10-Q 1 fmfg20190930_10q.htm FORM 10-Q fmfg20190930_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 September 30, 2019

 

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

 

For the transition period from _______________ to ________________

 

Commission file number 000-55756

 

Farmers and Merchants Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

              Maryland                         81-3605835     

(State or other jurisdiction of

incorporation or organization)

 

 (I. R. S. Employer Identification No.)

 

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

       (Address of principal executive offices)         (Zip Code)

 

(410) 374-1510

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

  Large accelerated filer ☐    

Accelerated filer ☐

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

                              

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

 

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

Yes ☐ No ☑

 

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

 

 

 

 

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

 

Table of Contents

 

  Page
   
PART I – FINANCIAL INFORMATION    3
     
Item 1. Financial Statements 3
     
 

Consolidated balance sheets at September 30, 2019 (unaudited) and December 31, 2018 

3
     
 

Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2019 and 2018

4
     
 

Consolidated statements of comprehensive income (unaudited) for the three and nine months Ended September 30, 2019 and 2018

5
     
 

Consolidated statements of changes in stockholders’ equity (unaudited) for the nine months ended September 30, 2019 and 2018

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

 

2

 
 

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
   

(Unaudited)

         

Assets

 
                 

Cash and due from banks

  $ 16,281,158     $ 11,480,608  

Federal funds sold and other interest-bearing deposits

    3,313,899       3,137,629  

Cash and cash equivalents

    19,595,057       14,618,237  

Certificate of deposit in other bank

    100,000       100,000  

Securities available for sale

    40,101,155       26,591,991  

Securities held to maturity

    19,509,907       18,127,067  

Equity security at fair value

    531,714       503,827  

Federal Home Loan Bank stock, at cost

    503,700       575,800  

Mortgage loans held for sale

    1,538,574       573,638  

Loans, less allowance for loan losses of $2,546,114 and $2,509,334

    336,748,866       340,900,635  

Premises and equipment

    4,913,640       5,075,310  

Accrued interest receivable

    978,300       990,529  

Deferred income taxes

    950,207       1,179,454  

Other real estate owned

    -       210,150  

Bank owned life insurance

    7,102,589       7,053,354  

Other assets

    1,931,803       657,885  
    $ 434,505,512     $ 417,157,877  
                 

Liabilities and Stockholders' Equity

 
                 

Deposits

               

Noninterest-bearing

  $ 58,298,592     $ 62,717,520  

Interest-bearing

    313,897,923       291,995,483  

Total deposits

    372,196,515       354,713,003  

Securities sold under repurchase agreements

    7,583,212       11,012,000  

Federal Home Loan Bank of Atlanta advances

    1,000,000       3,000,000  

Accrued interest payable

    348,862       311,489  

Other liabilities

    4,382,403       2,726,678  
      385,510,992       371,763,170  

Stockholders' equity

               

Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,959,777 in 2019 and 1,682,997 shares in 2018

    29,598       16,830  

Additional paid-in capital

    27,561,138       27,324,794  

Retained earnings

    21,276,789       18,621,382  

Accumulated other comprehensive income

    126,995       (568,299 )
      48,994,520       45,394,707  
    $ 434,505,512     $ 417,157,877  

 

 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

   

Nine months ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Interest income

                               

Loans, including fees

  $ 4,250,071     $ 4,189,626     $ 12,582,392     $ 12,171,765  

Investment securities - taxable

    234,274       145,791       631,382       450,649  

Investment securities - tax exempt

    150,141       142,493       431,354       428,055  

Federal funds sold and other interest earning assets

    84,526       47,280       280,876       117,973  

Total interest income

    4,719,012       4,525,190       13,926,004       13,168,442  
                                 

Interest expense

                               

Deposits

    916,452       604,697       2,577,229       1,543,023  

Securities sold under repurchase agreements

    29,190       42,841       82,912       112,242  

Federal Home Loan Bank advances and other borrowings

    10,769       16,480       42,517       125,427  

Total interest expense

    956,411       664,018       2,702,658       1,780,692  

Net interest income

    3,762,601       3,861,172       11,223,346       11,387,750  
                                 

Provision for loan losses

    (13,000 )     (100,000 )     -       25,000  
                                 

Net interest income after provision for loan losses

    3,775,601       3,961,172       11,223,346       11,362,750  
                                 

Noninterest income

                               

Service charges on deposit accounts

    176,577       160,665       494,752       496,393  

Mortgage banking income

    144,268       105,144       249,867       219,805  

Bank owned life insurance income

    39,443       40,880       321,841       121,274  

Unrealized gain (loss) on equity security

    3,966       (3,869 )     18,721       (15,348 )

Write down of other real estate owned

    -       (55,350 )     (210,150 )     (55,350 )

Gain on sale of SBA loans

    -       3,317       139,535       63,825  

Other fees and commissions

    28,714       21,634       94,031       73,433  

Total noninterest income

    392,968       272,421       1,108,597       904,032  
                                 

Noninterest expense

                               

Salaries

    1,358,208       1,344,759       3,993,998       3,892,971  

Employee benefits

    312,119       328,258       1,008,228       1,018,280  

Occupancy

    189,603       168,759       594,566       535,448  

Furniture and equipment

    149,191       148,945       460,271       475,953  

Other

    673,814       606,346       1,990,354       1,932,585  

Total noninterest expense

    2,682,935       2,597,067       8,047,417       7,855,237  
                                 

Income before income taxes

    1,485,634       1,636,526       4,284,526       4,411,545  

Income taxes

    307,724       327,838       784,508       835,674  

Net income

  $ 1,177,910     $ 1,308,688     $ 3,500,018     $ 3,575,871  
                                 

Earnings per share - basic and diluted

  $ 0.40     $ 0.45     $ 1.19     $ 1.22  

 

  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

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 1,177,910     $ 1,308,688     $ 3,500,018     $ 3,575,871  
                                 

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

                               
                                 

Securities available for sale

                               

Net unrealized gain (loss) arising during the period

    113,117       (115,428 )     959,257       (534,867 )

Income tax expense (benefit)

    31,127       (31,762 )     263,963       (147,181 )

Total other comprehensive income (loss)

    81,990       (83,666 )     695,294       (387,686 )
                                 

Total comprehensive income

  $ 1,259,900     $ 1,225,022     $ 4,195,312     $ 3,188,185  

 

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

Nine months ended September 30, 2019 and 2018

(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, 2017

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

Net income

    -       -       -       3,575,871       -       3,575,871  

Unrealized loss on securities available for sale net of income tax benefit of $147,181

    -       -       -       -       (387,686 )     (387,686 )

Reclassification due to adoption of ASU No. 2016-01

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

Cash dividends, $0.23 per share

    -       -       -       (667,192 )     -       (667,192 )

Dividends reinvested

    7,337       73       215,406       -       -       215,479  

Shares Issued

    50       1       1,549       -       -       1,550  
                                                 

Balance, September 30, 2018

    1,675,200     $ 16,752     $ 27,086,751     $ 18,204,888     $ (771,437 )   $ 44,536,954  
                                                 

Balance, December 31, 2018

    1,682,997     $ 16,830     $ 27,324,794     $ 18,621,382     $ (568,299 )   $ 45,394,707  
                                                 

Net income

    -       -       -       3,500,018       -       3,500,018  

Unrealized gain on securities available for sale net of income tax expense of $263,963

    -       -       -       -       695,294       695,294  

Adjustment due to adoption of ASU No. 2016-02

    -       -       -       (91,447 )     -       (91,447 )

Cash dividends, $0.25 per share

    -       -       -       (740,477 )     -       (740,477 )

Dividends reinvested

    8,095       81       236,344       -       -       236,425  

Stock dividend

    1,268,685       12,687       -       (12,687 )     -       -  
                                                 

Balance, September 30, 2019

    2,959,777     $ 29,598     $ 27,561,138     $ 21,276,789     $ 126,995     $ 48,994,520  

 

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)

 

Nine Months Ended September 30,

 

2019

   

2018

 
                 

Cash flows from operating activities

               

Interest received

  $ 13,871,203     $ 13,200,699  

Fees and commissions received

    1,111,256       789,631  

Interest paid

    (2,665,285 )     (1,664,444 )

Proceeds from sale of mortgage loans held for sale

    12,266,054       10,513,771  

Origination of mortgage loans held for sale

    (13,230,990 )     (10,336,071 )

Cash paid to suppliers and employees

    (7,504,291 )     (7,490,137 )

Income taxes paid, net of refunds received

    (761,512 )     (588,898 )
      3,086,435       4,424,551  
                 

Cash flows from investing activities

               

Proceeds from maturity and call of securities

               

Available for sale

    5,103,515       3,867,038  

Held to maturity

    1,043,420       165,000  

Purchase of securities

               

Available for sale

    (17,761,884 )     -  

Held to maturity

    (2,406,339 )     (63,242 )

Purchase of certificate of deposit

    -       (242,000 )

Loans made to customers, net of principal collected

    2,766,804       (9,473,587 )

Proceeds from sale of loans

    1,582,364       729,511  

Redemption of stock in FHLB of Atlanta

    72,100       487,800  

Purchases of premises, equipment and software

    (60,267 )     (176,346 )
      (9,660,287 )     (4,705,826 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Noninterest-bearing deposits

    (4,418,928 )     (4,841,569 )

Interest-bearing deposits

    21,902,440       34,559,400  

Securities sold under repurchase agreements

    (3,428,788 )     (9,605,084 )

Federal Home Loan Bank of Atlanta advances (repayments)

    (2,000,000 )     (14,000,000 )

Dividends paid, net of reinvestments

    (504,052 )     (451,713 )

Common stock issued

    -       1,550  
                 
      11,550,672       5,662,584  
                 

Net increase (decrease) in cash and cash equivalents

    4,976,820       5,381,309  
                 

Cash and cash equivalents at beginning of period

    14,618,237       7,237,385  

Cash and cash equivalents at end of period

  $ 19,595,057     $ 12,618,694  

 

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)

 

Nine Months Ended September 30,

 

2019

   

2018

 
                 

Reconciliation of net income to net cash provided by operating activities

               

Net income

  $ 3,500,018     $ 3,575,871  

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

               

Depreciation and amortization

    259,626       289,097  

Provision for loan losses

    -       25,000  

Lease expense in excess of rent paid

    31,403       -  

Write down of other real estate owned

    210,150       55,350  

Equity security dividend reinvested

    (9,166 )     (8,383 )

Unrealized (gain) loss on equity security

    (18,721 )     15,348  

Gain on sale of loans

    (139,535 )     (63,825 )

Decrease (increase) in mortgage loans held for sale

    (964,936 )     177,700  

Amortization of premiums and accretion of discounts, net

    88,541       100,989  

Increase (decrease) in

               

Deferred loan fees

    (57,864 )     (10,665 )

Accrued interest payable

    37,373       116,248  

Other liabilities

    200,398       312,878  

Decrease (increase) in

               

Accrued interest receivable

    12,229       51,305  

Bank owned life insurance cash surrender value

    (49,235 )     (121,274 )

Other assets

    (13,846 )     (91,088 )
    $ 3,086,435     $ 4,424,551  

 

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

 

 

2.

Basis of Presentation

 

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

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 841).” Among other things, in the amendments in ASU 2016-02, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company adopted the provisions of ASU 2016-02, effective January 1, 2019, by recording an asset of $1,400,855, a liability of $1,527,019, a $91,447 adjustment to retained earnings, and a $34,717 adjustment to deferred income taxes.

 

 

9

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2.

Basis of Presentation (continued)

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in July 2019, the FASB proposed extending the implementation date to 2023 for SEC registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The proposal is expected to be enacted before the end of 2019. The Company has engaged a third-party vendor to assist in the implementation of this ASU.

 

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

 

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

 

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

 

Subsequent Events

 

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements were issued. No significant subsequent events were identified which would affect the presentation of the financial statements except as noted below.

 

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

 

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

 

September 30, 2019

 

cost

   

gains

   

losses

   

value

 
                                 

Available for sale

                               
                                 

State and municipal

  $ 1,378,761     $ 11,464     $ -     $ 1,390,225  

SBA pools

    2,388,707       -       51,269       2,337,438  

Mortgage-backed securities

    36,158,480       351,762       136,750       36,373,492  
    $ 39,925,948     $ 363,226     $ 188,019     $ 40,101,155  
                                 

Held to maturity

                               
                                 

State and municipal

  $ 19,509,907     $ 644,737     $ 563     $ 20,154,081  

 

   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2018

 

cost

   

gains

   

losses

   

value

 
                                 

Available for sale

                               
                                 

State and municipal

  $ 1,506,011     $ 11,161     $ 10,667     $ 1,506,505  

SBA pools

    2,779,411       -       60,039       2,719,372  

Mortgage-backed securities

    23,090,618       33,594       758,098       22,366,114  
    $ 27,376,040     $ 44,755     $ 828,804     $ 26,591,991  
                                 

Held to maturity

                               
                                 

State and municipal

  $ 18,127,067     $ 115,220     $ 209,194     $ 18,033,093  

 

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

 

September 30, 2019

 

cost

   

value

   

cost

   

value

 
                                 

Within one year

  $ -     $ -     $ 258,014     $ 263,101  

Over one to five years

    258,761       260,187       330,000       330,611  

Over five to ten years

    1,120,000       1,130,038       2,948,579       3,029,811  

Over ten years

    -       -       15,973,314       16,530,558  
      1,378,761       1,390,225       19,509,907       20,154,081  

Mortgage-backed securities and

                               

SBA pools, due in monthly installments

    38,547,187       38,710,930       -       -  
    $ 39,925,948     $ 40,101,155     $ 19,509,907     $ 20,154,081  

 

December 31, 2018

                               
                                 
Within one year   $ 375,000     $ 375,653     $ 1,009,284     $ 1,011,165  
Over one to five years     260,587       249,920       590,522       598,528  
Over five to ten years     870,424       880,932       1,858,695       1,876,364  
Over ten years     -       -       14,668,566       14,547,036  
       1,506,011       1,506,505       18,127,067       18,033,093  
Mortgage-backed securities and                                

SBA pools, due in monthly installments

    25,870,029       25,085,486       -       -  
    $ 27,376,040     $ 26,591,991     $ 18,127,067     $ 18,033,093  

 

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

 

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 September 30, 2019 and December 31, 2018.

 

September 30, 2019

 

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

  $ -     $ -     $ 252,000     $ 563     $ 252,000     $ 563  

SBA pools

    -       -       2,337,438       51,269       2,337,438       51,269  

Mortgage-backed securities

    7,726,619       41,199       8,286,586       95,551       16,013,205       136,750  

Total

  $ 7,726,619     $ 41,199     $ 10,876,024     $ 147,383     $ 18,602,643     $ 188,582  

 

 

December 31, 2018

 

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

  $ 3,435,052     $ 42,080     $ 3,740,467     $ 177,781     $ 7,175,519     $ 219,861  

SBA pools

    443,288       6,707       2,276,084       53,332       2,719,372       60,039  

Mortgage-backed securities

    596,002       6,631       17,770,790       751,467       18,366,792       758,098  

Total

  $ 4,474,342     $ 55,418     $ 23,787,341     $ 982,580     $ 28,261,683     $ 1,037,998  

 

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

 

13

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

4.

Loans

 

Major categories of loans are as follows:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
                 

Real estate:

               

Commercial

  $ 233,140,797     $ 238,834,149  

Construction and land development

    16,132,994       18,265,505  

Residential

    69,049,698       63,024,106  

Commercial

    21,134,598       23,323,073  

Consumer

    309,902       494,009  
      339,767,989       343,940,842  

Less: Allowance for loan losses

    2,546,114       2,509,334  

Deferred origination fees net of costs

    473,009       530,873  
    $ 336,748,866     $ 340,900,635  

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
                 

Commercial real estate

  $ -     $ 988,811  

 

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

 

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

 

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

 

September 30, 2019

                                                       

Real estate:

                                                       

Commercial

  $ -     $ -     $ -     $ -     $ 233,140,797     $ 233,140,797     $ -  

Construction and land development

    -       -       -       -       16,132,994       16,132,994       -  

Residential

    31,857       -       -       31,857       69,017,841       69,049,698       -  

Commercial

    -       -       -       -       21,134,598       21,134,598       -  

Consumer

    -       -       -       -       309,902       309,902       -  

Total

  $ 31,857     $ -     $ -     $ 31,857     $ 339,736,132     $ 339,767,989     $ -  
                                                         

December 31, 2018

                                                       

Real estate:

                                                       

Commercial

  $ -     $ -     $ 988,811     $ 988,811     $ 237,845,338     $ 238,834,149     $ -  

Construction and land development

    -       -       -       -       18,265,505       18,265,505       -  

Residential

    -       -       10,507       10,507       63,013,599       63,024,106       10,507  

Commercial

    -       25,000       -       25,000       23,298,073       23,323,073       -  

Consumer

    -       -       -       -       494,009       494,009       -  

Total

  $ -     $ 25,000     $ 999,318     $ 1,024,318     $ 342,916,524     $ 343,940,842     $ 10,507  

 

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

 

   

Unpaid

   

Recorded

   

Recorded

                         
   

Contractual

   

Investment

   

Investment

   

Total

           

Average

 
   

Principal

   

With No

   

With

   

Recorded

   

Related

   

Recorded

 
   

Balance

   

Allowance

   

Allowance

   

Investment

   

Allowance

   

Investment

 

September 30, 2019

                                               

Real estate:

                                               

Commercial

  $ 2,097,690     $ 2,097,690     $ -     $ 2,097,690     $ -     $ 2,610,536  

Residential

    50,790       50,790       -       50,790       -       25,395  
    $ 2,148,480     $ 2,148,480     $ -     $ 2,148,480     $ -     $ 2,635,931  
                                                 

December 31, 2018

                                               

Real estate:

                                               

Commercial

  $ 3,813,381     $ 3,123,381     $ -     $ 3,123,381     $ -     $ 4,153,282  

Residential

    54,000       54,000       -       54,000       -       27,000  
    $ 3,867,381     $ 3,177,381     $ -     $ 3,177,381     $ -     $ 4,180,282  

 

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

 

15

 

 

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

4.

Loans (continued)

 

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

 

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

 

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

 

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

 

Pass/Watch

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

 

Special Mention

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

 

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

 

Substandard

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

 

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

 

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

                         

September 30, 2019

 

Excellent

   

average

   

Average

   

Acceptable

   

watch

   

mention

   

Substandard

   

Doubtful

   

Total

 
                                                                         

Real estate:

                                                                       

Commercial

  $ -     $ 3,056,485     $ 90,131,537     $ 108,685,401     $ 22,306,448     $ -     $ 8,960,926     $ -     $ 233,140,797  

Construction and land development

    -       202,500       4,820,218       8,187,688       2,922,588       -       -       -       16,132,994  

Residential

    37,425       1,572,805       24,944,785       33,582,371       6,372,666       -       2,539,646       -       69,049,698  

Commercial

    192,622       37,519       9,850,802       8,138,156       2,915,499       -       -       -       21,134,598  

Consumer

    2,659       102,472       98,925       63,494       20,000       -       440       21,912       309,902  
    $ 232,706     $ 4,971,781     $ 129,846,267     $ 158,657,110     $ 34,537,201     $ -     $ 11,501,012     $ 21,912     $ 339,767,989  

 

           

Above

                   

Pass

   

Special

                         

December 31, 2018

 

Excellent

   

average

   

Average

   

Acceptable

   

watch

   

mention

   

Substandard

   

Doubtful

   

Total

 
                                                                         

Real estate:

                                                                       

Commercial

  $ -     $ 3,632,231     $ 101,633,803     $ 104,454,812     $ 20,356,642     $ -     $ 8,756,661     $ -     $ 238,834,149  

Construction and land development

    -       -       8,190,212       7,871,642       2,203,651       -       -       -       18,265,505  

Residential

    35,926       1,178,899       26,856,131       30,169,305       2,093,825       -       2,690,020       -       63,024,106  

Commercial

    977,054       24,180       12,373,503       7,130,122       2,818,214       -       -       -       23,323,073  

Consumer

    3,668       80,670       266,704       63,160       -       -       1,340       78,467       494,009  
    $ 1,016,648     $ 4,915,980     $ 149,320,353     $ 149,689,041     $ 27,472,332     $ -     $ 11,448,021     $ 78,467     $ 343,940,842  

 

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 nine months ended September 30, 2019 and 2018, and the year ended December 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

September 30, 2019

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,754,372     $ (47,253 )   $ -     $ 19,689     $ 1,726,808     $ -     $ 1,726,808     $ 2,097,690     $ 231,043,107  

Construction and land development

    196,374       (34,932 )     -       10,425       171,867       -       171,867       -       16,132,994  

Residential

    401,626       45,242       -       -       446,868       -       446,868       50,790       68,998,908  

Commercial

    102,610       (14,180 )     -       6,666       95,096       -       95,096       -       21,134,598  

Consumer

    10,428       (5,521 )     -       -       4,907       -       4,907       -       309,902  

Unallocated

    43,924       56,644       -       -       100,568       -       100,568       -       -  
    $ 2,509,334     $ -     $ -     $ 36,780     $ 2,546,114     $ -     $ 2,546,114     $ 2,148,480     $ 337,619,509  

 

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

September 30, 2018

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,867,397     $ (252,948 )   $ -     $ 202,660     $ 1,817,109     $ 210,686     $ 1,606,423     $ 3,825,462     $ 234,744,541  

Construction and land development

    223,274       99,933       (22,116 )     1,462       302,553       -       302,553       -       23,971,982  

Residential

    247,953       143,681       -       -       391,634       -       391,634       44,254       60,271,255  

Commercial

    87,353       1,539       -       6,667       95,559       -       95,559       -       21,238,222  

Consumer

    7,027       (1,523 )     -       -       5,504       -       5,504       -       467,592  

Unallocated

    25,907       34,318       -       -       60,225       -       60,225       -       -  
    $ 2,458,911     $ 25,000     $ (22,116 )   $ 210,789     $ 2,672,584     $ 210,686     $ 2,461,898     $ 3,869,716     $ 340,693,592  

 

 

                                           

Allowance for loan losses

   

Outstanding loan

 
           

Provision

                           

ending balance evaluated

   

balances evaluated

 
   

Beginning

   

for loan

   

Charge

           

Ending

   

for impairment:

   

for impairment:

 

December 31, 2018

 

balance

   

losses

   

offs

   

Recoveries

   

balance

   

Individually

   

Collectively

   

Individually

   

Collectively

 
                                                                         

Real estate:

                                                                       

Commercial

  $ 1,867,397     $ 372,315     $ (690,000 )   $ 204,660     $ 1,754,372     $ -     $ 1,754,372     $ 3,177,381     $ 235,656,768  

Construction and land development

    223,274       (78,496 )     (12,115 )     63,711       196,374       -       196,374       -       18,265,505  

Residential

    247,953       153,673       -       -       401,626       -       401,626       -       63,024,106  

Commercial

    87,353       6,090       -       9,167       102,610       -       102,610       -       23,323,073  

Consumer

    7,027       3,401       -       -       10,428       -       10,428       -       494,009  

Unallocated

    25,907       18,017