# Farmers & Merchants Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Farmers & Merchants Bancshares, Inc.](/companies/fmfg.md) (CIK 1698022)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 19:37 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031906
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1698022/000143774923031906/fmfg20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1698022/000143774923031906/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $2.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $6.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $467.1k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $1.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $5.0m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.46 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.63 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $5.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $256.7k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $629.6k | us-gaap:PaymentsOfDividends |
| Total assets | at 2023-09-30 | $756.6m | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $708.4m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $13.7m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $48.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,960 characters.

### 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, 2022 (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”).

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 Bancshares, Inc.’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, 2022, 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.

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, 2022 other than the adoption of Accounting Standards Codification 326 as described in Note 2 of the Notes to the Consolidated Financial Statements presented elsewhere in this report.

### Financial Condition

Total assets increased by $38,427,095, or 5.4%, to $756,637,767 at September 30, 2023 from $718,210,672 at December 31, 2022. The increase in total assets was due primarily to an increase of $9,212,501 in loans, an increase of $17,748,141 in cash and cash equivalents and an increase of $9,873,802 in debt securities.

Total liabilities increased $37,940,122, or 5.7%, to $708,375,831 at September 30, 2023 from $670,435,709 at December 31, 2022. The increase was due primarily to a $20,651,610 increase in deposits and a $33,000,000 increase in advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”), offset by a $15,000,000 decrease in advances from the Federal Home Loan Bank (“FHLB”) and a $1,412,447 decrease in long-term debt.

Stockholders’ equity increased by $486,973 to $48,261,936 at September 30, 2023 from $47,774,963 at December 31, 2022. The increase was due to net income of $5,003,107 and an increase of $38,250 for stock-based compensation paid to an executive officer, offset by dividends paid, net of reinvestments, of $629,576, an increase of $3,583,416 in accumulated other comprehensive loss and a $341,392 adjustment for the adoption of the Financial Accounting Standards Board’s Accounting Standard Update 2016-13.

### Loans

Major categories of loans at September 30, 2023 and December 31, 2022 were as follows:

| Real estate: | September 30, 2023 |  | December 31, 2022 |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $367,260,065 | 69% | $351,794,702 | 67% |
| Construction/Land development | 21,137,478 | 4% | 23,978,373 | 5% |
| Residential | 112,068,945 | 21% | 114,683,149 | 22% |
| Commercial | 30,612,786 | 6% | 31,066,497 | 6% |
| Consumer | 171,426 | 0% | 156,422 | 0% |
|  | 531,250,700 | 100% | 521,679,143 | 100% |
| Less: Allowance for credit losses on loans | 4,516,402 |  | 4,150,198 |  |
| Deferred origination fees net of costs | 601,257 |  | 608,405 |  |
|  | $526,133,041 |  | $516,920,540 |  |

\- 39 -

Loans increased by $9,212,501, or 1.8%, to $526,133,041 at September 30, 2023 from $516,920,540 at December 31, 2022. The increase was due primarily to an increase of $15,465,363 in commercial real estate loans, offset by decreases of $2,614,204 in residential loans, 2,840,895 in construction/land development loans and $453,711 in commercial loans. The allowance for credit losses on loans increased by $366,204 to $4,516,402 at September 30, 2023 from $4,150,198 at December 31, 2022.

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 $75,000 and $570,000 were recorded for the three- and nine-month periods ended September 30, 2023, respectively. A provision for credit losses of $95,000 was recorded for each of the three- and nine-month periods ended September 30, 2022.

During the nine-month periods ended September 30, 2023 and 2022, the Company had recoveries from loans written off in prior periods totaling $392,973 and $12,150, respectively, and charge-offs of $0 and $10,240, respectively.

Watch list loans include loans classified as Special Mention, Substandard, and Doubtful. As of September 30, 2023, the Company had $10,407,132 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, 2022, the Company had $9,926,932 of such loans. Watch List loans are subject to ongoing management attention and their classifications are reviewed regularly.

Management believes that the $4.5 million reserve at September 30, 2023 and the $570,000 recovery for the nine-month period ended September 30, 2023 are appropriate to adequately cover the expected losses in the loan portfolio. The recovery of credit losses was due primarily to a recovery of $381,000 from loans charged off over 10 years ago which also resulted in lower historical losses and a decrease in the required reserve for loans. The reserve was increased by $0.4 million from December 31, 2022 due primarily to the current expected credit loss (“CECL”) adjustment effective January 1, 2023. The Company’s loan portfolio grew by $9.2 million during the first nine months of 2023. The allowance for credit losses on loans was 0.85% of the loan portfolio at September 30, 2023 compared to 0.80% at December 31, 2022.

### Investment Securities

Investments in debt securities decreased by $9,873,802, or 6.7%, to $156,697,248 at September 30, 2023 from $146,823,446 at December 31, 2022. At September 30, 2023 and December 31, 2022, the Company had classified 87% and 86% 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.

### Other Real Estate Owned

Other real estate owned (“OREO”) at September 30, 2023 and December 31, 2022 included two properties with an aggregate carrying value of $1,242,365. The first property is an apartment building in Baltimore, Maryland with a carrying value of $1,242,365 that was acquired in the Merger. The property is under a sales contract with a projected closing in the fourth quarter of 2023. The other property is land in Cecil County, Maryland with a carrying value of $0 that was acquired through foreclosure in 2007. The latter property consists of 10.43 acres and is currently under contract for a gross sales price of $295,000 with closing expected in the fourth quarter of 2023. Due to the length of time the property has been held, Maryland banking law required a write-down of the value to $0 in 2019.

### Deposits

Total deposits increased by $20,651,610, or 3.3%, to $644,262,734 at September 30, 2023 from $623,611,124 at December 31, 2022. The increase in deposits was due to a $72,235,846 increase in time deposits, offset by a $13,368,383 decrease in noninterest-bearing accounts, a $36,422,272 decrease in savings and money market accounts and a $1,793,581 decrease in interest bearing checking accounts.

The following table shows the average balances and average costs of deposits for the nine-month periods ended September 30, 2023 and 2022:

|  | September 30, 2023 Average Balance | Cost | September 30, 2022 Average Balance | Cost |
| --- | ---: | ---: | ---: | ---: |
| Noninterest bearing demand deposits | $121,234,643 | 0.00% | $128,933,942 | 0.00% |
| Interest bearing demand deposits | 131,411,988 | 0.45% | 132,951,644 | 0.15% |
| Savings and money market deposits | 174,321,420 | 0.36% | 197,244,419 | 0.12% |
| Time deposits | 204,486,844 | 2.67% | 171,266,359 | 0.50% |
|  | $631,454,895 | 1.06% | $630,396,364 | 0.21% |

### 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 $66.0 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 $25.6 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. 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 and $20,000,000 were outstanding as of September 30, 2023 and December 31, 2022, respectively. BTFP advances of $33,000,000 and $0 were outstanding as of September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022. 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 $155,833,000 or 24% of total deposits at September 30, 2023.

### 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 $13,683,195 and $15,095,642 as of September 30, 2023 and December 31, 2022, 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 will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to 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:

| Amount oustanding at period-end: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Securities sold under repurchase agreements | $5,357,674 | $5,175,303 |
| Federal Home Loan Bank advances | 5,000,000 | 20,000,000 |
| Federal Home Loan Bank advances mature in: 2023 | - | 15,000,000 |
| 2025 | 5,000,000 | 5,000,000 |
| Federal Reserve Bank advances mature in: 2024 | 33,000,000 | - |
| Long-term debt (net of issuance costs) | 13,683,195 | 15,095,642 |
| Weighted average rate paid at period-end: |  |  |
| Securites sold under repurchase agreements | 1.25% | 0.30% |
| Federal Home Loan Bank advances | 1.01% | 1.55% |
| Federal Reserve Bank advances | 5.43% | 0.00% |
| Long-term debt | 4.10% | 4.10% |

The advances from the Reserve Bank and the FHLB and the long-term debt outstanding at September 30, 2023 will require the following principal payments:

|  |  |
| --- | ---: |
| Year ending December 31, 2023 | $472,222 |
| Year ending December 31, 2024 | 34,888,889 |
| Year ending December 31, 2025 | 16,333,334 |

\- 42 -

### Off-Balance Sheet Arrangements

In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as of September 30, 2023 and December 31, 2022 are as follows:

| Loan commitments | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Construction and land development | $5,200,337 | $911,500 |
| Commercial | 6,251,001 | 398,046 |
| Commercial real estate | 8,700,000 | 9,264,000 |
| Residential | 2,652,500 | 3,402,371 |
|  | $22,803,838 | $13,975,917 |
| Unused lines of credit |  |  |
| Home-equity lines | $11,529,212 | $12,086,758 |
| Commercial lines | 32,006,235 | 25,464,025 |
|  | $43,535,447 | $37,550,783 |
| Letters of credit | $1,208,609 | $1,403,956 |

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 Nine Months Ended September 30, 2023 and 2022

### General

Net income for the nine months ended September 30, 2023 was $5,003,107, compared to $6,075,845 for the same period of 2022. The decrease of $1,072,738, or 17.7%, was due primarily to a $1,713,139 decrease in net interest income, a $106,043 decrease in noninterest income and a $36,155 increase in noninterest expense, offset by a $665,000 decrease in the provision for credit losses.

### Net Interest Income

Net interest income was $16,114,887 for the nine months ended September 30, 2023, compared to $17,828,026 for the same period of 2022. The net yield on interest earning assets decreased to 3.04% for the nine months ended September 30, 2023 from 3.51% for the same period last year. Higher interest expense on deposits and borrowings was the driving factor in the lower net interest income. The Federal Reserve rate increases caused the cost of deposits and borrowings to increase significantly.

Total interest income for the nine months ended September 30, 2023 was $22,438,448, compared to $19,350,937 for the same period of 2022, an increase of $3,087,511, or 16.0%.

Total interest income on loans for the nine months ended September 30, 2023 increased by $2,362,683 when compared to the same period of 2022 due to a $36.9 million higher average loan balance for the nine months ended September 30, 2023 when compared to the same period of 2022 and a higher loan yield of 4.79% for the nine months ended September 30, 2023 versus 4.51% for the same period of 2022. Investment income for the nine months ended September 30, 2023 increased by $344,770, or 13.2 %, when compared to the same period of 2022 due to an increase in the fully-taxable equivalent yield to 2.36% for the nine months ended September 30, 2023, compared to 2.07% for the same period of 2022, offset by a $2.5 million lower average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 41 basis points to 4.22% for the nine months ended September 30, 2023 from 3.81% for the same period of 2022. The average balance of total interest-earning assets increased by $30.6 million to $713.2 million for the nine months ended September 30, 2023, compared to $682.6 million for the same period of 2022.

Total interest expense for the nine months ended September 30, 2023 was $6,323,561, compared to $1,522,911 for the same period of 2022, an increase of $4,800,650, or 315.2%. The increase was due to a $28.2 million increase in the average balance of interest-bearing liabilities to $554.6 million for the nine months ended September 30, 2023, compared to $526.4 million in the same period of 2022, and a higher overall cost of funds on interest bearing deposits and borrowings of 1.52% for the nine months ended September 30, 2023, compared to 0.39% for the same period of 2022. Cost of funds for time deposits increased to 2.67% for the nine months ended September 30, 2023 from 0.50% for the same period of 2022. FHLB, Reserve Bank and other borrowings cost of funds increased to 4.39% for the nine months ended September 30, 2023 from 1.01% for the same period of 2022.

Average noninterest-earning assets decreased by $12.2 million to $18.2 million for the nine months ended September 30, 2023, compared to $30.5 million in the same period of 2022. Average noninterest-bearing deposits decreased by $7.7 million to $121.2 million during the nine months ended September 30, 2023, compared to $128.9 million in the same period of 2022. The average balance in stockholders’ equity decreased by $2.6 million for the nine months ended September 30, 2023 when compared with the same period of 2022.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the nine-month periods ended September 30, 2023 and 2022. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

| Assets: | Nine Months Ended September 30, 2023 Average Balance | Interest | Yield | Nine Months Ended Septembr 30, 2022 Average Balance | Interest | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $529,127,695 | $19,023,308 | 4.79% | $492,180,338 | $16,660,625 | 4.51% |
| Securities, taxable | 154,673,211 | 2,532,396 | 2.18% | 156,586,314 | 2,173,853 | 1.85% |
| Securities, tax exempt | 18,278,667 | 528,212 | 3.85% | 18,890,763 | 556,009 | 3.92% |
| Federal funds sold and other interest-earning assets | 11,145,233 | 488,811 | 5.85% | 14,934,097 | 95,357 | 0.85% |
| Total interest-earning assets | 713,224,806 | 22,572,727 | 4.22% | 682,591,512 | 19,485,844 | 3.81% |
| Noninterest-earning assets | 18,221,115 |  |  | 30,461,709 |  |  |
| Total assets | $731,445,921 |  |  | $713,053,221 |  |  |
| Liabilities and Stockholders’ Equity: |  |  |  |  |  |  |
| NOW, savings, and money market | $305,733,408 | 916,917 | 0.40% | $330,196,063 | 332,810 | 0.13% |
| Certificates of deposit | 204,486,844 | 4,093,707 | 2.67% | 171,266,359 | 638,510 | 0.50% |
| Securities sold under repurchase agreements | 4,307,417 | 23,949 | 0.74% | 3,813,719 | 8,558 | 0.30% |
| Long-term debt | 14,440,578 | 444,953 | 4.11% | 16,162,515 | 505,268 | 4.17% |
| FRB advances and other borrowings | 9,622,710 | 391,763 | 5.43% | - | - |  |
| FHLB advances | 16,018,315 | 452,272 | 3.76% | 5,000,000 | 37,765 | 1.01% |
| Total interest-bearing liabilities | 554,609,272 | 6,323,561 | 1.52% | 526,438,656 | 1,522,911 | 0.39% |
| Noninterest-bearing deposits | 121,234,643 |  |  | 128,933,242 |  |  |
| Noninterest-bearing liabilities | 6,008,674 |  |  | 5,525,793 |  |  |
| Total liabilities | 681,852,589 |  |  | 660,897,691 |  |  |
| Stockholders' equity | 49,593,332 |  |  | 52,155,530 |  |  |
| Total liabilities and stockholders' equity | $731,445,921 |  |  | $713,053,221 |  |  |
| Net interest income |  | $16,249,166 |  |  | $17,962,933 |  |
| Interest rate spread |  |  | 2.70% |  |  | 3.42% |
| Net yield on interest-earning assets |  |  | 3.04% |  |  | 3.51% |
| Ratio of average interest-earning assets to Average interest-bearing liabilities |  |  | 128.60% |  |  | 129.66% |

(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.

### Noninterest Income

Noninterest income for the nine months ended September 30, 2023 was $1,168,890, compared to $1,274,933 for the same period of 2022, a decrease of $106,043, or 8.3%. The decrease was primarily a result of a $158,123 decrease in the gain on the sale of SBA loans and a $103,315 decrease in mortgage banking income as a result of residential refinance activity declining due to rising interest rates, offset by an increase of $81,860 in bank owned life insurance income and a $47,181 increase in the fair value adjustment on equity securities.

### Noninterest Expense

Noninterest expense for the nine months ended September 30, 2023 totaled $11,189,030, compared to $11,152,875 for the same period of 2022, an increase of $36,155, or 0.3%. The increase was due primarily to increases in salaries and benefits of $102,548, offset by a decrease in other expenses of $138,117. Salaries and benefits increased due to normal and usual annual salary increases that are effective January 1 as well as an increase in the overall headcount. The other expense decrease was due to a $198,609 decrease in professional fees as a result of recruitment fees paid to fill several positions in 2022, offset by a $117,214 increase in FDIC assessments due to an increase in the minimum assessment rate.

### Income Tax Expense

Income tax expense for the nine months ended September 30, 2023 was $1,661,640, compared to $1,779,239 for the same period of 2022. The effective tax rate was 24.9% for the nine months ended September 30, 2023, compared to 22.7% for the same period of 2022. The increase in the effective tax rate is due to lower tax exempt revenue in 2023 versus 2022 as a result of the non-renewal of the captive insurance policy.

### Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

### General

Net income for the three months ended September 30, 2023 was $1,432,139, compared to $1,974,310 for the same period of 2022. The decrease of $542,171, or 27.5%, was primarily due to a $904,763 decrease in net interest income, offset by a $45,741 increase in noninterest income, a $38,743 decrease in noninterest expense and a $170,000 decrease in the provision for credit losses.

### Net Interest Income

Net interest income was $5,186,989 for the three months ended September 30, 2023, compared to $6,091,752 for the same period of 2022. The net yield on interest earning assets decreased to 2.88% for the three months ended September 30, 2023 from 3.60% for the same period last year. Higher interest expense on deposits and borrowings was the driving factor in the lower net interest income. The Federal Reserve rate increases caused the cost of deposits and borrowings to increase significantly.

Total interest income for the three months ended September 30, 2023 was $8,001,697, compared to $6,586,065 for the same period of 2022, an increase of $1.4 million, or 21.5%.

Total interest income on loans for the three months ended September 30, 2023 increased by $1,002,126 when compared to the same period of 2022 due to a $30.5 million higher average loan balance for the three months ended September 30, 2023 when compared to the same period of 2022 and a higher loan yield of 4.98% for the three months ended September 30, 2023 versus 4.48% for the same period of 2022. Investment income for the three months ended September 30, 2023 increased by $204,496, or 21.2%, when compared to the same period of 2022 due to an increase in the fully-taxable equivalent yield to 2.57% for the three months ended September 30, 2023, compared to 2.19% for the same period of 2022, and a $5.9 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 53 basis points to 4.42% for the three months ended September 30, 2023 from 3.89% for the same period of 2022. The average balance of total interest-earning assets increased by $45.4 million to $727.9 million for the three months ended September 30, 2023, compared to $682.5 million for the same period of 2022.

Total interest expense for the three months ended September 30, 2023 was $2,814,708, compared to $494,313 for the same period of 2022, an increase of $2,320,395, or 469.4%. The increase was due to a $43.1 million increase in the average balance of interest-bearing liabilities to $571.7 million for the three months ended September 30, 2023, compared to $528.6 million in the same period of 2022, and a higher overall cost of funds on interest bearing deposits and borrowings of 1.97% for the three months ended September 30, 2023, compared to 0.37% for the same period of 2022. Cost of funds for time deposits increased to 3.28% for the three months ended September 30, 2023 from 0.47% for the same period of 2022. FHLB, Reserve Bank and other borrowings cost of funds increased to 4.86% for the three months ended September 30, 2023 from 1.02% for the same period of 2022.

Average noninterest-earning assets decreased by $14.6 million to $17.8 million for the three months ended September 30, 2023, compared to $32.4 million in the same period of 2022. Average noninterest-bearing deposits decreased by $12.9 million to $118.0 million during the three months ended September 30, 2023, compared to $130.9 million in the same period of 2022. The average balance in stockholders’ equity decreased by $207,637 for the three months ended September 30, 2023 when compared with the same period of 2022.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the three-month periods ended September 30, 2023 and 2022. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

| Assets: | Three Months Ended September 30, 2023 Average Balance | Interest | Yield | Three Months Ended September 30, 2022 Average Balance | Interest | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $530,623,169 | $6,609,039 | 4.98% | $500,169,548 | $5,606,913 | 4.48% |
| Securities, taxable | 163,646,118 | 997,784 | 2.44% | 157,672,542 | 784,738 | 1.99% |
| Securities, tax exempt | 18,355,423 | 172,714 | 3.76% | 18,438,547 | 181,264 | 3.93% |
| Federal funds sold and other interest-earning assets | 15,323,743 | 270,109 | 7.05% | 6,246,364 | 59,008 | 3.78% |
| Total interest-earning assets | 727,948,453 | 8,049,646 | 4.42% | 682,527,001 | 6,631,923 | 3.89% |
| Noninterest-earning assets | 17,813,892 |  |  | 32,366,316 |  |  |
| Total assets | $745,762,345 |  |  | $714,893,317 |  |  |
| Liabilities and Stockholders’ Equity: |  |  |  |  |  |  |
| NOW, savings, and money market | $294,227,739 | 389,251 | 0.53% | $337,682,240 | 119,062 | 0.14% |
| Certificates of deposit | 225,433,241 | 1,850,557 | 3.28% | 166,446,902 | 194,494 | 0.47% |
| Securities sold under repurchase agreements | 3,841,994 | 12,110 | 1.26% | 3,800,797 | 2,874 | 0.30% |
| Long-term debt | 13,800,547 | 145,001 | 4.20% | 15,683,811 | 165,156 | 4.21% |
| FRB advances and other borrowings | 27,532,609 | 378,500 | 5.50% | - | - | - |
| FHLB advances | 6,847,826 | 39,289 | 2.29% | 5,000,000 | 12,727 | 1.02% |
| Total interest-bearing liabilities | 571,683,956 | 2,814,708 | 1.97% | 528,613,750 | 494,313 | 0.37% |
| Noninterest-bearing deposits | 117,985,523 |  |  | 130,880,729 |  |  |
| Noninterest-bearing liabilities | 6,466,054 |  |  | 5,564,389 |  |  |
| Total liabilities | 696,135,533 |  |  | 665,058,868 |  |  |
| Stockholders' equity | 49,626,812 |  |  | 49,834,449 |  |  |
| Total liabilities and stockholders' equity | $745,762,345 |  |  | $714,893,317 |  |  |
| Net interest income |  | $5,234,938 |  |  | $6,137,610 |  |
| Interest rate spread |  |  | 2.45% |  |  | 3.52% |
| Net yield on interest-earning assets |  |  | 2.88% |  |  | 3.60% |
| Ratio of average interest-earning assets to Average interest-bearing liabilities |  |  | 127.33% |  |  | 129.12% |

(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.

### Noninterest Income

Noninterest income for the three months ended September 30, 2023 was $383,226, compared to $337,485 for the same period of 2022, an increase of $45,741, or 13.6%. The increase resulted primarily from a $25,430 increase in mortgage banking income, an increase of $19,270 in bank owned life insurance income and a $3,842 increase in the fair value adjustment on equity securities.

### Noninterest Expense

Noninterest expense for the three months ended September 30, 2023 totaled $3,745,948, compared to $3,784,691 for the same period of 2022, a decrease of $38,743, or 1.0%. The decrease was due primarily to decreases in salaries and benefits of $141,561, offset by an increase in other expenses of $59,135. Salaries and benefits decreased due to a decrease in the overall headcount. The other expense increase was due to a $26,361 increase in the FDIC assessment due to an increase in the minimum assessment rate.

### Income Tax Expense

Income tax expense for the three months ended September 30, 2023 was $467,128, compared to $575,236 for the same period of 2022. The effective tax rate was 24.6% for the three months ended September 30, 2023, compared to 22.6% for the same period of 2022. The increase in the effective tax rate is due to lower tax exempt revenue in 2023 versus 2022 as a result of the non-renewal of the captive insurance policy.

## Market risk

As filed, 268 characters.

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.

## Controls and procedures

As filed, 2,285 characters.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including Farmers and Merchants Bancshares, Inc.’s principal executive officer (“PEO”) and the principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of September 30, 2023 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.

During the quarter ended September 30, 2023, 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.

## Risk factors

As filed, 270 characters.

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.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031906. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.