Equibles

10-Q

Farmers & Merchants Bancshares, Inc. (FMFG)

10-Q 2024-05-14 For: 2024-03-31
View Original
Added on April 06, 2026

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 March 31, 2024

☐ 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<br> <br>incorporation or organization) (I. R. S. Employer Identification No.)

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: 3,116,966 as of May 14, 2024.

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 March 31, 2024 **** (unaudited) and December 31, 2023 3
Consolidated statements of income (unaudited) for the three months ended March 31, 2024 **** and 2023 4
Consolidated statements of comprehensive income (unaudited) for the three months ended March 31, 2024 **** and 2023 5
Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2024 **** and 2023 6
Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2024 **** and 2023 7
Notes to financial statements (unaudited) 9
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
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 46
SIGNATURES 47

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31,
2023 *
Assets
Cash and due from banks 25,375,049 $ 44,404,473
Federal funds sold and other interest-bearing deposits 258,181 285,864
Cash and cash equivalents 25,633,230 44,690,337
Certificates of deposit in other banks 100,000 100,000
Securities available for sale, at fair value 162,126,265 164,084,673
Securities held to maturity, at amortized cost less allowance for credit losses of 31,670 and 35,627 20,198,804 20,163,622
Equity security, at fair value 507,743 507,130
Restricted stock, at cost 920,900 863,500
Loans, less allowance for credit losses of 4,317,837 and 4,285,247 537,080,607 523,308,044
Premises and equipment, net 7,282,487 6,583,452
Accrued interest receivable 2,235,859 2,180,734
Deferred income taxes, net 8,436,251 8,312,482
Other real estate owned, net 1,242,365 1,242,365
Bank owned life insurance 15,021,074 14,930,754
Goodwill and other intangibles, net 7,032,342 7,034,424
Other assets 6,775,313 5,939,309
794,593,240 $ 799,940,826
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 115,416,221 $ 115,284,706
Interest-bearing 540,561,366 565,678,145
Total deposits 655,977,587 680,962,851
Securities sold under repurchase agreements 5,600,380 6,760,493
Federal Home Loan Bank of Atlanta advances 5,000,000 5,000,000
Federal Reserve Bank advances 54,000,000 33,000,000
Long-term debt, net of issuance costs 12,741,562 13,212,378
Accrued interest payable 1,404,170 1,482,773
Other liabilities 6,792,739 7,344,040
741,516,438 747,762,535
Stockholders' equity
Common stock, par value .01 per share, authorized 5,000,000 shares; issued and outstanding 3,116,966 shares in 2024 and 2023 31,170 31,170
Additional paid-in capital 30,402,618 30,398,080
Retained earnings 40,653,172 39,433,185
Accumulated other comprehensive loss (18,010,158 ) (17,684,144 )
53,076,802 52,178,291
794,593,240 $ 799,940,826

All values are in US Dollars.

* Derived from audited consolidated financial statements

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements .

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

Three months ended
March 31,
2024 2023
Interest income **** **** **** **** **** ****
Loans, including fees $ 6,881,911 $ 6,045,548
Investment securities - taxable 1,579,066 805,707
Investment securities - tax exempt 136,778 139,844
Federal funds sold and other interest earning assets 468,307 61,430
Total interest income 9,066,062 7,052,529
Interest expense **** **** **** **** **** ****
Deposits 3,100,926 1,034,851
Securities sold under repurchase agreements 23,009 4,338
Federal Home Loan Bank advances 12,588 204,447
Federal Reserve Bank advances 621,683 263
Long-term debt 133,600 151,562
Total interest expense 3,891,806 1,395,461
Net interest income 5,174,256 5,657,068
Recovery of credit losses - (270,000 )
Net interest income after recovery of credit losses 5,174,256 5,927,068
Noninterest income **** **** **** **** **** ****
Service charges on deposit accounts 194,674 186,707
Mortgage banking income 4,951 25,293
Bank owned life insurance income 90,321 83,105
Fair value adjustment on equity security (3,541 ) 5,767
Gain on insurance proceeds 142,794 -
Other fees and commissions 75,216 81,542
Total noninterest income 504,415 382,414
Noninterest expense **** **** **** **** **** ****
Salaries 1,976,187 1,876,444
Employee benefits 606,313 594,057
Occupancy 246,327 214,116
Furniture and equipment 242,421 239,727
Other 1,041,219 833,091
Total noninterest expense 4,112,467 3,757,435
Income before income taxes 1,566,204 2,552,047
Income taxes 346,217 651,196
Net income $ 1,219,987 $ 1,900,851
Earnings per share - basic $ 0.39 $ 0.62
Earnings per share - diluted $ 0.39 $ 0.62

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements .

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended
March 31,
2024 2023
Net income $ 1,219,987 $ 1,900,851
Other comprehensive (loss) income, net of income taxes:
Total unrealized (loss) gain on investment securities available for sale (1,574,213 ) 2,187,186
Income tax benefit (expense) 433,185 (601,859 )
Net unrealized (loss) gain on investment securities available for sale (1,141,028 ) 1,585,327
Total unrealized gain (loss) on derivatives 1,124,429 (213,521 )
Income tax (expense) benefit (309,415 ) 58,756
Net unrealized gain (loss) on derivatives 815,014 (154,765 )
Total other comprehensive (loss) income (326,014 ) 1,430,562
Total comprehensive income **** 893,973 **** 3,331,413

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements .

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Three months Ended March 31, 2024 and 2023

(Unaudited)

Additional Accumulated other Total
Common stock paid-in Retained comprehensive stockholders'
Shares Par value capital earnings income (loss) equity
Balance, December 31, 2022 3,071,214 $ 30,712 $ 29,549,914 $ 35,300,166 $ (17,105,829 ) $ 47,774,963
Net income - - - 1,900,851 - 1,900,851
Other comprehensive income - - - - 1,430,562 1,430,562
Reclassification due to the adoption of ASU 2016-13 - - - (341,392 ) - (341,392 )
Dividend adjustment - - - (7,843 ) - (7,843 )
Balance, March 31, 2023 3,071,214 $ 30,712 $ 29,549,914 $ 36,851,782 $ (15,675,267 ) $ 50,757,141
Balance, December 31, 2023 3,116,966 $ 31,170 $ 30,398,080 $ 39,433,185 $ (17,684,144 ) $ 52,178,291
Net income - - - 1,219,987 - 1,219,987
Stock-based compensation - - 4,538 - - 4,538
Other comprehensive loss - - - - (326,014 ) (326,014 )
Balance, March 31, 2024 3,116,966 $ 31,170 $ 30,402,618 $ 40,653,172 $ (18,010,158 ) $ 53,076,802

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31, 2024 2023
Reconciliation of net income to net cash provided by operating activities **** **** **** **** **** ****
Net income $ 1,219,987 $ 1,900,851
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 130,019 127,908
Recovery of credit losses - (270,000 )
(Accretion) amortization of right of use asset 659 (927 )
Equity security dividends reinvested (4,153 ) (2,900 )
Unrealized loss (gain) on equity security 3,541 (5,767 )
Gain on sale of premises and equipment - (9,000 )
Gain on insurance proceeds (142,794 ) -
Loss (gain) on fair value hedge 11,529 (34,113 )
Stock based compensation 4,538 -
Amortization of debt issuance costs 1,406 1,406
Amortization of premiums and (accretion of discounts), net (236,259 ) (808 )
Bank owned life insurance cash surrender value (90,320 ) (83,105 )
Increase (decrease) in
Deferred loan fees and costs, net (16,793 ) (12,202 )
Accrued interest payable (78,603 ) 371,097
Other liabilities (276,084 ) (249,840 )
Decrease (increase) in
Mortgage loans held for sale - 428,355
Accrued interest receivable (55,125 ) 76,470
Other assets 12,733 (86,736 )
Net cash provided by operating activities 484,281 2,150,689

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31, 2024 2023
Cash flows from investing activities **** **** **** **** **** ****
Proceeds from maturity and call of securities
Available for sale 3,854,141 2,615,824
Purchase of securities
Available for sale (3,269,141 ) -
Loans made to customers, net of principal collected (13,779,297 ) (4,020,500 )
Redemption (purchase) of stock in FHLB of Atlanta (57,400 ) 425,000
Proceeds from sale of premises and equipment - 9,000
Proceeds from insurance 142,794 -
Purchases of premises, equipment and software (816,971 ) (27,243 )
Net cash used in investing activities (13,925,874 ) (997,919 )
Cash flows from financing activities **** **** **** **** **** ****
Net increase (decrease) in
Noninterest-bearing deposits 131,515 647,093
Interest-bearing deposits (25,114,694 ) 13,081,095
Securities sold under repurchase agreements (1,160,113 ) (2,098,076 )
Federal Home Loan Bank of Atlanta advances - (10,000,000 )
Federal Reserve Bank advances 21,000,000 -
Long-term debt principal payments (472,222 ) (472,222 )
Dividends paid, net of reinvestments - (7,843 )
Net cash (used in) provided by financing activities (5,615,514 ) 1,150,047
Net (decrease) increase in cash and cash equivalents (19,057,107 ) 2,302,817
Cash and cash equivalents at beginning of period 44,690,337 7,263,537
Cash and cash equivalents at end of period $ 25,633,230 $ 9,566,354
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,969,006 $ 1,051,398
Cash paid during the period for income taxes - -
Supplemental disclosure of non-cash transactions:
Net unrealized (loss) gain on securities available for sale (1,574,213 ) 2,187,186
Additions to right of use assets 704,577 -

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements

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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. The Insurance Subsidiary is a series investment, 100% owned by Farmers and Merchants Bancshares, Inc. in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions, including insurance premium paid by the Bank that were received by the Insurance Subsidiary through an intermediary, have been eliminated.

As used in these notes, the terms the “Company”, “we”, “us”, or “our” refer to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.

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 (“GAAP”) 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 month period ended March 31, 2024 do not necessarily reflect the results that may be expected for the fiscal year ending December 31, 2024 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, 2023, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2023 that was filed with the Securities and Exchange Commission (the “SEC”).

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segments items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect that the adoption of ASU 2023-07 will have a material impact on its consolidated financial statements.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2. Basis of Presentation (continued)

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect that the adoption of ASU 2023-09 will have a material impact on its consolidated financial statements.

The accounting policies adopted by management are consistent with authoritative GAAP and are consistent with those followed by our peers.

Summary of Significant Accounting Policies

There have been no changes to significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 was issued.

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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 Allowance for Net Carrying
March 31, 2024 cost gains losses value Credit Losses Amount
Available for sale ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ******
State and municipal $ 500,000 $ - $ 18,070 $ 481,930 $ - $ 481,930
SBA pools 754,309 1,284 9,574 746,019 - 746,019
Corporate bonds 9,343,965 - 1,193,412 8,150,553 - 8,150,553
Mortgage-backed securities 175,890,767 573,939 23,716,943 152,747,763 - 152,747,763
$ 186,489,041 $ 575,223 $ 24,937,999 $ 162,126,265 $ - $ 162,126,265
Held to maturity ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ******
State and municipal $ 20,230,474 $ 25,167 $ 1,280,219 $ 18,975,422 $ 31,670 $ 20,198,804
Amortized Unrealized Unrealized Fair Allowance for Net Carrying
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 cost gains losses value Credit Losses Amount
Available for sale ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ******
State and municipal $ 500,000 $ - $ 15,192 $ 484,808 $ - $ 484,808
SBA pools 776,686 1,160 11,136 766,710 - 766,710
Corporate bonds 9,853,988 - 1,283,559 8,570,429 - 8,570,429
Mortgage-backed securities 175,742,562 1,025,623 22,505,459 154,262,726 - 154,262,726
$ 186,873,236 $ 1,026,783 $ 23,815,346 $ 164,084,673 $ - $ 164,084,673
Held to maturity ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ****** ******
State and municipal $ 20,199,249 $ 39,537 $ 1,175,565 $ 19,063,221 $ 35,627 $ 20,163,622

The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to securities issued by states and political subdivisions, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts. Unrated bonds were underwritten similar to commercial loans and the financial condition of the issuer is monitored periodically. Expected credit losses on commercial loans are applied to unrated bonds.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Investment Securities (continued)

The following table summarizes Moody's and/or Standard & Poor's bond ratings (the Company’s primary credit quality indicators) for our portfolio of held-to-maturity securities issued by states and political subdivisions as of March 31, 2024 and December 31, 2023 at amortized cost:

March 31, 2024 December 31, 2023
AAA $ 2,790,036 $ 2,785,955
AA 10,455,537 10,434,388
A 3,812,546 3,808,365
BAA 252,113 250,661
Not rated 2,920,242 2,919,880
Total $ 20,230,474 $ 20,199,249

Historical loss rates associated with securities having similar grades as those in our portfolio have generally not been significant. Furthermore, as of March 31, 2024, there were no past due principal or interest payments associated with these securities and none are on nonaccrual.

The following table details activity in the allowance for credit losses on held-to-maturity securities for the three-month periods ended March 31, 2024 and 2023:

Three Months Ended Three Months Ended
March 31, 2024 March 31, 2023
Beginning balance $ 35,627 $ -
Impact of adopting ASC 326 - 51,990
Credit loss (recovery) provision (3,957 ) 8,602
Ending balance $ 31,670 $ 60,592

Available for sale securities accrued interest receivable totaled $407,633 and $418,549 and held to maturity securities accrued interest receivable totaled $101,327 and $121,670 as of March 31, 2024 and December 31, 2023, respectively.  Both are grouped in accrued interest receivable on the balance sheet.

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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
March 31, 2024 cost value cost value
Within one year $ 1,759,510 $ 1,716,188 $ 230,000 $ 229,273
Over one to five years 772,467 731,005 668,760 653,885
Over five to ten years 7,311,988 6,185,290 5,889,453 5,637,026
Over ten years - - 13,442,261 12,455,238
9,843,965 8,632,483 20,230,474 18,975,422
Mortgage-backed securities and SBA pools, due in monthly installments 176,645,076 153,493,782 - -
$ 186,489,041 $ 162,126,265 $ 20,230,474 $ 18,975,422

Securities with a carrying value of $48,926,054 and $50,371,861 as of March 31, 2024 and December 31, 2023, respectively, were pledged as collateral for securities sold under repurchase agreements and other collateralized deposits.

During the three-month periods ended March 31, 2024 and 2023, there were no sales of securities.

The following table sets forth the Company’s gross unrealized losses on a continuous basis for investment securities, by category and length of time.

March 31, 2024 Less than 12 months 12 months or more Total
Description of investments Fair Value Unrealized<br> <br>Loss Fair Value Unrealized<br> <br>Loss Fair Value Unrealized<br> <br>Loss
State and municipal $ 244,600 $ 5,400 $ 237,330 $ 12,670 $ 481,930 $ 18,070
SBA pools - - 628,696 9,574 628,696 9,574
Corporate bonds - - 8,150,553 1,193,412 8,150,553 1,193,412
Mortgage-backed securities 24,615,742 540,406 101,042,001 23,176,537 125,657,743 23,716,943
Total $ 24,860,342 $ 545,806 $ 110,058,580 $ 24,392,193 $ 134,918,922 $ 24,937,999

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Investment Securities (continued)
December 31, 2023 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 $ 246,608 $ 3,392 $ 238,200 $ 11,800 $ 484,808 $ 15,192
SBA pools - - 659,869 11,136 659,869 11,136
Corporate bonds 341,264 58,736 8,229,165 1,224,823 8,570,429 1,283,559
Mortgage-backed securities 23,840,242 378,379 104,657,869 22,127,080 128,498,111 22,505,459
Total $ 24,428,114 $ 440,507 $ 113,785,103 $ 23,374,839 $ 138,213,217 $ 23,815,346

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 March 31, 2024, management did not have the intent to sell any of the securities before a recovery of cost. The unrealized losses are 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 investment 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 these factors, as of March 31, 2024, management believes the unrealized losses detailed in the table above are temporary and, accordingly, none of these unrealized losses have been recognized in the Company’s consolidated statement of income.

4. Loans and Allowance for Credit Losses

Major categories of loans are as follows:

March 31, December 31,
2024 2023
Real estate:
Commercial $ 365,948,344 $ 361,942,511
Construction and land development 19,148,561 20,446,150
Residential 112,424,358 112,789,631
Commercial 44,240,198 32,823,072
Consumer 193,399 165,136
541,954,860 528,166,500
Less: Allowance for credit losses 4,317,837 4,285,247
Deferred origination fees net of costs 556,416 573,209
$ 537,080,607 $ 523,308,044

For purposes of monitoring the performance of the loan portfolio and estimating the allowance for credit losses, the Company's loans receivable portfolio is segmented as follows: (i) commercial real estate; (ii) construction and land development; (iii) residential; (iv) commercial and industrial; (v) and consumer.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally do not exceed 80%.

Construction and land development real estate loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral  *may,*at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who  mayor  may not be a loan customer,  maybe unable to finish the construction project as planned because of financial pressure unrelated to the project. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally do not exceed 80%.

Residential real estate mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the collateral.

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans  maybe dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which  maydepreciate over time and cannot be appraised with as much precision.

Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral. The Company's consumer loans consist primarily of installment loans made to individuals for personal, family and household purposes. These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

- 15 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

The following tables present the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more still accruing as of March 31, 2024 and December 31, 2023:

Nonaccrual Nonaccrual
With No With
Allowance Allowance
for Credit Loss for Credit Loss
March 31, 2024
Real estate:
Commercial $ - $ 502,961
Construction and land development - -
Residential - -
Commercial - 152,449
Consumer - -
$ - $ 655,410
December 31, 2023
Real estate:
Commercial $ - $ 502,961
Construction and land development - -
Residential - -
Commercial - 152,449
Consumer - -
$ - $ 655,410

The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2024 and 2023.

At March 31, 2024, the Company had one nonaccrual commercial real estate loan totaling $502,961 and one nonaccrual commercial loan totaling $152,449. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of $11,433 would have been recorded for the three months ended March 31, 2024 if these nonaccrual loans had been current and performing in accordance with their original terms. The Company allocated $475,000 of its allowance for credit losses to these nonaccrual loans.

At December 31, 2023, the Company had one nonaccrual commercial real estate loan totaling $502,961 and one nonaccrual commercial loan totaling $152,449. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of $45,856 would have been recorded in 2023 if these nonaccrual loans had been current and performing in accordance with their original terms. The Company allocated $450,000 of its allowance for credit losses to these nonaccrual loans.

- 16 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

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
March 31, 2024
Real estate:
Commercial $ - $ - $ 502,961 $ 502,961 $ 365,445,383 $ 365,948,344 $ -
Construction and land development - - - - 19,148,561 19,148,561 -
Residential - - - - 112,424,358 112,424,358 -
Commercial - - 152,449 152,449 44,087,749 44,240,198 -
Consumer - - - - 193,399 193,399 -
Total $ - $ - $ 655,410 $ 655,410 $ 541,299,450 $ 541,954,860 $ -
December 31, 2023
Real estate:
Commercial $ - $ - $ 502,961 $ 502,961 $ 361,439,550 $ 361,942,511 $ -
Construction and land development - - - - 20,446,150 20,446,150 -
Residential 161,431 - - 161,431 112,628,200 112,789,631 -
Commercial - - 152,449 152,449 32,670,623 32,823,072 -
Consumer 1,163 - - 1,163 163,973 165,136 -
Total $ 162,594 $ - $ 655,410 $ 818,004 $ 527,348,496 $ 528,166,500 $ -

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2024 and December 31, 2023:

March 31, 2024
Real estate:
Commercial $ 2,515,020
Construction and land development -
Residential 273,463
Commercial 152,449
Consumer -
$ 2,940,932
December 31, 2023
--- --- ---
Real estate:
Commercial $ 2,515,103
Construction and land development -
Residential 275,622
Commercial 152,449
Consumer -
$ 2,943,174

- 17 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

From time to time, loans to borrowers experiencing financial difficulty may be modified. Generally, the modifications we grant are extensions of terms, deferrals of payments for an extended period or interest rate reductions. Occasionally, we may modify a loan by providing principal forgiveness. In some cases, we will modify a loan by providing multiple types, or combinations, of concessions.

There were no modifications to borrowers experiencing financial distress during the three months ended March 31, 2024 and 2023. There were no loan defaults during the three months ended March 31, 2024 and 2023.

Accrued interest receivable on loans totaled $1,621,151 and $1,539,332 at March 31, 2024 and December 31, 2023, respectively, and is included as accrued interest receivable on the balance sheets.

Credit Quality Indicators

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, Acceptable, and Pass/Watch 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:

Special Mention

A special mention loan is a loan that management believes 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 a loan that management believes is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Such 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. Substandard loans require more intense supervision by Company management.

Doubtful

A doubtful loan is a loan that management believes has all of 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.

- 18 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

Loans by credit grade, segregated by loan type, and year originated as of March 31, 2024 are as follows:

Term Loans Amortized Cost Basis by Origination
Revolving
Revolving Loans Converted
2024 2023 2022 2021 2020 Prior Loans to Term Total
Commercial Real Estate
Pass $ 5,011,657 $ 27,464,322 $ 73,640,394 $ 56,459,519 $ 20,358,378 $ 170,504,116 $ 3,142,991 $ - $ 356,581,377
Special Mention - - - - - - - - -
Substandard - - - - - 9,366,967 - - 9,366,967
Doubtful - - - - - - - - -
Total $ 5,011,657 $ 27,464,322 $ 73,640,394 $ 56,459,519 $ 20,358,378 $ 179,871,083 $ 3,142,991 $ - $ 365,948,344
Construction and Land Development
Pass $ 587,636 $ 3,630,188 $ 6,561,781 $ 2,643,137 $ 634,519 $ 5,091,300 $ - $ - $ 19,148,561
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Doubtful - - - - - - - - -
Total $ 587,636 $ 3,630,188 $ 6,561,781 $ 2,643,137 $ 634,519 $ 5,091,300 $ - $ - $ 19,148,561
Residential Real Estate
Pass $ 2,091,278 $ 10,334,045 $ 18,450,985 $ 9,968,171 $ 7,783,011 $ 55,189,937 $ 6,947,521 $ - $ 110,764,948
Special Mention - - - - - - - - -
Substandard - - - - - 1,659,410 - - 1,659,410
Doubtful - - - - - - - - -
Total $ 2,091,278 $ 10,334,045 $ 18,450,985 $ 9,968,171 $ 7,783,011 $ 56,849,347 $ 6,947,521 $ - $ 112,424,358
Commercial
Pass $ 5,776,066 $ 6,817,393 $ 7,768,722 $ 3,004,509 $ 1,032,155 $ 1,611,486 $ 18,077,418 $ - $ 44,087,749
Special Mention - - - - - - - - -
Substandard - - - - - 152,449 - - 152,449
Doubtful - - - - - - - - -
Total $ 5,776,066 $ 6,817,393 $ 7,768,722 $ 3,004,509 $ 1,032,155 $ 1,763,935 $ 18,077,418 $ - $ 44,240,198
Consumer
Pass $ 50,342 $ 83,558 $ 28,344 $ 3,006 $ 4,240 $ 4,174 $ - $ - $ 173,664
Special Mention - - - - - - - - -
Substandard 2,167 4,151 - 1,322 - - - - 7,640
Doubtful - - - - - - 12,095 - 12,095
Total $ 52,509 $ 87,709 $ 28,344 $ 4,328 $ 4,240 $ 4,174 $ 12,095 $ - $ 193,399
Aggregate total
Pass $ 13,516,979 $ 48,329,506 $ 106,450,226 $ 72,078,342 $ 29,812,303 $ 232,401,013 $ 28,167,930 $ - $ 530,756,299
Special Mention - - - - - - - - -
Substandard 2,167 4,151 - 1,322 - 11,178,826 - - 11,186,466
Doubtful - - - - - - 12,095 - 12,095
Total $ 13,519,146 $ 48,333,657 $ 106,450,226 $ 72,079,664 $ 29,812,303 $ 243,579,839 $ 28,180,025 $ - $ 541,954,860

- 19 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

Loans by credit grade, segregated by loan type, and year originated as of December 31, 2023 are as follows:

Term Loans Amortized Cost Basis by Origination
Revolving
Revolving Loans Converted
2023 2022 2021 2020 2019 Prior Loans to Term Total
Commercial Real Estate
Pass $ 27,500,909 $ 73,944,442 $ 54,973,818 $ 20,540,492 $ 25,102,276 $ 147,755,491 $ 2,694,268 $ - $ 352,511,696
Special Mention - - - - - - - - -
Substandard - - - - - 9,430,815 - - 9,430,815
Doubtful - - - - - - - - -
Total $ 27,500,909 $ 73,944,442 $ 54,973,818 $ 20,540,492 $ 25,102,276 $ 157,186,306 $ 2,694,268 $ - $ 361,942,511
Construction and Land Development
Pass $ 3,359,456 $ 6,519,085 $ 4,623,119 $ 642,571 $ 309,038 $ 4,992,881 $ - $ - $ 20,446,150
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Doubtful - - - - - - - - -
Total $ 3,359,456 $ 6,519,085 $ 4,623,119 $ 642,571 $ 309,038 $ 4,992,881 $ - $ - $ 20,446,150
Residential Real Estate
Pass $ 10,109,347 $ 18,603,074 $ 9,870,791 $ 6,793,326 $ 16,218,714 $ 40,015,758 $ 9,501,733 $ - $ 111,112,743
Special Mention - - - - - - - - -
Substandard - - - - - 1,676,888 - - 1,676,888
Doubtful - - - - - - - - -
Total $ 10,109,347 $ 18,603,074 $ 9,870,791 $ 6,793,326 $ 16,218,714 $ 41,692,646 $ 9,501,733 $ - $ 112,789,631
Commercial
Pass $ 7,016,763 $ 8,074,370 $ 3,264,342 $ 1,225,297 $ 884,537 $ 910,042 $ 11,295,272 $ - $ 32,670,623
Special Mention - - - - - - - - -
Substandard - - - - 152,449 - - - 152,449
Doubtful - - - - - - - - -
Total $ 7,016,763 $ 8,074,370 $ 3,264,342 $ 1,225,297 $ 1,036,986 $ 910,042 $ 11,295,272 $ - $ 32,823,072
Consumer
Pass $ 92,295 $ 32,771 $ 4,179 $ 4,895 $ 7,226 $ 2 $ - $ - $ 141,368
Special Mention - - - - - - - - -
Substandard 6,106 - 1,524 - - - - - 7,630
Doubtful - - - - - - 16,138 - 16,138
Total $ 98,401 $ 32,771 $ 5,703 $ 4,895 $ 7,226 $ 2 $ 16,138 $ - $ 165,136
Aggregate total
Pass $ 48,078,770 $ 107,173,742 $ 72,736,249 $ 29,206,581 $ 42,521,791 $ 193,674,174 $ 23,491,273 $ - $ 516,882,580
Special Mention - - - - - - - - -
Substandard 6,106 - 1,524 - 152,449 11,107,703 - - 11,267,782
Doubtful - - - - - - 16,138 - 16,138
Total $ 48,084,876 $ 107,173,742 $ 72,737,773 $ 29,206,581 $ 42,674,240 $ 204,781,877 $ 23,507,411 $ - $ 528,166,500

- 20 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

The following table details activity in the allowance for credit losses and loan balances by portfolio as of and for the three-month periods ended March 31, 2024 and 2023 and for the year ended December 31, 2023. 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 credit losses ending Outstanding loan balances
Provision for balance evaluated for impairment: evaluated:
Beginning (recovery of) Charge Ending
March 31, 2024 balance credit losses offs Recoveries balance Individually Collectively Individually Collectively
Real estate:
Commercial $ 2,449,988 $ 18,900 $ - $ - $ 2,468,888 $ 322,551 $ 2,146,337 $ 2,515,020 $ 363,433,324
Construction and land development 253,173 (7,269 ) - - 245,904 - 245,904 - 19,148,561
Residential 1,012,938 (117,994 ) - 6,000 900,944 - 900,944 273,463 112,150,895
Commercial 493,502 104,040 - - 597,542 152,449 445,093 152,449 44,087,749
Consumer 2,080 568 (1,163 ) - 1,485 - 1,485 - 193,399
Unallocated 73,566 29,508 - - 103,074 - 103,074 - -
$ 4,285,247 $ 27,753 $ (1,163 ) $ 6,000 $ 4,317,837 $ 475,000 $ 3,842,837 $ 2,940,932 $ 539,013,928
Allowance for credit losses ending Outstanding loan balances
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Provision for balance evaluated for impairment: evaluated:
Beginning Impact of ASC (recovery of) Charge Ending
March 31, 2023 balance 326 Adoption credit losses offs Recoveries balance Individually Collectively Individually Collectively
Real estate:
Commercial $ 2,818,582 $ (350,838 ) $ 1,218 $ - $ - $ 2,468,962 $ 129,461 $ 2,339,501 $ 502,961 $ 357,265,645
Construction and land development 164,596 120,976 (401 ) - 4,050 289,221 - 289,221 - 24,545,262
Residential 793,919 464,227 (369,453 ) - 371,048 1,259,741 - 1,259,741 - 113,176,411
Commercial 337,303 135,200 (15,444 ) - - 457,059 152,449 304,610 152,449 29,723,854
Consumer 4,706 (4,537 ) 3,367 - - 3,536 - 3,536 - 140,150
Unallocated 31,092 (31,092 ) 110,713 - - 110,713 - 110,713 - -
$ 4,150,198 $ 333,936 $ (270,000 ) $ - $ 375,098 $ 4,589,232 $ 281,910 $ 4,307,322 $ 655,410 $ 524,851,322

- 21 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)
Allowance for credit losses ending Outstanding loan balances
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Provision for balance evaluated for impairment: evaluated:
Beginning Impact of ASC (recovery of) Charge Ending
December 31, 2023 balance 326 Adoption credit losses offs Recoveries balance Individually Collectively Individually Collectively
Real estate:
Commercial $ 2,818,582 $ (448,483 ) $ 79,889 $ - $ - $ 2,449,988 $ 297,551 $ 2,152,437 $ 2,515,103 $ 359,427,408
Construction and land development 164,596 277,317 (200,665 ) - 11,925 253,173 - 253,173 - 20,446,150
Residential 793,919 508,579 (676,608 ) - 387,048 1,012,938 - 1,012,938 275,622 112,514,009
Commercial 337,303 133,838 22,361 - - 493,502 152,449 341,053 152,449 32,670,623
Consumer 4,706 (4,526 ) 1,900 - - 2,080 - 2,080 - 165,136
Unallocated 31,092 (31,092 ) 73,566 - - 73,566 - 73,566 - -
$ 4,150,198 $ 435,633 $ (699,557 ) $ - $ 398,973 $ 4,285,247 $ 450,000 $ 3,835,247 $ 2,943,174 $ 525,223,326

Loans acquired from Carroll Community Bank in 2020 were measured at fair value at the acquisition date with no carryover of any allowance for credit losses. The following table provides activity for the accretable credit discount of purchased loans:

2024
Balance at December 31, 2023 $ 539,338
Accretion (75,378 )
Balance at March 31, 2024 $ 463,960

During the three-months ended March 31, 2023, accretion of $112,233 was recorded.

At March 31, 2024, the remaining yield premium on purchased loans was $437,936. Yield premium amortization was $71,151 and $105,939 for the three-month periods ended March 31, 2024 and 2023, respectively. At March 31, 2024, the aggregate principal balance of purchased loans was $72,259,692 and the aggregate carrying value was $72,233,668.

The following table details activity in the allowance for credit losses on unfunded loan commitments for the three-month periods ended March 31, 2024 and 2023:

Three Months Ended Three Months Ended
March 31, 2024 March 31, 2023
Beginning balance $ 227,643 $ -
Impact of adopting ASC 326 - 85,073
Credit loss recovery (23,796 ) (8,602 )
Ending balance $ 203,847 $ 76,471

- 22 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Loans and Allowance for Credit Losses (continued)

The following table provides a summary of all of the components of the allowance for credit losses:

Three Months Ended March 31, 2024
Held to<br> <br>maturity<br> <br>securities Loans Unfunded<br> <br>loan<br> <br>commitments Total
Beginning balance $ 35,627 $ 4,285,247 $ 227,643 $ 4,548,517
Provision (recovery) of credit losses (3,957 ) 27,753 (23,796 ) -
Charge-offs - (1,163 ) - (1,163 )
Recoveries - 6,000 - 6,000
Ending balance $ 31,670 $ 4,317,837 $ 203,847 $ 4,553,354
Three Months Ended March 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- ---
Held to<br> <br>maturity<br> <br>securities Loans Unfunded<br> <br>loan<br> <br>commitments Total
Beginning balance $ - $ 4,150,198 $ - $ 4,150,198
Impact of adopting ASC 326 51,990 333,936 85,073 470,999
Provision (recovery) of credit losses (3,957 ) (270,000 ) (8,602 ) (282,559 )
Charge-offs - - - -
Recoveries - 375,098 - 375,098
Ending balance $ 48,033 $ 4,589,232 $ 76,471 $ 4,713,736
5. Goodwill and Other Intangibles
--- ---

The Company’s acquisitions of Carroll Bancorp, Inc. and Carroll Community Bank in 2020 (collectively, the “Merger”) resulted in the recording of goodwill and a core deposit intangible (“CDI”). The following table presents the changes in both assets for the three-month periods ended March 31, 2024 and 2023:

Goodwill CDI Total
Balance at December 31, 2022 $ 6,978,208 $ 64,544 $ 7,042,752
Amortization - (2,082 ) (2,082 )
Balance at March 31, 2023 $ 6,978,208 $ 62,462 $ 7,040,670
Balance at December 31, 2023 $ 6,978,208 $ 56,216 $ 7,034,424
Amortization - (2,082 ) (2,082 )
Balance at March 31, 2024 $ 6,978,208 $ 54,134 $ 7,032,342

- 23 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Goodwill and Other Intangibles (continued)

The CDI is being amortized over 10 years on a straight-line basis. Annual amortization will be $8,328 per year through year nine and $6,246 in year 10. Because the Merger was a tax-free reorganization, neither the goodwill nor the CDI is deductible for income tax purposes. A goodwill impairment analysis is performed annually.

6. Capital Standards

The Bank is 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.

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, 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, 2015, 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.

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.

- 24 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Capital Standards (continued)

On September 17, 2019, the Federal Deposit Insurance Corporation (the “FDIC”) finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

On April 6, 2020, in a joint statement, the FDIC, Board of Governors of the Federal Reserve System and the Office of Comptroller of the Currency issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the federal CARES Act. Under the interim final rules, the community bank leverage ratio was reduced to 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company has not opted-in to the CBLR framework.

As of March 31, 2024 the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. Capital ratios of the Company are substantially the same as the Bank’s.

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.

- 25 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Capital Standards (continued)

The following table presents actual and required capital ratios as of March 31, 2024 and December 31, 2023, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2024 and December 31, 2023, based on the 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 To Be Well
(Dollars in thousands) Actual Capital Adequacy Capitalized
March 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk-weighted assets) $ 80,699 13.22 % $ 64,108 10.50 % $ 61,055 10.00 %
Tier 1 capital (to risk-weighted assets) 76,146 12.47 % 51,897 8.50 % 48,844 8.00 %
Common equity tier 1 (to risk- weighted assets) 76,146 12.47 % 42,739 7.00 % 39,686 6.50 %
Tier 1 leverage (to average assets) 76,146 9.31 % 32,730 4.00 % 40,913 5.00 %
Minimum To Be Well
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(Dollars in thousands) Actual Capital Adequacy Capitalized
December 31, 2023 Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk-weighted assets) $ 79,988 13.45 % $ 62,437 10.50 % $ 59,464 10.00 %
Tier 1 capital (to risk-weighted assets) 75,440 12.69 % 50,544 8.50 % 47,571 8.00 %
Common equity tier 1 (to risk- weighted assets) 75,440 12.69 % 41,625 7.00 % 38,651 6.50 %
Tier 1 leverage (to average assets) 75,440 9.42 % 32,051 4.00 % 40,063 5.00 %
7. Derivative Financial Instruments
--- ---

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and other terms of the individual interest rate swap agreements.

Fair Value Hedges: Interest rate swaps with notional amounts totaling $59.1 million as of March 31, 2024 were designated as fair value last of layer hedges of certain government agency mortgage backed securities. There were no interest rate swaps prior to 2023. The hedges were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps.

- 26 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7. Derivative Financial Instruments (continued)

The following table presents the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges as of March 31, 2024 and December 31, 2023:

Line item in Carrying Carrying
the balance sheet Carrying amount of fair Carrying amount of fair
in which the amount of the value hedging amount of the value hedging
hedged item is hedged assets adjustment hedged assets adjustment
included March 31, 2024 March 31, 2024 December 31, 2023 December 31, 2023
Securities available for sale $ 69,127,662 $ (439,097 ) $ 69,920,575 $ (1,609,248 )

The Company presents derivative positions gross on the balance sheet. The following table reflects the derivatives recorded on the balance sheet as of March 31, 2024 and Dcember 31, 2023:

March 31, 2024 December 31, 2023
Fair Fair
Value Value
Included in other assets:
Derivatives designated as hedges:
Interest rate swaps related to securities available for sale $ 205,349 $ -
Total included in other assets $ 205,349 $ -
Included in other liabilities:
Derivatives designated as hedges:
Interest rate swaps related to securities available for sale $ 655,975 $ 1,563,527
Total included in other liabilities $ 655,975 $ 1,563,527

- 27 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7. Derivative Financial Instruments (continued)

The effect of fair value hedge accounting on the statement of income for the three-month periods ended March 31, 2024 and 2023 are as follows:

Fair Value Hedging Relationships
Total amounts of income and expense line items presented in the statements of income in which the effects of the fair value hedge is recorded are as follows:
Three Months Ended<br> <br>March 31, 2024 Three Months Ended<br> <br>March 31, 2023
Interest Interest
Income Income
The effects of fair value hedging:
Loss (gain) on fair value hedging relationships:
Hedged items $ (11,529 ) $ 232,536
Interest rate contracts designated as hedging instruments 180,210 (198,424 )
Net gain on fair value hedging relationships included in interest income from investment securities- taxable $ 168,681 $ 34,112
8. Fair Value
--- ---

In accordance with FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosure”, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is the most representative of fair value under current market conditions.

- 28 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8. Fair Value (continued)

In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC Topic 820 based on these two types of inputs, are 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.
--- ---

Collateral-dependent loans: Nonrecurring fair value adjustments to collateral-dependent loans reflect full or partial write-downs and reserves that are based on the collateral-dependent loan’s observable market price or current appraised value of the collateral. Because the market for collateral-dependent 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.

● Fair value hedges: The market value based on independent third party valuation sources that uses observable and traded prices of interest rate swaps from leading banks and brokers.

- 29 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8. Fair Value (continued)

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2024 and December 31, 2023, 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
March 31, 2024
Recurring:
Available for sale securities
State and municipal $ - $ 481,930 $ - $ 481,930
SBA pools - 746,019 - 746,019
Corporate bonds - 8,150,553 - 8,150,553
Mortgage-backed securities - 152,747,763 - 152,747,763
$ - $ 162,126,265 $ - $ 162,126,265
Fair value hedge in other assets $ - $ 205,349 $ - $ 205,349
Equity security at fair value
Mutual fund $ 507,743 $ - $ - $ 507,743
Fair value hedge in other liabilities $ - $ 655,975 $ - $ 655,975
Nonrecurring:
Other real estate owned, net $ - $ - $ 1,242,365 $ 1,242,365
Collateral-dependent loans, net $ - $ - $ 180,410 $ 180,410
Carrying Value:
--- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3 Total
December 31, 2023
Recurring:
Available for sale securities
State and municipal $ - $ 484,808 $ - $ 484,808
SBA pools - 766,710 - 766,710
Corporate bonds - 8,570,429 - 8,570,429
Mortgage-backed securities - 154,262,726 - 154,262,726
$ - $ 164,084,673 $ - $ 164,084,673
Equity security at fair value
Mutual fund $ 507,130 $ - $ - $ 507,130
Fair value hedge in other liabilities $ - $ 1,563,527 $ - $ 1,563,527
Nonrecurring:
Other real estate owned, net $ - $ - $ 1,242,365 $ 1,242,365
Collateral-dependent loans, net $ - $ - $ 205,410 $ 205,410

- 30 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8. Fair Value (continued)

The following table provides information describing the unobservable inputs used in level 3 fair value measurements at March 31, 2024 and December 31, 2023:

March 31, 2024:
Assets Fair Value Valuation Technique Unobservable Inputs Range (Average)
Collateral-dependent loans $ 180,410 Third party appraisals and in-house real estate valuations of fair value Marketability/selling costs and current market conditions 0% to 20% (10%)
Other real estate owned $ 1,242,365 Third party appraisals and in-house real estate valuations of fair value Marketability/selling costs and current market conditions 0% to 10% (5%)
December 31, 2023:
--- --- --- --- --- --- --- --- --- ---
Assets Fair Value Valuation Techniques Unobservable Input Average
Collateral-dependent loans $ 205,410 Third party appraisals and in-house real estate valuations of fair value Marketability/selling costs and current market conditions 0% to 20% (10%)
Other real estate owned $ 1,242,365 Third party appraisals and in-house real estate valuations of fair value Marketability/selling costs and current market conditions 0% to 10% (5%)

- 31 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8. Fair Value (continued)

The estimated fair value of financial instruments that are reported at amortized cost less allowance for credit losses in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs were as follows:

March 31, 2024 December 31, 2023
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets
Level 1 inputs
Cash and cash equivalents $ 25,633,230 $ 25,633,230 $ 44,690,337 $ 44,690,337
Level 2 inputs
Certificates of deposit in other banks 100,000 100,000 100,000 100,000
Accrued interest receivable 2,235,859 2,235,859 2,180,734 2,180,734
Securities available for sale 162,126,265 162,126,265 164,084,673 164,084,673
Securities held to maturity 17,328,604 16,073,552 17,293,422 16,193,020
Equity security 507,743 507,743 507,130 507,130
Restricted stock, at cost 920,900 920,900 863,500 863,500
Bank owned life insurance 15,021,074 15,021,074 14,930,754 14,930,754
Fair value hedge 205,349 205,349 - -
Level 3 inputs
Securities held to maturity 2,870,200 2,870,200 2,870,200 2,870,200
Loans, net 537,080,607 516,778,960 523,308,044 507,138,253
Financial liabilities
Level 1 inputs
Noninterest-bearing deposits $ 115,416,221 $ 115,416,221 $ 115,284,706 $ 115,284,706
Securities sold under repurchase agreements 5,600,380 5,600,380 6,760,493 6,760,493
Level 2 inputs
Interest-bearing deposits 540,561,366 540,811,366 565,678,145 566,925,060
Federal Home Loan Bank advances 5,000,000 4,806,000 5,000,000 4,754,000
Federal Reserve Bank advances 54,000,000 53,712,875 33,000,000 32,996,852
Long-term debt, net 12,741,562 11,833,366 13,212,378 12,428,000
Accrued interest payable 1,404,170 1,404,170 1,482,773 1,482,773
Fair value hedge 655,975 655,975 1,563,527 1,563,527
  • 32 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

9. Earnings per Share

Earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. The following table shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common shareholders. There were 206 restricted stock units included in weighted average dilutive shares for the three months ended March 31, 2024 and none for the three months ended March 31, 2023.

Three Months Ended
March 31,
2024 2023
Net income $ 1,219,987 $ 1,900,851
Weighted average shares outstanding 3,116,966 3,071,214
Effect of dilutive restricted stock units 206 -
Weighted average shares outstanding 3,117,172 3,071,214
Earnings per share - basic $ 0.39 $ 0.62
Earnings per share - diluted $ 0.39 $ 0.62
10. Retirement Plans
--- ---

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or older 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 $80,290 and $77,675 for the three-month periods ended March 31, 2024 and 2023, 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. Some of the policies provide benefits subsequent to the employee’s employment with the Company. For this plan, the Company expensed $1,976 and $1,834 for the three-month periods ended March 31, 2024 and 2023, respectively.

The Company adopted supplemental executive retirement plans for four 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 $66,000 and $72,600 for the three-month periods ended March 31, 2024 and 2023, respectively.

Retirement plan expenses are included in employee benefits on the Consolidated Statements of Income.

  • 33 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

11. Borrowed Funds

Borrowed funds consist of securities sold under repurchase agreements, which represent overnight or term borrowings from customers, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”), term borrowings from a commercial bank, and overnight borrowings from commercial banks.

Additional information is as follows:

March 31, December 31,
2024 2023
Amount oustanding at period-end:
Securities sold under repurchase agreements $ 5,600,380 $ 6,760,493
Federal Home Loan Bank advances mature in: 2025 5,000,000 5,000,000
Federal Reserve Bank advances mature in: 2024 - 33,000,000
2025 54,000,000 -
Long-term debt (net of issuance costs) 12,741,562 13,212,378

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 $71.4 million under a secured line of credit with the FHLB. The Bank also has two facilities with the Reserve Bank. Under the first facility, which has been in place for over 10 years and is collateralized by loans, the Bank can borrow approximately $26.0 million. The second facility is the Bank Term Funding Program (“BTFP”) that the Reserve Bank created in 2023. The BTFP facility allows securities to be pledged at par, provides fixed rates for up to one-year terms, and allows prepayments in whole or in part at any time. Effective March 11, 2024 no new advances can be obtained through the BTFP facility. Finally, the Bank has $23,500,000 ($14,500,000 unsecured and $9,000,000 secured) of overnight federal funds lines of credit available from commercial banks.

FHLB advances of $5,000,000 were outstanding as of March 31, 2024 and December 31, 2023. BTFP advances of $54,000,000 and $33,000,000 were outstanding as of March 31, 2024 and December 31, 2023, respectively. The Company borrowed $17,000,000 to facilitate the Merger in 2020. There were no borrowings from the Reserve Bank other than the BTFP advances noted above or our commercial bank lenders at March 31, 2024 or December 31, 2023.

12. Stock-Based Compensation

On August 22, 2023, the Board of Directors approved the Farmers and Merchants Bancshares, Inc. 2023 Equity Compensation Plan (the “Equity Plan”). The Equity Plan allows the Board of Directors or its Compensation Committee to grant awards that may be payable in shares of common stock or the cash equivalent thereof.

The Company complies with the provisions of ASC Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock compensation cost. The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

- 34 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

12. Stock-Based Compensation (continued)

During the year ended December 31, 2023, 2,000 fully vested shares of common stock and 3,000 restricted stock units (the “RSUs”) were granted to one executive officer. One-third of the RSUs will vest on September 22, 2024, one-third will vest on September 22, 2025, and one-third will vest on September 22, 2026, provided that, in each case, the grantee is employed and in good standing with the Company on the applicable vesting date.

A summary of the Company’s restricted stock unit grant activity as of March 31, 2024 is shown below:

Weighted Average
Number of Grant Date
Shares Fair Value per Share
Balance at December 31, 2023 3,000 18.15
Granted - -
Vested - -
Forefeited - -
Balance at March 31, 2024 3,000 18.15

The compensation cost charged to income in respect of awards granted under the Equity Plan was $4,538 for the three months ended March 31, 2024. As of March 31, 2024, there was $45,374 of unrecognized compensation cost related to the unvested RSUs, which is expected to be recognized over a period of 30 months.

  • 35 -

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, 2023 (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; 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; 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”).

  • 36 -

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 (i.e., 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.

Effective October 1, 2020, pursuant to a series of merger transactions, Farmers and Merchants Bancshares, Inc. acquired Carroll Bancorp, Inc. (“Carroll”) and the Bank acquired Carroll’s wholly-owned bank subsidiary, Carroll Community Bank (collectively, the “Merger”).

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, 2023, which were included in Item 8 of Part II of the Form 10-K. On an on-going basis, management evaluates estimates, including those related to credit losses and intangible assets, impairment 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.

The allowance for credit losses on loans represents management’s estimate of expected credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit 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 collateral dependent 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.

  • 37 -

Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered impaired or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2023.

Financial Condition

Total assets decreased by $5,347,586, or 0.7%, to $794,593,240 at March 31, 2024 from $799,940,826 at December 31, 2023. The decrease in total assets was due primarily to a decrease of $19,057,107 in cash and cash equivalents and a decrease of $1,923,226 in debt securities, offset by an increase of $13,772,563 in loans.

Total liabilities decreased by $6,246,097, or 0.8%, to $741,516,438 at March 31, 2024 from $747,762,535 at December 31, 2023. The decrease was due primarily to a $24,985,264 decrease in deposits, due primarily to an $18,182,000 decrease in brokered deposits, a $1,160,113 decrease in securities sold under repurchase agreements and a $470,816 decrease in long-term debt, offset by a $21,000,000 increase in advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”).

Stockholders’ equity increased by $898,511, or 1.7%, to $53,076,802 at March 31, 2024 from $52,178,291 at December 31, 2023. The increase was due to net income of $1,219,987 and an increase of $4,538 for stock-based compensation paid to an executive officer, offset by an increase of $326,014 in accumulated other comprehensive loss.

Loans

Major categories of loans at March 31, 2024 and December 31, 2023 were as follows:

March 31, December 31,
2024 2023
Real estate:
Commercial $ 365,948,344 68 % $ 361,942,511 69 %
Construction/Land development 19,148,561 3 % 20,446,150 4 %
Residential 112,424,358 21 % 112,789,631 21 %
Commercial 44,240,198 8 % 32,823,072 6 %
Consumer 193,399 0 % 165,136 0 %
541,954,860 100 % 528,166,500 100 %
Less: Allowance for credit losses on loans 4,317,837 4,285,247
Deferred origination fees net of costs 556,416 573,209
$ 537,080,607 $ 523,308,044
  • 38 -

Loans increased by $13,772,563, or 2.6%, to $537,080,607 at March 31, 2024 from $523,308,044 at December 31, 2023. The increase was due primarily to an increase of $11,417,126 in commercial loans and an increase of $4,005,833 in commercial real estate loans, offset by decreases of $1,297,589 in construction/land development loans and $365,273 in residential real estate loans. The allowance for credit losses on loans increased by $32,590, or 0.8%, to $4,317,837 at March 31, 2024 from $4,285,247 at December 31, 2023.

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 credit losses on loans. 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.

Recoveries of credit losses of $0 and $270,000 were recorded for the three-month periods ended March 31, 2024 and 2023, respectively.

During the three-month periods ended March 31, 2024 and 2023, the Company had recoveries from loans written off in prior periods totaling $6,000 and $375,098, respectively. The Company had charge-offs of $1,163 during the three months ended March 31, 2024. There were no charge-offs during the same time period in 2023.

Watch list loans include loans classified as Special Mention, Substandard, and Doubtful. As of March 31, 2024, the Company had $8,257,629 of loans on a watch list, other than collateral-dependent loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2023, the Company had $8,340,746 of such loans. Watch List loans are subject to ongoing management attention and their classifications are reviewed regularly.

Management believes that the $4.3 million reserve at March 31, 2024 is appropriate to adequately cover the expected losses in the loan portfolio. The Company’s loan portfolio grew by $13.8 million during the first three months of 2024. The allowance for credit losses on loans was 0.80% of the loan portfolio at March 31, 2024 compared to 0.81% at December 31, 2023.

Investment Securities

Investments in debt securities decreased by $1,923,226, or 1.0%, to $182,325,069 at March 31, 2024 from $184,248,295 at December 31, 2023. At March 31, 2024 and December 31, 2023, the Company had classified 89% and 89% of the investment portfolio as available for sale, respectively. 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.

  • 39 -

Other Real Estate Owned

Other real estate owned (“OREO”) at March 31, 2024 and December 31, 2023 included one property with a carrying value of $1,242,365. The property is an apartment building in Baltimore, Maryland that was acquired in the Merger. The property is being marketed for sale.

March 31, December 31,
2024 2023
Other Real Estate Owned $ 1,242,365 $ 1,242,365

Deposits

Total deposits decreased by $24,985,264, or 3.7%, to $655,977,587 at March 31, 2024 from $680,962,851 at December 31, 2023. The decrease in deposits was due to a $17,387,059 decrease in time deposits, due primarily to a reduction in brokered deposits, and a $7,972,613 decrease in checking accounts, offset by a $247,160 increase in savings and money market accounts.

The following table shows the average balances and average costs of deposits for the three-month periods ended March 31, 2024 and 2023:

March 31, 2024 March 31, 2023
Average Average
Balance Cost Balance Cost
Noninterest bearing demand deposits $ 113,410,901 0.00 % $ 125,019,656 0.00 %
Interest bearing demand deposits 130,458,298 0.68 % 130,576,396 0.33 %
Savings and money market deposits 157,978,341 0.65 % 190,483,431 0.24 %
Time deposits 261,572,905 4.01 % 180,125,426 1.81 %
$ 663,420,445 1.87 % $ 626,204,909 0.66 %

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 $71.4 million under a secured line of credit with the FHLB. The Bank also has two facilities with the Reserve Bank. Under the first facility, which has been in place for over 10 years and is collateralized by loans, the Bank can borrow approximately $26.0 million. The second facility is the Bank Term Funding Program (“BTFP”) that the Reserve Bank created in 2023. The BTFP facility allows securities to be pledged at par, provides fixed rates for up to one-year terms, and allows prepayments in whole or in part at any time. Effective, March 11, 2024, no new advances are available under the BTFP facility. Finally, the Bank has $23,500,000 ($14,500,000 unsecured and $9,000,000 secured) of overnight federal funds lines of credit available from commercial banks.

  • 40 -

FHLB advances of $5,000,000 were outstanding as of March 31, 2024 and December 31, 2023. BTFP advances of $54,000,000 and $33,000,000 were outstanding as of March 31, 2024 and December 31, 2023, respectively. The Company borrowed $17,000,000 to facilitate the Merger in 2020 as more fully described below. There were no borrowings from the Reserve Bank other than the BTFP advances noted above or our commercial bank lenders at March 31, 2024 or December 31, 2023. 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. Uninsured deposits were approximately $144,315,000, or 22% of total deposits, at March 31, 2024.

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”) for the purpose of funding a portion of the consideration that was payable to the stockholders of Carroll in the Merger. Net of issuance costs, the amount of the net long-term debt was $12,741,562 and $13,212,378 as of March 31, 2024 and December 31, 2023, respectively. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. Quarterly interest-only payments were made through October 1, 2021. During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $615,000, which is 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 FHN.

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:

March 31, December 31,
2024 2023
Amount oustanding at period-end:
Securities sold under repurchase agreements $ 5,600,380 $ 6,760,493
Federal Home Loan Bank advances mature in: 2025 5,000,000 5,000,000
Federal Reserve Bank advances mature in: 2024 - 33,000,000
2025 54,000,000 -
Long-term debt (net of issuance costs) 12,741,562 13,212,378
Weighted average rate paid at period-end:
Securites sold under repurchase agreements 1.25 % 1.25 %
Federal Home Loan Bank advances 1.00 % 1.00 %
Federal Reserve Bank advances 4.76 % 4.83 %
Long-term debt 4.10 % 4.10 %

The advances from the Reserve Bank and the FHLB and the long-term debt outstanding at March 31, 2024 will require the following principal payments:

Year ending December 31, 2024 $ 1,416,667
Year ending December 31, 2025 70,333,333
  • 41 -

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 March 31, 2024 and December 31, 2023 are as follows:

March 31, December 31,
2024 2023
Loan commitments
Construction and land development $ 7,078,802 $ 8,575,337
Commercial 10,750,250 17,877,375
Commercial real estate 17,644,750 7,277,500
Residential 3,751,000 2,195,000
$ 39,224,802 $ 35,925,212
Unused lines of credit
Home-equity lines $ 11,979,618 $ 11,395,790
Commercial lines 45,407,926 46,610,690
$ 57,387,544 $ 58,006,480
Letters of credit $ 963,734 $ 1,339,391

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.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended March 31, 2024 and 2023

General

Net income for the three months ended March 31, 2024 was $1,219,987 compared to $1,900,851 for the same period of 2023. The decrease of $680,864, or 35.8%, was primarily due to a $482,812 decrease in net interest income, a $355,032 increase in noninterest expense and a $270,000 decrease in the recovery of credit losses, offset by a $122,001 increase in noninterest income.

  • 42 -

Net Interest Income

Net interest income was $5,174,256 for the three months ended March 31, 2024 compared to $5,657,068 for the same period of 2023. The net yield on interest earning assets decreased to 2.69% for the three months ended March 31, 2024 from 3.24% for the same period of 2023. Higher interest expense on deposits and borrowings was the driving factor in the lower net interest income. The Federal Reserve rate increases of 5.25% since March 2022 caused the cost of deposits and borrowings to increase significantly.

Total interest income for the three months ended March 31, 2024 was $9,066,062 compared to $7,052,529 for the same period of 2023, an increase of $2.0 million, or 28.6%.

Total interest income on loans for the three months ended March 31, 2024 increased by $836,363 when compared to the same period of 2023 due to a $9.0 million higher average loan balance for the three months ended March 31, 2024 when compared to the same period of 2023 and a higher loan yield of 5.15% for the three months ended March 31, 2024 versus 4.60% for the same period of 2023. Investment income for the three months ended March 31, 2024 increased by $770,293, or 81.5%, when compared to the same period of 2023 due to an increase in the fully-taxable equivalent yield to 3.36% for the three months ended March 31, 2024 compared to 2.22% for the same period of 2023, and a $38.3 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 65 basis points to 4.68% for the three months ended March 31, 2024 from 4.03% for the same period of 2023. The average balance of total interest-earning assets increased by $75.8 million to $779.9 million for the three months ended March 31, 2024 compared to $704.1 million for the same period of 2023.

Total interest expense for the three months ended March 31, 2024 was $3,891,806 compared to $1,395,461 for the same period of 2023, an increase of $2,496,345, or 178.9%. The increase was due to an $83.7 million increase in the average balance of interest-bearing liabilities to $626.9 million for the three months ended March 31, 2024 compared to $543.2 million in the same period of 2023, and a higher overall cost of funds on interest bearing deposits and borrowings of 2.48% for the three months ended March 31, 2024 compared to 1.03% for the same period of 2023. Cost of funds for time deposits increased to 4.01% for the three months ended March 31, 2024 from 1.81% for the same period of 2023. Long-term debt, FHLB, Reserve Bank and other borrowings cost of funds increased to 4.42% for the three months ended March 31, 2024 from 3.94% for the same period of 2023.

Average noninterest-earning assets increased by $0.9 million to $19.9 million for the three months ended March 31, 2024 compared to $19.0 million in the same period of 2023. Average noninterest-bearing deposits decreased by $11.6 million to $113.4 million during the three months ended March 31, 2024 compared to $125.0 million in the same period of 2023. The average balance in stockholders’ equity increased by $2.9 million for the three months ended March 31, 2024 when compared with the same period of 2023.

  • 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 March 31, 2024 and 2023. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

Three Months Ended Three Months Ended
March 31, 2024 March 31, 2023
Average Average
Balance Interest Yield Balance Interest Yield
Assets*:*
Loans $ 534,565,557 $ 6,881,911 5.15 % $ 525,515,876 $ 6,045,548 4.60 %
Securities, taxable (1) 190,081,796 1,580,269 3.33 % 151,487,864 763,420 2.02 %
Securities, tax exempt (1) 18,052,125 170,126 3.77 % 18,385,556 178,477 3.88 %
Federal funds sold and other interest-earning assets (1) 37,224,007 500,715 5.38 % 8,718,634 108,732 4.99 %
Total interest-earning assets 779,923,485 9,133,021 4.68 % 704,107,930 7,096,177 4.03 %
Noninterest-earning assets 19,917,249 18,997,676
Total assets $ 799,840,734 $ 723,105,606
Liabilities and Stockholders’ Equity*:*
NOW, savings, and money market $ 288,436,639 475,635 0.66 % $ 321,059,827 221,392 0.28 %
Certificates of deposit 261,572,905 2,625,291 4.01 % 180,125,426 813,459 1.81 %
Securities sold under repurchase agreements 7,379,930 23,009 1.25 % 5,863,801 4,338 0.30 %
FHLB advances 5,000,000 12,588 1.01 % 21,422,222 204,709 3.82 %
FRB advances and other borrowings 51,692,308 621,683 4.81 % - - -
Long-term debt 12,858,915 133,600 4.16 % 14,742,179 151,563 4.11 %
Total interest-bearing liabilities 626,940,697 3,891,806 2.48 % 543,213,455 1,395,461 1.03 %
Noninterest-bearing deposits 113,410,901 125,019,656
Noninterest-bearing liabilities 7,560,740 5,801,886
Total liabilities 747,912,338 674,034,997
Stockholders' equity 51,928,396 49,070,609
Total liabilities and stockholders' equity $ 799,840,734 $ 723,105,606
Net interest income $ 5,241,215 5,700,716
Interest rate spread 2.20 % 3.00 %
Net yield on interest-earning assets 2.69 % 3.24 %
Ratio of average interest-earning assets to Average interest-bearing liabilities 124.40 % 129.62 %

(1) - Interest on tax-exempt securities and other tax-exempt investments are reported on a fully taxable equivalent basis.  The federal, state and combined tax rates used were 21.00%, 8.25% and 27.5175% respectively.

  • 44 -

Noninterest Income

Noninterest income for the three months ended March 31, 2024 was $504,415 compared to $382,414 for the same period of 2023, an increase of $122,001, or 31.9%. The increase was due primarily to an increase a $142,794 on insurance proceeds from the storm damage to the Bank’s Upperco, Maryland location, offset by a $20,432 decrease in mortgage banking income.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2024 totaled $4,112,467 compared to $3,757,435 for the same period of 2023, an increase of $355,032, or 9.4%. The increase was due primarily to increases in salaries and benefits of $111,999 as a result of hiring several new employees and normal annual salary increases and an increase in other expenses of $208,128. The increase in other expenses was due primarily to an increase in professional fees paid to consultants related to the upcoming core conversion along with increases in Federal Deposit Insurance Corporation assessments.

Income Tax Expense

Income tax expense for the three months ended March 31, 2024 was $346,217 compared to $651,196 for the same period of 2023. The effective tax rate was 22.1% for the three months ended March 31, 2024 compared to 25.5% for the same period of 2023. The decrease in the effective tax rate is due to a higher percentage of tax exempt revenue in 2024 versus 2023.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Farmers and Merchants Bancshares, Inc. is a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, is not required to include the information required by this item.

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 March 31, 2024 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 March 31, 2024, 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. 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, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

During the quarter ended March 31, 2024, no director or officer of the Company adopted or terminated (i) any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) promulgated under the Exchange Act or (ii) any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of the SEC’s Regulation S-K.

Item 6. Exhibits

The exhibits filed or furnished with this quarterly report are listed in the following Exhibit Index:

Exhibit Description
31.1 Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
32 Certification of the Principal Executive Officer and the Principal Financial Office pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)
101 Interactive Data Files pursuant to Rule 405 of Regulation S-T (filed herewith)
104 The cover page of Farmers and Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).
  • 46 -

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:         May 14, 2024 /s/ Gary A. Harris
Gary A. Harris
Chief Executive Officer
(Principal Executive Officer)
Date         May 14, 2024 /s/ Mark C. Krebs
Mark C. Krebs
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, Gary A. Harris, 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:         May 14, 2024 /s/ Gary A. Harris
--- ---
Gary A. Harris
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         May 14, 2024 /s/ Mark C. Krebs
--- ---
Mark C. Krebs
Treasurer and Chief Financial Officer
(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 March 31, 2024 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:         May 14, 2024 /s/ Gary A. Harris
Gary A. Harris
Chief Executive Officer
(Principal Executive Officer)
Date:         May 14, 2024 /s/ Mark C. Krebs
Mark C. Krebs
Treasurer and Chief Financial Officer
(Principal Financial Officer)

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