Equibles

10-Q

F&M BANK CORP (FMBM)

10-Q 2020-11-09 For: 2020-09-30
View Original
Added on April 06, 2026

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 September 30, 2020.

☐     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
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(State or Other Jurisdiction of<br><br>Incorporation or Organization) (I.R.S. Employer<br><br>Identification No.)

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

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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

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

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

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

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

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

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

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

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

Class Outstanding at November 4, 2020
Common Stock, par value ‑ $5 3,200,911 shares

F & M BANK CORP.

Index

Page
Part I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets – September 30, 2020 and December 31, 2019 3
Consolidated Statements of Income – Three Months Ended September 30, 2020 and 2019 4
Consolidated Statements of Income – Nine Months Ended September 30, 2020 and 2019 5
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2020 and 2019 6
Consolidated Statements of Changes in Stockholders’ Equity – Three and Nine Months Ended September 30, 2020 and 2019 7
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019 9
Notes to Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures about Market Risk 52
Item 4. Controls and Procedures 52
Part II Other Information 53
Item 1. Legal Proceedings 53
Item 1a. Risk Factors 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
Item 3. Defaults upon Senior Securities 53
Item 4. Mine Safety Disclosures 53
Item 5. Other Information 53
Item 6. Exhibits 53
Signatures 54
Certifications
2
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Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

December 31,
2019*
Assets
Cash and due from banks 14,484 $ 8,119
Money market funds and interest-bearing deposits in other banks 1,259 1,126
Federal funds sold 73,407 66,559
Cash and cash equivalents 89,150 75,804
Securities:
Held to maturity, at amortized cost – fair value of 125 and 124 in 2020 and 2019, respectively 125 124
Available for sale, at fair value 107,083 4,366
Other investments 11,680 13,525
Loans held for sale, at fair value 18,900 2,974
Loans held for sale, participations 69,139 63,824
Loans held for investment 672,525 603,425
Less: allowance for loan losses (10,826 ) (8,390 )
Net loans held for investment 661,699 595,035
Other real estate owned, net 166 1,489
Bank premises and equipment, net 18,080 18,931
Bank premises held for sale 520 -
Interest receivable 2,771 2,044
Goodwill 2,884 2,884
Bank owned life insurance 20,496 20,050
Other assets 12,731 12,949
Total assets 1,015,424 $ 813,999
Liabilities
Deposits:
Noninterest bearing 210,682 $ 168,715
Interest bearing 582,854 472,994
Total deposits 793,536 641,709
Short-term debt - 10,000
Long-term debt 106,510 53,201
Other liabilities 21,698 17,514
Total liabilities 921,744 722,424
Commitments and contingencies - -
Stockholders’ Equity
Preferred Stock 25 par value, 400,000 shares authorized, 206,660 issued and outstanding for September 30, 2020 and December 31, 2019 4,592 4,592
Common stock, 5 par value, 6,000,000 shares authorized, 3,199,283 and 3,208,498 shares issued and outstanding for September 30, 2020 and December 31, 2019, respectively. 15,996 16,042
Additional paid in capital – common stock 6,792 7,510
Retained earnings 69,337 66,008
Non-controlling interest in consolidated subsidiaries - 634
Accumulated other comprehensive loss (3,037 ) (3,211 )
Total stockholders’ equity 93,680 91,575
Total liabilities and stockholders’ equity 1,015,424 $ 813,999

All values are in US Dollars.

*2019 derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

Three Months Ended
September 30,
Interest and Dividend income 2020 2019
Interest and fees on loans held for investment $ 8,345 $ 9,174
Interest and fees on loans held for sale 384 555
Interest from money market funds and federal funds sold 15 131
Interest on debt securities 434 106
Total interest and dividend income 9,178 9,966
Interest expense
Total interest on deposits 1,074 1,355
Interest from short-term debt - 189
Interest from long-term debt 350 257
Total interest expense 1,424 1,801
Net interest income 7,754 8,165
Provision for Loan Losses 1,000 3,750
Net Interest Income After Provision for Loan Losses 6,754 4,415
Noninterest income
Service charges on deposit accounts 302 460
Investment services and insurance income, net 167 165
Mortgage banking income, net 1,621 907
Title insurance income 543 434
Income on bank owned life insurance 171 153
Low income housing partnership losses (223 ) (206 )
ATM and check card fees 499 378
Other operating income 148 354
Total noninterest income 3,228 2,645
Noninterest expense
Salaries 3,470 3,570
Employee benefits 611 821
Occupancy expense 278 287
Equipment expense 296 306
FDIC insurance assessment 95 -
Other real estate owned, net 201 107
Marketing expense 136 147
Legal and professional fees 160 220
ATM and check card fees 264 264
Telecommunication and data processing expense 464 420
Directors fees 96 102
Bank franchise tax 174 195
Other operating expenses 1,159 1,037
Total noninterest expense 7,404 7,476
Income (loss) before income taxes 2,578 (416 )
Income tax expense (benefit) 372 (307 )
Net Income (loss) 2,206 (109 )
Net income attributable to non-controlling interest - 78
Net Income (loss) attributable to F & M Bank Corp. $ 2,206 $ (187 )
Dividends paid/accumulated on preferred stock 65 79
Net income (loss) available to common stockholders $ 2,141 $ (266 )
Per Common Share Data
Net income (loss) – basic $ 0.67 $ (.08 )
Net income (loss) – diluted $ 0.65 $ (.08 )
Cash dividends on common stock .26 $ .26
Weighted average common shares outstanding – basic 3,197,718 3,175,192
Weighted average common shares outstanding – diluted 3,404,378 3,175,192

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

Nine Months Ended
September 30,
Interest and Dividend income 2020 2019
Interest and fees on loans held for investment $ 25,341 $ 27,368
Interest and fees on loans held for sale 977 1,377
Interest from money market funds and federal funds sold 336 185
Interest on debt securities 626 350
Total interest and dividend income 27,280 29,280
Interest expense
Total interest on deposits 3,685 3,714
Interest from short-term debt 41 607
Interest from long-term debt 789 704
Total interest expense 4,515 5,025
Net interest income 22,765 24,255
Provision for Loan Losses 3,300 6,800
Net Interest Income After Provision for Loan Losses 19,465 17,455
Noninterest income
Service charges on deposit accounts 888 1,263
Investment services and insurance income 525 487
Mortgage banking income, net 4,521 2,252
Title insurance income 1,386 1,116
Income on bank owned life insurance 458 449
Low income housing partnership losses (670 ) (633 )
ATM and check card fees 1,394 1,276
Other operating income 513 699
Total noninterest income 9,015 6,909
Noninterest expense
Salaries 9,414 9,037
Employee benefits 2,835 3,455
Occupancy expense 850 857
Equipment expense 892 869
FDIC insurance assessment 284 167
Other real estate owned, net 341 405
Marketing expense 440 434
Legal and professional fees 441 570
ATM and check card fees 777 670
Telecommunication and data processing expense 1,543 1,207
Directors fees 325 306
Bank franchise tax 558 478
Impairment of long-lived assets 19 -
Other operating expenses 3,089 3,143
Total noninterest expense 21,808 21,598
Income before income taxes 6,672 2,766
Income tax expense (benefit) 545 (75 )
Net Income 6,127 2,841
Net income attributable to non-controlling interest 105 106
Net Income attributable to F & M Bank Corp. $ 6,022 $ 2,735
Dividends paid/accumulated on preferred stock 197 236
Net income available to common stockholders $ 5,825 $ 2,499
Per Common Share Data
Net income – basic $ 1.82 $ .78
Net income – diluted $ 1.76 $ .78
Cash dividends on common stock .78 .77
Weighted average common shares outstanding – basic 3,198,691 3,191,719
Weighted average common shares outstanding – diluted 3,421,290 3,191,719

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)

Nine Months Ended<br><br>September 30, Three Months Ended<br><br>September 30,
2020 2019 2020 2019
Net Income (loss) $ 6,022 $ 2,735 $ 2,206 $ (187 )
Other comprehensive income:
Unrealized holding gains on available-for sale securities 220 115 303 2
Tax effect (46 ) (24 ) (64 ) -
Unrealized holding gains, net of tax 174 91 239 2
Total other comprehensive income 174 91 239 2
Comprehensive income (loss) attributable to F&M Bank Corp. $ 6,196 $ 2,826 $ 2,445 $ (185 )
Comprehensive income attributable to noncontrolling interests $ 105 $ 106 $ - $ 78
Total comprehensive income (loss) $ 6,301 $ 2,932 $ 2,445 $ (107 )

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Three Months Ended September 30, 2020 and 2019

Accumulated
Additional Other
Common Paid in Retained Noncontrolling Comprehensive
Stock Capital Earnings Interest Loss Total
Balance As At June 30, 2019 5,592 $ 15,907 $ 7,127 $ 66,741 $ 587 $ (3,880 ) $ 92,074
Net income (loss) - - - (187 ) 78 - (109 )
Other comprehensive income - - - - - 2 2
Dividends on preferred stock (.32 per share) - - - (79 ) - - (79 )
Dividends on common stock (.26 per share) - - - (827 ) - - (827 )
Common stock repurchased (7,881 shares) - (39 ) (190 ) - - - (229 )
Common stock issued (2,282 shares) - 11 50 - - - 61
Balance, As At September 30, 2019 5,592 $ 15,879 $ 6,987 $ 65,648 $ 665 $ (3,878 ) $ 90,893
Balance, As At June 30, 2020 4,592 $ 15,980 $ 6,744 $ 68,018 $ - $ (3,276 ) $ 92,058
Net income - - - 2,206 - - 2,206
Other comprehensive income - - - - - 239 239
Dividends on preferred stock (.32 per share) - - - (65 ) - - (65 )
Dividends on common stock (.26 per share) - - - (822 ) - - (822 )
Common stock issued (3,345 shares) - 16 48 - - - 64
Balance, As At September 30, 2020 4,592 $ 15,996 $ 6,792 $ 69,337 $ - $ (3,037 ) $ 93,680

All values are in US Dollars.

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

Nine Months Ended September 30, 2020 and 2019

Accumulated
Additional Other
Common Paid in Retained Noncontrolling Comprehensive
Stock Capital Earnings Interest Loss Total
Balance, December 31, 2018 5,672 $ 16,066 $ 7,987 $ 65,596 $ 559 $ (3,969 ) $ 91,911
Net Income - - - 2,735 106 - 2,841
Other comprehensive income - - - - - 91 91
Dividends on preferred stock (1.28 per share) - - - (236 ) - - (236 )
Dividends on common stock (.77 per share) - - - (2,447 ) - - (2,447 )
Preferred converted to Common (2,000 pfd shares) (50 ) 11 39 - - - -
Common stock repurchased (45,957 shares) - (230 ) (1,187 ) - - - (1,417 )
Common stock issued (8,610 shares) - 32 159 - - - 191
Preferred stock repurchased (1,200 shares) (30 ) - (11 ) - - - (41 )
Balance, September 30, 2019 5,592 $ 15,879 $ 6,987 $ 65,648 $ 665 $ (3,878 ) $ 90,893
Balance, December 31, 2019 4,592 $ 16,042 $ 7,510 $ 66,008 $ 634 $ (3,211 ) $ 91,575
Net Income - - - 6,022 105 - 6,127
Other comprehensive income - - - - - 174 174
Distributions to noncontrolling interest - - - - (177 ) - (177 )
Dividends on preferred stock (1.28 per share) - - - (197 ) - - (197 )
Dividends on common stock (.78 per share) - - - (2,496 ) - - (2,496 )
Purchase of noncontrolling interest - - (488 ) - (562 ) - (1,050 )
Common stock repurchased (18,472 shares) - (92 ) (381 ) - - - (473 )
Common stock issued (9,257 shares) - 46 151 - - - 197
Balance, September 30, 2020 4,592 $ 15,996 $ 6,792 $ 69,337 $ - $ (3,037 ) $ 93,680

All values are in US Dollars.

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

Nine Months Ended<br><br>September 30,
2020 2019
Cash flows from operating activities
Net income $ 6,022 $ 2,735
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 940 914
Amortization of intangibles 42 55
Amortization of securities 120 1
Proceeds from loans held for sale originated 145,553 89,200
Loans held for sale originated (157,618 ) (91,519 )
Gain on sale of loans held for sale originated (3,861 ) (2,234 )
Provision for loan losses 3,300 6,800
(Increase) decrease in interest receivable (727 ) 138
Decrease (increase) in other assets 224 (629 )
Increase in other liabilities 4,039 1,839
Amortization of limited partnership investments 670 633
Income from life insurance investment (458 ) (449 )
(Gain) on the sale of fixed assets (14 ) (3 )
Loss on sale and valuation adjustments for other real estate owned and bank premises held for sale 326 356
Impairment of long lived assets 19 -
Net cash (used in) provided by operating activities (1,423 ) 7,837
Cash flows from investing activities
Purchase of investments available for sale and other investments (123,804 ) (1,995 )
Proceeds from maturity of investments available for sale 21,185 3,236
Decrease in FHLB stock 1,167 -
Purchase of investments held to maturity (125 ) -
Proceeds from maturity of investments held to maturity 125 -
Net (increase) decrease in loans held for investment (69,964 ) 3,779
Net (increase) in loans held for sale participations (5,315 ) (20,400 )
Proceeds from the sale of fixed assets 34 3
Proceeds from the sale of other real estate owned 997 550
Cash paid for noncontrolling interest (806 ) -
Net purchase of property and equipment (648 ) (2,170 )
Net cash (used in) in investing activities (177,154 ) (16,997 )
Cash flows from financing activities
Net change in deposits 151,827 27,110
Net change in short-term debt (10,000 ) (20,116 )
Dividends paid in cash (2,693 ) (2,683 )
Proceeds from issuance of common stock 197 191
Repurchase of preferred stock - (41 )
Repurchase of common stock (473 ) (1,417 )
Issuance of long-term debt 71,903 30,000
Repayments of long-term debt (18,838 ) (5,909 )
Net cash provided by financing activities 191,923 27,135
Net increase in Cash and Cash Equivalents 13,346 17,975
Cash and cash equivalents, beginning of period 75,804 10,912
Cash and cash equivalents, end of period $ 89,150 $ 28,887
Supplemental Cash Flow information:
Cash paid for: Interest $ 4,559 $ 4,984
Taxes 445 150
Supplemental non-cash disclosures:
Change in unrealized (loss) gain on securities available for sale 211 115
Right of use asset and lease liability, upon adoption - 1,034
Bank premises and equipment transferred to held for sale 520 -
Liability to former noncontrolling interest for remainder of purchase price 244 -

See Notes to Consolidated Financial Statements

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DOLLARS ARE REPORTED IN THOUSANDS THROUGHOUT THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

Notes to the Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

Nature of Operations

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

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses 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 coronavirus (“COVID-19”) pandemic spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operating businesses in March with branch lobby closings, operations and administrative staff working remotely and the use of virtual meetings.  These changes will likely affect our operations throughout the remainder of 2020, although the extent and significance remain unknown. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may adversely affect our future earnings, cash flows and financial condition, including amoung others, credit losses resulting from financial stress on borrowers, decreased demand for products and operational failures. In addition, significant assumptions, judgments, and estimates used in the preparation of our financial statements, including those associated with evaluations of goodwill for impairment, and allowance for loan losses, may be subject to adjustments in future periods due to the rapidly changing, uncertain and unprecedented nature of the pandemic.

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Note 1. Summary of Significant Accounting Policies, continued

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.

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  In calculating diluted EPS, net income available to common stockholders is used as the numerator and the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per share calculation for the three and nine month periods ended September 30, 2020 and 2019.

Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared. The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:

For the Nine months ended For the Three months ended For the Nine months ended For the Three months ended
September 30,<br><br>2020 September 30,<br><br>2020 September 30,<br><br>2019 September 30,<br><br>2019
Earnings available to common stockholders
Net income (loss) $ 6,127 $ 2,206 $ 2,841 $ (109 )
Non-controlling interest income 105 - 106 78
Preferred stock dividends 197 65 236 79
Net income (loss) available to common stockholders $ 5,825 $ 2,141 $ 2,499 $ (266 )

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

Nine months ended September 30, 2020 Nine months ended September 30, 2019
Income Weighted Average Shares Per Share Amounts Income Weighted<br><br>Average<br><br>Shares Per Share Amounts
Basic EPS $ 5,825 3,198,691 $ 1.82 $ 2,499 3,191,719 $ .78
Effect of Dilutive Securities:
Convertible Preferred Stock 197 222,599 .06 ) - - -
Diluted EPS $ 6,022 3,421,290 $ 1.76 $ 2,499 3,191,719 $ .78
Three months ended September 30, 2020 Three months ended September 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Income Weighted Average Shares Per Share Amounts Income (loss) Weighted<br><br>Average<br><br>Shares Per Share Amounts
Basic EPS $ 2,141 3,197,718 $ 0.67 $ (266 ) 3,175,192 $ (.08 )
Effect of Dilutive Securities:
Convertible Preferred Stock 65 206,660 (.02 ) - - -
Diluted EPS $ 2,206 3,404,378 $ 0.65 $ (266 ) 3,175,192 $ (.08 )
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Note 2. Investment Securities

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

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

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

Amortized<br><br>Cost Gross<br><br>Unrealized<br><br>Gains Gross<br><br>Unrealized<br><br>Losses Fair<br><br>Value
September 30, 2020
U. S. Government sponsored enterprises $ 6,000 $ 7 $ - $ 6,007
Securities issued by States and political subdivisions in the U.S. 17,194 397 (58 ) 17,533
Mortgage-backed obligations of federal agencies 76,889 261 (437 ) 76,713
Corporate debt security 6,789 235 (194 ) 6,830
Total Securities Available for Sale $ 106,872 $ 900 $ (689 ) $ 107,083
December 31, 2019
U. S. Government sponsored enterprises $ 2,000 $ - $ (11 ) $ 1,989
Mortgage-backed obligations of federal agencies 317 2 - 319
Corporate debt security 2,059 - (1 ) 2,058
Total Securities Available for Sale $ 4,376 $ 2 $ (12 ) $ 4,366

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

Securities Held to Maturity Securities Available for Sale
Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Cost Value
Due in one year or less $ 125 $ 125 $ - $ -
Due after one year through five years - - 70,733 70,611
Due after five years - - 28,042 28,140
Due after ten years - - 8,098 8,332
Total $ 125 $ 125 $ 106,873 $ 107,083

There were no sales of available for sale securities in 2020 or 2019. Securities held that are U.S. Agency and Government Sponsored Entities and Agency MBS which carry an implicit government guarantee and are not subject to other than temporary impairment evaluation. One Security issued by States and political subdivisions in the U.S. was in an unrealized loss position for less than 12 months with minimal loss. Therefore, no securities were determined to be other than temporarily impaired.

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Note 2. Investment Securities, continued

A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type of September 30, 2020 and December 31, 2019 were as follows:

Less than 12 Months More than 12 Months Total
Fair<br><br>Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
September 30, 2020
Securities issued by States and political subdivisions in the U.S. $ 17,533 $ (58 ) $ - $ - $ 17,533 $ (58 )
Mortgage-backed obligations of federal agencies 76,713 (437 ) - - 76,713 (437 )
Corporate debt security 6,830 (194 ) - - 6,830 (194 )
Total $ 101,076 $ (689 ) $ - $ - $ 101,076 $ (689 )
Less than 12 Months More than 12 Months Total
Fair<br><br>Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
December 31, 2019
U. S. Government sponsored enterprises $ 1,989 $ (11 ) $ - $ - $ 1,989 $ (11 )
Corporate debt security 2,058 (1 ) - - 2,058 (1 )
Total $ 4,047 $ (12 ) $ - $ - $ 4,047 $ (12 )

As of September 30, 2020, other investments consist of investments in fifteen low-income housing and historic equity partnerships (carrying basis of $7,859), stock in the Federal Home Loan Bank (carrying basis $1,342) and various other investments (carrying basis $2,479).The interests in low-income housing and historic equity partnerships have limited transferability and the interests in the other stocks are restricted as to sales. The fair values of these securities are estimated to approximate their carrying value as of September 30, 2020. At September 30, 2020, the Company was committed to invest an additional $2,351in six low-income housing limited partnerships. These funds will be paid as requested by the general partner to complete the projects. This additional investment has been reflected in the above carrying basis and in other liabilities on the consolidated balance sheet. The Company does not have any pledged securities.

Note 3. Loans

During the first nine months of 2020, we executed 1,048 modifications allowing principal and interest deferrals in connection with COVID-19 relief to our customers.Of those modifications, 99 remain in deferral as of September 30, 2020 with balances of $19.1 million. These modifications and deferrals were not considered troubled debt restructurings pursuant to interagency guidance issued in March 2020 and the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

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

(dollars in thousands) 2020 2019
Construction/Land Development $ 71,377 $ 77,131
Farmland 47,454 29,718
Real Estate 166,591 178,267
Multi-Family 6,001 5,364
Commercial Real Estate 132,564 129,850
Home Equity – closed end 8,768 9,523
Home Equity – open end 47,035 47,774
Commercial & Industrial – Non-Real Estate 89,874 33,535
Consumer 10,113 10,165
Dealer Finance 90,004 78,976
Credit Cards 2,744 3,122
Total $ 672,525 $ 603,425
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Note 3. Loans, continued

The Company has pledged loans held for investment as collateral for borrowings with the Federal Home Loan Bank of Atlanta totaling $171,748 and $178,253 as of September 30, 2020 and December 31, 2019, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial and home equity portfolios.

Loans held for sale consists of loans originated by F&M Mortgage for sale in the secondary market, and the Bank’s commitment to purchase residential mortgage loan participations from Northpointe Bank. The volume of loans purchased from Northpointe fluctuates due to a number of factors including changes in secondary market rates, which affects demand for mortgage loans; the number of participating banks involved in the program; the number of mortgage loan originators selling loans to the lead bank and the funding capabilities of the lead bank. Loans held for sale as of September 30, 2020 and December 31, 2019 were $88,039 and $66,798, respectively.

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

September 30, 2020 December 31, 2019
Unpaid Unpaid
Recorded Principal Related Recorded Principal Related
Investment(1) Balance Allowance Investment Balance Allowance
Impaired loans without a valuation allowance:
Construction/Land Development $ 1,664 $ 1,664 $ - $ 2,042 $ 2,042 $ -
Farmland - - - - - -
Real Estate 4,916 4,916 - 5,131 5,131 -
Multi-Family - - - - - -
Commercial Real Estate 824 824 - 1,302 1,302 -
Home Equity – closed end 699 699 - 716 716 -
Home Equity – open end - - - - - -
Commercial & Industrial – Non-Real Estate 11 11 - 17 17 -
Consumer - - - - - -
Credit cards - - - - - -
Dealer Finance 17 17 - 79 79 -
8,131 8,131 - 9,287 9,287 -
Impaired loans with a valuation allowance
Construction/Land Development $ 261 $ 261 $ 77 $ 1,036 $ 2,061 $ 85
Farmland 1,751 1,751 449 1,933 1,933 537
Real Estate 9,293 9,293 588 10,404 10,404 569
Multi-Family - - - - - -
Commercial Real Estate 4,292 4,292 1,017 638 638 213
Home Equity – closed end - - - - - -
Home Equity – open end 151 151 13 151 151 151
Commercial & Industrial – Non-Real Estate - - - 192 192 192
Consumer 1 1 1 4 4 1
Credit cards - - - - - -
Dealer Finance 153 153 14 136 136 7
15,902 15,902 2,159 14,494 15,519 1,755
Total impaired loans $ 24,033 $ 24,033 $ 2,159 $ 23,781 $ 24,806 $ 1,755

_________

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

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Note 3. Loans Held for Investment, continued

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

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Average Recorded Interest Income Average Recorded Interest Income Average Recorded Interest Income Average Recorded Interest Income
Investment Recognized Investment Recognized Investment Recognized Investment Recognized
Impaired loans without a valuation allowance:
Construction/Land Development $ 1,547 $ 19 $ 1,871 $ 16 $ 1,853 $ 59 $ 2,089 $ 139
Farmland - - 972 8 - - 971 10
Real Estate 4,908 78 8,406 637 5,024 214 8,317 659
Multi-Family - - - - - - - -
Commercial Real Estate 1,561 (19 ) 1,646 (175 ) 1,063 30 3,746 53
Home Equity – closed end 701 5 719 - 708 26 359 -
Home Equity – open end - - 81 9 - - 81 9
Commercial & Industrial – Non-Real Estate 13 1 22 10 14 1 10 10
Consumer and credit cards - - - (1 ) - - - -
Dealer Finance 30 (1 ) 43 - 48 1 42 -
8,760 83 13,760 504 8,710 331 15,615 880
Impaired loans with a valuation allowance:
Construction/Land Development $ 309 $ 28 $ 2,616 $ 12 $ 649 $ 28 $ 3,482 $ 43
Farmland 1,763 35 967 - 1,842 219 967 -
Real Estate 9,456 119 830 54 9,849 381 833 120
Multi-Family - - - - - - - -
Commercial Real Estate 3,566 72 2,669 25 2,465 121 614 57
Home Equity – closed end - - - 10 - - - 50
Home Equity – open end 151 2 - - 151 6 - -
Commercial & Industrial – Non-Real Estate - - 97 - 96 - 97 2
Consumer and credit card 1 - 4 1 3 - 6 -
Dealer Finance 142 4 186 4 145 9 186 13
15,388 260 7,369 106 15,200 764 6,185 285
Total Impaired Loans $ 24,148 $ 343 $ 21,129 $ 610 $ 23,910 $ 1,095 $ 21,800 $ 1,165
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Note 3. Loans, continued

The following table presents the aging of the recorded investment of past due loans (dollars in thousands) as of September 30, 2020 and December 31, 2019:

30-59 Days<br><br>Past due 60-89 Days<br><br>Past Due Greater than<br><br>90 Days Total Past Due Current Total Loan Receivable Non-Accrual Loans Recorded Investment >90 days & accruing
September 30, 2020
Construction/Land Development $ - $ - $ 18 $ 18 $ 71,359 $ 71,377 $ 318 $ -
Farmland - 1,751 - 1,751 45,703 47,454 1,751 -
Real Estate 1,670 245 563 2,478 164,113 166,591 512 142
Multi-Family - - - - 6,001 6,001 - -
Commercial Real Estate 149 1,009 - 1,158 131,406 132,564 1,121 -
Home Equity – closed end 4 - - 4 8,764 8,768 - -
Home Equity – open end 569 18 301 888 46,147 47,035 325 -
Commercial & Industrial – Non- Real Estate 66 - - 66 89,808 89,874 5 -
Consumer - - - - 10,113 10,113 - -
Dealer Finance 658 112 22 792 89,212 90,004 64 15
Credit Cards 59 - 2 61 2,683 2,744 - 2
Total $ 3,175 $ 3,135 $ 906 $ 7,216 $ 665,309 $ 672,525 $ 4,096 $ 159
30-59 Days<br><br>Past due 60-89 Days<br><br>Past Due Greater than<br><br>90 Days Total Past Due Current Total Loan Receivable Non-Accrual Loans Recorded Investment >90 days & accruing
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2019
Construction/Land Development $ 117 $ 45 $ 1,255 $ 1,417 $ 75,714 $ 77,131 $ 1,301 $ -
Farmland 27 - 1,933 1,960 27,758 29,718 1,933 -
Real Estate 2,440 1,035 837 4,312 173,955 178,267 420 619
Multi-Family - - - - 5,364 5,364 - -
Commercial Real Estate 563 - 137 700 129,150 129,850 900 -
Home Equity – closed end - - - - 9,523 9,523 - -
Home Equity – open end 429 296 15 740 47,034 47,774 - 15
Commercial & Industrial – Non- Real Estate 726 4 - 730 32,805 33,535 203 -
Consumer 89 14 - 103 10,062 10,165 1 -
Dealer Finance 1,943 400 198 2,541 76,435 78,976 249 84
Credit Cards 31 - 4 35 3,087 3,122 - 4
Total $ 6,365 $ 1,794 $ 4,379 $ 12,538 $ 590,887 $ 603,425 $ 5,007 $ 722

On September 30, 2020 other real estate owned did not include any foreclosed residential real estate and December 31, 2019 included $133 of foreclosed residential real estate.The Company had $878 of consumer mortgages for which foreclosure was in process on September 30, 2020.

Nonaccrual loans on September 30, 2020 would have earned approximately $52 in interest income for the quarter had they been accruing loans.

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Note 4. Allowance for Loan Losses

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

September 30, 2020 Beginning Balance Charge-offs Recoveries Provision Ending Balance Individually Evaluated for Impairment Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development $ 1,190 $ 7 $ - $ 381 $ 1,564 $ 77 $ 1,487
Farmland 668 - - 102 770 449 321
Real Estate 1,573 76 5 335 1,837 588 1,249
Multi-Family 20 - - 34 54 - 54
Commercial Real Estate 1,815 - 11 1,699 3,525 1,017 2,508
Home Equity – closed end 42 - - 14 56 - 56
Home Equity – open end 457 - 3 (6 ) 454 13 441
Commercial & Industrial – Non-Real Estate 585 92 15 (149 ) 359 - 359
Consumer 186 85 45 75 221 1 220
Dealer Finance 1,786 1,292 641 774 1,909 14 1,895
Credit Cards 68 83 51 41 77 - 77
Total $ 8,390 $ 1,635 $ 771 $ 3,300 $ 10,826 $ 2,159 $ 8,667
December 31, 2019 Beginning Balance Charge-offs Recoveries Provision Ending Balance Individually Evaluated for Impairment Collectively Evaluated for Impairment
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Allowance for loan losses:
Construction/Land Development $ 2,094 $ 2,319 $ 50 $ 1,365 $ 1,190 $ 85 $ 1,105
Farmland 15 - - 653 668 537 131
Real Estate 292 32 4 1,309 1,573 569 1,004
Multi-Family 10 - - 10 20 - 20
Commercial Real Estate 416 677 16 2,060 1,815 213 1,602
Home Equity – closed end 13 1 2 28 42 - 42
Home Equity – open end 126 126 1 456 457 151 306
Commercial & Industrial – Non-Real Estate 192 127 81 439 585 192 393
Consumer 70 116 44 188 186 1 185
Dealer Finance 1,974 2,118 1,144 786 1,786 7 1,779
Credit Cards 38 110 29 111 68 - 68
Total $ 5,240 $ 5,626 $ 1,371 $ 7,405 $ 8,390 $ 1,755 $ 6,635
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Note 4. Allowance for Loan Losses, continued

The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of September 30, 2020 and December 31, 2019:

Individually Collectively
**** Evaluated for Evaluated for
September 30, 2020 Loan Receivable Impairment Impairment
Construction/Land Development $ 71,377 $ 1,925 $ 69,452
Farmland 47,454 1,751 45,703
Real Estate 166,591 14,209 152,382
Multi-Family 6,001 - 6,001
Commercial Real Estate 132,564 5,116 127,448
Home Equity – closed end 8,768 699 8,069
Home Equity – open end 47,035 151 46,864
Commercial & Industrial – Non-Real Estate 89,874 11 89,863
Consumer 10,113 1 10,112
Dealer Finance 90,004 170 89,834
Credit Cards 2,744 - 2,744
Total $ 672,525 $ 24,033 $ 648,492
December 31, 2019 Loan Receivable Individually<br><br>Evaluated for Impairment Collectively<br><br>Evaluated for Impairment
--- --- --- --- --- --- ---
Construction/Land Development $ 77,131 $ 3,078 $ 74,053
Farmland 29,718 1,933 27,785
Real Estate 178,267 15,535 162,732
Multi-Family 5,364 - 5,364
Commercial Real Estate 129,850 1,940 127,910
Home Equity – closed end 9,523 716 8,807
Home Equity – open end 47,774 151 47,623
Commercial & Industrial – Non-Real Estate 33,535 209 33,326
Consumer 10,165 4 10,161
Dealer Finance 78,976 215 78,761
Credit Cards 3,122 - 3,122
Total $ 603,425 $ 23,781 $ 579,644
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Note 4. Allowance for Loan Losses, continued

The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands) as of September 30, 2020 and December 31, 2019:

September 30, 2020 Grade 1<br><br>Minimal Risk Grade 2<br><br>Modest Risk Grade 3<br><br>Average Risk Grade 4 Acceptable Risk Grade 5 Marginally Acceptable Grade 6<br><br>Watch Grade 7 Substandard Grade 8 Doubtful Total
Construction/Land Development $ - $ 144 $ 8,922 $ 33,745 $ 18,642 $ 8,783 $ 1,141 $ - $ 71,377
Farmland 58 476 10,223 24,514 9,775 657 1,751 - 47,454
Real Estate - 2,398 42,044 75,825 25,938 4,153 16,233 - 166,591
Multi-Family - - 1,085 3,572 1,344 - - - 6,001
Commercial Real Estate - 4,188 34,485 56,839 11,128 22,471 3,453 - 132,564
Home Equity – closed end - 129 2,586 3,553 1,229 1,241 30 - 8,768
Home Equity – open end - 1,626 19,126 21,331 3,487 823 642 - 47,035
Commercial & Industrial (Non-Real Estate) 102 1,498 7,586 13,868 65,640 1,156 24 - 89,874
Consumer (excluding dealer) 2 182 3,990 4,099 1,830 10 - - 10,113
Total $ 162 $ 10,641 $ 130,047 $ 237,346 $ 139,013 $ 39,294 $ 23,274 $ - $ 579,777
Credit Cards Dealer Finance
--- --- --- --- ---
Performing $ 2,742 $ 89,920
Non-performing 2 84
Total $ 2,744 $ 90,004

Note 4. Allowance for Loan Losses, continued

December 31, 2019 Grade 1<br><br>Minimal Risk Grade 2<br><br>Modest Risk Grade 3<br><br>Average Risk Grade 4 Acceptable Risk Grade 5 Marginally Acceptable Grade 6<br><br>Watch Grade 7 Substandard Grade 8 Doubtful Total
Construction/Land Development $ - $ 615 $ 21,904 $ 41,693 $ 8,218 $ 2,434 $ 2,267 $ - $ 77,131
Farmland 60 363 9,479 13,754 2,942 1,188 1,932 - 29,718
Real Estate - 1,900 48,308 81,371 23,876 5,635 17,177 - 178,267
Multi-Family - - 1,327 3,711 153 173 - - 5,364
Commercial Real Estate - 2,465 40,227 67,626 14,139 4,397 996 - 129,850
Home Equity – closed end - 189 2,999 3,816 1,154 1,365 - - 9,523
Home Equity – open end 17 1,965 17,789 22,705 3,769 1,198 331 - 47,774
Commercial & Industrial (Non-Real Estate) 142 2,042 12,818 15,035 2,877 373 248 - 33,535
Consumer (excluding dealer) 6 170 3,476 4,726 1,729 56 2 - 10,165
Total $ 225 $ 9,709 $ 158,327 $ 254,437 $ 58,857 $ 16,819 $ 22,953 $ - $ 521,327
Credit Cards Dealer Finance
--- --- --- --- ---
Performing $ 3,118 $ 78,529
Non-performing 4 447
Total $ 3,122 $ 78,976

Description of internal loan grades:

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

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

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

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

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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. Loans rated substandard and in aggregate relationships of $500,000 or more are reviewed for impairment and a specific reserve is established when needed.

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

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

Note 5. Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all of its full-time employees hired before April 1, 2012.The benefits are primarily based on years of service and earnings. The Company uses December 31^st^ as the measurement date for the defined benefit pension plan. The Bank does not expect to contribute to the pension plan in 2020.

The following is a summary of net periodic pension costs for the three and nine month periods ended September 30, 2020 and 2019:

Nine Months Ended Three Months Ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Service cost $ 606 $ 553 $ 202 $ 184
Interest cost 314 411 105 137
Expected return on plan assets (55 ) (604 ) (18 ) (201 )
Amortization of prior service cost (9 ) (12 ) (3 ) (4 )
Amortization of net loss 166 212 55 71
Net periodic pension cost $ 1,022 $ 560 $ 341 $ 187

Note 6. Fair Value

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

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

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Note 6. Fair Value, continued

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

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

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

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

Securities

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

Loans Held for Sale

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

Derivative assets – IRLCs

Beginning with the second quarter of 2020, simultaneous with the purchase of the minority interest in F&M Mortgage, the Company elected to recognize IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 2. The fair value of interest rate lock commitments was considered immaterial at December 31, 2019.

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Note 6. Fair Value, continued

Derivative Asset/Liability – Forward Sale Commitments

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

Derivative Asset/Liability – Indexed Certificate of Deposit

The Company’s derivatives, which are associated with the Indexed Certificate of Deposit (ICD) product once offered, are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs.This product is no longer offered, however there are a few certificates of deposits that have not matured.

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

September 30, 2020 Total Level 1 Level 2 Level 3
Assets:
Loans held for sale, F&M Mortgage $ 18,900 $ - $ 18,900 $ -
IRLC 706 - 706 -
U. S. Government sponsored enterprises 6,007 - 6,007 -
Securities issued by States and political subdivisions in the U. S. 17,533 - 17,533 -
Mortgage-backed obligations of federal agencies 76,713 - 76,713 -
Corporate debt securities 6,830 - 6,830 -
Forward sales commitments 10 - 10 -
Assets at Fair Value $ 126,699 $ - $ 126,699 $ -
Liabilities:
Derivatives - ICD $ 45 $ - $ 45 $ -
Liabilities at Fair Value $ 45 $ - $ 45 $ -
December 31, 2019 Total Level 1 Level 2 Level 3
Assets:
U. S. Government sponsored enterprises $ 1,989 $ - $ 1,989 $ -
Mortgage-backed obligations of federal agencies 319 - 319 -
Other debt securities 2,058 - 2,058 -
Assets at Fair Value $ 4,366 $ - $ 4,366 $ -
Derivatives - ICD $ 72 $ - $ 72 $ -
Liabilities at Fair Value $ 72 $ - $ 72 $ -

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

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

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Note 6. Fair Value, continued

Impaired Loans

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

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

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

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

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

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

September 30, 2020 Total Level 1 Level 2 Level 3
Construction/Land Development $ 184 $ - $ - $ 184
Farmland 1,302 - - 1,302
Real Estate 8,705 - - 8,705
Commercial Real Estate 3,275 - - 3,275
Consumer - - - -
Home Equity – open end 138 - - 138
Dealer Finance 139 - - 139
Impaired loans $ 13,743 $ - $ - $ 13,743
December 31, 2019 Total Level 1 Level 2 Level 3
--- --- --- --- --- --- --- --- ---
Construction/Land Development $ 951 - - $ 951
Farmland 1,396 - - 1,396
Real Estate 9,835 - - 9,835
Commercial Real Estate 425 - - 425
Consumer 3 - - 3
Dealer Finance 129 - - 129
Impaired loans $ 12,739 $ - $ - $ 12,739
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Note 6. Fair Value, continued

The following table presents information about Level 3 Fair Value Measurements for September 30, 2020:

Fair Value at September 30, 2020 Valuation Technique Significant Unobservable Inputs Range
(dollars in thousands)
Impaired Loans $ 13,743 Discounted appraised value Discount for selling costs and marketability 3%-48% (Average 24.38%)

The following table presents information about Level 3 Fair Value Measurements for December 31, 2019:

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

Assets Held for Sale

Assets held for sale were transferred from bank premises at the lower of cost less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 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.

Other Real Estate Owned

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

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

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

September 30, 2020 Total Level 1 Level 2 Level 3
Other real estate owned $ 166 $ - $ - $ 166
Assets held for sale $ 520 $ - $ - $ 520
December 31, 2019 Total Level 1 Level 2 Level 3
--- --- --- --- --- --- --- --- ---
Other real estate owned $ 1,489 $ - $ - $ 1,489

The following table presents information about Level 3 Fair Value Measurements for September 30, 2020:

Fair Value at September 30, 2020 Valuation Technique Significant Unobservable Inputs Range
(dollars in thousands)
Other real estate owned $ 166 Discounted appraised value Discount for selling costs .38%-6.67% (Average 4.66%)
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Note 6. Fair Value, continued

The following table presents information about Level 3 Fair Value Measurements for December 31, 2019:

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

Note 7. Disclosures about 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 September 30, 2020 and December 31, 2019.Fair values for September 30, 2020 and December 31, 2019 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities

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

Fair Value Measurements at September 30, 2020 Using
(dollars in thousands) Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value at September 30, 2020
Assets:
Cash and cash equivalents $ 89,150 $ 89,150 $ - $ - $ 89,150
Securities 107,208 - 107,208 - 107,208
Loans held for sale 88,039 - 87,915 - 87,915
Loans held for investment, net 661,699 - - 649,493 649,493
Interest receivable 2,771 - 2,771 - 2,771
Bank owned life insurance 20,496 - 20,496 - 20,496
Total $ 969,363 $ 89,150 $ 218,390 $ 649,493 $ 957,033
Liabilities:
Deposits $ 793,536 $ - $ 672,066 $ 134,417 $ 806,483
Long-term debt 106,510 - - 96,022 96,022
Interest payable 432 - 432 - 432
Total $ 900,478 $ - $ 672,498 $ 230,439 $ 902,937
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Note 7. Disclosures About Fair Value of Financial Instruments, continued

Fair Value Measurements at December  31,2019 Using
(dollar in thousands) Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level1) Significant Other Observable Inputs (Level2) Significant Unobservable Inputs (Level3) Fair Value at December 31, 2019
Assets:
Cash and cash equivalents $ 75,804 $ 75,804 $ - $ - $ 75,804
Securities 4,490 - 4,490 - 4,490
Loans held for sale 66,798 - 66,798 - 66,798
Loans held for investment, net 595,035 - - 580,903 580,903
Interest receivable 2,044 - 2,044 - 2,044
Bank owned life insurance 20,050 - 20,050 - 20,050
Total $ 764,221 $ 75,804 $ 93,382 $ 580,903 $ 750,089
Liabilities:
Deposits $ 641,709 $ - $ 504,522 $ 139,713 $ 644,235
Short-term debt 10,000 - 10,000 - 10,000
Long-term debt 53,201 - - 53,543 53,543
Interest payable 354 - 354 - 354
Total $ 705,264 $ - $ 514,876 $ 193,256 $ 708,132

Note 8. Troubled Debt Restructuring

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

During the nine months ended September 30, 2020, there were four loan modifications that were considered to be troubled debt restructurings.Two of these loans was modified during the three months ended September 30, 2020 and two loan modifications considered a troubled debt restructuring were modified during the second quarter of 2020. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

September 30, 2020
Pre-Modification Post-Modification
(dollars in thousands) Outstanding Outstanding
Troubled Debt Restructurings Number of<br><br>Contracts Recorded<br><br>Investment Recorded<br><br>Investment
Consumer 4 $ 26 $ 26
Total 4 $ 26 $ 26
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Note 8. Troubled Debt Restructuring, continued

On September 30, 2020, there were no loans restructured in the previous 12 months in default or on nonaccrual status. A restructured loan is considered in default when it becomes 90 days past due.

During the nine months ended September 30, 2019, there were seven loan modifications that were considered to be troubled debt restructurings. All of the loan modifications that would be considered a troubled debt restructuring were modified during the first quarter of 2019. Modifications may have included rate adjustments, revisions to amortization schedules, suspension of principal payments for a temporary period, re-advancing funds to be applied as payments to bring the loan(s) current, or any combination thereof.

Nine months ended September 30, 2019
Pre-Modification Post-Modification
(dollars in thousands) Outstanding Outstanding
Troubled Debt Restructurings Number of<br><br>Contracts Recorded<br><br>Investment Recorded<br><br>Investment
Real Estate 1 $ 192 $ 192
Home Equity 1 718 718
Commercial and Industrial 1 20 20
Consumer 4 33 33
Total 7 $ 963 $ 963

On September 30, 2019, there were three loans restructured in the previous 12 months in default or on nonaccrual status.  A restructured loan is considered in default when it becomes 90 days past due.

September 30, 2019
Pre-Modification Post-Modification
(dollars in thousands) Outstanding Outstanding
Troubled Debt Restructurings Number of<br><br>Contracts Recorded<br><br>Investment Recorded<br><br>Investment
Real Estate 2 $ 221 $ 221
Consumer 1 3 3
Total 3 $ 224 $ 224

Note 9. Accumulated Other Comprehensive Loss

The balances in accumulated other comprehensive loss are shown in the following tables for September 30, 2020 and 2019:

(dollars in thousands) Unrealized Securities Gains (Losses) Adjustments Related to Pension Plan Accumulated Other Comprehensive Loss
Balance at December 31, 2019 $ (7 ) $ (3,204 ) $ (3,211 )
Change in unrealized securities gains, net of tax 174 - 174
Balance at September 30, 2020 $ 167 $ (3,204 ) $ (3,037 )
(dollars in thousands) Unrealized Securities Gains (Losses) Adjustments Related to Pension Plan Accumulated Other Comprehensive Loss
--- --- --- --- --- --- --- --- --- ---
Balance at December 31, 2018 $ (94 ) $ (3,875 ) $ (3,969 )
Change in unrealized securities gains, net of tax 91 - 91
Balance at September 30, 2019 $ (3 ) $ (3,875 ) $ (3,878 )

There were no reclassifications adjustment reported on the consolidated statements of income during the three or nine months ended September 30, 2020 or 2019.

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Note 10. Business Segments

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

The following tables represent revenues and expenses by segment for the three and nine months ended September 30, 2020 and September 30, 2019.

Nine Months Ended September 30, 2020
**** F&M Bank F&M Mortgage TEB Life/FMFS VS Title Parent Only **** Eliminations **** F&M Bank Corp. Consolidated
Revenues:
Interest Income $ 27,199 $ 227 $ 115 $ - $ - $ (261 ) $ 27,280
Service charges on deposits 888 - - - - - 888
Investment services and insurance income - - 543 - - (18 ) 525
Mortgage banking income, net - 4,521 - - - - 4,521
Title insurance income - - - 1,386 - - 1,386
Other operating income (loss) 1,668 126 - - (99 ) - 1,695
Total income (loss) 29,755 4,874 658 1,386 (99 ) (279 ) 36,295
Expenses:
Interest Expense 4,419 235 - - - (261 ) 4,393
Provision for loan losses 3,300 - - - 122 - 3,422
Salary and benefit expense 9,623 1,655 231 740 - - 12,249
Other operating expenses 8,622 691 42 190 32 (18 ) 9,559
Total expense 25,964 2,581 273 930 154 (279 ) 29,623
Net income (loss) before taxes 3,791 2,293 385 456 (253 ) - 6,672
Income tax expense (benefit) 527 - 59 - (41 ) - 545
Net income (loss) 3,264 2,293 326 456 (212 ) - 6,127
Net income attributable to non-controlling interest - 105 - - - - 105
Net Income (loss) attributable to F & M Bank Corp. $ 3,264 $ 2,188 $ 326 $ 456 $ (212 ) $ - $ 6,022
Total Assets $ 1,019,005 $ 24,589 $ 7,911 $ 4,664 $ 105,633 $ (146,378 ) $ 1,015,424
Goodwill $ 2,670 $ 47 $ - $ 3 $ 164 $ - $ 2,884
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Note 10. Business Segments, continued

Three months ended September 30, 2020
**** F&M Bank F&M Mortgage TEB Life/FMFS VS Title Parent Only **** Eliminations **** F&M Bank Corp. Consolidated
Revenues:
Interest Income $ 9,163 $ 107 $ 35 $ - $ - $ (127 ) $ 9,178
Service charges on deposits 302 - - - - - 302
Investment services and insurance income - - 176 - - (9 ) 167
Mortgage banking income, net - 1,621 - - - - 1,621
Title insurance income - - - 543 - - 543
Other operating income (loss) 572 69 - - (46 ) - 595
Total income (loss) 10,037 1,797 211 543 (46 ) (136 ) 12,406
Expenses:
Interest Expense 1,308 121 - - 122 (127 ) 1,424
Provision for loan losses 1,000 - - - - - 1,000
Salary and benefit expense 3,257 504 73 247 - - 4,081
Other operating expenses 2,899 339 16 61 17 9 ) 3,223
Total expense 8,464 964 89 308 139 (136 ) 9,828
Net income (loss) before taxes 1,573 833 122 235 (185 ) - 2,578
Income tax expense 337 - 20 - 15 - 372
Net income (loss) $ 1,236 $ 833 $ 102 $ 235 $ (200 ) $ - $ 2,206
Net Income (loss) attributable to F & M Bank Corp. $ 1,236 $ 833 $ 102 $ 235 $ (200 ) $ - $ 2,206
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Note 10. Business Segments, continued

Nine Months Ended September 30, 2019
F&M Bank VBS Mortgage TEB Life/FMFS VS Title Parent Only Eliminations F&M Bank Corp. Consolidated
Revenues:
Interest Income $ 29,200 $ 120 $ 120 $ - $ - $ (160 ) $ 29,280
Service charges on deposits 1,263 - - - - - 1,263
Investment services and insurance income 2 - 497 - - (12 ) 487
Mortgage banking income, net - 2,252 - - - - 2,252
Title insurance income - - - 1,116 - - 1,116
Other operating income (loss) 1,786 58 - - (53 ) - 1,791
Total income (loss) 32,251 2,430 617 1,116 (53 ) (172 ) 36,189
Expenses:
Interest Expense 5,046 139 - - - (160 ) 5,025
Provision for loan losses 6,800 - - - - - 6,800
Salary and benefit expense 10,156 1,410 221 705 - - 12,492
Other operating expenses 8,317 527 46 188 40 (12 ) 9,106
Total expense 30,319 2,076 267 893 40 (172 ) 33,423
Net income (loss) before taxes 1,932 354 350 223 (93 ) - 2,766
Income tax expense (benefit) (210 ) - 51 - 84 - (75 )
Net income (loss) $ 2,142 $ 354 $ 299 $ 223 $ (177 ) $ - $ 2,841
Net income (loss) attributable to non-controlling interest - 106 - 54 (54 ) - 106
Net Income (loss) attributable to F & M Bank Corp. $ 2,142 $ 248 $ 299 $ 169 $ (123 ) $ - $ 2,735
Total Assets $ 816,130 $ 12,287 $ 7,617 $ 2,913 $ 90,390 $ (116,100 ) $ 813,237
Goodwill $ 2,670 $ 47 $ - $ 3 $ 164 $ - $ 2,884
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Note 10. Business Segments, continued

Three Months Ended September 30, 2019 ****
**** F&M Bank **** VBS Mortgage TEB Life/FMFS VS Title Parent Only **** Eliminations **** F&M Bank Corp. Consolidated
Revenues:
Interest Income $ 9,945 $ 52 $ 45 $ - $ - $ (76 ) $ 9,966
Service charges on deposits 460 - - - - - 460
Investment services and insurance income - - 172 - - (7 ) 165
Mortgage banking income, net - 907 - - - - 907
Title insurance income - - - 434 - - 434
Other operating income (loss) 678 30 - - (29 ) - 679
Total income (loss) 11,083 989 217 434 (29 ) (83 ) 12,611
Expenses:
Interest Expense 1,814 63 - - - (76 ) 1,801
Provision for loan losses 3,750 - - - - - 3,750
Salary and benefit expense 3,581 491 71 248 - - 4,391
Other operating expenses 2,825 176 18 64 9 (7 ) 3,085
Total expense 11,970 730 89 312 9 (83 ) 13,027
Net income (loss) before taxes (887 ) 259 128 122 (38 ) - (416 )
Income tax expense (benefit) (369 ) - 18 - 44 - (307 )
Net income (loss) $ (518 ) $ 259 $ 110 $ 122 $ (82 ) $ - $ (109 )
Net income (loss) attributable to non-controlling interest - 78 - 29 (29 ) - 78
Net Income (loss) attributable to F & M Bank Corp. $ (518 ) $ 181 $ 110 $ 93 $ (53 ) $ - $ (187 )

Note 11. Debt

Short-term Debt

The Company utilizes short-term debt such as Federal funds purchased and Federal Home Loan Bank of Atlanta (“FHLB”) short term borrowings to support the loans held for sale participation program and provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the need of the Company. There was no short term debt at September 30, 2020 and $10,000at December 31, 2019.

Long-term Debt

The Company utilizes the FHLB advance program to fund loan growth and provide liquidity.  The interest rates on long-term debt are fixed at the time of the advance and range from .64% to2.50%; the weighted average interest rate was1.80% at September 30, 2020 and 1.85% at December 31, 2019.  The balance of these obligations at September 30, 2020 and December 31, 2019 was $34,875and $53,197, respectively.  FHLB advances include a $6,000letter of credit at FHLB that is pledged to the Commonwealth of Virginia to secure public funds.

The Company utilized the Federal Reserve Paycheck Protection Program Liquidity Facility to fund the Paycheck Protection Program (“PPP”) loans funded in the second quarter.  This funding facility is secured by the PPP loans and interest is set at a fixed rate of .35%.  On September 30, 2020 the balances totaled $59,903; there were no borrowings under this program on December 31, 2019.

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Note 11. Debt

Long-term Debt. Continued

On July 29, 2020, the Company sold and issued to certain institutional accredited investors $5.0 million in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030 (the “2030 Notes”). 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 $11,732at September 30, 2020.

VSTitle, LLC had a note payable to purchase vehicles that totaled $4 at December 31, 2019 and was paid off by September 30, 2020.

Note 12. Revenue Recognition

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

Service Charges on Deposit Accounts

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

Investment Services and Insurance Income

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

Title 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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Note 12. Revenue Recognition, continued

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 nine months ended September 30, 2020 and 2019.

Nine Months Ended September 30, Three Months Ended September 30,
2020 2019 2020 2019
Noninterest Income (in thousands)
In-scope of Topic 606:
Service Charges on Deposits $ 888 $ 1,263 $ 302 $ 460
Investment Services and Insurance Income 525 487 167 165
Title Insurance Income 1,386 1,116 543 434
ATM and check card fees 1,394 1,276 499 378
Other 476 616 193 334
Noninterest Income (in-scope of Topic 606) 4,669 4,758 1,704 1,771
Noninterest Income (out-of-scope of Topic 606) 4,346 2,151 1,524 874
Total Noninterest Income $ 9,015 $ 6,909 $ 3,228 $ 2,645

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 September 30, 2020 and December 31, 2019, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a 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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Note 13. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842.The Company elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases.The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.03million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

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

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

The following tables present information about the Company’s leases:

(Dollars in thousands) September 30, 2020
Lease Liabilities $ 882
Right-of-use assets $ 867
Weighted average remaining lease term 4.35 years
Weighted average discount rate 3.47 %
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Lease cost (in thousands)
Operating lease cost $ 30 $ 32 $ 88 $ 96
Total lease cost $ 30 $ 32 $ 88 $ 96
Cash paid for amounts included in the measurement of lease liabilities $ 28 $ 38 $ 98 $ 113

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

As of
September 30, 2020
Three months ending December 31, 2020 $ 26
Twelve months ending December 31, 2021 127
Twelve months ending December 31, 2022 129
Twelve months ending December 31, 2023 93
Twelve months ending December 31, 2024 92
Thereafter 629
Total undiscounted cash flows $ 1,096
Discount 214
Lease liabilities $ 882
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Note 14. Mortgage Banking and Derivatives

Loans Held for Sale

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage Company, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. During the second quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale (LHFS) in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business total $18.9 million as of September 30, 2020 of which $18.9million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2. These loans were previously carried as of December 31, 2019 at the lower of cost or estimated fair value on an aggregate basis as determined by outstanding commitments from investors and totaled $3.0 million.

Interest Rate Lock Commitments and Forward Sales Commitments

The Company, through F&M Mortgage Company, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (IRLCs). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation. The Company determines the fair value of the IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate loan commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2020, and totaled $706 thousand, with a notional amount of $46.1 million and total positions of 178. The fair value of the IRLCs was considered immaterial at December 31, 2019. Changes in fair value are recorded as a component of “Mortgage banking, net” in the Consolidated Income Statement for the period ended September 30, 2020. The Company’s IRLCs are classified as Level 2. At September 30, 2020 and December 31, 2019, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

During the second quarter of 2020, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments is reported in “Other Assets” in the Consolidated Balance Sheet at September 30, 2020, and totaled $10 thousand, with a notional amount of $65.4million and total positions of 269.

Note 15. Subsequent Events

Long-term Debt

On October 30, 2020 the Bank paid off the borrowing facility under the Federal Reserve Paycheck Protection Program Liquidity Facility used by the Bank to fund the PPP loans. As of October 30, the outstanding borrowings under the Paycheck Protection Program Liquidity Facility are $0.

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

F & M Bank Corp. (“Company”), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank (“Bank”). TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services (“FMFS”) and VBS Mortgage LLC (dba F&M Mortgage) are wholly owned subsidiaries of the Bank. F & M Bank Corp. holds a majority ownership in VSTitle 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 eleven 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,  and Woodstock, Virginia.  VSTitle provides title insurance services through their offices in Harrisonburg, Fishersville, and Charlottesville, Virginia.

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

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

Forward-Looking Statements

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

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

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

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

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. 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.

Allowances for loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the loan portfolio.  Specific allowances, if required are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard, Watch or Doubtful risk grades 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.

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

Critical Accounting Policies (continued)

Fair Value

The estimate of fair value involves the 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

The World 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 of Virginia 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 are closed and the Company is utilizing drive through windows and courier service to handle transactions, new accounts are opened electronically with limited in person contact for document signing and verification of identification, and lenders are taking applications by appointment with limited in person contact as well.

The Small Business Administration (“SBA”) implemented the Paycheck Protection Program (“PPP”) to support small business operations with loans during the shutdown and into the following months. The Company worked diligently to support both our customers and noncustomers within our footprint with these loans. As of September 30, 2020, there were 717 PPP loans outstanding for a total of $62.6 million through the SBA program, with expected fee income related to these loans of $2.4 million. These fees will be recognized over the life of the associated loans.

The Company initially funded PPP loans through the Federal Reserve’s PPP liquidity facility (“PPPLF”); this facility allows Banks to borrow funds to support the PPP program at a rate of .35%, reduce the leverage ratio reported by the amount of the debt and maintain liquidity for core loan growth and investment opportunities. As of September 30, 2020, the Company had borrowed $59.9 million under the PPPLF program. The Company paid off the PPPLF facility on October 30, 2020.

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

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

The industries most likely to be affected by COVID-19, which include lodging, food service, assisted living facilities, recreation, multi-family, retail, childcare and education services, have been identified and reviewed. Management determined there is a concentration in low-end budget hotels and as they reopen may have more vacancies than normal. There are also a couple of large recreational facilities that were closed and missed the summer camp season. There were approximately $88 million in closed/restricted businesses that are considered non-essential. Multi-family may struggle with collecting rents from tenants; however, our portfolio has not seen any indication.

As of October 28, 2020, we had executed 1,100 modifications allowing principal and interest deferrals on outstanding loan balances of $84.1 million in connection with the COVID-19 related needs. These modifications, 75% of which were short-term dealer loan modifications, were consistent with regulatory guidance and the CARES Act. As of October 28, 2020, 69 loans remain in deferral with a balance of $16.9 million.

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

COVID-19, continued

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

Loan Category Loan Balance<br><br>(in thousands) Percent of Total Loans Held for Investment Number of Extensions Dollar amount of Extension
Construction $ 25,611 3.81 % 2 $ 9,327
Land development 9,849 1.46 % 1 219
Commercial owner occupied 26,907 4.00 % 8 3,465
Commercial owner occupied -  office 8,090 1.20 % - -
Commercial owner occupied -  campgrounds 5,258 0.78 % 2 3,005
Commercial owner occupied -  restaurants 5,657 0.84 % 5 2.839
Commercial owner occupied -  school 966 0.14 % - -
Commercial owner occupied -  church 5,858 0.87 % 1 1,097
Commercial nonowner occupied - other 18,444 2.74 % 9 2,537
Commercial hotel/motel 14,584 2.17 % 13 12,839
Commercial assisted living 2,641 0.39 % - -
Commercial nonowner occupied -  retail 22,254 3.31 % 8 13,169
Consumer - auto, truck, motorcycle 86,868 12.92 % 827 8,931
Consumer other 6,951 1.03 % 40 212
Poultry Farm 19,170 2.85 % 2 64
Raw Farm Land 15,881 2.36 % 2 1,345
Multifamily 6,001 0.89 % 2 980
Farmland residential 2,243 0.33 % - -
Municipals 5,363 0.80 % - -
$ 288,596 42.91 % 922 $ 60,029

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

Overview (Dollars in thousands)

Net income for the nine months ended September 30, 2020 was $6,022 or $1.76 per diluted share, compared to $2,735 or $0.78 in the same period in 2019, an increase of 120.18%. This is a $3,287 increase compared to the first nine months of 2019.  During the nine months ended September 30, 2020, noninterest income increased 30.49% and noninterest expense increased 0.97% during the same period.

During the three months ended September 30, 2020, net income (loss) was $2,206 or $0.65 per diluted share, compared to $(187) or $(0.08) in the same period in 2019, an increase of 1,279.68%.

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

Results of Operations

As shown in Table I, the 2020 year to date tax equivalent net interest income decreased $1,483 or 6.10% compared to the same period in 2019.  The tax equivalent adjustment to net interest income totaled $63 for the first nine months of 2020.  The yield on earning assets decreased 1.15%, while the cost of funds decreased .30% compared to the same period in 2019.

The three months ended September 30, 2020 tax equivalent net interest income decreased $409 or 5.00% compared to the same period in 2019.  The tax equivalent adjustment to net interest income totaled $20 for the three months ended September 30, 2020.

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 structure, including PPP loans which were at a rate of 1.00% and building an investment portfolio that has an average yield of 1.15%, resulted in the net interest margin decreasing to 3.60% for the nine months ended  September 30, 2020, a decrease of 92 basis points when compared to the same period in 2019.  For the three months ended September 30, 2020, the net interest margin decreased 106 basis points when compared to the same period in 2019.  A schedule of the net interest margin for the three and nine month periods ended September 30, 2020 and 2019 can be found in Table I.

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

GAAP Financial Measurements:<br><br>(Dollars in thousands). September 30, 2020 September 30, 2019
Nine Months Three Months Nine Months Three Months
Interest Income – Loans $ 26,318 $ 8,728 $ 28,745 $ 9,729
Interest Income - Securities and Other Interest-Earnings Assets 962 450 535 237
Interest Expense – Deposits 3,685 1,074 3,714 1,355
Interest Expense - Other Borrowings 830 350 1,311 446
Total Net Interest Income 22,765 $ 7,754 24,255 8,165
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans 63 21 56 19
Total Tax Benefit on Tax-Exempt Interest Income 63 21 56 19
Tax-Equivalent Net Interest Income $ 22,828 $ 7,775 $ 24,311 $ 8,184

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 40.25% of rate sensitive assets and 30.75% 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 $2,106 for the nine-month period September 30, 2020 compared to the same period in 2019 is due primarily to growth in mortgage banking income ($2,269), and title insurance income ($270).  The increase in noninterest income of $583 for the three months ended September 30, 2020 is primarily due to growth in mortgage banking income ($714).  Increase in mortgage banking income was primarily due to the purchase of noncontrolling interest, increased business due to the low rate environment and recognition of the interest rate lock derivative in second quarter.

Noninterest expense for the nine months ended September 30, 2020 increased $210 as compared to 2019.  Expenses increased in the areas of ATM and card processing ($107), telecommunication and data processing expense ($336) and Bank franchise tax ($80) and were offset by savings in other real estate owned ($64) and legal and professional expense ($129).  For the three months ended September 30, 2020 noninterest expense decreased $72.  Areas of decrease were salary and benefits ($310), bank franchise tax ($21) and occupancy and equipment expense ($19).  Increases in ATM and card processing are due to change in vendor and increased card usage.  Telecommunication and data processing relate to a new lending product, increase in remote processing and increased accounts due to deposit growth and dealer loans.  Bank franchise tax is due to growth.

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

Balance Sheet

Federal Funds Sold and Interest Bearing Bank Deposits

The Company’s subsidiary bank invests a portion of its excess liquidity in either federal funds sold or interest bearing bank deposits. Federal funds sold offer daily liquidity and pay market rates of interest that at quarter end were benchmarked at 0.00% to 0.25% by the Federal Reserve. Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits.  The Company held $73,407 and $66,559 in federal funds sold at September 30, 2020 and December 31, 2019, respectively.   Growth in excess funds is due to strong deposit growth, and the Company is deploying these funds into the investment portfolio during 2020.  Interest bearing bank deposits have increased by $133 since year end.

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 in to an investment portfolio.  This has resulted in an increase in the investments available for sale of $102,717.

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 of September 30, 2020, the fair value of securities available for sale was above their cost by $211. The portfolio is made up of primarily 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 4.37 years.  Efforts to deploy excess funds in an uncertain rate environment has resulted in a mixture of maturities.

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

Loan Portfolio

The Company operates in a predominately rural area that includes the counties of Rockingham, Page, Shenandoah and Augusta in the western portion of Virginia. The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges.  The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area.  There are no loan concentrations as defined by regulatory guidelines.

Loans Held for Investment of $672,525 increased $69,100 on September 30, 2020 compared to December 31, 2019.  Loan growth was concentrated in the commercial non-real estate (PPP loans), farmland and dealer finance segments of the portfolio.

Loans Held for Sale totaled $88,039 on September 30, 2020, an increase of $21,241 compared to December 31, 2019.  The Northpointe participation loan program as well as F&M mortgage loans are typically subject to seasonal fluctuations, both have experienced tremendous volume since year end with the largest portion being Northpointe.

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Loan Portfolio, continued

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 $4,255 on September 30, 2020 compared to $5,729 at December 31, 2019.  The decrease in nonperforming loans from year end is primarily due to one commercial relationship which was refinanced outside of the Company due to the sale of the collateral, another relationship improved and was removed from nonaccrual during the first quarter ($638 thousand) and paydowns on several nonaccrual relationships.  One relationship was added in the second quarter of 2020 totaling $1.0 million. The balance also decreased due to payments received on the loans on nonaccrual basis during the third quarter. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses and what has previously been charged off, management believes the Bank is generally well secured and continues to actively work with its customers to effect payment.

As of September 30, 2020 and December 31, 2019, the Company held $166 and $1,489 of real estate which was acquired through foreclosure, respectively.

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

September 30, 2020 December 31,<br><br>2019
Nonaccrual Loans
Real Estate $ 830 $ 1,721
Commercial 2,877 3,036
Home Equity 325 -
Other 64 250
$ 4,096 $ 5,007
Loans past due 90 days or more (excluding nonaccrual)
Real Estate - 619
Commercial - -
Home Equity 142 15
Other 17 88
159 722
Total Nonperforming loans $ 4,255 $ 5,729
Restructured Loans current and performing:
Real Estate $ 2,905 $ 3,644
Commercial 1,929 1,223
Home Equity 699 716
Other 147 167
Nonperforming loans as a percentage of loans held for investment .63 % .95 %
Net charge offs to total loans held for investment^1^ .17 % .71 %
Allowance for loan and lease losses to nonperforming loans 254.43 % 146.45 %

^1^ – Annualized for nine month period ended September 30, 2020

Allowance for Loan Losses

The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations.  The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence, 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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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 into loans with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of $500,000 and loans identified as troubled debt restructurings 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 two 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 $10,826 at September 30, 2020 is equal to 1.61% of loans held for investment, or 1.77% of loans held for investment excluding PPP loans. This compares to an allowance of $8,390 (1.39%) at December 31, 2019. One impaired loan relationship was added in the second quarter totaling $1.0 million and two impaired loan relationships required increased specific reserves during the third quarter due to new appraisals on the underlying collateral. Due to COVID-19, the bank increased the qualitative factor for the economy and concentrations in industries specifically affected by the virus. The bank increased the environmental factor for COVID-19's negative impact on the economy, such as continued government restrictions on businesses, high weekly unemployment filings, and deferred loan payments. Additionally, the bank analyzed the loan portfolio for industries most likely to be affected by COVID-19, such as hotels, restaurants, recreations facilities, assisted living facilities, retail establishments, childcare and education facilities, and multi-family properties. Based on the Bank’s loans in these industry segments, the environmental factor was increased for three segments of the loan portfolio. Past due loans have decreased over $1.4 million since December 31, 2019 and as stated previously, the Company experienced a decrease in nonperforming loans during 2020. However, the full impact of loan payment deferrals will not be known until these borrowers return to their normal scheduled payments. As a result, the Bank recorded a $3,300 provision for loan losses in the first nine months of 2020. Management will continue to monitor nonperforming and past due loans and will make necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or cash flow expectations.

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Item2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Deposits and Other Borrowings

The Company's main source of funding is comprised of deposits received from individuals, governmental entities and businesses located within the Company's service area.  Deposit accounts include demand deposits, savings, money market and certificates of deposit.  Total deposits at September 30, 2020 have increased $151,827 since December 31, 2019.  Noninterest bearing deposits increased $41,967 while interest bearing increased $109,860.  The increase in deposits in the first nine months is due to a focus on deposit growth as an organization, proceeds from PPP loans that are in deposit accounts of the Bank, and general savings of customers due to the economic uncertainty.  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 September 30, 2020 and December 31, 2019 the Company had a total of $506 and $514 in CDARS funding and $41,289 and $25,714 in ICS funding, respectively.

Short-term borrowings

Short-term debt consists of federal funds purchased, daily rate credit obtained from the Federal Home Loan Bank (“FHLB”), and short-term fixed rate FHLB borrowings.  Federal funds purchased are overnight borrowings obtained from the Bank’s primary correspondent bank to manage short-term liquidity needs. Borrowings from the FHLB have been used to finance loans held for sale.  As of September 30, 2020, there were no short-term borrowings.

This compared to short-term borrowings of $10,000 at December 31, 2019, all of which were FHLB short term advances. There were no balances in FHLB daily rate credit at September 30, 2020 or December 31, 2019.

Long-term borrowings

Borrowings from the FHLB continue to be an important source of funding.  The Company’s subsidiary bank borrows funds on a fixed rate basis.  These borrowings are used to 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 $34,875 and $53,196 on September 30, 2020 and December 31, 2019, respectively.

Borrowings from the Federal Reserve Paycheck Protection Program Liquidity Facility were utilized to fund the PPP loans originated in the second quarter.  The Company’s subsidiary bank borrows funds on a fixed rate basis and secured by PPP loans; the maturity of the borrowings matches the maturity of the PPP loans.  On September 30, 2020, the balances totaled $59,903; there were no borrowings under this program on December 31, 2019.

On July 29, 2020, the Company sold and issued to certain institutional accredited investors $5.0 million in aggregate principal amount of 5.75% fixed rated subordinated notes due July 31, 2027 (the “2027 Notes”) and $7.0 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due July 31, 2030 (the “2030 Notes”). 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 $11,732 at September 30, 2020.

VS Title, LLC had a vehicle loan with a balance of $0 at September 30, 2020 and $4 at December 31, 2019.

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

Capital

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

In March 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). At September 30, 2020, the Bank had Common Equity Tier I capital of 12.51% of risked weighted assets, Tier I capital of 12.51% of risk weighted assets and combined Tier I and II capital of 13.76% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. At December 31, 2019, the Bank had Common Equity Tier I capital of 13.30% of risk weighted assets, Tier I capital of 13.30% of risk weighted assets and combined Tier I and II capital of 14.55% 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. At September 30, 2020, the Bank reported a leverage ratio of 9.49%, compared to 10.89% at December 31, 2019. The Bank's leverage ratio was substantially above the minimum. The Bank also reported a capital conservation buffer of 5.76% at September 30, 2020 and 6.55% at December 31, 2019. The capital conservation buffer is designed to strengthen an institution’s financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments. The capital conservation buffer was fully phased in on January 1, 2019 at 2.5%.

Community Bank Leverage Ratio

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

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

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

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.

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

Liquidity, continued

Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds.  To further meet its liquidity needs, the Company’s subsidiary bank also maintains a line of credit with its primary correspondent financial institution, with Zions Bank and Pacific Coast Bankers Bank.  The Bank also has a line of credit with the Federal Home Loan Bank of Atlanta that allows for secured borrowings. Additionally, the Bank can utilize the Federal Reserve Paycheck Protection Program Loan Facility or 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 of September 30, 2020, the Company had a cumulative Gap Rate Sensitivity Ratio of 17.76% 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 (Continued)

Effect 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 in the set-up stage with expectations of running parallel in 2021. All data has been archived under the current model.

In January 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 on January 1, 2020.   The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”  The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.”  These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted.  The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

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.

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

Effect of Newly Issued Accounting Standards, continued

In December 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. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 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. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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

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.

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

Effect of Newly Issued Accounting Standards, continued

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 October 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. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Bank/Company does not expect the adoption of ASU 2020-08 to have a material impact on its (consolidated) financial statements.

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

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 Securities and Exchange Commission Web Site

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

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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, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Income/ Average Income/ Average Income/ Average Income/ Average
Average Balance ^2,4^ Expense Rates Balance ^2,4^ Expense Rates Balance ^2,4^ Expense Rates Balance ^2,4^ Expense Rates
Interest income
Loans held for investment^1,2^ $ 651,111 $ 25,391 5.21 % $ 643,451 $ 27,405 5.69 % $ 684,849 $ 8,361 4.86 % $ 638,240 $ 9,173 5.70 %
Loans held for sale 45,678 977 2.86 % 52,706 1,397 3.54 % 56,302 384 2.71 % 63,102 574 3.61 %
Federal funds sold 105,652 333 0.42 % 9,579 155 2.16 % 88,195 15 0.07 % 21,152 112 2.10 %
Interest bearing deposits 1,080 3 0.37 % 1,816 29 2.14 % 1,177 1 0.34 % 3,755 20 2.11 %
Investments
Taxable ^3^ 40,587 578 1.90 % 11,225 348 4.14 % 92,364 401 1.73 % 13,672 105 3.05 %
Partially taxable 125 2 2.13 % 124 2 2.16 % 125 1 3.18 % 124 1 3.20 %
Tax exempt 3,134 59 2.51 % - - - 6,279 36 2.28 % - - -
Total earning assets $ 847,367 $ 27,343 4.31 % $ 718,901 $ 29,336 5.46 % $ 929,291 $ 9,199 3.94 % $ 740,045 $ 9,985 5.35 %
Interest Expense
Demand deposits 102,902 224 0.29 % 183,852 150 .11 % 111,832 90 0.32 % 198,332 49 .10 %
Savings 287,730 1,779 0.83 % 106,873 1,766 2.21 % 315,354 469 0.59 % 103,354 684 2.63 %
Time deposits 132,349 1,682 1.70 % 149,231 1,798 1.61 % 127,937 515 1.60 % 144,795 622 1.70 %
Short-term debt 2,372 41 2.31 % 32,361 607 2.51 % - - - 31,196 189 2.39 %
Long-term debt 81,881 789 1.29 % 48,086 704 1.96 % 102,878 350 1.35 % 56,966 257 1.80 %
Total interest bearing liabilities $ 607,234 $ 4,515 0.99 % $ 520,403 $ 5,025 1.29 % $ 658,001 $ 1,424 0.86 % $ 534,643 $ 1,801 1.34 %
Tax equivalent net interest income $ 22,828 $ 24,311 $ 7,775 $ 8,184
Net interest margin 3.60 % 4.52 % 3.33 % 4.39 %

_________

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

F & M BANK CORP.

Interest Sensitivity Analysis

September 30, 2020

(Dollars In Thousands)

The following table presents the Company’s interest sensitivity.

0 – 3 4 – 12 1 – 5 Over 5 Not
Months **** Months **** Years **** Years **** Classified **** Total
Uses of funds
Loans
Commercial $ 65,492 $ 15,352 $ 149,430 $ 45,600 $ - $ 275,874
Installment 2,016 1,379 74,649 22,092 - 100,136
Real estate loans for investments 86,799 42,744 141,925 22,303 - 293,771
Loans held for sale 88,039 - - - - 88,039
Credit cards 2,744 - - - - 2,744
Interest bearing bank deposits 73,407 - - - - 73,407
Federal funds sold 1,259 - - - - 1,259
Investment securities - 125 15,028 92,055 - 107,208
Total 319,756 59,600 381,032 182,050 - 942,438
Sources of funds
Interest bearing demand deposits - 23,122 69,368 23,122 - 115,612
Savings deposits - 133,634 179,033 22,697 - 335,364
Certificates of deposit 9,154 39,917 81,724 1,083 - 131,878
Short-term borrowings - - - - - -
Long-term borrowings 1,107 5,072 78,224 22,107 - 106,510
Total 10,261 201,745 408,349 69,009 - 689,364
Discrete Gap 309,495 (142,145 ) (27,317 ) 113,041 - 253,074
Cumulative Gap $ 309,495 $ 167,350 $ 140,033 $ 253,074 $ 253,074
Ratio of Cumulative Gap to Total Earning Assets 32.84 % 17.76 % 14.86 % 26.85 % 26.85 %

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonable likely to material affect, on the Company’s internal control over financial reporting.

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Part II Other Information

Item 1. Legal Proceedings
There are no material pending legal proceedings other than ordinary routine litigation incidental to its business, to which the Company is a party or of which the property of the Company is subject.
Item 1a. Risk Factors Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
Item 4. Mine Safety Disclosures None
Item 5. Other Information None
Item 6. Exhibits

(a) Exhibits

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 September 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
104 The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, formatted in Inline XBRL (included with Exhibit 101)
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Signatures

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

F & M BANK CORP.
/s/ Mark C. Hanna
Mark C. Hanna <br>President and Chief Executive Officer
/s/ Carrie A. Comer
Carrie A. Comer<br><br>Executive Vice President and Chief Financial Officer

November 09, 2020

54

fmbm_ex32.htm EXHIBIT 32

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER,

EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer of F & M Bank Corp., respectively, certify that, to the best of each such individual’s knowledge and belief, the Quarterly Report on Form 10-Q for the period ended September 30, 2020, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of F & M Bank Corp. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

/s/ Mark C. Hanna
Mark C. Hanna
President and Chief Executive Officer
/s/ Carrie A. Comer
Carrie A. Comer
Executive Vice President and Chief Financial Officer
November 9, 2020

fmbm_ex311.htm EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(Chapter 63, Title 18 USC Section 1350 (A) and (B)

I, Mark C. Hanna, certify that:

1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 9, 2020 By: /s/ Mark C. Hanna
--- --- ---
Mark C. Hanna
President & Chief Executive Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

fmbm_ex312.htm EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(Chapter 63, Title 18 USC Section 1350 (A) and (B)

I, Carrie A. Comer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of F & M Bank Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
--- ---
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 9, 2020 By: /s/ Carrie A. Comer
--- --- ---
Carrie A. Comer
Executive Vice President & Chief Financial Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to F & M Bank Corp. and will be retained by F & M Bank Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

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