10-Q
Farmers & Merchants Bancshares, Inc. (FMFG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|---|
| For quarterly period ended September 30, 2020 | |
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
| --- | --- |
| For the transition period from _______________ to ________________ |
Commission file number 000-55756
Farmers and Merchants Bancshares, Inc.
(Exact name of registrant as specified in its charter)
| Maryland | 81-3605835 |
|---|---|
| (State or other jurisdiction of | (I. R. S. Employer Identification No.) |
| incorporation or organization) |
4510 Lower Beckleysville Road, Suite H, Hampstead, Maryland 21074
(Address of principal executive offices) (Zip Code)
(410) 374-1510
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☑ Smaller reporting company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,991,964 as of November 9, 2020.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Table of Contents
| Page | |
|---|---|
| PART I – FINANCIAL INFORMATION | 3 |
| Item 1. Financial Statements | 3 |
| Consolidated balance sheets at September 30, 2020 (unaudited) and December 31, 2019 | 3 |
| Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2020 and 2019 | 4 |
| Consolidated statements of comprehensive income (unaudited) for the three and nine months ended September 30, 2020 and 2019 | 5 |
| Consolidated statements of changes in stockholders’ equity (unaudited) for the three and nine months ended September 30, 2020 and 2019 | 6 |
| Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2020 and 2019 | 7 |
| Notes to financial statements (unaudited) | 9 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 45 |
| Item 4. Controls and Procedures | 45 |
| PART II – OTHER INFORMATION | 46 |
| Item 1. Legal Proceedings | 46 |
| Item 1A. Risk Factors | 46 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 46 |
| Item 3. Defaults upon Senior Securities | 46 |
| Item 4. Mine Safety Disclosures | 46 |
| Item 5. Other Information | 46 |
| Item 6. Exhibits | 47 |
| SIGNATURES | 47 |
2
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, | |||
|---|---|---|---|
| 2019 | |||
| **** | **** | ||
| Assets | |||
| Cash and due from banks | 14,766,830 | $ | 6,664,307 |
| Federal funds sold and other interest-bearing deposits | 465,755 | 2,457,045 | |
| Cash and cash equivalents | 15,232,585 | 9,121,352 | |
| Certificate of deposit in other bank | 100,000 | 100,000 | |
| Securities available for sale | 39,882,135 | 36,531,774 | |
| Securities held to maturity | 22,602,562 | 19,510,018 | |
| Equity security at fair value | 553,057 | 532,321 | |
| Federal Home Loan Bank stock, at cost | 696,300 | 376,200 | |
| Mortgage loans held for sale | 2,650,459 | 242,000 | |
| Loans, less allowance for loan losses of 3,141,312 and 2,593,715 | 390,114,430 | 359,382,843 | |
| Premises and equipment | 5,096,063 | 5,036,851 | |
| Accrued interest receivable | 1,215,284 | 1,019,540 | |
| Deferred income taxes | 754,417 | 1,036,078 | |
| Bank owned life insurance | 7,272,949 | 7,145,477 | |
| Other assets | 27,307,504 | 2,180,644 | |
| 513,477,745 | $ | 442,215,098 | |
| Liabilities and Stockholders' Equity | |||
| Deposits | |||
| Noninterest-bearing | 79,010,403 | $ | 60,659,015 |
| Interest-bearing | 347,065,245 | 315,954,299 | |
| Total deposits | 426,075,648 | 376,613,314 | |
| Securities sold under repurchase agreements | 6,317,682 | 10,958,118 | |
| Federal Home Loan Bank of Atlanta advances | 7,000,000 | - | |
| Long-term debt | 16,971,874 | - | |
| Accrued interest payable | 230,177 | 346,214 | |
| Other liabilities | 4,954,184 | 4,843,936 | |
| 461,549,565 | 392,761,582 | ||
| Stockholders' equity | |||
| Common stock, par value .01 per share, authorized 5,000,000 shares; issued and outstanding 2,991,964 in 2020 and 2,974,019 in 2019 | 29,920 | 29,740 | |
| Additional paid-in capital | 28,054,158 | 27,812,991 | |
| Retained earnings | 23,059,567 | 21,568,161 | |
| Accumulated other comprehensive income | 784,535 | 42,624 | |
| 51,928,180 | 49,453,516 | ||
| 513,477,745 | $ | 442,215,098 |
All values are in US Dollars.
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements**.**
3
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| Three months ended | Nine months ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | |||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||
| Interest income | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Loans, including fees | $ | 4,489,992 | $ | 4,250,071 | $ | 13,205,913 | $ | 12,582,392 | ||
| Investment securities - taxable | **** | 159,277 | 234,274 | **** | 561,038 | 631,382 | ||||
| Investment securities - tax exempt | **** | 163,522 | 150,141 | **** | 462,305 | 431,354 | ||||
| Federal funds sold and other interest earning assets | **** | 9,563 | 84,526 | **** | 58,362 | 280,876 | ||||
| Total interest income | **** | 4,822,354 | 4,719,012 | **** | 14,287,618 | 13,926,004 | ||||
| Interest expense | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Deposits | **** | 690,833 | 916,452 | **** | 2,429,496 | 2,577,229 | ||||
| Securities sold under repurchase agreements | **** | 18,020 | 29,190 | **** | 95,710 | 82,912 | ||||
| Federal Home Loan Bank advances and other borrowings | **** | 12,752 | 10,769 | **** | 25,726 | 42,517 | ||||
| Total interest expense | **** | 721,605 | 956,411 | **** | 2,550,932 | 2,702,658 | ||||
| Net interest income | **** | 4,100,749 | 3,762,601 | **** | 11,736,686 | 11,223,346 | ||||
| Provision for loan losses | **** | - | (13,000 | ) | **** | 475,000 | **** | - | ||
| Net interest income after provision for loan losses | **** | 4,100,749 | 3,775,601 | **** | 11,261,686 | 11,223,346 | ||||
| Noninterest income | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Service charges on deposit accounts | **** | 138,288 | 176,577 | **** | 414,501 | 494,752 | ||||
| Mortgage banking income | **** | 272,297 | 144,268 | **** | 684,664 | 249,867 | ||||
| Bank owned life insurance income | **** | 42,250 | 39,443 | **** | 127,473 | 321,841 | ||||
| Unrealized gain on equity security | **** | 1 | 3,966 | **** | 13,046 | 18,721 | ||||
| Write down of other real estate owned | **** | - | - | **** | - | (210,150 | ) | |||
| Gain on sale of SBA loans | **** | - | - | **** | 63,635 | 139,535 | ||||
| Other fees and commissions | **** | 34,532 | 28,714 | **** | 94,277 | 94,031 | ||||
| Total noninterest income | **** | 487,368 | 392,968 | **** | 1,397,596 | 1,108,597 | ||||
| Noninterest expense | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Salaries | **** | 1,462,946 | 1,358,208 | **** | 4,114,143 | 3,993,998 | ||||
| Employee benefits | **** | 376,860 | 312,119 | **** | 1,183,414 | 1,008,228 | ||||
| Occupancy | **** | 183,719 | 189,603 | **** | 552,265 | 594,566 | ||||
| Furniture and equipment | **** | 175,006 | 149,191 | **** | 501,267 | 460,271 | ||||
| Acquisition | **** | 1,267,401 | - | **** | 1,612,321 | - | ||||
| Other | **** | 660,075 | 673,814 | **** | 1,970,913 | 1,990,354 | ||||
| Total noninterest expense | **** | 4,126,007 | 2,682,935 | **** | 9,934,323 | 8,047,417 | ||||
| Income before income taxes | **** | 462,110 | 1,485,634 | **** | 2,724,959 | 4,284,526 | ||||
| Income taxes | **** | 76,863 | 307,724 | **** | 460,350 | 784,508 | ||||
| Net income | $ | 385,247 | $ | 1,177,910 | $ | 2,264,609 | $ | 3,500,018 | ||
| Earnings per share - basic and diluted | $ | 0.13 | $ | 0.40 | $ | 0.76 | $ | 1.19 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements**.**
4
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sepember 30, | September 30, | ||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||
| Net income | $ | 385,247 | $ | 1,177,910 | $ | 2,264,609 | $ | 3,500,018 | |
| Other comprehensive income, net of income taxes: | |||||||||
| Securities available for sale | |||||||||
| Net unrealized gain (loss) arising during the period | **** | (32,263 | ) | 113,117 | **** | 1,023,573 | 959,257 | ||
| Income tax expense (benefit) | **** | (8,878 | ) | 31,127 | **** | 281,662 | 263,963 | ||
| Total other comprehensive income (loss) | **** | (23,385 | ) | 81,990 | **** | 741,911 | 695,294 | ||
| Total comprehensive income | $ | 361,862 | $ | 1,259,900 | $ | 3,006,520 | $ | 4,195,312 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements**.**
5
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Three and Nine Months Ended September 30, 2020 and 2019
(Unaudited except for year-end amounts)
| Additional | Accumulated other | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| paid-in | Retained | comprehensive | stockholders' | ||||||||||||
| Par value | capital | earnings | income | equity | |||||||||||
| Three months ended September, 2019 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Balance, June 30, 2019 | 1,691,091 | $ | 16,911 | $ | 27,561,593 | $ | 20,111,524 | $ | 45,005 | $ | 47,735,033 | ||||
| Net income | - | - | - | 1,177,910 | - | 1,177,910 | |||||||||
| Unrealized gain on securities available for sale net of income tax expense of 31,127 | - | - | - | - | 81,990 | 81,990 | |||||||||
| Dividends reinvested adjustment | 1 | - | (455 | ) | 42 | - | (413 | ) | |||||||
| Stock dividend | 1,268,685 | 12,687 | - | (12,687 | ) | - | - | ||||||||
| Balance, September 30, 2019 | 2,959,777 | $ | 29,598 | $ | 27,561,138 | $ | 21,276,789 | $ | 126,995 | $ | 48,994,520 | ||||
| Nine months ended September 30, 2019 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Balance, December 31, 2018 | 1,682,997 | $ | 16,830 | $ | 27,324,794 | $ | 18,621,382 | $ | (568,299 | ) | $ | 45,394,707 | |||
| Net income | - | - | - | 3,500,018 | - | 3,500,018 | |||||||||
| Unrealized gain on securities available for sale net of income tax expense of 263,963 | - | - | - | - | 695,294 | 695,294 | |||||||||
| Reclassification due to adoption of ASU No. 2016-02 | - | - | - | (91,447 | ) | - | (91,447 | ) | |||||||
| Cash dividends, 0.25 per share | - | - | - | (740,477 | ) | - | (740,477 | ) | |||||||
| Dividends reinvested | 8,095 | 81 | 236,344 | - | - | 236,425 | |||||||||
| Stock dividend | 1,268,685 | 12,687 | - | (12,687 | ) | - | - | ||||||||
| Balance, September 30, 2019 | 2,959,777 | $ | 29,598 | $ | 27,561,138 | $ | 21,276,789 | $ | 126,995 | $ | 48,994,520 | ||||
| Three months ended September 30, 2020 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Balance, June 30, 2020 | 2,991,963 | $ | 29,920 | $ | 28,054,158 | $ | 22,674,059 | $ | 807,920 | $ | 51,566,057 | ||||
| Net income | - | **** | - | **** | - | **** | 385,247 | **** | - | **** | 385,247 | ||||
| Unrealized loss on securities available for sale net of income tax benefit of 8,878 | - | **** | - | **** | - | **** | - | **** | (23,385 | ) | **** | (23,385 | ) | ||
| Dividends reinvested adjustment | 1 | **** | - | **** | - | **** | 261 | **** | - | **** | 261 | ||||
| Balance, September 30, 2020 | 2,991,964 | $ | 29,920 | $ | 28,054,158 | $ | 23,059,567 | $ | 784,535 | $ | 51,928,180 | ||||
| Nine months ended September 30, 2020 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Balance, December 31, 2019 | 2,974,019 | $ | 29,740 | $ | 27,812,991 | $ | 21,568,161 | $ | 42,624 | $ | 49,453,516 | ||||
| Net income | - | **** | - | **** | - | **** | 2,264,609 | **** | - | **** | 2,264,609 | ||||
| Unrealized gain on securities available for sale net of income tax expense of 281,662 | - | **** | - | **** | - | **** | - | **** | 741,911 | **** | 741,911 | ||||
| Cash dividends, 0.26 per share | - | **** | - | **** | - | **** | (773,203 | ) | **** | - | **** | (773,203 | ) | ||
| Dividends reinvested | 17,945 | **** | 180 | **** | 241,167 | **** | - | **** | - | **** | 241,347 | ||||
| Balance, September 30, 2020 | 2,991,964 | $ | 29,920 | $ | 28,054,158 | $ | 23,059,567 | $ | 784,535 | $ | 51,928,180 |
All values are in US Dollars.
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
6
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | 2020 | 2019 | ||||
|---|---|---|---|---|---|---|
| Cash flows from operating activities | **** | **** | **** | **** | **** | **** |
| Interest received | $ | 14,615,625 | $ | 13,871,203 | ||
| Fees and commissions received | **** | 1,193,443 | 1,111,256 | |||
| Interest paid | **** | (2,666,969 | ) | (2,665,285 | ) | |
| Proceeds from sale of mortgage loans held for sale | **** | 35,230,924 | 12,266,054 | |||
| Origination of mortgage loans held for sale | **** | (37,639,383 | ) | (13,230,990 | ) | |
| Cash paid to suppliers and employees | **** | (9,241,695 | ) | (7,504,291 | ) | |
| Income taxes paid, net of refunds received | **** | (838,335 | ) | (761,512 | ) | |
| **** | 653,610 | 3,086,435 | ||||
| Cash flows from investing activities | **** | **** | **** | **** | **** | **** |
| Proceeds from maturity and call of securities | ||||||
| Available for sale | **** | 15,222,262 | 5,103,515 | |||
| Held to maturity | **** | 1,898,420 | 1,043,420 | |||
| Proceeds from sale of securities | ||||||
| Available for sale | **** | 2,025,000 | - | |||
| Purchase of securities | ||||||
| Available for sale | **** | (19,890,543 | ) | (17,761,884 | ) | |
| Held to maturity | **** | (4,957,679 | ) | (2,406,339 | ) | |
| Loans made to customers, net of principal collected | **** | (32,358,278 | ) | 2,766,804 | ||
| Proceeds from sale of loans | **** | 683,885 | 1,582,364 | |||
| Redemption (purchase) of stock in FHLB of Atlanta | **** | (320,100 | ) | 72,100 | ||
| Deposit to transfer agent for subsequent acquisition | **** | (24,807,728 | ) | - | ||
| Purchases of premises, equipment and software | **** | (299,532 | ) | (60,267 | ) | |
| **** | (62,804,293 | ) | (9,660,287 | ) | ||
| Cash flows from financing activities | **** | **** | **** | **** | **** | **** |
| Net increase (decrease) in | ||||||
| Noninterest-bearing deposits | **** | 18,351,388 | (4,418,928 | ) | ||
| Interest-bearing deposits | **** | 31,110,946 | 21,902,440 | |||
| Securities sold under repurchase agreements | **** | (4,640,436 | ) | (3,428,788 | ) | |
| Federal Home Loan Bank of Atlanta advances | **** | 7,000,000 | (2,000,000 | ) | ||
| Long-term debt proceeds | **** | 16,971,874 | - | |||
| Dividends paid, net of reinvestments | **** | (531,856 | ) | (504,052 | ) | |
| **** | 68,261,916 | 11,550,672 | ||||
| Net increase in cash and cash equivalents | **** | 6,111,233 | 4,976,820 | |||
| Cash and cash equivalents at beginning of period | **** | 9,121,352 | 14,618,237 | |||
| Cash and cash equivalents at end of period | $ | 15,232,585 | $ | 19,595,057 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
7
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | 2020 | 2019 | ||||
|---|---|---|---|---|---|---|
| Reconciliation of net income to net cash provided by operating activities | **** | **** | **** | **** | **** | **** |
| Net income | $ | 2,264,609 | $ | 3,500,018 | ||
| Adjustments to reconcile net income to net cash provided by operating activities | **** | **** | **** | **** | **** | **** |
| Depreciation and amortization | **** | 274,241 | 259,626 | |||
| Provision for loan losses | **** | 475,000 | - | |||
| Lease expense in excess of rent paid | **** | 25,677 | 31,403 | |||
| Write down of other real estate owned | **** | - | 210,150 | |||
| Equity security dividends reinvested | **** | (7,690 | ) | (9,166 | ) | |
| Unrealized gain on equity security | **** | (13,046 | ) | (18,721 | ) | |
| Gain on sale of SBA loans | **** | (63,635 | ) | (139,535 | ) | |
| Amortization of premiums and accretion of discounts, net | **** | 283,207 | 88,541 | |||
| Increase (decrease) in | ||||||
| Deferred loan fees | **** | 531,441 | (57,864 | ) | ||
| Accrued interest payable | **** | (116,037 | ) | 37,373 | ||
| Other liabilities | **** | 196,658 | 200,398 | |||
| Decrease (increase) in | ||||||
| Mortgage loans held for sale | **** | (2,408,459 | ) | (964,936 | ) | |
| Accrued interest receivable | **** | (195,744 | ) | 12,229 | ||
| Bank owned life insurance cash surrender value | **** | (127,472 | ) | (49,235 | ) | |
| Other assets | **** | (465,140 | ) | (13,846 | ) | |
| $ | 653,610 | $ | 3,086,435 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
8
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
| 1. | Principles of consolidation |
|---|
The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), and one subsidiary of the Bank, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions have been eliminated.
| 2. | Basis of Presentation |
|---|
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three and nine months ended September 30, 2020 do not necessarily reflect the results that may be expected for the entire fiscal year ending December 31, 2020 or any future interim period. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2019, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019.
Acquisition of Carroll Bancorp, Inc.
On October 1, 2020, the Company consummated its previously-announced acquisition by merger (the “Merger”) of Carroll Bancorp, Inc. (“Carroll”) and its wholly-owned subsidiary, Carroll Community Bank. Each share of common stock of Carroll (“Carroll Common Stock”) that was outstanding immediately prior to the effective time of the Merger (the “Effective Time”) was converted into the right to receive cash in the amount $21.63 (the “Per Share Consideration”). Immediately prior to the Effective Time, there were 1,146,913 outstanding shares of Carroll Common Stock, all of which were converted into the Per Share Consideration. The merger consideration was paid by the Company using $8 million in cash and $17 million in proceeds from a third-party term loan obtained in connection with the Merger. Because the Merger was consummated after the end of the period covered by this report, this report does not take into account the financial condition or results of operations of Carroll and its subsidiaries for the three- or nine-month periods ended September 30, 2020. At September 30, 2020, Carroll had total assets of $176,159,890, net loans of $145,153,100, and total liabilities of $157,992,286, of which $144,896,990 represented deposits.
9
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 2. | Basis of Presentation (continued) |
|---|
The following table presents the book values and estimated fair values of the assets, liabilities, and equity of Carroll as of October 1, 2020. The estimates of fair value are subject to change.
| Estimated | ||||
|---|---|---|---|---|
| Book value | fair value | |||
| Cash | $ | 5,441,610 | $ | 5,441,610 |
| Investments | 14,540,495 | 14,599,320 | ||
| Loans held for sale | 1,702,950 | 1,743,195 | ||
| Loans | 145,153,100 | 145,233,219 | ||
| Premises and equipment | 2,619,413 | 2,791,286 | ||
| Other real estate owned | 1,411,605 | 1,411,605 | ||
| Other assets | 5,290,717 | 5,480,538 | ||
| Goodwill and other intangibles | - | 6,770,000 | ||
| Total assets | $ | 176,159,890 | $ | 183,470,773 |
| Deposits | $ | 144,896,990 | $ | 145,512,990 |
| FHLB advances | 13,000,000 | 13,000,000 | ||
| Other liabilities | 95,296 | 95,296 | ||
| Total liabilities | 157,992,286 | 158,608,286 | ||
| Stockholders' equity | 18,167,604 | 24,862,487 | ||
| Total liabilities and stockholders equity | $ | 176,159,890 | $ | 183,470,773 |
10
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 2. | Basis of Presentation (continued) |
|---|
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective Dates” extended the implementation date to 2023 for SEC registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The Company has engaged a third-party vendor to assist in the implementation of this ASU.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 was effective for us on January 1, 2020, with early adoption permitted, and did not have a material impact on the Company’s financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. As of September 30, 2020, the Company has only one adjustable rate loan tied to LIBOR.
In December 2019, FASB released ASU 2019-12 - Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. ASU 2019-12 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company is in the process of reviewing the impact of adopting this standard on the Company’s financial statements.
11
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 3. **** | Investment Securities |
|---|
Investments in debt securities are summarized as follows:
| Amortized | Unrealized | Unrealized | Fair | |||||
|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | cost | gains | losses | value | ||||
| Available for sale | ****** | ****** | ****** | ****** | ****** | ****** | ****** | ****** |
| State and municipal | $ | 506,267 | $ | 22,530 | $ | - | $ | 528,797 |
| SBA pools | **** | 1,885,788 | **** | - | **** | 42,632 | **** | 1,843,156 |
| Corporate bonds | **** | 2,095,456 | **** | 92,089 | **** | - | **** | 2,187,545 |
| Mortgage-backed securities | **** | 34,312,246 | **** | 1,036,284 | **** | 25,893 | **** | 35,322,637 |
| $ | 38,799,757 | $ | 1,150,903 | $ | 68,525 | $ | 39,882,135 | |
| Held to maturity | ****** | ****** | ****** | ****** | ****** | ****** | ****** | ****** |
| State and municipal | $ | 22,602,562 | $ | 1,044,046 | $ | 13,309 | $ | 23,633,299 |
| Amortized | Unrealized | Unrealized | Fair | |||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31, 2019 | cost | gains | losses | value | ||||
| Available for sale | ****** | ****** | ****** | ****** | ****** | ****** | ****** | ****** |
| State and municipal | $ | 508,134 | $ | 4,536 | $ | - | $ | 512,670 |
| SBA pools | 2,203,834 | - | 52,037 | 2,151,797 | ||||
| Mortgage-backed securities | 33,760,999 | 255,843 | 149,535 | 33,867,307 | ||||
| $ | 36,472,967 | $ | 260,379 | $ | 201,572 | $ | 36,531,774 | |
| Held to maturity | ****** | ****** | ****** | ****** | ****** | ****** | ****** | ****** |
| State and municipal | $ | 19,510,018 | $ | 588,393 | $ | 480 | $ | 20,097,931 |
12
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 3. | Investment Securities (continued) |
|---|
Contractual maturities, shown below, will differ from actual maturities because borrowers and issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Available for Sale | Held to Maturity | |||||||
|---|---|---|---|---|---|---|---|---|
| Amortized | Fair | Amortized | Fair | |||||
| September 30, 2020 | cost | value | cost | value | ||||
| Within one year | $ | - | $ | - | $ | - | $ | - |
| Over one to five years | **** | 2,351,723 | **** | 2,450,600 | **** | 792,990 | **** | 813,269 |
| Over five to ten years | **** | 250,000 | **** | 265,742 | **** | 2,957,174 | **** | 3,156,466 |
| Over ten years | **** | - | **** | - | **** | 18,852,398 | **** | 19,663,564 |
| **** | 2,601,723 | **** | 2,716,342 | **** | 22,602,562 | **** | 23,633,299 | |
| Mortgage-backed securities and SBA pools, due in monthly installments | **** | 36,198,034 | **** | 37,165,793 | **** | - | **** | - |
| $ | 38,799,757 | $ | 39,882,135 | $ | 22,602,562 | $ | 23,633,299 | |
| December 31, 2019 | ||||||||
| Within one year | $ | - | $ | - | $ | 257,150 | $ | 261,204 |
| Over one to five years | 258,134 | 258,838 | 562,587 | 565,140 | ||||
| Over five to ten years | 250,000 | 253,832 | 2,717,125 | 2,782,474 | ||||
| Over ten years | - | - | 15,973,156 | 16,489,113 | ||||
| 508,134 | 512,670 | 19,510,018 | 20,097,931 | |||||
| Mortgage-backed securities and SBA pools, due in monthly installments | 35,964,833 | 36,019,104 | - | - | ||||
| 36,472,967 | $ | 36,531,774 | $ | 19,510,018 | $ | 20,097,931 |
Securities with a carrying value of $ 7,746,036 **** and $11,441,474 as of September 30, 2020 and December 31, 2019, respectively, were pledged as collateral for government deposits and securities sold under repurchase agreements.
During the nine months ended September 30, 2020, the Company received proceeds of $2,025,000 from the sale of investment securities available for sale. The Company realized no gain or loss on the sale of the securities. There were no sales of securities during the nine months ended September 20, 2019.
13
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 3. | Investment Securities (continued) |
|---|
The following table sets forth the Company’s gross unrealized losses on a continuous basis for investments in debt securities, by category and length of time, at September 30, 2020 and December 31, 2019.
| September 30, 2020 | Less than 12 months | 12 months or more | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description of investments | Fair Value | Unrealized<br><br> <br>Loss | Fair Value | Unrealized<br><br> <br>Loss | Fair Value | Unrealized<br><br> <br>Loss | ||||||
| State and municipal | $ | 1,724,366 | $ | 13,309 | $ | - | $ | - | $ | 1,724,366 | $ | 13,309 |
| SBA pools | - | - | 1,843,156 | 42,632 | 1,843,156 | 42,632 | ||||||
| Corporate bonds | - | - | - | - | - | - | ||||||
| Mortgage-backed securities | 4,138,537 | 25,392 | 145,797 | 501 | 4,284,334 | 25,893 | ||||||
| Total | $ | 5,862,903 | $ | 38,701 | $ | 1,988,953 | $ | 43,133 | $ | 7,851,856 | $ | 81,834 |
| December 31, 2019 | Less than 12 months | 12 months or more | Total | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Unrealized | Unrealized | Unrealized | ||||||||||
| Description of investments | Fair value | losses | Fair value | losses | Fair value | losses | ||||||
| State and municipal | $ | 251,618 | $ | 480 | $ | - | $ | - | $ | 251,618 | $ | 480 |
| SBA pools | - | - | 2,151,797 | 52,037 | 2,151,797 | 52,037 | ||||||
| Mortgage-backed securities | 10,643,624 | 58,063 | 7,295,788 | 91,472 | 17,939,412 | 149,535 | ||||||
| Total | $ | 10,895,242 | $ | 58,543 | $ | 9,447,585 | $ | 143,509 | $ | 20,342,827 | $ | 202,052 |
Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of September 30, 2020 and December 31, 2019, management did not have the intent to sell any of the held to maturity or available for sale securities with unrealized losses before a recovery of cost. The unrealized losses detailed in the table above were due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the debt securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the foregoing factors, as of September 30, 2020 and December 31, 2019, management believes that these unrealized losses are temporary and, accordingly, have not been recognized in the Company’s consolidated statement of income.
14
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 4. | Loans |
|---|
Major categories of loans are as follows:
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Real estate: | ||||
| Commercial | $ | 239,106,276 | $ | 240,938,149 |
| Construction and land development | **** | 23,889,344 | 18,194,955 | |
| Residential | **** | 70,628,272 | 76,122,069 | |
| Commercial | **** | 60,442,374 | 26,947,503 | |
| Consumer | **** | 239,062 | 292,027 | |
| **** | 394,305,328 | 362,494,703 | ||
| Less: Allowance for loan losses | **** | 3,141,312 | 2,593,715 | |
| Deferred origination fees net of costs | **** | 1,049,586 | 518,145 | |
| $ | 390,114,430 | $ | 359,382,843 |
At September 30, 2020 and December 31, 2019 the Company had no nonaccrual loans.
An age analysis of past due loans, segregated by type of loan, is as follows:
| 90 Days | Past Due 90 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 30 - 59 Days | 60 - 89 Days | or More | Total | Total | Days or More | |||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Loans | and Accruing | ||||||||
| September 30, 2020 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commercial | $ | - | $ | - | $ | - | $ | - | $ | 239,106,276 | $ | 239,106,276 | $ | - |
| Construction and land development | **** | - | **** | - | **** | - | **** | - | **** | 23,889,344 | **** | 23,889,344 | **** | - |
| Residential | **** | - | **** | - | **** | 1,514,012 | **** | 1,514,012 | **** | 69,114,260 | **** | 70,628,272 | **** | 1,514,012 |
| Commercial | **** | - | **** | - | **** | - | **** | - | **** | 60,442,374 | **** | 60,442,374 | **** | - |
| Consumer | **** | - | **** | - | **** | - | **** | - | **** | 239,062 | **** | 239,062 | **** | - |
| Total | $ | - | $ | - | $ | 1,514,012 | $ | 1,514,012 | $ | 392,791,316 | $ | 394,305,328 | $ | 1,514,012 |
| December 31, 2019 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commercial | $ | 224,794 | $ | - | $ | - | $ | 224,794 | $ | 240,713,355 | $ | 240,938,149 | $ | - |
| Construction and land development | - | - | - | - | 18,194,955 | 18,194,955 | - | |||||||
| Residential | 59,892 | - | - | 59,892 | 76,062,177 | 76,122,069 | - | |||||||
| Commercial | - | - | - | - | 26,947,503 | 26,947,503 | - | |||||||
| Consumer | - | - | - | - | 292,027 | 292,027 | - | |||||||
| Total | $ | 284,686 | $ | - | $ | - | $ | 284,686 | $ | 362,210,017 | $ | 362,494,703 | $ | - |
The one loan that is 90 days or more past due with a principal balance of $1,514,012 has not been placed on nonaccrual because the borrower is in the process of requesting a second 90 day payment deferral. The loan will be placed on nonaccrual in the fourth quarter if the additional payment deferral is not granted and the borrower does not make sufficient payments.
15
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 4. | Loans (continued) |
|---|
Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the nine months ended September 30, 2020 and the year ended December 31, 2019, are set forth in the following table:
| Unpaid | Recorded | Recorded | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual | Investment | Investment | Total | Average | ||||||||||
| Principal | With No | With | Recorded | Related | Recorded | Interest | ||||||||
| Balance | Allowance | Allowance | Investment | Allowance | Investment | Recognized | ||||||||
| September 30, 2020 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commercial | $ | 2,266,855 | $ | 2,266,855 | $ | - | $ | 2,266,855 | $ | - | $ | 2,175,922 | $ | 87,252 |
| Residential | **** | 46,075 | **** | 46,075 | **** | - | **** | 46,075 | **** | - | **** | 48,066 | **** | 2,014 |
| $ | 2,312,930 | $ | 2,312,930 | $ | - | $ | 2,312,930 | $ | - | $ | 2,223,988 | $ | 89,266 | |
| December 31, 2019 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commercial | $ | 2,084,988 | $ | 2,084,988 | $ | - | $ | 2,084,988 | $ | - | $ | 2,631,185 | $ | 106,874 |
| Residential | 50,057 | 50,057 | - | 50,057 | - | 25,029 | 2,876 | |||||||
| $ | 2,135,045 | $ | 2,135,045 | $ | - | $ | 2,135,045 | $ | - | $ | 2,656,214 | $ | 109,750 |
Impaired loans include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
At September 30, 2020, the Company had two commercial real estate loans totaling $2,266,855 and one residential real estate loan totaling $46,075 that were classified as TDRs. All are included in impaired loans above. At September 30, 2020, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these three loans.
At December 31, 2019, the Company had one commercial real estate loan totaling $2,084,988 and one residential real estate loan totaling $50,057 that were classified as TDRs. All are included in impaired loans above. Each loan was paying as agreed at December 31, 2019. There have been no charge-offs or allowances associated with these two loans.
Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. During the second quarter of 2020, the Company modified loans, due to the pandemic and at the borrower’s request, with an aggregate principal balance of $109.2 million, or 30% of its loan portfolio. As of September 30, 2020, $21.8 million, or 6% of the Company’s loan portfolio, of these previously-deferred loans were granted additional three-month deferrals. None of these loans were classified as TDRs as of September 30, 2020 because they met the criteria discussed above.
16
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 4. | Loans (continued) |
|---|
As part of our portfolio risk management, the Company assigns a risk grade to each loan. The factors used to determine the grade are the payment history of the loan and the borrower, the value of the collateral and net worth of the guarantor, and cash flow projections of the borrower. Excellent, Above Average, Average and Acceptable grades are assigned to loans with limited or no delinquent payments and more than sufficient collateral and/or cash flow.
A description of the general characteristics of loans characterized as watch list or classified is as follows:
Pass/Watch
Loans graded as Pass/Watch are secured by generally acceptable assets which reflect above-average risk. The loans warrant closer scrutiny by management than is routine, due to circumstances affecting the borrower, the borrower’s industry, or the overall economic environment. Borrowers may reflect weaknesses such as inconsistent or weak earnings, break even or moderately deficit cash flow, thin liquidity, minimal capacity to increase leverage, or volatile market fundamentals or other industry risks. Such loans are typically secured by acceptable collateral, at or near appropriate margins, with realizable liquidation values.
Special Mention
A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.
Substandard
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management.
17
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 4. | Loans (continued) |
|---|
Doubtful
A doubtful loan has all the weaknesses inherent in a substandard loan with the added characteristic that the weaknesses, based on currently existing facts, conditions, and values, make collection or liquidation in full highly questionable and improbable.
Loans by credit grade, segregated by loan type, are as follows:
| Above | Pass | Special | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | Excellent | average | Average | Acceptable | watch | mention | Substandard | Doubtful | Total | |||||||||
| Real estate: | ||||||||||||||||||
| Commercial | $ | - | $ | 2,259,854 | $ | 48,681,901 | $ | 86,002,900 | $ | 93,453,659 | $ | 182,656 | $ | 8,525,306 | $ | - | $ | 239,106,276 |
| Construction and land development | **** | - | **** | - | **** | 2,877,340 | **** | 11,374,057 | **** | 9,637,947 | **** | - | **** | - | **** | - | **** | 23,889,344 |
| Residential | **** | 35,380 | **** | 976,572 | **** | 26,380,985 | **** | 32,580,138 | **** | 8,257,416 | **** | - | **** | 2,397,781 | **** | - | **** | 70,628,272 |
| Commercial | **** | 31,112,843 | **** | - | **** | 6,396,533 | **** | 17,794,459 | **** | 5,138,539 | **** | - | **** | - | **** | - | **** | 60,442,374 |
| Consumer | **** | 16,773 | **** | 89,963 | **** | 54,779 | **** | 9,264 | **** | 16,744 | **** | - | **** | - | **** | 51,539 | **** | 239,062 |
| $ | 31,164,996 | $ | 3,326,389 | $ | 84,391,538 | $ | 147,760,818 | $ | 116,504,305 | $ | 182,656 | $ | 10,923,087 | $ | 51,539 | $ | 394,305,328 | |
| Above | Pass | Special | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31, 2019 | Excellent | average | Average | Acceptable | watch | mention | Substandard | Doubtful | Total | |||||||||
| Real estate: | ||||||||||||||||||
| Commercial | $ | - | $ | 2,769,944 | $ | 91,274,940 | $ | 110,566,629 | $ | 27,438,005 | $ | - | $ | 8,888,631 | $ | - | $ | 240,938,149 |
| Construction and land development | - | 216,000 | 4,737,737 | 8,572,151 | 4,669,067 | - | - | - | 18,194,955 | |||||||||
| Residential | 39,817 | 1,633,783 | 30,767,418 | 34,784,120 | 6,386,377 | - | 2,510,554 | - | 76,122,069 | |||||||||
| Commercial | 153,848 | 20,000 | 11,682,299 | 11,995,143 | 3,096,213 | - | - | - | 26,947,503 | |||||||||
| Consumer | 2,327 | 99,385 | 91,620 | 60,049 | 19,214 | - | 240 | 19,192 | 292,027 | |||||||||
| $ | 195,992 | $ | 4,739,112 | $ | 138,554,014 | $ | 165,978,092 | $ | 41,608,876 | $ | - | $ | 11,399,425 | $ | 19,192 | $ | 362,494,703 |
The principal balance of loans in the Pass/Watch category as of September 30, 2020 increased significantly over the balance as of December 31, 2019 because all of the loans that were granted payment deferrals due to COVID -19 were downgraded to the Pass/Watch category if they were in a higher rated category at the time the deferral was granted. Loans that completed their initial 90 day deferral and are making scheduled payments again are being re-evaluated on a loan by loan basis to determine if they warrant upgrading.
The Company’s allowance for loan losses is based on management’s evaluation of the risks inherent in the Company’s loan portfolio and the general economy. The allowance for loan **** losses is maintained at the amount management considers adequate to cover estimated losses in loans receivable that are deemed probable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience by pools of similar loans, diversification and size of the portfolio, adequacy of the collateral, the amount of non-performing loans and industry trends. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.
18
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 4. | Loans (Continued) |
|---|
The following table details activity in the allowance for loan losses by portfolio for the nine-month periods ended September 30, 2020 and 2019 and for the year ended December 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| September 30, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,763,861 | $ | 340,084 | $ | - | $ | 45,962 | $ | 2,149,907 | $ | - | $ | 2,149,907 | $ | 2,266,855 | $ | 236,839,421 | |
| Construction and land development | **** | 192,828 | **** | 51,804 | **** | - | **** | 10,800 | **** | 255,432 | **** | - | **** | 255,432 | **** | - | **** | 23,889,344 | |
| Residential | **** | 478,124 | **** | 102,515 | **** | - | **** | - | **** | 580,639 | **** | - | **** | 580,639 | **** | 46,075 | **** | 70,582,197 | |
| Commercial | **** | 107,782 | **** | 5,429 | **** | - | **** | 15,835 | **** | 129,046 | **** | - | **** | 129,046 | **** | - | **** | 60,442,374 | |
| Consumer | **** | 4,133 | **** | 2,260 | **** | - | **** | - | **** | 6,393 | **** | - | **** | 6,393 | **** | - | **** | 239,062 | |
| Unallocated | **** | 46,987 | **** | (27,092 | ) | **** | - | **** | - | **** | 19,895 | **** | - | **** | 19,895 | **** | - | **** | - |
| $ | 2,593,715 | $ | 475,000 | $ | - | $ | 72,597 | $ | 3,141,312 | $ | - | $ | 3,141,312 | $ | 2,312,930 | $ | 391,992,398 | ||
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| September 30, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,754,372 | $ | (47,253 | ) | $ | - | $ | 19,689 | $ | 1,726,808 | $ | - | $ | 1,726,808 | $ | 2,097,690 | $ | 231,043,107 |
| Construction and land development | 196,374 | (34,932 | ) | - | 10,425 | 171,867 | - | 171,867 | - | 16,132,994 | |||||||||
| Residential | 401,626 | 45,242 | - | - | 446,868 | - | 446,868 | 50,790 | 68,998,908 | ||||||||||
| Commercial | 102,610 | (14,180 | ) | - | 6,666 | 95,096 | - | 95,096 | - | 21,134,598 | |||||||||
| Consumer | 10,428 | (5,521 | ) | - | - | 4,907 | - | 4,907 | - | 309,902 | |||||||||
| Unallocated | 43,924 | 56,644 | - | - | 100,568 | - | 100,568 | - | - | ||||||||||
| $ | 2,509,334 | $ | - | $ | - | $ | 36,780 | $ | 2,546,114 | $ | - | $ | 2,546,114 | $ | 2,148,480 | $ | 337,619,509 | ||
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| December 31, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,754,372 | $ | (11,700 | ) | $ | - | $ | 21,189 | $ | 1,763,861 | $ | - | $ | 1,763,861 | $ | 2,084,988 | $ | 238,853,161 |
| Construction and land development | 196,374 | (17,571 | ) | - | 14,025 | 192,828 | - | 192,828 | - | 18,194,955 | |||||||||
| Residential | 401,626 | 76,498 | - | - | 478,124 | - | 478,124 | 50,057 | 76,072,012 | ||||||||||
| Commercial | 102,610 | (3,995 | ) | - | 9,167 | 107,782 | - | 107,782 | - | 26,947,503 | |||||||||
| Consumer | 10,428 | (6,295 | ) | - | - | 4,133 | - | 4,133 | - | 292,027 | |||||||||
| Unallocated | 43,924 | 3,063 | - | - | 46,987 | - | 46,987 | - | - | ||||||||||
| $ | 2,509,334 | $ | 40,000 | $ | - | $ | 44,381 | $ | 2,593,715 | $ | - | $ | 2,593,715 | $ | 2,135,045 | $ | 360,359,658 |
19
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 5. | Lease Commitments |
|---|
The Company and its subsidiaries are obligated under operating leases for certain office premises.
The following table shows operating lease right of use assets and operating lease liabilities as of September 30, 2020 and December 31, 2019:
| Consolidated Balance | |||||
|---|---|---|---|---|---|
| Sheet classification | September 30, 2020 | December 31, 2019 | |||
| Operating lease right of use asset | Other assets | $ | 1,280,194 | $ | 1,392,281 |
| Operating lease liabilities | Other liabilities | 1,472,946 | 1,559,356 |
Operating lease cost included in occupancy expense in the statement of income for the three months ended September 30, 2020 and 2019 was $49,926 and $50,630, respectively. Operating lease cost included in occupancy expense in the statement of income for the nine months ended September 30, 2020 and 2019 was $144,060 and $144,851, respectively.
Future minimum payments under the agreements, including those option years for which the Company is reasonably certain to renew, are as follows:
| Year | Amount | ||
|---|---|---|---|
| 2020 | $ | 50,490 | |
| 2021 | 210,955 | ||
| 2022 | 221,497 | ||
| 2023 | 228,531 | ||
| 2024 | 234,910 | ||
| Thereafter | 1,140,679 | ||
| Total lease payments | 2,087,062 | ||
| Less imputed interest | (614,116 | ) | |
| Present value of operating lease liabilities | $ | 1,472,946 |
For operating leases as of September 30, 2020, the weighted average remaining lease term is 8.8 years and the weighted average discount rate is 3.25%. During the three months ended September 30, 2020 and 2019, cash paid for amounts included in the measurement of lease liabilities was $41,463 and $39,500, respectively. During the nine months ended September 30, 2020 and 2019, cash paid for amounts included in the measurement of lease liabilities was $118,383 and $113,448, respectively.
| 6. | Capital Standards |
|---|
Farmers and Merchants Bancshares, Inc. and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
20
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 6. | Capital Standards (continued) |
|---|
The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.
Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as “well capitalized”: (i) a common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a total risk-based capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%.
The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank. As of September 30, 2020, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The following table presents actual and required capital ratios as of September 30, 2020 and December 31, 2019 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2020 and December 31, 2019 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Capital ratios of the Company are substantially the same as the Bank’s.
21
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 6. | Capital Standards (continued) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Minimum | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Capital Adequacy | To Be Well | ||||||||||||||
| (Dollars in thousands) | Actual | Phase-In Schedule | Capitalized | ||||||||||||
| September 30, 2020 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
| Total capital (to risk-weighted assets) | $ | 44,784 | **** | 12.05 | % | $ | 39,027 | **** | 10.50 | % | $ | 37,169 | **** | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) | **** | 41,643 | **** | 11.20 | % | **** | 31,593 | **** | 8.50 | % | **** | 29,735 | **** | 8.00 | % |
| Common equity tier 1 (to risk- weighted assets) | **** | 41,643 | **** | 11.20 | % | **** | 26,018 | **** | 7.00 | % | **** | 24,160 | **** | 6.50 | % |
| Tier 1 leverage (to average assets) | **** | 41,643 | **** | 8.41 | % | **** | 19,816 | **** | 4.00 | % | **** | 24,771 | **** | 5.00 | % |
| Minimum | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Capital Adequacy | To Be Well | ||||||||||||||
| (Dollars in thousands) | Actual | Phase-In Schedule | Capitalized | ||||||||||||
| December 31, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
| Total capital (to risk-weighted assets) | $ | 51,274 | 13.88 | % | $ | 38,775 | 10.50 | % | $ | 36,928 | 10.00 | % | |||
| Tier 1 capital (to risk-weighted assets) | 48,681 | 13.18 | % | 31,389 | 8.50 | % | 29,543 | 8.00 | % | ||||||
| Common equity tier 1 (to risk- weighted assets) | 48,681 | 13.18 | % | 25,850 | 7.00 | % | 24,003 | 6.50 | % | ||||||
| Tier 1 leverage (to average assets) | 48,681 | 10.94 | % | 17,798 | 4.00 | % | 22,247 | 5.00 | % |
On September 30, 2020, the Bank paid an $8 million dividend to the Company to be used as a portion of the purchase price to be paid for the acquisition of Carroll.
To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. As of September 30, 2020, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the Bank’s category.
The FDIC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action.
| 7. | Fair Value |
|---|
Accounting standards define fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants. The price in the principal market used to measure the fair value of the asset or liability is not adjusted for transaction costs. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The standards require the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. The standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
22
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 7. | Fair Value (continued) |
|---|
The fair value hierarchy is as follows:
| ● | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
|---|---|
| ● | Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. |
| --- | --- |
| ● | Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
| --- | --- |
The Company uses the following methods and significant assumptions to estimate the fair values of the following assets:
| ● | Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices from a nationally recognized securities pricing agent. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. |
|---|---|
| ● | Equity security at fair value: The Company’s investment in an equity mutual fund is valued based on the net asset value of the fund, which is classified as Level 1. |
| --- | --- |
| ● | Other real estate owned (“OREO”): Nonrecurring fair value adjustments to OREO reflect full or partial write-downs that are based on the OREO’s observable market price or current appraised value of the real estate. Since the market for OREO is not active, OREO subjected to nonrecurring fair value adjustments based on the current appraised value of the real estate are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value. |
| --- | --- |
| ● | Impaired loans: Nonrecurring fair value adjustments to impaired loans reflect full or partial write-downs and reserves that are based on the impaired loan’s observable market price or current appraised value of the collateral. Since the market for impaired loans is not active, such loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value. |
| --- | --- |
23
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 7. | Fair Value (continued) |
|---|
The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| Carrying Value: | ||||||||
|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||||
| September 30, 2020 | ||||||||
| Recurring | ||||||||
| Available for sale securities | ||||||||
| State and municipal | $ | - | $ | 528,797 | $ | - | $ | 528,797 |
| SBA pools | **** | - | **** | 1,843,156 | **** | - | **** | 1,843,156 |
| Corporate bonds | **** | - | **** | 2,187,545 | **** | - | **** | 2,187,545 |
| Mortgage-backed securities | **** | - | **** | 35,322,637 | **** | - | **** | 35,322,637 |
| $ | - | $ | 39,882,135 | $ | - | $ | 39,882,135 | |
| Equity security at fair value Mutual fund | $ | 553,057 | $ | - | $ | - | $ | 553,057 |
| Nonrecurring | ||||||||
| Impaired loans | $ | - | $ | - | $ | 2,312,930 | $ | 2,312,930 |
| December 31, 2019 | ||||||||
| Recurring | ||||||||
| Available for sale securities | ||||||||
| State and municipal | $ | - | $ | 512,670 | $ | - | $ | 512,670 |
| SBA pools | - | 2,151,797 | - | 2,151,797 | ||||
| Mortgage-backed securities | - | 33,867,307 | - | 33,867,307 | ||||
| $ | - | $ | 36,531,774 | $ | - | $ | 36,531,774 | |
| Equity security at fair value Mutual fund | $ | 532,321 | $ | - | $ | - | $ | 532,321 |
| Nonrecurring | ||||||||
| Impaired loans | $ | - | $ | - | $ | 2,135,045 | $ | 2,135,045 |
24
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 7. | Fair Value (continued) |
|---|
The estimated fair value of financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs were as follows:
| September 30, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Carrying | Estimated | Carrying | Estimated | |||||
| Amount | Fair Value | Amount | Fair Value | |||||
| Financial assets | ||||||||
| Level 2 inputs | ||||||||
| Securities held to maturity | $ | 22,602,562 | $ | 23,633,299 | $ | 19,510,018 | $ | 20,097,931 |
| Mortgage loans held for sale | **** | 2,650,459 | **** | 2,686,558 | 242,000 | 245,857 | ||
| Federal Home Loan Bank stock | **** | 696,300 | **** | 696,300 | 376,200 | 376,200 | ||
| Level 3 inputs | ||||||||
| Loans, net | **** | 390,114,430 | **** | 390,036,407 | 359,382,843 | 359,346,031 | ||
| Financial liabilities | ||||||||
| Level 1 inputs | ||||||||
| Noninterest-bearing deposits | $ | 79,010,403 | $ | 79,010,403 | $ | 60,659,015 | $ | 60,659,015 |
| Securities sold under repurchase agreements | **** | 6,317,682 | **** | 6,317,682 | 10,958,118 | 10,958,118 | ||
| Level 2 inputs | ||||||||
| Interest-bearing deposits | **** | 347,065,245 | **** | 352,695,245 | 315,954,299 | 313,622,299 | ||
| Federal Home Loan Bank advances | **** | 7,000,000 | **** | 7,154,000 | - | - | ||
| Long-term debt | **** | 16,971,874 | **** | 16,971,874 | - | - |
The fair value of mortgage loans held for sale is determined by the expected sales price. The fair value of loans were determined using an exit price methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level 3). In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark.
The fair values of interest-bearing checking, savings, and money market deposit accounts are equal to their carrying amounts. The fair values of fixed-maturity time deposits are estimated based on interest rates currently offered for deposits of similar remaining maturities.
The fair value of credit commitments are considered to be the same as the contractual amounts, and are not included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.
25
Farmers and Merchants Bancshares, Inc. and Subsidiaries ****
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 8. | Earnings per Share |
|---|
Basic earnings per share is determined by dividing net income available to stockholders by the weighted-average number of shares of common stock outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents, giving retroactive effect to stock dividends declared during the period. Diluted earnings per share is determined in the same manner, except that the weighted-average number of shares of common stock outstanding is adjusted for the dilutive effect of outstanding common stock equivalents. The following table sets forth the calculation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2020 and 2019. There were no common stock equivalents outstanding for the three or nine-month periods ended September 30, 2020 or 2019.
| Three Months Ended | Nine Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| Net income | $ | 385,247 | $ | 1,177,910 | $ | 2,264,609 | $ | 3,500,018 |
| Weighted average shares outstanding | **** | 2,991,964 | 2,959,411 | **** | 2,980,372 | 2,950,122 | ||
| Earnings per share - basic and diluted | $ | 0.13 | $ | 0.40 | $ | 0.76 | $ | 1.19 |
| 9. | Retirement Plans | |||||||
| --- | --- |
The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or more with six months of service are eligible for participation in the plan. The Company matches employee contributions up to 4% of total compensation and may make additional discretionary contributions. Employee and employer contributions are 100% vested when made. The Company’s contributions to this plan were $ 51,347 and $46,398 for the three-month periods ended September 30, 2020 and 2019, respectively, and $ 160,937 and $148,991 for the nine-month periods ended September 30, 2020 and 2019, respectively.
The Company has entered into agreements with 12 employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. For this plan, the Company expensed $1,589 and $1,468 for the three-month periods ended September 30, 2020 and 2019, respectively, and $ 4,767 and $4,405 for the nine-month periods ended September 30, 2020 and 2019, respectively.
The Company adopted supplemental executive retirement plans for three of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses, including interest, of $51,300 and $30,600 for the three-month periods ended September 30, 2020 and 2019, respectively, and $153,900 and $91,800 for the nine-month periods ended September 30, 2020 and 2019, respectively.
Retirement plan expenses are included in employee benefits on the consolidated statements of income.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”). References in this report to “us”, “we”, “our”, and “the Company” are to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.
Forward-Looking Statements
This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions, including those impacted and/or driven by the COVID-19 pandemic; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; our ability to successfully integrate the business and operations of Carroll Community Bank (“Carroll Bank”) into our business and operations; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports that Farmers and Merchants Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.
Farmers and Merchants Bancshares, Inc.
Farmers and Merchants Bancshares, Inc. is a Maryland corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended. The Company was incorporated on August 8, 2016 for the purpose of becoming the holding company of Farmers and Merchants Bank (the “Bank”) in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the “Reorganization”). The Reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company.
The Company’s primary business activities are serving as the parent company of the Bank and holding a series investment in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed protected cell captive insurance company (“FCBI”). The Company owns 100% of one series of membership interests issued by FCBI, which series is deemed a “protected cell” under Tennessee law and has been designated “Series Protected Cell FCB-4” (such series investment is hereinafter referred to as the “Insurance Subsidiary”).
27
The Bank is a Maryland commercial bank chartered on October 24, 1919 that is engaged in a general commercial and retail banking business. The Bank has had one inactive subsidiary, Reliable Community Financial Services, Inc., a Maryland corporation that was incorporated in April 1992 to facilitate the sale of fixed rate annuity products and later positioned to sell a full array of investment and insurance products.
The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (FCBI) that was formed on November 9, 2016 to better manage our risk programs, provide insurance efficiencies, and add operating income by both keeping insurance premiums paid with respect to such risks within our affiliated group of entities and realizing certain tax benefits that are unique to captive insurance companies. The Company’s investment in the Insurance Subsidiary represents one series of membership interests in FCBI. As a “series” limited liability company, FCBI is authorized by state law and its governing instruments to issue one or more series of membership interests, each of which, for all purposes under state law, is deemed to be a legal entity separate and apart from FCBI and its other series.
On October 1, 2020, the Company consummated its previously-announced acquisition by merger (the “Merger”) of Carroll Bancorp, Inc. (“Carroll”) and its wholly-owned subsidiary, Carroll Community Bank. Each share of common stock of Carroll (“Carroll Common Stock”) that was outstanding immediately prior to the effective time of the Merger (the “Effective Time”) was converted into the right to receive cash in the amount $21.63 (the “Per Share Consideration”). Immediately prior to the Effective Time, there were 1,146,913 outstanding shares of Carroll Common Stock, all of which were converted into the Per Share Consideration. The merger consideration was paid by the Company using $8 million in cash and $17 million in proceeds from a third-party term loan obtained in connection with the Merger. Because the Merger was consummated after the end of the period covered by this report, this report does not take into account the financial condition or results of operations of Carroll and its subsidiaries for the three- or nine-month periods ended September 30, 2020. At September 30, 2020, Carroll had total assets of $176,159,890, net loans of $145,153,100, and total liabilities of $157,992,286, of which $144,896,990 represented deposits.
The Company maintains an Internet site at www.fmb1919.bank on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
Estimates and Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year ended December 31, 2019, which were included in Item 8 of Part II of Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019. On an on-going basis, management evaluates estimates, including those related to loan losses and intangible assets, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.
28
The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.
Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2019.
COVID-19 Pandemic
The COVID-19 pandemic has been wreaking havoc on the U.S. economy since the World Health Organization declared it a pandemic on March 11, 2020. The full impact and its effect on the banking industry, including the Company, will not be known for several quarters, but will be significant.
The U.S. and state governments reacted to the outbreak of the pandemic by issuing shelter-at-home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.
Although states, including Maryland, have eased several of the COVID-19 restrictions, including stay-at-home orders and the required closure of non-essential businesses, there appears to be a resurgence of COVID-19 cases in many states, including Maryland. As a result, it is possible that states, including Maryland, will re-implement some or all of the COVID-19 related restrictions and again require some or all non-essential businesses to close or drastically alter their business operations, which could have a material adverse impact on our customers and, thus, our financial condition and results of operations.
Paycheck Protection Program
The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. Following the enactment of the CARES Act and the establishment of the PPP, we acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program. We developed an SBA PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access. Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible. We were able to fund 172 loan applications for approximately $25.3 million from the first tranche of PPP designated funds. Congress allocated additional funding to the PPP on April 23, 2020. Due to our advance preparation and software implementation, we were able to quickly gain approval for an additional 101 loan applications for approximately $5.8 million. In total, we have gained approval for over $31 million to 273 small businesses. Approximately 70% of the loans were under $100,000 in size. All PPP loans are 100% guaranteed by the SBA, have up to a five-year maturity (the majority of our PPP originations have a two-year maturity), provide for a six-month deferral period, and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount. We have received $1,285,719 in fees which, net of related origination costs, will be amortized into interest income over the life of the loans.
In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements were to internal, non-interest-bearing accounts for use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.
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Financial Condition
Total assets increased by $71,262,647 or 16.1% to $513,477,745 at September 30, 2020 from $442,215,098 at December 31, 2019. The increase in total assets was due primarily to increases of $30,731,587 in loans, $25,126,860 in other assets, $6,111,233 in cash and cash equivalents, and $6,442,905 in debt securities. The increase in loans was due primarily to the origination of the aforementioned PPP loans. The increase in other assets is a result of depositing in escrow the acquisition price of Carroll on September 30, 2020.
Total liabilities increased $68,787,983 or 17.5% to $461,549,565 at September 30, 2020 from $392,761,582 at December 31, 2019. The increase was due primarily to a $49,462,334 increase in deposits, a $16,971,874 increase in long-term debt and a $7,000,000 increase in FHLB advances, offset by a $4,640,436 decrease in securities sold under repurchase agreements. The increase in deposits was due to an inflow of funds from depositors who abandoned riskier investments for the safety of a bank and to the aforementioned PPP loans. The majority of PPP loans were made to existing customers, so the loan proceeds were deposited in checking accounts. In many cases, the customer has not withdrawn the PPP funds.
Stockholders’ equity increased by $2,474,664 to $51,928,180 at September 30, 2020 from $49,453,516 at December 31, 2019. The increase was due primarily to net income for the period of $2,264,609 and an increase of $741,911 in accumulated other comprehensive income, offset by dividends paid, net of reinvestments of $531,856.
Loans
Major categories of loans at September 30, 2020 and December 31, 2019 are as follows:
| September 30, | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| Real estate: | ||||||||
| Commercial | $ | 239,106,276 | 61 | % | $ | 240,938,149 | 67 | % |
| Construction/Land development | 23,889,344 | 6 | % | 18,194,955 | 5 | % | ||
| Residential | 70,628,272 | 18 | % | 76,122,069 | 21 | % | ||
| Commercial | 60,442,374 | 15 | % | 26,947,503 | 7 | % | ||
| Consumer | 239,062 | 0 | % | 292,027 | 0 | % | ||
| 394,305,328 | 100 | % | 362,494,703 | 100 | % | |||
| Less: Allowance for loan losses | 3,141,312 | 2,593,715 | ||||||
| Deferred origination fees net of costs | 1,049,586 | 518,145 | ||||||
| $ | 390,114,430 | $ | 359,382,843 |
Loans increased by $30,731,587 or 8.6% to $390,114,430 at September 30, 2020 from $359,382,843 at December 31, 2019. The increase was due primarily to a $33,494,871 increase in commercial loans because of the origination of $31,112,843 of PPP loans and an increase in construction/land development loans of $5,694,389, offset by a $1,831,873 decrease in commercial real estate loans and a $5,493,797 decrease in residential loans. The allowance for loan losses increased $547,597 to $3,141,312 at September 30, 2020 from $2,593,715 at December 31, 2019. Deferred origination fees increased to $1,049,586 at September 30, 2020 from $518,145 at December 31, 2020 due to the origination of the PPP loans.
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The Company has adopted policies and procedures that seek to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Company’s policy is to make the majority of its loan commitments in the market area it serves. Management believes that this tends to reduce risk because management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.
An age analysis of past due loans, segregated by class of loans, as of September 30, 2020 and December 31, 2019, is as follows:
| 90 Days | Past Due 90 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 30 - 59 Days | 60 - 89 Days | or more | Total | Total | Days or More | |||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Loans | and Accruing | ||||||||
| September 30, 2020 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commerical | $ | - | $ | - | $ | - | $ | - | $ | 239,106,276 | $ | 239,106,276 | $ | - |
| Construction/Land development | - | - | - | - | 23,889,344 | 23,889,344 | - | |||||||
| Residential | - | - | 1,514,012 | 1,514,012 | 69,114,260 | 70,628,272 | 1,514,012 | |||||||
| Commercial | - | - | - | - | 60,442,374 | 60,442,374 | - | |||||||
| Consumer | - | - | - | - | 239,062 | 239,062 | - | |||||||
| Total | $ | - | $ | - | $ | 1,514,012 | $ | 1,514,012 | $ | 392,791,316 | $ | 394,305,328 | $ | 1,514,012 |
| 90 Days | Past Due 90 | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 30 - 59 Days | 60 - 89 Days | or more | Total | Total | Days or More | |||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Loans | and Accruing | ||||||||
| December 31, 2019 | ||||||||||||||
| Real estate: | ||||||||||||||
| Commerical | $ | 224,794 | $ | - | $ | - | $ | 224,794 | $ | 240,713,355 | $ | 240,938,149 | $ | - |
| Construction/Land development | - | - | - | - | 18,194,955 | 18,194,955 | - | |||||||
| Residential | 59,892 | - | - | 59,892 | 76,062,177 | 76,122,069 | - | |||||||
| Commercial | - | - | - | - | 26,947,503 | 26,947,503 | - | |||||||
| Consumer | - | - | - | - | 292,027 | 292,027 | - | |||||||
| Total | $ | 284,686 | $ | - | $ | - | $ | 284,686 | $ | 362,210,017 | $ | 362,494,703 | $ | - |
It is the Company’s policy to place a loan in nonaccrual status whenever there is substantial doubt about the ability of the borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan, and the overall economic situation of the borrower when making a nonaccrual decision. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least nine months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.
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At September 30, 2020 and December 31, 2019 the Company had no nonaccrual loans.
The one loan that is 90 days or more past due with a principal balance of $1,514,012 has not been placed on nonaccrual because the borrower is in the process of requesting a second 90 day payment deferral. The loan will be placed on nonaccrual in the fourth quarter if the additional payment deferral is not granted and the borrower does not make sufficient payments.
Impaired loans as of September 30, 2020 and December 31, 2019 are set forth in the following table:
| September 30 | December 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Impaired loans with no valuation allowance | $ | 2,312,930 | $ | 2,135,045 |
| Impaired loans with a valuation allowance | - | - | ||
| Total impaired loans | $ | 2,312,930 | $ | 2,135,045 |
Impaired loans include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under Accounting Standards Codification (“ASC 310-40”) for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40.
The Company has provided loan modifications to its borrowers who are impacted by the COVID-19 pandemic. Modifications include deferrals of principal and interest for periods up to three months and interest only periods of three months. These deferrals can be extended for an additional three months, subject to approval by the Company. During the second quarter of 2020, the Company modified loans having an aggregate principal balance of $109.2 million, or 30% of its loan portfolio. None of these loans were classified as TDRs as of June 30, 2020 because they met the criteria discussed above. Of these previously-deferred loans, borrowers owing a total of $21.8 million, or 6% of the Company’s loan portfolio, have been granted additional three-month deferrals. None of these loans were classified as TDRs as of September 30, 2020 because they met the criteria discussed above.
The Company continues to prudently work with borrowers that have been negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. See Note 4 to the financial statements included elsewhere in this report for additional information.
At September 30, 2020, the Company had two commercial real estate loans totaling $2,266,855 and one residential real estate loan totaling $46,075 that were classified as TDRs. All are included in impaired loans above. At September 30, 2020, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these three loans.
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At December 31, 2019, the Company had one commercial real estate loan totaling $2,084,988 and one residential real estate loan totaling $50,057 that were classified as TDRs. All are included in impaired loans above. Each loan was paying as agreed at December 31, 2019. There have been no charge-offs or allowances associated with these two loans.
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Restructured loans (TDRs): | ||||
| Performing as agreed | $ | 2,312,930 | $ | 2,135,045 |
| Not performing as agreed | - | - | ||
| Total TDRs | $ | 2,312,930 | $ | 2,135,045 |
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.
The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors.
Although management believes that, based on information currently available, the Company’s allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Company’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions at the time management determined the current level of the allowance for loan losses.
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The following table details activity in the allowance for loan losses by portfolio for the nine-month periods ended September 30, 2020 and 2019 and the year ended December 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| September 30, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,763,861 | $ | 340,084 | $ | - | $ | 45,962 | $ | 2,149,907 | $ | - | $ | 2,149,907 | $ | 2,266,855 | $ | 236,839,421 | |
| Construction and land development | 192,828 | 51,804 | - | 10,800 | 255,432 | - | 255,432 | - | 23,889,344 | ||||||||||
| Residential | 478,124 | 102,515 | - | - | 580,639 | - | 580,639 | 46,075 | 70,582,197 | ||||||||||
| Commercial | 107,782 | 5,429 | - | 15,835 | 129,046 | - | 129,046 | - | 60,442,374 | ||||||||||
| Consumer | 4,133 | 2,260 | - | - | 6,393 | - | 6,393 | - | 239,062 | ||||||||||
| Unallocated | 46,987 | (27,092 | ) | - | - | 19,895 | - | 19,895 | - | - | |||||||||
| $ | 2,593,715 | $ | 475,000 | $ | - | $ | 72,597 | $ | 3,141,312 | $ | - | $ | 3,141,312 | $ | 2,312,930 | $ | 391,992,398 | ||
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| September 30, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,754,372 | $ | (47,253 | ) | $ | - | $ | 19,689 | $ | 1,726,808 | $ | - | $ | 1,726,808 | $ | 2,097,690 | $ | 231,043,107 |
| Construction and land development | 196,374 | (34,932 | ) | - | 10,425 | 171,867 | - | 171,867 | - | 16,132,994 | |||||||||
| Residential | 401,626 | 45,242 | - | - | 446,868 | - | 446,868 | 50,790 | 68,998,908 | ||||||||||
| Commercial | 102,610 | (14,180 | ) | - | 6,666 | 95,096 | - | 95,096 | - | 21,134,598 | |||||||||
| Consumer | 10,428 | (5,521 | ) | - | - | 4,907 | - | 4,907 | - | 309,902 | |||||||||
| Unallocated | 43,924 | 56,644 | - | - | 100,568 | - | 100,568 | - | - | ||||||||||
| $ | 2,509,334 | $ | - | $ | - | $ | 36,780 | $ | 2,546,114 | $ | - | $ | 2,546,114 | $ | 2,148,480 | $ | 337,619,509 | ||
| Allowance for loan losses | Outstanding loan | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Provision | ending balance evaluated | balances evaluated | |||||||||||||||||
| Beginning | for loan | Charge | Ending | for impairment: | for impairment: | ||||||||||||||
| December 31, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | ||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | $ | 1,754,372 | $ | (11,700 | ) | $ | - | $ | 21,189 | $ | 1,763,861 | $ | - | $ | 1,763,861 | $ | 2,084,988 | $ | 238,853,161 |
| Construction and land development | 196,374 | (17,571 | ) | - | 14,025 | 192,828 | - | 192,828 | - | 18,194,955 | |||||||||
| Residential | 401,626 | 76,498 | - | - | 478,124 | - | 478,124 | 50,057 | 76,072,012 | ||||||||||
| Commercial | 102,610 | (3,995 | ) | - | 9,167 | 107,782 | - | 107,782 | - | 26,947,503 | |||||||||
| Consumer | 10,428 | (6,295 | ) | - | - | 4,133 | - | 4,133 | - | 292,027 | |||||||||
| Unallocated | 43,924 | 3,063 | - | - | 46,987 | - | 46,987 | - | - | ||||||||||
| $ | 2,509,334 | $ | 40,000 | $ | - | $ | 44,381 | $ | 2,593,715 | $ | - | $ | 2,593,715 | $ | 2,135,045 | $ | 360,359,658 |
The provision for loan losses was $475,000 for the nine months ended September 30, 2020 and $0 for the nine months ended September 30, 2019.
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During the nine-month periods ended September 30, 2020 and 2019, the Company had no loan charge-offs. Recoveries from loans written off in prior periods totaled $72,597 and $36,780 for the nine-month periods ended September 30, 2020 and 2019, respectively.
As of September 30, 2020, the Company had $8,792,813 of loans on a watch list, other than impaired loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2019, the Company had $9,264,380 of such loans. These loans are subject to ongoing management attention and their classifications are reviewed regularly. Watch list loans include loans classified as Special Mention, Substandard, and Doubtful.
Investment Securities
Investments in debt securities increased by $6,442,905 or 11.5% to $62,484,697 at September 30, 2020 from $56,041,792 at December 31, 2019. At September 30, 2020 and December 31, 2019, the Company had classified 64% and 65%, respectively, of the investment portfolio as available for sale. The balance of the portfolio was classified as held to maturity.
Securities classified as available for sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the Company’s asset/liability management strategy. Available for sale debt securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of income taxes. Securities classified as held to maturity, which the Company has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company records unrealized gains and losses on equity securities in earnings. The Company does not currently follow a strategy of making security purchases with a view to near-term sales, and, therefore, does not own trading securities. The Company manages the investment portfolio within policies that seek to achieve desired levels of liquidity, manage interest rate sensitivity, meet earnings objectives, and provide required collateral for deposit and borrowing activities.
The following table sets forth the carrying value of investments in debt securities at September 30, 2020 and December 31, 2019:
| September | December 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Available for sale | **** | **** | **** | **** |
| State and municipal | $ | 528,797 | $ | 512,670 |
| SBA pools | 1,843,156 | 2,151,797 | ||
| Corporate bonds | 2,187,545 | - | ||
| Mortgage-backed securities | 35,322,637 | 33,867,307 | ||
| $ | 39,882,135 | $ | 36,531,774 | |
| Held to maturity | **** | **** | **** | **** |
| State and municipal | $ | 22,602,562 | $ | 19,510,018 |
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The following table sets forth the scheduled maturities of investments in debt securities at September 30, 2020:
| Available for Sale | Held to Maturity | |||||||
|---|---|---|---|---|---|---|---|---|
| Amortized<br><br> <br>Cost | Fair Value | Amortized<br><br> <br>Cost | Fair Value | |||||
| Within 1 year | $ | - | $ | - | $ | - | $ | - |
| Over 1 to 5 years | 2,351,723 | 2,450,600 | 792,990 | 813,269 | ||||
| Over 5 to 10 years | 250,000 | 265,742 | 2,957,174 | 3,156,466 | ||||
| Over 10 years | - | - | 18,852,398 | 19,663,564 | ||||
| 2,601,723 | 2,716,342 | 22,602,562 | 23,633,299 | |||||
| SBA Pools | 1,885,788 | 1,843,156 | - | - | ||||
| Mortgage-backed securities | 34,312,246 | 35,322,637 | - | - | ||||
| $ | 38,799,757 | $ | 39,882,135 | $ | 22,602,562 | $ | 23,633,299 |
SBA pools and mortgage-backed securities are due in monthly installments.
Other Real Estate Owned
The Bank owns one property in Cecil County, Maryland that was acquired through foreclosure in 2007 and is classified as other real estate owned (“OREO”). The Bank was required by statute to write this property down during 2019 to $0 due to the length of time that it has been held by the Bank. The property is under contract to be sold by the end of 2021.
Deposits
Total deposits increased by $49,462,334 or 13.1% to $426,075,648 at September 30, 2020 from $376,613,314 at December 31, 2019. The increase in deposits was due to a $24,693,308 increase in interest bearing checking accounts, a $7,733,446 increase in money market accounts, a $3,824,247 increase in savings accounts, and a $18,351,388 increase in noninterest-bearing accounts, offset by a $5,140,055 decrease in time deposits.
The following table shows the average balances and average costs of deposits for the nine-month periods ended September 30, 2020 and 2019:
| September 30, 2020 | September 30, 2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Average | Average | |||||||||
| Balance | Cost | Balance | Cost | |||||||
| Noninterest bearing demand deposits | $ | 74,243,150 | 0.00 | % | $ | 58,922,450 | 0.00 | % | ||
| Interest bearing demand deposits | 73,702,521 | 0.30 | % | 55,466,882 | 0.32 | % | ||||
| Savings and money market deposits | 107,353,960 | 0.26 | % | 100,681,579 | 0.31 | % | ||||
| Time deposits | 153,264,507 | 1.79 | % | 148,466,527 | 1.98 | % | ||||
| $ | 408,564,138 | 0.79 | % | $ | 363,537,438 | 0.94 | % |
Liquidity Management
Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet depositor withdrawal requirements, to fund loans, and to fund our other debts and obligations as they come due in the normal course of business. We maintain our asset liquidity position internally through short-term investments, the maturity distribution of the investment portfolio, loan repayments, and income from earning assets. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed. The Bank is approved to borrow 75% of eligible pledged single-family residential loans and 50% of eligible pledged commercial loans as well as investment securities, or approximately $62.7 million under a secured line of credit with the FHLB. The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately $22.2 million. Finally, the Bank has an $18,500,000 ($9,500,000 unsecured and $9,000,000 secured) overnight federal funds line of credit available from two commercial banks. FHLB advances of $7,000,000 and $0 were outstanding as of September 30, 2020 and December 31, 2019, respectively. The Company borrowed $17,000,000 to facilitate the acquisition of Carroll as more fully described below. There were no borrowings from the Reserve Bank or our commercial bank lenders at September 30, 2020 and December 31, 2019. Management believes that we have adequate liquidity sources to meet all anticipated liquidity needs over the next 12 months. Management knows of no trend or event which is likely to have a material impact on our ability to maintain liquidity at satisfactory levels.
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Borrowings and Other Contractual Obligations
The Company’s contractual obligations consist primarily of borrowings and operating leases for various facilities.
On September 30, 2020, the Company borrowed $17,000,000 from First Horizon Bank (“FHN”) to be used in the acquisition of Carroll on October 1, 2020. Net of issuance costs of $28,126, the amount of the net long-term debt was $16,971,874 as of September 30, 2020. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. The Company is required to make quarterly interest-only payments through October 1, 2021. The Company expects that the amount of these quarterly interest-only payments to be $174,250. During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $646,472, which will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to the lender.
Securities sold under agreements to repurchase represent overnight borrowings from customers. Securities owned by the Company which are used as collateral for these borrowings are primarily U.S. government agency securities.
Specific information about the Company’s borrowings and contractual obligations is set forth in the following table:
| September 30, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| Amount oustanding at period-end: | ||||||
| Securities sold under repurchase agreements | $ | 6,317,682 | $ | 10,958,118 | ||
| Federal Home Loan Bank advances | 7,000,000 | - | ||||
| Long-term debt (net of issuance costs) | 16,971,874 | - | ||||
| Weighted average rate paid at period-end: | ||||||
| Securites sold under repurchase agreements | 0.60 | % | 1.49 | % | ||
| Federal Home Loan Bank advances | 0.78 | % | - | |||
| Long-term debt | 4.10 | % | - |
37
The Federal Home Loan Bank advances and the long-term debt outstanding at September 30, 2020 will require the following principal payments:
| Three months ending December 31, 2020 | $ | 2,000,000 |
|---|---|---|
| Year ending December 31, 2021 | - | |
| Year ending December 31, 2022 | 1,888,889 | |
| Year ending December 31, 2023 | 1,888,889 | |
| Year ending December 31, 2024 | 1,888,889 | |
| Year ending December 31, 2025 | 16,333,333 |
Capital Resources and Adequacy
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
Additional information regarding the capital requirements that apply to us can be found in Note 6 to the consolidated financial statements presented elsewhere in this report and in Item 1 of Part I of the Form 10-K under the heading, “Supervision and Regulation – Capital Requirements”.
The following table presents actual and required capital ratios as of September 30, 2020 and December 31, 2019 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2020 and December 31, 2019, based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
| Minimum | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Capital Adequacy | To Be Well | ||||||||||||||
| (Dollars in thousands) | Actual | Phased In Schedule | Capitalized | ||||||||||||
| September 30, 2020 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
| Total capital (to risk-weighted assets) | $ | 44,784 | **** | 12.05 | % | $ | 39,027 | **** | 10.50 | % | $ | 37,169 | **** | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) | **** | 41,643 | **** | 11.20 | % | **** | 31,593 | **** | 8.50 | % | **** | 29,735 | **** | 8.00 | % |
| Common equity tier 1 (to risk- weighted assets) | **** | 41,643 | **** | 11.20 | % | **** | 26,018 | **** | 7.00 | % | **** | 24,160 | **** | 6.50 | % |
| Tier 1 leverage (to average assets) | **** | 41,643 | **** | 8.41 | % | **** | 19,816 | **** | 4.00 | % | **** | 24,771 | **** | 5.00 | % |
| December 31, 2019 | |||||||||||||||
| Total capital (to risk-weighted assets) | $ | 51,274 | 13.88 | % | $ | 38,775 | 10.50 | % | $ | 36,928 | 10.00 | % | |||
| Tier 1 capital (to risk-weighted assets) | 48,681 | 13.18 | % | 31,389 | 8.50 | % | 29,543 | 8.00 | % | ||||||
| Common equity tier 1(to risk- weighted assets) | 48,681 | 13.18 | % | 25,850 | 7.00 | % | 24,003 | 6.50 | % | ||||||
| Tier 1 leverage (to average assets) | 48,681 | 10.94 | % | 17,798 | 4.00 | % | 22,247 | 5.00 | % |
38
On September 30, 2020, the Bank paid an $8 million dividend to the Company to be used as a portion of the purchase price to be paid for the acquisition of Carroll.
The Company intends to fund future growth primarily with cash, federal funds, maturities of investment securities and deposit growth. Management knows of no other trend or event that will have a material impact on capital.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as of September 30, 2020 and December 31, 2019 are as follows:
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Loan commitments | ||||
| Construction and land development | $ | 1,206,500 | $ | 1,322,275 |
| Commercial | **** | - | 4,102,000 | |
| Commercial real estate | **** | 10,833,965 | 7,560,714 | |
| Residential | **** | 1,030,000 | 770,499 | |
| $ | 13,070,465 | $ | 13,755,488 | |
| Unused lines of credit | ||||
| Home-equity lines | $ | 3,856,821 | $ | 3,700,404 |
| Commercial lines | **** | 15,535,650 | 22,229,095 | |
| $ | 19,392,471 | $ | 25,929,499 | |
| Letters of credit | $ | 2,077,969 | $ | 1,935,613 |
Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.
The maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments.
39
RESULTS OF OPERATIONS
Comparison of Operating Results for the Nine Months Ended September 30 , 2020 and 2019
General
Net income for the nine months ended September 30, 2020 was $2,264,609, compared to $3,500,018, for the same period of 2019. The decrease of $1,235,409 or 35.3% was due to a $1,886,906 increase in noninterest expenses and a $475,000 increase in the loan loss provision, offset by a $288,999 increase in noninterest income, a $513,340 increase in net interest income, and a $324,158 decrease in income taxes. Included in noninterest expense is $1,612,321 of one-time expenses incurred in connection with the Merger. Without these Merger costs, net income would have been $3,488,045 for the nine months ended September 30, 2020. The table below provides a comparison of the Company’s results for the nine-month periods ended September 30, 2020 and 2019, both with and without the Merger costs.
| Nine Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | ||||||||
| Excluding | |||||||||
| As Reported | Acquisition Costs | As Reported | |||||||
| Income before taxes | $ | 2,724,959 | $ | 4,337,280 | $ | 4,284,526 | |||
| Income taxes | 460,350 | 849,235 | 784,508 | ||||||
| Net income | $ | 2,264,609 | $ | 3,488,045 | $ | 3,500,018 | |||
| Earnings per share | $ | 0.76 | $ | 1.17 | $ | 1.19 | |||
| Return on average assets | 0.63 | % | 0.97 | % | 1.09 | % | |||
| Return on average equity | 5.88 | % | 9.06 | % | 9.84 | % |
Net Interest Income
Net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings, was $11,736,686 for the nine months ended September 30, 2020, compared to $11,223,346 for the same period of 2019.
Total interest income for the nine months ended September 30, 2020 was $14,287,618, compared to $13,926,004 for the same period of 2019, an increase of $361,614 or 2.6%.
Total interest income on loans for the nine months ended September 30, 2020 increased by $623,521 when compared to the same period of 2019 due to a $38.8 million higher average loan balance for the first nine months of 2020 when compared to the same period of 2019, offset by a lower loan yield of 4.62% for the first nine months of 2020 versus 4.90% for the same period of 2019. Investment income for the first nine months of 2020 decreased by $39,393 or 3.7% when compared to the same period of 2019 due to a decrease in the fully-taxable equivalent yield to 2.46% for nine months ended September 30, 2020, compared to 3.06% for the same period of 2019, offset by a $11.1 million higher average investment balance. Interest income on federal funds sold and other interest earning assets decreased $222,514 due to a decrease in the fully-taxable equivalent yield to 0.60% for the nine months ended September 30, 2020, compared to 2.44% for the same period of 2019. The fully-taxable equivalent yield on total interest-earning assets decreased 37 basis points to 4.21% for the nine months ended September 30, 2020, compared to 4.58% for the same period of 2019. The average balance of total interest-earning assets increased by $47.5 million to $457.4 million for the nine months ended September 30, 2020, compared to $409.8 million for the same period of 2019.
Total interest expense for the nine months ended September 30, 2020 was $2,550,932, compared to $2,702,658 for the same period of 2019, a decrease of $151,726, or 5.6%. The decrease was due to a lower overall cost of funds on interest bearing deposits and borrowings of 0.98% for the nine months ended September 30, 2020, compared to 1.14% for the same period of 2019, offset by a $30.5 million increase in the average balance of interest-bearing liabilities to $347.5 million in the first nine months of 2020 compared to $317.0 million in the same period of 2019. Cost of funds for time deposits decreased to 1.79% for the nine months ended September 30, 2020 from 1.98% for the same period of 2019. Securities sold under repurchase agreements cost of funds increased to 1.30% for the first nine months of 2020 from 1.23% for the first nine months of 2019. Federal Home Loan Bank of Atlanta advances and other borrowings cost of funds decreased to 1.01% for the first nine months of 2020 from 1.66% for the same period in 2019.
Average noninterest-earning assets increased by $3.2 million to $20.6 million in the first nine months of 2020, compared to $17.4 million in the same period of 2019. Average noninterest-bearing deposits increased by $15.3 million to $74.2 million during the first nine months of 2020 compared to $58.9 million in the same period of 2019. The average balance in stockholders’ equity increased by $3.9 million for the nine months ended September 30, 2020 when compared with the same period of 2019.
40
In 2020, the FRB reduced the federal funds range to 0.00% to 0.25%. As a result, yields on loans and investments have decreased. Our cost of funds is lower than the same period of 2019 and will continue to decline as higher rate certificates of deposit mature and are replaced by lower rate certificates. Management will closely monitor its asset-liability position so that it can respond to any future changes in interest rates and/or changes to the Bank’s interest rate spread.
The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the nine-month periods ended September 30, 2020 and 2019. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
| Nine Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | |||||||||||||
| Average | Average | |||||||||||||
| Balance | Interest | Yield | Balance | Interest | Yield | |||||||||
| Assets*:* | ||||||||||||||
| Loans | $ | 381,189,719 | $ | 13,205,913 | 4.62 | % | $ | 342,398,030 | $ | 12,582,392 | 4.90 | % | ||
| Securities, taxable | 41,209,087 | 564,540 | 1.83 | % | 33,467,239 | 636,235 | 2.53 | % | ||||||
| Securities, tax exempt | 21,334,547 | 590,741 | 3.69 | % | 17,942,912 | 545,007 | 4.05 | % | ||||||
| Federal funds sold and other interest-earning assets | 13,641,105 | 60,940 | 0.60 | % | 16,034,923 | 293,151 | 2.44 | % | ||||||
| Total interest-earning assets | 457,374,458 | 14,422,134 | 4.21 | % | 409,843,104 | 14,056,785 | 4.58 | % | ||||||
| Noninterest-earning assets | 20,569,704 | 17,395,304 | ||||||||||||
| Total assets | $ | 477,944,162 | $ | 427,238,408 | ||||||||||
| Liabilities and Stockholders’ Equity*:* | ||||||||||||||
| NOW, savings, and money market | $ | 181,056,481 | 376,248 | 0.28 | % | $ | 156,148,461 | 370,726 | 0.32 | % | ||||
| Certificates of deposit | 153,264,507 | 2,053,248 | 1.79 | % | 148,466,527 | 2,206,503 | 1.98 | % | ||||||
| Securities sold under repurchase agreements | 9,804,072 | 95,710 | 1.30 | % | 9,006,627 | 82,912 | 1.23 | % | ||||||
| FHLB advances and other borrowings | 3,397,814 | 25,726 | 1.01 | % | 3,421,989 | 42,517 | 1.66 | % | ||||||
| Total interest-bearing liabilities | 347,522,874 | 2,550,932 | 0.98 | % | 317,043,604 | 2,702,658 | 1.14 | % | ||||||
| Noninterest-bearing deposits | 74,243,150 | 58,922,450 | ||||||||||||
| Noninterest-bearing liabilities | 4,858,736 | 3,868,457 | ||||||||||||
| Total liabilities | 426,624,760 | 379,834,511 | ||||||||||||
| Stockholders' equity | 51,319,402 | 47,403,897 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 477,944,162 | $ | 427,238,408 | ||||||||||
| Net interest income | $ | 11,871,202 | $ | 11,354,127 | ||||||||||
| Interest rate spread | 3.23 | % | 3.44 | % | ||||||||||
| Net yield on interest-earning assets | 3.46 | % | 3.69 | % | ||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 131.61 | % | 129.27 | % | ||||||||||
| Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis. | ||||||||||||||
| --- |
41
Noninterest Income
Noninterest income for the nine months ended September 30, 2020 was $1,397,596 compared to $1,108,597 for the same period of 2019, an increase of $288,999 or 26.1%. The increase was primarily a result of a $434,797 increase in mortgage banking income and a $210,150 lower write down of OREO, offset by a $75,900 lower gain on the sale of SBA loans, $194,368 lower bank owned life insurance income, and $80,251 lower service charges on deposit accounts. Our mortgage banking division has experienced strong mortgage origination activity as a result of historically low interest rates. Lower service charges are a result of less customer transaction activity due to the COVID-19 pandemic.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2020 totaled $9,934,323, compared to $8,047,417 for the same period of 2019, an increase of $1,886,906 or 23.5%. The increase was due primarily to $1,612,321 in Merger-related costs and an increase in salaries and benefits of $295,331.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2020 was $460,350, compared to $784,508 for the same period of 2019. The effective tax rate was 16.9% and 18.3% for the nine-month periods ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate was due to a higher percentage of tax exempt revenue for the nine months ended September 30, 2020 when compared to the same period in 2019.
Comparison of Operating Results for the Three Months Ended September 30, 2020 and 2019
Net income for the three months ended September 30, 2020 was $385,247 compared to $1,177,910 for the same period of 2019. The decrease of $792,663 or 67.3% was due to a $13,000 increase in the provision for loan losses and a $1,443,072 increase in noninterest expense, offset by a $230,861 decrease in income taxes, a $338,148 increase in net interest income and a $94,400 increase in noninterest income. Included in noninterest expense are one-time expenses of $1,267,401 incurred in connection with the Merger. Without these acquisition costs, net income would have been $1,358,676 for the three months ended September 30, 2020. The table below provides a comparison of the Company’s results for the three-month periods ended September 30, 2020 and 2019, both with and without the Merger costs.
| Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | ||||||||
| Excluding | |||||||||
| As Reported | Acquisition Costs | As Reported | |||||||
| Income before taxes | $ | 462,110 | $ | 1,729,511 | $ | 1,485,634 | |||
| Income taxes | 76,863 | 370,835 | 307,724 | ||||||
| Net income | $ | 385,247 | $ | 1,358,676 | $ | 1,177,910 | |||
| Earnings per share | $ | 0.13 | $ | 0.45 | $ | 0.40 | |||
| Return on average assets | 0.31 | % | 1.10 | % | 1.09 | % | |||
| Return on average equity | 2.95 | % | 10.40 | % | 9.70 | % |
Net Interest Income
Net interest income was $4,100,749 for the three months ended September 30, 2020, compared to $3,762,601 for the same period of 2019.
42
Total interest income for the three months ended September 30, 2020 was $4,822,354, compared to $4,719,012 for the same period of 2019, an increase of $103,342 or 2.2%.
Total interest income on loans for the three months ended September 30, 2020 increased by $239,921 when compared to the same period of 2019 due to a $51.2 million higher average loan balance for the three months ended September 30, 2020 when compared to the same period of 2019, offset by a lower loan yield of 4.57% for the three months ended September 30, 2020 versus 4.97% for the same period of 2019. Investment income for the three months ended September 30, 2020 decreased by $61,616 or 16.0% when compared to the same period of 2019 due to a decrease in the fully-taxable equivalent yield to 2.12% for three months ended September 30, 2020, compared to 3.01% for the same period of 2019, offset by a $10.6 million higher average investment balance. Interest income on federal funds sold and other interest earning assets decreased $74,963 due to a decrease in the fully-taxable equivalent yield to 0.42% for the three months ended September 30, 2020, compared to 2.39% for the same period of 2019. The fully-taxable equivalent yield on total interest-earning assets was 4.13% for the three months ended September 30, 2020, compared to 4.61% for the same period in 2019. The average balance of total interest-earning assets increased by $56.6 million to $470.3 million for the three months ended September 30, 2020, compared to $413.7 million for the same period of 2019.
Total interest expense for the three months ended September 30, 2020 was $721,605, compared to $956,411 for the same period of 2019, a decrease of $234,806 or 24.6%. The decrease was due to a lower overall cost of funds of 0.81% for the three months ended September 30, 2020, compared to 1.20% for the same period of 2019, offset by a $36.1 million increase in the average balance of interest-bearing liabilities to $356.5 million for the three months ended September 30, 2020, compared to $320.4 million in the same period of 2019. Cost of funds for time deposits decreased to 1.58% for the three months ended September 30, 2020 from 2.09% for the same period of 2019. Securities sold under repurchase agreements cost of funds decreased to 0.83% for the three months ended September 30, 2020 from 1.24% for the same period of 2019. Federal Home Loan Bank of Atlanta advances and other borrowings cost of funds decreased to 1.01% for the three months ended September 30, 2020 from 1.52% for the same period in 2019.
Average noninterest-earning assets increased by $7.4 million to $25.8 million for the three months ended September 30, 2020, compared to $18.4 million in the same period of 2019. Average noninterest-bearing deposits increased by $24.0 million to $82.5 million during the three months ended September 30, 2020, compared to $58.5 million in the same period of 2019. The average balance in stockholders’ equity increased by $3.7 million for the three months ended September 30, 2020 when compared with the same period of 2019.
43
The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the three-month periods ended September 30, 2020 and 2019. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
| Three Months Ended, | Three Months Ended, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | |||||||||||||
| Average | Average | |||||||||||||
| Balance | Interest | Yield | Balance | Interest | Yield | |||||||||
| Assets*:* | ||||||||||||||
| Loans | $ | 393,225,957 | $ | 4,489,992 | 4.57 | % | $ | 342,050,963 | $ | 4,250,071 | 4.97 | % | ||
| Securities, taxable | 43,770,543 | 150,272 | 1.37 | % | 38,073,848 | 235,978 | 2.48 | % | ||||||
| Securities, tax exempt | 23,659,811 | 207,940 | 3.52 | % | 18,759,966 | 191,462 | 4.08 | % | ||||||
| Federal funds sold and other interest-earning assets | 9,651,367 | 10,069 | 0.42 | % | 14,790,327 | 88,506 | 2.39 | % | ||||||
| Total interest-earning assets | 470,307,678 | 4,858,273 | 4.13 | % | 413,675,104 | 4,766,017 | 4.61 | % | ||||||
| Noninterest-earning assets | 25,768,859 | 18,389,380 | ||||||||||||
| Total assets | $ | 496,076,537 | $ | 432,064,484 | ||||||||||
| Liabilities and Stockholders’ Equity*:* | ||||||||||||||
| NOW, savings, and money market | $ | 194,896,794 | 106,356 | 0.22 | % | $ | 156,924,885 | 124,712 | 0.32 | % | ||||
| Certificates of deposit | 147,923,538 | 584,477 | 1.58 | % | 151,279,838 | 791,740 | 2.09 | % | ||||||
| Securities sold under repurchase agreements | 8,651,764 | 18,020 | 0.83 | % | 9,394,922 | 29,190 | 1.24 | % | ||||||
| FHLB advances and other borrowings | 5,043,489 | 12,752 | 1.01 | % | 2,826,120 | 10,769 | 1.52 | % | ||||||
| Total interest-bearing liabilities | 356,515,585 | 721,605 | 0.81 | % | 320,425,765 | 956,411 | 1.20 | % | ||||||
| Noninterest-bearing deposits | 82,493,506 | 58,548,434 | ||||||||||||
| Noninterest-bearing liabilities | 4,804,935 | 4,523,982 | ||||||||||||
| Total liabilities | 443,814,026 | 383,498,181 | ||||||||||||
| Stockholders' equity | 52,262,511 | 48,566,303 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 496,076,537 | $ | 432,064,484 | ||||||||||
| Net interest income | $ | 4,136,668 | $ | 3,809,606 | ||||||||||
| Interest rate spread | 3.32 | % | 3.41 | % | ||||||||||
| Net yield on interest-earning assets | 3.52 | % | 3.68 | % | ||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 131.92 | % | 129.10 | % | ||||||||||
| Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis. | ||||||||||||||
| --- |
44
Noninterest Income
Noninterest income for the three months ended September 30, 2020 was $487,368, compared to $392,968 for the same period of 2019, an increase of $94,400 or 24.0%. The increase was primarily a result of an increase in mortgage banking revenue of $128,029, offset by a $38,289 decrease in service charges on deposit accounts.
Noninterest Expense
Noninterest expenses for the three months ended September 30, 2020 totaled $4,126,007, compared to $2,682,935 for the same period of 2019, an increase of $1,443,072 or 53.8%. The increase was due primarily to $1,267,401 in Merger-related costs and increases in salaries and benefits of $169,479.
Income Tax Expense
Income tax expense for the three months ended September 30, 2020 was $76,863, compared to $307,724 for the same period of 2019. The effective tax rate was 16.6% for the three months ended September 30, 2020, compared to 20.7% for the same period of 2019. The decrease in the effective tax rate was due to a higher percentage of tax exempt revenue for the three months ended September 30, 2020 when compared to the same period in 2019.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is interest rate fluctuation and we have procedures in place to evaluate and mitigate this risk. This market risk and our procedures are described in Item 7 of Part II the on Form 10-K under the heading, “Interest Rate Risk”, which provides information as of December 31, 2019. Management believes that no material changes in market risk or our procedures used to evaluate and mitigate these risks have occurred since December 31, 2019.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including Farmers and Merchants Bancshares, Inc.’s principal executive officer (“PEO”) and the principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls as of September 30, 2020 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
45
During the quarter ended September 30, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Form 10-K and in Item 1A of Part II of Farmers and Merchants Bancshares, Inc.’s Quarter Report on Form 10-Q for the quarter ended March 31, 2020. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
46
Item 6. Exhibits
The exhibits filed or furnished with this quarterly report are listed in the following Exhibit Index:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FARMERS AND MERCHANTS BANCSHARES, INC. | |
|---|---|
| Date: November 10, 2020 | /s/ James R. Bosley, Jr. |
| James R. Bosley, Jr. | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date November 10, 2020 | /s/ Mark C. Krebs |
| Mark C. Krebs,<br><br> <br>Treasurer and Chief Financial Officer | |
| (Principal Financial Officer & Principal Accounting Officer) |
47
Exhibit 31.1
Certifications of the Principal Executive Officer
Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James R. Bosley, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmers and Merchants Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|---|---|
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| --- | --- |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| --- | --- |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|---|---|
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| --- | --- |
| Date: November 10, 2020 | /s/ James R. Bosley, Jr. |
| --- | --- |
| James R. Bosley, Jr. | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
Certifications of the Principal Financial Officer
Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mark C. Krebs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmers and Merchants Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|---|---|
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| --- | --- |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| --- | --- |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|---|---|
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| --- | --- |
| Date November 10, 2020 | /s/ Mark C. Krebs |
| --- | --- |
| Mark C. Krebs,<br><br> <br>Treasurer and Chief Financial Officer<br><br> <br>(Principal Financial Officer) |
Exhibit 32
Certification of Periodic Report
Pursuant to 18 U.S.C. § Section 1350
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to, and for purposes only of, 18 U.S.C. § 1350, each of the undersigned hereby certifies that (i) the Quarterly Report of Farmers and Merchants Bancshares, Inc. on Form 10-Q for the quarter ended September 30, 2020 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Farmers and Merchants Bancshares, Inc.
| Date: November 10, 2020 | /s/ James R. Bosley, Jr. |
|---|---|
| James R. Bosley, Jr. | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 10, 2020 | /s/ Mark C. Krebs |
| Mark C. Krebs,<br><br> <br>Treasurer and Chief Financial Officer | |
| (Principal Financial Officer) |