F & M Bank Corp. ("Company"), incorporated inVirginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiary Farmers & Merchants Bank ("Bank").TEB Life Insurance Company ("TEB"), Farmers &Merchants Financial Services ("FMFS") andVBS Mortgage LLC (dba F&M Mortgage) are wholly owned subsidiaries of the Bank.F & M Bank Corp. held a majority ownership inVSTitle LLC ("VST"), with the remaining minority interest owned by F&M Mortgage, until the Company purchased F&M Mortgage's minority interest
in VST onJanuary 3, 2022 .
The Bank is a full-service commercial bank offering a wide range of banking and financial services through its thirteen branch offices as well as its loan production office located inPenn 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 inHarrisonburg ,Fishersville ,Woodstock , andWinchester, Virginia . VSTitle provides title insurance services through their offices inHarrisonburg ,Fishersville , andCharlottesville, Virginia .
The Company's primary trade area services customers in the counties of
Management's discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company'sDecember 31, 2021 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. 31 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
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: 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, consumer spending and savings habits, geopolitical conditions, and exposure to fraud, negligence, computer theft and cyber-crime.
We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company's significant accounting policies that are highly dependent on estimates, assumptions and judgments. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310 "Receivables", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management's estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the dealer loan portfolio; maturity of lending staff; the findings of internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviews. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations. Allowances for loans are determined by applying estimated loss factors to the portfolio based on management's evaluation and "risk grading" of the loan portfolio. Specific allowances, if required are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades and on all troubled debt restructurings. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. 32 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Critical Accounting Policies, continued
While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Fair Value The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management's judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as
critical. Pension Obligations
The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees' active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated benefit obligation include discount rates, expected return on assets, mortality rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company's financial condition and results of operations. As a result, accounting for the Company's pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical. COVID-19 TheWorld Health Organization declared a global pandemic in the first quarter of 2020 due to the spread of the coronavirus ("COVID-19") around the world. The Company was considered an essential business and implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies were closed in 2021 and again briefly fromJanuary 18, 2022 toMarch 7, 2022 . During this time the Company utilized drive through windows and courier service to handle transactions, new accounts were opened electronically with limited in person contact for document signing and verification of identification, and lenders accepted applications by appointment with limited in person contact. The 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, originating a total of 1,080 PPP loans totaling$87,061 and associated fees of$3,824 through the SBA program. As ofMarch 31, 2022 , there are 25 loans outstanding with a balance of$2,061 and unamortized fees of$56 . Based on the Company's capital levels, current 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. 33 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Overview (Dollars in thousands)
Net income for the three months endedMarch 31, 2022 was$2,528 or$0.74 per share, compared to$3,801 or$1.17 in the same period in 2021, a decrease of 33.49%. During the three months endedMarch 31, 2022 , noninterest income decreased 25.99% and noninterest expense increased 11.24% during the same period. Results of Operations As shown in Table I, the 2022 year to date tax equivalent net interest income increased$377 or 4.89% compared to the same period in 2021. The tax equivalent adjustment to net interest income totaled$27 for the first three months of 2022. The yield on earning assets decreased .75%, while the cost of funds decreased .21% compared to the same period in 2021. The combination of the decrease in yield on assets and the decrease in cost of funds coupled with changes in balance sheet leverage resulted in the net interest margin decreasing to 2.82% for the three months endedMarch 31, 2022 , a decrease of 62 basis points when compared to the same period in 2021. A schedule of the net interest margin for the three-month periods endedMarch 31, 2022 and 2021 can be found in Table I.
The following table provides detail on the components of tax equivalent net interest income (dollars in thousands):
GAAP Financial Measurements: March 31, 2022 March 31, 2021 Interest Income - Loans $ 7,539 $ 8,270 Interest Income - Securities and Other Interest-Earnings Assets 1,522
476
Interest Expense - Deposits 845
795
Interest Expense - Other Borrowings 159
273
Total Net Interest Income $ 8,057 $
7,678
Non-GAAP Financial Measurements: Add: Tax Benefit on Tax-Exempt Interest Income -Loans & Securities 27
29
Total Tax Benefit on Tax-Exempt Interest Income 27
29
Tax-Equivalent Net Interest Income $ 8,084 $
7,707
The decrease in noninterest income of$872 for the three-month periodMarch 31, 2022 compared to the same period in 2021 is due primarily to a decrease in mortgage banking income ($930 ) and in investment and insurance income ($96 ) due to a slowdown in refinance activity. This was offset by an increase in ATM and check card fees ($43 ) and other income ($58 ). Noninterest expense for the three months endedMarch 31, 2022 increased$864 as compared to 2021. Expenses increased primarily in the areas of salaries and benefits ($413 ), occupancy expenses ($45 ), advertising ($42 ) and telecommunication and data processing expense ($361 ). Expansion into theWinchester andWaynesboro markets led to increased salary, benefits, and occupancy expenses. Advertising increased as a result of increased marketing efforts in markets where larger banks were leaving. Telecommunications and data processing increased due to a focus on infrastructure improvements, digital enhancements, and online capabilities. 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 0.50% to 2.25% by theFederal Reserve . Actual rates received vary slightly based upon money supply and demand among banks. Interest bearing bank deposits are held either in money market accounts or as short-term certificates of deposits. The Company held$31,994 and$76,667 in federal funds sold atMarch 31, 2022 andDecember 31, 2021 , respectively. Growth in excess funds has been due to strong deposit growth, and the decrease fromDecember 31, 2021 toMarch 31, 2022 was due to the Company deploying these funds into the investment portfolio. Interest bearing bank deposits have decreased by$142 since year
end from$2,938 to$2,796 . 34 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Securities
The Company's securities portfolio serves to assist the Company with asset liability management. With the growth in deposits, the Company has worked to strategically invest the excess funds into the investment portfolio. This has resulted in an increase in the investments available for sale of$57,940 sinceDecember 31, 2021 . 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 toMaturity 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 ofMarch 31, 2022 , the fair value of securities available for sale was below their cost by$20,329 . The portfolio is made up of primarily treasuries, agencies and mortgage-backed obligations of federal agencies, as well as Securities issued by States and political subdivisions in theU.S. and Corporate debt securities. The average maturity is 5.14 years. Efforts to deploy excess funds in an uncertain rate environment has resulted in a mixture of maturities. In reviewing investments as ofMarch 31, 2022 , there were no securities which met the definition for other than temporary impairment. Management continues to re-evaluate the portfolio for impairment on a quarterly basis. Loan Portfolio The Company operates primarily in the counties ofRockingham ,Shenandoah , andAugusta , and the cities ofHarrisonburg ,Staunton ,Waynesboro andWinchester in westernVirginia . The local economy benefits from a variety of businesses including agri-business, manufacturing, service businesses and several universities and colleges. The Bank is an active residential mortgage and residential construction lender and generally makes commercial loans to small and mid-size businesses and farms within its primary service area. There are no loan concentrations as defined by regulatory guidelines.
Loans Held for Investment of
Loans Held for Sale totaled
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$4,751 onMarch 31, 2022 compared to$5,465 atDecember 31, 2021 . The decrease in nonperforming loans from year end is primarily due to one loan paying off, one loan moving to accrual status, and amortization. Although the potential exists for loan losses beyond what is currently provided for in the allowance for loan losses, management believes the Bank is generally well secured and continues to actively work with its customers to effect payment. A summary of credit ratios for nonaccrual loans is as follows (in thousands):March 31 ,December 2022 31, 2021
Allowance for loan losses$ 7,389
$ 7,748 Nonaccrual loans$ 4,751 $ 5,465 Total Loans$ 659,560 $ 662,421
Allowance for loan losses to Total Loans 1.12 % 1.17 % Nonaccrual Loans to Total Loans 0.72 % 0.83 % Allowance for loan losses to Nonaccrual loans 155.53 %
141.77 % 35 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Allowance for Loan Losses
The allowance for loan losses provides for the risk that borrowers will be unable to repay their obligations. The risk associated with real estate and installment notes to individuals is based upon employment, the local and national economies and consumer confidence, and the value of the underlying collateral. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies.
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank's watch list or schedule of classified loans. In evaluating the portfolio, loans are segregated by segment with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of$500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry, and economic factors. Loans that are not reviewed for impairment are categorized by call report code and an estimate is calculated based on actual loss experience over the last three years. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation.
The allowance for loan losses of$7,389 atMarch 31, 2022 is equal to 1.12% of loans held for investment. This compares to an allowance of$7,748 , or 1.17% atDecember 31, 2021 . Due to increasing interest rates, loan portfolio growth over the last 12 months, and deteriorating economic conditions, the qualitative reserve increased. This was offset by improvements in the unemployment rate, a decrease in historical loss rates and paydowns on individually impaired loans. The Company is monitoring the economic effects of increased inflation, building costs, and used car prices, as well as a rising interest rate environment. The Company continues to manage the classified, past due and non-performing loans, which are all at lower levels thanDecember 31, 2021 , Classified loans (internally rated substandard or watch) decreased from a total of$43,230 atDecember 31, 2021 to$40,313 atMarch 31, 2022 , past due loans on accrual decreased from$3,226 atDecember 31, 2021 to$2,414 atMarch 31, 2022 , and non-performing loans decreased from$5,508 atDecember 31, 2021 to$4,805 atMarch 31, 2022 . Management is closely monitoring the effects of economic conditions on the loan portfolio and makes adjustments to specific reserves, the environmental factors and the provision for loan losses as necessary. Deposits and Other Borrowings
The Company's 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 atMarch 31, 2022 have increased$32,000 sinceDecember 31, 2021 . Noninterest bearing deposits increased$17,683 while interest bearing increased$14,317 . The increase in deposits is due to a focus on deposit growth as an organization as well as excess funds that customers are holding due to the pandemic. The Bank participates in the CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep) programs. These programs, CDARS for certificates of deposit and ICS for demand and savings, allow the Bank to accept customer deposits in excess ofFDIC limits and through reciprocal agreements with other network participating banks by offeringFDIC insurance up to as much as$50 million in deposits. AtMarch 31, 2022 andDecember 31, 2021 the Company had a total of$257 in CDARS accounts; and,$95,976 and$94,948 in ICS accounts, respectively. 36 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Short-term borrowings The Company utilizes short-term debt such as Federal funds purchased and FHLB short term borrowings to provide liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short term debt, which is secured by the loan portfolio, can be a daily rate variable loan that acts as a line of credit or a fixed rate advance, depending on the needs of the Company. With the growth in deposits and excess liquidity, the Company has not utilized the short-term debt facilities for 2021 or 2022. Long-term borrowings The Company's subsidiary bank borrows funds on a fixed rate basis as needed. These borrowings are used to support the Bank's lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various types in the loan portfolio. FHLB long term advances totaled$10,000 onMarch 31, 2022 , andDecember 31, 2021 . OnJuly 29, 2020 , the Company sold and issued to certain institutional accredited investors$5,000 in aggregate principal amount of 5.75% fixed rated subordinated notes dueJuly 31, 2027 (the "2027 Notes") and$7,000 in aggregate principal amount of 6.00% fixed to floating rate subordinated notes dueJuly 31, 2030 (the "2030 Notes"). The 2027 Notes will bear interest at 5.75% per annum, payable semi-annually in arrears. Beginning onJuly 31, 2022 through maturity, the 2027 Notes may be redeemed, at the Company's option, on any scheduled interest payment date. The 2027 Notes will mature onJuly 31, 2027 . The 2030 Notes will initially bear interest at 6.00% per annum, beginningJuly 29, 2020 to but excludingJuly 31, 2025 , payable semi-annually in arrears. From and includingJuly 31, 2025 throughJuly 30, 2030 , or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning onJuly 31, 2025 through maturity, the 2030 Notes may be redeemed, at the Company's option, on any scheduled interest payment date. The 2030 Notes will mature onJuly 31, 2030 . The subordinated notes, net of issuance costs totaled$11,780 atMarch 31, 2022 . 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.
AtMarch 31, 2022 , the Bank had Common Equity Tier I capital of 13.72% of risked weighted assets, Tier I capital of 13.72% of risk weighted assets and combined Tier I and II capital of 14.70% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. AtDecember 31, 2021 , the Bank had Common Equity Tier I capital of 13.95% of risk weighted assets, Tier I capital of 13.95% of risk weighted assets and combined Tier I and II capital of 15.00% of risk weighted assets. The Bank has maintained capital levels far above the minimum requirements. In the unlikely event that such capital levels are not met, regulatory agencies are empowered 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. AtMarch 31, 2022 , the Bank reported a leverage ratio of 8.47%, compared to 8.62% atDecember 31, 2021 . The Bank's leverage ratio was substantially above the minimum. The Bank also reported a capital conservation buffer of 6.70% atMarch 31, 2022 and 7.00% atDecember 31, 2021 . The capital conservation buffer is designed to strengthen an institution's financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by theBasel III final rules in order to avoid restrictions on capital distributions and
other payments. 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. 37 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (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 and withPacific Coast Bankers Bank ,Zions Bank , and FNBB. The Bank also has a line of credit with theFederal Home Loan Bank of Atlanta that allows for secured borrowings. Additionally, the Bank can utilize the Federal Reserve Discount Window. Interest Rate Sensitivity In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. The Company monitors its interest rate sensitivity periodically and makes adjustments as needed. There are no off-balance sheet items that will impair future liquidity.
Effect of Newly Issued Accounting Standards
InJune 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU's 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU's have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companieswho file with theU.S. Securities and Exchange Commission (SEC) and all other entitieswho do not file with theSEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning afterDecember 15, 2022 . The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and has created a CECL model to run parallel for 2022. All data has been archived under the current model. EffectiveNovember 25, 2019 , theSEC adopted Staff Accounting Bulletin (SAB) 119.SAB 119 updated portions ofSEC interpretative guidance to align with FASB ASC 326, "Financial Instruments - Credit Losses." It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. InMarch 2020 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . Subsequently, inJanuary 2021 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includesMarch 12, 2020 , or prospectively to new modifications from any date within the interim period that includes or is subsequent toJanuary 7, 2021 , up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includesMarch 12, 2020 , and to new eligible hedging relationships entered into after the beginning of the interim period that includesMarch 12, 2020 . 38 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) (Continued)
Effect of Newly Issued Accounting Standards, continued
The Company is preparing loan agreements, other than SWAP loans, to transition from LIBOR by the end of second quarter 2022. The SWAP loans have amended Rate Protection Agreements executed by the borrower in preparation to transition
from LIBOR by the swap holder. InAugust 2020 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under currentU.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning afterDecember 15, 2021 , and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning afterDecember 15, 2023 , including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements. InMay 2021 , the FASB issued ASU 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity - Classified Written Call Options (a consensus of theFASB Emerging Issues Task Force )." The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021-04 was effective for the Company onJanuary 1, 2022 . The adoption of ASU 2021-04 did not have a material impact on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company's financial position, result of operations or cash flows.
Existence of
39 Table of Contents TABLE I F & M BANK CORP. Net Interest Margin Analysis (on a fully taxable equivalent basis) (Dollar Amounts in Thousands) Three Months Ended Three Months Ended March 31, 2022 March 31, 2021 Income/ Average Average Income/ Average Average Balance Expense Rates1 Balance Expense Rates1 Interest income Loans held for investment2,3 $ 656,099$ 7,522 4.65 %$ 673,744 $ 8,196 4.93 % Loans held for sale 3,683 29 3.19 % 13,221 94 2.88 % Federal funds sold 64,813 24 0.15 % 87,157 15 0.07 % Interest bearing deposits 2,845 1 0.14 % 884 - 0.11 % Investments Taxable 423,751 1,444 1.38 % 126,973 427 1.37 % Partially taxable4 125 1 1.62 % 125 1 1.62 % Tax exempt4 10,250 67 2.65 % 6,237 42 2.73 % Total earning assets$ 1,161,566 $ 9,088 3.17 %$ 908,341 $ 8,775 3.92 % Interest Expense Demand deposits 188,344 103 0.22 % 114,699 44 0.16 % Savings 492,458 503 0.41 % 347,332 351 0.41 % Time deposits 122,471 239 0.79 % 129,142 400 1.26 % Long-term debt 21,776 159 2.96 % 32,531 273 3.40 % Total interest bearing liabilities $ 825,049$ 1,004 0.49 %$ 623,704 $ 1,068 0.70 % Tax equivalent net interest income$ 8,084 $ 7,707 Net interest margin 2.82 % 3.44 % ____________ 1 Annualized. 2 Interest income on loans includes loan fees. 3 Loans held for investment include nonaccrual loans. 4 Income tax rate of 21% was used to calculate the tax equivalent income on
nontaxable and partially taxable investments and loans.
Average balance information is reflective of historical cost and has not been
adjusted for changes in market value annualized. 40 Table of Contents
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