# Farmers & Merchants Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [Farmers & Merchants Bancshares, Inc.](/companies/fmfg.md) (CIK 1698022)
- Form: 10-Q
- Filed: 2024-11-14
- Accepted by EDGAR: Nov 14, 2024, 21:00 ET
- Period: 2024-09-30
- Accession: 0001437749-24-035284
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1698022/000143774924035284/fmfg20240930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1698022/000143774924035284/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $341.5k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $993.3k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $1.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $3.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.36 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 3,145,061 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 3,127,895 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $2.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $1.3m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $602.9k | us-gaap:PaymentsOfDividends |
| Total assets | at 2024-09-30 | $817.5m | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $758.4m | us-gaap:Liabilities |
| Long-term debt | at 2024-09-30 | $11.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-09-30 | $59.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,047 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, 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 November 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”).

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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, consideration of current economic trends and conditions and reasonable and supportable forecasts, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.

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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 increased by $17,590,155, or 2.2%, to $817,530,981 at September 30, 2024 from $799,940,826 at December 31, 2023. The increase in total assets was due primarily to an increase of $48,254,335 in loans, offset by a decrease of $27,848,470 in cash and cash equivalents and a decrease of $4,551,270 in debt securities.

Total liabilities increased by $10,606,098, or 1.4%, to $758,368,633 at September 30, 2024 from $747,762,535 at December 31, 2023. The increase was due primarily to a $21,000,000 increase in advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”), offset by a $7,218,129 decrease in deposits, and a $3,874,997 decrease in securities sold under repurchase agreements.

Stockholders’ equity increased by $6,984,057, or 13.4%, to $59,162,348 at September 30, 2024 from $52,178,291 at December 31, 2023. The increase was due to net income of $3,421,643, a decrease of $4,151,691 in accumulated other comprehensive loss and an increase of $13,614 for stock-based compensation paid to an executive officer, offset by dividends paid, net of reinvestments, of $602,871.

### Loans

Major categories of loans at September 30, 2024 and December 31, 2023 were as follows:

| Real estate: | September 30, 2024 |  | December 31, 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $385,795,685 | 67% | $361,942,511 | 69% |
| Construction/Land development | 30,328,093 | 5% | 20,446,150 | 4% |
| Residential | 109,202,653 | 19% | 112,789,631 | 21% |
| Commercial | 50,931,823 | 9% | 32,823,072 | 6% |
| Consumer | 153,568 | 0% | 165,136 | 0% |
|  | 576,411,822 | 100% | 528,166,500 | 100% |
| Less: Allowance for credit losses on loans | 4,190,882 |  | 4,285,247 |  |
| Deferred origination fees net of costs | 658,561 |  | 573,209 |  |
|  | $571,562,379 |  | $523,308,044 |  |

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Loans increased by $48,254,335, or 9.2%, to $571,562,379 at September 30, 2024 from $523,308,044 at December 31, 2023. The increase was due primarily to increases of $23,853,174 in commercial real estate loans, $18,108,751 in commercial loans, and $9,881,943 in construction/land development loans, offset by a decrease of $3,586,978 in residential real estate. The net increase is a result of the Company hiring several new loan officers over the last 18 months and opening a new loan production office. The Company’s long term strategy is to increase the Commercial loan portfolio for a more diversified portfolio and reduce the concentration in commercial real estate loans. The allowance for credit losses on loans decreased by $94,365, or 2.2%, to $4,190,882 at September 30, 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.

The following table provides the provision for (recovery of) credit losses for the nine-month periods ended September 30, 2024 and 2023:

| Three Months Ended September 30, 2024 Held to maturity securities | Loans | Unfunded loan commitments | Total | Nine Months Ended September 30, 2024 Held to maturity securities | Loans | Unfunded loan commitments | Total |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $(89,737) | $102,784 | $(13,047) | $- | $1,267 | $43,414 | $(44,681) | $- |

| Three Months Ended September 30, 2023 Held to maturity securities | Loans | Unfunded loan commitments | Total | Nine Months Ended September 30, 2023 Held to maturity securities | Loans | Unfunded loan commitments | Total |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $41,600 | $(136,434) | $19,834 | $(75,000) | $40,055 | $(594,116) | $(15,939) | $(570,000) |

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The following table provides the recoveries from loans written off in prior periods and charge-offs for the three- and nine-month periods ended September 30, 2024 and 2023:

|  | Three Months Ended September 30, 2024 Held to maturity securities | Loans | Unfunded loan commitments | Total | Nine Months Ended September 30, 2024 Held to maturity securities | Loans | Unfunded loan commitments | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Charge-offs | $- | $- | $- | $- | $- | $(155,779) | $- | $(155,779) |
| Recoveries | - | 6,000 | - | 6,000 | - | 18,000 | - | 12,000 |

|  | Three Months Ended September 30, 2023 Held to maturity securities | Loans | Unfunded loan commitments | Total | Nine Months Ended September 30, 2023 Held to maturity securities | Loans | Unfunded loan commitments | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Charge-offs | $- | $- | $- | $- | $- | $- | $- | $- |
| Recoveries | - | 6,000 | - | 6,000 | - | 392,973 | - | 392,973 |

Watch list loans include loans classified as Special Mention, Substandard, and Doubtful. As of September 30, 2024, the Company had $8,133,178 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 $4.2 million reserve at September 30, 2024 is adequate to cover the expected losses in the loan portfolio. The Company’s loan portfolio grew by $48.2 million during the first nine months of 2024. The allowance for credit losses on loans was 0.72% of the loan portfolio at September 30, 2024 compared to 0.81% at December 31, 2023. The decrease in the percentage is due primarily to a $152,449 fully reserved loan being charged off and removed from the reserve and a decrease in the reserve required for multi-family loans due to no historical losses incurred by the Company in that segment and the improvement of the qualitative factors for that segment.

The reserve for held to maturity securities was $36,894 at September 30, 2024, $126,631 at June 30, 2024 and $35,627 at December 31, 2023. It has vacillated significantly from quarter to quarter due to the unrated portion of the bond portfolio where the projected life is the most significant factor in determining the reserve. The unrated bonds have a call provision at the option of the issuer. The level of interest rates at quarter end determines if the bonds are projected to be called which shortens the projected life of the bonds significantly. If rates are at a level that a call is not projected, the bonds are assumed to reach maturity which significantly lengthens the projected life.

### Investment Securities

Investments in debt securities decreased by $4,551,270, or 2.5%, to $177,697,025 at September 30, 2024 from $184,248,295 at December 31, 2023. At both September 30, 2024 and December 31, 2023, the Company had classified 89% of the investment portfolio as available for sale. The balance of the portfolio was classified as held to maturity.

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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.

### Premises and Equipment

Premises and equipment increased by $857,719 to $7,441,171 at September 30, 2024 from $6,583,452 at December 31, 2023 due primarily to the renovations made to the Upperco, Maryland location after significant storm damage in 2022 and the leasehold improvements made to the new Towson, Maryland location.

### Other Real Estate Owned

Other real estate owned (“OREO”) at both September 30, 2024 and December 31, 2023 included one property. The property is an apartment building in Baltimore, Maryland that was acquired in the Merger. The property is being marketed for sale.

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Other Real Estate Owned | $1,226,245 | $1,242,365 |

### Other assets

Other assets increased by $1,070,270 to $7,009,579 at September 30, 2024 from $5,939,309 at December 31, 2023 due primarily capitalized conversion costs in connection with the core system conversion occurring in 2024 and the increase in right of use assets due to the lease of the new Towson, Maryland location.

### Deposits

Total deposits decreased by $7,218,129, or 1.1%, to $673,744,722 at September 30, 2024 from $680,962,851 at December 31, 2023. The decrease in deposits was due primarily to a $20,280,610 decrease in interest-bearing checking accounts, a $6,037,013 decrease in money market accounts, a $10,497,961 decrease in savings accounts and a $6,842,403 decrease in noninterest-bearing checking accounts, offset by a $36,439,858 increase in certificates of deposit. Generally, the decreases are due to the competition for deposits among all financial institutions due to higher interest rates.

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The following table shows the average balances and average costs of deposits for the nine-month periods ended September 30, 2024 and 2023:

|  | September 30, 2024 Average Balance | Cost | September 30, 2023 Average Balance | Cost |
| --- | ---: | ---: | ---: | ---: |
| Noninterest bearing demand deposits | $111,087,949 | 0.00% | $121,234,643 | 0.00% |
| Interest bearing demand deposits | 125,272,567 | 0.76% | 131,411,988 | 0.45% |
| Savings and money market deposits | 150,371,933 | 0.69% | 174,321,420 | 0.36% |
| Time deposits | 271,372,046 | 4.30% | 204,486,844 | 2.67% |
|  | $658,104,495 | 2.08% | $631,454,895 | 1.06% |

### 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 $71.0 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 $36.6 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. 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.

FHLB advances of $5,000,000 were outstanding as of both September 30, 2024 and December 31, 2023. BTFP advances of $54,000,000 and $33,000,000 were outstanding as of September 30, 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 September 30, 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 $138,773,000, or 21% of total deposits, at September 30, 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 $11,799,931 and $13,212,378 as of September 30, 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 $600,000, 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.

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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, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Securities sold under repurchase agreements | $2,885,496 | $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) | 11,799,931 | 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 September 30, 2024 will require the following principal payments:

|  |  |
| --- | ---: |
| Year ending December 31, 2024 | $472,222 |
| Year ending December 31, 2025 | 70,333,334 |

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

| Loan commitments | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Construction and land development | $1,531,850 | $8,575,337 |
| Commercial | 1,425,000 | 17,877,375 |
| Commercial real estate | 21,262,500 | 7,277,500 |
| Residential | 2,805,000 | 2,195,000 |
|  | $27,024,350 | $35,925,212 |
| Unused lines of credit |  |  |
| Home-equity lines | $13,243,281 | $11,395,790 |
| Commercial lines | 51,315,968 | 46,610,690 |
|  | $64,559,249 | $58,006,480 |
| Letters of credit | $1,987,109 | $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 Nine Months Ended September 30, 2024 and 2023

### General

Net income for the nine months ended September 30, 2024 was $3,421,623 compared to $5,003,107 for the same period of 2023. The decrease of $1,581,484, or 31.6%, was due to a $722,419 decrease in net interest income, a $1,117,921 increase in noninterest expense and a $570,000 decrease in the recovery of credit losses, offset by a $160,505 increase in noninterest income and a $668,351 decrease in income taxes.

### Net Interest Income

Net interest income was $15,392,468 for the nine months ended September 30, 2024 compared to $16,114,887 for the same period of 2023. The net yield on interest earning assets decreased to 2.67% for the nine months ended September 30, 2024 from 3.04% 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 4.75% since March 2022 caused the cost of deposits and borrowings to increase significantly.

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Total interest income for the nine months ended September 30, 2024 was $28,092,282 compared to $22,438,448 for the same period of 2023, an increase of $5,653,834, or 25.2%.

Total interest income on loans for the nine months ended September 30, 2024 increased by $2,997,928 when compared to the same period of 2023 due to a $18.5 million higher average loan balance for the nine months ended September 30, 2024 when compared to the same period of 2023 and a higher loan yield of 5.36% for the nine months ended September 30, 2024 versus 4.79% for the same period of 2023. Investment income for the nine months ended September 30, 2024 increased by $2,095,197, or 67.2%, when compared to the same period of 2023 due to an increase in the fully-taxable equivalent yield to 3.47% for the nine months ended September 30, 2024 compared to 2.490% for the same period of 2023, and a $31.4 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 64 basis points to 4.86% for the nine months ended September 30, 2024 from 4.22% for the same period of 2023. The average balance of total interest-earning assets increased by $62.7 million to $775.9 million for the nine months ended September 30, 2024 compared to $713.2 million for the same period of 2023.

Total interest expense for the nine months ended September 30, 2024 was $12,699,814 compared to $6,323,561 for the same period of 2023, an increase of $6,376,253, or 100.8%. The increase was due to a $69.9 million increase in the average balance of interest-bearing liabilities to $624.5 million for the nine months ended September 30, 2024 compared to $554.6 million for the same period of 2023, and a higher overall cost of funds on interest bearing deposits and borrowings of 2.71% for the nine months ended September 30, 2024 compared to 1.52% for the same period of 2023. Cost of funds for time deposits increased to 4.30% for the nine months ended September 30, 2024 from 2.67% for the same period of 2023. Costs of funds attributable to long-term debt and FHLB, Reserve Bank and other borrowings increased to 4.44% for the nine months ended September 30, 2024 from 4.29% for the same period of 2023.

Average noninterest-earning assets increased by $3.3 million to $21.5 million for the nine months ended September 30, 2024 compared to $18.2 million in the same period of 2023. Average noninterest-bearing deposits decreased by $10.1 million to $111.1 million during the nine months ended September 30, 2024 compared to $121.2 million in the same period of 2023. The average balance in stockholders’ equity increased by $3.9 million for the nine months ended September 30, 2024 when compared with the same period of 2023.

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

| Assets: | Nine Months Ended September 30, 2024 Average Balance | Interest | Yield | Nine Months Ended September 30, 2023 Average Balance | Interest | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $547,645,864 | $22,021,236 | 5.36% | $529,127,695 | $19,023,308 | 4.79% |
| Securities, taxable (1) | 186,276,558 | 4,798,093 | 3.43% | 154,673,211 | 2,701,904 | 2.33% |
| Securities, tax exempt (1) | 18,076,313 | 515,755 | 3.80% | 18,278,667 | 528,212 | 3.85% |
| Deposits at other financial institutions and other interest-earning assets (1) | 23,887,129 | 920,261 | 5.14% | 11,145,233 | 319,303 | 3.82% |
| Total interest-earning assets | 775,885,864 | 28,255,345 | 4.86% | 713,224,806 | 22,572,727 | 4.22% |
| Noninterest-earning assets | 21,481,494 |  |  | 18,221,115 |  |  |
| Total assets | $797,367,358 |  |  | $731,445,921 |  |  |
| Liabilities and Stockholders’ Equity: |  |  |  |  |  |  |
| NOW, savings, and money market | $275,644,500 | 1,489,560 | 0.72% | $305,733,408 | 916,917 | 0.40% |
| Certificates of deposit | 271,372,046 | 8,754,092 | 4.30% | 204,486,844 | 4,093,707 | 2.67% |
| Securities sold under repurchase agreements | 5,206,994 | 49,113 | 1.26% | 4,307,417 | 23,949 | 0.74% |
| FHLB advances | 6,682,482 | 109,230 | 2.18% | 16,018,315 | 452,272 | 3.76% |
| FRB advances and other borrowings | 53,233,577 | 1,910,411 | 4.78% | 9,622,710 | 391,763 | 5.43% |
| Long-term debt | 12,364,488 | 387,408 | 4.18% | 14,440,578 | 444,953 | 4.11% |
| Total interest-bearing liabilities | 624,504,087 | 12,699,814 | 2.71% | 554,609,272 | 6,323,561 | 1.52% |
| Noninterest-bearing deposits | 111,087,949 |  |  | 121,234,643 |  |  |
| Noninterest-bearing liabilities | 8,298,771 |  |  | 6,008,674 |  |  |
| Total liabilities | 743,890,807 |  |  | 681,852,589 |  |  |
| Stockholders' equity | 53,476,551 |  |  | 49,593,332 |  |  |
| Total liabilities and stockholders' equity | $797,367,358 |  |  | $731,445,921 |  |  |
| Net interest income |  | $15,555,531 |  |  | 16,249,166 |  |
| Interest rate spread |  |  | 2.14% |  |  | 2.70% |
| Net yield on interest-earning assets |  |  | 2.67% |  |  | 3.04% |
| Ratio of average interest-earning assets to Average interest-bearing liabilities |  |  | 124.24% |  |  | 128.60% |

(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.

### Provision for Credit Losses

For the nine months ended September 30, 2024, a provision for credit losses on loans of $43,414 and a provision for held to maturity securities of $1,267, offset by a recovery for unfunded loan commitments of $44,681, resulted in a net provision of $0. For the nine months ended September 30, 2023, a recovery for credit losses on loans of $594,116 and a recovery for unfunded loan commitments of $15,939, offset by a provision for held to maturity securities of $40,055, resulted in a net recovery of $570,000. The recovery of credit losses on loans 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 significant decrease in the required reserve for loans.

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### Noninterest Income

Noninterest income for the nine months ended September 30, 2024 was $1,329,395 compared to $1,168,890 for the same period of 2023, an increase of $160,505, or 13.7%. The increase was due primarily to an increase of $142,794 on insurance proceeds from the storm damage to the Bank’s Upperco, Maryland location.

### Noninterest Expense

Noninterest expense for the nine months ended September 30, 2024 totaled $12,306,951 compared to $11,189,030 for the same period of 2023, an increase of $1,117,921, or 10.0%. The increase was due primarily to an increase in salaries and benefits of $317,909 as a result of hiring several new employees, primarily in the commercial loan production department and normal annual salary increases, an increase in other expenses of $488,857, and an increase in occupancy and furniture and equipment costs of $311,155. The increase in other expenses was due primarily to increases in costs related to the upcoming core conversion, ATM related expenses, legal fees incurred for stockholder matters, and Federal Deposit Insurance Corporation assessments. The increase in occupancy and furniture and equipment was due primarily to the renovations and new equipment for the Upperco, Maryland location which was placed in service at the end of the first quarter and the new Towson, Maryland location that was placed in service during the second quarter.

### Income Tax Expense

Income tax expense for the nine months ended September 30, 2024 was $993,289 compared to $1,661,640 for the same period of 2023. The effective tax rate was 22.5% for the nine months ended September 30, 2024 compared to 24.9% for the same period of 2023. The decrease in the effective tax rate was due to a higher percentage of tax exempt revenue in 2024 versus 2023.

### Comparison of Operating Results for the Three Months Ended September 30, 2024 and 2023

### General

Net income for the three months ended September 30, 2024 was $1,123,127 compared to $1,432,139 for the same period of 2023. The decrease of $309,012, or 21.6%, was due to a $102,144 decrease in net interest income, a $325,275 increase in noninterest expense, a $75,000 decrease in the recovery of credit losses, offset by a $67,794 increase in noninterest income and a $125,613 decrease in income taxes.

### Net Interest Income

Net interest income was $5,084.845 for the three months ended September 30, 2024 compared to $5,186,989 for the same period of 2023. The net yield on interest earning assets decreased to 2.62% for the three months ended September 30, 2024 from 2.88% 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 4.75% since March 2022 caused the cost of deposits and borrowings to increase significantly.

Total interest income for the three months ended September 30, 2024 was $9,846,452 compared to $8,001,697 for the same period of 2023, an increase of $1,844,755, or 23.1%.

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Total interest income on loans for the three months ended September 30, 2024 increased by $1,292,470 when compared to the same period of 2023 due to a $36.3 million higher average loan balance for the three months ended September 30, 2024 when compared to the same period of 2023 and a higher loan yield of 5.58% for the three months ended September 30, 2024 versus 4.98% for the same period of 2023. Investment income for the three months ended September 30, 2024 increased by $534,769, or 43.5%, when compared to the same period of 2023 due to an increase in the fully-taxable equivalent yield to 3.60% for the three months ended September 30, 2024 compared to 2.78% for the same period of 2023, and a $17.9 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 63 basis points to 5.05% for the three months ended September 30, 2024 from 4.42% for the same period of 2023. The average balance of total interest-earning assets increased by $55.0 million to $782.9 million for the three months ended September 30, 2024 compared to $727.9 million for the same period of 2023.

Total interest expense for the three months ended September 30, 2024 was $4,761,607 compared to $2,814,708 for the same period of 2023, an increase of $1,946,899, or 69.2%. The increase was due to a $63.9 million increase in the average balance of interest-bearing liabilities to $635.5 million for the three months ended September 30, 2024 compared to $571.7 million for the same period of 2023, and a higher overall cost of funds on interest bearing deposits and borrowings of 3.00% for the three months ended September 30, 2024 compared to 1.97% for the same period of 2023. Cost of funds for time deposits increased to 4.54% for the three months ended September 30, 2024 from 3.28% for the same period of 2023. Cost of funds attributable to long-term debt and FHLB, Reserve Bank and other borrowings increased to 4.49% for the three months ended September 30, 2024 from 4.67% for the same period of 2023.

Average noninterest-earning assets increased by $6.7 million to $24.6 million for the three months ended September 30, 2024 compared to $17.8 million in the same period of 2023. Average noninterest-bearing deposits decreased by $11.3 million to $106.7 million during the three months ended September 30, 2024 compared to $118.0 million in the same period of 2023. The average balance in stockholders’ equity increased by $6.2 million for the three months ended September 30, 2024 when compared with the same period of 2023.

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

| Assets: | Three Months Ended September 30, 2024 Average Balance | Interest | Yield | Three Months Ended September 30, 2023 Average Balance | Interest | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $566,893,271 | $7,901,509 | 5.58% | $530,623,169 | $6,609,039 | 4.98% |
| Securities, taxable (1) | 181,816,130 | 1,624,305 | 3.57% | 163,646,118 | 1,093,546 | 2.67% |
| Securities, tax exempt (1) | 18,099,155 | 174,307 | 3.85% | 18,355,423 | 172,714 | 3.76% |
| Deposits at other financial institutions and other interest-earning assets (1) | 16,129,366 | 192,966 | 4.79% | 15,323,743 | 174,347 | 4.55% |
| Total interest-earning assets | 782,937,922 | 9,893,087 | 5.05% | 727,948,453 | 8,049,646 | 4.42% |
| Noninterest-earning assets | 24,555,446 |  |  | 17,813,892 |  |  |
| Total assets | $807,493,368 |  |  | $745,762,345 |  |  |
| Liabilities and Stockholders’ Equity: |  |  |  |  |  |  |
| NOW, savings, and money market | $260,436,854 | 546,508 | 0.84% | $294,227,739 | 389,251 | 0.53% |
| Certificates of deposit | 296,462,745 | 3,364,332 | 4.54% | 225,433,241 | 1,850,557 | 3.28% |
| Securities sold under repurchase agreements | 4,072,671 | 13,069 | 1.28% | 3,841,994 | 12,110 | 1.26% |
| FHLB advances | 8,652,196 | 64,713 | 2.99% | 6,847,826 | 39,289 | 2.29% |
| FRB advances and other borrowings | 54,000,000 | 647,882 | 4.80% | 27,532,609 | 378,500 | 5.50% |
| Long-term debt | 11,917,283 | 125,103 | 4.20% | 13,800,547 | 145,001 | 4.20% |
| Total interest-bearing liabilities | 635,541,749 | 4,761,607 | 3.00% | 571,683,956 | 2,814,708 | 1.97% |
| Noninterest-bearing deposits | 106,694,426 |  |  | 117,985,523 |  |  |
| Noninterest-bearing liabilities | 9,438,398 |  |  | 6,466,054 |  |  |
| Total liabilities | 751,674,573 |  |  | 696,135,533 |  |  |
| Stockholders' equity | 55,818,795 |  |  | 49,626,812 |  |  |
| Total liabilities and stockholders' equity | $807,493,368 |  |  | $745,762,345 |  |  |
| Net interest income |  | $5,131,480 |  |  | 5,234,938 |  |
| Interest rate spread |  |  | 2.06% |  |  | 2.45% |
| Net yield on interest-earning assets |  |  | 2.62% |  |  | 2.88% |
| Ratio of average interest-earning assets to Average interest-bearing liabilities |  |  | 123.19% |  |  | 127.33% |

(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.

### Provision for Credit Losses

For the three months ended September 30, 2024, a provision for credit losses on loans of $102,784, offset by a recovery for held to maturity securities of $89,737 and a recovery for unfunded loan commitments of $13,047, resulted in a net provision of $0. For the three months ended September 30, 2023, a recovery for credit losses on loans of $136,434, offset by a provision for held to maturity securities of $41,600 and a provision for unfunded loan commitments of $19,834, resulted in a net recovery of $75,000.

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### Noninterest Income

Noninterest income for the three months ended September 30, 2024 was $451,020 compared to $383,226 for the same period of 2023, an increase of $67.794, or 17.7%. The increase was due primarily to a $33,577 increase in the unrealized gain on equity securities.

### Noninterest Expense

Noninterest expense for the three months ended September 30, 2024 totaled $4,071,223 compared to $3,745,948 for the same period of 2023, an increase of $325,275, or 8.9%. The increase was due primarily to an increase in employee benefits of $200,844 as a result of higher supplemental executive retirement plan costs, and an increase in occupancy and furniture and equipment costs of $125,747. The increase in occupancy and furniture and equipment was due primarily to the renovations and new equipment for the Upperco location which was placed in service at the end of the first quarter and the new Towson location that was placed in service during the second quarter.

### Income Tax Expense

Income tax expense for the three months ended September 30, 2024 was $341,515 compared to $467.128 for the same period of 2023. The effective tax rate was 23.3% for the three months ended September 30, 2024 compared to 24.6% 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.

## 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, 2,294 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, 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.

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During the quarter ended September 30, 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.

## Risk factors

As filed, 2,125 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 except as follows:

***The Company is subject to risks from a proxy contest and/or the actions of activist stockholders.***

In a document filed with the SEC by Barry and Carol Renbaum on July 8, 2024, the Renbaums stated that they intend to nominate up to three candidates for election to the Company’s Board of Directors at the 2025 annual meeting of stockholders. A proxy contest or related activities on the part of the Renbaums or other activist stockholders could adversely affect our business for a number of reasons, including, without limitation, the following:

- Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;
- Perceived uncertainties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success, any of which could negatively affect our business and our results of operations and financial condition; and
- Our ability to effectively and timely implement our strategic plans and/or to realize long-term value from our assets could be adversely affected if nominees advanced by activist stockholders are elected or appointed to our Board of Directors with a specific agenda, and that could in turn have an adverse effect on our business and on our results of operations and financial condition.

Proxy contests may cause our stock price to experience periods of volatility. Further, if a proxy contest results in a change in control of our Board of Directors, then such an event could subject us to risks relating to certain third parties' rights under our existing contractual obligations, which could adversely affect our business.

Filed Nov 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-035284. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.