Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2021

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bank, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc., VBS Mortgage, LLC (dba F&M Mortgage), and VSTitle, LLC and were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  On May 1, 2020 the Bank purchased the noncontrolling interest of VBS Mortgage, LLC and VSTitle, the minority interest for 2020 covers January 1 through March 31, 2020.  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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.  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, 2020 (the “2020 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 in the counties of Rockingham, Shenandoah, and Augusta, and the cities of Harrisonburg, Staunton, Waynesboro and Winchester in Virginia.  Services are provided at twelve branch offices and a Dealer Finance Division. A loan production office in Winchester opened during second quarter 2021. The Company offers insurance, mortgage lending, title insurance and financial services through its subsidiaries, TEB Life Insurance Company, Farmers & Merchants Financial Services, Inc. (“FMFS”), F&M Mortgage, and VSTitle, LLC (“VST”). 

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that 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.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and fair value.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.

Risk and Uncertainties

The coronavirus (“COVID-19”) pandemic spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operating businesses in March 2020 with branch lobby closings, operations and administrative staff working remotely and the use of virtual meetings. Branches reopened on April 12, 2021 for regular business hours and staff returned to their normal office locations. The continuing effects of COVID-19 will likely affect our operations throughout the remainder of 2021, although the extent and significance remain unknown. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may adversely affect our future earnings, cash flows and financial condition, including among others, credit losses resulting from financial stress on borrowers, decreased demand for products and operational failures. In addition, significant assumptions, judgments, and estimates used in the preparation of our financial statements, including those associated with evaluations of goodwill for impairment, and allowance for loan losses, may be subject to adjustments in future periods due to the rapidly changing, uncertain and unprecedented nature of the pandemic.

Reclassification

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

Earnings per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  In calculating diluted EPS, net income available to common stockholders is used as the numerator and the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of conversion of preferred stock is reflected in the diluted earnings per share calculation for the three and nine month periods ended September 30, 2021 and 2020.

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, 2021		September 30, 2021		September 30, 2020		September 30, 2020
Earnings available to common stockholders:
Net income	$	9,358	$	2,337	$	6,127	$	2,206
Non-controlling interest income		-		-		105		-
Preferred stock dividends		196		65		197		65
Net income available to common stockholders	$	9,162	$	2,272	$	5,825	$	2,141

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

	Nine months ended September 30, 2021							Nine months ended September 30, 2020
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	9,162		3,207,916	$	2.86		$	5,825		3,198,691	$	1.82
Effect of Dilutive Securities:
Convertible Preferred Stock		196		228,118		(.14	)		197		222,599		(.06	)
Diluted EPS	$	9,358		3,436,034	$	2.72		$	6,022		3,421,290	$	1.76

	Three months ended September 30, 2021							Three months ended September 30, 2020
	Income		Weighted Average Shares		Per Share Amounts			Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	2,272		3,210,577	$	.71		$	2,141		3,197,718	$	.67
Effect of Dilutive Securities:
Convertible Preferred Stock		65		205,327		(.05	)		65		206,660		(.02	)
Diluted EPS	$	2,337		3,415,904	$	.66		$	2,206		3,404,378	$	.65