10-Q 1 fmfg20180630_10q.htm FORM 10-Q fmfg20180630_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 June 30, 2018

 

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)

 

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

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☑
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: 1,675,200 as of August 9, 2018.

 

 

 

 

 

 

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 June 30, 2018 (unaudited) and December 31, 2017

3

 

Consolidated statements of income (unaudited) for the three and six months ended June 30, 2018 and 2017

4

 

Consolidated statements of comprehensive income (unaudited) for the three and six months Ended June 30, 2018 and 2017

5

 

Consolidated statements of changes in stockholders’ equity (unaudited) for the six months ended June 30, 2018 and 2017

6

 

Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2018 and 2017

7

 

Notes to financial statements (unaudited)

9

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

26

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.  Controls and Procedures

41

   

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

42

Item 1A.  Risk Factors

42

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

42

Item 3.  Defaults upon Senior Securities

42

Item 4.  Mine Safety Disclosures

42

Item 5.  Other Information

42

Item 6.  Exhibits

43

   

SIGNATURES

43

 

2

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
   

(Unaudited)

         

Assets

 
                 

Cash and due from banks

  $ 6,564,122     $ 6,235,186  

Federal funds sold and other interest-bearing deposits

    1,011,658       1,002,199  

Cash and cash equivalents

    7,575,780       7,237,385  

Certificates of deposit in other banks

    342,000       100,000  

Securities available for sale

    24,755,317       27,929,510  

Securities held to maturity

    18,215,244       18,204,182  

Equity security at fair value

    497,883       503,881  

Federal Home Loan Bank stock, at cost

    682,100       1,063,600  

Mortgage loans held for sale

    1,265,165       327,700  

Loans, less allowance for loan losses of $2,731,955 and $2,458,911

    343,874,046       332,533,706  

Premises and equipment

    5,176,739       5,206,271  

Accrued interest receivable

    1,038,809       1,020,256  

Deferred income taxes

    1,113,451       998,032  

Other real estate owned

    265,500       265,500  

Bank owned life insurance

    6,971,984       6,891,590  

Other assets

    649,327       622,856  
    $ 412,423,345     $ 402,904,469  
                 

Liabilities and Stockholders' Equity

 
                 

Deposits

               

Noninterest-bearing

  $ 62,921,659     $ 64,403,133  

Interest-bearing

    277,354,227       255,393,291  

Total deposits

    340,275,886       319,796,424  

Securities sold under repurchase agreements

    18,521,862       21,768,507  

Federal Home Loan Bank of Atlanta advances

    7,500,000       17,000,000  

Accrued interest payable

    262,413       180,620  

Other liabilities

    2,551,252       2,359,986  
      369,111,413       361,105,537  

Stockholders' equity

               

Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 1,675,201 in 2018 and 1,667,813 shares in 2017

    16,752       16,678  

Additional paid-in capital

    27,086,704       26,869,796  

Retained earnings

    16,896,247       15,306,625  

Accumulated other comprehensive income

    (687,771 )     (394,167 )
      43,311,932       41,798,932  
    $ 412,423,345     $ 402,904,469  

 

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

 

3

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

   

Three months ended June 30

   

Six months ended June 30

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Interest income

                               

Loans, including fees

  $ 4,048,984     $ 3,765,062     $ 7,982,139     $ 7,381,230  

Investment securities - taxable

    149,998       173,807       304,858       369,552  

Investment securities - tax exempt

    142,799       154,853       285,562       302,107  

Federal funds sold and other interest earning assets

    43,725       28,038       70,693       45,483  

Total interest income

    4,385,506       4,121,760       8,643,252       8,098,372  
                                 

Interest expense

                               

Deposits

    499,916       332,879       938,326       643,684  

Securities sold under repurchase agreements

    35,012       37,772       69,401       84,287  

Federal Home Loan Bank advances and other borrowings

    45,985       41,967       108,947       70,360  

Total interest expense

    580,913       412,618       1,116,674       798,331  

Net interest income

    3,804,593       3,709,142       7,526,578       7,300,041  
                                 

Provision for loan losses

    75,000       75,000       125,000       125,000  
                                 

Net interest income after provision for loan losses

    3,729,593       3,634,142       7,401,578       7,175,041  
                                 

Noninterest income

                               

Service charges on deposit accounts

    173,888       176,110       335,728       353,000  

Mortgage banking income

    60,468       50,952       114,661       108,733  

Bank owned life insurance income

    40,489       43,328       80,394       86,244  

Gain on sale of loans

    -       217,563       60,508       217,563  

Other fees and commissions

    15,651       33,785       40,320       59,242  

Total noninterest income

    290,496       521,738       631,611       824,782  
                                 

Noninterest expense

                               

Salaries

    1,264,702       1,232,977       2,548,212       2,391,872  

Employee benefits

    322,568       323,626       690,022       679,167  

Occupancy

    189,156       167,618       366,689       351,421  

Furniture and equipment

    165,392       169,887       327,008       334,656  

Other

    687,062       680,879       1,326,239       1,321,139  

Total noninterest expense

    2,628,880       2,574,987       5,258,170       5,078,255  
                                 

Income before income taxes

    1,391,209       1,580,893       2,775,019       2,921,568  

Income taxes

    245,962       446,004       507,836       803,122  

Net income

  $ 1,145,247     $ 1,134,889     $ 2,267,183     $ 2,118,446  
                                 

Earnings per share - basic and diluted

  $ 0.69     $ 0.69     $ 1.36     $ 1.28  

 

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

 

4

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 1,145,247     $ 1,134,889     $ 2,267,183     $ 2,118,446  
                                 

Other comprehensive income (loss), net of income taxes:

                               
                                 

Securities available for sale

                               

Net unrealized gain (loss) arising during the period

    (107,478 )     176,423       (419,439 )     182,869  

Reclassification adjustment for realized gains and losses included in net income

    -       -       -       -  

Total unrealized gain (loss) on investment securities available for sale

    (107,478 )     176,423       (419,439 )     182,869  

Income tax expense (benefit) relating to investment securities available for sale

    (29,576 )     69,590       (115,419 )     72,133  

Total other comprehensive income (loss)

    (77,902 )     106,833       (304,020 )     110,736  
                                 

Total comprehensive income

  $ 1,067,345     $ 1,241,722     $ 1,963,163     $ 2,229,182  

 

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

 

5

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2018 and 2017

(Unaudited except for year-end amounts)

 

                   

Additional

           

Accumulated other

   

Total

 
   

Common stock

   

paid-in

   

Retained

   

comprehensive

   

stockholders'

 
   

Shares

   

Par value

   

capital

   

earnings

   

income

   

equity

 

Balance, December 31, 2016

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

Net income

    -       -       -       2,118,446       -       2,118,446  

Unrealized gain on securities available for sale net of income tax expense of $72,133

    -       -       -       -       110,736       110,736  
                                                 

Balance, June 30, 2017

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

Balance, December 31, 2017

    1,667,813     $ 16,678     $ 26,869,796     $ 15,306,625     $ (394,167 )   $ 41,798,932  
                                                 

Net income

    -       -       -       2,267,183       -       2,267,183  

Unrealized loss on securities available for sale net of income tax benefit of $115,419

    -       -       -       -       (304,020 )     (304,020 )

Reclassification due to adoption of ASU No. 2016-01

    -       -       -       (10,416 )     10,416       -  

Cash dividends, $0.40 per share

    -       -       -       (667,145 )     -       (667,145 )

Dividends reinvested

    7,338       73       215,359       -       -       215,432  

Shares issued

    50       1       1,549       -       -       1,550  
                                                 

Balance, June 30, 2018

    1,675,201     $ 16,752     $ 27,086,704     $ 16,896,247     $ (687,771 )   $ 43,311,932  

 

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

 

6

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

Six Months Ended June 30,

 

2018

   

2017

 
                 

Cash flows from operating activities

               

Interest received

  $ 8,608,553     $ 8,194,288  

Fees and commissions received

    502,188       520,975  

Interest paid

    (1,034,881 )     (753,271 )

Proceeds from sale of mortgage loans held for sale

    4,785,472       5,244,483  

Origination of mortgage loans held for sale

    (5,722,937 )     (4,833,483 )

Cash paid to suppliers and employees

    (4,751,554 )     (2,548,389 )

Income taxes paid, net of refunds received

    (614,760 )     (767,251 )
      1,772,081       5,057,352  
                 

Cash flows from investing activities

               

Proceeds from maturity and call of securities

               

Available for sale

    2,674,444       3,858,368  

Held to maturity

    -       1,054,308  

Purchase of securities

               

Available for sale

    -       (1,132,225 )

Held to maturity

    -       (1,805,923 )

Purchase of certificate of deposit

    (242,000 )     -  

Loans made to customers, net of principal collected

    (12,062,675 )     (31,504,240 )

Proceeds from sale of loans

    668,508       2,752,563  

(Purchase) redemption of stock in FHLB of Atlanta

    381,500       (327,800 )

Purchases of premises, equipment and software

    (136,117 )     (37,290 )
      (8,716,340 )     (27,142,239 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Noninterest-bearing deposits

    (1,481,474 )     (1,953,935 )

Interest-bearing deposits

    21,960,936       17,081,711  

Securities sold under repurchase agreements

    (3,246,645 )     (6,222,299 )

Federal Home Loan Bank of Atlanta advances (repayments)

    (9,500,000 )     9,000,000  

Dividends paid, net of reinvestments

    (451,713 )     -  

Common stock issued

    1,550       -  
                 
      7,282,654       17,905,477  
                 

Net increase (decrease) in cash and cash equivalents

    338,395       (4,179,410 )
                 

Cash and cash equivalents at beginning of period

    7,237,385       13,312,915  

Cash and cash equivalents at end of period

  $ 7,575,780     $ 9,133,505  

 

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

 

7

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

Six Months Ended June 30,

 

2018

   

2017

 
                 

Reconciliation of net income to net cash provided by operating activities

               

Net income

  $ 2,267,183     $ 2,118,446  

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation and amortization

    194,595       216,767  

Provision for loan losses

    125,000       125,000  

Mutual fund dividend reinvested

    (5,481 )     (5,160 )

Mutual fund unrealized loss included in net income

    11,479       -  

Gain on sale of loans

    (60,508 )     (217,563 )

Decrease (increase) in mortgage loans held for sale

    (937,465 )     411,000  

Amortization of premiums and accretion of discounts, net

    69,248       65,503  
Increase (decrease) in                

Deferred loan fees

    (10,665 )     86,760  

Accrued interest payable

    81,793       45,060  

Other liabilities

    191,266       366,777  
Decrease (increase) in                

Accrued interest receivable

    (18,553 )     14,316  

Bank owned life insurance cash surrender value

    (80,394 )     (86,244 )

Other assets

    (55,417 )     1,916,690  
    $ 1,772,081     $ 5,057,352  

 

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

 

8

 

 

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 indirect subsidiary, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions have been eliminated.

 

 

2.

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three months and six months ended June 30, 2018 do not necessarily reflect the results that may be expected for the entire fiscal year ending December 31, 2018 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, 2017, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost. The amendments within this ASU are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose at fair value information about financial instruments measured at amortized cost. The Company adopted the provisions of ASU 2016-01, effective January 1, 2018, by recording a $10,416 adjustment to retained earnings and reclassifying the Company’s ownership of a mutual fund, considered an equity security, to a separate line on the consolidated balance sheet as of December 31, 2017.

 

9

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2.    Basis of Presentation (continued)

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 841).” Among other things, ASU 2016-02 will require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company anticipates that the impact of ASU 2016-02’s implementation will be an equal increase in assets and liabilities by approximately $1,500,000.

 

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

 

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

 

10

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

3.

Investment Securities

 

Investments in debt securities are summarized as follows:

 

   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

June 30, 2018

 

cost

   

gains

   

losses

   

value

 
                                 

Available for sale

                               
                                 

State and municipal

  $ 1,508,353     $ 22,453     $ 10,779     $ 1,520,027  

SBA pools

    3,032,118       -       43,460       2,988,658  

Mortgage-backed securities

    21,163,725       -       917,093       20,246,632  
    $ 25,704,196     $ 22,453     $ 971,332     $ 24,755,317  
                                 

Held to maturity

                               
                                 

State and municipal

  $ 18,215,244     $ 132,811     $ 218,852     $ 18,129,203  

 

 

   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2017

 

cost

   

gains

   

losses

   

value

 
                                 

Available for sale

                               
                                 

State and municipal

  $ 1,510,848     $ 38,494     $ 10,135     $ 1,539,207  

SBA pools

    3,212,771       75       13,000       3,199,846  

Mortgage-backed securities

    23,735,332       8,787       553,662       23,190,457  
    $ 28,458,951     $ 47,356     $ 576,797     $ 27,929,510  
                                 

Held to maturity

                               
                                 

State and municipal

  $ 18,204,182     $ 225,349     $ 121,904     $ 18,307,627  

 

11

 

 

 

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

 

June 30, 2018

 

cost

   

value

   

cost

   

value

 
                                 

Within one year

  $ -     $ -     $ 675,383     $ 676,420  

Over one to five years

    261,799       251,020       1,101,989       1,116,837  

Over five to ten years

    870,695       888,142       1,461,581       1,493,790  

Over ten years

    375,859       380,865       14,976,291       14,842,156  
      1,508,353       1,520,027       18,215,244       18,129,203  

Mortgage-backed securities and SBA pools, due in monthly installments

    24,195,843       23,235,290       -       -  
    $ 25,704,196     $ 24,755,317     $ 18,215,244     $ 18,129,203  
                                 

December 31, 2017

                               
                                 

Within one year

  $ -     $ -     $ 165,677     $ 168,260  

Over one to five years

    -       -       780,336       794,512  

Over five to ten years

    1,133,940       1,150,564       1,792,019       1,831,833  

Over ten years

    376,908       388,643       15,466,150       15,513,022  
      1,510,848       1,539,207       18,204,182       18,307,627  

Mortgage-backed securities and SBA pools, due in monthly installments

    26,948,103       26,390,303       -       -  
    $ 28,458,951     $ 27,929,510     $ 18,204,182     $ 18,307,627  

 

Securities with a carrying value of $28,425,591 and $31,982,381 as of June 30, 2018 and December 31, 2017, respectively, were pledged as collateral for Federal Home Loan Bank advances, government deposits and securities sold under repurchase agreements.

 

12

 

 

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 June 30, 2018 and December 31, 2017.

 

 

June 30, 2018

 

Less than 12 months

   

12 months or more

   

Total

 

Description of investments

 

Fair Value

   

Unrealized

Loss

   

Fair Value

   

Unrealized

Loss

   

Fair Value

   

Unrealized

Loss

 
                                                 

State and municipal

  $ 3,673,970     $ 43,225     $ 2,900,289     $ 186,406     $ 6,574,259     $ 229,631  

SBA pools

    481,592       6,552       2,507,066       36,908       2,988,658       43,460  

Mortgage-backed securities

    2,661,167       90,365       17,585,465       826,728       20,246,632       917,093  

Total

  $ 6,816,729     $ 140,142     $ 22,992,820     $ 1,050,042     $ 29,809,549     $ 1,190,184  

 

 

December 31, 2017

 

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

  $ 812,630     $ 1,519     $ 3,444,443     $ 130,520     $ 4,257,073     $ 132,039  

SBA pools

    551,780       1,903       2,109,832       11,097       2,661,612       13,000  

Mortgage-backed securities

    2,871,597       41,413       19,571,511       512,249       22,443,108       553,662  

Total

  $ 4,236,007     $ 44,835     $ 25,125,786     $ 653,866     $ 29,361,793     $ 698,701  

 

 

 

Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of June 30, 2018 and December 31, 2017, management did not have the intent to sell any of the held to maturity or available for sale securities with unrealized losses before a recovery of cost. The unrealized losses detailed in the table above were due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the foregoing factors, as of June 30, 2018 and December 31, 2017, management believes that these unrealized losses are temporary and, accordingly, have not been recognized in the Company’s consolidated statement of income.

 

13

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

4.

Loans

 

Major categories of loans are as follows:

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

Real estate:

               

Commercial

  $ 242,116,569     $ 234,026,574  

Construction and land development

    22,494,576       18,160,366  

Residential

    59,418,252       59,241,416  

Commercial

    22,675,755       23,613,543  

Consumer

    493,483       554,017  
      347,198,635       335,595,916  

Less: Allowance for loan losses

    2,731,955       2,458,911  

Deferred origination fees net of costs

    592,634       603,299  
    $ 343,874,046     $ 332,533,706  

 

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

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

Commercial real estate

  $ 1,693,826     $ 2,245,743  

 

At June 30, 2018, the Company had two nonaccrual commercial real estate loans totaling $1,693,826. The loans were secured by real estate and business assets, and were personally guaranteed. Gross interest income of $0 and $34,259 would have been recorded for the three and six months ended June 30, 2018, respectively, if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $225,701 of its allowance for loan losses for these nonaccrual loans.

 

At December 31, 2017, the Company had one nonaccrual commercial real estate loan totaling $2,245,743. The loan was secured by real estate and business assets, and was personally guaranteed. Gross interest income of $82,070 would have been recorded in 2017 if this nonaccrual loan had been current and performing in accordance with the original terms. The Company allocated $127,213 of its allowance for loan losses for this nonaccrual loan. The balance of the nonaccrual loan was net of charge-offs of $275,000 at December 31, 2017.

 

14

 

 

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

 

June 30, 2018

                                                       

Real estate:

                                                       

Commercial

  $ -     $ -     $ 1,693,826     $ 1,693,826     $ 240,422,743     $ 242,116,569     $ -  

Construction and land development

    -       -       -       -       22,494,576       22,494,576       -  

Residential

    -       -       45,816       45,816       59,372,436       59,418,252       45,816  

Commercial

    -       -       -       -       22,675,755       22,675,755       -  

Consumer

    -       -       -       -       493,483       493,483       -  

Total

  $ -     $ -     $ 1,739,642     $ 1,739,642     $ 345,458,993     $ 347,198,635     $ 45,816  
                                                         

December 31, 2017

                                                       

Real estate:

                                                       

Commercial

  $ -     $ -     $ 2,245,743     $ 2,245,743     $ 231,780,831     $ 234,026,574     $ -  

Construction and land development

    -       -       -       -       18,160,366       18,160,366       -  

Residential

    -       -       146,459       146,459       59,094,957       59,241,416       146,459  

Commercial

    -       -       -       -       23,613,543       23,613,543       -  

Consumer

    -       -       -       -       554,017       554,017       -  

Total

  $ -     $ -     $ 2,392,202     $ 2,392,202     $ 333,203,714     $ 335,595,916     $ 146,459  

 

 

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

 

   

Unpaid

   

Recorded

   

Recorded

                                 
   

Contractual

   

Investment

   

Investment

   

Total

           

Average

         
   

Principal

   

With No

   

With

   

Recorded

   

Related

   

Recorded

   

Interest

 
   

Balance

   

Allowance

   

Allowance

   

Investment

   

Allowance

   

Investment

   

Recognized

 

June 30, 2018

                                                       

Commercial real estate

  $ 3,852,180     $ 2,158,354     $ 1,693,826     $ 3,852,180     $ 225,701     $ 4,517,681     $ 54,435  
                                                         

December 31, 2017

                                                       

Commercial real estate

  $ 5,458,182     $ 2,937,439     $ 2,245,743     $ 5,183,182     $ 127,213     $ 2,591,591     $ 268,652  

 

 

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

 

15

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

4.

Loans (continued)

 

At June 30, 2018, the Company had three loans classified as a TDR. The loans are included in impaired loans above and are commercial real estate loans with an aggregate balance of $3,852,180. One of the loans totaling $2,158,354 is paying as agreed and the other two totaling $1,693,826 are more than 90 days delinquent.

 

At December 31, 2017, the Company had three commercial real estate loans totaling $2,937,439 classified as TDRs. Two loans totaling $774,274 were restructured as TDRs during 2017 and were paid off during the quarter ended June 30, 2018. All are included in impaired loans above. The remaining loan is paying as agreed. There have been no charge-offs or allowances associated with these three loans.

 

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

 

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

 

Pass/Watch

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

 

Special Mention

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

 

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

 

Substandard

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

 

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

 

16

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

4.

Loans (continued)

 

Doubtful

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

 

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

 

           

Above

                   

Pass

   

Special

                         

June 30, 2018

 

Excellent

   

average

   

Average

   

Acceptable

   

watch

   

mention

   

Substandard

   

Doubtful

   

Total

 
                                                                         

Real estate:

                                                                       

Commercial

  $ -     $ 5,558,119     $ 114,537,206     $ 94,808,467     $ 17,361,596     $ 7,527,095     $ 2,324,086     $ -     $ 242,116,569  

Construction and land development

    -       1,222,941       7,310,422       9,438,403       4,522,810       -       -       -       22,494,576  

Residential

    40,075       1,337,672       30,523,560       23,430,988       3,442,182       -       643,775       -       59,418,252  

Commercial

    407,224       68,234       12,894,917       9,167,619       137,761       -       -       -       22,675,755  

Consumer

    -       90,521       313,676       57,817       -       -       2,040       29,429       493,483  
    $ 447,299     $ 8,277,487     $ 165,579,781     $ 136,903,294     $ 25,464,349     $ 7,527,095     $ 2,969,901     $ 29,429     $ 347,198,635  

 

           

Above

                   

Pass

   

Special

                         

December 31, 2017

 

Excellent

   

average

   

Average

   

Acceptable

   

watch

   

mention

   

Substandard

   

Doubtful

   

Total

 
                                                                         

Real estate:

                                                                       

Commercial

  $ -     $ 6,115,925     $ 127,639,361     $ 79,619,726     $ 9,041,882     $ 5,391,589     $ 3,972,348     $ 2,245,743     $ 234,026,574  

Construction and land development

    -       173,633       9,288,372       4,978,964       3,719,397       -       -       -       18,160,366  

Residential

    53,948       1,260,128       35,254,016       18,659,174       3,363,570       -       650,580       -       59,241,416  

Commercial

    1,581,878       121,919       16,225,350       5,545,562       138,834       -       -       -       23,613,543  

Consumer

    5,210       96,484       351,093       70,171       -       -       2,640       28,419       554,017  
    $ 1,641,036     $ 7,768,089     $ 188,758,192     $ 108,873,597     $ 16,263,683     $ 5,391,589     $ 4,625,568     $ 2,274,162     $ 335,595,916  

 

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.

 

17

 

 

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 six months ended June 30, 2018 and 2017, and the year ended December 31, 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

June 30, 2018

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,867,397     $ 39,796     $ -     $ 154,500     $ 2,061,693     $ 225,701     $ 1,835,992     $ 3,852,180     $ 238,264,389  

Construction and land development

    223,274       34,898       (10,622 )     -       247,550       -       247,550       -       22,494,576  

Residential

    247,953       7,914       -       -       255,867       -       255,867       -       59,418,252  

Commercial

    87,353       (7,632 )     -       4,166       83,887       -       83,887       -       22,675,755  

Consumer

    7,027       (173 )     -       -       6,854       -       6,854       -       493,483  

Unallocated

    25,907       50,197       -       -       76,104       -       76,104       -       -  
    $ 2,458,911     $ 125,000     $ (10,622 )   $ 158,666     $ 2,731,955     $ 225,701     $ 2,506,254     $ 3,852,180     $ 343,346,455  

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

June 30, 2017

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,717,749     $ 120,972     $ -     $ 1,780     $ 1,840,501     $ -     $ 1,840,501     $ 3,136,252     $ 229,552,790  

Construction and land development

    204,860       59,606       -       -       264,466       37,700       226,766       573,820       14,591,305  

Residential

    247,437       12,253       -       147       259,837       -       259,837       -       57,961,821  

Commercial

    125,260       (27,036 )     -       -       98,224       -       98,224       145,719       20,468,951  

Consumer

    8,826       (1,377 )     -       -       7,449       -       7,449       -       667,428  

Unallocated

    58,954       (39,418 )     -       -       19,536       -       19,536       -       -  
    $ 2,363,086     $ 125,000     $ -     $ 1,927     $ 2,490,013     $ 86,859     $ 2,452,313     $ 3,855,791     $ 323,242,295  

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

December 31, 2017

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,717,749     $ 419,868     $ (275,000 )   $ 4,780     $ 1,867,397     $ 127,213     $ 1,740,184     $ 5,183,182     $ 228,843,392  

Construction and land development

    204,860       65,850       (47,436 )     -       223,274       -       223,274       -       18,160,366  

Residential

    247,437       368       -       148       247,953       -       247,953       -       59,241,416  

Commercial

    125,260       (41,240 )     -       3,333       87,353       -       87,353       -       23,613,543  

Consumer

    8,826       (1,799 )     -       -       7,027       -       7,027       -       554,017  

Unallocated

    58,954       (33,047 )     -       -       25,907       -       25,907       -       -  
    $ 2,363,086     $ 410,000     $ (322,436 )   $ 8,261     $ 2,458,911     $ 127,213     $ 2,331,698     $ 5,183,182     $ 330,412,734  

 

18

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

5.

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.

 

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

 

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

 

Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as “well capitalized”: (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%. Management believes that, as of June 30, 2018, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were fully in effect.

 

The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank. Management believes that, as of June 30, 2018, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.

 

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

 

The following table presents actual and required capital ratios as of June 30, 2018 and December 31, 2017, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2018 and December 31, 2017 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.

 

19

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

5.

Capital Standards (continued)

 

                   

Minimum

                 
                   

Capital Adequacy

   

To Be Well

 

(Dollars in thousands)

 

Actual

   

Phase-In Schedule

   

Capitalized

 

June 30, 2018

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 

Total capital (to risk-weighted assets)

  $ 45,577       12.61 %   $ 35,698       9.88 %