Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2022

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”). 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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021 (the “2021 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 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 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 COVID-19 pandemic has had a disruptive impact on the U.S. and global economy since the first quarter of 2020. Since the pandemic is ongoing and dynamic, there are many uncertainties on the potential impacts to our customers, employees and vendors; as well as the economy as a whole. The Company carefully monitors economic impacts attributable to the COVID-19 pandemic and the potential impacts on the Company’s loan portfolio and their borrowers ability to repay their loans.

As the COVID-19 pandemic continues, its magnitude and duration remain uncertain. The risks and uncertainties resulting from the pandemic may adversely the Company’s future operational and financial performance; however, these remain highly uncertain and cannot be predicted.

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. Diluted EPS is similar to the computation of basic EPS except that 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 common share calculation. All of the Company’s outstanding preferred stock was redeemed by the Company for cash or converted to common stock during the fourth quarter of 2021. 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.

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 Six months ended		For the Three months ended		For the Six months ended		For the Three months ended
	June 30, 2022		June 30, 2022		June 30, 2021		June 30, 2021
Earnings available to common stockholders:
Net income	$	4,317	$	1,789	$	7,021	$	3,220
Preferred stock dividends		-		-		131		66
Net income available to common stockholders	$	4,317	$	1,789	$	6,890	$	3,154

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):

	Six months ended June 30, 2022						Six months ended June 30, 2021
	Income		Weighted Average Shares		Per Share Amounts		Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	4,317		3,443,850	$	1.25	$	6,890		3,206,534	$	2.15
Effect of Dilutive Securities:
Convertible Preferred Stock		-		-		-		131		228,118		(0.11	)
Diluted EPS	$	4,317		3,443,850	$	1.25	$	7,021		3,434,652	$	2.04

	Three months ended June 30, 2022						Three months ended June 30, 2021
	Income		Weighted Average Shares		Per Share Amounts		Income		Weighted Average Shares		Per Share Amounts
Basic EPS	$	1,789		3,452,711	$	0.51	$	3,154		3,207,978	$	0.98
Effect of Dilutive Securities:
Convertible Preferred Stock		-		-		-		66		205,327		(0.05	)
Diluted EPS	$	1,789		3,452,711	$	0.51	$	3,220		3,413,305	$	0.93