F&M BANK CORP Management’s Report of Financial Condition and Results of Operations (in thousands of dollars) (Form 10-K)

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The following discussion provides information about the major components of the
results of operations and financial condition, liquidity and capital resources
of F & M Bank Corp. and its subsidiaries. This discussion and analysis should be
read in conjunction with the Consolidated Financial Statements and the Notes to
the Consolidated Financial Statements presented in Item 8, Financial Statements
and Supplementary Information, of this Form 10-K.



Lending Activities



Credit Policies



The principal risk associated with each of the segments of loans in our
portfolio is the creditworthiness of our borrowers. Within each segment, such
risk is increased or decreased, depending on prevailing economic conditions. In
an effort to manage the risk, our loan policy gives loan amount approval limits
to individual loan officers based on their position and level of experience and
to our loan committees based on the size of the lending relationship. The risk
associated with real estate and construction loans, commercial loans and
consumer loans varies, based on market employment levels, fluctuations in the
value of real estate and other conditions that affect the ability of borrowers
to repay indebtedness. The risk associated with real estate construction loans
varies, based on the supply and demand for the type of real estate under
construction.



We have written policies and procedures to help manage credit risk. We have a
loan review policy that includes regular portfolio reviews to establish loss
exposure and to ascertain compliance with our loan policy.



We use a management loans committee and a directors loans committee to approve loans. The Loan Management Committee is comprised of members from senior management, credit administration and senior lenders; the directors’ loan committee is composed of six directors. Both committees approve new, renewed and/or amended loans that exceed executive loan authorizations. The Directors Lending Committee also reviews any changes to our lending policies, which are then approved by our Board of Directors.

Construction and development loans

We make construction loans, primarily residential, and land acquisition and
development loans. The residential construction loans are secured by residential
houses under construction and the underlying land for which the loan was
obtained. The land acquisition and development loans are secured by the land for
which the loan was obtained. The average life of a construction loan is
approximately 12 months, and it is typically re-priced as the prime rate of
interest changes. Construction lending entails significant additional risks,
compared with residential mortgage lending. Construction loans often involve
larger loan balances concentrated with single borrowers or groups of related
borrowers. Another risk involved in construction lending is attributable to the
fact that loan funds are advanced upon the security of the land or home under
construction, which value is estimated prior to the completion of construction.
Thus, it is more difficult to evaluate accurately the total loan funds required
to complete a project and related loan-to-value ratios. To mitigate the risks
associated with construction lending, we generally limit loan amounts to 75% to
90% of appraised value, in addition to analyzing the creditworthiness of our
borrowers. We also obtain a first lien on the property as security for our
construction loans and typically require personal guarantees from the borrower's
principal owners.


Commercial real estate loans



Commercial real estate loans are secured by various types of commercial real
estate in our market area, including multi-family residential buildings,
commercial buildings and offices, shopping centers and churches. Commercial real
estate lending entails significant additional risks, compared with residential
mortgage lending. Commercial real estate loans typically involve larger loan
balances concentrated with single borrowers or groups of related borrowers.
Additionally, the payment experience on loans secured by income producing
properties is typically dependent on the successful operation of a business or a
real estate project and thus may be subject, to a greater extent, to adverse
conditions in the real estate market or in the economy in general. Our
commercial real estate loan underwriting criteria require an examination of debt
service coverage ratios and the borrower's creditworthiness, prior credit
history and reputation. We also evaluate the location of the property securing
the loan and typically require personal guarantees or endorsements of the
borrower's principal owners.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Commercial & Industry – Not real estate



Business loans generally have a higher degree of risk than residential mortgage
loans but have higher yields. To manage these risks, we generally obtain
appropriate collateral and personal guarantees from the borrower's principal
owners and monitor the financial condition of our business borrowers.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from employment and other income and are secured by
real estate whose value tends to be readily ascertainable. In contrast, business
loans typically are made on the basis of the borrower's ability to make
repayment from cash flow from its business and are secured by business assets,
such as real estate, accounts receivable, equipment and inventory. As a result,
the availability of funds for the repayment of business loans is substantially
dependent on the success of the business itself. Furthermore, the collateral for
business loans may depreciate over time and generally cannot be appraised with
as much precision as residential real estate.



Consumer Lending



We offer various consumer loans, including personal loans, automobile loans,
deposit account loans, installment and demand loans, and home equity loans. We
currently originate all of our consumer loans in our geographic market area.



The underwriting standards employed by us for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of their ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount. For home
equity lines of credit and loans we require title insurance, hazard insurance
and, if required, flood insurance.



Residential Mortgage Lending


The Bank makes residential mortgage loans for the purchase or refinance of
existing loans with loan to value limits generally ranging between 80 and 90%
depending on the age of the property, borrower's income and credit worthiness.
Loans that are retained in our portfolio generally carry adjustable rates that
can change every one, three or five years, based on amortization periods of
twenty to thirty years.



Loans Held for Sale


The Bank makes fixed rate mortgage loans with terms of typically fifteen or
thirty years through its subsidiary F&M Mortgage. These loans are funded by F&M
Mortgage utilizing a line of credit at the Bank until sold to investors in the
secondary market. Similarly, the Bank also has a relationship with Northpointe
Bank in Grand Rapids, MI whereby it can purchase fixed rate conforming 1-4
family mortgage loans for short periods of time pending those loans being sold
to investors in the secondary market. These loans have an average duration of
ten days to two weeks, but occasionally remain on the Bank's books for up to 60
days. The Bank began its relationship with Northpointe Bank in 2014 and had a
similar program with a prior bank since 2003. F&M Bank does not share in the
gains on sale of loans for the Northpointe participation and only earns interest
during the holding period.



Dealer Finance Division


In September 2012, the Bank started a loan production office in Penn Laird, VA
which specializes in providing automobile financing through a network of
automobile dealers. The Dealer Finance Division is staffed with officers that
have extensive experience in Dealer Finance. This office is serving the
automobile finance needs for customers of dealers throughout the existing
geographic footprint of the Bank. Approximately eighty dealers have signed
contracts to originate loans on behalf of the Bank. As of year-end 2021, the
division had total loans outstanding of $107,346.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Critical Accounting Policies



General



The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
financial information contained within the statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. The Company's financial
position and results of operations are affected by management's application of
accounting policies, including estimates, assumptions and judgments made to
arrive at the carrying value of assets and liabilities and amounts reported for
revenues, expenses and related disclosures. Different assumptions in the
application of these policies could result in material changes in the Company's
consolidated financial position and/or results of operations.



In addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of these transactions would be the same,
the timing of events that would impact these transactions could change.
Following is a summary of the Company's significant accounting policies that are
highly dependent on estimates, assumptions and judgments.



Allowance for Loan Losses



The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued
when they are probable of occurring and estimable and (ii) ASC 310,
"Receivables", which requires that losses be accrued based on the differences
between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. The Company's
allowance for loan losses is the accumulation of various components that are
calculated based on independent methodologies. All components of the allowance
represent an estimation performed pursuant to either ASC 450 or ASC 310.
Management's estimate of each ASC 450 component is based on certain observable
data that management believes are most reflective of the underlying credit
losses being estimated. This evaluation includes credit quality trends;
collateral values; loan volumes; economic conditions, borrower and industry
concentrations; changes in the experience and depths of lending management and
staff; effects of any concentrations of credit; the findings of internal credit
quality assessments, results from external bank regulatory examinations and
third-party loan reviews. These factors, as well as historical losses and
current economic and business conditions, are used in developing estimated loss
factors used in the calculations.



Allowances for loan losses are determined by applying estimated loss factors to
the portfolio based on management's evaluation and "risk grading" of the loan
portfolio. Specific allowances, if required, are typically provided on all
impaired loans in excess of a defined loan size threshold that are classified in
the Substandard or Doubtful risk grades and on all troubled debt restructurings.
The specific reserves are determined on a loan-by-loan basis based on
management's evaluation of the Company's exposure for each credit, given the
current payment status of the loan, the value of any underlying collateral or
future discounted cash flows.



While management uses the best information available to establish the allowance
for loan and lease losses, future adjustments to the allowance may be necessary
if economic conditions change or, if required by regulators, based upon
information available to them at the time of their examinations. Such
adjustments to original estimates, as necessary, are made in the period in which
these factors and other relevant considerations indicate that loss levels may
vary from previous estimates.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Fair Value



The estimate of fair value involves the use of (1) quoted prices for identical
instruments traded in active markets, (2) quoted prices for similar instruments
in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques using significant
assumptions that are observable in the market or (3) model-based techniques that
use significant assumptions not observable in the market. When observable market
prices and parameters are not fully available, management's judgment is
necessary to arrive at fair value including estimates of current market
participant expectations of future cash flows, risk premiums, among other
things. Additionally, significant judgment may be required to determine whether
certain assets measured at fair value are classified within the fair value
hierarchy as Level 2 or Level 3. The estimation process and the potential
materiality of the amounts involved result in this item being identified as
critical.



Pension Obligations


The accounting guidance for the measurement and recognition of obligations and
expense related to pension plans generally applies the concept that the cost of
benefits provided during retirement should be recognized over the employees'
active working life. Inherent in this concept is the requirement to use various
actuarial assumptions to predict and measure costs and obligations many years
prior to the settlement date. Major actuarial assumptions that require
significant management judgment and have a material impact on the measurement of
benefits expense and accumulated benefit obligation include discount rates,
expected return on assets, mortality rates, and projected salary increases,
among others. Changes in assumptions or judgments related to any of these
variables could result in significant volatility in the Company's financial
condition and results of operations. As a result, accounting for the Company's
pension expense and obligation is considered a significant estimate. The
estimation process and the potential materiality of the amounts involved result
in this item being identified as critical.



COVID-19



The World Health Organization declared a global pandemic in the first quarter of
2020 due to the spread of the coronavirus ("COVID-19") around the globe.  As a
result, the state of Virginia issued a stay at home order in March 2020
requiring all nonessential businesses to shut down and nonessential workers to
stay home.  The Company, while considered an essential business, implemented
procedures to protect its employees, customers and the community and still serve
their banking needs.  Branch lobbies were closed until April 12, 2021. During
this time the Company utilized drive through windows and courier service to
handle transactions, new accounts were opened electronically with limited in
person contact for document signing and verification of identification, and
lenders accepted applications by appointment with limited in person contact as
well. Due to high transmission rates in our service area, branch lobbies were
closed again from January 18, 2022 to March 7, 2022, and only open by
appointment. The Company serviced customers in similar methods as when the
lobbies closed in 2020.



The SBA implemented the Paycheck Protection Program ("PPP") to support small
business operations with loans during the shutdown and into the following
months. The Company worked diligently to support both our customers and
noncustomers within our footprint with these loans. The Company originated a
total of 1,080 PPP loans totaling $87,061 and associated fees of $3,824 through
the SBA program. The fees will be recognized over the life of the associated
loans. As of February 4, 2022, there are 50 loans outstanding with a balance of
$4,767 and unamortized fees of $122.



The full impact of COVID-19 and its length of duration remains uncertain at this
time. The Company is closely monitoring the effects of the pandemic on our
customers. Management assessed the risks in our loan portfolio and worked with
our customers to minimize losses.



The company granted 1,266 modifications allowing principal and interest
deferrals in connection with the COVID-19 related needs from first quarter 2020
to first quarter 2021. These modifications, 75% of which were short-term dealer
loan modifications, were consistent with regulatory guidance and/or the CARES
Act. As of January 18, 2022, no loans remain in deferral.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


COVID-19, continued



Based on the Company's capital levels, current underwriting policies, low
loan-to-deposit ratio, loan concentration diversification and rural operating
environment, management believes that it is well positioned to support its
customers and communities and to manage the economic risks and uncertainties
associated with COVID-19 pandemic and remain adequately capitalized.



Given the rapidly changing and unprecedented nature of the pandemic, however,
the Company could experience material and adverse effects on its business,
including as a result of credit deterioration, operational disruptions,
decreased demand for products and services, or other reasons. The extent to
which the pandemic impacts the Company will depend on future developments, which
are highly uncertain and are difficult to predict, including, but not limited
to, its duration and severity, the actions to contain it or treat its impact,
and how quickly and to what extent normal economic and operating conditions
will
resume.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Five-year summary of selected financial data

(Dollars and shares in
thousands, except per share      2021            2020          2019
data)                                                                         20186         20176
Income Statement Data:
Interest and Dividend
Income                        $    35,576      $  36,792     $  38,210     $  36,377     $  33,719
Interest Expense                    4,302          5,728         6,818         4,832         3,897
Net Interest Income                31,274         31,064        31,392        31,545        29,822
(Recovery of) Provision for
Loan Losses                        (2,821 )        3,300         7,405         2,930             -
Net Interest Income After
(Recovery of) Provision for
Loan Losses                        34,095         27,764        23,987        28,615        29,822
Noninterest Income                 12,167         13,103        10,759         8,770         8,517
Low-income housing
partnership losses                   (861 )         (893 )        (839 )        (767 )        (625 )
Noninterest Expenses               33,340         29,939        29,518        26,744        24,719
Income before income taxes         12,061         10,035         4,389         9,874        12,995
Income Tax Expense
(Benefit)                           1,323          1,142          (250 )       1,041         4,202
Net income attributable to
noncontrolling interest                 -           (105 )        (130 )         (10 )         (31 )
Net Income attributable to
F & M Bank Corp.              $    10,738      $   8.788     $   4,509     $   8,823     $   8,762
Per Common Share Data:
Net Income - basic            $      3.25      $    2.66     $    1.32     $    2.60     $    2.68
Net Income - diluted                 3.12           2.56          1.30          2.45          2.41
Dividends Declared                   1.04           1.04          1.02          1.20           .94
Book Value per Common Share         29.42          28.43         27.11         26.68         25.65
Balance Sheet Data:
Assets                        $ 1,219,342      $ 966,930     $ 813,999     $ 779,743     $ 752,894
Loans Held for Investment         662,421        661,329       603,425       638,799       616,974
Loans Held for Sale                 4,887         58,679        66,798        55,910        39,775
Securities                        413,217        117,898        18,015        21,844        41,243
Deposits                        1,080,295        818,582       641,709       591,325       569,177
Short-Term Debt                         -              -        10,000        40,116        25,296
Long-Term Debt                     21,772         33,202        53,201        40,218        49,733
Stockholders' Equity              100,456         95,629        91,575        91,401        91,027
Average Common Shares
Outstanding - basic                 3,245          3,200         3,189         3,238         3,270
Average Common Shares
Outstanding - diluted               3,442          3,429         3,460         3,596         3,632
Financial Ratios:
Return on Average Assets1            0.98 %         0.95 %        0.57 %        1.15 %        1.17 %
Return on Average Equity1           10.84 %         9.46 %        4.93 %        9.67 %        9.89 %
Net Interest Margin                  3.00 %         3.61 %        4.33 %        4.65 %        4.48 %
Efficiency Ratio 2                  75.44 %        67.51 %       69.03 %       66.04 %       64.27 %
Dividend Payout Ratio -
Common                              32.00 %        39.10 %       77.27 %       46.15 %       35.07 %
Capital and Credit Quality
Ratios:
Average Equity to Average
Assets1                              9.05 %        10.08 %       11.48 %       11.90 %       12.10 %
Allowance for Loan Losses
to Loans3                            1.17 %         1.58 %        1.39 %        0.82 %        0.98 %
Nonperforming Loans to
Total Assets4                        0.45 %         0.68 %        0.70 %        1.31 %        0.94 %
Nonperforming Assets to
Total Assets5                        0.45 %         0.68 %        0.89 %        1.62 %        1.21 %
Net Charge-offs to Total
Loans3                               (.01 )%        0.18 %        0.71 %        0.58 %        0.24 %



1 Ratios are primarily based on average daily balances. 2 The efficiency ratio is equal to the non-interest expenses divided by the sum of the

net interest income and equivalent non-interest income. Non-interest income

excludes gains (losses) on securities transactions and LIH partnership losses.

Non-interest expense excludes amortization of intangible assets. 3 Calculated on the basis of loans held for investment purposes, excluding loans held for sale. 4 Calculated on the basis of loans 90 days past due and outstanding loans to Total

Assets.

5 Calculated based on loans 90 days past due, outstanding loans and total OREOs

Assets.

6 The 2018 and 2017 financial information has been adjusted to reflect

correction of an error from prior periods.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Overview


The Company's net income for 2021 totaled $10,738 or $3.25 per common share
(basic), an increase of 22.19% from $8,788 or $2.66 a share (basic) in 2020.
Return on average equity increased in 2021 to 10.84% versus 9.46% in 2020, and
the return on average assets increased from .95% in 2020 to .98% in 2021. The
Company's net income per share (dilutive) totaled $3.12 in 2021, an increase
from $2.56 in 2020.


Changes in net earnings per common share (basic)

                                                   2021         2020
                                                 to 2020      to 2019

Net earnings per ordinary share for the prior year (basic) $2.66 $1.32
Change from differences in: Net interest income

                                  0.06        (0.10 )
Provision for loan losses                            1.89         1.28

Non-interest income, excluding securities gains (0.08 ) 0.72 Non-interest expense

                                (0.16 )      (0.13 )
Income taxes                                        (1.05 )      (0.44 )
Effect of preferred stock dividend                  (0.06 )       0.02
Change in average shares outstanding                (0.01 )      (0.01 )
Total Change                                         0.59         1.34
Net Income Per Common Share (Basic)              $   3.25     $   2.66




Net Interest Income



The largest source of operating revenue for the Company is net interest income,
which is calculated as the difference between the interest earned on earning
assets and the interest expense paid on interest bearing liabilities. Net
interest income increased 0.68% from 2020 to 2021 following a decrease of 1.04%
from 2019 to 2020. The net interest margin is the net interest income expressed
as a percentage of interest earning assets. Changes in the volume and mix of
interest earning assets and interest-bearing liabilities, along with their
yields and rates, have a significant impact on the level of net interest income.
Tax equivalent net interest income for 2021 was $31,385 representing an increase
of $231 or 0.74% over the prior year. A 0.99% decrease in 2020 versus 2019
resulted in total tax equivalent net interest income of $31,154.



In this discussion and in the tabular analysis of net interest income
performance, entitled "Consolidated Average Balances, Yields and Rates," the
interest earned on tax exempt loans and investment securities has been adjusted
to reflect the amount that would have been earned had these investments been
subject to normal income taxation. This is referred to as tax equivalent net
interest income. For a reconciliation of tax equivalent net interest income to
GAAP measures, see the accompanying table.



Tax equivalent income on earning assets decreased $1,196 in 2021 compared to
2020. Loans held for investment, expressed as a percentage of total earning
assets, decreased in 2021 to 63.77% as compared to 76.37% in 2020. During 2021,
yields on earning assets decreased 86 basis points (BP) and the average cost of
interest-bearing liabilities decreased 34BP. Both are a result of the declining
interest rate environment experienced in 2021.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Net interest income, continued



The following table provides detail on the components of tax equivalent net
interest income:



GAAP Financial Measurements:                                     2021          2020

Interest Income - Loans                                        $  32,560     $  35,411
Interest Income - Securities and Other Interest-Earnings
Assets                                                             3,016   

1,381

Interest Expense - Deposits                                        3,336   

4,615

Interest Expense - Other Borrowings                                  966   

1,113

Total Net Interest Income                                         31,274   

31,064

Non-GAAP financial measures: Add: Tax benefit on tax-exempt interest income – Loans and securities

                                                           110    

90

Total Tax Benefit on Tax-Exempt Interest Income                      110   

90

Tax-Equivalent Net Interest Income                             $  31,384   
 $  31,154




Interest Income



Tax equivalent net interest income increased $230 or 0.73% in 2021, after
decreasing 0.99% or $312 in 2020. Overall, the yield on earning assets decreased
0.86%, from 4.27% to 3.41%. Average loans held for investment increased during
2021, with average loans outstanding increasing $7,973 to $667,082. Average real
estate loans decreased 4.20%, commercial loans increased 3.26%, and consumer
installment loans increased 12.29% on average. Average investment securities
increased 288.46%, with average securities outstanding increasing $175,455
to
$236,280.



Interest Expense



Interest expense decreased $1,426 or 24.90% during 2021. The average cost of
funds of 0.60% decreased 34BP compared to 2020, which followed a decrease of
36BP in 2020. Average interest-bearing liabilities increased $105,694 or 17.31%
in 2021. Interest expense on deposits decreased 27.74%, in spite of a 28.17%
increase in average deposits. Interest expense on borrowings decreased 13.21% as
average debt decreased 61.21%. Changes in the cost of funds attributable to rate
and volume variances are reflected in a following table.



The following analysis reveals a decrease in the net interest margin to 3.00% in
2021 from 3.61% in 2020, due to changes in balance sheet mix during the year and
decreases in interest rates in earning assets and interest-bearing liabilities.
The investment portfolio has grown significantly due to the increase in deposits
and a decrease in funding loans held for sale with Northpointe Bank. The rate
environment remained low in 2021 due to uncertainties in the economy.




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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Consolidated balances, yields and average rates1


                                         2021                                     2020
                           Balance       Interest       Rate       Balance      Interest        Rate
ASSETS
Loans2
Commercial               $   246,495     $  11,667       4.73 %   $ 238,722     $  11,165         4.68 %
Real estate
                             298,983        13,506       4.52 %     312,092        15,893         5.09 %
Consumer                     121,604         7,277       5.98 %     108,295         7,124         6.58 %
Loans held for
investment4                  667,082        32,450       4.86 %     659,109        34,182         5.19 %
Loans held for
sale                           3,844           186       4.84 %      45,784         1,298         2.84 %

Investment securities3
Fully
taxable                      228,287         2,739       1.20 %      60,700         1,051         1.73 %
Partially
taxable                          125             1       0.80 %         125             2         1.60 %
Tax exempt                     7,868           168       2.14 %           -             -            - %
Total investment
securities                   236,280         2,908       1.23 %      60,825         1,053         1.73 %

Interest bearing
deposits in
banks                          2,184             3       0.14 %       1,227             3         0.24 %
Federal funds sold           136,705           139       0.10 %      96,127           346         0.36 %
Total Earning Assets       1,046,095        35,686       3.41 %     863,072        36,882         4.27 %

Allowance for loan
losses                        (9,000 )                               (9,433 )
Nonearning assets             57,474                                 67,645
Total Assets             $ 1,094,569                              $ 921,284

LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand -interest
bearing                  $   147,008     $     280       0.19 %   $ 107,961     $     292         0.27 %
Savings                      410,769         1,689       0.41 %     296,403         2,190         0.74 %
Time deposits                129,760         1,367       1.05 %     132,081         2,133         1.61 %
Total interest-bearing
deposits                     687,537         3,336       0.49 %     536,445         4,615         0.86 %

Short­term debt                    -             -         -%         1,776            41         2.31 %
Long-term debt                28,770           966       3.36 %      72,392         1,072         1.48 %
Total interest-bearing
liabilities                  716,307         4,302       0.60 %     610,613

5,728 0.94%

Noninterest bearing
deposits                     263,911                                203,312
Other liabilities             15,258                                 14,484
Total
liabilities                  995,476                                828,409
Stockholders' equity          99,093                                 92,875
Total liabilities and
stockholders'
equity                   $ 1,094,569                              $ 921,284

Net interest
earnings                                 $  31,384                              $  31,154

Net yield on interest
earning assets (NIM)
                                                         3.00 %                                   3.61 %




1 Revenues and returns are presented on a tax equivalent basis using

   federal income tax rate of 21%.
2  Interest income on loans includes loan fees.
3  Average balance information is reflective of historical cost and has not been
   adjusted for changes in market value.
4  Includes nonaccrual loans.





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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

The following table illustrates the effect of variations in volumes and prices.


                                             2021 Compared to 2020
                                              Increase (Decrease)
                                         Due to Change           Increase
                                          in Average:               Or
                                      Volume        Rate        (Decrease)

Interest income
Loans held for investment            $    414     $ (2,146 )   $     (1,732 )
Loans held for sale                    (1,191 )         79           (1,112 )
Investment securities
Fully taxable                           2,899       (1,211 )          1,688
Partially taxable                           -           (1 )             (1 )
Tax exempt                                  -          168              168
Interest bearing deposits in banks          2           (2 )              -
Federal funds sold                        146         (353 )           (207 )
Total Interest Income                   2,270       (3,466 )         (1,196 )

Interest expense
Deposits
Demand - interest bearing                 105         (117 )            (12 )
Savings                                   846       (1,347 )           (501 )
Time deposits                           3,408       (4,174 )           (766 )

Short-term debt                           (41 )          -              (41 )
Long-term debt                           (646 )        540             (106 )
Total Interest Expense                  3,672       (5,099 )         (1,426 )
Net Interest Income                  $ (1,402 )   $  1,633     $        230




Note: Volume changes have been determined by multiplying the prior years'
average rate by the change in average balances outstanding. The rate change is
determined by multiplying the current year average balance outstanding by the
change in rate from the prior year to the current year.



Noninterest Income


Non-interest income continues to be an increasingly important factor for the Company in maintaining and growing its profitability. Management is aware of the need to constantly review fee income and develop additional sources of complementary income.



Noninterest income decreased 7.40% or $904, in 2021. The 2021 decrease is due
primarily to a decline in the gross revenue of F&M Mortgage and realized
security losses. The decline in revenue from F&M Mortgage was due to a decrease
in refinance volume. The Company experienced growth in investment services and
insurance income, title insurance income and ATM and check card fees.




         23

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Noninterest Expense


Noninterest expenses increased from $29,939 in 2020 to $33,340 in 2021, an
11.36% increase. Expenses increased primarily in the areas of salaries and
benefits ($2,003), legal and professional expense ($406), telecommunication and
data processing expense ($406), and other operating expenses ($376). Salary
increases were due to expansion into the Winchester and Waynesboro markets; this
also increased legal and professional fees and data processing expenses. Other
operating expenses include loss on the sale of bank property ($112), donation of
bank property ($162) and prepayment penalties on FHLB debt repayments ($228).
Total noninterest expense as a percentage of average assets totaled 3.05% and
3.36% in 2021 and 2020, respectively. Peer group averages (as reported in the
most recent Uniform Bank Performance Report) were 2.40% for 2021 and 2.60%
for
2020.



Provision for Loan Losses



Management evaluates the loan portfolio in light of national and local economic
trends, changes in the nature and volume of the portfolio and industry
standards. Specific factors considered by management in determining the adequacy
of the level of the allowance for loan losses include internally generated and
third-party loan review reports, past due reports and historical loan loss
experience. This review also considers concentrations of loans in terms of
geography, business type and level of risk. Management evaluates nonperforming
loans relative to their collateral value, when deemed collateral dependent, and
makes the appropriate adjustments to the allowance for loan losses when needed.
Due to COVID-19, the Company had added or increased qualitative factors for the
economy and concentrations in industries specifically affected by the virus. The
Company continues to evaluate these factors in light of the changing effects the
virus has on the economy, supply chains, and labor markets. The Company has
experienced improvements in past dues and nonperforming loans since December 31,
2020. Past due loans have decreased $4,609 and nonperforming loans have
decreased $1,029 since December 31, 2020.



 As a result of the above factors, the current year recovery of provision for
loan losses totaled $2,821 compared to a provision of $3,300 for 2020. Net
charge offs decreased from $1,215 in 2020 to net recoveries of $94 in 2021. Net
charge-offs as a percentage of loans held for investment totaled (0.01)% and
0.18% in 2021 and 2020, respectively. The dealer finance charge-off percentage
is the largest category at 0.04% of loans held for investment. Losses in the
dealer finance segment are closely monitored, and due to payment deferrals,
government stimulus programs and record high used car prices, have declined in
2021. As stated in the most recently available Uniform Bank Performance Report
(UPBR), peer group loss averages were 0.04% in 2021 and 0.08% in 2020.



The current levels of the allowance for loan losses reflect net charge-off
activity and other credit risk factors that the Company considers in assessing
the adequacy of the allowance for loan losses. Management will continue to
monitor the effects of COVID-19 and nonperforming, adversely classified and past
due loans to make necessary adjustments to specific reserves and provision for
loan losses should conditions change regarding collateral values or cash flow
expectations.



Balance Sheet


Total assets increased 26.10% during the year to $1,219,342 at December 31,
2021, an increase of $252,412 from $966,930 at December 31, 2020. Cash and cash
equivalents increased $9,713, the AFS security portfolio grew $296,983, net
loans held for investment increased $3,819, and loans held for sale declined
$53,792. Average earning assets increased 21.21% to $1,046,095 for 2021. The
increase in earning assets is due largely to the growth in investment securities
and federal funds sold. Deposits grew $261,713 and non-deposit liabilities
decreased $14,128 in 2021 as the Bank paid off long-term debt with the FHLB.
Average interest-bearing deposits increased $151,092 for 2021 or 28.17%, with
increases in interest-bearing demand accounts and savings while time deposits
declined. The Company continues to utilize its assets well, with 95.57% of
average assets consisting of earning assets.




         24

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Balance Sheet, continued



In January 2021, the Bank entered into an agreement to purchase the operations
of a branch office in Waynesboro, Virginia from Carter Bank & Trust. The Bank
acquired deposits of $14,229 in the transaction and received a cash payment of
$13,758, which was net of a premium paid on deposits of $135. No loans were
included in the transaction. The transaction closed on April 23, 2021; see Note
29 to the consolidated financial statements in this Form 10-K for additional
details on the transaction.



Investment Securities



Due to the deposit growth initiatives implemented in recent years and the
COVID-19 pandemic, management has invested excess funds into securities during
2021. Total securities increased $295,319 or 250.49% in 2021 to $413,217 at
December 31, 2021 from $117,898 at December 31, 2020. Average balances in
investment securities increased 288.46% in 2021 to $236,280. At year end, 22.59%
of average earning assets of the Company were held as investment securities, all
of which are unpledged. Management strives to match the types and maturities of
securities owned to balance projected liquidity needs, interest rate sensitivity
and to maximize earnings through a portfolio bearing low credit risk. Portfolio
yields averaged 1.23% for 2021, compared to 1.73% in 2020; this is due to the
overall market declines in 2021.



There were no Other Than Temporary Impairments (OTTI) write-downs in 2021 or
2020. There were $525 in realized security losses on sales of securities in
2021; there were no realized security gains or loss on sales of securities
in
2020.



Maturities and weighted average yields of securities at December 31, 2021 are
presented in the table below. Amounts are shown by contractual maturity;
expected maturities will differ as issuers may have the right to call or prepay
obligations. Maturities of other investments are not readily determinable due to
the nature of the investment; see Note 4 to the Consolidated Financial
Statements for a description of these investments.



                         Less                    One to                   Five to                    Over
                     Than one Year             Five Years                Ten Years                 Ten Years
                  Amount      Yield1       Amount       Yield1       Amount      Yield1       Amount       Yield1        Total       Yield1

Debt Securities
Available for
Sale:
U.S. Treasuries   $     -                 $  14,895        0.68 %   $ 14,587        0.99 %   $       -                 $  29,482        0.83 %
U.S. Government
sponsored
enterprises             -                    95,313        0.98 %     38,401        1.37 %           -                   133,714        1.09 %
Securities
issued by
States &
political
subdivisions of
the U.S.            2,005        0.21 %      18,181        0.98 %     
3,730        1.63 %      10,421        2.38 %      34,337        1.43 %
Mortgage-backed
obligations of
federal
agencies                -                    18,299        0.92 %     11,678        1.21 %     153,670        1.46 %     183,647        1.39 %
Corporate debt
securities          2,013        2.13 %           -                   19,189        3.19 %       1,500        3.75 %      22,702        3.13 %
Total             $ 4,018        1.17 %   $ 146,688        0.94 %   $ 87,585        1.70 %   $ 165,591        1.54 %   $ 403,882        1.35 %
Debt Securities
Held to
Maturity:
U.S. Treasury &
Agency            $   125        0.52 %   $       -                 $      -                 $       -                 $     125        0.52 %
Total             $   125        0.52 %   $       -                 $      -                 $       -                 $     125        0.52 %



1Tax yield equivalent to the lesser of the date of purchase or the date of maturity. On securities without a redemption date, it is the announced return.


Analysis of Loan Portfolio


The Company's market area has a relatively stable economy which tends to be less
cyclical than the national economy. Major industries in the market area include
agricultural production and processing, higher education, retail sales, services
and light manufacturing.




         25

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Loan portfolio analysis, continued

The Company's market area has a relatively stable economy which tends to be less
cyclical than the national economy. Major industries in the market area include
agricultural production and processing, higher education, retail sales, services
and light manufacturing.



The Company's portfolio of loans held for investment totaled $662,421 at
December 31, 2021 compared with $661,329 at December 31, 2020.  Collateral
required by the Company is determined on an individual basis depending on the
purpose of the loan and the financial condition of the borrower. Real estate
mortgages decreased $23,466 or 14.39%. Construction loans increased $3,769 or
5.27%.  Commercial loans, including agricultural and multifamily loans,
increased 4.25% during 2021 to $279,019; PPP loans decreased from $34,908 at
December 31, 2020 to $7,936 at December 31, 2021. Consumer loans increased
$14,116 or 13.94% mainly due to the dealer finance division loans.  Consumer
loans include personal loans, auto loans and other loans to individuals.



The following table shows the maturities of loans and leases, outstanding as of
December 31, 2021:


                      1 Year or
                         less        1-5 Years       5-15 Years      After 15 Years        Total
Construction/Land
Development           $   39,177     $   25,215     $      8,818     $         2,026     $  75,236
Farmland                   4,851          7,745           37,143              16,605        66,344
Real Estate               24,356         74,824           31,832               8,540       139,552
Multi-Family                   -            241            2,530               2,116         4,887
Commercial Real
Estate                    16,442         52,962           69,670              24,490       163,564
Home Equity -
closed end                 1,187          3,239            1,836                   -         6,262
Home Equity - open
end                        1,965          6,997           34,247               1,038        44,247
Commercial &
Industrial -
Non-Real Estate            9,091         16,023           19,110                   -        44,224
Consumer                   1,014          5,940            1,082                   -         8,036
Dealer Finance             1,976         38,922           66,448                   -       107,346
Credit Cards               3,000              -                -           
       -         3,000
Total                 $  103,059     $  232,108     $    272,716     $        54,815     $ 662,698





26






PART II, Continued



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Loan portfolio analysis, continued



At December 31, 2021, for loans and leases due after one year, interest rate
information is as follows:



                                 1-5 Years       5-15 Years      After 15 Years        Total
Construction/Land Development
Outstanding with fixed
interest rates                   $   12,052     $      1,968     $         1,164     $  15,184
Outstanding with adjustable
rates                                13,163            6,850                 862        20,875
Total Construction/Land
Development                          25,215            8,818               2,026        36,059
Farmland
Outstanding with fixed
interest rates                   $      218     $      4,547     $             -     $   4,765
Outstanding with adjustable
rates                                 7,527           32,596              16,605        56,728
Total Farmland                        7,745           37,143              16,605        61,493
Real Estate
Outstanding with fixed
interest rates                   $      417     $      1,473     $         1,807     $   3,697
Outstanding with adjustable
rates                                74,407           30,359               6,733       111,499
Total Real Estate                    74,824           31,832               8,540       115,196
Multi-Family
Outstanding with fixed
interest rates                   $        -     $          -     $             -     $       -
Outstanding with adjustable
rates                                   241            2,530               2,116         4,887
Total Multi-Family                      241            2,530               2,116         4,887
Commercial Real Estate
Outstanding with fixed
interest rates                   $    1,234     $      7,694     $             -     $   8,928
Outstanding with adjustable
rates                                51,728           61,976              24,490       138,194
Total Commercial Real Estate         52,962           69,670              24,490       147,122
Home Equity - closed end
Outstanding with fixed
interest rates                   $      357     $      1,623     $             -     $   1,980
Outstanding with adjustable
rates                                 2,882              213                   -         3,095
Total Home Equity - closed end        3,239            1,836               
   -         5,075
Home Equity - open end
Outstanding with fixed
interest rates                   $        -     $          -     $             -     $       -
Outstanding with adjustable
rates                                 6,997           34,247               1,038        42,282
Total Home Equity - open end          6,997           34,247              
1,038        42,282
Commercial & Industrial -
Non-Real Estate
Outstanding with fixed
interest rates                   $    5,549     $     12,616     $             -     $  18,165
Outstanding with adjustable
rates                                10,474            6,494                   -        16,968
Total Commercial & Industrial
- Non-Real Estate                    16,023           19,110                   -        35,133
Consumer
Outstanding with fixed
interest rates                   $    5,008     $        633     $             -     $   5,641
Outstanding with adjustable
rates                                   932              449                   -         1,381
Total Consumer                        5,940            1,082                   -         7,022
Dealer Finance
Outstanding with fixed
interest rates                   $   38,922     $     66,448     $             -     $ 105,370
Outstanding with adjustable
rates                                     -                -                   -             -
Total Dealer Finance                 38,922           66,448                   -       105,370
Total outstanding with fixed
interest rates                   $   63,757     $     97,002     $         2,971     $ 163,730
Total outstanding with
adjustable interest rates        $  168,351     $    175,714     $        51,844     $ 395,909
Total                            $  232,108     $    272,716     $        54,815     $ 559,639



Residential real estate loans are made for a period up to 30 years and are
secured by a first deed of trust which normally does not exceed 90% of the
appraised value. If the loan to value ratio exceeds 90%, the Company requires
additional collateral, guarantees or mortgage insurance. On approximately 81% of
the real estate loans, interest is adjustable after each one, three or five-year
period. The remainder of the portfolio is comprised of fixed rate loans that are
generally made for a fifteen-year or a twenty-year period with an interest rate
adjustment after ten years, except for dealer loans that generally have a term
of 5 years.



Fixed rate real estate loans were partially funded with fixed rate borrowings
from the Federal Home Loan Bank, which allowed the Company to control its
interest rate risk. The Company has not had a need for additional funding from
the FHLB due to the growth in deposits, but there may be a time where we match
the maturities in the future. In addition, the Company makes home equity loans
secured by second deeds of trust with total indebtedness not to exceed 90% of
the appraised value. Home equity loans are made for ten or twenty year periods
as a revolving line of credit.




         27

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Loan portfolio analysis, continued



Construction loans may be made to individuals, who have arranged with a
contractor for the construction of a residence, or to contractors that are
involved in building pre-sold, spec-homes or subdivisions. The majority of
commercial loans are made to small retail, manufacturing and service businesses.
Commercial construction loans are made to construct commercial and agricultural
buildings. Consumer loans are made for a variety of reasons; however,
approximately 75% of the loans are secured by vehicles.



Approximately 75% of the Company's loans are secured by real estate; however,
policies relating to appraisals and loan to value ratios are adequate to control
the related risk. Market values continue to be stable with increases in sales
prices, reduction in inventory and reduction in days on the market. Unemployment
rates in the Company's market area continue to be below both the national and
state averages.



The Bank has not identified any loan categories that would be considered loan
concentrations of greater than 25% of capital. The Bank has an approved limit of
16% for dealer loans as a percentage of total loans. The Bank has not developed
a formal policy limiting the concentration level of any other particular loan
type or industry segment; it has established target limits on both a nominal and
percentage of capital basis. Concentrations are monitored and reported to the
board of directors quarterly. Concentration levels have been used by management
to determine how aggressively we may price or pursue new loan requests.



Unaccumulated and overdue loans

Nonperforming loans include nonaccrual loans and loans 90 days or more past due
still accruing. Nonaccrual loans are loans on which interest accruals have been
suspended or discontinued permanently. The Company would have earned
approximately $276 in additional interest income in 2021 had the loans on
nonaccrual status been current and performing. Nonperforming loans totaled
$5,508 at December 31, 2021 compared to $6,537 at December 31, 2020. At December
31, 2021, there were $43 of loans 90 days or more past due and accruing compared
to $102 at December 31, 2020. The remainder of nonperforming loans were on
nonaccrual. Management continues their efforts to reduce nonperforming loans,
which decreased 15.74% from December 31, 2020 to December 31, 2021 and from
0.99% of loans held for investment at December 31, 2020 to 0.83% at December 31,
2021.



Approximately 98.48% of these nonperforming loans are secured by real estate and
were in the process of collection. The Bank believes that adequate specific
reserves have been established on impaired loans and continues to actively work
with its customers to effect payment. As of December 31, 2021 and 2020, the
Company holds $0 of real estate acquired through foreclosure.



A summary of credit ratios for outstanding loans is as follows:



                                                  2021          2020
Allowance for loan losses                       $   7,748     $  10,475
Nonaccrual loans                                $   5,465     $   6,435
Total Loans                                     $ 662,421     $ 661,329

Allowance for loan losses to Total Loans             1.17 %        1.58 %
Nonaccrual Loans to Total Loans                      0.83 %        0.97 %

Allowance for loan losses on unaccrued loans 141.77% 162.78%




         28

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued


Potential Problem Loans



As of December 31, 2021, management is not aware of any potential problem loans
which are not already classified for regulatory purposes or on the watch list as
part of the Bank's internal grading system.



Loan losses and provision for loan losses

Management evaluates the allowance for loan losses on a quarterly basis in light
of national and local economic trends, changes in the nature and volume of the
loan portfolio and trends in past due and criticized loans. Specific factors
evaluated include internally generated loan review reports, past due reports,
historical loan loss experience and changes in the financial strength of
individual borrowers that have been included on the Bank's watch list or
schedule of classified loans.



In evaluating the portfolio, loans are segregated by segment with identified
potential losses, pools of loans by type, with separate weighting for past dues
and a general allowance based on a variety of criteria. Loans with identified
potential losses include examiner and bank classified loans. Classified
relationships in excess of $500,000 and loans identified as troubled debt
restructurings are reviewed individually for impairment under ASC 310. A variety
of factors are considered when reviewing these credits, including borrower cash
flow, payment history, fair value of collateral, company management, industry
and economic factors.



Loans that are not reviewed for impairment are categorized by call report code
and an estimate is calculated based on actual loss experience over the last
three years. As reflected in Note 6, the Company made a change in its allowance
for loan losses methodology to increase the look back period on historical
losses from two years to three years. This revised lookback period more
accurately reflects the average loss history within the portfolio, as loss
history during the most recent two years was impacted by government programs in
response to the COVID-19 pandemic.



A general allowance for inherent losses has been established to reflect other
unidentified losses within the portfolio. The general allowance is calculated
using nine qualitative factors identified in the 2006 Interagency Policy
Statement on the allowance for loan losses. The general allowance assists in
managing recent changes in portfolio risk that may not be captured in
individually impaired loans, or in the homogeneous pools based on loss
histories. The Board approves the loan loss provision for each quarter based on
this evaluation.



The allowance for loan losses of $7,748 at December 31, 2021 is equal to 1.17%
of total loans held for investment. This compares to an allowance of $10,475 or
1.58% of total loans at December 31, 2020. PPP loans are 100% guaranteed by the
SBA; thus, they do not have an allowance. PPP loans totaled $7,936 and $34,908
at December 31, 2021 and 2020, respectively.



During 2021, three relationships reviewed for impairment improved their
collateral and/or cash flow position and were moved to the general allowance;
proceeds were received on one foreclosure sale, sales of collateral to reduce
the debt and amortization; and new appraisals on three relationships decreased
the calculated impairment. Due to COVID-19, the bank increased the qualitative
factor for the economy and concentrations in industries specifically affected by
the virus in 2020. Due to improvements in 2021 in the unemployment rate,
nonperforming, past due and classified loans, and the end of CARES Act
modifications, the bank decreased the environmental factor for COVID-19's impact
on the economy. The Company continues to monitor COVID-19's effects on the labor
market, inflation, the supply chain, government stimulus programs and increased
used car prices. Nonaccrual loans at December 31, 2021 totaled $5,465 compared
to $6,435 at December 31, 2020. Classified loans (internally rated substandard
or watch) decreased from a total of $67,592 at December 31, 2020 to $43,230 at
December 31, 2021, or 36%. This remains above the pre-pandemic total of $41,343.
Management is closely monitoring the effects of COVID-19 on the loan portfolio
and makes adjustments to specific reserves, the environmental factors and the
provision for loan losses as necessary.



Loan recoveries, net of losses, total $94 in 2021, which is equivalent to (0.01)% of total outstanding loans.



         29

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Loan losses and provision for loan losses, continued

Here is a summary of the activity in the allowance for loan losses:



                                                                2021        

2020

Balance at beginning of period                                $  10,475      $   8,390
(Recovery of) Provision charged to expenses                      (2,821 )  
     3,300
Loan losses:
Construction/land development                                         -              7
Farmland                                                              -              -
Real Estate                                                           -            158
Multi-family                                                          -              -
Commercial Real Estate                                                -             64
Home Equity - closed end                                              -              -
Home Equity - open end                                                -             34
Commercial & Industrial - Non-Real Estate                            40    
       138
Consumer                                                             33             89
Dealer Finance                                                    1,038          1,551
Credit Cards                                                         54            123
Total loan losses                                                 1,165          2,164
Recoveries:
Construction/land development                                       307              -
Farmland                                                              -              -
Real Estate                                                          76              7
Multi-family                                                          -              -
Commercial Real Estate                                               19             11
Home Equity - closed end                                              -              -
Home Equity - open end                                               13              3
Commercial & Industrial - Non-Real Estate                            37    
        19
Consumer                                                             24             50
Dealer Finance                                                      754            784
Credit Cards                                                         29             75
Total recoveries                                                  1,259            949
Net loan (losses) recoveries                                         94         (1,215 )
Balance at end of period                                      $   7,748      $  10,475

Net loan (recoveries) losses to average loans held for
investment:
Construction/land development                                      (.05 )%           - %
Farmland                                                              - %            - %
Real Estate                                                        (.01 )%         .02 %
Multi-family                                                          - %            - %
Commercial Real Estate                                                - %          .01 %
Home Equity - closed end                                              - %            - %
Home Equity - open end                                                - %            - %
Commercial & Industrial - Non-Real Estate                             - %  
       .02 %
Consumer                                                              - %          .01 %
Dealer Finance                                                      .04 %          .12 %
Credit Cards                                                          - %          .01 %
Total                                                              (.01 )%         .18 %

Allowance for loan losses as a percentage of loans held for
investment                                                         1.17 %         1.58 %





         30

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Loan losses and provision for loan losses, continued



                  ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES



                                         2021                                2020
                                            Percentage of                      Percentage of
                                            Loans in Each                      Loans in Each
                             Balance           Category          Balance          Category
Construction/Land
Development                 $      977                12.61 %   $   1,249                11.92 %
Farmland                           448                 5.78 %         731                 6.98 %
Real Estate                      1,162                15.00 %       1,624                15.50 %
Multi-Family                        29                  .38 %          54                  .52 %
Commercial Real Estate           2,205                28.46 %       3,662                34.96 %
Home Equity - closed end            41                  .53 %          55                  .53 %
Home Equity - open end             407                 5.25 %         463                 4.42 %
Commercial & Industrial -
Non-Real Estate                    288                 3.72 %         363                 3.46 %
Consumer                           520                 6.71 %         521                 4.98 %
Dealer Finance                   1,601                20.66 %       1,674                15.96 %
Credit Cards                        70                  .90 %          79                  .76 %
Total                       $    7,748               100.00 %   $  10,475               100.00 %




Deposits and Borrowings



The average deposit balances and average rates paid for 2021 and 2020 were as
follows:



                                                             December 31,
                                                   2021                         2020
                                          Average                      Average
                                          Balance         Rate         Balance         Rate

Noninterest-bearing                      $  263,911                   $  203,312

Interest-bearing:
Interest Checking                        $  147,008          0.19 %   $  107,961          0.27 %
Savings Accounts                            410,769          0.41 %      296,403          0.74 %
Time Deposits                               129,760          1.05 %      132,081          1.61 %
Total interest-bearing deposits             687,537          0.48 %      536,445          0.86 %
Total deposits                           $  951,448          0.35 %   $  739,757          0.61 %




Average noninterest-bearing demand deposits, which are comprised of checking
accounts, increased $60,599 or 29.81% from $203,312 at December 31, 2020 to
$263,911 at December 31, 2021. Average interest-bearing deposits, which include
interest checking accounts, money market accounts, regular savings accounts and
time deposits, increased $151,092 or 28.17% from $536,445 at December 31, 2020
to $687,537 at December 31, 2021. Total average interest checking account
balances increased $39,047 or 36.17% from $107,961 at December 31, 2020 to
$147,008 at December 31, 2021. Total average savings account balances (including
money market accounts) increased $114,366 or 38.58% from $296,403 at
December 31, 2020 to $410,769 at December 31, 2021. The bank has a competitive
money market rate to maintain and attract core deposits.




         31

  Table of Contents




PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Deposits and borrowings, continued



Average time deposits decreased $2,321 or 1.76% from $132,081 at December 31,
2020 to $129,760 at December 31, 2021. The money market rate has been attractive
and as time deposits matured, customers moved their deposits to the money market
account.



The maturity distribution of certificates of deposit in excess of FDIC limits is
as follows:



                       2021         2020
Less than 3 months   $      -     $      -
3 to 6 months           3,206          300
6 to 12 months            257            -
1 year to 5 years       8,910       11,983
Total                $ 12,373     $ 12,283



Total uninsured deposits greater than $250,000 has been $323,361 and $179,218 at
December 31, 2021 and 2020, respectively.

Borrowings other than deposits include Federal mortgage bank (FHLB) borrowings and subordinated debt securities. Non-deposit borrowings are an important source of funding for the Bank that helps manage short- and long-term funding needs.

Borrowings from the FHLB are used to support the Bank's lending program and
allow the Bank to manage interest rate risk by laddering maturities and matching
funding terms to the terms of various loan types in the loan portfolio. The
Company had no short-term borrowings in 2021 or 2020 due to deposit growth.
Repayment of amortizing and fixed maturity loans through FHLB totaled $11,268
during 2021. One loan with a balance of $10,000 and rate of 0.81% was
outstanding at December 31, 2021.



Other long-term debt includes $11,772 of subordinated notes, net of unamortized
costs at December 31, 2021. On July 29, 2020, the Company issued $5,000 in
aggregate principal amount of 5.75% fixed rate subordinated notes due July 31,
2027 and $7,000 in aggregate principal amount of 6% fixed to floating rate
subordinated notes due July 31, 2030.



Contractual obligations and scheduled payments:


                                                 December 31, 2021
                                                         Three Years
                 Less than       One Year Through          Through          More than
                 One Year           Three Years          Five Years        Five Years        Total
FHLB long
term
advances       $           -     $               -     $             -     $    10,000     $  10,000
Subordinated
debt                       -                     -                   -          11,772        11,772
Total          $           -     $               -     $             -     $    21,772     $  21,772



See note 11 (short-term debt) and note 12 (long-term debt) to the consolidated financial statements for a discussion of the rates, terms and conversion characteristics of these advances.


Stockholders' Equity


Total stockholders' equity increased $4,827 or 5.05% in 2021.  Capital was
increased by net income totaling $10,738, issuance of common stock totaling
$263, common stock issued in the Company's stock incentive plan of $121, and
pension adjustment of $530. Capital was reduced by common and preferred
dividends totaling $3,593, unrealized gains on available for sale securities of
$2,605, and redemption of preferred stock totaling $627.  As of December 31,
2021, book value per common share was $29.42 compared to $28.43 as of December
31, 2020. Dividends are paid to stockholders quarterly based on decisions by the
Board of Directors unless unexpected fluctuations in net income indicate a
change to this policy is needed.




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PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Equity, continued



Banking regulators have established a uniform system to address the adequacy of
capital for financial institutions. The rules require minimum capital levels
based on risk-adjusted assets. Simply stated, the riskier an entity's
investments, the more capital it is required to maintain. The Bank is required
to maintain these minimum capital levels. Beginning in 2015, the Bank
implemented the Basel III capital requirements, which introduced the Common
Equity Tier I ratio in addition to the two previous capital guidelines of Tier I
capital (referred to as core capital) and Tier II capital (referred to as
supplementary capital). At December 31, 2021, the Bank had Common Equity Tier I
capital of 13.95%, Tier I risked based capital of 13.95% and total risked based
capital of 15.00% of risk weighted assets. Regulatory minimums at this date were
4.5%, 6% and 8%, respectively. The Bank has maintained capital levels far above
the minimum requirements throughout the year. In the unlikely event that such
capital levels are not met, regulatory agencies are empowered to require the
Bank to raise additional capital and/or reallocate present capital.



In addition, the regulatory agencies have issued guidelines requiring the
maintenance of a capital leverage ratio. The leverage ratio is computed by
dividing Tier I capital by average total assets. The regulators have established
a minimum of 4% for this ratio but can increase the minimum requirement based
upon an institution's overall financial condition. At December 31, 2021, the
Bank reported a leverage ratio of 8.62%. The Bank's leverage ratio was also
substantially above the minimum. The Bank also reported a capital conservation
buffer of 7.00% at December 31, 2021. The capital conservation buffer is
designed to strengthen an institution's financial resilience during economic
cycles. Financial institutions are required to maintain a minimum buffer as
required by the Basel III final rules in order to avoid restrictions on capital
distributions and other payments.



Market Risk Management



Most of the Company's net income is dependent on the Bank's net interest income.
Rapid changes in short-term interest rates may lead to volatility in net
interest income resulting in additional interest rate risk to the extent that
imbalances exist between the maturities or repricing of interest-bearing
liabilities and interest earning assets. The Company's net interest margin
decreased .61% in 2021 following a decrease of .72% in 2020. This decrease is
primarily due to decreases in interest rates as well as changes in balance sheet
structure including a decrease in loans held for investment, establishing an
investment portfolio, and substantial deposit growth which led to excess funds
on hand. In 2020, the Federal Open Market Committee elected to decrease the
short-term rates target 150BP to 0% from 1.50%.



Net interest income is also affected by changes in the mix of funding that
supports earning assets. For example, higher levels of non-interest bearing
demand deposits and leveraging earning assets by funding with stockholder's
equity would result in greater levels of net interest income than if most of the
earning assets were funded with higher cost interest-bearing liabilities, such
as certificates of deposit and borrowings.



Liquid assets, which include cash and cash equivalents, federal funds sold,
interest bearing deposits and short-term investments averaged $83,265 for 2021.
The Bank historically has had a stable core deposit base and, therefore, does
not have to rely on volatile funding sources. Because of growth in the core
deposit base, liquid assets have grown over the prior year. The Company has
increased efforts to raise deposits and depositors have changed their savings
habits during 2021 due to the COVID-19 pandemic. While this helps liquidity, the
investment options and rate market in general have hurt the net interest margin.
The Company has lowered core deposit rates throughout 2021 to mitigate the
decline in net interest margin. The Bank's membership in the Federal Home Loan
Bank has historically provided liquidity as the Bank borrows money that is
repaid over a five to ten-year period and uses the money to make fixed rate
loans. With excess funds provided by deposit growth, management anticipates no
additional borrowings in 2022. The matching of the long-term receivables and
liabilities helps the Bank reduce its sensitivity to interest rate changes. The
Company reviews its interest rate gap periodically and makes adjustments as
needed. Management is not aware of any off-balance sheet items that will impair
future liquidity.




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PART II, Continued


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands of dollars), continued

Market risk management, continued



The following table depicts the Company's interest rate sensitivity, as measured
by the repricing of its interest sensitive assets and liabilities as of December
31, 2021. As the notes to the table indicate, the data was based in part on
assumptions as to when certain assets or liabilities would mature or reprice.
The analysis indicates an asset sensitive one-year cumulative GAP position of
-1.96% of total earning assets, compared to 17.03% in 2020. Approximately 22.42%
of rate sensitive assets and 34.19% of rate sensitive liabilities are subject to
repricing within one year. Short term assets (less than one year) decreased
$99,862 during the year, while total earning assets increased $256,998. The
growth in earning assets is primarily due to the utilization of excess funds
created by deposit growth. Short term deposits, maturities less than 365 days,
increased $78,658 and short-term borrowings decreased $3,623. Short term
borrowings decreased as advances matured and were not renewed.



The following GAP analysis shows lead times from December 31, 2021in which the assets and liabilities of the Company are subject to repricing:


                   1-90          91-365          1-5         Over 5           Not
                   Days           Days          Years         Years        Classified         Total
Rate Sensitive
Assets:
Loans held for
investment       $ 108,743     $   60,772     $ 360,168     $ 133,015     $          -     $   662,698
Loans held for
sale                 4,887              -             -             -                -           4,887
Federal funds
sold                76,667              -             -             -                -          76,667
Investment
securities             125          4,018       146,688       253,176                -         404,007
Interest
bearing money
market and
bank deposits
in other banks       2,938              -             -             -                -           2,938
Total Earning
Assets             193,360         64,790       506,856       386,191                -       1,151,197

Rate Sensitive
Liabilities:
Interest
bearing demand
deposits                 -         38,394       115,181        38,394                -         191,969
Savings
deposits                 -        198,946       256,003        28,527                -         483,476
Certificates
of deposit          12,622         30,790        80,445             -                -         123,857
Total Deposits      12,622        268,130       451,629        66,921                -         799,302
Long-term debt           -              -             -        21,772                -          21,772
Total               12,622        268,130       451,629        88,693                -         821,074

Discrete Gap       180,738       (203,340 )      55,227       297,498                -         330,123
Cumulative Gap     180,738        (22,602 )      32,625       330,123          330,123
As a % of
Earning Assets       15.70 %        -1.96 %        2.83 %       28.68 %          28.68 %



· When preparing the table above, no assumptions are made regarding the loan

installments or exhausted installments. Loan principal repayments are included in

        the earliest period in which the loan matures or can be repriced.
        Principal payments on installment loans scheduled prior to maturity are
        included in the period of maturity or repricing. Proceeds from the
        redemption of investments and deposits are included in the period of

maturity. Estimated maturities on deposits that have no stated maturity

        dates were derived from regulatory guidance.



Item 7A. Quantitative and qualitative information on market risk


Note Applicable




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