Farmers & Merchants Bancshares, Inc. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended June 30, 2017

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______________ to ________________

Commission file number 000-55756

Farmers and Merchants Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland	81-3605835
(State or other jurisdiction of	(I. R. S. Employer Identification No.)
incorporation or organization)

4510 Lower Beckleysville Road, Suite H, Hampstead, Maryland 21074

(Address of principal executive offices) (Zip Code)

(410) 374-1510

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer ¨	Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,659,460 as of August 11, 2017.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Contents

			Pages
PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated balance sheets at June 30, 2017 (unaudited) and December 31, 2016		3
	Consolidated statements of income (unaudited) for the three and six months ended June 30, 2017 and 2016		4
	Consolidated statements of comprehensive income (unaudited) for the three and six months ended June 30, 2017 and 2016		5
	Consolidated statements of changes in stockholders’ equity (unaudited) for the six months ended June 30, 2017 and 2016		6
	Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2017 and 2016		7

	Notes to financial statements (unaudited)		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

	Item 4.	Controls and Procedures	43

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings	44

	Item 1A.	Risk Factors	44

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 3.	Defaults upon Senior Securities	44

	Item 4.	Mine Safety Disclosures	44

	Item 5.	Other Information	44

	Item 6.	Exhibits	44

SIGNATURES			44

EXHIBIT INDEX			45

PART I- FINANCIAL INFORMATION

Item 1 – Financial Statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30,			December 31,
	2017			2016
	(Unaudited)
Assets

Cash and due from banks	$	8,069,467		$	12,334,358
Federal funds sold and other interest-bearing deposits		1,064,038			978,557
Cash and cash equivalents		9,133,505			13,312,915
Certificate of deposit in other bank		100,000			100,000
Securities available for sale		31,773,618			34,385,939
Securities held to maturity		18,747,947			17,987,628
Federal Home Loan Bank stock, at cost		1,106,100			778,300
Mortgage loans held for sale		473,500			884,500
Loans, less allowance for loan losses of $2,490,013 and $2,363,086		324,044,052			295,286,572
Premises and equipment		5,301,948			5,449,678
Accrued interest receivable		942,647			956,963
Deferred income taxes		956,886			1,029,019
Other real estate owned		414,000			414,000
Bank owned life insurance		6,807,247			6,721,003
Other assets		576,405			2,524,842
	$	400,377,855		$	379,831,359

Liabilities and Stockholders' Equity

Deposits
Noninterest-bearing	$	60,837,900		$	62,791,835
Interest-bearing		257,005,012			239,923,301
Total deposits		317,842,912			302,715,136
Securities sold under repurchase agreements		21,003,860			27,226,159
Federal Home Loan Bank of Atlanta advances		18,000,000			9,000,000
Accrued interest payable		186,963			141,903
Other liabilities		2,102,661			1,735,884
		359,136,396			340,819,082

Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 1,656,390 shares in 2017 and 2016		16,564			16,564
Additional paid-in capital		26,562,919			26,562,919
Retained earnings		14,831,545			12,713,099
Accumulated other comprehensive income		(169,569	)		(280,305	)
		41,241,459			39,012,277
	$	400,377,855		$	379,831,359

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended June 30,				Six Month Ended June 30,
	2017		2016		2017		2016

Interest income
Loans, including fees	$	3,765,062	$	3,383,179	$	7,381,230	$	6,848,668
Investment securities - taxable		173,807		207,362		369,552		389,142
Investment securities - tax exempt		154,853		123,185		302,107		229,922
Federal funds sold and other interest earning assets		28,038		17,434		45,483		35,008
Total interest income		4,121,760		3,731,160		8,098,372		7,502,740

Interest expense
Deposits		332,879		265,878		643,684		525,549
Securities sold under repurchase agreements		37,772		32,428		84,287		60,899
Federal Home Loan Bank advances and other borrowings		41,967		24,234		70,360		50,688
Total interest expense		412,618		322,540		798,331		637,136
Net interest income		3,709,142		3,408,620		7,300,041		6,865,604

Provision for loan losses		75,000		-		125,000		-

Net interest income after provision for loan losses		3,634,142		3,408,620		7,175,041		6,865,604

Noninterest income
Service charges on deposit accounts		176,110		180,878		353,000		371,062
Mortgage banking income		50,952		86,205		108,733		162,137
Bank owned life insurance income		43,328		45,847		86,244		88,544
Gain on sale of SBA loan		217,563		-		217,563		-
Other fees and commissions		33,785		28,136		59,242		62,408
Total noninterest income		521,738		341,066		824,782		684,151

Noninterest expense
Salaries		1,232,977		1,116,375		2,391,872		2,212,281
Employee benefits		323,626		303,095		679,167		634,674
Occupancy		167,618		159,347		351,421		330,607
Furniture and equipment		169,887		165,253		334,656		305,603
Other		680,879		595,542		1,321,139		1,199,212
Total noninterest expense		2,574,987		2,339,612		5,078,255		4,682,377

Income before income taxes		1,580,893		1,410,074		2,921,568		2,867,378
Income taxes		446,004		496,597		803,122		1,014,722
Net income	$	1,134,889	$	913,477	$	2,118,446	$	1,852,656

Earnings per share - basic and diluted	$	0.69	$	0.55	$	1.28	$	1.12

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016

Net income	$	1,134,889	$	913,477	$	2,118,446	$	1,852,656

Other comprehensive income, net of income taxes:

Securities available for sale
Net unrealized gain arising during the period		176,423		162,581		182,869		585,073
Income tax expense relating to investment securities available for sale		69,590		64,130		72,133		230,782
Total other comprehensive income		106,833		98,451		110,736		354,291

Total comprehensive income	$	1,241,722	$	1,011,928	$	2,229,182	$	2,206,947

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2017 and 2016

(Unaudited except for year-end amounts)

				Additional					Accumulated other			Total
	Common stock				paid-in		Retained			comprehensive			stockholders'
	Shares		Par value		capital		earnings			income			equity
Balance, December 31, 2015	1,647,541	$	16,475,415	$	9,889,659	$	9,960,410		$	(102,123	)	$	36,223,361

Net income	-		-		-		1,852,656			-			1,852,656
Unrealized gain on securities available for sale net of income tax expense of $230,782	-		-		-		-			354,291			354,291
Cash dividends, $0.34 per share	-		-		-		(560,164	)		-			(560,164	)
Dividends reinvested	8,860		88,597		126,075		-			-			214,672

Balance, June 30, 2016	1,656,401	$	16,564,012	$	10,015,734	$	11,252,902		$	252,168		$	38,084,816

Balance, December 31, 2016	1,656,390	$	16,564	$	26,562,919	$	12,713,099		$	(280,305	)	$	39,012,277

Net income	-		-		-		2,118,446			-			2,118,446
Unrealized gain on securities available for sale net of income tax expense of $72,133	-		-		-		-			110,736			110,736

Balance, June 30, 2017	1,656,390	$	16,564	$	26,562,919	$	14,831,545		$	(169,569	)	$	41,241,459

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,	2017			2016

Cash flows from operating activities
Interest received	$	8,194,288		$	7,498,206
Fees and commissions received		738,538			595,608
Interest paid		(753,271	)		(644,475	)
Proceeds from sale of mortgage loans held for sale		5,244,483			7,404,341
Origination of mortgage loans held for sale		(4,833,483	)		(8,524,391	)
Cash paid to suppliers and employees		(2,548,389	)		(3,802,103	)
Income taxes paid, net of refunds received		(767,251	)		(1,220,863	)
		5,274,915			1,306,323

Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale		3,858,368			3,415,953
Held to maturity		1,054,308			748,926
Proceeds from sale of securities
Available for sale		-			298,379
Purchase of securities
Available for sale		(1,132,225	)		(15,338,753	)
Held to maturity		(1,805,923	)		(2,798,480	)
Loans made to customers, net of principal collected		(28,969,240	)		(16,735,125	)
(Purchase) redemption of stock in FHLB of Atlanta		(327,800	)		(232,700	)
Purchases of premises, equipment and software		(37,290	)		(81,128	)
		(27,359,802	)		(30,722,928	)

Cash flows from financing activities
Net increase (decrease) in
Noninterest-bearing deposits		(1,953,935	)		3,636,124
Interest-bearing deposits		17,081,711			8,019,277
Securities sold under repurchase agreements		(6,222,299	)		4,179,079
Federal Home Loan Bank of Atlanta advances		9,000,000			5,000,000
Dividends paid, net of reinvestments		-			(345,492	)
		17,905,477			20,488,988

Net increase (decrease) in cash and cash equivalents		(4,179,410	)		(8,927,617	)

Cash and cash equivalents at beginning of period		13,312,915			20,192,839
Cash and cash equivalents at end of period	$	9,133,505		$	11,265,222

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,	2017			2016

Reconciliation of net income to net cash provided by operating activities
Net income	$	2,118,446		$	1,852,656
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		216,767			223,692
Provision for loan losses		125,000			-
Mutual fund dividend reinvested		(5,160	)		-
Decrease (increase) in mortgage loans held for sale		411,000			(1,120,050	)
Amortization of premiums and accretion of discounts, net		65,503			79,136
Increase (decrease) in
Deferred loan fees		86,760			48,052
Accrued interest payable		45,060			(7,339	)
Other liabilities		366,777			334,154
Decrease (increase) in
Accrued interest receivable		14,316			(52,586	)
Bank owned life insurance cash surrender value		(86,244	)		(88,543	)
Other assets		1,916,690			37,151
	$	5,274,915		$	1,306,323

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Principles of consolidation

The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), and one indirect subsidiary, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions have been eliminated. Farmers and Merchants Bancshares, Inc. was incorporated on August 8, 2016 but had no operations until November 1, 2016 when it completed its share exchange with the Bank pursuant to which the Bank became a wholly-owned subsidiary of Farmers and Merchants Bancshares, Inc. The Insurance Subsidiary was formed effective November 9, 2016. Results prior to November 1, 2016 are solely attributable to the Bank and its subsidiary Reliable Community Financial Services, Inc.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2017 or any other interim period. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2016, which are included in Farmers and Merchants Bancshares, Inc.’s Registration Statement on Form 10 that was filed pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (File No. 000-55756).

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing the financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial statements.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation (continued)

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Statements Codification and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (CIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or Variable Interest Entities. The amendments in the ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of 2014-09 for all entities by one year. Entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its financial statements.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation (continued)

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost. The amendments within this ASU are effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose at fair value information about financial instruments measured at amortized cost. The Company is currently assessing the impact that ASU 2016-01 will have on its financial statements.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation (continued)

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 841).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)—Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for fiscal years beginning after December 15, 2018 and is not expected to have a significant impact on our financial statements.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
June 30, 2017	cost		gains		losses		value

Available for sale

State and municipal	$	1,513,322	$	54,411	$	8,348	$	1,559,385
Mutual fund		512,772		-		10,671		502,101
SBA pools		3,339,304		-		14,675		3,324,629
Mortgage-backed securities		26,688,244		29,469		330,210		26,387,503
	$	32,053,642	$	83,880	$	363,904	$	31,773,618

Held to maturity

State and municipal	$	18,747,947	$	249,372	$	164,747	$	18,832,572

		Amortized		Unrealized		Unrealized		Fair
December 31, 2016		cost		gains		losses		value

Available for sale

State and municipal	$	1,515,863	$	62,512	$	12,048	$	1,566,327
Mutual fund		507,612		-		15,369		492,243
SBA pools		2,280,415		-		16,581		2,263,834
Mortgage-backed securities		30,544,941		20,139		501,545		30,063,535
	$	34,848,831	$	82,651	$	545,543	$	34,385,939

Held to maturity

State and municipal	$	17,987,628	$	163,239	$	317,068	$	17,833,799

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Investment Securities (continued)

Contractual maturities, shown below, will differ from actual maturities because borrowers and issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
June 30, 2017	cost		value		cost		value

Within one year	$	512,772	$	502,101	$	-	$	-
Over one to five years		-		-		315,352		315,981
Over five to ten years		1,135,407		1,162,294		1,665,943		1,716,655
Over ten years		377,915		397,091		16,766,652		16,799,936
		2,026,094		2,061,486		18,747,947		18,832,572
Mortgage-backed securities and SBA pools, due in monthly installments		30,027,548		29,712,132		-		-
	$	32,053,642	$	31,773,618	$	18,747,947	$	18,832,572

December 31, 2016

Within one year	$	507,612	$	492,243	$	-	$	-
Over one to five years		-		-		-		-
Over five to ten years		1,136,919		1,163,288		2,657,130		2,702,121
Over ten years		378,944		403,039		15,330,498		15,131,678
		2,023,475		2,058,570		17,987,628		17,833,799
Mortgage-backed securities and SBA pools, due in monthly installments		32,825,356		32,327,369		-		-
	$	34,848,831	$	34,385,939	$	17,987,628	$	17,833,799

Securities with a carrying value of $32,305,784 and $39,818,557 as of June 30, 2017 and December 31, 2016, respectively, were pledged as collateral for Federal Home Loan Bank advances, government deposits and securities sold under repurchase agreements.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Investment Securities (continued)

The following table sets forth the Company's gross unrealized losses on a continuous basis for investment securities, by category and length of time, at June 30, 2017 and December 31, 2016.

June 30, 2017	Less than 12 months				12 months or more				Total
Description of investments	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

State and municipal	$	3,452,959	$	164,747	$	255,847	$	8,348	$	3,708,806	$	173,095
Mutual fund		502,101		10,671		-		-		502,101		10,671
SBA pools		2,761,390		14,675		-		-		2,761,390		14,675
Mortgage-backed securities		19,711,203		242,117		3,418,657		88,093		23,129,860		330,210
Total	$	26,427,653	$	432,210	$	3,674,504	$	96,441	$	30,102,157	$	528,651

December 31, 2016	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
Description of investments	Fair value		losses		Fair value		losses		Fair value		losses

State and municipal	$	8,558,230	$	329,116	$	-	$	-	$	8,558,230	$	329,116
Mutual fund		492,243		15,369		-		-		492,243		15,369
SBA pools		2,263,834		16,581		-		-		2,263,834		16,581
Mortgage-backed securities		26,726,037		473,451		1,353,900		28,094		28,079,937		501,545
Total	$	38,040,344	$	834,517	$	1,353,900	$	28,094	$	39,394,244	$	862,611

Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of June 30, 2017 and December 31, 2016, management did not have the intent to sell any of the securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the these factors, as of June 30, 2017 and December 31, 2016, management believes the unrealized losses detailed in the table above are temporary and, accordingly, none of these unrealized losses have been recognized in the Company’s consolidated statement of income.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans

Major categories of loans are as follows:

	June 30,		December 31,
	2017		2016

Real estate:
Commercial	$	232,689,042	$	206,145,076
Construction and land development		15,165,125		14,392,992
Residential		57,961,821		54,710,809
Commercial		20,614,670		22,152,773
Consumer		667,428		725,269
		327,098,086		298,126,919
Less: Allowance for loan losses		2,490,013		2,363,086
Deferred origination fees net of costs		564,021		477,261
	$	324,044,052	$	295,286,572

Non-accrual loans, segregated by class of loans, were as follows:

	June 30,		December 31,
	2017		2016

Construction and land development	$	573,820	$	752,889

At June 30, 2017, the Company had two nonaccrual construction and land development loans to one borrower totaling $573,820. The loans were secured by real estate and business assets, and were personally guaranteed. Gross interest income of $16,737 would have been recorded in the first six months of 2017 if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $37,700 of its allowance for loan losses for these nonaccrual loans as of June 30, 2017. The balance of nonaccrual loans was net of charge-offs of $400,000 at June 30, 2017.

At June 30, 2016, the Company had three nonaccrual loans totaling $1,109,348. Two of the loans were construction and land development loans to one borrower totaling $1,008,863, secured by real estate and business assets, and were personally guaranteed. The third loan was a commercial loan of $100,485 that was secured by business assets and was personally guaranteed. Gross interest income of $23,071 would have been recorded in the first six months of 2016 if these nonaccrual loans had been current and performing in accordance with the original terms.

At December 31, 2016, the Company had two nonaccrual construction and land development loans to one borrower totaling $752,889. The loans were secured by real estate and business assets, and were personally guaranteed. The Company allocated $16,587 of its allowance for loan losses for these nonaccrual loans as of December 31, 2016. The balance of nonaccrual loans was net of charge-offs of $400,000 at December 31, 2016.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans (Continued)

An age analysis of past due loans, segregated by type of loan, is as follows:

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
June 30, 2017
Real estate:
Commercial	$	-	$	-	$	-	$	-	$	232,689,042	$	232,689,042	$	-
Construction and land development		-		-		573,820		573,820		14,591,305		15,165,125		-
Residential		75,824		-		-		75,824		57,885,997		57,961,821		-
Commercial		-		-		-		-		20,614,670		20,614,670		-
Consumer		-		-		-		-		667,428		667,428		-
Total	$	75,824	$	-	$	573,820	$	649,644	$	326,448,442	$	327,098,086	$	-

December 31, 2016
Real estate:
Commercial	$	-	$	-	$	-	$	-	$	206,145,076	$	206,145,076	$	-
Construction and land development		-		-		752,889		752,889		13,640,103		14,392,992		-
Residential		824,554		-		-		824,554		53,886,255		54,710,809		-
Commercial		48,719		-		-		48,719		22,104,054		22,152,773		-
Consumer		-		-		-		-		725,269		725,269		-
Total	$	873,273	$	-	$	752,889	$	1,626,162	$	296,500,757	$	298,126,919	$	-

Impaired loans, segregated by class of loans, are set forth in the following table:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded		Interest
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
June 30, 2017
Real estate:
Commercial	$	3,136,252	$	3,136,252	$	-	$	3,136,252	$	-	$	2,780,671	$	79,068
Construction and land development		973,820		-		573,820		573,820		37,700		663,355		-
Commercial		145,719		145,719		-		145,719		-		155,243		5,558
	$	4,255,791	$	3,281,971	$	573,820	$	3,855,791	$	37,700	$	3,599,269	$	84,626

December 31, 2016
Real estate:
Commercial	$	2,455,090	$	2,183,509	$	241,580	$	2,425,089	$	7,580	$	2,332,568	$	125,260
Construction and land development		1,152,889		-		752,889		752,889		16,587		854,851		-
Commercial		164,766		164,766		-		164,766		-		184,201		14,442
	$	3,772,745	$	2,348,275	$	994,469	$	3,342,744	$	24,167	$	3,371,620	$	139,702

Impaired loans also include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans (Continued)

At June 30, 2017, the Company had four loans classified as a troubled debt restructuring. All are included in impaired loans above. The first is a commercial real estate loan with a balance of $2,186,252. The second is a commercial loan with a balance of $145,719. The final two loans with a combined principal balance of $950,000 are commercial real estate loans to the same borrower that were restructured during the six months ended June 30, 2017. All four loans are paying as agreed.

At December 31, 2016, the Company had three loans classified as a troubled debt restructuring. All are included in impaired loans above. The first is a commercial real estate loan with a balance of $2,183,509. The second is a commercial loan with a balance of $164,766. These two loans are paying as agreed. The third loan was restructured in 2016 with a balance of $271,580. The loan is a commercial real estate loan with a balance of $241,580 at December 31, 2016 which is net of a $30,000 charge-off. The Company has allocated $7,580 of its allowance for loan losses for this loan.

As part of our portfolio risk management, the Company assigns a risk grade to each loan. The factors used to determine the grade are the payment history of the loan and the borrower, the value of the collateral and net worth of the guarantor, and cash flow projections of the borrower. Excellent, Above Average, Average and Acceptable grades are assigned to loans with limited or no delinquent payments and more than sufficient collateral and/or cash flow.

A description of the general characteristics of loans characterized as watch list or classified is as follows:

Pass/Watch

Loans graded as Pass/Watch are secured by generally acceptable assets which reflect above-average risk. The loans warrant closer scrutiny by management than is routine, due to circumstances affecting the borrower, the borrower's industry, or the overall economic environment. Borrowers may reflect weaknesses such as inconsistent or weak earnings, break even or moderately deficit cash flow, thin liquidity, minimal capacity to increase leverage, or volatile market fundamentals or other industry risks. Such loans are typically secured by acceptable collateral, at or near appropriate margins, with realizable liquidation values.

Special Mention

A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company's credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.

Substandard

A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Doubtful

A doubtful loan has all the weaknesses inherent in a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable.

Loans by credit grade, segregated by loan type, are as follows:

			Above						Pass		Special
June 30, 2017	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total

Real estate:
Commercial	$	-	$	8,142,458	$	129,340,463	$	73,954,685	$	11,969,140	$	4,854,743	$	4,427,553	$	-	$	232,689,042
Construction and land development		-		176,051		8,167,830		2,685,161		2,488,322		1,073,941		573,820		-		15,165,125
Residential		74,468		1,903,097		38,064,664		15,553,712		1,708,829		-		657,051		-		57,961,821
Commercial		1,616,401		110,685		15,963,821		2,278,628		499,416		145,719		-		-		20,614,670
Consumer		14,473		109,002		432,961		82,852		-		-		3,240		24,900		667,428
	$	1,705,342	$	10,441,293	$	191,969,739	$	94,555,038	$	16,665,707	$	6,074,403	$	5,661,664	$	24,900	$	327,098,086

December 31, 2016	Excellent		Above average		Average		Acceptable		Pass watch		Special mention		Substandard		Doubtful		Total

Real estate:
Commercial	$	-	$	9,584,756	$	147,668,371	$	32,474,566	$	3,883,813	$	8,644,563	$	3,889,007	$	-	$	206,145,076
Construction and land development		-		178,078		10,178,876		2,039,090		-		153,611		1,843,337		-		14,392,992
Residential		110,142		2,811,362		42,715,571		8,059,118		351,182		-		663,434		-		54,710,809
Commercial		1,666,880		77,745		18,469,572		1,228,598		545,212		164,766		-		-		22,152,773
Consumer		42,577		121,306		476,465		51,339		-		-		3,840		29,742		725,269
	$	1,819,599	$	12,773,247	$	219,508,855	$	43,852,711	$	4,780,207	$	8,962,940	$	6,399,618	$	29,742	$	298,126,919

The Company’s allowance for loan losses is based on management’s evaluation of the risks inherent in the Company’s loan portfolio and the general economy. The allowance for loan losses is maintained at the amount management considers adequate to cover estimated losses in loans receivable that are deemed probable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience by pools of similar loans, diversification and size of the portfolio, adequacy of the collateral, the amount of non-performing loans and industry trends. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans (Continued)

The following table details activity in the allowance for loan losses by portfolio for the six months ended June 30, 2017 and 2016, and the year ended December 31, 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

												Allowance for loan losses				Outstanding loan
			Provision									ending balance evaluated				balances evaluated
	Beginning		for loan			Charge				Ending		for impairment:				for impairment:
June 30, 2017	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,717,749	$	120,972		$	-	$	1,780	$	1,840,501	$	-	$	1,840,501	$	3,136,252	$	229,552,790
Construction and land development		204,860		59,606			-		-		264,466		37,700		226,766		573,820		14,591,305
Residential		247,437		12,253			-		147		259,837		-		259,837		-		57,961,821
Commercial		125,260		(27,036	)		-		-		98,224		-		98,224		145,719		20,468,951
Consumer		8,826		(1,377	)		-		-		7,449		-		7,449		-		667,428
Unallocated		58,954		(39,418	)		-		-		19,536		-		19,536		-		-
	$	2,363,086	$	125,000		$	-	$	1,927	$	2,490,013	$	37,700	$	2,452,313	$	3,855,791	$	323,242,295

												Allowance for loan losses				Outstanding loan
			Provision									ending balance evaluated				balances evaluated
	Beginning		for loan			Charge				Ending		for impairment:				for impairment:
June 30, 2016	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,718,256	$	55,321		$	-	$	-	$	1,773,577	$	-	$	1,773,577	$	2,206,045	$	195,659,998
Construction and land development		306,982		265			-		-		307,247		173,652		133,595		1,008,862		13,114,390
Residential		322,084		(109,032	)		-		55,027		268,079		-		268,079		-		53,025,508
Commercial		132,362		122,851			-		-		255,213		100,485		154,728		283,596		21,952,044
Consumer		7,900		1,406			-		-		9,306		-		9,306		-		803,047
Unallocated		95,861		(70,811	)		-		-		25,050		-		25,050		-		-
	$	2,583,445	$	-		$	-	$	55,027	$	2,638,472	$	274,137	$	2,364,335	$	3,498,503	$	284,554,987

													Allowance for loan losses				Outstanding loan
			Provision										ending balance evaluated				balances evaluated
	Beginning		for loan			Charge					Ending		for impairment:				for impairment:
December 31, 2016	balance		losses			offs			Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,718,256	$	29,493		$	(30,000	)	$	-	$	1,717,749	$	7,580	$	1,710,169	$	2,425,089	$	203,719,987
Construction and land development		306,982		97,878			(200,000	)		-		204,860		16,587		188,273		752,889		13,640,103
Residential		322,084		(184,773	)		-			110,126		247,437		-		247,437		-		54,710,809
Commercial		132,362		93,383			(100,485	)		-		125,260		-		125,260		164,766		21,988,007
Consumer		7,900		926			-			-		8,826		-		8,826		-		725,269
Unallocated		95,861		(36,907	)		-			-		58,954		-		58,954		-		-
	$	2,583,445	$	-		$	(330,485	)	$	110,126	$	2,363,086	$	24,167	$	2,338,919	$	3,342,744	$	294,784,175

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Capital Standards

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10%; and (4) a Tier 1 leverage ratio of 5%. Management believes that, as of June 30, 2017, the Bank met all capital adequacy requirements under the Basel III Capital Rules.

The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and is to be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does not have current applicability to the Bank. Management believes that, as of June 30, 2017, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The following table presents actual and required capital ratios as of June 30, 2017 and December 31, 2016, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2017 and December 31, 2016, based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Capital Standards (continued)

As of June 30, 2017, the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. Management is not aware of any changes in conditions or other events since that notification that are likely to change the Bank's category.

The FDIC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action.

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)		43,100		12.69	%		31,408		9.25	%		33,954		10.00	%
Tier 1 capital (to risk-weighted assets)		40,610		11.96	%		24,617		7.25	%		27,164		8.00	%
Common equity tier 1 (to risk-weighted assets)		40,610		11.96	%		19,524		5.75	%		22,070		6.50	%
Tier 1 leverage (to average assets)		40,610		10.27	%		15,824		4.00	%		19,780		5.00	%

				Minimum			To Be Well
(Dollars in thousands)	Actual			Capital Adequacy			Capitalized
December 31, 2016	Amount	Ratio		Amount	Ratio		Amount	Ratio

Total capital (to risk-weighted assets)	41,385	13.18	%	27,076	8.63	%	31,392	10.00	%
Tier 1 capital (to risk-weighted assets)	39,022	12.43	%	20,797	6.63	%	25,114	8.00	%
Common equity tier 1 (to risk-weighted assets)	39,022	12.43	%	16,089	5.13	%	20,405	6.50	%
Tier 1 leverage (to average assets)	39,022	10.39	%	15,025	4.00	%	18,781	5.00	%

Capital ratios of the Company are substantially the same as the Bank’s.

Fair Value

Accounting standards define fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants. The price in the principal market used to measure the fair value of the asset or liability is not adjusted for transaction costs. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The standards require the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. The standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Fair Value (continued)

The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company uses the following methods and significant assumptions to estimate the fair values of the following assets:

Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices from a nationally recognized securities pricing agent. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.

Other real estate owned (“OREO”): Nonrecurring fair value adjustments to OREO reflect full or partial write-downs that are based on the OREO’s observable market price or current appraised value of the real estate. Since the market for OREO is not active, OREO subjected to nonrecurring fair value adjustments based on the current appraised value of the real estate are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value.

Impaired loans: Nonrecurring fair value adjustments to impaired loans reflect full or partial write-downs and reserves that are based on the impaired loan’s observable market price or current appraised value of the collateral. Since the market for impaired loans is not active, such loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value.

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Fair Value (continued)

	Carrying Value:
	Level 1		Level 2		Level 3		Total
June 30, 2017

Recurring
Available for sale securities
State and municipal	$	-	$	1,559,385	$	-	$	1,559,385
Mutual Fund		502,101		-		-		502,101
SBA pools		-		3,324,629		-		3,324,629
Mortgage-backed securities		-		26,387,503		-		26,387,503
	$	502,101	$	31,271,517	$	-	$	31,773,618
Nonrecurring
Other real estate owned	$	-	$	-	$	414,000	$	414,000
Impaired loans		-		-		3,818,091		3,818,091

December 31, 2016

Recurring
Available for sale securities
State and municipal	$	-	$	1,566,327	$	-	$	1,566,327
Mutual Fund		492,243		-		-		492,243
SBA pools		-		2,263,834		-		2,263,834
Mortgage-backed securities		-		30,063,535		-		30,063,535
	$	492,243	$	33,893,696	$	-	$	34,385,939
Nonrecurring
Other real estate owned	$	-	$	-	$	414,000	$	414,000
Impaired loans		-		-		3,318,577		3,318,577

Reconciliation of Level 3 Inputs

	Other Real		Impaired
	Estate Owned		Loans

December 31, 2016 balance	$	414,000	$	3,318,577
Additions		-		667,331
Advances		-		602,604
Loan loss provision		-		(13,533	)
Principal payments received		-		(756,888	)
June 30, 2017 balance	$	414,000	$	3,818,091

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Fair Value (continued)

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

	June 30, 2017				December 31, 2016
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	9,133,505	$	9,133,505	$	13,312,915	$	13,312,915
Level 2 inputs
Securities held to maturity		18,747,947		18,832,572		17,987,628		17,833,799
Mortgage loans held for sale		473,500		481,187		884,500		902,061
Federal Home Loan Bank stock		1,106,100		1,106,100		778,300		778,300
Level 3 inputs
Loans, net		324,044,052		324,958,813		295,286,572		297,982,000

Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	60,837,900	$	60,837,900	$	62,791,835	$	62,791,835
Securities sold under repurchase agreements		21,003,860		21,003,860		27,226,159		27,226,159
Level 2 inputs
Interest-bearing deposits		257,005,012		247,386,012		239,923,301		230,394,000
Federal Home Loan Bank advances		18,000,000		17,965,000		9,000,000		8,975,000

The fair value of mortgage loans held for sale is determined by the expected sales price. The fair values of fixed-rate loans are estimated to be the present values of scheduled payments discounted using interest rates currently in effect. The fair values of variable-rate loans, including loans with a demand feature, are estimated to equal the carrying amount. The valuation of a loan is adjusted for probable loan losses.

The fair values of interest-bearing checking, savings, and money market deposit accounts are equal to their carrying amounts. The fair values of fixed-maturity time deposits are estimated based on interest rates currently offered for deposits of similar remaining maturities.

The fair value of credit commitments are considered to be the same as the contractual amounts, and are not included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Earnings per Share

Basic earnings per common share is derived by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, giving retroactive effect to stock dividends declared during the period, and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common stockholders by the weighted-average number of shares outstanding, giving retroactive effect to stock dividends declared during the period, and adjusted for the dilutive effect of outstanding common stock equivalents. There were no common stock equivalents at June 30, 2017 or June 30, 2016.

The following tables set forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2017 and 2016:

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016

Net income	$	1,134,889	$	913,477	$	2,118,446	$	1,852,656
Weighted average shares outstanding		1,656,390		1,647,638		1,656,390		1,647,290
Earnings per share - basic and diluted	$	0.69	$	0.55	$	1.28	$	1.12

Post-retirement plans

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or more with six months of service are eligible for participation in the plan. The Company matches employee contributions up to 4% of total compensation and may make additional discretionary contributions. Employee and employer contributions are 100% vested when made. The Company's contributions to this plan were $79,746 and $73,806 for the six months ended June 30, 2017 and 2016, respectively.

The Company has entered into agreements with 12 employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. For this plan, the Company expensed $2,614 and $2,408 for the six months ended June 30, 2017 and 2016, respectively.

In 2010 and 2015, the Company adopted supplemental executive retirement plans for three of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses, including interest, of $127,200 and $125,980 for the six months ended June 30, 2017 and 2016, respectively, for these plans.

Retirement plan expenses are included in employee benefits on the consolidated statements of income.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements were issued.

No significant subsequent events were identified which would affect the presentation of the financial statements.

ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report. 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 IRC (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. Although we use the terms “Company”, “we”, “us”, and “our” in this Item, the discussion and analysis with respect to periods ending prior to November 1, 2016 relate to the operations of the Bank and its consolidated subsidiaries, and the discussion and analysis with respect to periods ending on and after November 1, 2016 relate to the operations of the Company and its consolidated subsidiaries, including the Bank.

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 (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.

The Company maintains an Internet site at www.fmb1919.com 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, 2016, which were included in Item 13 of Farmers and Merchants Bancshares, Inc.’s Registration Statement on Form 10, File No. 000-55756 (the “Form 10”), that was filed pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). On an on-going basis, management evaluates estimates, including those related to loan losses and intangible assets, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2016.

Financial Condition

Total assets increased by $20,546,496 or 5.4% during the first half of 2017 to $400,377,855 at June 30, 2017 from $379,831,359 at December 31, 2016. The increase in total assets was due primarily to increases of $28,757,480 in loans, offset by decreases of $4,179,410 in cash, $1,948,437 in other assets, and $1,852,002 in securities.`

Total liabilities increased $18,317,314 or 5.4% during the first half of 2017 to $359,136,396 at June 30, 2017 from $340,819,082 at December 31, 2016. The increase was due primarily to increases of $15,127,776 in deposits and $9,000,000 in advances from the Federal Home Loan Bank of Atlanta (“FHLB”), offset by a $6,222,299 decrease in securities sold under repurchase agreements.

Stockholders’ equity increased by $2,229,182 or 5.7% during first half of 2017 to $41,241,459 at June 30, 2017 from $39,012,277 at December 31, 2016. The increase was due primarily to net income of $2,118,446 during the period.

Loans

Major categories of loans at June 30, 2017 and December 31, 2016 are as follows:

	June 30,				December 31,
	2017				2016

Real estate:
Commercial	$	232,689,042	71	%	$	206,145,076	69	%
Construction/Land development		15,165,125	5	%		14,392,992	5	%
Residential		57,961,821	18	%		54,710,809	18	%
Commercial		20,614,670	6	%		22,152,773	8	%
Consumer		667,428	0	%		725,269	0	%
		327,098,086	100	%		298,126,919	100	%
Less: Allowance for loan losses		2,490,013				2,363,086
Deferred origination fees net of costs		564,021				477,261
	$	324,044,052			$	295,286,572

Loans increased by $28,757,480 or 9.7% to $324,044,052 at June 30, 2017 from $295,286,572 at December 31, 2016. The growth was due primarily to a $26,543,966 increase in commercial real estate loans. The allowance for loan losses increased $126,927 to $2,490,013 at June 30, 2017 as compared to $2,363,086 at December 31, 2016.

The Company has adopted policies and procedures that seek to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Company’s policy is to make the majority of its loan commitments in the market area it serves. Management believes that this tends to reduce risk because management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

An age analysis of past due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016, is as follows:

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
June 30, 2017
Real estate:
Commercial	$	-	$	-	$	-	$	-	$	232,689,042	$	232,689,042	$	-
Construction/Land development		-		-		573,820		573,820		14,591,305		15,165,125		-
Residential		75,824		-		-		75,824		57,885,997		57,961,821
Commercial		-		-		-		-		20,614,670		20,614,670		-
Consumer		-		-		-		-		667,428		667,428		-

Total	$	75,824	$	-	$	573,820	$	649,644	$	326,448,442	$	327,098,086	$	-

						90 Days								Past Due 90
		30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More
		Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
December 31, 2016
Real estate:
Commercial	$	-	$	-	$	-	$	-	$	206,145,076	$	206,145,076	$	-
Construction/Land development		-		-		752,889		752,889		13,640,103		14,392,992		-
Residential		824,554		-		-		824,554		53,886,255		54,710,809
Commercial		48,719		-		-		48,719		22,104,054		22,152,773		-
Consumer		-		-		-		-		725,269		725,269		-

Total	$	873,273	$	-	$	752,889	$	1,626,162	$	296,500,757	$	298,126,919	$	-

It is the Company’s policy to place a loan in nonaccrual status whenever there is substantial doubt about the ability of the borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan, and the overall economic situation of the borrower when making a nonaccrual decision. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least six months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.

Non-accrual loans at June 30, 2017 and December 31, 2016, segregated by class of loans, were as follows:

	June 30,		December 31,
	2017		2016

Construction and land development	$	573,820	$	752,889

At June 30, 2017, the Company had two nonaccrual construction and land development loans to one borrower totaling $573,820. The loans were secured by real estate and business assets, and were personally guaranteed. Gross interest income of $16,737 would have been recorded during the first six months of 2017 if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $37,700 of its allowance for loan losses for these nonaccrual loans as of June 30, 2017. The balance of nonaccrual loans was net of charge-offs of $400,000 at June 30, 2017.

At June 30, 2017 and December 31, 2016, the Company had no loans that were delinquent 90 days or greater other than the nonaccrual loans discussed above.

Impaired loans at June 30, 2017 and December 31, 2016 are set forth in the following table:

	June 30,		December 31,
	2017		2016

Impaired loans no valuation allowance	$	3,281,971	$	2,348,275
Impaired loans with a valuation allowance		573,820		994,469
Total impaired loans	$	3,855,791	$	3,342,744
Valuation allowance related to impaired loans	$	37,700	$	24,167

At June 30, 2017, the Company had four loans classified as a troubled debt restructuring. All are included in impaired loans above. The first is a commercial real estate loan with a balance of $2,186,252. The second is a commercial loan with a balance of $145,719. The final two loans with a combined principal balance of $950,000 are commercial real estate loans to the same borrower that were restructured during the six months ended June 30, 2017. All four loans are paying as agreed.

	June 30,		December 31,
	2017		2016

Restructured loans (TDRs):
Performing as agreed	$	3,281,971	$	2,348,275
Not performing as agreed		-		241,580
Total TDRs	$	3,281,971	$	2,589,855

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company's allowance for loan loss methodology includes allowance allocations calculated in accordance with Accounting Standards Codification (“ASC”) Topic 310, "Receivables" and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies." Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.

The Company's process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors.

Although management believes that, based on information currently available, the Company’s allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Company’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions at the time management determined the current level of the allowance for loan losses.

													Allowance for loan losses				Outstanding loan
				Provision									ending balance evaluated				balances evaluated
		Beginning		for loan			Charge				Ending		for impairment:				for impairment:
June 30, 2017		balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,717,749	$	120,972		$	-	$	1,780	$	1,840,501	$	-	$	1,840,501	$	3,136,252	$	229,552,790
Construction and land development		204,860		59,606			-		-		264,466		37,700		226,766		573,820		14,591,305
Residential		247,437		12,253			-		147		259,837		-		259,837		-		57,961,821
Commercial		125,260		(27,036	)		-		-		98,224		-		98,224		145,719		20,468,951
Consumer		8,826		(1,377	)		-		-		7,449		-		7,449		-		667,428
Unallocated		58,954		(39,418	)		-		-		19,536		-		19,536		-		-
	$	2,363,086	$	125,000		$	-	$	1,927	$	2,490,013	$	37,700	$	2,452,313	$	3,855,791	$	323,242,295

												Allowance for loan losses				Outstanding loan
			Provision									ending balance evaluated				balances evaluated
	Beginning		for loan			Charge				Ending		for impairment:				for impairment:
June 30, 2016	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,718,256	$	55,321		$	-	$	-	$	1,773,577	$	-	$	1,773,577	$	2,206,045	$	195,659,998
Construction and land development		306,982		265			-		-		307,247		173,652		133,595		1,008,862		13,114,390
Residential		322,084		(109,032	)		-		55,027		268,079		-		268,079		-		53,025,508
Commercial		132,362		122,851			-		-		255,213		100,485		154,728		283,596		21,952,044
Consumer		7,900		1,406			-		-		9,306		-		9,306		-		803,047
Unallocated		95,861		(70,811	)		-		-		25,050		-		25,050		-		-
	$	2,583,445	$	-		$	-	$	55,027	$	2,638,472	$	274,137	$	2,364,335	$	3,498,503	$	284,554,987

													Allowance for loan losses				Outstanding loan
			Provision										ending balance evaluated				balances evaluated
	Beginning		for loan			Charge					Ending		for impairment:				for impairment:
December 31, 2016	balance		losses			offs			Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	1,718,256	$	29,493		$	(30,000	)	$	-	$	1,717,749	$	7,580	$	1,710,169	$	2,425,089	$	203,719,987
Construction and land development		306,982		97,878			(200,000	)		-		204,860		16,587		188,273		752,889		13,640,103
Residential		322,084		(184,773	)		-			110,126		247,437		-		247,437		-		54,710,809
Commercial		132,362		93,383			(100,485	)		-		125,260		-		125,260		164,766		21,988,007
Consumer		7,900		926			-			-		8,826		-		8,826		-		725,269
Unallocated		95,861		(36,907	)		-			-		58,954		-		58,954		-		-
	$	2,583,445	$	-		$	(330,485	)	$	110,126	$	2,363,086	$	24,167	$	2,338,919	$	3,342,744	$	294,784,175

The provision for loan losses for the six months ended June 30, 2017 was $125,000, compared to $0 for the six months ended June 30, 2016. The increase was due to a larger loan portfolio during the six months ended June 30, 2017 when compared to the same period of 2016.

During the six months ended June 30, 2017, the Company had no loan charge-offs and had recoveries of $1,927 from loans written off in prior periods. During the six months ended June 30, 2016, the Company had no loan charge-offs and had recoveries of $55,027 from loans written off in prior periods.

As of June 30, 2017, the Company had $8,454,096 of loans on a watch list, other than impaired loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2016, the Company had $12,019,814 of such loans. These loans are subject to ongoing management attention and their classifications are reviewed regularly.

Investment Securities

Investment securities decreased $1,852,002 or 3.5% to $50,521,565 at June 30, 2017 from $52,373,567 at December 31, 2016. At June 30, 2017 and December 31, 2016, the Company had classified 63% and 66%, respectively, of the investment portfolio as available for sale. The balance of the portfolio was classified as held to maturity.

Securities classified as available for sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the Company’s asset/liability management strategy. Available for sale 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 management has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company does not currently follow a strategy of making security purchases with a view to near-term sales, and, therefore, does not own trading securities. The Company manages the investment portfolio within policies that seek to achieve desired levels of liquidity, manage interest rate sensitivity, meet earnings objectives, and provide required collateral for deposit and borrowing activities.

The following table sets forth the carrying value of investment securities at June 30, 2017 and December 31, 2016:

		June 30,		December 31,
		2017		2016
Available for sale
State and municipal	$	1,559,385	$	1,566,327
Mutual fund		502,101		492,243
SBA pools		3,324,629		2,263,834
Mortgage-backed securities		26,387,503		30,063,535
	$	31,773,618	$	34,385,939

Held to maturity
State and municipal	$	18,747,947	$	17,987,628

The following table sets forth the scheduled maturities of investment securities at June 30, 2017:

		Available for Sale				Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value

Within 1 year	$	512,772	$	502,101	$	-	$	-
Over 1 to 5 years		-		-		315,352		315,981
Over 5 to 10 years		1,135,407		1,162,294		1,665,943		1,716,655
Over 10 years		377,915		397,091		16,766,652		16,799,936
		2,026,094		2,061,486		18,747,947		18,832,572
Mortgage-backed securities and
SBA pools		30,027,548		29,712,132		-		-
	$	32,053,642	$	31,773,618	$	18,747,947	$	18,832,572

SBA pools and mortgage-backed securities are due in monthly installments.

Other Real Estate Owned

Other real estate owned at June 30, 2017 and December 31, 2016 included one property with a carrying value of $414,000. The property is land in Cecil County, Maryland and was acquired through foreclosure in 2007. The property consists of 10.43 acres earmarked for townhouse and single family residential housing development. The property is being actively marketed for sale.

Deposits

Total deposits increased by $15,127,776 or 5.0% to $317,842,912 at June 30, 2017 from $302,715,136 at December 31, 2016. The increase in deposits was due to a $2,854,355 increase in interest bearing checking accounts, a $3,893,763 increase in savings accounts, and a $14,288,336 increase in time deposits, offset by a $3,954,743 decrease in money market accounts and a $1,953,935 decrease in noninterest-bearing accounts.

The following table shows the average balances and average costs of deposits for the six months ended June 30, 2017 and 2016:

	June 30, 2017					June 30, 2016
	Average Balance		Cost			Average Balance		Cost

Noninterest bearing demand deposits	$	59,316,396		0.00	%	$	57,755,458		0.00	%
Interest bearing demand deposits		41,836,281		0.13	%		35,845,347		0.13	%
Savings and money market deposits		105,643,475		0.23	%		90,784,943		0.23	%
Time deposits		104,109,381		0.95	%		93,770,116		0.85	%
	$	310,905,533		0.41	%	$	278,155,864		0.38	%

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 $53.2 million under a secured line of credit with the FHLB. The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately $30.3 million. Finally, the Bank has an $11,000,000 ($2,000,000 unsecured and $9,000,000 secured) overnight federal funds line of credit available from a commercial bank. FHLB advances of $18,000,000 and $9,000,000 were outstanding at June 30, 2017 and December 31, 2016, respectively. There were no borrowings from the Reserve Bank or our commercial bank lender at June 30, 2017 and December 31, 2016. 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.

Borrowings and Other Contractual Obligations

The Company’s contractual obligations consist primarily of borrowings and operating leases for various facilities.

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:

		June 30,			December 31,
		2017			2016
Amount outstanding at period-end:
Securities sold under repurchase agreements		$	21,003,860		$	27,226,159
Federal Home Loan Bank advances			18,000,000			9,000,000
Federal Home Loan Bank advances mature in:
	2017	$	7,000,000		$	2,000,000
	2018		9,000,000			5,000,000
	2019		2,000,000			2,000,000
Weighted average rate paid at period-end:
Securities sold under repurchase agreements			0.66	%		0.63	%
Federal Home Loan Bank advances			1.17	%		1.11	%

Capital Resources and Adequacy

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Additional information regarding the capital requirements that apply to us can be found in Item 1 of the Form 10 under the heading, “Supervision and Regulation – Capital Requirements”, as well as in Note 5 to the unaudited consolidated financial statements included elsewhere in this report.

The following table presents actual and required capital ratios as of June 30, 2017 and December 31, 2016 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2017 and December 31, 2016, based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)		43,100		12.69	%		31,408		9.25	%		33,954		10.00	%
Tier 1 capital (to risk-weighted assets)		40,610		11.96	%		24,617		7.25	%		27,164		8.00	%
Common equity tier 1 (to risk-weighted assets)		40,610		11.96	%		19,524		5.75	%		22,070		6.50	%
Tier 1 leverage (to average assets)		40,610		10.27	%		15,824		4.00	%		19,780		5.00	%

December 31, 2016

Total capital (to risk-weighted assets)		41,385		13.18	%		27,076		8.63	%		31,392		10.00	%
Tier 1 capital (to risk-weighted assets)		39,022		12.43	%		20,797		6.63	%		25,114		8.00	%
Common equity tier 1 (to risk-weighted assets)		39,022		12.43	%		16,089		5.13	%		20,405		6.50	%
Tier 1 leverage (to average assets)		39,022		10.39	%		15,025		4.00	%		18,781		5.00	%

The Company intends to fund future growth primarily with cash, federal funds, maturities of investment securities and deposit growth. Management knows of no other trend or event that will have a material impact on capital.

Off-Balance Sheet Arrangements

In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit at June 30, 2017 and December 31, 2016 were as follows:

	June 30,		December 31,
	2017		2016

Loan commitments
Construction and land development	$	4,900,000	$	250,000
Commercial		85,800		1,050,000
Commercial real estate		3,380,000		17,134,718
Residential		1,397,200		3,894,689
	$	9,763,000	$	22,329,407

Unused lines of credit
Home-equity lines	$	3,460,602	$	3,345,309
Commercial lines		23,326,806		27,182,226
	$	26,787,408	$	30,527,535

Letters of credit	$	1,934,995	$	1,281,848

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 Six Months Ended June 30, 2017 and 2016

General

Net income for the six months ended June 30, 2017 was $2,118,446, compared to $1,852,656 for the same period of 2016. The increase of $265,790 or 14.4% was due to a $434,437 increase in net interest income, a $140,631 increase in noninterest income, and a $211,600 decrease in income taxes, offset by a $395,878 increase in noninterest expense and a $125,000 increase in the provision for loan losses.

Net Interest Income

Net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings, was $7,300,041 for the six months ended June 30, 2017, compared to $6,865,604 for the same period of 2016.

Total interest income for the six months ended June 30, 2017 was $8,098,372, compared to $7,502,740 for the same period of 2016, an increase of $595,632 or 7.9%.

Total interest income on loans for the six months ended June 30, 2017 increased $532,562 over the same period of 2016 due to a $36.5 million higher average loan balance for the first six months of 2017 when compared to the same period of 2016, offset by a lower loan yield of 4.73% for the first six months of 2017 versus 4.97% for the same period of 2016. Investment income for the first six months of 2017 increased by $52,595 or 8.5% when compared to the same period of 2016 due to a $3.7 million higher average investment balance and an increase in fully-taxable equivalent yield to 3.21% for six months ended June 30, 2017, compared to 3.09% for the same period of 2016. The fully-taxable equivalent yield on total interest-earning assets decreased 16 basis points to 4.46% for the six months ended June 30, 2017, compared to 4.62% for the same period of 2016. The average balance of total interest-earning assets increased by $40.2 million to $370.7 million for the six months ended June 30, 2017, compared to $330.5 million for the same period of 2016.

Total interest expense for the six months ended June 30, 2017 was $798,331, compared to $637,136 for the same period of 2016, an increase of $161,195 or 25.3%. The increase was due to a higher overall cost of funds of 0.55% for the six months ended June 30, 2017, compared to 0.50% for the same period of 2016, and a $35.5 million increase in the average balance of interest-bearing liabilities to $289.6 million in the first six months of 2017, compared to $254.1 million in the same period of 2016. Cost of funds for time deposits increased to 0.95% for the six months ended June 30, 2017 from 0.85% for the same period of 2016. Securities sold under repurchase agreements cost of funds also increased to 0.65% for the first six months of 2017 from 0.55% for the first six months of 2016. FHLB advances cost of funds also increased to 1.16% for the first six months of 2017 from 0.89% for the first six months of 2016.

Average noninterest-earning assets decreased by $1.1 million to $19.3 million in the first six months of 2017, compared to $20.4 million in the same period of 2016. Average noninterest-bearing deposits increased by $1.6 million to $59.3 million during the first six months of 2017, compared to $57.7 million in the same period of 2016. The average balance in stockholders’ equity increased by $2.0 million for the six months ended June 30, 2017, when compared with the same period of 2016.

The FRB has raised rates four times in the last 24 months. The cost of deposits and borrowings has increased slightly over that time. However, the yields on loans and investments continue to decline as those with higher rates mature or payoff and are replaced by lower yielding loans and investments. Management anticipates that the FRB will continue to raise rates over the next few years. Management will closely monitor its asset-liability position so that it can respond to any future changes in interest rates and/or changes to the Bank’s interest rate spread.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the six-month periods ended June 30, 2017 and 2016. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

	Six Months Ended June 30, 2017						Six Months Ended June 30, 2016
		Average Balance		Interest	Yield			Average Balance		Interest	Yield
Assets:
Loans	$	312,050,387	$	7,381,230	4.73	%	$	275,567,646	$	6,848,668	4.97	%
Securities, taxable		33,682,115		372,187	2.21	%		33,784,432		393,200	2.33	%
Securities, tax exempt		18,177,304		459,603	5.06	%		14,344,307		350,275	4.88	%
Federal funds sold and other interest-earning assets		6,776,653		47,979	1.42	%		6,828,649		37,022	1.08	%
Total interest-earning assets		370,686,459		8,260,999	4.46	%		330,525,034		7,629,165	4.62	%
Noninterest-earning assets		19,343,666						20,404,936
Total assets	$	390,030,125					$	350,929,970

Liabilities and Stockholders’ Equity:
NOW, savings, and money market	$	147,479,756		148,681	0.20	%	$	126,630,290		126,820	0.20	%
Certificates of deposit		104,109,381		495,003	0.95	%		93,770,116		398,729	0.85	%
Securities sold under repurchase agreements		25,844,306		84,287	0.65	%		22,339,519		60,899	0.55	%
FHLB advances and other borrowings		12,176,796		70,360	1.16	%		11,329,670		50,688	0.89	%
Total interest-bearing liabilities		289,610,239		798,331	0.55	%		254,069,595		637,136	0.50	%

Noninterest-bearing deposits		59,316,396						57,755,458
Noninterest-bearing liabilities		1,684,081						1,656,379
Total liabilities		350,610,716						313,481,432
Stockholders' equity		39,419,409						37,448,538
Total liabilities and stockholders' equity	$	390,030,125					$	350,929,970

Net interest income			$	7,462,668					$	6,992,029

Interest rate spread					3.91	%					4.12	%

Net yield on interest-earning assets					4.03	%					4.23	%

Ratio of average interest-earning assets to Average interest-bearing liabilities					127.99	%					130.09	%

Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis.

Noninterest Income

Noninterest income for the six months ended June 30, 2017 was $824,782, compared to $684,151 for the same period of 2016, an increase of $140,631 or 20.6%. An increase in net gain on sale of loans drove the increase, offset by a decline in mortgage banking income of $53,404 and service charges on deposit accounts of $18,062.

Noninterest Expense

Noninterest expenses for the six months ended June 30, 2017 totaled $5,078,255, compared to $4,682,377 for the same period of 2016, an increase of $395,878 or 8.5%. The increase was due primarily to increases in salaries and benefits of $224,084, occupancy and furniture and equipment of $49,867 and in other expenses of $121,927. The salary and benefit increase was attributable to several new positions, annual salary increases, and rising health care costs.

Income Tax Expense

Income tax expense for the six months ended June 30, 2017 was $803,122, compared to $1,014,722 for the same period of 2016. The effective tax rate was 27.5% for the six months ended June 30, 2017, compared to 35.4% for the same period of 2016. The decline is due to higher tax exempt revenue in the first six months of 2017 when compared to the first six months of 2016.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

Net income for the three months ended June 30, 2017 was $1,134,889, compared to $913,477 for the same period of 2016. The increase of $221,412 or 24.2% was due to a $300,522 increase in net interest income, a $180,672 increase in noninterest income and a $50,593 decrease in income taxes, offset by a $235,375 increase in noninterest expense and a $75,000 increase in the provision for loan losses.

Net Interest Income

Net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings, was $3,709,142 for the three months ended June 30, 2017, compared to $3,408,620 for the same period of 2016.

Total interest income for the three months ended June 30, 2017 was $4,121,760, compared to $3,731,160 for the same period of 2016, an increase of $390,600 or 10.5%.

Total interest income on loans for the three months ended June 30, 2017 increased $381,883 over the same period of 2016 due to a $39.2 million higher average loan balance for the three months ended June 30, 2017 when compared to the same period of 2016, offset by a lower loan yield of 4.75% for the three months ended June 30, 2017 versus 4.87% for the same period of 2016. Investment income for the three months ended June 30, 2017 decreased by $1,887 or 0.6% when compared to the same period of 2016 due to a $0.6 million lower average investment balance offset by an increase in fully-taxable equivalent yield to 3.13% for three months ended June 30, 2017, compared to 3.05% for the same period of 2016. The fully-taxable equivalent yield on total interest-earning assets decreased 7 basis points to 4.46% for the three months ended June 30, 2017, compared to 4.53% for the same period of 2016. The average balance of total interest-earning assets increased by $39.3 million to $376.8 million for the three months ended June 30, 2017, compared to $337.5 million for the same period of 2016.

Total interest expense for the three months ended June 30, 2017 was $412,618, compared to $322,540 for the same period of 2016, an increase of $90,078 or 27.9%. The increase was due to a higher overall cost of funds of 0.56% for the three months ended June 30, 2017, compared to 0.50% for the same period of 2016, and a $35.3 million increase in the average balance of interest-bearing liabilities to $293.7 million in the three months ended June 30, 2017, compared to $258.4 million in the same period of 2016. Cost of funds for time deposits increased to 0.96% for the three months ended June 30, 2017 from 0.85% for the same period of 2016. Securities sold under repurchase agreements cost of funds also increased to 0.66% for the three months ended June 30, 2017 from 0.54% for the same period of 2016. FHLB advances cost of funds increased to 1.17% for the three months ended June 30, 2017 from 0.88% for the same period of 2016.

Average noninterest-earning assets decreased by $1.8 million to $18.6 million for the three months ended June 30, 2017, compared to $20.4 million in the same period of 2016. Average noninterest-bearing deposits decreased by $0.2 million to $59.6 million during the three months ended June 30, 2017, compared to $59.8 million in the same period of 2016. The average balance in stockholders’ equity increased by $2.2 million for the three months ended June 30, 2017 when compared with the same period of 2016.

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 June 30, 2017 and 2016. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

	Three Months Ended June 30, 2017						Three Months Ended June 30, 2016
	Average						Average
		Balance		Interest	Yield			Balance		Interest	Yield
Assets:
Loans	$	316,936,352	$	3,765,062	4.75	%	$	277,732,071	$	3,383,179	4.87	%
Securities, taxable		33,353,651		175,124	2.10	%		37,015,119		211,420	2.28	%
Securities, tax exempt		18,449,733		229,675	4.98	%		15,368,645		187,644	4.88	%
Federal funds sold and other interest-earning assets		8,011,113		29,687	1.48	%		7,342,399		35,594	1.94	%
Total interest-earning assets		376,750,849		4,199,548	4.46	%		337,458,234		3,817,837	4.53	%
Noninterest-earning assets		18,626,127						20,386,775
Total assets	$	395,376,976					$	357,845,009

Liabilities and Stockholders’ Equity:
NOW, savings, and money market	$	149,220,473		75,322	0.20	%	$	128,314,791		64,497	0.20	%
Certificates of deposit		107,241,134		257,557	0.96	%		95,046,027		201,381	0.85	%
Securities sold under repurchase agreements		22,867,851		37,772	0.66	%		24,053,459		32,428	0.54	%
FHLB advances and other borrowings		14,362,637		41,967	1.17	%		10,978,022		24,234	0.88	%
Total interest-bearing liabilities		293,692,095		412,618	0.56	%		258,392,299		322,540	0.50	%

Noninterest-bearing deposits		59,571,704						59,781,215
Noninterest-bearing liabilities		1,986,241						1,705,027
Total liabilities		355,250,040						319,878,541
Stockholders' equity		40,126,936						37,966,468
Total liabilities and stockholders' equity	$	395,376,976					$	357,845,009

Net interest income			$	3,786,930					$	3,495,297

Interest rate spread					3.90	%					4.03	%

Net yield on interest-earning assets					4.02	%					4.14	%

Ratio of average interest-earning assets to Average interest-bearing liabilities					128.28	%					130.60	%

Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis.

Noninterest Income

Noninterest income for the three months ended June 30, 2017 was $521,738, compared to $341,066 for the same period of 2016, an increase of $180,672 or 53.0%. An increase in net gain on sale of loans of $217,563 drove the increase, offset by a decrease in mortgage banking income of $35,253.

Noninterest Expense

Noninterest expenses for the three months ended June 30, 2017 totaled $2,574,987, compared to $2,339,612 for the same period of 2016, an increase of $235,375 or 10.1%. The increase was due primarily to increases in salaries and benefits of $137,133 and other expenses of $85,337. The salary and benefit increase was attributable to several new positions, annual salary increases, and rising health care costs.

Income Tax Expense

Income tax expense for the three months ended June 30, 2017 was $446,004, compared to $496,597 for the same period of 2016. The effective tax rate was 28.2% for the three months ended June 30, 2017, compared to 35.2% for the same period of 2016. The decline is due to higher tax exempt revenue in the second quarter of 2017 when compared to the second quarter of 2016.

Item 3. - Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk is interest rate fluctuation and we have procedures in place to evaluate and mitigate this risk. This market risk and our procedures are described in Item 2 of the Form 10 under the heading, “Interest Rate Risk”, which provides information as of December 31, 2016. Management believes that no material changes in our procedures used to evaluate and mitigate these risks have occurred since December 31, 2016.

Item 4. - Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including Farmers and Merchants Bancshares, Inc.’s principal executive officer (“CEO”) and its principal accounting officer (“CFO”), 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 June 30, 2017 was carried out under the supervision and with the participation of management, including the CEO and the CFO. Based on that evaluation, management, including the CEO and the CFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the quarter ended June 30, 2017, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in the Form 10. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

The exhibits filed or furnished with this quarterly report are listed in the Exhibit Index that follows the signatures, which index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FARMERS AND MERCHANTS BANCSHARES, INC.

Date: August 11, 2017	/s/ James R. Bosley, Jr.
	James R. Bosley, Jr. President and Chief Executive Officer
	(Principal Executive Officer)

Date August 11, 2017	/s/ Mark C. Krebs
	Mark C. Krebs, Treasurer and Chief Financial Officer
	(Principal Accounting Officer)

EXHIBIT INDEX

Exhibit		Description

31.1		Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

31.2		Certifications of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

32		Certification of the Principal Executive Officer and the Principal Accounting Office pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

101		Interactive Data Files pursuant to Rule 405 of Regulation S-T (filed herewith)