F & M Bank 10Q 2024 Q3 Quarterly report

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, 2024

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

Commission File Number: 000-13273

F&M BANK CORP.

Virginia

54-1280811

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

P. O. Box 1111

Timberville, Virginia 22853

(Address of Principal Executive Offices) (Zip Code)

(540) 896-8941

(Registrant's Telephone Number, Including Area Code)

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

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

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

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 ☒

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

Class		Outstanding at November 4, 2024
Common Stock, par value ‑ $5 per share		3,520,434 shares

F & M BANK CORP.

Table of Contents

		Page

Part I	Financial Information	3

Item 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2024 and December 31, 2023	3

	Consolidated Statements of Income – Three Months Ended September 30, 2024 and 2023	4

	Consolidated Statements of Income – Nine Months Ended September 30, 2024 and 2023	5

	Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2024 and 2023	6

	Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended September 30, 2024 and 2023	7

	Consolidated Statements of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2024 and 2023	7

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2024 and 2023	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

Part II	Other Information	46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

Signatures		48

Certifications

Table of Contents

Part I Financial Information

Item 1 Financial Statements

F & M BANK CORP.

Consolidated Balance Sheets

(Dollars in thousands)

	September 30,			December 31,
	2024			2023*
	*(Unaudited)*
Assets
Cash and due from banks	$	18,314		$	19,790
Money market funds and interest-bearing deposits in other banks		684			178
Federal funds sold		41,322			3,749
Cash and cash equivalents		60,320			23,717

Securities available for sale, at fair value		376,159			368,674
Other investments		3,531			5,535

Loans held for sale, at fair value		2,332			1,119

Loans held for investment, net of deferred fees and costs		830,717			822,092
Less: allowance for credit losses		(8,028	)		(8,321	)
Net loans held for investment		822,689			813,771

Bank premises and equipment, net		23,060			24,328
Other real estate owned		-			55
Interest receivable		5,066			5,034
Goodwill		3,082			3,082
Bank owned life insurance		23,420			22,878
Other assets		24,936			26,403
Total Assets	$	1,344,595		$	1,294,596
Liabilities
Deposits:
Noninterest bearing	$	270,783		$	264,254
Interest bearing		947,505			868,982
Total deposits		1,218,288			1,133,236

Short-term debt		15,000			60,000
Long-term debt		6,965			6,932
Other liabilities		14,348			16,105
Total Liabilities		1,254,601			1,216,273

Commitments and contingencies

Shareholders’ Equity
Common stock, $5 par value, 6,000,000 shares authorized, 3,520,353 (2024) and 3,485,570 (2023)shares issued and outstanding		17,356			17,263
Additional paid in capital		11,287			11,043
Retained earnings		83,324			81,034
Accumulated other comprehensive loss		(21,973	)		(31,017	)
Total Shareholders’ Equity		89,994			78,323
Total Liabilities and Shareholders’ Equity	$	1,344,595		$	1,294,596

*2023 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, except share and per share data)

(Unaudited)

	Three Months Ended
	September 30,
*Interest and Dividend income*	2024			2023
Interest and fees on loans held for investment	$	13,833		$	12,498
Interest and fees on loans held for sale		60			18
Interest from money market funds and federal funds sold		518			54
Interest and dividends on interest bearing deposits and other investments		55			108
Interest on debt securities		1,824			1,923
Total interest and dividend income		16,290			14,601

*Interest expense*
Total interest on deposits		7,440			5,804
Interest from short-term debt		241			701
Interest from long-term debt		116			116
Total interest expense		7,797			6,621

*Net interest income*		8,493			7,980

*Provision for Credit Losses*		902			620
*Net Interest Income After Provision for Credit Losses*		7,591			7,360

*Noninterest income*
Service charges on deposit accounts		317			256
Investment services and insurance income		481			376
Mortgage banking income		671			532
Title insurance income		423			421
Income on bank owned life insurance		191			181
Low income housing partnership losses		(196	)		(205	)
Card services and interchange income		773			769
Other operating income		88			177
Total noninterest income		2,748			2,507

*Noninterest expense*
Salaries		4,056			4,210
Employee benefits		1,011			908
Occupancy expense		401			358
Equipment expense		323			295
FDIC insurance assessment		257			225
Marketing expense		175			243
Legal and professional fees		303			327
ATM and check card fees		296			349
Telecommunication and data processing expense		798			616
Directors’ fees		101			128
Bank franchise tax		195			129
Other operating expenses		1,741			1,105
Total noninterest expense		9,657			8,893

*Income before income taxes*		682			974
Income tax (benefit)		(110	)		(44	)
*Net Income*	$	792		$	1,018
*Per Common Share Data*
Net income (basic and diluted)	$	0.23		$	0.29
Cash dividends on common stock		0.26			0.26
Weighted average common shares outstanding (basic and diluted)		3,519,182			3,480,670

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Income

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

(Unaudited)

	Nine Months Ended
	September 30,
*Interest and Dividend income*	2024			2023
Interest and fees on loans held for investment	$	40,678		$	34,869
Interest and fees on loans held for sale		123			66
Interest from money market funds and federal funds sold		891			186
Interest and dividends on interest bearing deposits and other investments		357			298
Interest on debt securities		5,537			5,797
Total interest and dividend income		47,586			41,216

*Interest expense*
Total interest on deposits		20,728			15,059
Interest from short-term debt		1,691			2,217
Interest from long-term debt		347			343
Total interest expense		22,766			17,619

*Net interest income*		24,820			23,597

*Provision for Credit Losses*		1,268			1,159
*Net Interest Income After Provision for Credit Losses*		23,552			22,438

*Noninterest income*
Service charges on deposit accounts		881			755
Investment services and insurance income		1,692			1,243
Mortgage banking income		1,821			1,590
Title insurance income		1,153			1,015
Income on bank owned life insurance		558			983
Low income housing partnership losses		(589	)		(616	)
Card services and interchange income		2,300			2,257
Other operating income		268			387
Total noninterest income		8,084			7,614

*Noninterest expense*
Salaries		11,682			13,571
Employee benefits		2,229			3,044
Occupancy expense		1,183			1,008
Equipment expense		1,002			962
FDIC insurance assessment		778			545
Other real estate owned, net		(20	)		-
Marketing expense		456			755
Legal and professional fees		1,260			1,242
ATM and check card fees		811			944
Telecommunication and data processing expense		2,255			2,109
Directors’ fees		329			419
Bank franchise tax		583			453
Other operating expenses		3,703			3,212
Total noninterest expense		26,251			28,264

*Income before income taxes*		5,385			1,788
Income tax expense (benefit)		360			(526	)
*Net Income*	$	5,025		$	2,314
*Per Common Share Data*
Net income (basic and diluted)	$	1.44		$	0.67
Cash dividends on common stock		0.78			0.78
Weighted average common shares outstanding (basic and diluted)		3,508,958			3,473,911

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023

Net Income	$	792		$	1,018		$	5,025		$	2,314

Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for sale securities		10,538			(6,865	)		11,446			(3,337	)
Tax effect		(2,213	)		1,442			(2,402	)		701
Unrealized holding gains (losses), net of tax		8,325			(5,423	)		9,044			(2,636	)

Total other comprehensive income (loss)		8,325			(5,423	)		9,044			(2,636	)

Total comprehensive income (loss)	$	9,117		$	(4,405	)	$	14,069		$	(322	)

See Notes to Consolidated Financial Statements

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F & M BANK CORP.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

(Unaudited)

Three Months Ended September 30, 2024 and 2023.

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

*Balance June 30, 2023*	$	17,228	$	10,822	$	81,369		$	(37,225	)	$	72,194
Net income		-		-		1,018			-			1,018
Other comprehensive (loss)		-		-		-			(5,423	)		(5,423	)
Dividends on common stock		-		-		(906	)		-			(906	)
Common stock issued		18		58		-			-			76
Stock-based compensation expense		-		61		-			-			61
*Balance, September 30, 2023*	$	17,246	$	10,941	$	81,481		$	(42,648	)	$	67,020

*Balance June 30, 2024*	$	17,333	$	11,134	$	83,447		$	(30,298	)	$	81,616
Net income		-		-		792			-			792
Other comprehensive income		-		-		-			8,325			8,325
Dividends on common stock		-		-		(915	)		-			(915	)
Common stock issued		23		81		-			-			104
Stock-based compensation expense		-		72		-			-			72
*Balance, September 30, 2024*	$	17,356	$	11,287	$	83,324		$	(21,973	)	$	89,994

Nine Months Ended September 30, 2024 and 2023.

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

*Balance December 31, 2022*	$	17,149	$	10,577		$	83,078		$	(40,012	)	$	70,792
Net income		-		-			2,314			-			2,314
Cumulative effect adjustment due to the adoption of ASC 326, net of tax		-		-			(1,203	)		-			(1,203	)
Other comprehensive (loss)		-		-			-			(2,636	)		(2,636	)
Dividends on common stock		-		-			(2,708	)		-			(2,708	)
Common stock issued		57		182			-			-			239
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		40		(12	)		-			-			28
Stock-based compensation expense		-		194			-			-			194
*Balance, September 30, 2023*	$	17,246	$	10,941		$	81,481		$	(42,648	)	$	67,020

*Balance December 31, 2023*	$	17,263	$	11,043		$	81,034		$	(31,017	)	$	78,323
Net income		-		-			5,025			-			5,025
Other comprehensive income		-		-			-			9,044			9,044
Dividends on common stock		-		-			(2,735	)		-			(2,735	)
Common stock issued		52		154			-			-			206
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		41		(41	)		-			-			-
Stock-based compensation expense		-		131			-			-			131
*Balance, September 30, 2024*	$	17,356	$	11,287		$	83,324		$	(21,973	)	$	89,994

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 September 30,
	2024			2023
*Cash flows from operating activities*
Net income	$	5,025		$	2,314
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,127			958
Amortization of intangibles		22			23
Amortization of securities		554			596
Proceeds from loans held for sale		82,402			93,872
Loans held for sale originated		(82,524	)		(92,677	)
Gain on sale of loans held for sale		(1,091	)		(1,849	)
Provision for credit losses		1,268			1,159
Increase in interest receivable		(32	)		(650	)
Decrease (increase) in deferred taxes		(7	)		(1	)
(Increase) in other assets		(1,523	)		(2,691	)
Decrease in accrued expenses		(1,675	)		(1,025	)
Amortization of limited partnership investments		589			616
Amortization of debt issuance costs		33			32
Income from life insurance investment		(558	)		(612	)
(Gain) on life insurance investment		-			(370	)
(Gain) on the sale of fixed assets		(12	)		(16	)
(Gain) on the sale of OREO		(21	)		-
Stock-based compensation expense		131			194
Net cash provided by (used in) operating activities		3,708			(127	)
*Cash flows from investing activities*
Proceeds from maturity of investments available for sale		10,500			4,825
Proceeds from paydowns of mortgage-backed securities		10,932			10,998
Proceeds (purchases) from the redemption of restricted stock, net		2,105			(137	)
Purchase of investments available for sale		(18,026	)		-
Investment in limited partnership		(100	)		(200	)
Net increase loans held for investment		(10,268	)		(62,702	)
Proceeds from life insurance investment		-			1,738
Proceeds from the sale of fixed assets		372			93
Proceeds from the sale of OREO		76			-
Net purchase of property and equipment		(219	)		(5,375	)
Net cash (used in) investing activities		(4,628	)		(50,760	)
*Cash flows from financing activities*
Net change in deposits		85,052			50,533
Net change in short-term debt		(45,000	)		(10,000	)
Dividends paid in cash		(2,735	)		(2,708	)
Proceeds from issuance of common stock		206			267
Net cash provided by financing activities		37,523			38,092
*Net increase (decrease) in Cash and Cash Equivalents*		36,603			(12,795	)
*Cash and cash equivalents, beginning of period*		23,717			34,953
*Cash and cash equivalents, end of period*	$	60,320		$	22,158
*Supplemental Cash Flow information:*
Cash paid for: Interest	$	22,100		$	16,709
Taxes		608			360
*Supplemental non-cash disclosures:*
Change in unrealized loss on securities available for sale	$	11,446		$	3,337
Cumulative effect of the adoption of ASC 326		-			1,524

See Notes to Consolidated Financial Statements

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Notes to the Consolidated Financial Statements

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of F&M Bank Corp. (the “Company”), Farmers & Merchants Bank (the “Bank”), TEB Life Insurance Company (“TEB”), Farmers & Merchants Financial Services, Inc. (“FMFS”), VBS Mortgage, LLC (dba “F&M Mortgage”), and VSTitle, LLC (“VST”), with all significant intercompany accounts and transactions eliminated. TEB was dissolved on November 8, 2023. FMFS was dissolved effective April 25, 2024, and its legal existence was subsequently terminated on June 7, 2024. The operations, assets, and liabilities of FMFS were transferred to the Bank.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to accepted practices within the banking industry.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses.

Reclassification

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

Nature of Operations

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

Cash and Cash Equivalents

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

Allowance for Credit Losses – Available for Sale Securities

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

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Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2024, there was no allowance for credit loss related to the available for sale securities portfolio.

Accrued interest receivable on available for sale debt securities totaled $1.4 million at September 30, 2024 and was excluded from the estimate of credit losses.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $3.7 million at September 30, 2024 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

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

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

Allowance for Credit Losses – Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for Credit Losses – Unfunded Commitments

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

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

Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period, including voting rights and sharing in nonforfeitable dividends. Diluted earnings per share includes all convertible securities, such as convertible preferred stock, convertible debt, equity options, and warrants. The Company does not have any convertible securities that would dilute the earnings per share.

Recent Accounting Pronouncements

Accounting Standards adopted in 2024:

In March 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. ASU 2023-02 was effective for the Company on January 1, 2024. The adoption of ASU 2023-02 did not have a material impact on the Company’s consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. ASU 2023-01 was effective for the Company on January 1, 2024. The adoption of ASU 2023-01 did not have a material impact on the Company’s consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 was effective for the Company on January 1, 2024. The adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements.

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In August 2020, the FASB issued 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 information transparency. ASU 2020-06 was effective for the Company on January 1, 2024. The adoption of ASU 2020-06 did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Pending Adoption:

In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” ASU 2024-03 requires public companies to disclose, in the notes to the financial statements, specific information about certain costs and expenses at each interim and annual reporting period. This includes disclosing amounts related to employee compensation, depreciation, and intangible asset amortization. In addition, public companies will need to provide qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. ASU 2024-03 is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Implementation of ASU 2024-03 may be applied prospectively or retrospectively. The Company does not expect the adoption of ASU 2024-03 to have a material impact on its consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02, “Codification Improvements – Amendments to Remove References to the Concepts Statements”. This ASU contains amendments to the Codification that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. This ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied prospectively to all new transactions recognized on or after the date that the entity first applies the amendments or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. If an entity adopts the amendments retrospectively, it should adjust the opening balance of retained earnings as of the beginning of the earliest comparative period presented. The Company does not expect the adoption of ASU 2024-02 to have a material impact on its consolidated financial statements.

In March 2024, the FASB issued ASU 2024-01, “Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards”. This ASU provides an illustrative example intended to demonstrate how entities that account for profits interest and similar awards would determine whether a profits interest award should be accounted for in accordance with Topic 718. This ASU is effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the annual period that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2024-01 to have a material impact on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received).

Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements.

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In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718).” This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

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

NOTE 2 SECURITIES

The amortized cost and estimated fair value of securities available for sale, along with gross unrealized gains and losses are summarized as follows (dollars in thousands):

September 30, 2024	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U. S. Treasuries	$	30,068	$	-	$	1,254	$	28,814
U. S. Government sponsored enterprises		128,494		-		5,042		123,452
Securities issued by States and political subdivisions of the U.S.		40,718		86		1,989		38,815
Mortgage-backed obligations of federal agencies		175,103		148		18,818		156,433
Corporate debt securities		30,550		-		1,905		28,645
Total Securities Available for Sale	$	404,933	$	234	$	29,008	$	376,159

December 31, 2023	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U. S. Treasuries	$	35,048	$	-	$	2,167	$	32,881
U. S. Government sponsored enterprises		133,487		-		8,784		124,703
Securities issued by States and political subdivisions of the U.S.		41,341		145		2,725		38,761
Mortgage-backed obligations of federal agencies		168,468		173		23,568		145,073
Corporate debt securities		30,550		25		3,319		27,256
Total Securities Available for Sale	$	408,894	$	343	$	40,563	$	368,674

There was no allowance for credit losses on available for sale securities at September 30, 2024 or December 31, 2023.

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The amortized cost and fair value of securities at September 30, 2024, by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available for Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	99,010	$	98,108
Due after one year through five years		93,575		87,606
Due after five years		66,571		61,566
Due after ten years		145,777		128,879
Total	$	404,933	$	376,159

There were no sales of available for sale securities in the first nine months of 2024 or 2023.

The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position at September 30, 2024 (dollars in thousands):

	Less than 12 Months				More than 12 Months				Total
September 30, 2024	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	119	$	5	$	28,695	$	1,249	$	28,814	$	1,254
U.S. Government sponsored enterprises		-		-		123,452		5,042		123,452		5,042
Securities issued by States and political subdivisions of the U.S.		1,336		17		31,852		1,972		33,188		1,989
Mortgage-backed obligations of federal agencies		10,018		-		134,230		18,818		144,248		18,818
Corporate debt securities		477		23		28,168		1,882		28,645		1,905
Total	$	11,950	$	45	$	346,397	$	28,963	$	358,347	$	29,008

Unrealized losses at September 30, 2024 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. Issuers continue to make timely principal and interest payments and the Company currently has no plans to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

The following table shows the gross unrealized losses and estimated fair value of available sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2023 (dollars in thousands):

	Less than 12 Months				More than 12 Months				Total
December 31, 2023	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U. S. Treasuries	$	125	$	-	$	32,756	$	2,167	$	32,881	$	2,167
U. S. Government sponsored enterprises		-		-		124,703		8,784		124,703		8,784
Securities issued by States and political subdivisions in the U.S.		484		11		32,597		2,714		33,081		2,725
Mortgage-backed obligations of federal agencies		-		-		140,041		23,568		140,041		23,568
Corporate debt securities		1,729		271		25,002		3,048		26,731		3,319
Total	$	2,338	$	282	$	355,099	$	40,281	$	357,437	$	40,563

The Company had securities with a market value of $204.9 million pledged to the Federal Reserve Discount Window as of September 30, 2024. The Discount Window provides access to funding to help depository institutions manage their liquidity risks. The Bank did not borrow from the Discount Window during the first nine months of 2024. Additionally, the Company had securities with a market value of $9.0 million pledged to the Federal Reserve Bank of Richmond as collateral for deposits of the Department of Justice U.S. Bankruptcy Trustee.

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As of September 30, 2024, other investments consisted of stock in the Federal Home Loan Bank of Atlanta (“FHLB”) (carrying basis $1.6 million), stock in the Federal Reserve Bank (carrying basis $1.1 million), and various other investments (carrying basis $831 thousand). The sale of these securities is restricted. The fair values of these securities are estimated to approximate their carrying value as of September 30, 2024.

As of September 30, 2024, the Bank held investments in eleven low-income housing and historic equity partnerships (carrying basis of $4.5 million) and reported in other assets on the consolidated balance sheet. The interests in low-income housing and historic equity partnerships have limited transferability. The fair values of these securities are estimated to approximate their carrying value as of September 30, 2024. The Company was committed to invest an additional $139 thousand in three low-income housing limited partnerships on September 30, 2024. 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.

NOTE 3 LOANS AND CREDIT QUALITY

The following is a summary of the major categories of total loans outstanding at September 30, 2024 and December 31, 2023 (dollars in thousands):

	September 30, 2024			December 31, 2023
1-4 Family residential construction	$	26,649		$	30,488
Other construction, land development and land		61,568			47,749
Secured by farmland		83,326			81,657
Home equity – open end		47,396			45,749
Real estate		208,199			200,629
Home Equity – closed end		6,532			4,835
Multifamily		10,942			8,203
Owner-occupied commercial real estate		82,577			92,362
Other commercial real estate		98,527			106,181
Agricultural loans		16,994			14,405
Commercial and industrial		57,257			44,329
Credit Cards		3,270			3,252
Automobile loans		110,952			122,924
Other consumer loans		12,153			14,376
Municipal loans		5,059			5,625
Gross loans		831,401			822,764
Unamortized net deferred loan fees		(684	)		(672	)
Less allowance for credit losses		8,028			8,321
Net loans	$	822,689		$	813,771

The table above does not include loans held for sale of $2.3 million and $1.1 million at September 30, 2024 and December 31, 2023, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.

Accrued interest receivable on loans held for investment totaled $3.7 million and $3.6 million at September 30, 2024 and December 31, 2023, respectively. For the quarter ended September 30, 2024, and the year ended December 31, 2023, accrued interest receivable write-offs were not material to the Company’s consolidated financial statements.

The Company had loans held for investment pledged as collateral for borrowings with the FHLB totaling $302.8 million and $289.1 million as of September 30, 2024, and December 31, 2023, respectively. The Company maintains a blanket lien on certain loans in its residential real estate, commercial, agricultural farmland, and home equity portfolios.

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Nonaccrual and Past Due Loans

The following tables show the aging of the Company’s loan portfolio, by class, for the periods indicated (dollars in thousands):

Age Analysis of Past Due Loans As of September 30, 2024
	Accruing Loans 30-59 Days Past due		Accruing Loans 60-89 Days Past due		Accruing Loans 90 Days or More Past due		Nonaccrual Loans		Accruing Current Loans			Total Loans
1-4 Family residential construction	$	297	$	-	$	-	$	439	$	25,913		$	26,649
Other construction, land development and land		160		-		-		15		61,393			61,568
Secured by farmland		97		-		-		53		83,176			83,326
Home equity – open end		216		-		-		493		46,687			47,396
Real estate		1,122		835		-		917		205,325			208,199
Home Equity – closed end		35		-		-		-		6,497			6,532
Multifamily		-		-		-		-		10,942			10,942
Owner-occupied commercial real estate		-		1,205		-		3,449		77,923			82,577
Other commercial real estate		-		784		-		-		97,743			98,527
Agricultural loans		171		-		-		-		16,823			16,994
Commercial and industrial		627		44		-		710		55,876			57,257
Credit Cards		28		32		-		-		3,210			3,270
Automobile loans		1,610		191		-		438		108,713			110,952
Other consumer loans		75		12		1		63		12,002			12,153
Municipal loans		-		-		-		-		5,059			5,059
Gross loans		4,438		3,103		1		6,577		817,282			831,401
Less: Unamortized net deferred loan fees		-		-		-		-		(684	)		(684	)
Loans held for investment	$	4,438	$	3,103	$	1	$	6,577	$	816,598		$	830,717

Age Analysis of Past Due Loans As of December 31, 2023
	Accruing Loans 30-59 Days Past due		Accruing Loans 60-89 Days Past due		Accruing Loans 90 Days or More Past due		Nonaccrual Loans		Accruing Current Loans			Total Loans
1-4 Family residential construction	$	-	$	-	$	-	$	440	$	30,048		$	30,488
Other construction, land development and land		-		-		-		528		47,221			47,749
Secured by farmland		-		-		-		596		81,061			81,657
Home equity – open end		595		74		-		217		44,863			45,749
Real estate		2,125		425		-		701		197,378			200,629
Home Equity – closed end		41		-		-		-		4,794			4,835
Multifamily		-		-		-		-		8,203			8,203
Owner-occupied commercial real estate		1,482		-		-		3,000		87,880			92,362
Other commercial real estate		92		887		-		-		105,202			106,181
Agricultural loans		10		-		-		73		14,322			14,405
Commercial and industrial		75		39		25		622		43,568			44,329
Credit Cards		35		7		6		-		3,204			3,252
Automobile loans		1,137		481		-		237		121,069			122,924
Other consumer loans		151		14		-		24		14,187			14,376
Municipal loans		-		-		-		-		5,625			5,625
Gross loans		5,743		1,927		31		6,438		808,625			822,764
Less: Unamortized net deferred loan fees		-		-		-		-		(672	)		(672	)
Loans held for investment	$	5,743	$	1,927	$	31	$	6,438	$	807,953		$	822,092

There were $6.6 million and $6.4 million in nonaccrual loans at September 30, 2024 and December 31, 2023, respectively. There was no income recognized on nonaccrual loans during the nine months ended September 30, 2024 and year ended December 31, 2023.

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

	September 30, 2024						December 31, 2023
	Nonaccrual loans						Nonaccrual loans
	With no Allowance		With an Allowance		Total		With no Allowance		With an Allowance		Total
1-4 Family residential construction	$	-	$	439	$	439	$	-	$	440	$	440
Other construction, land development and land		15		-		15		528		-		528
Secured by farmland		53		-		53		596		-		596
Home equity – open end		493		-		493		217		-		217
Real estate		917		-		917		701		-		701
Owner-occupied commercial real estate		2,146		1,303		3,449		-		3,000		3,000
Agricultural loans		-		-		-		73		-		73
Commercial and industrial		710		-		710		25		597		622
Automobile loans		438		-		438		237		-		237
Other consumer loans		63		-		63		24		-		24
Total loans	$	4,835	$	1,742	$	6,577	$	2,401	$	4,037	$	6,438

Troubled Loan Modifications

Loan modifications where the borrower is experiencing financial difficulty and the modification is in the form of principal forgiveness, interest rate reductions, term extensions, other-than-insignificant payment delays, or a combination of the above modifications, are defined by the Company as troubled loan modifications. The allowance for credit losses on loans (“ACLL”) on troubled loan modifications is measured using the same method as other loans held for investment.

The Company evaluates all loan modifications according to the accounting guidance for loan refinancing and restructuring to determine whether the modification should be accounted for as a new loan or a continuation of the existing loan. If the modification meets the criteria to be accounted for as a new loan, any deferred fees and costs remaining prior to the modification are recognized in income and any new deferred fees and costs are recorded on the loan as part of the modification. If the modification does not meet the criteria to be accounted for as a new loan, any new deferred fees and costs resulting from the modification are added to the existing amortized cost basis of the loan.

The following tables present the amortized cost of loans and leases to borrowers experiencing financial difficulty by class of financing receivable, type of modification, financial effect of the modification, and percentage of the amortized cost basis of modifications as compared to the amortized cost basis of each loan segment for the periods presented (dollars in thousands). There were no loans modified for borrowers experiencing financial difficulty in the three months ended September 30, 2024 or 2023.

Amortized Cost of Basis of Loan Modifications Made to Borrowers Experiencing Financial Difficulty For the Nine Months Ended September 30, 2024
	Term Extension		Weighted Average Term Extension (in months)		% of Total Loan Type
Owner-occupied commercial real estate	$	16		13.0		0.02	%
Automobile loans		53		4.1		0.05	%
Total Term Extension	$	69		6.1		0.05	%

Amortized Cost of Basis of Loan Modifications Made to Borrowers Experiencing Financial Difficulty For the Year Ended December 31, 2023
	Term Extension		Weighted Average Term Extension (in months)		% of Total Loan Type
Owner-occupied commercial real estate	$	45		13.0		0.05	%
Automobile loans		68		4.5		0.06	%
Total Term Extension	$	113		7.9		0.05	%

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The Company monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The Company considers a default on a troubled loan modification to occur when the borrower is 90 days past due following the modification or a foreclosure and repossession of the applicable collateral occurs. No loan or lease modifications to borrowers experiencing financial difficulty had a payment default at September 30, 2024 or December 31, 2023.

The Company monitors the performance of troubled loan modifications to determine the effectiveness of the modifications. As of September 30, 2024 and December 31, 2023, $15 thousand and $159 thousand in loans modified and designated as a troubled loan modification were past due.

As of September 30, 2024, the Company did not have any unfunded commitments on loans modified and designated as troubled loan modifications.

Collateral Dependent Disclosures

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

The following table presents an analysis of collateral-dependent loans of the Company as of the periods noted (dollars in thousands):

	Collateral Dependent Loans
	September 30, 2024
	Real Estate		Business/Other Assets
1-4 Family residential construction	$	439	$	-
Owner-occupied commercial real estate		3,449		-
Commercial and industrial		-		605
Total loans	$	3,888	$	605

	Collateral Dependent Loans
	December 31, 2023
	Real Estate		Business/Other Assets
1-4 Family residential construction	$	440	$	-
Other construction, land development and land		511		-
Secured by farmland		596		-
Owner-occupied commercial real estate		3,000		-
Commercial and industrial		-		597
Total loans	$	4,547	$	597

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The following tables present the loan portfolio by segment, details of the loan portfolio and the ACLL calculated in accordance with our credit loss accounting methodology for loans described above (dollars in thousands).

	September 30, 2024
	Loan Balances							Allowance for Credit Losses - Loans
	Loans Individually Evaluated		Loans Collectively Evaluated		Total			Loans Individually Evaluated		Loans Collectively Evaluated		Total
1-4 Family residential construction	$	439	$	26,210	$	26,649		$	362	$	261	$	623
Other construction, land development and land		-		61,568		61,568			-		1,658		1,658
Secured by farmland		-		83,326		83,326			-		840		840
Home equity – open end		-		47,396		47,396			-		180		180
Real estate		-		208,199		208,199			-		748		748
Home Equity – closed end		-		6,532		6,532			-		104		104
Multifamily		-		10,942		10,942			-		256		256
Owner-occupied commercial real estate		3,449		79,128		82,577			95		708		803
Other commercial real estate		-		98,527		98,527			-		135		135
Agricultural loans		-		16,994		16,994			-		24		24
Commercial and industrial		605		56,652		57,257			-		865		865
Credit Cards		-		3,270		3,270			-		82		82
Automobile loans		-		110,952		110,952			-		1,397		1,397
Other consumer loans		-		12,153		12,153			-		297		297
Municipal loans		-		5,059		5,059			-		16		16
Gross loans		4,493		826,908		831,401			457		7,571		8,028
Less: Unamortized net deferred loan fees		-		-		(684	)		-		-		-
Net loans held for investment	$	4,493	$	826,908	$	830,717		$	457	$	7,571	$	8,028

	December 31, 2023
	Loan Balances							Allowance for Credit Losses - Loans
	Loans Individually Evaluated		Loans Collectively Evaluated		Total			Loans Individually Evaluated		Loans Collectively Evaluated		Total
1-4 Family residential construction	$	440	$	30,048	$	30,488		$	363	$	351	$	714
Other construction, land development and land		511		47,238		47,749			-		1,287		1,287
Secured by farmland		596		81,061		81,657			-		815		815
Home equity – open end		-		45,749		45,749			-		180		180
Real estate		-		200,629		200,629			-		810		810
Home Equity – closed end		-		4,835		4,835			-		77		77
Multifamily		-		8,203		8,203			-		181		181
Owner-occupied commercial real estate		3,000		89,362		92,362			263		958		1,221
Other commercial real estate		-		106,181		106,181			-		166		166
Agricultural loans		-		14,405		14,405			-		20		20
Commercial and industrial		597		43,732		44,329			351		683		1,034
Credit Cards		-		3,252		3,252			-		81		81
Automobile loans		-		122,924		122,924			-		1,443		1,443
Other consumer loans		-		14,376		14,376			-		292		292
Municipal loans		-		5,625		5,625			-		-		-
Gross loans		5,144		817,620		822,764			977		7,344		8,321
Less: Unamortized net deferred loan fees		-		-		(672	)		-		-		-
Net loans held for investment	$	5,144	$	817,620	$	822,092		$	977	$	7,344	$	8,321

Credit Quality Indicators

The Company presents loan and lease portfolio segments and classes by credit quality indicator and vintage year. The Company defines the vintage date for the purpose of this disclosure as the date of the most recent credit decision. Renewals are categorized as new credit decisions and reflect the renewal date as the vintage date, except for renewals of loans modified for borrowers experiencing financial difficulty which are presented in the original vintage.

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Description of the Company’s credit quality indicators:

Pass: Loans in all classes that make up the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

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

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

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

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The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of September 30, 2024 (dollars in thousands):

	Term Loans by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
1-4 Family residential construction
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	26,210	$	26,210
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		439		439
Total 1-4 Family residential construction		-		-		-		-		-		-		26,649		26,649
Current period gross write-offs		-		-		-		-		-		-		-		-

Other construction, land development and land
Pass		2,209		11,975		7,590		4,610		1,753		9,278		22,962		60,377
Watch		-		-		-		-		-		-		665		665
Substandard		-		-		-		-		-		526		-		526
Total Other construction, land development and land		2,209		11,975		7,590		4,610		1,753		9,804		23,627		61,568
Current period gross write-offs		-		-		-		-		-		-		-		-

Secured by farmland
Pass		4,320		10,223		13,841		13,118		25,813		8,693		4,607		80,615
Watch		156		-		1,748		-		-		754		-		2,658
Substandard		-		-		-		-		-		53		-		53
Total Secured by farmland		4,476		10,223		15,589		13,118		25,813		9,500		4,607		83,326
Current period gross write-offs		-		-		-		-		-		-		-		-

Home equity – open end
Pass		-		-		-		-		-		139		46,617		46,756
Watch		-		-		-		-		-		-		249		249
Substandard		-		-		-		-		-		-		391		391
Total Home equity - open end		-		-		-		-		-		139		47,257		47,396
Current period gross write-offs		-		-		-		-		-		-		-		-

Real estate
Pass		15,922		57,159		44,985		13,817		11,710		60,415		1,310		205,318
Watch		-		-		81		-		-		-		-		81
Substandard		-		207		-		530		-		2,063		-		2,800
Total Real estate		15,922		57,366		45,066		14,347		11,710		62,478		1,310		208,199
Current period gross write-offs		-		-		-		-		-		-		-		-

Home Equity – closed end
Pass		771		2,551		260		90		974		1,886		-		6,532
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Home Equity - closed end		771		2,551		260		90		974		1,886		-		6,532
Current period gross write-offs		-		-		-		-		-		-		-		-

Multifamily
Pass		2,138		-		2,656		1,339		876		1,580		2,353		10,942
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Multifamily		2,138		-		2,656		1,339		876		1,580		2,353		10,942
Current period gross write-offs		-		-		-		-		-		-		-		-

Owner-occupied commercial real estate
Pass		4,376		2,220		17,296		16,106		6,805		21,379		2,578		70,760
Watch		-		-		-		-		-		756		-		756
Substandard		-		-		-		-		-		8,617		2,444		11,061
Total Owner-occupied commercial real estate		4,376		2,220		17,296		16,106		6,805		30,752		5,022		82,577
Current period gross write-offs		-		-		-		-		-		-		-		-
Other commercial real estate
Pass		389		9,368		29,904		11,919		3,792		31,320		1,779		88,471
Watch		8,155		-		-		-		-		1,814		-		9,969
Substandard		-		-		-		-		-		87		-		87
Total Other commercial real estate		8,544		9,368		29,904		11,919		3,792		33,221		1,779		98,527
Current period gross write-offs		-		-		-		-		-		-		-		-

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	Term Loans by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
Agricultural loans
Pass		3,079		2,323		2,000		403		202		-		8,769		16,776
Watch		-		-		37		-		31		-		150		218
Substandard		-		-		-		-		-		-		-		-
Total Agricultural loans		3,079		2,323		2,037		403		233		-		8,919		16,994
Current period gross write-offs		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		6,453		5,659		7,242		4,138		1,049		447		26,449		51,437
Watch		-		-		106		37		-		-		4,961		5,104
Substandard		-		-		57		611		-		-		48		716
Total 1-4 Commercial and industrial		6,453		5,659		7,405		4,786		1,049		447		31,458		57,257
Current period gross write-offs		-		-		133		47		24		5		-		209

Credit Cards
Pass		-		-		-		-		-		-		3,270		3,270
Substandard		-		-		-		-		-		-		-		-
Total Credit cards		-		-		-		-		-		-		3,270		3,270
Current period gross write-offs		-		-		-		-		-		-		27		27

Automobile loans
Pass		23,506		41,268		28,202		12,401		3,988		1,167		-		110,532
Watch		-		-		-		-		-		-		-		-
Substandard		34		88		149		110		32		7		-		420
Total Automobile loans		23,540		41,356		28,351		12,511		4,020		1,174		-		110,952
Current period gross write-offs		60		872		582		422		70		55		-		2,061

Other consumer loans
Pass		3,017		3,537		3,161		1,231		327		460		356		12,089
Watch		-		-		-		-		-		-		-		-
Substandard		-		43		6		12		-		3		-		64
Total Other consumer loans		3,017		3,580		3,167		1,243		327		463		356		12,153
Current period gross write-offs		7		50		57		19		15		4		-		152

Municipal loans
Pass		-		-		-		812		1,065		3,182		-		5,059
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Municipal loans		-		-		-		812		1,065		3,182		-		5,059
Current period gross write-offs		-		-		-		-		-		-		-		-

Total loans	$	74,525	$	146,621	$	159,321	$	81,284	$	58,417	$	154,626	$	156,607	$	831,401
Less: Unamortized net deferred loan fees																(684	)
Loans held for investment															$	830,717

Current period gross write-offs	$	67	$	922	$	772	$	488	$	109	$	64	$	27	$	2,449

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The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023 (dollars in thousands):

	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
1-4 Family residential construction
Pass	$	162	$	-	$	-	$	-	$	-	$	108	$	29,214	$	29,484
Watch		-		-		-		-		-		-		564		564
Substandard		-		-		-		-		-		-		440		440
Total 1-4 Family residential construction		162		-		-		-		-		108		30,218		30,488
Current period gross write-offs		-		70		-		-		-		-		-		70

Other construction, land development and land
Pass		5,123		9,138		4,983		1,831		2,847		5,456		17,770		47,148
Watch		-		-		-		-		-		67		-		67
Substandard		511		-		-		-		-		23		-		534
Total Other construction, land development and land		5,634		9,138		4,983		1,831		2,847		5,546		17,770		47,749
Current period gross write-offs		-		-		-		-		-		-		-		-

Secured by farmland
Pass		7,503		15,834		13,688		27,020		2,509		7,842		5,869		80,265
Watch		-		-		-		-		781		-		-		781
Substandard		-		-		333		-		-		263		15		611
Total Secured by farmland		7,503		15,834		14,021		27,020		3,290		8,105		5,884		81,657
Current period gross write-offs		-		-		-		-		-		-		-		-

Home equity – open end
Pass		370		-		-		-		-		141		44,089		44,600
Watch		-		-		-		-		-		-		883		883
Substandard		-		-		-		-		-		-		266		266
Total Home equity - open end		370		-		-		-		-		141		45,238		45,749
Current period gross write-offs		-		-		-		-		-		-		-		-

Real estate
Pass		53,413		47,785		15,211		12,192		6,490		55,665		386		191,142
Watch		-		45		-		499		155		4,893		-		5,592
Substandard		-		88		539		-		1,212		2,056		-		3,895
Total Real estate		53,413		47,918		15,750		12,691		7,857		62,614		386		200,629
Current period gross write-offs		-		-		-		-		-		19		-		19

Home Equity – closed end
Pass		1,126		382		117		1,044		464		1,690		-		4,823
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		12		-		-		12
Total Home Equity - closed end		1,126		382		117		1,044		476		1,690		-		4,835
Current period gross write-offs		-		-		-		-		-		-		-		-

Multifamily
Pass		-		2,712		1,395		906		-		1,567		1,524		8,104
Watch		-		-		-		-		-		99		-		99
Substandard		-		-		-		-		-		-		-		-
Total Multifamily		-		2,712		1,395		906		-		1,666		1,524		8,203
Current period gross write-offs		-		-		-		-		-		-		-		-

Owner-occupied commercial real estate
Pass		2,820		18,049		17,775		7,109		3,586		22,301		7,821		79,461
Watch		-		-		-		-		40		2,097		-		2,137
Substandard		-		-		-		-		6,283		1,183		3,298		10,764
Total Owner-occupied commercial real estate		2,820		18,049		17,775		7,109		9,909		25,581		11,119		92,362
Current period gross write-offs		-		-		-		-		-		-		-		-
Other commercial real estate
Pass		10,193		29,317		12,744		4,990		3,739		32,666		3,206		96,855
Watch		-		-		-		-		-		9,239		-		9,239
Substandard		-		-		-		-		-		87		-		87
Total Other commercial real estate		10,193		29,317		12,744		4,990		3,739		41,992		3,206		106,181
Current period gross write-offs		-		-		-		-		-		-		-		-

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	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
Agricultural loans
Pass		4,626		2,548		534		340		-		38		6,066		14,152
Watch		-		-		-		31		-		-		149		180
Substandard		-		48		14		11		-		-		-		73
Total Agricultural loans		4,626		2,596		548		382		-		38		6,215		14,405
Current period gross write-offs		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		7,396		9,373		5,359		1,691		674		272		17,408		42,173
Watch		-		44		91		-		-		-		1,363		1,498
Substandard		-		-		632		25		-		1		-		658
Total Commercial and industrial		7,396		9,417		6,082		1,716		674		273		18,771		44,329
Current period gross write-offs		-		31		-		-		-		2		-		33

Credit Cards
Pass		-		-		-		-		-		-		3,246		3,246
Substandard		-		-		-		-		-		-		6		6
Total Credit cards		-		-		-		-		-		-		3,252		3,252
Current period gross write-offs		-		-		-		-		-		-		69		69

Automobile loans
Pass		52,471		38,375		19,193		7,301		2,145		2,367		-		121,852
Watch		179		323		158		106		36		32		-		834
Substandard		98		48		63		6		18		5		-		238
Total Automobile loans		52,748		38,746		19,414		7,413		2,199		2,404		-		122,924
Current period gross write-offs		334		669		560		149		53		39		-		1,804

Other consumer loans
Pass		5,169		4,983		2,230		843		194		367		530		14,316
Watch		17		4		7		-		1		2		1		32
Substandard		12		7		2		-		6		1		-		28
Total Other consumer loans		5,198		4,994		2,239		843		201		370		531		14,376
Current period gross write-offs		-		77		3		3		6		4		-		93

Municipal loans
Pass		-		118		923		1,096		1,228		2,260		-		5,625
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Municipal loans		-		118		923		1,096		1,228		2,260		-		5,625
Current period gross write-offs		-		-		-		-		-		-		-		-

Total loans	$	151,189	$	179,221	$	95,991	$	67,041	$	32,420	$	152,788	$	144,114	$	822,764
Less: Unamortized net deferred loan fees																(672	)
Loans held for investment															$	822,092

Current period gross write-offs	$	334	$	847	$	563	$	152	$	59	$	64	$	69	$	2,088

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NOTE 4 ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses (“ACL”) consists of the allowance for credit losses on loans and the reserve for unfunded commitments. The Company’s ACL is governed by the Company’s ACL Committee, which reports to the Board of Directors and contains representatives from the Company’s finance, credit, and risk teams, and is responsible for calculating the Company’s estimate of expected credit losses and resulting ACL. The ACL Committee considers the quantitative model results and qualitative factors when finalizing the ACL. The Company’s ACL model is subject to the Company’s models risk management program, which is overseen by the Director of Risk Management that reports to the Company’s Board Risk Committee.

Allowance for Credit Losses on Loans

The following tables show the allowance for credit losses activity by loan segment for the periods indicated, (dollars in thousands).

Allowance for Credit Losses and Carrying Amount of Loans For the Nine Months Ended September 30, 2024
	Beginning Balance		Charge-offs		Recoveries		Provision for loan credit losses			Ending Balance
1-4 Family residential construction	$	714	$	-	$	-	$	(91	)	$	623
Other construction, land development and land		1,287		-		69		302			1,658
Secured by farmland		815		-		-		25			840
Home equity – open end		180		-		25		(25	)		180
Real estate		810		-		4		(66	)		748
Home Equity – closed end		77		-		-		27			104
Multifamily		181		-		-		75			256
Owner-occupied commercial real estate		1,221		-		-		(418	)		803
Other commercial real estate		166		-		-		(31	)		135
Agricultural loans		20		-		-		4			24
Commercial and industrial		1,034		209		44		(4	)		865
Credit Cards		81		27		19		9			82
Automobile loans		1,443		2,061		572		1,443			1,397
Other consumer loans		292		152		73		84			297
Municipal loans		-		-		-		16			16
Total loans	$	8,321	$	2,449	$	806	$	1,350		$	8,028

Allowance for Credit Losses and Carrying Amount of Loans For the Year Ended December 31, 2023
	Beginning Balance		Adjustment for adoption of ASU 2016-13			Charge-offs		Recoveries		Provision for loan credit losses			Ending Balance
1-4 Family residential construction	$	324	$	109		$	70	$	1	$	350		$	714
Other construction, land development and land		694		602			-		-		(9	)		1,287
Secured by farmland		571		311			-		-		(67	)		815
Home equity – open end		446		(189	)		-		3		(80	)		180
Real estate		1,389		(184	)		19		2		(378	)		810
Home Equity – closed end		39		96			-		-		(58	)		77
Multifamily		71		182			-		-		(72	)		181
Owner-occupied commercial real estate		992		280			-		-		(51	)		1,221
Other commercial real estate		1,023		(582	)		-		-		(275	)		166
Agricultural loans		80		(58	)		-		-		(2	)		20
Commercial and industrial		368		338			33		2		359			1,034
Credit Cards		68		26			69		37		19			81
Automobile loans		1,790		(257	)		1,804		514		1,200			1,443
Other consumer loans		81		103			93		55		146			292
Municipal loans		-		-			-		-		-			-
Total loans	$	7,936	$	777		$	2,088	$	614	$	1,082		$	8,321

Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over their estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans and are discussed above. The allowance for credit losses for unfunded loan commitments of $608 thousand at September 30, 2024 and $690 thousand at December 31, 2023 is separately classified on the consolidated balance sheet within Other liabilities.

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The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the periods indicated (dollars in thousands).

	2024			2023
Balance as of January 1	$	690		$	-
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		-			747
Recovery of credit losses – unfunded commitments		(82	)		-
Balance as of September 30	$	608		$	747

NOTE 5 LEASES

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. 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 Company has five operating leases for office properties.

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

	September 30, 2024
Lease Liabilities	$	624
Right-of-use assets	$	593
Weighted average remaining lease term (years)	0.77 years
Weighted average discount rate		3.43	%

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
Operating lease cost	$	35	$	40	$	110	$	123
Total lease cost	$	35	$	40	$	110	$	123
Cash paid for amounts included in the measurement of lease liabilities	$	40	$	44	$	129	$	149

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

	September 30, 2024
Three months ending December 31, 2024	$	45
Twelve months ending December 31, 2025		125
Twelve months ending December 31, 2026		70
Twelve months ending December 31, 2027		56
Twelve months ending December 31, 2028		57
Thereafter		406
Total undiscounted cash flows	$	759
Discount		(135	)
Lease liabilities	$	624

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NOTE 6 OTHER REAL ESTATE OWNED

The table below reflects other real estate owned (“OREO”) activity for the nine months ended September 30, 2024 and 2023 (dollars in thousands).

	2024			2023
Balance as of January 1	$	55		$	-
Purchase of foreclosed real estate		-			-
Loans transferred to OREO		-			-
Proceeds from sale of OREO		(76	)		-
Gain on sales of OREO		21			-
Balance as of September 30	$	-		$	-

The Company did not have any other real estate owned at September 30, 2024 or 2023.

NOTE 7 SHORT-TERM DEBT

The Company uses short-term debt, including Federal funds purchased and FHLB short-term borrowings, to maintain liquidity. Federal funds purchased are unsecured, overnight borrowings from other financial institutions. FHLB short-term debt, secured by the Company’s loan portfolio, may take the form of a daily rate variable loan, which acts as a line of credit, or a fixed-rate advance, depending on the Company’s needs. As of September 30, 2024, and December 31, 2023, the Company had $15.0 million and $60.0 million in FHLB advances, respectively.

NOTE 8 LONG-TERM DEBT

On July 29, 2020, the Company sold and issued to an institutional accredited investor a 6.00% fixed to floating rate subordinated note due July 31, 2030 with an aggregate principal amount of $7.0 million. The note initially bears interest at 6.00% per annum, beginning July 29, 2020 but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $7.0 and $6.9 million at September 30, 2024 and December 31, 2023, respectively.

NOTE 9 MORTGAGE BANKING DERIVATIVES

Loans Held for Sale (“LHFS”)

The Company, through the Bank’s mortgage banking subsidiary, F&M Mortgage, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to a permanent investor with the mortgage servicing rights released. 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, totaling $2.3 million as of September 30, 2024, of which $2.3 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Interest Rate Lock Commitments and Forward Sales Commitments (“IRLCs”)

The Company, through F&M Mortgage, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (“IRLCs”). Such rate lock commitments on mortgage loans to be sold in the secondary market are 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 lock commitments will close.

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The fair value of these derivative instruments is reported in Other assets in the consolidated balance sheet at September 30, 2024, and totaled $13 thousand, with a notional amount of $8.1 million and total positions of 29. The fair value of the IRLCs at December 31, 2023 totaled $81 thousand, with a notional amount of $6.2 million and total positions of 22. Changes in fair value are recorded as a component of Mortgage banking income in the consolidated income statement for the period ended September 30, 2024. The Company’s IRLCs are classified as Level 2. At September 30, 2024 and 2023, each IRLC and all LHFS were subject to a forward sales commitment on a best-efforts basis.

The Company elects the fair value option for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments reported in Other assets in the consolidated balance sheet at September 30, 2024 totaled $32 thousand, with a notional amount of $10.4 million and total positions of 42. The fair value of forward sales commitments reported in Other liabilities in the consolidated balance sheet at December 31, 2023 totaled $22 thousand, with a notional amount of $7.3 million and total positions of 27.

NOTE 10 ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present components of accumulated other comprehensive loss for the periods stated (dollars in thousands).

	For the three months ended September 30, 2024
	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan		Accumulated Other Comprehensive Loss
Balance at June 30, 2024	$	(31,055	)	$	757	$	(30,298	)
Change in unrealized securities gains, net of tax expense of $2,213		8,325			-		8,325
Balance at September 30, 2024	$	(22,730	)	$	757	$	(21,973	)

	For the three months ended September 30, 2023
	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan		Accumulated Other Comprehensive Loss
Balance at June 30, 2023	$	(37,664	)	$	439	$	(37,225	)
Change in unrealized securities (losses), net of tax benefit of $1,442		(5,423	)		-		(5,423	)
Balance at September 30, 2023	$	(43,087	)	$	439	$	(42,648	)

	For the nine months ended September 30, 2024
	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan		Accumulated Other Comprehensive Loss
Balance at December 31, 2023	$	(31,774	)	$	757	$	(31,017	)
Change in unrealized securities gains, net of tax expense of $2,404		9,044			-		9,044
Balance at September 30, 2024	$	(22,730	)	$	757	$	(21,973	)

	For the nine months ended September 30, 2023
	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan		Accumulated Other Comprehensive Loss
Balance at December 31, 2022	$	(40,451	)	$	439	$	(40,012	)
Change in unrealized securities (losses), net of tax benefit of $701		(2,636	)		-		(2,636	)
Balance at September 30, 2023	$	(43,087	)	$	439	$	(42,648	)

There were no reclassification adjustments reported on the consolidated statements of income during the three or nine months ended September 30, 2024 or 2023.

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NOTE 11 FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

	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:

Available for Sale Securities (“AFS Securities”) - AFS Securities are recorded at fair value on a recurring basis. The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company contracts annually with a third-party portfolio accounting service vendor for valuation of its securities portfolio. The carrying value of restricted FRB and FHLB stock approximates fair value based upon the redemption provisions of each security and is therefore excluded from the following table.

Loans Held for Sale - Residential loans originated for sale in the open market are carried at fair value. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within mortgage banking income on the Consolidated Statements of Income.

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

Derivative Asset/Liability – Forward Sale Commitments - The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best-efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best-efforts commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale. The Company’s forward sale commitments are classified as Level 2.

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The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the periods indicated (dollars in thousands):

September 30, 2024	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	2,332	$	-	$	2,332	$	-
U. S. Treasury securities		28,814		-		28,814		-
U.S. Government sponsored enterprises		123,452		-		123,452		-
Securities issued by States and political subdivisions of the US		38,815		-		38,815		-
Mortgage-backed obligations of federal agencies		156,433		-		156,433		-
Corporate debt securities		28,645		-		28,645		-
IRLC		32		-		32		-
Forward sales commitments		12		-		12		-
Assets at Fair Value	$	378,535	$	-	$	378,535	$	-

December 31, 2023	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	1,119	$	-	$	1,119	$	-
U. S. Treasury securities		32,881		-		32,881		-
U.S. Government sponsored enterprises		124,703		-		124,703		-
Securities issued by States and political subdivisions of the US		38,761		-		38,761		-
Mortgage-backed obligations of federal agencies		145,073		-		145,073		-
Corporate debt securities		27,256		-		27,256		-
IRLC		81		-		81		-
Assets at Fair Value	$	369,874	$	-	$	369,874	$	-

Liabilities:
Forward sales commitments	$	22	$	-	$	22	$	-
Liabilities at Fair Value	$	22	$	-	$	22	$	-

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

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

Collateral Dependent Loans with an ACL - In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

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 had no OREO at September 30, 2024 and OREO with a carrying value of $55 thousand at December 31, 2023.

The Company markets OREO 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 presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2024 and December 31, 2023 (dollars in thousands). Fair values are estimated under the exit price notion in accordance with the adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

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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, 2024			Fair Value Measurements Using:
Collateral dependent loans with an ACL	Balance		Level 1		Level 2		Level 3
1-4 family residential construction	$	77	$	-	$	-	$	77
Owner-occupied commercial real estate		1,208		-		-		1,208
Total collateral dependent loans with an ACL	$	1,285	$	-	$	-	$	1,285
OREO	$	-	$	-	$	-	$	-

December 31, 2023			Fair Value Measurements Using:
Collateral dependent loans with an ACL	Balance		Level 1		Level 2		Level 3
1-4 family residential construction	$	77	$	-	$	-	$	77
Owner-occupied commercial real estate		2,737		-		-		2,737
Commercial and industrial		246		-		-		246
Total collateral dependent loans with an ACL	$	3,060	$	-	$	-	$	3,060
OREO	$	55	$	-	$	-	$	55

The following table presents information about Level 3 Fair Value Measurements for the periods indicated (dollars in thousands):

September 30, 2024	Fair Value		Valuation Technique	Significant Unobservable Inputs
1-4 family residential construction	$	77	Discounted appraised value	Discount for marketability (25%) and selling costs (25%)
Owner-occupied commercial real estate		1,208	Discounted appraised value	Discount for marketability (25%) and selling costs (10%)

December 31, 2023	Fair Value		Valuation Technique	Significant Unobservable Inputs
1-4 family residential construction	$	77	Discounted appraised value	Discount for marketability (25%) and selling costs (10%)
Owner-occupied commercial real estate		2,737	Discounted appraised value	Discount for marketability (25%) and selling costs (8%)
Commercial and industrial		246	Discounted appraised value	Discount for marketability (65%) and selling costs (6%)
OREO		55	Discounted appraised value	Discount for marketability (60%) and selling costs (10%)

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	September 30, 2024 Fair Value Measurements using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets:
Cash and cash equivalents	$	60,320	$	60,320	$	-	$	-	$	60,320
Securities		376,159		-		376,159		-		376,159
Loans held for sale		2,332		-		2,332		-		2,332
Loans held for investment, net		830,717		-		-		811,324		811,324
Interest receivable		5,066		-		5,066		-		5,066
Bank owned life insurance		23,420		-		23,420		-		23,420
IRLC		32		-		32		-		32
Forward sales commitments		13		-		13		-		13
Liabilities:
Deposits	$	1,218,288	$	-	$	1,218,135	$	-	$	1,218,135
Short-term debt		15,000		-		-		15,000		15,000
Long-term debt		6,965		-		-		6,888		6,888
Interest payable		2,258		-		2,258		-		2,258

	December 31, 2023 Fair Value Measurements using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets:
Cash and cash equivalents	$	23,717	$	23,717	$	-	$	-	$	23,717
Securities		368,674		-		368,674		-		368,674
Loans held for sale		1,119		-		1,119		-		1,119
Loans held for investment, net		822,092		-		-		793,440		793,440
Interest receivable		5,034		-		5,034		-		5,034
Bank owned life insurance		22,878		-		22,878		-		22,878
IRLC		81		-		81		-		81
Liabilities:
Deposits	$	1,133,236	$	-	$	1,131,747	$	-	$	1,131,747
Short-term debt		60,000		-		-		60,000		60,000
Long-term debt		6,932		-		-		6,761		6,761
Interest payable		1,592		-		1,592		-		1,592
Forward sales commitments		22		-		22		-		22

NOTE 12 EMPLOYEE BENEFITS

Defined Benefit Pension Plan

The Bank has a qualified noncontributory defined benefit pension plan which covers substantially all full-time employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31^st as the measurement date for the defined benefit pension plan. The plan was amended on February 15, 2023 to stop the accrual of future benefits and was terminated on June 1, 2024. The following is a summary of net periodic pension costs for the three- and nine-month periods ended September 30, 2024 and 2023 (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Service cost	$	-		$	-		$	-		$	-
Interest cost		79			92			237			276
Expected return on plan assets		(98	)		(130	)		(294	)		(390	)
Recognized net actuarial gain		(5	)		-			(15	)		-
Net periodic pension cost	$	(24	)	$	(38	)	$	(72	)	$	(114	)

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Stock Incentive Plan

The Company grants stock awards to directors and employees under the Company’s 2020 Stock Incentive Plan and 2023 Directors Stock Incentive Plan. On March 7, 2024, the Company’s Compensation Committee awarded 33,568 shares with a fair value of $597 thousand from the 2020 Stock Incentive Plan to selected employees. These shares vest 25% over each of the next four years. In the three months ended September 30, 2024, no shares were awarded and 3,367 shares were forfeited. Unrecognized compensation expense related to the nonvested restricted stock as of September 30, 2024 totaled $834 thousand.

NOTE 13 REVENUE RECOGNITION

The majority of the Company’s noninterest income is generated from short-term contracts for fees on deposit accounts, ATM and check cards, and annuity and insurance commissions that is accounted for in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Service charges on deposit accounts consist of account maintenance charges and overdrawn account fees. The Company’s performance obligation is generally satisfied, and the related revenue recognized, immediately, when the transaction occurs, or by month-end. Investment services and insurance income consists primarily of commissions received on mutual funds and other investment sales that are recognized on the trade date, which is when the Company has satisfied its performance obligation. Title insurance and real estate settlement services revenue is recognized at the time the real estate transaction is completed.

Card services and interchange income primarily consist of debit and credit card income, ATM fees, merchant services income, and other service charges. The Company’s performance obligation is generally satisfied, and the related revenue recognized, immediately, when the transaction occurs, or by month-end. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized no less than monthly.

Noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, for September 30, 2024 and 2023 consisted of the following (dollars in thousands).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Noninterest income
Service charges on deposit accounts	$	317	$	256	$	881	$	755
Investment services and insurance income		481		376		1,692		1,243
Title insurance income		423		421		1,153		1,015
Card services and interchange income		773		769		2,300		2,257
Other		71		192		211		389
Within scope of ASC 606		2,065		2,014		6,237		5,659
Not within scope of ASC 606		683		493		1,847		1,955
Total noninterest income	$	2,748	$	2,507	$	8,084	$	7,614

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

F & M Bank Corp. (“Company”), incorporated in Virginia in 1983, is a financial holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, which provides financial services through its wholly-owned subsidiaries, Farmers & Merchants Bank (“Bank”) and VSTitle (“VST’). As well as the Bank’s wholly-owned subsidiaries, VBS Mortgage LLC (dba “F&M Mortgage”), and TEB Life Insurance Company (“TEB”), and Farmers & Merchants Financial Services (“FMFS”). TEB was dissolved on November 8, 2023. FMFS was dissolved effective April 25, 2024, and its legal existence was subsequently terminated on June 7, 2024. The operations, assets, and liabilities of FMFS were transferred to the Bank.

The Bank is a full-service commercial bank offering a wide range of banking and financial services through its fourteen branch offices as well as its loan production office located in Penn Laird, Virginia (which specializes in providing automobile financing through a network of automobile dealers). The former operations of FMFS now operate as a division of the Bank to provide brokerage services and property/casualty insurance. F&M Mortgage originates conventional and government sponsored mortgages through their offices in Harrisonburg, Woodstock, and Winchester, Virginia. VSTitle provides title insurance services through their offices in Harrisonburg and Charlottesville, Virginia.

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

Management’s discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Part 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

Forward-Looking Statements

Certain statements in this report may contain “forward-looking statements” as defined by federal securities laws, which are subject to significant risks and uncertainties. These include statements regarding future plans, strategies, results, or expectations that are not historical facts, and are generally identified by the use of words such as “believe,” “expect,” “intend,” “anticipate,” “will,” “estimate,” “project,” “plan” or similar expressions or other statements concerning opinions or judgements of the Company and its management about future events. These statements are based on estimates and assumptions, and our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Our actual results could differ materially from those contemplated by these forward-looking statements.

Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in local and national economies or market conditions; changes in interest rates; regulations and accounting principles; changes in policies or guidelines; loan demand and asset quality, including values of real estate and other collateral; deposit flow; the impact of competition from traditional or new sources; and other factors. Readers should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on such statements.

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

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

The Company’s critical accounting policies used in the preparation of the Consolidated Financial Statements as of September 30, 2024 were unchanged from the policies disclosed in the 2023 Form 10-K within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.

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Results of Operations

Third Quarter Income Statement Discussion

Net income for third quarter 2024 was $792,000 or $0.23 per share, compared to $3.0 million or $0.86 per share for the previous quarter, a decrease of $2.2 million or $0.63 per share. Return on average assets was 0.24% and return on average equity was 3.70% for the three months ended September 30, 2024. Both ratios are lower than those reported for the second quarter 2024. The decline in net income is attributed primarily to a provision for credit losses of $902,000 compared to a recovery of $458,000 recorded in the second quarter which combined to increase provision expense by $1.4 million. In addition, we recorded $930,000 in one-time expenses, consisting of $193,000 in severance expense for a former bank officer and a $737,000 expense related to an external fraud event. The after-tax impact of these two events on net income lowered third quarter net income by $735,000 as compared to the second quarter. Noninterest income declined $238,000 from the previous quarter due to lower income from investment services, insurance and mortgage banking. Non-interest expenses increased by $1.5 million due to the previously mentioned one-time items and higher employee benefits expenses which included $577,000 in pension distribution gains in the second quarter. Net interest income before the provision for credit losses increased by $294,000 on a linked quarter basis.

Net income for the three months ended September 30, 2024 decreased by $226,000 or $0.06 per share from the $1.0 million or $0.29 per share reported for same quarter in 2023. Return on average assets declined by 0.08% and return on average equity decreased by 2.10%. These results reflect an increase of $513,000 in net interest income, an increase of $282,000 in the provision for credit losses, an increase of $241,000 in noninterest income and an increase of $764,000 in noninterest expenses due to the severance and fraud loss expenses recorded in the third quarter 2024.

For third quarter 2024, net interest income totaled $8.5 million, an increase of $294,000 from second quarter 2024, as a $570,000 increase in interest income outpaced a $276,000 increase in interest expense. Net interest margin for the quarter ending September 30, 2024 was 2.77%, up five basis points from the quarter ending June 30, 2024. Higher loan balances and repricing of adjustable-rate loans contributed to a $339,000 increase in loan interest income. Higher balances in federal funds sold and interest bearing overnight cash balances increased interest income on cash and securities. The earning asset yield increased by ten basis points to 5.29%. Cost of funds increased by three basis points to 2.54%. Total interest expense increased by $276,000, a combination of a $489,000 increase in interest expense on deposits and a $213,000 decrease in interest expense on short-term debt. The increase in interest expense on deposits resulted from growth in time deposit balances. This was partially offset by the decrease in interest expense on short-term debt as Federal Home Loan Bank (“FHLB”) advances declined from $20.0 million on June 30, 2024, to $15.0 million on September 30, 2024.

Compared to third quarter 2023, net interest margin increased by seven basis points due to growth in the average balances of loans, federal funds sold and overnight cash. Loans as a percentage of earning assets increased to 68% in third quarter 2024 from 66% in third quarter 2023. Interest income increased $1.7 million, and the earning asset yield increased by 37 basis points. Interest expense grew by $1.2 million, and the cost of funds increased by 33 basis points as growth in both the average balances of and rates paid on time deposits was partially offset by a decline in FHLB advances.

During third quarter 2024, the Bank recorded a $902,000 provision for credit losses compared to a $458,000 recovery of credit losses in second quarter 2024 and a $620,000 provision in third quarter 2023. The current quarter provision was the result of a $7.4 million increase in the balances of pooled loans used in the Bank’s Allowance for Credit Losses on Loans (“ACLL”) model and net charge-offs of $657,000. There were no significant changes in the qualitative factors used in the ACLL model during the quarter; the reserve on one individually reviewed loan increased $20,000. By comparison, the second quarter recovery was due to the release of $608,000 in reserves related to the improvement in the collateral value of an individually evaluated loan relationship, net loan charge-offs totaling $179,000, slower loan growth, and an improvement in the experience, depth and ability of lending management qualitative factor. In third quarter 2023, the provision was driven by net charge-offs of $193,000 and growth of $29.3 million in gross loans.

Noninterest income, which includes gains and losses, totaled $2.7 million for third quarter 2024, a decrease of $238,000 from second quarter 2024. Investment services and insurance income declined by $148,000, mortgage banking income declined by $91,000 and income from ATM and check card fees decreased by $28,000. Service charges on deposits increased by $25,000. The other categories of noninterest income combined to increase noninterest income by $4,000.

Compared to third quarter 2023, noninterest income increased $241,000 from $2.5 million. The increase resulted from increases of $61,000 in service charges on deposit accounts, $105,000 in investment services and insurance income, and $139,000 in mortgage banking income. Other operating income declined by $89,000. Smaller year-over-year changes in other categories combined to increase noninterest income by $25,000.

Noninterest expenses totaled $9.7 million for third quarter 2024, compared to $8.2 million for second quarter 2024, an increase of $1.5 million. During the third quarter, we recorded $930,000 in one-time expenses, consisting of $193,000 in severance expense for a former bank officer and a $737,000 expense related to an external fraud event. During second quarter 2024, the Bank recognized $577,000 in gains from lump sum pension distributions, which lowered employee benefits expense by $547,000. Salaries expense increased by $211,000 due to the severance expense for a former bank officer. Employee benefits expense increased by $659,000 due to the pension related gains in the second quarter. Other operating expenses increased by $687,000, driven by the fraud loss. ATM and check card expenses increased by $73,000, telecommunication and data processing expenses increased by $60,000 and marketing expenses were $35,000 higher than in the prior quarter. There were decreases of $170,000 in legal and professional fees and $33,000 in equipment expenses. Other changes in noninterest expense categories combined to decrease total noninterest expenses by $21,000.

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Compared to the same quarter in 2023, noninterest expenses increased $763,000 from $8.9 million. Salary expense was $154,000 lower than last year as $193,000 in severance offset a portion of the cost savings derived from the voluntary early retirement program implemented in fourth quarter 2023. Other operating expenses increased $635,000, due to the previously mentioned fraud loss. There were also increases of $103,000 in employee benefits expense, $182,000 in telecommunications and data processing expense, $43,000 in occupancy expenses, $28,000 in equipment expenses, $32,000 in FDIC insurance assessment expense and $66,000 in bank franchise tax expense. There were decreases of $68,000 in advertising expenses, $24,000 in legal and professional fees, $53,000 in ATM and check card fees, and $27,000 in director fees expense.

Year-to-Date Income Statement Discussion

Net income for the nine months ended September 30, 2024 was $5.0 million or $1.44 per share, compared to $2.3 million or $0.67 per share for the same period in 2023, an increase of $2.7 million or $0.77 per share. Year-to-date return on average assets was 0.51% and return on average equity was 8.37%. Both ratios are higher than those reported for the same period of 2023. The improvement in net income is attributed primarily to lower noninterest expenses, which declined by $2.0 million to $26.3 million. Net interest income and noninterest income also improved by $1.2 million and $470,000, respectively. The year-to-date provision for credit losses increased from $1.2 million in 2023 to $1.3 million in 2024.

Year-to-date net interest income totaled $24.8 million, an increase of $1.2 million from 2023, as a $6.4 million increase in interest income outpaced a $5.1 million increase in interest expense. Net interest margin was 2.74%, up two basis points from the 2.72% reported for 2023. Higher loan balances and repricing of adjustable-rate loans contributed to a $5.8 million increase in loan interest income, which represented most of the increase in interest income and increased the earning asset yield by fifty-one basis points to 5.24%. Cost of funds increased by fifty basis points to 2.51%. Total interest expense increased by $5.1 million, due to growth in both the average balances of and rates paid on time deposits.

During the first nine months of 2024, the Bank recorded a $1.3 million provision for credit losses compared to a $1.2 million provision in the same period in 2023. The provision for 2024 was the result of $8.6 million in loan growth and $1.6 million in net charge-offs, which were partially offset by the release of $608,000 in reserves related to improvement in the collateral value of a $2.8 million individually evaluated loan relationship that no longer requires an allowance for credit losses. There were no significant changes in the reserves on individually analyzed loans; there was improvement in the experience, depth and ability of lending management qualitative factor in in second quarter of 2024.

Year-to-date noninterest income, which includes gains and losses, totaled $8.1 million in 2024, an increase of $470,000 from the same period in 2023. Several categories of noninterest income increased on a year-over-year basis. Service charges on deposit accounts increased by $126,000, investment services and insurance income increased by $449,000, mortgage banking income increased by $231,000, title insurance income increased by $138,000, ATM and check card fees increased by $43,000 and low-income partnership losses decreased by $27,000. Income on bank owned life insurance declined by $425,000 due to the gains received in 2023 on a death benefit and other operating income decreased by $119,000.

Noninterest expenses totaled $26.3 million for the first nine months of 2024, compared to $28.3 million for the same period of 2023, a decrease of $2.0 million. Salary expense declined by $1.9 million due to cost savings associated with a voluntary early retirement program implemented in fourth quarter of 2023 and lower severance expenses. Employee benefits expense declined by $815,000 due to a combination of the voluntary early retirement program, $577,000 in gains from lump sum pension distributions, and a refund of $162,000 received in March 2024 due to better than projected group health insurance claims in 2023. There were declines of $299,000 in advertising expenses, $133,000 in ATM and check card fees, and $90,000 in directors’ fees. There were increases of $491,000 in other operating expenses, $233,000 in FDIC insurance expense, $175,000 in occupancy expenses, $146,000 in telecommunications and data processing expenses, and $130,000 in bank franchise tax expense. There were other changes in noninterest expense categories that combined to increase total noninterest expenses by $38,000.

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Net Interest Income and Net Interest Margin

For the first nine months of 2024, tax-equivalent net interest income¹ was $24.9 million, an increase of $1.2 million compared to the same period in 2023. This resulted in a slight increase in the net interest margin, from 2.72% to 2.74%. Tax-equivalent interest income and fees on loans rose by $5.9 million, driven by higher rates on variable-rate loans and a $58.5 million increase in the average balance of loans and loans held for sale. Tax-equivalent interest income from federal funds sold, interest-bearing deposits with other banks, and securities increased by $503,000, reflecting higher interest rates and increased average balances in federal funds sold and interest-bearing deposits with other banks. The earning asset yield for the first nine months of 2024 was 5.24%, compared to 4.73% for the same period in 2023.

Interest expense rose by $5.1 million in the first nine months of 2024 to $22.8 million, primarily due to higher market interest rates and an increase in the average balance of time deposits by $127.7 million. This growth in time deposits shifted the deposit mix away from noninterest-bearing demand and lower-cost deposits. Consequently, the cost of funds increased to 2.51% for the period, compared to 2.01% in 2023.

In the third quarter of 2024, tax-equivalent net interest income totaled $8.5 million, an increase of $525,000 compared to the third quarter of 2023. The net interest margin for the three months ended September 30 was 2.77% in 2024, up from 2.69% in 2023. Tax-equivalent interest income for the quarter reached $16.3 million, up from $14.6 million in the same quarter last year. This increase was driven by an additional $1.4 million in tax-equivalent interest and fee income on loans, resulting from a $39.3 million rise in average balances of loans and loans held for sale. Tax-equivalent interest income from interest-bearing deposits with other banks and securities rose by $329,000, as average balances of fed funds sold and interest-bearing deposits with other banks increased by $33.0 million, while the average balance of securities declined by $25.1 million due to bond maturities and mortgage-backed securities paydowns. This shift in the earning asset mix, along with higher market interest rates, contributed to an earning asset yield of 5.29% for the current quarter, compared to 4.92% for the same quarter in the prior year.

Total interest expense for the third quarter of 2024 was $7.8 million, an increase of $1.2 million compared to the third quarter of 2023. This increase was primarily driven by higher interest expense on time deposits, which rose by $2.2 million. In contrast, interest expense on interest-bearing demand, savings, and money market accounts declined by $519,000. This shift reflects both higher rates paid on time deposits and a reallocation of funding from lower-costing deposits to time deposits. Additionally, interest expense on borrowings declined by $460,00 due to paydowns of $5.0 million in FHLB debt during the quarter.

Comparing the two quarters, the average balance of noninterest-bearing deposits declined by $4.4 million, while the average balance of time deposits increased by $129.8 million. This shift contributed to an increase in the cost of funds, rising to 2.54% in the third quarter of 2024, up from 2.21% in the same quarter of 2023.

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¹Tax equivalent net interest income is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for additional information and a reconciliation to the most closely related GAAP measure.

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The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

	Nine Months Ended September 30, 2024							Nine Months Ended September 30, 2023							Three Months Ended September 30, 2024							Three Months Ended September 30, 2023
	Average Balances⁵		Income/ Expense		Average Rates¹			Average Balances⁵		Income/ Expense		Average Rates¹			Average Balances⁵		Income/ Expense		Average Rates¹			Average Balances⁵		Income/ Expense		Average Rates¹
INTEREST INCOME
Loans held for investment^2,3,4	$	824,961	$	40,707		6.59	%	$	767,299	$	34,903		6.08	%	$	825,511	$	13,842		6.67	%	$	787,607	$	12,512		6.30	%
Loans held for sale		3,430		123		4.79	%		2,610		66		3.38	%		4,294		60		5.56	%		2,914		18		2.45	%
Federal funds sold		21,748		891		5.47	%		5,031		186		4.94	%		38,425		518		5.36	%		4,390		54		4.88	%
Interest bearing deposits		6,746		357		7.07	%		5,649		298		7.05	%		4,420		55		5.00	%		5,439		108		7.88	%
Investments
Taxable ⁴		342,684		5,223		2.04	%		372,392		5,481		1.97	%		339,701		1,645		1.93	%		364,642		1,808		1.97	%
Tax exempt		16,226		397		3.27	%		14,291		400		3.74	%		16,189		226		5.55	%		16,337		145		3.52	%
Total Earning Assets	$	1,215,795	$	47,698		5.24	%	$	1,167,272	$	41,334		4.73	%	$	1,228,540	$	16,346		5.29	%	$	1,181,329	$	14,645		4.92	%

INTEREST EXPENSE
Deposits
Demand-interest bearing		135,463		1,807		1.78	%		172,078		2,444		1.90	%		137,457		646		1.87	%		168,159		878		2.07	%
Savings		487,909		9,690		2.65	%		507,290		9,881		2.60	%		482,334		3,219		2.66	%		510,752		3,506		2.72	%
Time deposits		278,868		9,231		4.42	%		151,135		2,734		2.42	%		309,968		3,575		4.59	%		180,197		1,420		3.13	%
Total interest-bearing deposits		902,240		20,728		3.07	%		830,503		15,059		2.42	%		929,759		7,440		3.18	%		859,108		5,804		2.68	%

Federal funds purchased		277		8		3.86	%		727		32		5.88	%		-		-		0.00	%		961		15		6.19	%
Short-term debt		40,894		1,683		5.50	%		57,901		2,185		5.05	%		17,283		241		5.55	%		50,250		686		5.42	%
Long-term debt		6,948		347		6.67	%		6,905		343		6.64	%		6,958		116		6.63	%		6,916		116		6.65	%
Total interest-bearing liabilities	$	950,359	$	22,766		3.20	%	$	896,036	$	17,619		2.63	%	$	954,000	$	7,797		3.25	%	$	917,235	$	6,621		2.86	%

Tax equivalent net interest income ⁶			$	24,932						$	23,715						$	8,549						$	8,024

Net interest margin						2.74	%						2.72	%						2.77	%						2.69	%

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¹ Annualized.

² Interest income on loans includes loan fees.

³ Loans held for investment include nonaccrual loans.

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

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

⁶Tax equivalent net interest income is a non-GAAP financial measure. For more information, see “Non-GAAP Financial Measures” below.”

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Non-GAAP Financial Measures

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow. These non-GAAP measures should not be viewed as a substitute for measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

	September 30, 2024						September 30, 2023
GAAP Financial Measurements:	Nine Months			Three Months			Nine Months			Three Months
Interest Income – Loans	$	40,801		$	13,893		$	34,935		$	12,516
Interest Income - Securities and Other Interest-Earnings Assets		6,785			2,397			6,281			2,085
Interest Expense – Deposits		(20,728	)		(7,440	)		(15,059	)		(5,804	)
Interest Expense - Other Borrowings		(2,038	)		(357	)		(2,560	)		(817	)
Total Net Interest Income	$	24,820		$	8,493		$	23,597		$	7,980

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income – Loans & Securities		112			56			118			44
Total Tax Benefit on Tax-Exempt Interest Income		112			56			118			44
Tax Equivalent Net Interest Income	$	24,932		$	8,549		$	23,715		$	8,024

Balance Sheet Review

Overview

On September 30, 2024, assets totaled $1.34 billion, an increase of $50.0 million over December 31, 2023. Total loans increased by $8.6 million to $830.7 million, including increases of $13.8 million in other construction and land development loans, $1.7 million in loans secured by farmland, $1.6 million in 1-4 family revolving loans, $9.3 million in residential mortgage loans, $2.7 million in multifamily loans, $2.6 million in loans to farmers, and $12.9 million in commercial and industrial loans. These increases were offset by decreases of $3.8 million in residential construction loans, $17.5 million in commercial real estate loans, $12.0 million in automobile loans, $2.2 million in other consumer loans, and $0.5 million in municipal loans.

Investment securities increased by $7.5 million due to purchases of $18.0 million, combined with amortization, paydowns on U.S. Agency mortgage-backed securities and expected bond maturities of $21.9 million, and a decrease of $11.4 million in unrealized loss on the bond portfolio. On September 30, 2024, the unrealized loss was $29.0 million compared to $40.2 million on December 31, 2023.

Total deposits on September 30, 2024, were $1.22 billion, an increase of $85.1 million from the end of 2023, due to growth of $78.5 million in interest bearing deposits, specifically time deposits, and an increase of $6.5 million in noninterest bearing deposits.

Shareholders’ equity increased by $11.7 million to $90.0 million due to net income of $5.0 million, a decrease in accumulated other comprehensive loss of $9.0 million, $206,000 in shares issued, and $131,000 in stock-based compensation expense. These increases were offset by the $2.7 million in dividends paid to shareholders.

Securities Available for Sale (“AFS”)

The Company’s available-for-sale (AFS) securities portfolio is reported at fair value, based on market prices of comparable instruments. This portfolio mainly includes U.S. Treasury securities, U.S. agency and mortgage-backed securities issued by federal agencies, as well as municipal bonds and corporate debt securities. As of September 30, 2024, the total AFS securities were $376.2 million, up from $368.7 million on December 31, 2023.

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This represents an increase of $7.5 million, or 2.0%. The average balance of the AFS securities portfolio during the first nine months of 2024 was $358.9 million, compared to $386.7 million during the same period in 2023. The average AFS securities portfolio accounted for 29.5% and 33.1% of average earning assets as of September 30, 2024, and 2023, respectively. The decrease in AFS securities is primarily due to maturities and expected paydowns on mortgage-backed securities in the bond portfolio. Net unrealized losses related to the fair value of AFS securities were $28.8 million as of September 30, 2024, compared to $40.2 million as of December 31, 2023. This unrealized loss is attributed to rising market interest rates rather than credit quality. During the period, $22.0 million in mortgage-backed securities and municipal bonds matured or were paid down, of which $18.0 million was reinvested in higher-yielding bonds. Scheduled maturities and paydowns are expected to total $70.7 million in the last quarter of 2024 and $59.3 million in 2025. The portfolio’s weighted average life is 4.24 years, with a modified duration of 3.41 years.

Loan Portfolio

The Company operates in a diverse local economy supported by various industries, including agribusiness, manufacturing, services, and several universities and colleges. The Bank is an active lender for residential mortgages and residential construction and typically provides commercial loans to small and mid-size businesses and farms within its primary service area. Additionally, the Bank offers automobile and recreational vehicle loans through its Dealer Finance division.

Loans Held for Investment totaled $830.7 million at September 30, 2024 and increased $8.6 million from $822.1 million at December 31, 2023. As a percentage of average earning assets, average loans were 67.9% for the nine months ended September 30, 2024, compared with 65.7% for the nine months ended September 30, 2023.

Loans Held for Sale totaled $2.3 million as of September 30, 2024, an increase of $1.2 million from $1.1 million on December 31, 2023. This category consists of F&M Mortgage loans, which are affected by interest rate changes, seasonal trends, and refinancing activity. All mortgage loans held for sale have been precommitted to investors, effectively minimizing interest rate risk.

The Company’s loans held for investment portfolio is well-diversified, with first-lien, amortizing residential mortgage loans as the largest segment, representing 25.04% of total loans. Commercial real estate loans, including both owner-occupied and non-owner-occupied properties, comprise $181.1 million, or 21.8% of the portfolio. Automobile loans, originated through the Company’s dealer finance division, total $111.0 million, accounting for 13.36% of the portfolio. Following is a breakdown of the loan portfolio composition as of September 30, 2024, and December 31, 2023 (dollars in thousands):

	September 30, 2024						December 31, 2023
Loan Segment	Balance			Percentage of Portfolio			Balance			Percentage of Portfolio
1-4 Family residential construction	$	26,649			3.21	%	$	30,488			3.71	%
Other construction, land development and land		61,568			7.41	%		47,749			5.80	%
Secured by farmland		83,326			10.02	%		81,657			9.92	%
Home equity – open end		47,396			5.70	%		45,749			5.56	%
Real estate		208,199			25.04	%		200,629			24.38	%
Home Equity – closed end		6,532			0.79	%		4,835			0.59	%
Multifamily		10,942			1.32	%		8,203			1.00	%
Owner-occupied commercial real estate		82,577			9.93	%		92,362			11.23	%
Other commercial real estate		98,527			11.85	%		106,181			12.91	%
Agricultural loans		16,994			2.04	%		14,405			1.75	%
Commercial and industrial		57,257			6.89	%		44,329			5.39	%
Credit Cards		3,270			0.39	%		3,252			0.40	%
Automobile loans		110,952			13.35	%		122,924			14.94	%
Other consumer loans		12,153			1.46	%		14,376			1.75	%
Municipal loans		5,059			0.61	%		5,625			0.68	%
Gross loans	$	831,401			100.00	%	$	822,764			100.00	%
Unamortized deferred net loan fees		(684	)					(672	)
Loans held for sale	$	830,717					$	822,092

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Provision for Credit Losses

The provision for credit losses represents the expense charged to current earnings to support the allowance for credit losses and the reserve for unfunded commitments. The allowance for credit losses is based on various factors that reflect management’s assessment of the risk within the loan portfolio. These factors include historical loss data, both internal and from peer institutions; forecasted economic conditions and trends; collateral adequacy and value; portfolio volume and composition; portfolio performance; and the Company’s and Bank’s internal loan processes. The reserve for unfunded commitments is based on the likelihood that these commitments will be utilized.

Management has implemented a comprehensive analytical process to evaluate the adequacy of the allowance for credit losses. This process and its guidelines are informed by federal banking regulatory guidance, along with relevant information from both internal and external sources, which consider past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience forms the basis for estimating expected credit losses. Adjustments to historical loss data are made to account for variations in current loan-specific risk factors, such as underwriting standards, portfolio composition, loan concentrations, credit quality, and loan term, as well as changes in environmental factors like unemployment rates, property values, or other relevant conditions. For more details on these forecasts, see the “Allowance for Credit Losses - Loans" section in Note 1 of the Consolidated Financial Statements.

The results of this process, combined with findings from the Bank’s external loan review of inherent risks in the loan portfolio, support management’s assessment of the adequacy of the allowance at the balance sheet date. For an overview of the methodology management uses to assess the allowance adequacy on a quarterly basis and the provisions charged to expense, see the “Critical Accounting Policies” section above and Note 1 of the Consolidated Financial Statements. Additionally, refer to the table “Allowance for Credit Losses” in Note 4 of the Consolidated Financial Statements, which details activity in the allowance for credit losses.

The current quarter provision for credit losses of $902,000 was a combination of $869,000 provision for the allowance for loan credit losses, plus $33,000 provision for the allowance for unfunded commitments. The current quarter provision of $869,000 was driven by net loan charge-offs of $657,000, loan growth, and a $20,000 increase in the reserve for an individually reviewed loan. There were no significant changes in the environmental factors. As of September 30, 2024, year-to-date net charge-offs totaled $1.6 million, up from $703,000 during the nine month period ended September 30, 2023. Gross loans increased by $4.4 million in the third quarter of 2024 and by $7.5 million since December 31, 2023. As of September 30, 2024, the allowance for credit losses on loans (ACLL) was $8.0 million, or 0.97% of gross loans outstanding, compared to $8.3 million, or 1.01% of gross loans outstanding, as of December 31, 2023.

The reserve for unfunded commitments decreased from $690,000 at December 31, 2023, to $608,000 at September 30, 2024, due to decreases in loan commitments of $12.1 million in commercial and industrial loans and $1.4 million in 1-4 family construction, which were offset by an increase of $3.1 million in commitments for farmland and $2.2 million in owner-occupied commercial real estate.

Nonperforming Assets

Nonperforming loans consist of nonaccrual loans and loans that are 90 days or more past due. Nonaccrual loans are those on which interest accruals have been suspended or permanently discontinued. As of September 30, 2024, nonperforming loans totaled $6.6 million, compared to $6.5 million on December 31, 2023. At year-end 2023, nonperforming loans included a large relationship secured by owner-occupied commercial real estate and equipment, totaling $3.6 million. This balance was reduced to $2.1 million by September 30, 2024, through the liquidation of equipment held as collateral, and did not require an allowance for credit losses as of that date. Additionally, smaller loans totaling $4.4 million were nonperforming as of September 30, 2024. The nonaccrual loan coverage ratio decreased to 122.06% from 129.25%. For more details on nonperforming loans by segment, see “Loans and Credit Quality” in Note 3 of the Consolidated Financial Statements.

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A summary of credit ratios for nonaccrual loans is as follows (dollars in thousands):

	September 30, 2024			December 31, 2023
Allowance for credit losses	$	8,028		$	8,321
Nonaccrual loans	$	6,577		$	6,438
Nonperforming loans	$	6,578		$	6,469
Nonperforming assets	$	6,578		$	6,524
Total loans	$	830,717		$	822,092

Allowance for credit losses to total loans		0.97	%		1.01	%
Nonaccrual loans to total loans		0.79	%		0.78	%
Allowance for credit losses to nonaccrual loans		122.06	%		129.25	%

Deposits and Other Borrowings

The Company's main source of funding consists of deposits received from individuals, governmental entities and businesses located within the Company's service area. Deposit accounts include demand deposits, savings, money market, and certificates of deposit. Total deposits were $1.22 billion and $1.13 billion at September 30, 2024 and December 31, 2023, respectively. Noninterest bearing deposits increased $6.5 million while interest bearing deposits increased $78.5 million. Total deposits increased $85.0 million from the end of 2023, as the Bank was able to attract deposits by offering competitive rates on time deposits.

The Bank participates in the ICS (Insured Cash Sweep) programs and CDARS (Certificate of Deposit Account Registry Service). These programs, ICS for demand and savings and CDARS for certificates of deposit, 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. On September 30, 2024 and December 31, 2023, the bank held $97.5 million and $95.5 million in ICS accounts, respectively. The Bank did not hold any customer deposits in CDARS on September 30, 2024, and $258,000 in CDARS accounts on December 31, 2023. On September 30, 2024, 10.98% of the Company’s total deposits were uninsured deposits.

Short-term borrowings

The Company utilizes short-term debt, including Federal funds purchased and FHLB short-term borrowings, to maintain liquidity. Federal funds purchased are unsecured overnight borrowings from other financial institutions. FHLB short-term debt, secured by the Company’s loan portfolio, may take the form of a daily rate variable loan, which acts as a line of credit, or a fixed rate advance, depending on the Company’s needs. As of September 30, 2024, and December 31, 2023, the Company had $15.0 million and $60.0 million of FHLB advances, respectively.

Long-term borrowings

On July 29, 2020, the Company sold and issued to an institutional accredited investor a 6.00% fixed to floating rate subordinated note due July 31, 2030 with an aggregate principal amount of $7.0 million. The note initially bears interest at 6.00% per annum, beginning July 29, 2020 but excluding July 31, 2025, payable semi-annually in arrears. From and including July 31, 2025 through July 30, 2030, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. The note will mature on July 31, 2030. The subordinated note, net of issuance costs totaled $6.97 million and $6.93 million at September 30, 2024 and December 31, 2023.

Capital

Banking regulators have established a uniform system to assess capital adequacy for financial institutions, setting minimum capital requirements based on risk-adjusted assets. Failure to meet these minimum requirements can trigger mandatory and possibly additional discretionary regulatory actions, which could materially impact the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must adhere to specific capital guidelines that incorporate quantitative measures of its assets, liabilities, and certain off balance-sheet items, as determined under regulatory accounting practices. Additionally, the Bank’s capital amounts and classification are subject to regulators’ qualitative assessments regarding components, risk weightings, and other factors.

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Under the Basel III rules, the Company must maintain a capital conservation buffer above the adequately capitalized risk-based capital ratios, set at 2.50%. As of September 30, 2024, the Company’s capital conservation buffer was 5.23%, compared to 4.58% on December 31, 2023. This buffer is intended to enhance an institution’s financial resilience across economic cycles. Financial institutions are required to maintain this minimum buffer under Basel III final rules to avoid restrictions on capital distributions and certain other payments.

At September 30, 2024, the Bank exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well capitalized” for purposes of the federal bank regulatory prompt corrective action regulations. The Bank’s common equity Tier 1 and Tier 1 capital ratios were both 12.28%, its total capital ratio was 13.23%; the leverage ratio was 8.20%.

Liquidity

Liquidity represents an institution’s ability to meet current and future financial obligations by either selling or maturing assets or obtaining additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, loans held for sale, and securities and loans maturing or repricing within one year. The Company also has access to additional liquidity sources, such as borrowing capacity through federal funds lines with several correspondent banks, a line of credit with the FHLB, credit availability at the Federal Reserve Bank, the ability to purchase brokered certificates of deposit, a corporate line of credit with a large correspondent bank, and options for debt and capital issuances. Management believes the Company’s current liquidity position is sufficient to meet depositor requirements and support customers’ credit needs.

The Company’s on-balance sheet asset liquidity includes cash and cash equivalents, unpledged investment securities, and loans held for sale, which totaled $228.3 million at September 30, 2024, up from $178.0 million at December 31, 2023. The Bank had securities with a market value of $210.6 million and $215.6 million pledged to Federal Reserve Bank’s credit programs as of September 30, 2024 and December 31, 2023, respectively. The bank has not utilized these credit programs in 2024 or 2023.

The Bank has access to off-balance sheet liquidity through unsecured Federal funds lines totaling $90.0 million at September 30, 2024, and December 31, 2023. The Bank has a secured line of credit with the Federal Home Loan Bank (FHLB) with available credit of $150.8 million as of September 30, 2024, and $90.1 million as of December 31, 2023. The FHLB line of credit is secured by a blanket lien on qualifying loans in the residential, commercial, agricultural real estate, and home equity portfolios.

The Bank is scheduled to receive $70.7 million from bond paydowns and maturities by the end of 2024 which can be used to fund future loan growth and for other purposes.

The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets.

Market Risk Management

Market risk refers to the sensitivity of a financial institution’s earnings or the economic value of its capital to unfavorable changes in interest rates, exchange rates, and equity prices. For the Company, the primary component of market risk is interest rate volatility. Fluctuations in interest rates affect the interest income earned on assets and the interest expense paid on liabilities. Rapid changes in short-term interest rates can introduce volatility in net interest income, particularly when there are imbalances in the maturity or repricing schedules of interest-bearing liabilities and interest-earning assets, thereby increasing interest rate risk.

The Company manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

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Management uses a simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.

The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:

Change in Prime Rate	% Change in Net Interest Income
+400 basis points		-4.39	%
+ 300 basis points		-3.29	%
+ 200 basis points		-2.16	%
+ 100 basis points		-1.05	%
- 100 basis points		0.43	%
- 200 basis points		0.50	%
- 300 basis points		-1.11	%
- 400 basis points		-3.94	%

Market value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of all assets minus the market value of all liabilities. The change in net market value over different rate environments is an indication of the longer-term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.

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

Change in Prime Rate	% Change in Net Economic Value
+ 400 basis points		-15.32	%
+ 300 basis points		-11.32	%
+ 200 basis points		-7.21	%
+ 100 basis points		-3.78	%
- 100 basis points		1.22	%
- 200 basis points		-0.12	%
- 300 basis points		-5.55	%
- 400 basis points		-5.93	%

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

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

An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At September 30, 2024, the Company had $104.0 million in assets repricing than liabilities subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required

Item 4. Controls and Procedures

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2024. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, 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.

The Company’s directors and executive officers may from time to time enter into plans or other arrangements for the purchase or sale of the Company’s shares that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or may represent a non-Rule 10b5-1 trading arrangement under the Exchange Act. On September 16, 2024, Charles C. Driest, the Company’s Executive Vice President and Chief Experience Officer, adopted a Rule 10b5-1 trading plan. Mr. Driest’s trading plan covers the potential purchase of up to 4,000 shares of the Company’s common stock, and will terminate on December 16, 2026, or an earlier date under certain circumstances specified under the terms of the trading plan, including the completion of all purchases of shares covered by the plan. This trading plan complied with the requirements of Rule 10b5-1(c) under the Exchange Act (the “Rule”) when adopted and the Company’s Insider Trading Policy, was entered into during an open insider trading window, and only permitted transactions upon expiration of the applicable cooling-off period under the Rule. During the quarter ended September 30, 2024, no other director or executive officer of the Company adopted, modified, or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Rule 408(e) of Regulation S-K.

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Item 6. Exhibits.

Exhibits
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	The following materials from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2024, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).
104	The cover page from F&M Bank Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2024, 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. (Registrant)

	By:	/s/ Aubrey M. Wilkerson
		Aubrey M. Wilkerson
		Director and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

November 14, 2024

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F & M Bank (FMBM) 10-Q2024 Q3 Quarterly report

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