1. Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Summary Of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements including the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC (dba F&M Mortgage), (net of non-controlling interest) and VSTitle, LLC and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

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

Nature of Operations

The Company, through its subsidiary Farmers & Merchants Bank (the “Bank”), operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services. As a state chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank. The Bank provides services to customers primarily located in Rockingham, Shenandoah, Page and Augusta Counties in Virginia. Services are provided at thirteen branch offices and a Dealer Finance Division. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance, Inc., Farmers & Merchants Financial Services, Inc. (FMFS), F&M Mortgage, and VSTitle, LLC (VST). The Company purchased VSTitle, a title company headquartered in Harrisonburg, VA with offices in Harrisonburg, Fishersville and Charlottesville, VA on January 1, 2017. VSTitle purchased a small title company in January of 2018.

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangibles, fair value, the valuation of deferred tax assets and liabilities, pension accounting and the valuation of foreclosed real estate. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.

Reclassification

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

Earnings per Share

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

Net income available to common stockholders represents consolidated net income adjusted for preferred dividends declared.

The following table provides a reconciliation of net income to net income available to common stockholders for the periods presented:  

(dollars in thousands)	For the Nine months ended			For the Three months ended			For the Nine months ended		For the Three months ended
	September 30, 2018			September 30, 2018			September 30, 2017		September 30, 2017
Earnings available to common stockholders:
Net income	$	6,165		$	2,500		$	7,274	$	2,598
Non-controlling interest income (loss)		(10	)		(15	)		51		48
Preferred stock dividends		310			103			312		103
Net income available to common stockholders	$	5,865		$	2,412		$	6,911	$	2,447

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

	Nine months ended September 30, 2018							Nine months ended September 30, 2017
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	5,865		3,245,032	$	1.81		$	6,911		3,271,863	$	2.11
Effect of Dilutive Securities:
Convertible Preferred Stock		310		359,161		(.10	)		312		362,993		(0.12	)
Diluted EPS	$	6,175		3,604,193	$	1.71		$	7,223		3,634,856	$	1.99

	Three months ended September 30, 2018							Three months ended September 30, 2017
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	2,412		3,229,341	$	.75		$	2,447		3,270,969	$	.75
Effect of Dilutive Securities:
Convertible Preferred Stock		103		358,309		(.05	)		103		361,638		(0.05	)
Diluted EPS	$	2,515		3,587,650	$	.70		$	2,550		3,632,607	$	.70