Farmers & Merchants Bancshares, Inc. - Quarter Report: 2019 September (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 September 30, 2019

 

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

 

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

       (Address of principal executive offices)         (Zip Code)

 

(410) 374-1510

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

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

 

	Large accelerated filer ☐		Accelerated filer ☐
	Non-accelerated filer ☑		Smaller reporting company ☑
	Emerging growth company ☐

                              

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,959,777 as of November 7, 2019.

 

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

 

Table of Contents

 

		Page
PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated balance sheets at September 30, 2019 (unaudited) and December 31, 2018	3
	Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated statements of comprehensive income (unaudited) for the three and nine months Ended September 30, 2019 and 2018	5
	Consolidated statements of changes in stockholders’ equity (unaudited) for the nine months ended September 30, 2019 and 2018	6
	Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2019 and 2018	7
	Notes to financial statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II – OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
SIGNATURES		43

 

 

 

		September 30,				December 31,
		2019				2018
		(Unaudited)
Assets
Cash and due from banks		$	16,281,158			$	11,480,608
Federal funds sold and other interest-bearing deposits			3,313,899				3,137,629
Cash and cash equivalents			19,595,057				14,618,237
Certificate of deposit in other bank			100,000				100,000
Securities available for sale			40,101,155				26,591,991
Securities held to maturity			19,509,907				18,127,067
Equity security at fair value			531,714				503,827
Federal Home Loan Bank stock, at cost			503,700				575,800
Mortgage loans held for sale			1,538,574				573,638
Loans, less allowance for loan losses of $2,546,114 and $2,509,334			336,748,866				340,900,635
Premises and equipment			4,913,640				5,075,310
Accrued interest receivable			978,300				990,529
Deferred income taxes			950,207				1,179,454
Other real estate owned			-				210,150
Bank owned life insurance			7,102,589				7,053,354
Other assets			1,931,803				657,885
		$	434,505,512			$	417,157,877
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing		$	58,298,592			$	62,717,520
Interest-bearing			313,897,923				291,995,483
Total deposits			372,196,515				354,713,003
Securities sold under repurchase agreements			7,583,212				11,012,000
Federal Home Loan Bank of Atlanta advances			1,000,000				3,000,000
Accrued interest payable			348,862				311,489
Other liabilities			4,382,403				2,726,678
			385,510,992				371,763,170
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,959,777 in 2019 and 1,682,997 shares in 2018			29,598				16,830
Additional paid-in capital			27,561,138				27,324,794
Retained earnings			21,276,789				18,621,382
Accumulated other comprehensive income			126,995				(568,299	)
			48,994,520				45,394,707
		$	434,505,512			$	417,157,877

---

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2019				2018				2019				2018
Interest income
Loans, including fees		$	4,250,071			$	4,189,626			$	12,582,392			$	12,171,765
Investment securities - taxable			234,274				145,791				631,382				450,649
Investment securities - tax exempt			150,141				142,493				431,354				428,055
Federal funds sold and other interest earning assets			84,526				47,280				280,876				117,973
Total interest income			4,719,012				4,525,190				13,926,004				13,168,442
Interest expense
Deposits			916,452				604,697				2,577,229				1,543,023
Securities sold under repurchase agreements			29,190				42,841				82,912				112,242
Federal Home Loan Bank advances and other borrowings			10,769				16,480				42,517				125,427
Total interest expense			956,411				664,018				2,702,658				1,780,692
Net interest income			3,762,601				3,861,172				11,223,346				11,387,750
Provision for loan losses			(13,000	)			(100,000	)			-				25,000
Net interest income after provision for loan losses			3,775,601				3,961,172				11,223,346				11,362,750
Noninterest income
Service charges on deposit accounts			176,577				160,665				494,752				496,393
Mortgage banking income			144,268				105,144				249,867				219,805
Bank owned life insurance income			39,443				40,880				321,841				121,274
Unrealized gain (loss) on equity security			3,966				(3,869	)			18,721				(15,348	)
Write down of other real estate owned			-				(55,350	)			(210,150	)			(55,350	)
Gain on sale of SBA loans			-				3,317				139,535				63,825
Other fees and commissions			28,714				21,634				94,031				73,433
Total noninterest income			392,968				272,421				1,108,597				904,032
Noninterest expense
Salaries			1,358,208				1,344,759				3,993,998				3,892,971
Employee benefits			312,119				328,258				1,008,228				1,018,280
Occupancy			189,603				168,759				594,566				535,448
Furniture and equipment			149,191				148,945				460,271				475,953
Other			673,814				606,346				1,990,354				1,932,585
Total noninterest expense			2,682,935				2,597,067				8,047,417				7,855,237
Income before income taxes			1,485,634				1,636,526				4,284,526				4,411,545
Income taxes			307,724				327,838				784,508				835,674
Net income		$	1,177,910			$	1,308,688			$	3,500,018			$	3,575,871
Earnings per share - basic and diluted		$	0.40			$	0.45			$	1.19			$	1.22

---

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Net income		$	1,177,910			$	1,308,688			$	3,500,018			$	3,575,871
Other comprehensive income (loss), net of income taxes:
Securities available for sale
Net unrealized gain (loss) arising during the period			113,117				(115,428	)			959,257				(534,867	)
Income tax expense (benefit)			31,127				(31,762	)			263,963				(147,181	)
Total other comprehensive income (loss)			81,990				(83,666	)			695,294				(387,686	)
Total comprehensive income		$	1,259,900			$	1,225,022			$	4,195,312			$	3,188,185

---

 

										Additional								Accumulated other				Total
		Common stock								paid-in				Retained				comprehensive				stockholders'
		Shares				Par value				capital				earnings				income				equity
Balance, December 31, 2017			1,667,813			$	16,678			$	26,869,796			$	15,306,625			$	(394,167	)		$	41,798,932
Net income			-				-				-				3,575,871				-				3,575,871
Unrealized loss on securities available for sale net of income tax benefit of $147,181			-				-				-				-				(387,686	)			(387,686	)
Reclassification due to adoption of ASU No. 2016-01			-				-				-				(10,416	)			10,416				-
Cash dividends, $0.23 per share			-				-				-				(667,192	)			-				(667,192	)
Dividends reinvested			7,337				73				215,406				-				-				215,479
Shares Issued			50				1				1,549				-				-				1,550
Balance, September 30, 2018			1,675,200			$	16,752			$	27,086,751			$	18,204,888			$	(771,437	)		$	44,536,954
Balance, December 31, 2018			1,682,997			$	16,830			$	27,324,794			$	18,621,382			$	(568,299	)		$	45,394,707
Net income			-				-				-				3,500,018				-				3,500,018
Unrealized gain on securities available for sale net of income tax expense of $263,963			-				-				-				-				695,294				695,294
Adjustment due to adoption of ASU No. 2016-02			-				-				-				(91,447	)			-				(91,447	)
Cash dividends, $0.25 per share			-				-				-				(740,477	)			-				(740,477	)
Dividends reinvested			8,095				81				236,344				-				-				236,425
Stock dividend			1,268,685				12,687				-				(12,687	)			-				-
Balance, September 30, 2019			2,959,777			$	29,598			$	27,561,138			$	21,276,789			$	126,995			$	48,994,520

---

 

Nine Months Ended September 30,		2019				2018
Cash flows from operating activities
Interest received		$	13,871,203			$	13,200,699
Fees and commissions received			1,111,256				789,631
Interest paid			(2,665,285	)			(1,664,444	)
Proceeds from sale of mortgage loans held for sale			12,266,054				10,513,771
Origination of mortgage loans held for sale			(13,230,990	)			(10,336,071	)
Cash paid to suppliers and employees			(7,504,291	)			(7,490,137	)
Income taxes paid, net of refunds received			(761,512	)			(588,898	)
			3,086,435				4,424,551
Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale			5,103,515				3,867,038
Held to maturity			1,043,420				165,000
Purchase of securities
Available for sale			(17,761,884	)			-
Held to maturity			(2,406,339	)			(63,242	)
Purchase of certificate of deposit			-				(242,000	)
Loans made to customers, net of principal collected			2,766,804				(9,473,587	)
Proceeds from sale of loans			1,582,364				729,511
Redemption of stock in FHLB of Atlanta			72,100				487,800
Purchases of premises, equipment and software			(60,267	)			(176,346	)
			(9,660,287	)			(4,705,826	)
Cash flows from financing activities
Net increase (decrease) in
Noninterest-bearing deposits			(4,418,928	)			(4,841,569	)
Interest-bearing deposits			21,902,440				34,559,400
Securities sold under repurchase agreements			(3,428,788	)			(9,605,084	)
Federal Home Loan Bank of Atlanta advances (repayments)			(2,000,000	)			(14,000,000	)
Dividends paid, net of reinvestments			(504,052	)			(451,713	)
Common stock issued			-				1,550
			11,550,672				5,662,584
Net increase (decrease) in cash and cash equivalents			4,976,820				5,381,309
Cash and cash equivalents at beginning of period			14,618,237				7,237,385
Cash and cash equivalents at end of period		$	19,595,057			$	12,618,694

---

Nine Months Ended September 30,		2019				2018
Reconciliation of net income to net cash provided by operating activities
Net income		$	3,500,018			$	3,575,871
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			259,626				289,097
Provision for loan losses			-				25,000
Lease expense in excess of rent paid			31,403				-
Write down of other real estate owned			210,150				55,350
Equity security dividend reinvested			(9,166	)			(8,383	)
Unrealized (gain) loss on equity security			(18,721	)			15,348
Gain on sale of loans			(139,535	)			(63,825	)
Decrease (increase) in mortgage loans held for sale			(964,936	)			177,700
Amortization of premiums and accretion of discounts, net			88,541				100,989
Increase (decrease) in
Deferred loan fees			(57,864	)			(10,665	)
Accrued interest payable			37,373				116,248
Other liabilities			200,398				312,878
Decrease (increase) in
Accrued interest receivable			12,229				51,305
Bank owned life insurance cash surrender value			(49,235	)			(121,274	)
Other assets			(13,846	)			(91,088	)
		$	3,086,435			$	4,424,551

---

 

1.	Principles of consolidation

 

The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), and one subsidiary of the Bank, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions have been eliminated.

 

 

2.	Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three months and nine months ended September 30, 2019 do not necessarily reflect the results that may be expected for the entire fiscal year ending December 31, 2019 or any future interim period. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 841).” Among other things, in the amendments in ASU 2016-02, lessees are 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. 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 adopted the provisions of ASU 2016-02, effective January 1, 2019, by recording an asset of $1,400,855, a liability of $1,527,019, a $91,447 adjustment to retained earnings, and a $34,717 adjustment to deferred income taxes.

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2.	Basis of Presentation (continued)

 

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. However, in July 2019, the FASB proposed extending the implementation date to 2023 for SEC registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The proposal is expected to be enacted before the end of 2019. The Company has engaged a third-party vendor to assist in the implementation of this ASU.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in ASC Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective for us on January 1, 2020, with early adoption permitted, and is not expected to have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for us on January 1, 2020, with early adoption permitted, and is not expected to have a material impact on the Company’s financial statements.

 

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 except as noted below.

 

On September 16, 2019, the Board of Directors of the Company declared a 75% stock dividend payable on October 31, 2019 to stockholders of record as of October 4, 2019. Accordingly, all per share information, including note 8, reflects the stock dividend.

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

3.	Investment Securities

 

Investments in debt securities are summarized as follows:

 

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

3.	Investment Securities (continued)

 

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

 

 

 

Securities with a carrying value of $7,465,493 and $11,706,765 as of September 30, 2019 and December 31, 2018, respectively, were pledged as collateral for government deposits and securities sold under repurchase agreements.

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

3.	Investment Securities (continued)

 

The following table sets forth the Company’s gross unrealized losses on a continuous basis for investments in debt securities, by category and length of time, at September 30, 2019 and December 31, 2018.

 

 

 

 

Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of September 30, 2019 and December 31, 2018, management did not have the intent to sell any of the held to maturity or available for sale securities with unrealized losses before a recovery of cost. The unrealized losses detailed in the table above were due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the 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 foregoing factors, as of September 30, 2019 and December 31, 2018, management believes that these unrealized losses are temporary and, accordingly, have not been recognized in the Company’s consolidated statement of income.

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

4.

Loans

 

Major categories of loans are as follows:

 

 

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

 

 

At September 30, 2019, the Company had no nonaccrual loans.

 

At December 31, 2018, the Company had two nonaccrual commercial real estate loans to the same borrower totaling $988,811. The loans were secured by real estate and business assets and were personally guaranteed. Gross interest income of $115,168 would have been recorded during the year ended December 31, 2018 if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $0 of its allowance for loan losses to these nonaccrual loans. The balance of the nonaccrual loans was net of charge-offs of $690,000 at December 31, 2018. The loans paid off during the nine months ended September 30, 2019 and the Company recorded a recovery of $15,299.

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

4.	Loans (continued)

 

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

 

 

Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the nine months ended September 30, 2019 and the year ended December 31, 2018, are set forth in the following table:

 

 

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

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

4.	Loans (continued)

 

At September 30, 2019, the Company had one commercial real estate loan totaling $2,097,690 and one residential real estate loan totaling $50,790 that were classified as TDRs. All are included in impaired loans above. Each loan is paying as agreed. There have been no charge-offs or allowances associated with these two loans.

 

At December 31, 2018, the Company had one commercial real estate loan totaling $2,134,570 and one residential real estate loan totaling $54,000 that were classified as TDRs. The $54,000 loan was restructured as a TDR during 2018. All are included in impaired loans above. Each loan is paying as agreed. There have been no charge-offs or allowances associated with these two loans.

 

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)

 

4.	Loans (continued)

 

Doubtful

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

 

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

 

 

 

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)

 

4.	Loans (Continued)

 

The following table details activity in the allowance for loan losses by portfolio for the nine months ended September 30, 2019 and 2018, and the year ended December 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

 

 

 

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)