ability to generate liquidity through liability funding, management believes that~~protect the Company ~~maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.~~
~~Additional sources of liquidity available to~~against unanticipated or significant changes in the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution and with Pacific Coast Bankers Bank, Zions Bank, and FNBB. The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. Additionally, the Bank can utilize the Federal Reserve Discount Window.
~~Interest Rate Sensitivity~~
~~In conjunction with maintaining a satisfactory~~ level of ~~liquidity, management must also control the degree of~~market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk ~~assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive~~is kept to an acceptable level. The ability to reprice our interest-sensitive assets ~~relative to interest sensitive~~and liabilities over ~~specific~~various time ~~intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off-balance sheet items that will impair future liquidity.~~
~~Effect~~intervals is of ~~Newly Issued Accounting Standards~~
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and is running a parallel CECL calculation. All data has been archived under the current model.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (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.critical importance.

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~~Item 2. Management’s Discussion~~The Company uses a variety of traditional and ~~Analysis~~on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the “gap” between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of ~~Financial Condition~~rising, stable, and ~~Results~~falling interest rate scenarios, the Company can position itself to take advantage of ~~Operations (dollars in thousands) (Continued)~~anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components.

~~Effect of Newly Issued Accounting Standards, continued~~
~~The amendments in this ASU~~An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be ~~applied prospectively, except for the transition method related to the recognition and measurement of TDRs,~~positively affected in an ~~entity has the option to apply~~increasing interest rate environment. Conversely, a ~~modified retrospective transition method, resulting~~liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 ofdecreasing interest rate ~~risk for portfolios of financial~~environment. At June 30, 2023, the Company had $130.5 million in liabilities repricing than assets subject to repricing in one year. This is a one-day position that is continually changing 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~~not necessarily indicative 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, andour position at any 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 Company does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is in the process of transitioning away from LIBOR for its loan and other financial instruments.
In October 2021, the FASB issued ASU 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 Company does not expect the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.
43
~~Table of Contents~~
~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)~~
~~Effect of Newly Issued Accounting Standards, continued~~
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021-04 was effective for the Company on January 1, 2022. The adoption of ASU 201-04 did not have a material impact on the Company’s 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).~~www.sec.gov.
44
~~Table of Contents~~
~~TABLE I~~
~~F & M BANK CORP.~~
~~Net Interest Margin Analysis~~
~~(on a fully taxable equivalent basis)~~
~~(Dollar Amounts in Thousands)~~

Six Months Ended
June 30, 2022

Six Months Ended
June 30, 2021

Three Months Ended
June 30, 2022

Three Months Ended
June 30, 2021

Average Balance

Income/
Expense

Average Rates¹

Average Balance

Income/ Expense

Average Rates¹

Average Balance

Income/ Expense

Average Rates¹

Average Balance

Income/ Expense

Average Rates¹

Interest income

Loans held for investment^2,3

$ 666,748

$ 15,529

4.70 %

$ 662,319

$ 16,328

4.97 %

$ 666,957

$ 8,007

4.82 %

$ 663,810

$ 8,204

4.96 %
Loans held for sale

5,056

61

2.43 %

18,206

235

2.60 %

3,964

32

3.24 %

12,491

69

2.22 %
Federal funds sold

35,832

35

0.20 %

116,077

44

.08 %

7,170

11

0.62 %

144,680

29

.08 %
Interest bearing deposits

2,603

4

0.31 %

1,302

-

-

1,731

3

0.70 %

1,716

-

-

Investments

Taxable ⁴

444,939

3,122

1.41 %

149,934

929

1.25 %

464,506

1,678

1.45 %

169,864

501

1.18 %
Partially taxable

125

1

1.61 %

125

1

1.61 %

125

-

-

125

-

-

Tax exempt

9,877

436

8.90 %

6,216

85

2.76 %

13,753

369

10.76 %

6,216

43

2.77 %
Total earning assets

$ 1,165,180

$ 19,188

3.32 %

$ 954,179

$ 17,622

3.72 %

$ 1,158,206

$ 10,100

3.50 %

$ 998,902

$ 8,846

3.55 %
Interest Expense

Demand deposits

183,235

206

0.23 %

123,994

107

.17 %

181,766

103

0.23 %

136,236

63

.19 %
Savings

502,376

1,020

0.41 %

368,743

738

.40 %

507,341

517

0.41 %

386,857

386

.40 %
Time deposits

120,501

456

0.76 %

130,268

768

1.19 %

118,552

217

0.73 %

131,383

369

1.13 %
Short-term debt

9,451

46

0.98 %

-

-

-

18,798

46

0.98 %

-

-

-

Long-term debt

18,678

283

3.06 %

32,009

524

3.30 %

15,630

124

3.18 %

31,580

251

3.19 %
Total interest bearing liabilities

$ 834,241

$ 2,011

0.49 %

$ 655,014

$ 2,137

.66 %

$ 842,087

$ 1,007

0.48 %

$ 686,056

$ 1,069

.62 %

Tax equivalent net interest income

$ 17,177

$ 15,485

$ 9,093

$ 7,777

Net interest margin

2.97 %

3.27 %

3.15 %

3.12 %
~~_____________~~
¹
~~Annualized.~~
²
~~Interest income on loans includes loan fees.~~
³
~~Loans held for investment include nonaccrual loans.~~
⁴
~~Income tax rate of 21% was used to calculate the tax equivalent income on nontaxable and partially taxable investments and loans.~~
~~Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.~~
45
~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required

Item 4. Controls and Procedures

The ~~Company’s~~Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the ~~Company’s~~Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"Exchange Act"), as of June 30, ~~2022.~~2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the ~~Company’s~~Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inby the SEC ~~rules~~ and ~~forms.~~that such information is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There were no ~~significant~~ changes in the Company’s internal ~~controls~~control over financial reporting ~~that occurred~~ during the ~~quarter~~three months ended June 30, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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
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 1a.~~
~~Risk Factors~~
~~Not required~~
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None

Item 3.
Defaults Upon Senior Securities
None

Item 4.
Mine Safety Disclosures
None

Item 5.
Other Information
None
53
Table of Contents

Item 6.
Exhibits

(a) Exhibits
~~(a)~~
~~Exhibits~~
~~4.1~~
~~Form of 2027 Subordinated Note (included as Exhibit 4.1 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).~~
~~4.2~~
~~Form of 2030 Subordinated Note (included as Exhibit 4.2 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).~~
~~10.1~~
~~Form of Subordinated Note Purchase Agreement (included as Exhibit 10.1 to the Current Report on Form 8-K filed July 31, 2020 and incorporated herein by reference).~~
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101
The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended June 30, ~~2022,~~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) ~~Income,~~, (iv) Consolidated Statements of Changes in ~~Stockholders’~~Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
104
The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended June 30, ~~2022,~~2023, formatted in Inline XBRL (included with Exhibit 101)

4754
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.
~~/s/ Mark C. Hanna~~
~~Mark C. Hanna~~
~~President and Chief Executive Officer~~
~~/s/ Carrie A. Comer~~

~~Carrie A. Comer~~
/s/ Aubrey M. Wilkerson

Aubrey M. Wilkerson
~~Executive Vice President and~~ Chief ~~Financial~~Executive Officer

/s/ Lisa F. Campbell

~~August 15, 2022~~
Lisa F. Campbell
Executive Vice President and Chief Financial Officer

August 14, 2023

4855

	For the Six months ended		For the Three months ended		For the Six months ended		For the Three months ended
	June 30, 2022		June 30, 2022		June 30, 2021		June 30, 2021
Earnings available to common stockholders:
Net income	$	4,317	$	1,789	$	7,021	$	3,220
Preferred stock dividends		0		0		131		66
Net income available to common stockholders	$	4,317	$	1,789	$	6,890	$	3,154

	Six months ended June 30, 2022						Six months ended June 30, 2021
	Income		Weighted Average Shares		Per Share Amounts		Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	4,317		3,443,850	$	1.25	$	6,890		3,206,534	$	2.15
Effect of Dilutive Securities:
Convertible Preferred Stock		0		-		0		131		228,118		(0.11	)
Diluted EPS	$	4,317		3,443,850	$	1.25	$	7,021		3,434,652	$	2.04

	Three months ended June 30, 2022						Three months ended June 30, 2021
	Income		Weighted Average Shares		Per Share Amounts		Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	1,789		3,452,711	$	0.51	$	3,154		3,207,978	$	0.98
Effect of Dilutive Securities:
Convertible Preferred Stock		0		-		0		66		205,327		(0.05	)
Diluted EPS	$	1,789		3,452,711	$	0.51	$	3,220		3,413,305	$	0.93

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2023
U. S. Treasury	$	125	$	-	$	10	$	115
December 31, 2022
U. S. Treasury	$	125	$	-	$	13	$	112

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2023
U.S. Treasury	$	39,913	$	1	$	2,861	$	37,053
U.S. Agency		143,480		1		11,899		131,582
Municipal bonds		42,423		72		3,509		38,986
Mortgage-backed securities		175,961		187		25,209		150,939
Corporate		30,550		-		4,459		26,091
Total Securities Available for Sale	$	432,327	$	261	$	47,937	$	384,651

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2022
U.S. Government treasuries	$	49,778	$	0	$	3,041	$	46,737
U.S. Government sponsored enterprises		168,464		0		12,315		156,149
Securities issued by States and political subdivisions in the U.S.		47,416		0		3,730		43,686
Mortgage-backed obligations of federal agencies		192,525		106		21,601		171,030
Corporate debt security		30,550		640		1,969		29,221
Total Securities Available for Sale	$	488,733	$	746	$	42,656	$	446,823

December 31, 2021
U.S. Government treasuries	$	29,847	$	0	$	365	$	29,482
U.S. Government sponsored enterprises		134,466		0		752		133,714
Securities issued by States and political subdivisions of the U.S.		34,078		406		147		34,337
Mortgage-backed obligations of federal agencies		185,216		522		2,091		183,647
Corporate debt securities		22,555		372		225		22,702
Total Securities Available for Sale	$	406,162	$	1,300	$	3,580	$	403,882

	Securities Held to Maturity				Securities Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	125	$	125	$	4,833	$	4,789
Due after one year through five years		0		0		210,477		198,311
Due after five years		0		0		107,718		97,741
Due after ten years		0		0		165,705		145,982
Total	$	125	$	125	$	488,733	$	446,823

	Three Months Ended June 30, 2022			Six Month Ended June 30, 2022
Realized gains (losses):
Gross realized gains	$	0		$	0
Gross realized losses		(97	)		0
Net realized (losses)	$	(97	)	$	0
Proceeds from sales of securities	$	8,699		$	0

	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
Realized gains (losses):
Gross realized gains	$	0	$	0
Gross realized (losses)		0		0
Net realized (losses)	$	0	$	0
Proceeds from sales of securities	$	0	$	0

	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
U.S. Government treasuries	$	38,025	$	1,843	$	8,711	$	1,198	$	46,736	$	3,041
U.S. Government sponsored enterprises		134,269		9,201		21,880		3,114		156,149		12,315
Securities issued by States and political subdivisions in the U.S.		43,686		3,730		0		0		43,686		3,730
Mortgage-backed obligations of federal agencies		131,930		17,112		34,388		4,489		166,318		21,601
Corporate debt security		19,749		1,851		1,132		118		20,881		1,969
Total	$	367,659	$	33,737	$	66,111	$	8,919	$	433,770	$	42,656

	Three Months Ended June 30, 2023			Six Month Ended June 30, 2023
Realized gains (losses):
Gross realized gains	$	-		$	-
Gross realized losses		-			-
Net realized (losses)	$	-		$	-
Proceeds from sales of securities	$	-		$	-

	Three Months Ended June 30, 2022			Six Months Ended June 30, 2022
Realized gains (losses):
Gross realized gains	$	-		$	-
Gross realized (losses)		(97	)		(97	)
Net realized (losses)	$	(97	)	$	(97	)
Proceeds from sales of securities	$	8,699		$	8,699

	2022			2021
Construction/Land Development	$	71,212		$	75,236
Farmland		72,573			66,344
Real Estate		133,747			139,552
Multi-Family		8,548			4,887
Commercial Real Estate		172,680			163,564
Home Equity – closed end		5,524			6,262
Home Equity – open end		44,267			44,247
Commercial & Industrial – Non-Real Estate		50,689			44,224
Consumer		8,852			8,036
Dealer Finance		119,758			107,346
Credit Cards		3,051			3,000
Gross loans		690,901			662,698
Less: Deferred loan fees, net of costs		(404	)		(277	)
Total	$	690,497		$	662,421

	June 30, 2022						December 31, 2021
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment⁽¹⁾		Balance		Allowance		Investment⁽¹⁾		Balance		Allowance
Impaired loans without a valuation allowance:
Construction/Land Development	$	468	$	468	$	0	$	645	$	645	$	0
Farmland		2,165		2,165		0		2,286		2,286		0
Real Estate		2,331		2,331		0		2,748		2,748		0
Multi-Family		0		0		-		-		-		-
Commercial Real Estate		8,058		8,058		-		8,494		8,494		-
Home Equity – closed end		-		-		-		147		147		-
Home Equity – open end		-		-		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-		-		-
Consumer		-		-		-		5		5		-
Credit cards		-		-		-		-		-		-
Dealer Finance		12		12		-		12		12		-
		13,034		13,034		-		14,337		14,337		-
Impaired loans with a valuation allowance
Construction/Land Development		-		-		-		-		-		-
Farmland		-		-		-		-		-		-
Real Estate		1,546		1,546		34		1,172		1,172		119
Multi-Family		-		-		-		-		-		-
Commercial Real Estate		2,527		2,527		446		6,004		6,004		603
Home Equity – closed end		-		-		-		-		-		-
Home Equity – open end		-		-		-		-		-		-
Commercial & Industrial – Non-Real Estate		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Credit cards		-		-		-		-		-		-
Dealer Finance		77		77		3		95		95		14
		4,150		4,150		483		7,271		7,271		736
Total impaired loans	$	17,184	$	17,184	$	483	$	21,608	$	21,608	$	736

June 30, 2022	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current			Total Loan Receivable			Non-Accrual Loans		Recorded Investment >90 days & accruing
Construction/Land Development	$	521	$	28	$	0	$	549	$	70,663		$	71,212		$	28	$	0
Farmland		0		332		0		332		72,241			72,573			1,218		0
Real Estate		1,636		34		142		1,812		131,935			133,747			402		0
Multi-Family		0		0		0		0		8,548			8,548			0		0
Commercial Real Estate		0		0		108		108		172,572			172,680			108		0
Home Equity – closed end		0		105		0		105		5,419			5,524			0		0
Home Equity – open end		431		167		0		598		43,669			44,267			0		0
Commercial & Industrial – Non- Real Estate		180		22		41		243		50,446			50,689			0		41
Consumer		23		0		0		23		8,829			8,852			0		0
Dealer Finance		572		125		95		792		118,966			119,758			95		0
Credit Cards		12		20		13		45		3,006			3,051			0		13
Less: Deferred loan fees, net of costs		0		0		0		0		(404	)		(404	)		0		0
Total	$	3,375	$	833	$	399	$	4,584	$	685,890		$	690,497		$	1,851	$	55

June 30, 2022	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	977	$	0	$	0	$	(97	)	$	880	$	0	$	880
Farmland		448		0		0		71			519		0		519
Real Estate		1,162		17		0		(14	)		1,131		34		1,097
Multi-Family		29		0		0		25			54		0		54
Commercial Real Estate		2,205		0		0		98			2,303		446		1,857
Home Equity – closed end		41		0		0		(2	)		39		0		39
Home Equity – open end		407		0		130		(162	)		375		0		375
Commercial & Industrial – Non-Real Estate		288		36		32		100			384		0		384
Consumer		520		24		14		(148	)		362		0		362
Dealer Finance		1,601		523		337		272			1,687		3		1,684
Credit Cards		70		21		8		7			64		0		64
Total	$	7,748	$	621	$	521	$	150		$	7,798	$	483	$	7,315

	June 30, 2023
1-4 Family residential construction	$	32,280
Other construction, land development and land		43,427
Secured by farmland		75,119
Home equity – open end		46,380
Real estate		169,955
Home Equity – closed end		5,305
Multifamily		7,963
Owner-occupied commercial real estate		91,387
Other commercial real estate		102,707
Agricultural loans		11,947
Commercial and industrial		44,802
Credit Cards		3,209
Automobile loans		120,871
Other consumer loans		15,488
Municipal loans		6,027
Gross loans		776,867
Unamortized net deferred loan fees		(607	)
Less allowance for credit losses		8,769
Net loans	$	767,491

	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

June 30, 2022	Loan Receivable			Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	71,212		$	468	$	70,744
Farmland		72,573			2,165		70,408
Real Estate		133,747			3,877		129,870
Multi-Family		8,548			0		8,548
Commercial Real Estate		172,680			10,585		162,095
Home Equity – closed end		5,524			0		5,524
Home Equity –open end		44,267			0		44,267
Commercial & Industrial – Non-Real Estate		50,689			0		50,689
Consumer		8,852			0		8,852
Dealer Finance		119,758			89		119,669
Credit Cards		3,051			0		3,051
Gross loans		690,901			17,184		673,717
Less: Deferred loan fees, net of costs		(404	)		0		(404	)
Total	$	690,497		$	17,184	$	673,313

	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
June 30, 2023
1-4 Family residential construction	$	440	$	-	$	-	$	-	$	31,840		$	32,280
Other construction, land development and land		164		520		-		30		42,713			43,427
Secured by farmland		-		-		-		986		74,133			75,119
Home equity – open end		240		-		-		228		45,912			46,380
Real estate		999		246		-		340		168,370			169,955
Home Equity – closed end		-		-		-		-		5,305			5,305
Multifamily		-		-		-		-		7,963			7,963
Owner-occupied commercial real estate		-		-		-		-		91,387			91,387
Other commercial real estate		923		65		-		-		101,719			102,707
Agricultural loans		-		-		-		88		11,859			11,947
Commercial and industrial		116		-		27		90		44,569			44,802
Credit Cards		18		9		2		-		3,180			3,209
Automobile loans		647		300		-		200		119,724			120,871
Other consumer loans		108		3		-		6		15,371			15,488
Municipal loans		-		-		-		-		6,027			6,027
Gross loans		3,655		1,143		29		1,968		770,072			776,867
Less: Unamortized net deferred loan fees		-		-		-		-		(607	)		(607	)
Loans held for investment	$	3,655	$	1,143	$	29	$	1,968	$	769,465		$	776,260

June 30, 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	$	0	$	5	$	11,182	$	39,977	$	18,463	$	1,557	$	28	$	0	$	71,212
Farmland		55		283		9,519		42,734		16,916		1,848		1,218		0		72,573
Real Estate		0		694		26,840		65,846		27,333		8,598		4,436		0		133,747
Multi-Family		0		0		992		5,315		2,120		121		0		0		8,548
Commercial Real Estate		0		1,350		37,964		77,168		31,341		15,199		9,658		0		172,680
Home Equity – closed end		0		55		983		2,804		672		1,010		0		0		5,524
Home Equity – open end		0		1,346		17,430		21,853		1,927		1,494		217		0		44,267
Commercial & Industrial -Non-Real Estate		25		1,186		12,133		29,606		6,350		1,330		59		0		50,689
Consumer		26		368		3,451		4,769		171		67		0		0		8,852
Gross Loans	$	106	$	5,287	$	120,494	$	290,072	$	105,293	$	31,224	$	15,616	$	0	$	568,092
Less: Deferred loan fees, net of costs																		(404	)
Total																	$	567,688

	Credit Cards		Dealer Finance
Performing	$	3,038	$	119,663
Non-performing		13		95
Total	$	3,051	$	119,758

	CECL						Incurred Loss
	June 30, 2023						December 31, 2022
	Nonaccrual loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
1-4 Family residential construction	$	-	$	-	$	-	$	-
Other construction, land development and land		30		-		30		21
Secured by farmland		986		-		986		1,458
Home equity – open end		228		-		228		-
Real estate		340		-		340		419
Home Equity – closed end		-		-		-		-
Multifamily		-		-		-		-
Owner-occupied commercial real estate		-		-		-		-
Other commercial real estate		-		-		-		-
Agricultural loans		88		-		88		88
Commercial and industrial		90		-		90		13
Credit Cards		-		-		-		-
Automobile loans		200		-		200		210
Other consumer loans		6		-		6		15
Municipal loans		-		-		-		-
Total loans	$	1,968	$	-	$	1,968	$	2,224

	For the Three Months Ended June 30, 2023		For the Six Months Ended June 30, 2023
1-4 Family residential construction	$	-	$	-
Other construction, land development and land		-		-
Secured by farmland		-		-
Home equity – open end		1		1
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		1		3
Other consumer loans		-		-
Municipal loans		-		-
Total loans	$	2	$	4

	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
1-4 Family residential construction
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	30,695	$	30,695
Watch		642		-		-		-		-		-		503		1,145
Substandard		-		-		-		-		-		-		440		440
Total 1-4 Family residential construction		642		-		-		-		-		-		31,638		32,280
Current period gross write-offs		-		70		-		-		-		-		-		70

Other construction, land development and land
Pass		4,159		4,667		5,997		1,889		2,931		5,186		17,562		42,391
Watch		-		-		-		-		-		265		221		486
Substandard		-		520		-		-		-		30		-		550
Total Other construction, land development and land		4,159		5,187		5,997		1,889		2,931		5,481		17,783		43,427
Current period gross write-offs		-		-		-		-		-		-		-		-

Secured by farmland
Pass		2,055		13,699		14,321		27,916		2,556		6,739		5,133		72,419
Watch		-		-		-		-		799		915		-		1,714
Substandard		-		-		318		-		-		652		16		986
Total Secured by farmland		2,055		13,699		14,639		27,916		3,355		8,306		5,149		75,119
Current period gross write-offs		-		-		-		-		-		-		-		-

Home equity – open end
Pass		370		-		-		-		-		143		44,245		44,758
Watch		-		-		-		-		-		-		1,345		1,345
Substandard		-		-		-		-		-		-		277		277
Total Home equity - open end		370		-		-		-		-		143		45,867		46,380
Current period gross write-offs		-		-		-		-		-		-		-		-

Real estate
Pass		24,258		42,310		15,661		12,410		6,793		58,008		-		159,440
Watch		-		-		-		505		156		5,892		-		6,553
Substandard		-		-		545		-		1,226		2,191		-		3,962
Total Real estate		24,258		42,310		16,206		12,915		8,175		66,091		-		169,955
Current period gross write-offs		-		-		-		-		-		19		-		19

Home Equity – closed end
Pass		1,080		400		123		1,086		481		1,748		-		4,918
Watch		-		-		-		-		-		374		-		374
Substandard		-		-		-		-		13		-		-		13
Total Home Equity - closed end		1,080		400		123		1,086		494		2,122		-		5,305
Current period gross write-offs		-		-		-		-		-		-		-		-

Multifamily
Pass		-		2,749		1,431		926		-		1,616		1,137		7,859
Watch		-		-		-		-		-		104		-		104
Substandard		-		-		-		-		-		-		-		-
Total Multifamily		-		2,749		1,431		926		-		1,720		1,137		7,963
Current period gross write-offs		-		-		-		-		-		-		-		-

Owner-occupied commercial real estate
Pass		1,413		18,493		18,655		7,307		3,685		24,061		4,748		78,362
Watch		-		-		-		-		41		2,121		-		2,162
Substandard		-		-		-		-		6,361		1,204		3,298		10,863
Total Owner-occupied commercial real estate		1,413		18,493		18,655		7,307		10,087		27,386		8,046		91,387
Current period gross write-offs		-		-		-		-		-		-		-		-
Other commercial real estate
Pass		2,930		30,265		13,034		5,127		3,875		32,581		2,924		90,736
Watch		-		-		-		-		-		11,884		-		11,884
Substandard		-		-		-		-		-		87		-		87
Total Other commercial real estate		2,930		30,265		13,034		5,127		3,875		44,552		2,924		102,707
Current period gross write-offs		-		-		-		-		-		-		-		-

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

~~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.~~

June 30, 2022	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	5,449	$	-	$	5,449	$	-
U. S. Treasury securities		46,737		-		46,737		-
U. S. Government sponsored enterprises		156,149		-		156,149		-
Securities issued by States and political subdivisions in the U. S.		43,686		-		43,686		-
Mortgage-backed obligations of federal agencies		171,030		-		171,030		-
Corporate debt securities		29,221		-		29,221		-
Forward Sales Commitments		535		-		535		-
Assets at Fair Value	$	452,807	$	-	$	452,807	$	-

Liabilities:
IRLC	$	273	$	-	$	273	$	-
Liabilities at Fair Value	$	273	$	-	$	273	$	-

	June 30, 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	$	-

		Fair Value at June 30, 2022	Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	3,667	Discounted appraised value	Discount for selling costs and marketability	14.00%-32.92% (Average 22.97%)
Bank premises held for sale		300	Contract value	Discount for selling costs and marketability	n/a
Other real estate owned		197	Discounted appraised value	Discount for selling costs and marketability	6.00% (Average 6.00%)

		~~Fair Value at December 31, 2021~~	~~Valuation~~ ~~Technique~~	~~Significant Unobservable Inputs~~	~~Range~~
~~Impaired Loans~~	$	~~6,535~~	~~Discounted appraised value~~	~~Discount for selling costs and marketability~~	~~11.76%-28.00% (Average 17.31%)~~
~~Bank premises held for sale~~		~~300~~	~~Contract value~~	~~Discount for selling costs and marketability~~	~~n/a~~
~~Other real estate owned~~		-	-	-	-