F & M BANK CORP. F & M Bank Corp. ("Company"), incorporated inVirginia 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") andVBS Mortgage LLC (dba F&M Mortgage) are wholly owned subsidiaries of the Bank.F & M Bank Corp. holds a majority ownership inVSTitle LLC ("VST"), with the remaining minority interest owned by F&M Mortgage.
The Bank is a full-service commercial bank offering a wide range of banking and financial services through its twelve branch offices as well as its loan production office located inPenn Laird, Virginia (which specializes in providing automobile financing through a network of automobile dealers). A loan production office opened inWinchester, Virginia in the second quarter of 2021. TEB reinsures credit life and accident and health insurance sold by the Bank in connection with its lending activities. FMFS provides brokerage services and property/casualty insurance to customers of the Bank. F&M Mortgage originates conventional and government sponsored mortgages through their offices inHarrisonburg ,Fishersville , andWoodstock, Virginia . VSTitle provides title insurance services through their offices inHarrisonburg ,Fishersville , andCharlottesville, Virginia .
The Company's primary trade area services customers in the counties of
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'sDecember 31, 2020 Form 10-K. 38 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Forward-Looking Statements Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: rapidly changing uncertainties related to the COVID-19 pandemic, general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, the financial strength of borrowers, and consumer spending and savings habits.
We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company's significant accounting policies that are highly dependent on estimates, assumptions and judgments. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 "Receivables", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management's estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the dealer loan portfolio; maturity of lending staff; the findings of internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviews. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations. 39 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Critical Accounting Policies (continued)
Allowances for loans are determined by applying estimated loss factors to the portfolio based on management's evaluation and "risk grading" of the loan portfolio. Specific allowances, if required are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades and on all troubled debt restructurings. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Fair Value The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management's judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as
critical. COVID-19 TheWorld Health Organization declared a global pandemic in the first quarter of 2020 due to the spread of the coronavirus ("COVID-19") around the globe. As a result, the state ofVirginia issued a stay-at-home order in March requiring all nonessential businesses to shut down and nonessential workers to stay home.
The
Company, while considered an essential business, implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies were closed untilApril 12, 2021 . The Company utilized drive through windows and courier service to handle transactions, new accounts were opened electronically with limited in person contact for document signing and verification of identification, and lenders were taking applications by appointment.The Small Business Administration ("SBA") implemented the Paycheck Protection Program ("PPP") to support small business operations with loans during the pandemic. The Company worked diligently to support both our customers and noncustomers within our footprint with these loans. As ofSeptember 30, 2021 , there were 123 PPP loans outstanding for a total of$11,606 . The Company has recognized a total of$3,387 in fee income from the SBA for PPP loans with$1,881 recorded in 2021 and$1,506 recorded in 2020. These fees are recognized over the life of the associated loans or when the loan is paid or forgiven; unamortized fees atSeptember 30, 2021 totaled$437 . COVID-19 continues to impact local, national, and foreign economies. Many foreign countries and states inthe United States continue to be under restrictions for employment, recreation and gatherings. The unemployment rate has declined from the recent high inApril 2020 but is still higher than the pre-pandemic level inFebruary 2020 . The Company is closely monitoring the effects of the pandemic on our customers. Management is focused on assessing the risks in our loan portfolio and working with our customers to minimize losses. At the beginning of the pandemic, additional resources were allocated to analyze higher risk segments in our loan portfolio, monitor and track loan payment deferrals and customer status. As ofSeptember 30, 2021 the Company has identified customers impacted by the pandemic and incorporated them into the bank's normal monitoring and tracking procedures. As ofAugust 3, 2021 , the Company has discontinued granting deferrals related to COVID-19 under the CARES Act. One loan remains in deferral with a balance of$2,486 . 40 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
COVID-19 (Continued)
Based on the Company's capital levels, conservative underwriting policies, low loan-to-deposit ratio, loan concentration diversification and rural operating environment, management believes that it is well positioned to support its customers and communities and to manage the economic risks and uncertainties associated with COVID-19 pandemic and remain adequately capitalized. Given the rapidly changing and unprecedented nature of the pandemic, however, the Company could experience material and adverse effects on its business, including credit deterioration, operational disruptions, decreased demand for products and services, or other reasons. The extent to which the pandemic impacts the Company will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Overview (Dollars in thousands)
Net income for the nine months endedSeptember 30, 2021 was$9,358 or$2.72 per diluted share, compared to$6,127 or$1.76 in the same period in 2020, an increase of 52.73%. This is a$3,231 increase compared to the first nine months of 2020. During the nine months endedSeptember 30, 2021 , noninterest income increased 4.24% and noninterest expense increased 12.94% during the same period. During the three months endedSeptember 30, 2021 , net income was$2,337 or$0.68 per diluted share, compared to$2,206 or$0.65 in the same period in 2020,
an increase of 5.94%. Results of Operations As shown in Table I, the 2021 year to date tax equivalent net interest income increased$652 or 2.86% compared to the same period in 2020. The tax equivalent adjustment to net interest income totaled$86 for the first nine months of 2021. The yield on earning assets decreased .72%, while the cost of funds decreased .36% compared to the same period in 2020. The three months endedSeptember 30, 2021 tax equivalent net interest income increased$220 or 2.83% compared to the same period in 2020. The tax equivalent adjustment to net interest income totaled$29 for the three months endedSeptember 30, 2021 . Year to date, the combination of the decrease in yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage resulted in the net interest margin decreasing to 3.15% for the nine months endedSeptember 30, 2021 , a decrease of 45 basis points when compared to the same period in 2020. For the three months endedSeptember 30, 2021 , the net interest margin decreased 38 basis points when compared to the same period in 2020. A schedule of the net interest margin for the three- and nine-month periods endedSeptember 30, 2021 and 2020 can be found in Table I. 41 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Results of Operations (continued)
The following table provides detail on the components of tax equivalent net interest income (dollars in thousands):
GAAP Financial
Measurements: September 30, 2021 September 30, 2020
Nine Months Three Months Nine Months Three Months
Interest Income - Loans $ 24,749 $ 8,225 $ 26,318 $ 8,728
Interest Income -
Securities and Other
Interest-Earnings Assets 1,871 830 962 450
Interest Expense -
Deposits 2,464 851 3,685 1,074
Interest Expense - Other
Borrowings 762 238 830 350
Total Net Interest Income
Non-GAAP Financial Measurements: Add: Tax Benefit on Tax-Exempt Interest Income - Loans & Securities 86 29 63 21 Total Tax Benefit on Tax-Exempt Interest Income 86 29 63 21 Tax-Equivalent Net Interest Income$ 23,480 $ 7,995 $ 22,828 $ 7,775 The Interest Sensitivity Analysis contained in Table II indicates the Company is in an asset sensitive position in the one-year time horizon. As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. Approximately 39.72% of rate sensitive assets and 35.19% of rate sensitive liabilities are subject to repricing within one year. Due to the relatively low rate environment, Management has continued to decrease deposit rates. The growth in earning assets and the growth in noninterest bearing accounts has resulted in an increase in the positive GAP position in the one-year time period. The increase in noninterest income of$382 for the nine-month periodSeptember 30, 2021 compared to the same period in 2020 is due primarily to growth in investment services and insurance income ($211 ), title insurance income ($221 ), ATM and check card fees ($321 ), and gain on bank owned life insurance ($355 ); offset by a decrease in mortgage banking income ($647 ). The decrease in noninterest income of$272 for the three months endedSeptember 30, 2021 is primarily due to a decrease in mortgage banking income ($445 ), offset by an increase in ATM and check card fees ($96 ) and insurance services and insurance income ($43 ).
Noninterest expense for the nine months endedSeptember 30, 2021 increased$2,823 as compared to 2020. Expenses increased primarily in the areas of salaries and benefits ($1,610 ), legal and professional fees ($271 ), and telecommunication and data processing ($192 ) and other operating expenses ($653 ). Salary increases were due to expansion into theWinchester andWaynesboro markets; this also increased legal and professional fees and data processing expenses. Other operating expenses include loss on the sale of bank property ($112 ), donation of bank property ($162 ) and prepayment penalties on FHLB debt repayments ($228 ). The increase in noninterest expense of$1,097 for the three months endedSeptember 30, 2021 is primarily due to increases in salaries ($621 ), legal and professional fees ($107 ), telecommunications and data processing expense ($149 ), and other operating expenses ($280 ). Balance Sheet
Federal Funds Sold and Interest Bearing Bank Deposits
The Company's subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest-bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at 0.00% to 0.25% by theFederal Reserve . Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. The Company held$165,666 and$65,983 in federal funds sold atSeptember 30, 2021 andDecember 31, 2020 , respectively. Growth in excess funds is due to strong deposit growth, and the Company is deploying these funds into the investment portfolio and reducing debt. Interest bearing bank deposits have increased by$1,698 since year end from$1,244 to$2,942 . 42 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Securities
The Company's securities portfolio serves to assist the Company with asset liability management. With the tremendous growth in deposits during the past twelve months, the Company has worked to strategically invest the excess funds into an investment portfolio. This has resulted in an increase in the investments available for sale of$164,546 sinceDecember 31, 2020 . The securities portfolio consists of investment securities commonly referred to as securities held to maturity and securities available for sale. Securities are classified as Held to Maturity investment securities when management has the intent and ability to hold the securities to maturity. Held to Maturity Investment securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, liquidity needs and other similar factors. Securities available for sale are recorded at fair value. Unrealized holding gains and losses on available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of stockholders' equity. The low-income housing projects included in other investments are held for the tax losses and credits that they provide. As ofSeptember 30, 2021 , the fair value of securities available for sale was below their cost by$111 . The portfolio is made up of primarily treasuries, agencies and mortgage-backed obligations of federal agencies, as well as Securities issued by States and political subdivisions in theU.S. and Corporate debt securities. The average maturity is 5.23 years. Efforts to deploy excess funds in an uncertain rate environment has resulted in a mixture of maturities.
In reviewing investments as of
Loan Portfolio The Company operates primarily in the counties ofRockingham ,Shenandoah , andAugusta , and the cities ofHarrisonburg ,Staunton ,Waynesboro andWinchester in westernVirginia . The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. There are no loan concentrations as defined by regulatory guidelines.
Loans Held for Investment of
Loans Held for Sale totaled$3,610 onSeptember 30, 2021 , a decrease of$55,069 compared to$58,679 atDecember 31, 2020 . AtSeptember 30, 2021 this balance is F&M mortgage loans, which are typically subject to seasonal fluctuations. The Company did not have any participation loans held for sale atSeptember 30, 2021 . Nonperforming loans include nonaccrual loans and loans 90 days or more past due. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. Nonperforming loans totaled$5,430 onSeptember 30, 2021 compared to$6,537 atDecember 31, 2020 . The decrease in nonperforming loans from year end is primarily due to two commercial relationships which were paid off due to the sale of the collateral. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses and what has previously been charged off, management believes the Bank is generally well secured and continues to actively work with its customers to
effect payment.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Loan Portfolio (continued)
The following is a summary of information pertaining to risk elements and nonperforming loans (in thousands):
September 30 ,December 2021 31, 2020 Nonaccrual Loans:
Construction/Land Development $ 267
$ 251 Farmland 1,395 1,737 Real Estate 842 368 Multi-Family - - Commercial Real Estate 2,877 3,820 Home Equity - Closed-end - - Home Equity - Open-end - 212 Commercial & Industrial - Non-Real Estate - 3 Consumer - - Dealer Finance 29 44 Credit Cards - -
Loans past due 90 days or more:
Construction/Land Development $ -
$ - Farmland - - Real Estate - 102 Multi-Family - - Commercial Real Estate - - Home Equity - Closed-End - - Home Equity - Open-End - - Commercial & Industrial - Non-Real Estate - - Consumer - - Dealer Finance - - Credit Cards 20 - Total Nonperforming loans $ 5,430$ 6,537
Restructured Loans current and performing:
Real Estate$ 2,152 $ 2,989 Home Equity 161 687 Commercial 2,853 1,922 Consumer 117 150 Nonperforming loans as a percentage of loans held for investment .83 % .99 % Net charge offs to total loans held for investment1 (.03 )% .18 % Allowance for loan and lease losses to nonperforming loans 155.27 %
160.24 %
1 - Annualized for nine month period ended
Allowance for Loan Losses
The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence, and the value of the underlying collateral. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Allowance for Loan Losses (continued)
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank's watch list or schedule of classified loans. In evaluating the portfolio, loans are segregated by segment with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of$500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loans that are not reviewed for impairment are categorized by call report code into unimpaired and classified loans. For both unimpaired and classified loans an estimate is calculated based on actual loss experience over the last three years. The classified Dealer finance loans are given a higher risk factor for past due and adverse risk ratings based on back testing of the risk factors. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation. The allowance for loan losses of$8,431 atSeptember 30, 2021 is equal to 1.29% of loans held for investment, or 1.31% of loans held for investment excluding PPP loans. This compares to an allowance of$10,475 (1.58%) atDecember 31, 2020 . As reflected in Note 4, the Company made a change in its allowance for loan losses methodology to increase the look back period on historical losses from two years to three years. This revised lookback period more accurately reflects the average loss history within the portfolio, as loss history during the most recent two years was impacted by government programs in response to the COVID-19 pandemic. There was a decrease in qualitative factors due to improvements in the unemployment rate. Due to COVID-19, the Company had added or increased qualitative factors for the economy and concentrations in industries specifically affected by the virus. The Company continues to evaluate these factors in light of the changing effects the virus has on the economy, supply chains, and labor markets. The Company has experienced improvements in past dues and nonperforming loans sinceDecember 31, 2020 . Past due loans have decreased$5,528 and nonperforming loans have decreased$1,107 sinceDecember 31, 2020 . As a result, the Bank recorded a negative provision for loan losses of$235 in the three months endingSeptember 30, 2021 and$2,210 for the nine months endingSeptember 30, 2021 . Management will continue to monitor the effects of COVID-19 and nonperforming and past due loans to make the necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or cash flow expectations.
Deposits and Other Borrowings
The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. Total deposits atSeptember 30, 2021 have increased$211,710 sinceDecember 31, 2020 . Noninterest bearing deposits increased$32,046 while interest bearing increased$179,664 . The increase in deposits in the first nine months is due to a focus on deposit growth as an organization as well as excess funds that customers are holding due to COVID.The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep) programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess ofFDIC limits and through reciprocal agreements with other network participating banks by offeringFDIC insurance up to as much as$50 million in deposits. AtSeptember 30, 2021 andDecember 31, 2020 the Company had a total of$256 and$257 in CDARS funding and$66,004 and$35,943 in ICS funding, respectively. 45 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Short-term borrowings Short-term debt consists of federal funds purchased, daily rate credit obtained from theFederal Home Loan Bank ("FHLB"), and short-term fixed rate FHLB borrowings. Federal funds purchased are overnight borrowings obtained from the Bank's primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale. AsSeptember 30, 2021 andDecember 31, 2020 , there were no short-term borrowings due to excess liquidity. Long-term borrowings The Company's subsidiary bank borrows funds on a fixed rate basis as needed. These borrowings are used to support the Bank's lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various types in the loan portfolio. FHLB long term advances totaled$10,000 and$21,268 onSeptember 30, 2021 , andDecember 31, 2020 , respectively. OnJuly 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 dueJuly 31, 2027 (the "2027 Notes") and$7,000 in aggregate principal amount of 6.00% fixed to floating rate subordinated notes dueJuly 31, 2030 (the "2030 Notes"). The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning onJuly 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 onJuly 31, 2027 . The 2030 Notes will initially bear interest at 6.00% per annum, beginningJuly 29, 2020 to but excludingJuly 31, 2025 , payable semi-annually in arrears. From and includingJuly 31, 2025 throughJuly 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 onJuly 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 onJuly 31, 2030 . The subordinated notes, net of issuance costs totaled$11,764 atSeptember 30, 2021 . Capital
The Company seeks to maintain a strong capital base to expand facilities, promote public confidence, support current operations and grow at a manageable level.
InMarch 2015 , the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). AtSeptember 30, 2021 , the Bank had Common Equity Tier I capital of 14.46% of risked weighted assets, Tier I capital of 14.46% of risk weighted assets and combined Tier I and II capital of 15.64% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. AtDecember 31, 2020 , the Bank had Common Equity Tier I capital of 13.55% of risk weighted assets, Tier I capital of 13.55% of risk weighted assets and combined Tier I and II capital of 14.81% of risk weighted assets. The Bank has maintained capital levels far above the minimum requirements. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital. In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial condition. AtSeptember 30, 2021 , the Bank reported a leverage ratio of 9.05%, compared to 9.93% atDecember 31, 2020 . The Bank's leverage ratio was substantially above the minimum. The Bank also reported a capital conservation buffer of 7.64% atSeptember 30, 2021 and 6.81% atDecember 31, 2020 . The capital conservation buffer is designed to strengthen an institution's financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments. OnSeptember 1, 2021 , the Company gave notice to our Preferred shareholders that we would redeem all Series A Preferred Stock onOctober 29, 2021 . Shareholders could convert their shares to common stock at a conversion rate of$1.111 or redeem their shares for$25.00 per share. OnOctober 29, 2021 , 25,066 shares were redeemed, and 180,261 shares were converted 200,247 shares of common stock. 46 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Community Bank Leverage Ratio The CBLR framework was made available for banks to use beginning in theirMarch 31, 2020 Call Report; to date, the Company has elected not to adopt the CBLR framework.
TheFederal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio ("CBLR") framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than$10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The CBLR framework was temporarily modified under the CARES Act to provide relief to banks.
Liquidity Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds. To further meet its liquidity needs, the Company's subsidiary bank also maintains a line of credit with its primary correspondent financial institution and withPacific Coast Bankers Bank . The Bank also has a line of credit with theFederal Home Loan Bank of Atlanta that allows for secured borrowings. Additionally, the Bank can utilize the Federal Reserve Discount Window. Interest Rate Sensitivity In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off-balance sheet items that will impair future liquidity.
As ofSeptember 30, 2021 , the Company had a cumulative Gap Rate Sensitivity Ratio of 14.66% for the one year repricing period. This generally indicates that earnings would increase in an increasing interest rate environment as assets reprice more quickly than liabilities. However, in actual practice, this may not be the case as balance sheet leverage, funding needs and competitive factors within the market could dictate the need to raise deposit rates more quickly. Management constantly monitors the Company's interest rate risk and has decided the current position is acceptable for a well-capitalized community bank.
A summary of asset and liability repricing opportunities is shown in Table II.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Effect of Newly Issued Accounting Standards
InJune 2016 , theFinancial 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 companieswho file with theU.S. Securities and Exchange Commission (SEC) and all other entitieswho do not file with theSEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning afterDecember 15, 2022 . The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and is in the set-up stage with expectations of running parallel in 2022. All data has been archived under the current model. EffectiveNovember 25, 2019 , theSEC adopted Staff Accounting Bulletin (SAB) 119.SAB 119 updated portions ofSEC 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. InMarch 2020 , theFinancial 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 ofMarch 12, 2020 throughDecember 31, 2022 . Subsequently, inJanuary 2021 , theFinancial 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 includesMarch 12, 2020 , or prospectively to new modifications from any date within the interim period that includes or is subsequent toJanuary 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 includesMarch 12, 2020 , and to new eligible hedging relationships entered into after the beginning of the interim period that includesMarch 12, 2020 . The Company is in the process of transitioning away from LIBOR for its loan and other financial instruments. InAugust 2020 , theFinancial 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 currentU.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 afterDecember 15, 2021 , and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning afterDecember 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. 48 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
InMay 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 theFASB Emerging Issues Task Force )." The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. For both public and private companies, the ASU is effective for fiscal years beginning afterDecember 15, 2021 . Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements. InAugust 2021 , the FASB issued ASU 2021-06, "'Presentation of Financial Statements (Topic 205),Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946): Amendments toSEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recentSEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants". The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements. InJanuary 2017 , the FASB issued ASU 2017-04, "Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company onJanuary 1 , 2021.The adoption of ASU 2017-04 did not have a material impact on the Company's consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers' application of certain income tax-related guidance. This ASU is part of the FASB's simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU 2019-12 was effective for the Company onJanuary 1, 2021 . The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements. InJanuary 2020 , the FASB issued ASU 2020-01, "Investments -Equity Securities (Topic 321), Investments -Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The ASU is based on a consensus of the EmergingIssues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020-01 was effective for the Company onJanuary 1 , 2021.The adoption of ASU 2020-01 did not have a material impact on the Company's consolidated financial statements. 49 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
InOctober 2020 , the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Company onJanuary 1, 2021 . The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements. InDecember 2020 , the Consolidated Appropriates Act of 2021 ("CAA") was passed. Under Section 541 of the CAA,Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. The COVID-19 discussion following the Critical Accounting Policies at the beginning of the Management's Discussion and Analysis and note 3 provide more details on what the Company is doing to prepare for the impact.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company's financial position, result of operations or cash flows.
Existence of
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Table of Contents
TABLE I
F & M BANK CORP.
Net Interest Margin Analysis
(on a fully taxable equivalent basis)
(Dollar Amounts in Thousands)
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020 September 30, 2021
September 30, 2020
Average Income/ Average Average Income/ Average Income/ Average Average Income/ Average
Balance Expense Rates1 Balance Expense Rates1 Average Balance Expense Rates1 Balance Expense Rates1 Interest income
Loans held for investment2,3$ 668,826 $ 24,646 4.93 %$ 651,111 $ 25,391 5.21 % $ 660,837$ 8,244 4.95 %$ 684,849 $ 8,361 4.86 % Loans held for sale 5,139 161 4.19 % 45,678 977 2.86 % - - 56,302 384 2.71 % Federal funds sold 137,715 99 0.10 % 105,652 333 0.42 % 180,285 55 0.12 % 88,195 15 0.07 %
Interest
bearing deposits 1,949 1 0.07 % 1,080 3 0.37 % 3,220 1 0.12 % 1,177 1 0.34 %
Investments
Taxable 4 175,445 1,672 1.27 % 40,587 578 1.90 % 225,655 743 1.31 % 92,364 401 1.73 %
Partially
taxable 125 1 1.07 % 125 2 2.13 % 125 - - 125 1 3.18 %Tax exempt 6,215 126 2.71 % 3,134 59 2.51 % 6,194 41 2.63 % 6,279 36 2.28 % Total earning assets$ 995,414 $ 26,706 3.59 %$ 847,367 $ 27,343 4.31 %$ 1,076,316 $ 9,084 3.35 %$ 929,291 $ 9,199 3.94 %
Interest Expense
Demand deposits 133,827 185 0.18 % 102,902 224 0.29 % 152,828 78 0.20 % 111,832 90 0.32 % Savings 392,741 1,189 0.40 % 287,730 1,779 0.83 % 439,957 451 0.41 % 315,354 469 0.59 % Time deposits 130,567 1,090 1.12 % 132,349 1,682 1.70 % 131,156 322 0.97 % 127,937 515 1.60 % Short-term debt - - - 2,372 41 2.31 % - - - - - - Long-term debt 31,160 762 3.27 % 81,881 789 1.29 % 29,401 238 3.21 % 102,878 350 1.35 % Total interest bearing liabilities$ 688,295 $ 3,226 0.63 %$ 607,234 $ 4,515 0.99 % $ 753,342$ 1,089 0.57 %$ 658,001 $ 1,424 0.86 % Tax equivalent net interest income$ 23,480 $ 22,828 $ 7,995 $ 7,775 Net interest margin 3.15 % 3.60 % 2.95 % 3.33 % ___________ 1 Annualized. 2 Interest income on loans includes loan fees. 3 Loans held for investment include nonaccrual loans. 4 Income tax rate of 21% was used to calculate the tax equivalent income on
nontaxable and partially taxable investments and loans. 5 Average balance information is reflective of historical cost and has not been
adjusted for changes in market value annualized.
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Table of Contents
TABLE II
F & M BANK CORP.
Interest Sensitivity Analysis
September 30, 2021
(Dollars In Thousands)
The following table presents the Company's interest sensitivity.
0 - 3 Months 4 - 12 Months 1 - 5 Years Over 5 Years Not Classified Total
Uses of funds
Loans
Commercial $ 110,372 $ 20,996 $ 112,068 $ 32,200 $ - $ 275,636
Installment 2,322 1,370 80,013 28,952 - 112,657
Real estate
loans for
investments 71,910 44,373 137,862 10,841 - 264,986
Loans held for
sale 3,610 - - - - 3,610
Credit cards 2,790 - - - - 2,790
Interest
bearing bank
deposits 2,942 - - - - 2,942
Federal funds
sold 165,666 - - - - 165,666
Investment
securities 125 10,358 114,816 146,271 - 271,570
Total 359,737 77,097 444,759 218,264 - 1,099,857
Sources of
funds
Interest
bearing demand
deposits - 30,453 91,360 30,454 - 152,267
Savings
deposits - 197,651 253,811 28,080 - 479,542
Certificates
of deposit 13,108 34,375 82,027 12 - 129,522
Long-term
borrowings - - 11,764 10,000 - 21,764
Total 13,108 262,479 438,962 68,546 - 783,095
Discrete Gap 346,629 (185,382 ) 5,797 149,718 - 316,762
Cumulative Gap $ 346,629 $ 161,247 $ 167,044 $ 316,762 $ 316,762
Ratio of
Cumulative Gap
to Total
Earning Assets 31.52 % 14.66 % 15.19 % 28.80 % 28.80 %
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities as of September 30, 2021 . In preparing the above table,
no assumptions were made with respect to loan prepayments. Loan principal
payments are included in the earliest period in which the loan matures or can
reprice. Investment securities included in the table consist of securities held
to maturity and securities available for sale. Principal payments on
installment loans scheduled prior to maturity are included in the period of
maturity or repricing. Proceeds from the redemption of investments and deposits
are included in the period of maturity. Estimated maturities of deposits, which
have no stated maturity dates, were derived from regulatory guidance.
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