Farmers & Merchants Bancshares, Inc. - Quarter Report: 2022 March (Form 10-Q)

fmfg20220331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended March 31, 2022

☐	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: 3,037,137 as of May 12, 2022.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Table of Contents

Page

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated balance sheets at March 31, 2022 (unaudited) and December 31, 2021	3
Consolidated statements of income (unaudited) for the three months ended March 31, 2022 and 2021	4
Consolidated statements of comprehensive (loss) income (unaudited) for the three months ended March 31, 2022 and 2021	5
Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2022 and 2021	6
Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2022 and 2021	7
Notes to financial statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	44
PART II – OTHER INFORMATION	45
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3. Defaults upon Senior Securities	45
Item 4. Mine Safety Disclosures	45
Item 5. Other Information	45
Item 6. Exhibits	45
SIGNATURES	46

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	March 31,			December 31,
	2022			2021*
	(Unaudited)
*Assets*

Cash and due from banks	$	26,506,362		$	25,258,932
Federal funds sold and other interest-bearing deposits		632,831			1,203,174
Cash and cash equivalents		27,139,193			26,462,106
Certificates of deposit in other banks		350,000			350,000
Securities available for sale, at fair value		145,716,435			149,237,916
Securities held to maturity, at cost		21,343,559			21,851,975
Equity security at fair value		518,091			543,605
Restricted stock, at cost		695,000			675,400
Mortgage loans held for sale		285,000			126,500
Loans, less allowance for loan losses of $3,654,318 and $3,650,268		483,908,857			482,011,334
Premises and equipment, net		6,268,709			6,259,421
Accrued interest receivable		1,562,014			1,609,063
Deferred income taxes, net		4,632,138			2,177,450
Other real estate owned, net		1,242,365			1,242,365
Bank owned life insurance		11,609,153			11,556,163
Goodwill and other intangibles, net		7,048,998			7,051,080
Other assets		5,604,129			5,522,877
	$	717,923,641		$	716,677,255

*Liabilities and Stockholders' Equity*

Deposits
Noninterest-bearing	$	132,629,508		$	124,175,615
Interest-bearing		501,151,145			502,239,055
Total deposits		633,780,653			626,414,670
Securities sold under repurchase agreements		4,083,707			5,414,026
Federal Home Loan Bank of Atlanta advances		5,000,000			5,000,000
Long-term debt, net of issuance costs		16,553,090			16,978,905
Accrued interest payable		276,573			295,910
Other liabilities		6,023,131			5,952,286
		665,717,154			660,055,797
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,037,137 in 2022 and 2021		30,372			30,372
Additional paid-in capital		28,857,422			28,857,422
Retained earnings		31,179,402			29,128,600
Accumulated other comprehensive loss		(7,860,709	)		(1,394,936	)
		52,206,487			56,621,458
	$	717,923,641		$	716,677,255

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

* derived from audited financial statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three months ended
	March 31,
	2022			2021

Interest income
Loans, including fees	$	5,683,362		$	5,984,657
Investment securities - taxable		644,461			211,224
Investment securities - tax exempt		149,487			160,574
Federal funds sold and other interest earning assets		12,415			14,137
Total interest income		6,489,725			6,370,592

Interest expense
Deposits		338,560			595,520
Securities sold under repurchase agreements		3,251			13,511
Federal Home Loan Bank advances and other borrowings		183,825			188,106
Total interest expense		525,636			797,137
Net interest income		5,964,089			5,573,455

Provision for loan losses		-			120,000

Net interest income after provision for loan losses		5,964,089			5,453,455

Noninterest income
Service charges on deposit accounts		181,466			159,191
Mortgage banking income		122,688			256,267
Bank owned life insurance income		52,990			70,119
Fair value adjustment on equity security		(26,817	)		(8,669	)
Gain on sale of SBA loans		93,600			-
Gain on premium call of debt security		-			8,569
Other fees and commissions		71,880			71,468
Total noninterest income		495,807			556,945

Noninterest expense
Salaries		1,740,395			1,626,338
Employee benefits		511,792			472,888
Occupancy		228,427			250,212
Furniture and equipment		214,615			196,683
Other		1,104,369			849,003
Total noninterest expense		3,799,598			3,395,124

Income before income taxes		2,660,298			2,615,276
Income taxes		609,496			585,701
Net income	$	2,050,802		$	2,029,575

Earnings per share - basic and diluted	$	0.68		$	0.67

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 (Loss) Income

(Unaudited)

	Three Months Ended
	March 31,
	2022			2021

Net income	$	2,050,802		$	2,029,575

Other comprehensive loss, net of income taxes:

Securities available for sale
Net unrealized loss arising during the period		(8,920,463	)		(899,330	)

Reclassification adjustment for realized gains included in net income		-			8,569
Total unrealized loss on investment securities available for sale		(8,920,463	)		(890,761	)

Income tax benefit		(2,454,690	)		(245,115	)
Total other comprehensive loss		(6,465,773	)		(645,646	)

Total comprehensive (loss) income	$	(4,414,971	)	$	1,383,929

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

Three months Ended March 31, 2022 and 2021

(Unaudited)

					Additional				Accumulated other			Total
	Common stock				paid-in		Retained		comprehensive			stockholders'
	Shares		Par value		capital		earnings		income (loss)			equity

Balance, December 31, 2020		3,011,255	$	30,113	$	28,294,139	$	22,698,954	$	706,277		$	51,729,483

Net income		-		-		-		2,029,575		-			2,029,575
Unrealized loss on securities available for sale net of income tax benefit of $245,115		-		-		-		-		(645,646	)		(645,646	)

Balance, March 31, 2021		3,011,255	$	30,113	$	28,294,139	$	24,728,529	$	60,631		$	53,113,412

Balance, December 31, 2021		3,037,137	$	30,372	$	28,857,422	$	29,128,600	$	(1,394,936	)	$	56,621,458

Net income		-		-		-		2,050,802		-			2,050,802
Unrealized loss on securities available for sale net of income tax benefit of $2,454,690		-		-		-		-		(6,465,773	)		(6,465,773	)

Balance, March 31, 2022		3,037,137	$	30,372	$	28,857,422	$	31,179,402	$	(7,860,709	)	$	52,206,487

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)

Three Months Ended March 31,	2022			2021

Reconciliation of net income to net cash provided by operating activities
Net income	$	2,050,802		$	2,029,575
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		116,110			117,030
Provision for loan losses		-			120,000
Amortization of right of use asset and lease liability, net		2,177			-
Lease expense in excess of rent paid		-			7,780
Equity security dividends reinvested		(1,303	)		(1,816	)
Unrealized loss on equity security		26,817			8,669
Gain on sale of SBA loans		(93,600	)		-
Gain on sale of premises and equipment		-			(37,613	)
Gain on premium call of debt security		-			(8,569	)
Amortization of debt issuance costs		1,406			1,407
Amortization of premiums and accretion of discounts, net		(212,443	)		69,559
Bank owned life insurance cash surrender value		(52,990	)		(70,119	)
Increase (decrease) in
Deferred loan fees and costs, net		(112,930	)		410,480
Accrued interest payable		(19,337	)		(51,661	)
Other liabilities		106,030			27,154
Decrease (increase) in
Mortgage loans held for sale		(158,500	)		(9,350	)
Accrued interest receivable		47,049			174,062
Other assets		(127,624	)		337,252
Cash provided by operating activities	$	1,571,664		$	3,123,840

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)

Three Months Ended March 31,	2022			2021

Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale		6,232,740			10,454,122
Held to maturity		535,000			1,580,000
Purchase of securities
Available for sale		(11,776,091	)		(31,974,384	)
Held to maturity		-			(342,061	)
Redemption of certificates of deposit		-			500,000
Loans made to customers, net of principal collected		(2,067,575	)		1,932,622
Proceeds from sale of loans		664,650			-
Redemption (purchase) of stock in FHLB of Atlanta		(19,600	)		225,100
Purchase of bank owned life insurance		-			(3,700,000	)
Proceeds from sale of premises and equipment		-			1,359,613
Purchases of premises, equipment and software		(116,388	)		(36,909	)
Cash used in investing activities		(6,547,264	)		(20,001,897	)

Cash flows from financing activities
Net increase (decrease) in
Noninterest-bearing deposits		8,453,893			18,770,755
Interest-bearing deposits		(1,043,666	)		11,151,227
Securities sold under repurchase agreements		(1,330,319	)		(12,105,703	)
Long-term debt principal payments		(427,221	)		-
Cash provided by financing activities		5,652,687			17,816,279

Net increase in cash and cash equivalents		677,087			938,222

Cash and cash equivalents at beginning of period		26,462,106			40,975,670
Cash and cash equivalents at end of period	$	27,139,193		$	41,913,892

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)

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, including the insurance premium paid by the Bank to the Insurance Subsidiary through an intermediary, 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 ended March 31, 2022 do not necessarily reflect the results that may be expected for the fiscal year ending December 31, 2022 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, 2021, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021.

Summary of Significant Accounting Policies

The accounting and reporting policies reflected in the financial statements conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Management makes estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of commitments and contingent liabilities at the balance sheet date, and revenues and expenses during the year. These estimates and assumptions may affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Loans and allowance for loan losses

Loans are stated at the current amount of unpaid principal, adjusted for deferred origination costs, deferred origination fees, premiums and discounts on acquired loans, and the allowance for loan losses. Interest on loans is accrued based on the principal amounts outstanding. Origination fees and costs, along with premiums and accretable discounts, are amortized to income over the terms of loans.

Past due status is based on the contractual terms of the loan. Management may make an exception to reporting a loan as past due if the past due status is due solely to the loan being past maturity, the Company intends to extend the loan, and the borrower is making principal and interest payments in accordance with the terms of the matured note. The accrual of interest is discontinued when any portion of the principal or interest is 90 days past due and collateral is insufficient to discharge the debt in full. If collection of principal is evaluated as doubtful, then all payments are applied to principal. Loans are considered impaired when, based on current information, management considers it unlikely that the collection of principal and interest payments will be made according to contractual terms. Generally, loans are not reviewed for impairment until the accrual of interest has been discontinued, the loans are included on the watch list, or the loans are troubled debt restructurings (“TDRs”).

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

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 losses consists of three elements: (i) segregating the loan portfolio into pools based upon similar characteristics and risk profiles and applying a loss factor to the pools, based on historical losses within those pools; (ii) applying qualitative factors to the loan pools that consider economic and other factors, both internal and external, affecting the Company and the pools; and (iii) determining specific reserves based on individual evaluation of impaired loans that are not included in the pools discussed above.

The allowances established for probable and estimable losses on impaired loans are based on a regular analysis and evaluation of problem loans. Management maintains a watch list of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the borrower’s ability to repay; (ii) the underlying collateral, if any; (iii) the economic environment; and (iv) for commercial borrowers, the industry in which the borrower operates. Specific valuation allowances are determined when the collateral value, if the loan is collateral dependent, or the discounted cash flows of the impaired loan is lower than the carrying value.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool over the prior twenty quarters. The historical loss ratios are updated quarterly based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the annual historical loss ratio and the total dollar amount of the loans in the pool.

Adjustments to the historical valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such adjustments are determined by evaluating, among other things: (i) the impact of economic conditions on the portfolio; (ii) changes in asset quality, including delinquency trends; (iii) the impact of changing interest rates on portfolio risk; (iv) changes in legislative and regulatory policy; (v) the composition and concentrations of credit; and (vi) the effectiveness of the internal loan review function as well as changes to policies and experience of loan personnel. Management evaluates these qualitative factors on a quarterly basis. Each factor could result in an adjustment that is positive, negative, or no impact.

Loan losses are charged to the allowance when management believes that collection is unlikely. Collections of loans previously charged off are added to the allowance at the time of recovery.

Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

Loans acquired through business combinations that meet the specific criteria of ASC 310-30 designated as purchase credit impaired loans are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the transfer of a corresponding amount of the nonaccretable discount, which we will then reclassify as accretable discount to be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. Subsequent to acquisition, a quarterly comparison of the remaining fair value discount to the required allowance under appropriate methodology is performed. If the fair value discount remains in excess of the required allowance, then no adjustment is made. If the fair value falls below the required reserve, then a charge to the provision is recorded for the shortfall as part of the allowance for loan losses.

Goodwill and other intangible assets

Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible asset, the core deposit intangible (“CDI”), has a finite life and is amortized over 10 years on a straight line basis.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“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. ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective Dates” extended the implementation date to January 1, 2023 for SEC-registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The Company has engaged a third-party vendor to assist in the implementation of this ASU. The CECL model will be run parallel with the current ALLL calculation during 2022 beginning with the March 31, 2022 calculation. Several members of the Company’s senior management and credit administration teams will participate in the implementation.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. The Company has identified its products that utilize LIBOR and has begun efforts to transition to an alternative reference rate. The Company continues to evaluate systems to assist in the transaction to a new rate.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities

Investments in debt securities are summarized as follows:

Amortized

Unrealized

Fair

March 31, 2022

cost

gains

losses

value

Available for sale

State and municipal

752,413

730

5,780

747,363

SBA pools

1,300,202

1,682

22,049

1,279,835

Corporate bonds

10,960,028

15,803

347,754

10,628,077

Mortgage-backed securities

143,548,768

27,105

10,514,713

133,061,160

156,561,411

45,320

10,890,296

145,716,435

Held to maturity

State and municipal

21,343,559

156,037

584,827

20,914,769

	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	cost		gains		losses		value

*Available for sale*

State and municipal	$	753,061	$	10,437	$	-	$	763,498
SBA pools		1,418,770		1,656		22,664		1,397,762
Corporate bonds		9,225,153		64,595		55,541		9,234,207
Mortgage-backed securities		139,765,445		336,084		2,259,080		137,842,449
	$	151,162,429	$	412,772	$	2,337,285	$	149,237,916

*Held to maturity*

State and municipal	$	21,851,975	$	1,020,877	$	67,251	$	22,805,601

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities (continued)

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

Available for Sale

Held to Maturity

Amortized

Fair

Amortized

Fair

March 31, 2022

cost

value

cost

value

Within one year

752,350

754,818

Over one to five years

3,628,616

3,560,563

800,729

800,815

Over five to ten years

7,331,475

7,060,059

1,782,321

1,797,278

Over ten years

18,760,509

18,316,676

11,712,441

11,375,440

21,343,559

20,914,769

Mortgage-backed securities and

SBA pools, due in monthly installments

144,848,970

134,340,995

156,561,411

145,716,435

21,343,559

20,914,769

Securities with a carrying value of $16,852,733 and $14,307,989 as of March 31, 2022 and December 31, 2021, respectively, were pledged as collateral for government deposits and securities sold under repurchase agreements.

During the three months ended March 31, 2022, there were no sales of securities. During the three months ended March 31, 2021, the Company received proceeds of $513,845 from the call at a premium of available for sale investment securities. The Company realized an $8,569 gain on the call of the securities.

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 March 31, 2022 and December 31, 2021.

March 31, 2022

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

7,738,761

412,339

924,219

178,268

8,662,980

590,607

SBA pools

1,039,389

22,049

1,039,389

22,049

Corporate bonds

8,201,181

347,754

8,201,181

347,754

Mortgage-backed securities

103,977,709

8,212,229

19,134,680

2,302,484

123,112,389

10,514,713

Total

119,917,651

8,972,322

21,098,288

2,502,801

141,015,939

11,475,123

December 31, 2021	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	$	1,324,648	$	35,720	$	715,650	$	31,531	$	2,040,298	$	67,251
SBA pools		-		-		1,133,398		22,664		1,133,398		22,664
Corporate bonds		5,443,886		55,541		-		-		5,443,886		55,541
Mortgage-backed securities		117,840,965		2,034,858		4,781,586		224,222		122,622,551		2,259,080
Total	$	124,609,499	$	2,126,119	$	6,630,634	$	278,417	$	131,240,133	$	2,404,536

Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of March 31, 2022 and December 31, 2021, 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 debt 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 March 31, 2022 and December 31, 2021, management believes that these unrealized losses are temporary and, accordingly, they have not been recognized in the Company’s consolidated statements of income. At March 31, 2022, 156 available for sale and 20 held to maturity investments had unrealized losses.

At March 31, 2022, none of the available for sale or held to maturity investments were impaired. In determining whether other-than-temporary impairment exists, management considers many factors, including (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether the Company intends to sell the security, whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, and whether the Company expects to recover the security’s entire amortized cost basis. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans

Major categories of loans are as follows:

	March 31,		December 31,
	2022		2021
Real estate:
Commercial	$	329,179,712	$	319,185,116
Construction and land development		20,325,400		28,221,854
Residential		111,993,662		107,436,033
Commercial		26,374,885		31,182,206
Consumer		296,151		355,958
		488,169,810		486,381,167
Less: Allowance for loan losses		3,654,318		3,650,268
Deferred origination fees net of costs		606,635		719,565
	$	483,908,857	$	482,011,334

Commercial loans in the table above include $4.2 million and $9.7 million of Paycheck Protection Program (“PPP”) loans as of March 31, 2022 and December 31, 2021, respectively, which are 100% guaranteed by the Small Business Administration (“SBA”). PPP loans totaling $60 million were originated during 2021 and 2020, and we collected approximately $2,323,000 in origination fees from the SBA. A substantial portion of the PPP loans in the Company’s portfolio are expected to be forgiven by the SBA. The fees, net of related origination costs, are being recognized as interest income over the term of the loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means. Income from PPP loans added approximately $105,000 to net income for the three months ended March 31, 2022 compared to $369,000 for the same period in 2021. As of March 31, 2022, $91,000 of deferred PPP fees, net of income taxes, have not been recognized.

Nonaccrual loans, segregated by class of loans, were as follows:

	March 31,		December 31,
	2022		2021
Commercial real estate	$	4,780,965	$	4,810,965
Residential real estate		31,500		31,500
Commercial		152,449		152,449
	$	4,964,914	$	4,994,914

At March 31, 2022, the Company had two nonaccrual commercial real estate loans totaling $4,780,965, one nonaccrual residential real estate loan totaling $31,500, and one nonaccrual commercial loan totaling $152,449. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $59,182 would have been recorded for the three months ended March 31, 2022 had these nonaccrual loans been current and performing in accordance with their original terms. The Company allocated $281,910 of its allowance for loan losses to these nonaccrual loans. The recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $27,146 at March 31, 2022.

At December 31, 2021, the Company had two nonaccrual commercial real estate loan totaling $4,810,965 and one nonaccrual residential real estate loan totaling $31,500, and one commercial loan totaling $152,449. The real estate loans were secured by real estate and business assets and were personally guaranteed. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of $219,734 would have been recorded in 2021 if these nonaccrual loans had been current and performing in accordance with their original terms. The Company allocated $281,910 of its allowance for loan losses to these nonaccrual loans. The balance of nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $27,146 at December 31, 2021.

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:

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
March 31, 2022
Real estate:
Commercial	$	-	$	-	$	502,961	$	502,961	$	328,676,751	$	329,179,712	$	-
Construction and land development		-		-		-		-		20,325,400		20,325,400		-
Residential		-		216,082		31,500		247,582		111,746,080		111,993,662		-
Commercial		-		-		152,449		152,449		26,222,436		26,374,885		-
Consumer		-		-		-		-		296,151		296,151		-
Total	$	-	$	216,082	$	686,910	$	902,992	$	487,266,818	$	488,169,810	$	-

December 31, 2021
Real estate:
Commercial	$	-	$	-	$	502,961	$	502,961	$	318,682,155	$	319,185,116	$	-
Construction and land development		-		-		-		-		28,221,854		28,221,854		-
Residential		-		-		249,161		249,161		107,186,872		107,436,033		217,661
Commercial		-		-		415,690		415,690		30,766,516		31,182,206		263,241
Consumer		-		-		-		-		355,958		355,958		-
Total	$	-	$	-	$	1,167,812	$	1,167,812	$	485,213,355	$	486,381,167	$	480,902

Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the three months ended March 31, 2022 and the year ended December 31, 2021, 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
March 31, 2022
Commercial real estate	$	6,781,030	$	6,278,069	$	502,961	$	6,781,030	$	129,461	$	6,800,981	$	25,054
Residential real estate		37,341		37,341		-		37,341		-		38,285		-
Commercial		152,449		-		152,449		152,449		152,449		152,449		378
	$	6,970,820	$	6,315,410	$	655,410	$	6,970,820	$	281,910	$	6,991,715	$	25,432

December 31, 2021
Commercial real estate	$	6,820,932	$	6,317,971	$	502,961	$	6,820,932	$	129,461	$	6,740,539	$	125,079
Residential real estate		39,228		39,228		-		39,228		-		41,981		1,672
Commercial		152,449		-		152,449		152,449		152,449		76,225		69,005
	$	7,012,609	$	6,357,199	$	655,410	$	7,012,609	$	281,910	$	6,858,745	$	195,756

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

Impaired loans include TDRs which are loans that have been modified to provide economic concessions to borrowers who have experienced 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.

At March 31, 2022, the Company had two commercial real estate loan totaling $6,278,069 and one residential real estate loan totaling $37,341 that were classified as TDRs. One of the commercial real estate loans with a principal balance of $4,278,004 was restructured as a TDR in 2022. All are included in impaired loans above. At March 31, 2022, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these loans.

At December 31, 2021, the Company had one commercial real estate loan totaling $2,009,967 and one residential real estate loan totaling $39,228 classified as TDRs. Both loans are included in impaired loans above and were paying as agreed. There have been no charge-offs or allowances associated with these loans.

Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. As of March 31, 2022, one loan totalling $4.3 million, or 1% of the Company’s loan portfolio, was operating under a three-month deferral. This loan was classified as a TDR as of March 31, 2022 because it did not meet the criteria discussed above.

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.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

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.

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.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

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

Above

Pass

Special

March 31, 2022

Excellent

average

Average

Acceptable

watch

mention

Substandard

Doubtful

Total

Real estate:

Commercial

98,984

69,394,973

161,821,022

85,424,219

3,217,512

9,223,002

329,179,712

Construction and land development

3,711,277

10,967,190

5,646,933

20,325,400

Residential

34,250

611,328

45,120,441

56,566,253

7,270,671

2,390,719

111,993,662

Commercial

4,312,074

5,666,167

12,613,235

3,630,960

152,449

26,374,885

Consumer

4,553

142,436

118,739

1,249

10,293

18,881

296,151

4,350,877

852,748

124,011,597

241,968,949

101,983,076

3,217,512

11,785,051

488,169,810

			Above						Pass		Special
December 31, 2021	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total

Real estate:
Commercial	$	-	$	1,225,732	$	73,924,748	$	146,174,439	$	82,018,890	$	3,345,788	$	12,495,519	$	-	$	319,185,116
Construction and land development		-		-		3,853,775		12,452,257		9,973,457		1,942,365		-		-		28,221,854
Residential		41,152		708,162		46,358,477		48,295,430		9,570,815		-		2,461,997		-		107,436,033
Commercial		9,774,570		-		5,292,721		12,585,396		3,377,070		-		152,449		-		31,182,206
Consumer		5,813		168,037		147,903		2,280		11,298		-		-		20,627		355,958
	$	9,821,535	$	2,101,931	$	129,577,624	$	219,509,802	$	104,951,530	$	5,288,153	$	15,109,965	$	20,627	$	486,381,167

The principal balance of loans in the Pass/Watch category as of March 31, 2022 and December 31, 2021 include loans that were granted payment deferrals due to COVID-19. The loans were downgraded to the Pass/Watch category if they were in a higher rated category at the time the deferral was granted. Loans that completed their deferral and are making scheduled payments again are being re-evaluated on a loan-by-loan basis to determine if they warrant upgrading.

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 three-month periods ended March 31, 2022 and 2021 and for the year ended December 31, 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Provision for (recovery

Allowance for loan losses ending

balance evaluated for impairment:

Outstanding loan balances

evaluated for impairment:

Beginning

of)

Charge

Ending

Purchase Credit

March 31, 2022

balance

loan losses

offs

Recoveries

balance

Individually

Impaired

Collectively

Individually

Impaired

Collectively

Real estate:

Commercial

2,482,930

63,130

2,546,060

129,461

2,416,599

6,781,030

32,991

322,365,691

Construction and land development

214,547

(97,873

)

4,050

120,724

379,349

19,946,051

Residential

603,558

51,081

654,639

37,341

244,789

111,711,532

Commercial

255,413

12,276

267,689

152,449

115,240

152,449

26,222,436

Consumer

4,370

(738

)

3,632

296,151

Unallocated

89,450

(27,876

)

61,574

3,650,268

4,050

3,654,318

281,910

3,372,408

6,970,820

657,129

480,541,861

			Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
March 31, 2021	balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	323,768		$	-	$	2,500	$	2,556,397	$	-	$	-	$	2,556,397	$	6,644,339	$	45,233	$	305,552,307
Construction and land development		201,692		(39,269	)		-		4,050		166,473		-		-		166,473		-		1,554,070		33,177,080
Residential		644,639		(154,755	)		-		-		489,884		-		-		489,884		43,371		590,847		116,066,706
Commercial		111,390		(12,143	)		-		-		99,247		-		-		99,247		-		-		60,064,503
Consumer		2,138		320			-		-		2,458		-		-		2,458		-		-		258,484
Unallocated		106,550		2,079			-		-		108,629		-		-		108,629		-		-		-
	$	3,296,538	$	120,000		$	-	$	6,550	$	3,423,088	$	-	$	-	$	3,423,088	$	6,687,710	$	2,190,177	$	515,119,080

			Provision for (recovery										Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge					Ending		Purchase Credit						Purchase Credit
December 31, 2021	balance		loan losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	241,301		$	-		$	11,500	$	2,482,930	$	129,461	$	-	$	2,353,469	$	6,820,932	$	56,825	$	312,307,359
Construction and land development		201,692		(3,345	)		-			16,200		214,547		-		-		214,547		-		383,666		27,838,188
Residential		644,639		(22,111	)		(18,970	)		-		603,558		-		-		603,558		39,228		568,151		106,828,654
Commercial		111,390		129,023			-			15,000		255,413		152,449		-		102,964		152,449		-		31,029,757
Consumer		2,138		2,232			-			-		4,370		-		-		4,370		-		-		355,958
Unallocated		106,550		(17,100	)		-			-		89,450		-		-		89,450		-		-		-
	$	3,296,538	$	330,000		$	(18,970	)	$	42,700	$	3,650,268	$	281,910	$	-	$	3,368,358	$	7,012,609	$	1,008,642	$	478,359,916

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (Continued)

The following table provides activity for the accretable credit discount of purchased loans:

	2022

Balance at December 31, 2021	$	1,629,242
Accretion		211,163
Balance at March 31, 2022	$	1,418,079

At March 31, 2022, the nonaccretable discount on purchased impaired loans was $241,587, a decrease of $225,000 from December 31, 2021 as a result of a one of the loans paying off in full. At March 31, 2022 the accretable discount on purchased impaired loans was $86,342 after the accretion of $54,266. At March 31, 2022, the remaining yield premium on purchased loans was $1,257,038. At March 31, 2022, the principal balance of purchased loans was $96,265,413 and the carrying value was $95,862,785. At March 31, 2022, there were no residential real estate loans in the process of foreclosure.

5.	Goodwill and Other Intangibles

The acquisition of Carroll Bancorp, Inc. in October of 2020 resulted in the recording of goodwill and core deposit intangible (“CDI”). The following table presents the changes in both assets:

Goodwill

CDI

Total

Balance at December 31, 2021

6,978,208

72,872

7,051,080

Amortization

(2,082

)

(2,082

)

Balance at March 31, 2022

6,978,208

70,790

7,048,998

The CDI is being amortized over 10 years on a straight-line basis. Annual amortization will be $8,328 for each of the years ended December 31, 2022 through 2029 and $6,246 in 2030. Because the Company’s acquisition by merger of Carroll Bancorp, Inc. and Carroll Community Bank was a tax-free reorganization, goodwill and CDI are not deductible for income tax purposes.

6.	Lease Commitments

The Company and its subsidiaries are obligated under operating leases for certain office premises.

The following table shows operating lease right of use assets and operating lease liabilities as of March 31, 2022 and December 31, 2021:

	Consolidated Balance
	Sheet classification	March 31, 2022		December 31, 2021
Operating lease right of use asset	Other assets	$	1,056,020	$	1,093,382
Operating lease liabilities	Other liabilities		1,276,385		1,311,570

Operating lease cost included in occupancy expense in the statement of income for the three months ended March 31, 2022 and 2021 was $47,529 and $49,930, respectively.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6.	Lease Commitments (continued)

A maturity analysis of operating lease liabilities, including those option years for which the Company is reasonably certain to renew, and reconciliation of the undiscounted cash flows to the total operating lease liabilities are as follows:

Year	Amount

2022	$	137,059
2023		187,951
2024		193,443
2025		199,107
2026		204,952
Thereafter		492,394
Total undiscounted cash flow		1,414,906
Discount		(138,521	)
Lease liabilities	$	1,276,385

For operating leases as of March 31, 2022, the weighted average remaining lease term is 7.3 years and the weighted average discount rate is 3.25%. During the three-month periods ended March 31, 2022 and 2021, cash paid for amounts included in the measurement of lease liabilities was $45,353 and $42,150, respectively.

7.	Capital Standards

Farmers and Merchants Bancshares, Inc. 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.

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.

Insured depository institutions are required to meet the following in order to qualify as “well capitalized”: (i) a common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a total risk-based capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7.	Capital Standards (continued)

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank. As of March 31, 2022, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased‑in basis.

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 March 31, 2022 and December 31, 2021 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2022 and December 31, 2021 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. Capital ratios of the Company are substantially the same as the Bank’s.

Minimum

To Be Well

(Dollars in thousands)

Actual

Capital Adequacy

Capitalized

March 31, 2022

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total capital (to risk-weighted assets)

71,541

13.09

57,396

10.50

54,663

10.00

Tier 1 capital (to risk-weighted assets)

67,887

12.42

46,463

8.50

43,730

8.00

Common equity tier 1 (to risk- weighted assets)

67,887

12.42

38,264

7.00

35,531

6.50

Tier 1 leverage (to average assets)

67,887

9.60

28,290

4.00

35,363

5.00

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	69,957		13.24	%	$	55,471		10.50	%	$	52,830		10.00	%
Tier 1 capital (to risk-weighted assets)		66,307		12.55	%		44,905		8.50	%		42,264		8.00	%
Common equity tier 1 (to risk- weighted assets)		66,307		12.55	%		36,981		7.00	%		34,339		6.50	%
Tier 1 leverage (to average assets)		66,307		9.27	%		28,614		4.00	%		35,767		5.00	%

To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. As of March 31, 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed 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.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value

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

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

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

●

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

●

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

●

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

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

●

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

●

Equity security at fair value: The Company’s investment in an equity mutual fund is valued based on the net asset value of the fund, which is classified as Level 1.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value (continued)

●

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 March 31, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Carrying Value:

Level 1

Level 2

Level 3

Total

March 31, 2022

Recurring:

Available for sale securities

State and municipal

747,363

SBA pools

1,279,835

Corporate bonds

10,628,077

Mortgage-backed securities

133,061,160

145,716,435

Equity security at fair value

Mutual fund

518,091

Nonrecurring:

Other real estate owned, net

1,242,365

Impaired loans

373,500

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value (continued)

	Carrying Value:
	Level 1		Level 2		Level 3		Total
December 31, 2021
Recurring:
Available for sale securities
State and municipal	$	-	$	763,498	$	-	$	763,498
SBA pools		-		1,397,762		-		1,397,762
Corporate Bonds		-		8,584,207		650,000		9,234,207
Mortgage-backed securities		-		137,842,449		-		137,842,449
	$	-	$	148,587,916	$	650,000	$	149,237,916

Equity security at fair value
Mutual fund	$	543,605	$	-	$	-	$	543,605

Nonrecurring:
Other real estate owned, net	$	-	$	-	$	1,242,365	$	1,242,365
Impaired loans		-		-		373,500		373,500

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:

	March 31, 2022				December 31, 2021
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	27,139,193	$	27,139,193	$	26,462,106	$	26,462,106
Level 2 inputs
Certificates of deposit in other banks		350,000		350,000		350,000		350,000
Accrued interest receivable		1,562,014		1,562,014		1,609,063		1,609,063
Securities held to maturity		21,343,559		20,914,769		21,851,975		22,805,601
Mortgage loans held for sale		285,000		287,015		126,500		128,829
Restricted stock, at cost		695,000		695,000		675,400		675,400
Bank owned life insurance		11,609,153		11,609,153		11,556,163		11,556,163
Level 3 inputs
Securities held to maturity		-		-		3,073,040		3,073,040
Loans, net		483,908,857		486,099,069		482,011,334		487,012,970

Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	132,629,508	$	132,629,508	$	124,175,615	$	124,175,615
Securities sold under repurchase agreements		4,083,707		4,083,707		5,414,026		5,414,026
Level 2 inputs
Interest-bearing deposits		501,151,145		499,421,145		502,239,055		502,396,172
Federal Home Loan Bank advances		5,000,000		4,764,000		5,000,000		4,967,000
Long-term debt		16,553,090		16,718,129		16,978,905		17,298,111
Accrued interest payable		276,573		276,573		295,910		295,910

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

9.	Earnings per Share

Basic earnings per share is determined by dividing net income available to stockholders by the weighted-average number of shares of common stock outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents, giving retroactive effect to stock dividends declared during the period. Diluted earnings per share is determined in the same manner, except that the weighted-average number of shares of common stock outstanding is adjusted for the dilutive effect of outstanding common stock equivalents. The following table sets forth the calculation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021. There were no common stock equivalents outstanding for the three months ended March 31, 2022 or 2021.

	Three Months Ended
	March 31,
	2022		2021

Net income	$	2,050,802	$	2,029,575
Weighted average shares outstanding		3,037,137		3,011,255
Earnings per share - basic and diluted	$	0.68	$	0.67

10.

Retirement Plans

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or older with six months of service are eligible for participation in the plan. The Company matches employee contributions up to 4% of total compensation and may make additional discretionary contributions. Employee and employer contributions are 100% vested when made. The Company’s contributions to this plan were $79,740 and $76,924 for the three-month periods ended March 31, 2022 and 2021.

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 $1,702 and $1,661 for the three-month periods ended March 31, 2022 and 2021.

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 related to these plans, including interest, of $45,000 and $42,000 for the three-month periods ended March 31, 2022 and 2021.

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

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

Introduction

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”). References in this report to “us”, “we”, “our”, and “the Company” are to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions, including those impacted and/or driven by the COVID-19 pandemic; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports that Farmers and Merchants Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

Farmers and Merchants Bancshares, Inc.

Farmers and Merchants Bancshares, Inc. is a Maryland corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended. The Company was incorporated on August 8, 2016 for the purpose of becoming the holding company of Farmers and Merchants Bank (the “Bank”) in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the “Reorganization”). The Reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company.

The Company’s primary business activities are serving as the parent company of the Bank and holding a series investment in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed protected cell captive insurance company (“FCBI”). The Company owns 100% of one series of membership interests issued by FCBI, which series is deemed a “protected cell” under Tennessee law and has been designated “Series Protected Cell FCB-4” (such series investment is hereinafter referred to as the “Insurance Subsidiary”).

The Bank is a Maryland commercial bank chartered on October 24, 1919 that is engaged in a general commercial and retail banking business. The Bank has had one inactive subsidiary, Reliable Community Financial Services, Inc., a Maryland corporation that was incorporated in April 1992 to facilitate the sale of fixed rate annuity products and later positioned to sell a full array of investment and insurance products.

The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (i.e., FCBI) that was formed on November 9, 2016 to better manage our risk programs, provide insurance efficiencies, and add operating income by both keeping insurance premiums paid with respect to such risks within our affiliated group of entities and realizing certain tax benefits that are unique to captive insurance companies. The Company’s investment in the Insurance Subsidiary represents one series of membership interests in FCBI. As a “series” limited liability company, FCBI is authorized by state law and its governing instruments to issue one or more series of membership interests, each of which, for all purposes under state law, is deemed to be a legal entity separate and apart from FCBI and its other series.

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

The Company maintains an Internet site at www.fmb1919.bank on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

Estimates and Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year ended December 31, 2021, which were included in Item 8 of Part II of the Form 10-K. On an on-going basis, management evaluates estimates, including those related to 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 applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2021.

Paycheck Protection Program

In response to ongoing COVID-19 global pandemic that began in 2020, the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which provided small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. During 2021 and 2020, we originated approximately $60 million in PPP. All PPP loans are 100% guaranteed by the SBA, have up to a five-year maturity, and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The majority of the PPP loans made in 2020 have been forgiven as of March 31, 2022. The SBA also established processing fees from 1% to 5%, depending on the loan amount. During 2021 and 2020, the Company collected approximately $2,323,000 in fees from the SBA in connection with the originations of the PPP loans. The fees, net of related origination costs, are being recognized as interest income over the term of the loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means. During the three months ended March 31, 2022, approximately $145,000 fees were recognized, compared to approximately $509,000 in the three months ended March 31, 2021. Approximately $125,000 of fees were unrecognized at March 31, 2022.

Financial Condition

Total assets increased by $1,246,386, or 0.2%, to $717,923,641 at March 31, 2022 from $716,677,255 at December 31, 2021. The increase in total assets was due primarily to increases of $1,897,523 in loans, $677,087 in cash and cash equivalents, and $2,454,688 in deferred income taxes, offset by a decrease of $4,029,897 in debt securities.

Total liabilities increased $5,661,357, or 0.9%, to $665,717,154 at March 31, 2022 from $660,055,797 at December 31, 2021. The increase was due primarily to a $7,365,983 increase in deposits, offset by a $1,330,319 decrease in securities sold under repurchase agreements.

Stockholders’ equity decreased by $4,414,971 to $52,206,487 at March 31, 2022 from $56,621,458 at December 31, 2021. The decrease was due to an increase of $6,465,773 in accumulated other comprehensive loss as a result of the decline in the market value of available for sale securities due to the significant increase in interest rates, offset by net income for the three-month period ended March 31, 2022 of $2,050,802.

Loans

Major categories of loans at March 31, 2022 and December 31, 2021 were as follows:

	March 31,				December 31,
	2022				2021

Real estate:
Commercial	$	329,179,712	67	%	$	319,185,116	66	%
Construction/Land development		20,325,400	4	%		28,221,854	6	%
Residential		111,993,662	23	%		107,436,033	22	%
Commercial		26,374,885	5	%		31,182,206	6	%
Consumer		296,151	0	%		355,958	0	%
		488,169,810	100	%		486,381,167	100	%
Less: Allowance for loan losses		3,654,318				3,650,268
Deferred origination fees net of costs		606,635				719,565
	$	483,908,857			$	482,011,334

Loans increased by $1,897,523, or 0.4%, to $483,908,857 at March 31, 2022 from $482,011,334 at December 31, 2021. The increase was due primarily to increases of $9,994,596 in commercial real estate loans and $4,557,629 in residential loans, offset by decreases of $4,807,321 in commercial loans and $7,896,454 in construction/land development loans. The decrease in commercial loans was driven primarily by a decrease of $5,494,643 in PPP loans and the decrease in construction/land development loans was due primarily to loans that were reclassified to commercial real estate after the construction was completed. The allowance for loan losses increased slightly by $4,050 to $3,654,318 at March 31, 2022 from $3,650,268 at December 31, 2021. Deferred origination fees, net of costs, decreased to $606,635 at March 31, 2022 from $719,565 at December 31, 2021 due to the forgiveness of PPP loans.

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 March 31, 2022 and December 31, 2021 is as follows:

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
March 31, 2022
Real estate:
Commerical	$	-	$	-	$	502,961	$	502,961	$	328,676,751	$	329,179,712	$	-
Construction/Land development		-		-		-		-		20,325,400		20,325,400		-
Residential		-		216,082		31,500		247,582		111,746,080		111,993,662		-
Commercial		-		-		152,449		152,449		26,222,436		26,374,885		-
Consumer		-		-		-		-		296,151		296,151		-

Total	$	-	$	216,082	$	686,910	$	902,992	$	487,266,818	$	488,169,810	$	-

					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, 2021
Real estate:
Commerical	$	-	$	-	$	502,961	$	502,961	$	318,682,155	$	319,185,116	$	-
Construction/Land development		-		-		-		-		28,221,854		28,221,854		-
Residential		-		-		249,161		249,161		107,186,872		107,436,033		217,661
Commercial		-		-		415,690		415,690		30,766,516		31,182,206		263,241
Consumer		-		-		-		-		355,958		355,958		-

Total	$	-	$	-	$	1,167,812	$	1,167,812	$	485,213,355	$	486,381,167	$	480,902

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 nine 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.

At March 31, 2022, the Company had two nonaccrual commercial real estate loan totaling $4,780,965, one nonaccrual residential real estate loan totaling $31,500, and one nonaccrual commercial loan totaling $152,449. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $59,182 would have been recorded for the three months ended March 31, 2022 if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $281,910 of its allowance for loan losses to these nonaccrual loans. The recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $27,146 at March 31, 2022.

At December 31, 2021, the Company had two nonaccrual commercial real estate loan totaling $4,810,965 and one nonaccrual residential real estate loan totaling $31,500, and one commercial loan totaling $152,449. The real estate loans were secured by real estate and business assets and were personally guaranteed. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of $219,734 would have been recorded in 2021 if these nonaccrual loans had been current and performing in accordance with their original terms. The Company allocated $281,910 of its allowance for loan losses to these nonaccrual loans. The balance of nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $27,146 at December 31, 2021.

Impaired loans as of March 31, 2022 and December 31, 2021 are set forth in the following table:

	March 31		December 31,
	2022		2021

Impaired loans with no valuation allowance	$	6,315,410	$	6,357,199
Impaired loans with a valuation allowance		655,410		655,410
Total impaired loans	$	6,970,820	$	7,012,609
Valuation allowance related to impaired loans	$	281,910	$	281,910

Impaired loans include troubled debt restructurings (“TDRs”), which are loans that were modified to provide economic concessions 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.

Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio.

The Company has provided loan modifications to its borrowers who are impacted by the COVID-19 pandemic. Modifications include deferrals of principal and interest for periods up to three months and interest only periods of three months. These deferrals can be extended for an additional three months, subject to approval by the Company. As of March 31, 2022, one loan totalling $4.3 million, or 1% of the Company’s loan portfolio, was operating under a three-month deferral. This loan was classified as a TDR as of March 31, 2022 because it did not meet the criteria discussed above. See Note 4 to the financial statements included elsewhere in this report for additional information.

At March 31, 2022, the Company had two commercial real estate loan totaling $6,278,069 and one residential real estate loan totaling $37,341 that were classified as TDRs. One of the commercial real estate loans with a principal balance of $4,278,004 was restructured as a TDR in 2022. All are included in impaired loans above. At March 31, 2022, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these loans.

At December 31, 2021, the Company had one commercial real estate loan totaling $2,009,967 and one residential real estate loan totaling $39,288 classified as TDRs. Both loans are included in impaired loans above and were paying as agreed. There have been no charge-offs or allowances associated with these loans.

	March 31,		December 31,
	2022		2021

Restructured loans (TDRs):
Performing as agreed	$	6,315,410	$	2,049,195
Not performing as agreed		-		-
Total TDRs	$	6,315,410	$	2,049,195

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 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.

The following table details activity in the allowance for loan losses by portfolio for the three-month periods ended March 31, 2022 and 2021 and the year ended December 31, 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


			Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
March 31, 2022	balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,482,930	$	63,130		$	-	$	-	$	2,546,060	$	129,461	$	-	$	2,416,599	$	6,781,030	$	32,991	$	322,365,691
Construction and land development		214,547		(97,873	)		-		4,050		120,724		-		-		120,724		-		379,349		19,946,051
Residential		603,558		51,081			-		-		654,639		-		-		654,639		37,341		244,789		111,711,532
Commercial		255,413		12,276			-		-		267,689		152,449		-		115,240		152,449		-		26,222,436
Consumer		4,370		(738	)		-		-		3,632		-		-		3,632		-		-		296,151
Unallocated		89,450		(27,876	)		-		-		61,574		-		-		61,574		-		-		-
	$	3,650,268	$	-		$	-	$	4,050	$	3,654,318	$	281,910	$	-	$	3,372,408	$	6,970,820	$	657,129	$	480,541,861

			Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
March 31, 2021	balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	323,768		$	-	$	2,500	$	2,556,397	$	-	$	-	$	2,556,397	$	6,644,339	$	45,233	$	305,552,307
Construction and land development		201,692		(39,269	)		-		4,050		166,473		-		-		166,473		-		1,554,070		33,177,080
Residential		644,639		(154,755	)		-		-		489,884		-		-		489,884		43,771		590,874		116,066,706
Commercial		111,390		(12,143	)		-		-		99,247		-		-		99,247		-		-		60,064,503
Consumer		2,138		320			-		-		2,458		-		-		2,458		-		-		258,484
Unallocated		106,550		2,079			-		-		108,629		-		-		108,629		-		-		-
	$	3,296,538	$	120,000		$	-	$	6,550	$	3,423,088	$	-	$	-	$	3,423,088	$	6,688,110	$	2,190,177	$	515,119,080

			Provision for (recovery										Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge					Ending		Purchase Credit						Purchase Credit
December 31, 2021	balance		loan losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	241,301		$	-		$	11,500	$	2,482,930	$	129,461	$	-	$	2,353,469	$	6,820,932	$	56,825	$	312,307,359
Construction and land development		201,692		(3,345	)		-			16,200		214,547		-		-		214,547		-		383,666		27,838,188
Residential		644,639		(22,111	)		(18,970	)		-		603,558		-		-		603,558		39,228		568,151		106,828,654
Commercial		111,390		129,023			-			15,000		255,413		152,449		-		102,964		152,449		-		31,029,757
Consumer		2,138		2,232			-			-		4,370		-		-		4,370		-		-		355,958
Unallocated		106,550		(17,100	)		-			-		89,450		-		-		89,450		-		-		-
	$	3,296,538	$	330,000		$	(18,970	)	$	42,700	$	3,650,268	$	281,910	$	-	$	3,368,358	$	7,012,609	$	1,008,642	$	478,359,916

The provision for loan losses was $0 and $120,000 for the three-month periods ended March 31, 2022 and 2021, respectively.

During the three-month periods ended March 31, 2022 and 2021, the Company had recoveries from loans written off in prior periods totaling $4,050 and $6,550, respectively, and no charge-offs.

As of March 31, 2022, the Company had $7,731,750 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, 2021, the Company had $13,140,695 of such loans. The decrease is due to the pay off in full of three loans totalling approximately $3.4 million and the upgrading of one loan totaling $2.0 million. These loans are subject to ongoing management attention and their classifications are reviewed regularly. Watch list loans include loans classified as Special Mention, Substandard, and Doubtful.

Management believes that the $3.7 million reserve at March 31, 2022 and the $0 provision for the three-month period ended March 31, 2022 are appropriate to adequately cover the probable and estimable losses inherent in the loan portfolio. The reserve is materially unchanged from the reserve at December 31, 2021. Excluding PPP loans, the Company’s loan portfolio grew by $7.4 million during the first quarter of 2022, and an increasing portfolio would typically require an increase in the provision. In addition, qualitative factors pertaining to the impact of rising rates and staff experience were given heavier weighting at March 31, 2022 as compared to December 31, 2021 to reflect the potential negative impact of the increase in interest rates during the first quarter and the addition of several new lenders during the quarter. Notwithstanding the foregoing, however, the amount of watch list loans in our portfolio declined by $5.4 million. Watch list loans receive a much higher reserve than the rest of the portfolio, so this decline offset the growth in the portfolio and the impact of the higher qualitative factors. Furthermore, there was no additional deterioration to the three loans that were negatively impacted by COVID -19, so management did not make any changes to their related reserves.

Investment Securities

Investments in debt securities decreased by $4,029,897, or 2.36%, to $167,059,994 at March 31, 2022 from $171,089,891 at December 31, 2021. At March 31, 2022 and December 31, 2021, the Company had classified 87% 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 debt securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of income taxes. Securities classified as held to maturity, which the Company has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company records unrealized gains and losses on equity securities in earnings. The Company does not currently follow a strategy of making security purchases with a view to near-term sales, and, therefore, does not own trading securities. The Company manages the investment portfolio within policies that seek to achieve desired levels of liquidity, manage interest rate sensitivity, meet earnings objectives, and provide required collateral for deposit and borrowing activities.

The following table sets forth the carrying value of investments in debt securities at March 31, 2022 and December 31, 2021:

	March 31		December 31,
	2022		2021
Available for sale
State and municipal	$	747,363	$	763,498
SBA pools		1,279,835		1,397,762
Corporate bonds		10,628,077		9,234,207
Mortgage-backed securities		133,061,160		137,842,449
	$	145,716,435	$	149,237,916

Held to maturity
State and municipal	$	21,343,559	$	21,851,975

The following table sets forth the scheduled maturities of investments in debt securities at March 31, 2022:

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

Within 1 year	$	752,350	$	754,818	$	-	$	-
Over 1 to 5 years		3,628,616		3,560,563		800,729		800,815
Over 5 to 10 years		7,331,475		7,060,059		1,782,321		1,797,278
Over 10 years		-		-		18,760,509		18,316,676
		11,712,441		11,375,440		21,343,559		20,914,769
SBA Pools		1,300,202		1,279,835		-		-
Mortgage-backed securities		143,548,768		133,061,160		-		-
	$	156,561,411	$	145,716,435	$	21,343,559	$	20,914,769

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

Other Real Estate Owned

Other real estate owned (“OREO”) at March 31, 2022 and December 31, 2021 included two properties with an aggregate carrying value of $1,242,365. The first property is an apartment building in Baltimore, Maryland with a carrying value of $1,242,365 that was acquired in the Merger. The property is under an optional sales contract with no projected closing date. The other property consists of 10.43 acres of land in Cecil County, Maryland with a carrying value of $0 that was acquired through foreclosure in 2007. The property is currently under contract for a gross sales price of $295,000 with closing expected in 2022. Due to the length of time that this latter property has been held, Maryland banking law required a write-down of the value to $0 in 2019.

Deposits

Total deposits increased by $7,365,983, or 1.2%, to $633,780,653 at March 31, 2022 from $626,414,670 at December 31, 2021. The increase in deposits was due to a $8,453,893 increase in noninterest-bearing accounts, a $6,576,470 increase in savings and money market accounts, and a $187,207 increase in interest bearing checking accounts, offset by a $7,851,587decrease in time deposits.

The following table shows the average balances and average costs of deposits for the three months ended March 31, 2022 and 2021:

	March 31, 2022					March 31, 2021
	Average					Average
	Balance		Cost			Balance		Cost

Noninterest bearing demand deposits	$	124,549,116		0.00	%	$	111,624,572		0.00	%
Interest bearing demand deposits		130,071,359		0.16	%		83,532,279		0.26	%
Savings and money market deposits		191,851,324		0.11	%		199,036,116		0.15	%
Time deposits		176,031,048		0.53	%		194,296,941		0.96	%
	$	622,502,847		0.22	%	$	588,489,908		0.40	%

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 $72.7 million under a secured line of credit with the Federal Home Loan Bank (“FHLB”). The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately $27.5 million. Finally, the Bank has $23,500,000 ($14,500,000 unsecured and $9,000,000 secured) of overnight federal funds lines of credit available from commercial banks. FHLB advances of $5,000,000 were outstanding as of March 31, 2022 and December 31, 2021. The Company borrowed $17,000,000 to facilitate the acquisition of Carroll as more fully described below. There were no borrowings from the Reserve Bank or our commercial bank lenders at March 31, 2022 and December 31, 2021. 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.

On September 30, 2020, the Company borrowed $17,000,000 from First Horizon Bank (“FHN”) for the purpose of funding a portion of the consideration that was payable to the stockholders of Carroll in the Merger. Net of issuance costs, the amount of the net long-term debt was $16,553,090 and $16,978,905 as of March 31, 2022 and December 31, 2021, respectively. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. Quarterly interest-only payments were made through October 1, 2021. During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $646,472, which will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to FHN.

Securities sold under agreements to repurchase represent overnight borrowings from customers. Securities owned by the Company which are used as collateral for these borrowings are primarily U.S. government agency securities.

Specific information about the Company’s borrowings and contractual obligations is set forth in the following table:

	March 31,			December 31,
	2022			2021
Amount oustanding at period-end:
Securities sold under repurchase agreements	$	4,083,707		$	5,414,026
Federal Home Loan Bank advances		5,000,000			5,000,000
Long-term debt (net of issuance costs)		16,553,090			16,978,905
Weighted average rate paid at period-end:
Securites sold under repurchase agreements		0.30	%		0.61	%
Federal Home Loan Bank advances		1.00	%		1.00	%
Long-term debt		4.10	%		4.10	%

The FHLB advances and the long-term debt outstanding at March 31, 2022 will require the following principal payments:

Year ending December 31, 2022	$	1,461,667
Year ending December 31, 2023		1,888,889
Year ending December 31, 2024		1,888,889
Year ending December 31, 2025		16,333,333

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 Note 6 to the consolidated financial statements presented elsewhere in this report and in Item 1 of Part I of the Form 10-K under the heading, “Supervision and Regulation – Capital Requirements”.

The following table presents actual and required capital ratios as of March 31, 2022 and December 31, 2021 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2022 and December 31, 2021, 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
March 31, 2022	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	71,541		13.09	%	$	57,396		10.50	%	$	54,663		10.00	%
Tier 1 capital (to risk-weighted assets)		67,887		12.42	%		46,463		8.50	%		43,730		8.00	%
Common equity tier 1 (to risk- weighted assets)		67,887		12.42	%		38,264		7.00	%		35,531		6.50	%
Tier 1 leverage (to average assets)		67,887		9.60	%		28,290		4.00	%		35,363		5.00	%

December 31, 2021

Total capital (to risk-weighted assets)	$	69,957		13.24	%	$	55,471		10.50	%	$	52,830		10.00	%
Tier 1 capital (to risk-weighted assets)		66,307		12.55	%		44,905		8.50	%		42,264		8.00	%
Common equity tier 1 (to risk- weighted assets)		66,307		12.55	%		36,981		7.00	%		34,339		6.50	%
Tier 1 leverage (to average assets)		66,307		9.27	%		28,614		4.00	%		35,767		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 as of March 31, 2022 and December 31, 2021 are as follows:

	March 31,		December 31,
	2022		2021

Loan commitments
Construction and land development	$	6,639,714	$	6,810,353
Commercial		3,081,000		630,000
Commercial real estate		29,927,351		23,552,400
Residential		2,453,981		3,804,617
	$	42,102,046	$	34,797,370

Unused lines of credit
Home-equity lines	$	12,504,898	$	12,707,519
Commercial lines		34,215,659		28,828,911
	$	46,720,557	$	41,536,430

Letters of credit	$	1,479,936	$	1,470,742

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 necessarily represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

The maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021

General

Net income for the three months ended March 31, 2022 was $2,050,802, compared to $2,029,575 for the same period of 2021. The increase of $21,227, or 1.05%, was due to a $390,634 increase in net interest income and a $120,000 decrease in the loan loss provision, offset by a $61,138 decrease in noninterest income, a $404,474 increase in noninterest expenses, and a $23,795 increase in income taxes.

Net Interest Income

Net interest income was $5,964,089 for the three months ended March 31, 2022, compared to $5,573,455 for the same period of 2021.

Total interest income for the three months ended March 31, 2022 was $6,489,725, compared to $6,370,592 for the same period of 2021, an increase of $119,133, or 1.87%.

Total interest income on loans for the three months ended March 31, 2022 decreased by $301,295 when compared to the same period of 2021 due to a $42.6 million lower average loan balance for the three months ended March 31, 2022 when compared to the same period of 2021, offset by a higher loan yield of 4.69% for the three months ended March 31, 2022 versus 4.54% for the same period of 2021. Investment income for the three months ended March 31, 2022 increased by $422,150, or 113.50%, when compared to the same period of 2021 due to a $67.9 million higher average investment balance and an increase in fully-taxable equivalent yield to 1.95% for three months ended March 31, 2022, compared to 1.60% for the same period of 2021. The fully-taxable equivalent yield on total interest-earning assets decreased 5 basis points to 3.87% for the three months ended March 31, 2022, compared to 3.92% for the same period of 2021. The average balance of total interest-earning assets increased by $19.3 million to $674.7 million for the three months ended March 31, 2022, compared to $655.4 million for the same period of 2021.

Total interest expense for the three months ended March 31, 2022 was $525,636, compared to $797,137 for the same period of 2021, a decrease of $271,501, or 34.06%. The decrease was due to a lower overall cost of funds on interest bearing deposits and borrowings of 0.40% for the three months ended March 31, 2022, compared to 0.63% for the same period of 2021, offset by a $14.7 million increase in the average balance of interest-bearing liabilities to $524.0 million for the three months ended March 31, 2022, compared to $509.3 million in the same period of 2021. Cost of funds for time deposits decreased to 0.53% for the three months ended March 31, 2022 from 0.96% for the same period of 2021. Securities sold under repurchase agreements cost of funds decreased to 0.30% for the three months ended March 31, 2022 from 0.52% for the same period of 2021.

Average noninterest-earning assets increased by $12.8 million to $35.8 million for the three months ended March 31, 2022, compared to $23.0 million in the same period of 2021. Average noninterest-bearing deposits increased by $12.9 million to $124.5 million during the three months ended March 31, 2022, compared to $111.6 million in the same period of 2021. The average balance in stockholders’ equity increased by $3.5 million for the three months ended March 31, 2022 when compared with the same period of 2021.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the three-month periods ended March 31, 2022 and 2021. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

	Three Months Ended							Three Months Ended
	March 31, 2022							March 31, 2021
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets:
Loans (1)	$	484,840,152	$	5,683,362		4.69	%	$	527,459,924	$	5,984,657		4.54	%
Securities, taxable (2)		152,685,500		645,744		1.69	%		83,279,735		212,244		1.02	%
Securities, tax exempt (2)		19,650,625		192,698		3.92	%		21,150,879		206,367		3.90	%
Federal funds sold and other interest-earning assets (2)		17,541,166		13,117		0.30	%		23,532,775		14,818		0.25	%
Total interest-earning assets		674,717,443		6,534,921		3.87	%		655,423,313		6,418,086		3.92	%
Noninterest-earning assets		35,830,220							23,003,563
Total assets	$	710,547,663						$	678,426,876

Liabilities and Stockholders’ Equity:
NOW, savings, and money market	$	321,922,683		104,877		0.13	%	$	282,568,395		130,585		0.18	%
Certificates of deposit		176,031,048		233,683		0.53	%		194,296,941		464,935		0.96	%
Securities sold under repurchase agreements		4,395,100		3,251		0.30	%		10,445,266		13,511		0.52	%
Long-term debt		16,659,192		171,375		4.11	%		16,973,984		175,656		4.14	%
FHLB advances and other borrowings		5,000,000		12,450		1.00	%		5,000,000		12,450		1.00	%
Total interest-bearing liabilities		524,008,023		525,636		0.40	%		509,284,586		797,137		0.63	%

Noninterest-bearing deposits		124,549,116							111,624,572
Noninterest-bearing liabilities		5,620,689							4,694,670
Total liabilities		654,177,828							625,603,828
Stockholders' equity		56,369,835							52,823,048
Total liabilities and stockholders' equity	$	710,547,663						$	678,426,876

Net interest income			$	6,009,285						$	5,620,949

Interest rate spread						3.47	%						3.29	%

Net yield on interest-earning assets						3.56	%						3.43	%

Ratio of average interest-earning assets to Average interest-bearing liabilities						128.76	%						128.69	%

(1) Nonaccrual loans are included in the average balance.

(2) Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis based upon tax rates of 21% for Federal and 8.25% for State.

Noninterest Income

Noninterest income for the three months ended March 31, 2022 was $495,807, compared to $556,945 for the same period of 2021, a decrease of $61,138, or 11.0%. The decrease was primarily a result of a $133,579 decrease in mortgage banking income as a result of residential refinance activity declining due to rising interest rates, offset by a $93,600 increase in the gain on the sale of SBA loans.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2022 totaled $3,799,598 compared to $3,395,124 for the same period of 2021, an increase of $404,474, or 11.91%. The increase was due primarily to increases in salaries and benefits of $152,961 and in other expenses of $255,366. Salaries and benefits increased due to normal and usual annual salary increases that are effective January 1 of each year as well as an increase in full-time equivalents. The other expense increase was due to a $241,809 increase in professional fees as a result of recruitment fees paid to fill several positions.

Income Tax Expense

Income tax expense for the three months ended March 31, 2022 was $609,496, compared to $585,701 for the same period of 2021. The effective tax rate was 22.9% for the three months ended March 31, 2022, compared to 22.4% for the same period of 2021.

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 7 of Part II the on Form 10-K under the heading, “Interest Rate Risk”, which provides information as of December 31, 2021. Management believes that no material changes in market risk or our procedures used to evaluate and mitigate these risks have occurred since December 31, 2021.

Item 4. Controls and Procedures

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

An evaluation of the effectiveness of these disclosure controls as of March 31, 2022 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the quarter ended March 31, 2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Form 10-K. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.

Item 2. Unregistered Sales of Equity Securities 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 following Exhibit Index:

Exhibit

Description

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

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

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

101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

101.SCH	Inline XBRL Taxonomy Extension Schema Document.

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104	The cover page of Farmers and Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

SIGNATURES

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

	FARMERS AND MERCHANTS BANCSHARES, INC.


Date: May 13, 2022		/s/ James R. Bosley, Jr.
		James R. Bosley, Jr.
		President and Chief Executive Officer (Principal Executive Officer)


Date May 13, 2022		/s/ Mark C. Krebs
		Mark C. Krebs Treasurer and Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)