10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

or

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

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 Number)
4510 Lower Beckleysville Road, Suite H, Hampstead, Maryland	21074
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 410-374-1510

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

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑

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 such shorter period 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 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 such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions 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 Act).Yes ☐ No ☑

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the last business day of the registrant’s most recently completed second fiscal quarter: $48,037,034.

The number of shares of the registrant’s common stock outstanding as of March 5, 2020: 2,974,019.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for the 2020 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K.

Farmers and Merchants Bancshares, Inc.

Table of Contents

PART I
ITEM 1.	Business	4
ITEM 1A.	Risk Factors	14
ITEM 1B.	Unresolved Staff Comments	22
ITEM 2.	Properties	23
ITEM 3.	Legal Proceedings	23
ITEM 4.	Mine Safety Disclosures	23
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
ITEM 6.	Selected Financial Data	25
ITEM 7.	Management’s Discussion and Analysis of Financial Condition & Results of Operations	26
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	45
ITEM 8.	Financial Statements and Supplementary Data	45
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	78
ITEM 9A.	Controls and Procedures	78
ITEM 9B.	Other Information	80
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	80
ITEM 11.	Executive Compensation	80
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	80
ITEM 14.	Principal Accountant Fees and Services	80
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	80
SIGNATURES		82

2

Forward-Looking Statements

As used in this Annual Report on Form 10-K, the terms the “Company”, “we”, “us”, and “our” refer to Farmers and Merchants Bancshares, Inc. and, unless the context clearly requires otherwise, its consolidated subsidiaries.

Some of the statements contained in this annual report may include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Such statements constitute forward-looking statements and are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements are based on various factors and were derived using numerous assumptions. In some cases, you can identify forward-looking statements by words like “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words. You should be aware that those statements reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this annual report and not place undue reliance on these forward-looking statements. Factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements in this annual report:

● unexpected changes in the housing market, business markets, and/or general economic conditions in our market area, or a slower-than-anticipated economic recovery, which might lead to increased or decreased demand for loans, deposits and other products and services and/or increase loan delinquencies or defaults;

● changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;

● our liquidity requirements could be adversely affected by changes in our assets and liabilities;

● the effects of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

● competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

● the effects of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies;

● the impact of acquisitions and other strategic transactions; and

● the effects of fiscal and governmental policies of the United States federal government.

You should also consider carefully the risk factors discussed in Item 1A of Part I of this annual report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. The risks discussed in this annual report are factors that, individually or in the aggregate, management believes could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3

ITEM 1. BUSINESS

Recent Developments

On March 6, 2020. the Company, Anthem Acquisition Sub, a wholly-owned subsidiary of the Company (“Merger Sub”) and Carroll Bancorp, (“Carroll”), the parent company of Carroll Community Bank, a Maryland commercial bank (“Carroll Bank”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will be merged with and into Carroll, with Carroll as the surviving corporation, and, immediately thereafter, Carroll will be merged with and into the Company, with the Company as the surviving corporation (collectively, the “Merger”). The Merger Agreement, which has been approved by the boards of the Company, Merger Sub and Carroll, provides that the outstanding shares of Carroll’s common stock will be converted into the right to receive cash in the aggregate amount of $25 million, subject to a dollar-for-dollar reduction if and to the extent Carroll’s tangible book value prior to the closing does not equal or exceed $18,200,000. Immediately following the Merger, Carroll Bank will be merged with and into Farmers and Merchants Bank, a Maryland commercial bank and wholly-owned subsidiary of the Company (the “Bank”), with the Bank as the surviving insured depository institution (the “Bank Merger”).

Consummation of the Merger is subject to certain conditions, including, among others, the approval of the Merger by the stockholders of Carroll and the receipt of required regulatory approvals. The Merger Agreement includes customary representations, warranties and covenants of the parties. The Merger Agreement contains termination rights of the Company and Carroll and further provides that Carroll will be required to pay us a termination fee of $1,000,000 if the Merger Agreement is terminated under specified circumstances set forth therein.

We expect the Merger to close in the third quarter of 2020, but this date is subject to change. For additional information regarding the pending Merger, please see as our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2020.

You should keep in mind that discussions in this annual report that refer to the Company’s business, operations and risks in the future refer to the Company as a stand-alone entity up to the closing of the proposed Merger or if the Merger does not close, and that these considerations will be different with respect to the combined company after the closing of the Merger.

General

Farmers and Merchants Bancshares, Inc. is a Maryland corporation chartered on August 8, 2016 that is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). At the time it registered as a bank holding company, the Company also elected to become a financial holding company, which allows it to engage in certain activities, and own shares or control of certain entities, that are in addition to those permissible for an entity that is a bank holding company only. Effective November 1, 2016, the Company consummated a bank holding company reorganization involving the Bank pursuant to which the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company (the “Reorganization”).

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

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

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

At December 31, 2019, our consolidated assets totaled approximately $442 million and stockholders’ equity was approximately $49.5 million.

4

Banking Activities

The Bank has been doing business in Maryland since 1919 and is engaged in both the commercial and consumer banking business. At December 31, 2019, the Bank had approximately 14,990 deposit accounts, representing $377 million in deposits. At December 31, 2019, the Bank had $359 million in loans, representing 81% of its total assets of $442 million.

The Bank’s general market area runs along the Route 30, Route 795, and Route 140 corridors south from Owings Mills and north to the Pennsylvania line including the areas of Reisterstown, Upperco, Hampstead and Manchester. The Bank’s western area includes the communities of Finksburg and Westminster, while the eastern side includes Sparks, Hereford and Parkton. All of these communities are located in Carroll County or Baltimore County, Maryland.

This market area serves as a bedroom community to large employment areas such as Owings Mills, Hunt Valley, Towson, White Marsh, Columbia and Baltimore City. The market area is primarily residential with retail, commercial and light-manufacturing activity. The opening of Interstate 795 in the 1980’s made it convenient to enjoy a rural lifestyle while still being able to commute to work in a reasonable time.

The Bank’s main office is located in Upperco, Maryland, and it has five additional full service branches located in the Maryland communities of Hampstead, Greenmount, Reisterstown, Owings Mills, and Westminster. In addition, the Bank has two satellite branches located in senior living communities: the Atrium in Owings Mills, Maryland and Carroll Lutheran Village in Westminster, Maryland

As a convenience to its customers, the Bank offers drive through automated teller machines (“ATMs”) at the Upperco, Owings Mills, Hampstead, Reisterstown, and Westminster locations and walk-up ATMs at the Greenmount and Atrium offices. The Greenmount In-Store location is open 7-days a week while the other five full service offices offer convenient banking hours which include Saturday mornings. The satellite branches are opened three to five days a week with limited business hours. Drive-thru windows are available at the Upperco, Owings Mills, Hampstead, Reisterstown, and Westminster branches. The Bank offers 24-hour on-line, internet banking for account balance inquiries, bill paying, or transferring funds between accounts. The Bank provides mobile banking functionality to its internet services. In addition, the 24-hour Dial-A-Bank automated telephone service is available. Debit cards are another service the Bank provides to its customers. The Bank joined Allpoint, America’s largest surcharge-free ATM network, to enable Bank customers to have access to over 55,000 ATMs, surcharge-free.

The Bank provides a wide range of personal banking services designed to meet the needs of local consumers. Among the deposit services provided are checking accounts, savings accounts, money market accounts, certificates of deposit and individual retirement accounts. The Bank also offers repurchase agreements and remote check deposits.

The Bank grants available credit for residential mortgages (including Federal Housing Administration and Veterans Affairs loans), construction loans, home equity lines, personal installment loans and other consumer financing.

The Bank also is engaged in financing commerce and industry by providing credit and deposit services for small to medium size businesses and the agricultural community in the Bank’s market area. The Bank offers many forms of commercial lending, including commercial mortgages, land acquisition and development loans, lines of credit, accounts receivable financing, term loans for fixed asset purchases, as well as loans guaranteed by the Small Business Administration (the “SBA”) and the United States Department of Agriculture (the “USDA”).

In addition, commercial depositors may take advantage of many different services including checking accounts, remote deposit banking services, sweep accounts, money market accounts, savings accounts and certificates of deposit.

The Bank also has strategic alliances that allow for the issuance of credit cards to retail customers and to provide merchant services so commercial customers can accept credit cards and debit cards as payment for their goods and services.

The Bank has adopted policies and procedures designed to mitigate credit risk and maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Bank’s policy is to make the majority of its loan commitments in the market area it serves. This tends to reduce risk because Management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. No material portion of the Bank’s loans is concentrated within a single industry or group of related industries. Most of the Bank’s loans are, however, made to Maryland customers and many are secured by real estate located in or around Maryland. Although Management believes that the loan portfolio is diversified, its performance will be influenced by the economy of the region.

5

Investment Activities

The Bank maintains a portfolio of investment securities to provide liquidity and income. The current portfolio of $56 million equals approximately 13% of the total assets at December 31, 2019 and is invested primarily in mortgage-backed securities and municipal bonds.

A key objective of the investment portfolio is to provide a balance in the Bank’s asset mix of investments and loans consistent with its liability structure, and to assist in management of interest rate risk. The investments augment the Bank’s capital position, providing the necessary liquidity to meet fluctuations in credit demand of the community and fluctuations in deposit levels. In addition, the portfolio provides collateral for pledging against public funds and repurchase agreements and an opportunity to minimize income tax liability. Finally, the investment portfolio is designed to provide income for the Bank. In view of the above objectives, only securities that meet conservative investment criteria are purchased.

Insurance Activities

As noted above, the Insurance Subsidiary is one protected cell of a protected cell captive insurance company. It reinsures certain risks of the Company and the Bank as well as other groups of related entities that are not affiliated with the Bank for which it receives premiums. The insurance policies that are the subject of this reinsurance obligation are issued each year. Once the claim deadline passes for a particular policy year, the premium earned by the Insurance Subsidiary may be retained as earnings (subject to any regulatory capital and surplus requirements imposed by applicable law). As the sole owner of the Insurance Subsidiary, the Company may choose to terminate the Insurance Subsidiary’s participation in this reinsurance arrangement with respect to a future year at any time.

Competition

The banking business, in all of its phases, is highly competitive. Within our market areas, we compete with commercial banks, (including local banks and branches or affiliates of other larger banks), savings and loan associations and credit unions for loans and deposits, with consumer finance companies for loans, and with other financial institutions for various types of products and services. There is also competition for commercial and retail banking business from banks and financial institutions located outside our market areas and on the internet.

The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services.

To compete with other financial services providers, we rely principally upon local promotional activities, personal relationships established by officers, directors and employees with customers, and specialized services tailored to meet customers’ needs. In those instances in which we are unable to accommodate a customer’s needs, we attempt to arrange for those services to be provided by other financial services providers with which we have a relationship.

Supervision and Regulation

The following is a summary of the material regulations and policies applicable to the Company and its subsidiaries and is not intended to be a comprehensive discussion. Changes in applicable laws and regulations may have a material effect on our business.

General

The Company is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve that apply to financial holding companies. As a holding company of a Maryland-chartered bank, the Company is also subject to supervision by the Office of the Maryland Commissioner of Financial Regulation (the “Maryland Commissioner”). Because the Company’s common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is also subject to regulation and supervision by the SEC.

The Bank is a Maryland commercial bank subject to the banking laws of Maryland and to regulation by the Maryland Commissioner, who is required by statute to make at least one examination in each calendar year (or at 18-month intervals if the Maryland Commissioner determines that an examination is unnecessary in a particular calendar year). As a member of the Federal Deposit Insurance Corporation (the “FDIC”), the Bank is also subject to certain provisions of federal laws and regulations regarding deposit insurance and activities of insured state-chartered banks, including those that require examination by the FDIC. In addition to the foregoing, there are a myriad of other federal and state laws and regulations that affect, or govern the business of banking, including consumer lending and deposit-taking.

All non-bank subsidiaries of the Company are subject to examination by the Federal Reserve, and, as affiliates of the Bank, are subject to examination by the FDIC and the Maryland Commissioner. In addition, the Insurance Subsidiary is subject to licensing and regulation by the Tennessee Insurance Department, and, as a captive insurance company, is subject to certain restrictions and requirements imposed under the Internal Revenue Code of 1986, as amended (the “IRC”).

6

Regulatory Reforms

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, significantly restructured the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as banks and bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all financial institutions, including the Bank. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”), discussed below, and contains a wide variety of provisions (many of which are not yet effective) affecting the regulation of depository institutions, including fair lending, fair debt collection practices, mortgage loan origination and servicing obligations, bankruptcy, military service member protections, use of credit reports, privacy matters, and disclosure of credit terms and correction of billing errors. Local, state and national regulatory and enforcement agencies continue efforts to address perceived problems within the mortgage lending and credit card industries through broad or targeted legislative or regulatory initiatives aimed at lenders’ operations in consumer lending markets. There continues to be a significant amount of legislative and regulatory activity, nationally, locally and at the state level, designed to limit certain lending practices while mandating certain servicing procedures. Federal bankruptcy and state debtor relief and collection laws, as well as the Servicemembers Civil Relief Act affect the ability of banks, including the Bank, to collect outstanding balances.

Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the CFPB. Recently, U.S. financial regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices”, which has been delegated to the CFPB for supervision.

Many of the Dodd-Frank Act’s provisions are subject to final rulemaking by the U.S. financial regulatory agencies, and the Dodd-Frank Act’s impact on our business will depend to a large extent on how and when such rules are adopted and implemented by the primary U.S. financial regulatory agencies. We continue to analyze the impact of rules adopted under the Dodd-Frank Act on our business, but the full impact will not be known until the rules and related regulatory initiatives are finalized and their combined impact can be understood. We do anticipate that the Dodd-Frank Act will increase our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future. In particular, the Dodd-Frank Act will require us to invest significant management attention and resources so that we can evaluate the impact of and ensure compliance with this law and its rules.

Regulation of Bank Holding Companies and Financial Holding Companies

The Company and its affiliates are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act. Section 23A limits the amount of loans or extensions of credit to, and investments in, the Company and its non-bank affiliates by the Bank. Section 23B requires that transactions between the Bank and the Company and its non-bank affiliates be on terms and under circumstances that are substantially the same as with non-affiliates.

Under Federal Reserve policy, the Company is expected to act as a source of strength to the Bank, and the Federal Reserve may charge the Company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. This support may be required at times when the bank holding company may not have the resources to provide the support. Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders. Because the Company is a bank holding company, it is viewed as a source of financial and managerial strength for any controlled depository institutions, like the Bank.

In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Accordingly, in the event that any insured subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries of the Company could be required to compensate the FDIC by reimbursing it for the estimated amount of such loss. Such cross guaranty liabilities generally are superior in priority to obligations of a financial institution to its shareholders and obligations to other affiliates. The Bank is the Company’s only FDIC-insured depository institution.

7

The provisions of the BHC Act relating to financial holding companies and the regulations promulgated thereunder require the Bank to remain “well capitalized” and “well managed”. The capital requirement is discussed below under the heading, “Prompt Corrective Act”. The Bank will be considered to be well managed so long as it achieves a CAMEL composite rating of at least “2” as a result of its most recent examination and at least a “satisfactory” management rating (if such rating is given). If the Bank were to fail to meet either of these requirements, then the Company would be required to enter into an agreement with the Federal Reserve that would address the remediation of the condition that led to the failure. During the term of that agreement, which is typically 180 days but which can be extended at the discretion of the Federal Reserve, the Company would be prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act. If the Company were to fail to correct that condition by the expiration of the agreement’s term, then the Federal Reserve could order the Company to divest its ownership of the Bank or, alternatively, terminate all financial holding company activities. For so long as the Company remains a financial holding company, the Bank must also maintain a Satisfactory or better rating under the Community Reinvestment Act (the “CRA”). During any period that the Bank fails to satisfy this requirement, the Company is prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act. The Bank currently satisfies all of the foregoing conditions.

Federal Banking Regulation

Federal banking regulators, such as the Federal Reserve and the FDIC, may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices. Federal banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.

The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, and principal shareholders or any related interest of such persons, which generally require that such credit extensions be made on substantially the same terms as those available to persons who are not related to the Bank and not involve more than the normal risk of repayment. Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels.

As part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority. These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be required by the agency to develop a plan acceptable to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank meets substantially all standards that have been adopted. FDICIA also imposes capital standards on insured depository institutions.

The CRA requires the FDIC, in connection with its examination of financial institutions within its jurisdiction, to evaluate the record of those financial institutions in meeting the credit needs of their communities, including low and moderate income neighborhoods, consistent with principles of safe and sound banking practices. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, the Bank had a CRA rating of “Satisfactory”.

The Bank is also subject to a variety of other laws and regulations with respect to the operation of its business, including, but not limited to, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Expedited Funds Availability (Regulation CC), Reserve Requirements (Regulation D), Privacy of Consumer Information (Regulation P), Margin Stock Loans (Regulation U), the Right To Financial Privacy Act, the Flood Disaster Protection Act, the Homeowners Protection Act, the Servicemembers Civil Relief Act, the Real Estate Settlement Procedures Act, the Telephone Consumer Protection Act, the CAN-SPAM Act, the Children’s Online Privacy Protection Act, and the John Warner National Defense Authorization Act.

8

Capital Requirements

In addition to operational requirements, the Bank and the Company are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.

On July 2, 2013, the Federal Reserve approved final rules that substantially amended the regulatory risk-based capital rules applicable to the Company. The FDIC subsequently approved the same rules, which are applicable to the Bank. The final rules implement the ”Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act and were implemented as of March 31, 2015. 

The Basel III capital rules include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019, and which refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to the Company under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The following minimum ratios were in effect at the beginning of 2019: (a) a common equity Tier 1 capital ratio of 7.0%, (b) a Tier 1 capital ratio of 8.5% and (c) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The Basel III capital final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that no longer qualify as Tier 1 capital, some of which will be phased out over time. Under the final rules, the effects of certain accumulated other comprehensive items are not excluded; however, banking organizations like the Company and the Bank that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items. The Company and the Bank made this election in their first quarter 2015 regulatory filings in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio.

The Basel III capital rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions were effective January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized”: (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The Basel III capital rules set forth certain changes for the calculation of risk-weighted assets. These changes include (i) an increased number of credit risk exposure categories and risk weights; (ii) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (iii) revisions to recognition of credit risk mitigation; (iv) rules for risk weighting of equity exposures and past due loans, and (v) revised capital treatment for derivatives and repo-style transactions.

Regulators may require higher capital ratios when warranted by the particular circumstances or risk profile of a given banking organization. In the current regulatory environment, banking organizations must stay well-capitalized in order to receive favorable regulatory treatment on acquisition and other expansion activities and favorable risk-based deposit insurance assessments. Our capital policy establishes guidelines meeting these regulatory requirements and takes into consideration current or anticipated risks as well as potential future growth opportunities.

As of December 31, 2019, we are in compliance with the applicable requirements of the Basel III rules.

Additional information about our capital ratios and requirements is contained in Item 7 of this Annual Report under the heading, “Capital Resources”.

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Prompt Corrective Action

The Federal Deposit Insurance Act (the “FDI Act”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDI Act includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”, (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%, (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%, and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

Effective January 1, 2015, the Basel III capital rules revised the prompt corrective action requirements by (i) introducing the CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8%; and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 but a leverage ratio of at least 3% to be deemed adequately capitalized. The Basel III Capital Rules did not change the total risk-based capital requirement for any prompt corrective action category.

The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

As of December 31, 2019, the Bank was “well capitalized” based on the aforementioned ratios.

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Liquidity Requirements

We require cash to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund these requirements, we can rely on the funding sources identified in Item 2 of this Annual Report under the heading, “Liquidity Management”. At December 31, 2019, the Bank had $18.5 million available through unsecured and secured lines of credit with correspondent banks, $21.2 million available through a secured line of credit with the Fed Discount Window and approximately $59.1 million available through the Federal Home Loan Bank (“FHLB”). Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future liquidity requirements.      

Historically, the regulation and monitoring of bank liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. In October 2013, the federal banking agencies proposed rules implementing the LCR for advanced approaches banking organizations and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to us. In the second quarter of 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for certain U.S. banking organizations to ensure that they have access to table funding over a one-year time horizon. The proposed rule would not apply to a U.S. banking organization with less than $50 billion in total consolidated assets, such as the Bank

Deposit Insurance

The Bank is a member of the FDIC and pays an insurance premium to the FDIC based upon its assessable deposits on a quarterly basis. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. Deposits are insured by the FDIC through the Deposit Insurance Fund (the “DIF”) and such insurance is backed by the full faith and credit of the United States Government. Under the Dodd-Frank Act, a permanent increase in deposit insurance to $250,000 was authorized. The coverage limit is per depositor, per insured depository institution for each account ownership category.

The Federal Deposit Insurance Reform Act of 2005, which created the DIF, gave the FDIC greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments. The FDIC has the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted without notice and comment, if certain conditions are met.

The Dodd-Frank Act also set a new minimum DIF reserve ratio at 1.35% of estimated insured deposits. The FDIC is required to attain this ratio by September 30, 2020. The Dodd-Frank Act required the FDIC to redefine the deposit insurance assessment base for an insured depository institution. Prior to the Dodd-Frank Act, an institution’s assessment base has historically been its domestic deposits, with some adjustments. As redefined pursuant to the Dodd-Frank Act, an institution’s assessment base is now an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity. Institutions with less than $1.0 billion in assets at the end of a fiscal quarter, like the Bank, are permitted to report their average consolidated total assets on a weekly basis (rather than on a daily basis) and to report their average tangible equity on an end-of-quarter balance (rather than on an end-of-month balance).

DIF-insured institutions pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued in the 1980s in connection with the failures in the thrift industry. These assessments ended in 2019. In addition, when the DIF reserve ratio exceeded 1.35%, smaller institutions were eligible to receive a credit. The Bank’s credit was $98,970 with most of it realized in 2019. The Bank expensed $30,571 and $125,143 in FDIC insurance premiums, including FICO assessments and net of the credit, in 2019 and 2018, respectively.

The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance would have a material adverse effect on our earnings, operations and financial condition.

The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance for our bank subsidiary would have a material adverse effect on our earnings, operations and financial condition.

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 Bank Secrecy Act/Anti-Money Laundering

The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every insured depository institution have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA.

The program must, at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training for appropriate personnel. In addition, state-chartered banks are required to adopt a customer identification program as part of its BSA compliance program. State-chartered banks are also required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.

In addition to complying with the BSA, the Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The USA Patriot Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.

Mortgage Lending and Servicing

The Bank’s mortgage lending and servicing activities are subject to various laws and regulations that are enforced by the federal banking regulators and the CFPB, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and various rules adopted thereunder, including those relating to consumer disclosures, appraisal requirements, mortgage originator compensation, prohibitions on mandatory arbitration provisions under certain circumstances, and the obligation to credit payments and provide payoff statements within certain time periods and provide certain notices prior to interest rate and payment adjustments.

The Bank is required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Qualified mortgages that that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules, while qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years, where the lender determines that the borrower has the ability to repay, and where the borrower’s points and fees do not exceed 3% of the total loan amount. “Higher-priced” mortgages must have escrow accounts for taxes and insurance and similar recurring expenses.

Consumer Lending – Military Lending Act

The Military Lending Act (the “MLA”), which was initially implemented in 2007, was amended and its coverage significantly expanded in 2015. The Department of Defense (the “DOD”) issued a final rule under the MLA that took effect on October 15, 2015, but financial institutions were not required to take action until October 3, 2016. The types of credit covered under the MLA were expanded to include virtually all consumer loan and credit card products (except for loans secured by residential real property and certain purchase-money motor vehicle/personal property secured transactions). Lenders must now provide specific written and oral disclosures concerning the protections of the MLA to active duty members of the military and dependents of active duty members of the military (“covered borrowers”). The rule imposes a 36% “Military Annual Percentage Rate” cap that includes costs associated with credit insurance premiums, fees for ancillary products, finance charges associated with the transactions, and application and participation charges. In addition, loan terms cannot include (i) a mandatory arbitration provision, (ii) a waiver of consumer protection laws, (iii) mandatory allotments from military benefits, or (iv) a prepayment penalty. The revised rule also prohibits “roll-over” or refinances of the same loan unless the new loan provides more favorable terms for the covered borrower. Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus. We believe that we are in compliance with the revised rule.

Cybersecurity

We rely on electronic communications and information systems to conduct our operations and store sensitive data. We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, we employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.

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The federal banking regulators have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking regulators expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack. If we fail to meet the expectations set forth in this regulatory guidance, then we could be subject to various regulatory actions and we may be required to devote significant resources to any required remediation efforts.

Laws Related to the Insurance Subsidiary

The Insurance Subsidiary is treated as a separate legal entity for state law purposes and is licensed and supervised by the Tennessee Department of Commerce and Insurance as a series protected cell of a protected cell captive insurance company. Tennessee insurance law requires a protected cell to possess and maintain unimpaired paid-in capital and surplus of at least $25,000, and the Tennessee Department of Commerce and Insurance has the authority to prescribe additional requirements based on the type, volume and nature of insurance business to be conducted. No captive insurance company may pay a dividend out of, or other distribution with respect to, capital or surplus without the prior approval of the Tennessee Department of Commerce and Insurance.

The Insurance Subsidiary was formed with the intention that it be treated as a “captive insurance company” by the Internal Revenue Service (the “IRS”) so that, among other things, some or all of the premiums that we pay to the Insurance Subsidiary will be deductible as trade or business expenses. Because of the significant tax benefits that can be realized through the operation of a captive insurance company, the IRS has recently focused significant attention on these arrangements to ensure that they are not simply a disguise for self-insurance. Amounts paid to the Insurance Subsidiary will be deductible only if they constitute “insurance premiums” under the IRC. The federal courts and the IRS have concluded that amounts paid to an insurance company will be deemed insurance premiums only if the arrangement under which those amounts were paid evidences an appropriate level of both “risk shifting” and “risk distribution”.

Moreover, our tax planning assumes that the Insurance Company will have made an effective election under Section 831(b) of the IRC for each taxable year so that it will be taxed only on its investment income (and not also on its premium income) generated in that year. A Section 831(b) election for a taxable year is available only if (i) the insurance company’s net written premiums (or, if greater, direct written premiums) for the year do not exceed $2.2 million and (ii) either (a) no more than 20% of the written premiums (net or direct, as applicable) for the year is attributable to any single insured or (b) the insurance company satisfies certain ownership diversification requirements specified in Section 831(b)(2)(B)(i)(II) of the IRC.

The laws governing these arrangements are very complicated and the positions taken by the IRS with respect to these laws and arrangements are subject to evolution and change. For additional information, see the risk factors entitled “We may not achieve the expected benefits from the Insurance Subsidiary” and “Our fiscal year 2016 U.S. consolidated federal income tax return is currently being audited” in Item 1A of this annual report under the heading “Risks Relating to the Company and its Affiliates”. Federal Securities Laws”.

SEC Regulation

The shares of the Company’s common stock are registered with the SEC under Section 12(g) of the Exchange Act and the Company is subject to the information reporting requirements, proxy solicitation requirements, insider trading restrictions and other requirements of the Exchange Act, including the requirements imposed under the federal Sarbanes-Oxley Act of 2002. Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure.

Governmental Monetary and Credit Policies and Economic Controls

The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on our businesses and earnings.

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Seasonality

Management does not believe that our business activities are seasonal in nature. Deposit and loan demand may vary depending on local and national economic conditions, but management believes that any variation will not have a material impact on our planning or policy-making strategies.

Employees

As of December 31, 2019, we employed 88 individuals, of whom 72 were full-time employees.

ITEM 1A.  RISK FACTORS.

The significant risks and uncertainties related to us, our business and our securities of which we are aware are discussed below. You should carefully consider these risks and uncertainties before making investment decisions in respect of our securities. Any of these factors could materially and adversely affect our business, financial condition, operating results and prospects and could negatively impact the market price of our securities. If any of these risks materialize, you could lose all or part of your investment in the Company. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations. You should also consider the other information contained in this annual report, including our financial statements and the related notes, before making investment decisions in respect of our securities.

Risks Related to Our Pending Merger with Carroll Bancorp, Inc.

Completion of the Merger is conditioned upon the satisfaction of customary closing conditions.

Although the Company and Carroll have agreed in the Merger Agreement to use reasonable best efforts to consummate the Merger, the Merger is subject to various closing conditions that might not be satisfied. The Merger will not be consummated unless and until all of those closing conditions are either satisfied or waived by the parties. In addition, satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect. Any delay in completing the Merger may adversely affect the benefits that the Company and Carroll expect to achieve from the Merger and the integration of our businesses. In addition, failure to complete the Merger may adversely affect the Company.

Failure to complete the Merger could materially and adversely impact our stock price and future businesses and financial results.

If the Merger is not completed, then our ongoing business may be materially and adversely affected and we will be subject to several risks, including the following:

● We will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees; and

● Matters relating to the Merger have required and may require substantial commitments of time and resources by our management that could otherwise have been devoted to other opportunities that may have been beneficial the Company as an independent company.

In addition, if the Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the Merger or to enforcement proceedings commenced against us to perform our obligations under the Merger Agreement. If the Merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially and adversely affect our business, financial results and stock price.

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If the Merger is completed, then we may fail to realize all of the anticipated benefits of the Merger.

Realization of the anticipated benefits in the Merger for our stockholders in the Merger will depend, in part, on the combined company’s ability to successfully integrate the businesses and operations of the Company and Carroll. The combined company will be required to devote significant management attention and resources to integrating its business practices, operations and support functions.

The success of the Merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of Carroll and the Company. To realize these anticipated benefits and cost savings, however, we must successfully combine the businesses of Carroll and the Company. If we are unable to achieve these objectives, then the anticipated benefits and cost savings of the Merger may not be realized fully or at all or may take longer to realize than expected.

Carroll and the Company have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the loss of key depositors or other bank customers, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s and Carroll’s ability to maintain their relationships with their respective clients, customers, depositors and employees or to achieve the anticipated benefits of the Merger. Integration efforts between the two companies may, to some extent, also divert management attention and resources. These integration matters could have an adverse effect on each of the Company and Carroll during such transition period.

If the Merger is not completed, then we will have incurred substantial expenses without realizing the expected benefits.

We have incurred substantial expenses in connection with the execution of the Merger Agreement and the Merger. The completion of the Merger depends on the satisfaction of specified conditions, including the approval of the Merger by stockholders of Carroll. There is no guarantee that these conditions will be satisfied. If the Merger is not completed, then these expenses could have a material and adverse impact on our financial condition and/or results of operations because we would not have realized the expected benefits of the Merger.

Because the aggregate consideration to be received in the Merger is subject to adjustment, we will not know the value of the consideration that we will pay in the Merger until its effective time.

Upon completion of the Merger, Carroll’s stockholders will receive aggregate cash merger consideration of $25 million, subject to adjustment if and to the extent that Carroll’s tangible book value prior to the Closing does not equal or exceed $17,775,000. Therefore, the value of the aggregate consideration to be received by Carroll’s stockholders in the Merger will depend on the extent of any adjustment. The impact of this adjustment on the actual cash merger consideration will depend on a variety of factors, including general market and economic conditions, changes in the business, operations and prospects of Carroll and regulatory considerations. Many of these factors are beyond our or Carroll’s control.

Risks Relating to the Company and its Affiliates

The Company’s future success depends on the successful growth of its subsidiaries.

The Company’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and the Insurance Subsidiary. Therefore, the Company’s future profitability will depend on the success and growth of these subsidiaries.

We could be adversely affected by risks associated with future acquisitions and expansions.

Although our core growth strategy has historically focused around organic growth, we may from time to time consider acquisition and expansion opportunities involving a bank or other entity operating in the financial services industry, such as the Merger. We cannot predict if or when we will engage in strategic transactions, or the nature or terms of any such transactions. To the extent that we grow through an acquisition, we cannot assure investors that we will be able to adequately and profitably manage that growth or that an acquired business will be integrated into our existing businesses as efficiently or as timely as we may anticipate. Acquiring another business would generally involve risks commonly associated with acquisitions, including:

• increased capital needs;

• increased and new regulatory and compliance requirements;

• implementation or remediation of controls, procedures and policies with respect to the acquired business;

• diversion of management time and focus from operation of our then-existing business to acquisition-integration challenges;

• coordination of product, sales, marketing and program and systems management functions;

• transition of the acquired business’s users and customers onto our systems;

• retention of employees from the acquired business;

• integration of employees from the acquired business into our organization;

• integration of the acquired business’s accounting, information management, human resources and other administrative systems and operations with ours;

• potential liability for activities of the acquired business prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities;

• potential increased litigation or other claims in connection with the acquired business, including claims brought by regulators, terminated employees, customers, former stockholders, vendors, or other third parties; and

• potential goodwill impairment.

Our failure to execute on our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects risks of unknown or contingent liabilities.

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Interest rates and other economic conditions will impact our results of operations.

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors, and market interest rates.

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.

The majority of our business is concentrated in Maryland, much of which involves real estate lending, so a decline in the real estate and credit markets could materially and adversely impact our financial condition and results of operations.

Most of the Bank’s loans are made to borrowers located in Maryland, and many of these loans, including construction and land development loans, are secured by real estate. At December 31, 2019, approximately 5%, or $18 million, of our total loans were real estate acquisition, construction and development loans that were secured by real estate. Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse. We cannot guarantee that any risk management practices we implement to address our geographic and loan concentrations will be effective to prevent losses relating to our loan portfolio.

The Bank’s concentrations of commercial real estate loans could subject it to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit future commercial lending activities.

The federal banking regulators believe that institutions with particularly high concentrations of CRE loans in their lending portfolios face a heightened risk of financial difficulties in the event of adverse changes in the economy and CRE markets. Accordingly, through published guidance, these regulators have directed institutions whose concentrations exceed certain percentages of capital to implement heightened risk management practices appropriate to their concentration risk. The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in CRE. At December 31, 2019, our CRE concentrations were above the heightened risk management thresholds set forth in this guidance. The Bank has implemented enhanced risk management practices and monitoring controls, but no assurance can be given that such controls will be effective.

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The Bank may experience loan losses in excess of its allowance, which would reduce our earnings.

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loans being made, the creditworthiness of the borrowers over the term of the loans and, in the case of collateralized loans, the value and marketability of the collateral for the loans. Management of the Bank maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of its examination process, our earnings and capital could be significantly and adversely affected. Although management continually monitors our loan portfolio and makes determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to the allowance for loan losses could result in a material decrease in our net income and capital, and could have a material adverse effect on our financial condition.

We may be adversely affected by recent changes in tax laws.

The Tax Cuts and Jobs Act (the “Tax Act”), which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. Beginning in 2018, the Tax Act reduces the federal tax rate for corporations from 35% to 21%, but it also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for certain home equity loans, (iii) a limitation on the deductibility of business interest expense, and (iv) a limitation on the deductibility of property taxes and state and local income taxes. These limitations could have the effect of reducing consumer demand for loans secured by real estate, which could adversely impact our financial condition and results of operations. We continue to evaluate the Tax Act and its impact on us.

A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board (the “FASB”) has adopted a new accounting standard that will be effective for the Company beginning with our first full fiscal year after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This standard will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

The market value of our investments could decline.

As of December 31, 2019, investment securities in our investment portfolio having a cost basis of $36.5 million and a market value of $36.5 million were classified as available-for-sale pursuant to FASB Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities, relating to accounting for investments. Topic 320 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity (net of tax) as accumulated other comprehensive gain or loss. There can be no assurance that future market performance of our investment portfolio will enable us to realize income from sales of securities. Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. Moreover, there can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in stockholders’ equity.

Management believes that several factors could affect the market value of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value. These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category.

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Impairment of investment securities or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

In assessing whether the impairment of investment securities is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. See the discussion under the heading “Application of Critical Accounting Policies” in Item 7 of Part II of this annual report for further information.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive, including the recent trend of quarterly earnings. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carry forward periods is available under the tax law, including the use of tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary. At December 31, 2019, our net deferred tax assets were valued at $1.0 million.

The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations.

We operate in a competitive environment, competing for loans, deposits, and customers with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Competition for other products, such as securities products, comes from other banks, securities and brokerage companies, and other non-bank financial service providers in our market area. Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those that we offer. In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.

In addition, changes to the banking laws over the last several years have facilitated interstate branching, merger and expanded activities by banks and holding companies. For example, the federal Gramm-Leach-Bliley Act revised the BHC Act and repealed the affiliation provisions of the Glass-Steagall Act of 1933, which, taken together, limited the securities and other non-banking activities of any company that controls an FDIC insured financial institution. As a result, the ability of financial institutions to branch across state lines and the ability of these institutions to engage in previously-prohibited activities are now accepted elements of competition in the banking industry. These changes may bring us into competition with more and a wider array of institutions, which may reduce our ability to attract or retain customers. Management cannot predict the extent to which we will face such additional competition or the degree to which such competition will impact our financial conditions or results of operations.

The banking industry is heavily regulated; significant regulatory changes could adversely affect our operations.

Our operations will be impacted by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. The Company is subject to supervision by the Federal Reserve. The Bank is subject to supervision and periodic examination by the Maryland Commissioner and the FDIC. The Insurance Subsidiary is subject to supervision and periodic examination by the Tennessee Insurance Department. Banking regulations, designed primarily for the safety of depositors, and insurance regulations, designed primarily for the safety of insureds, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. The Company and the Bank are also subject to capitalization guidelines established by federal law and the Insurance Subsidiary is subject to capitalization guidelines established by Tennessee law, and could be subject to enforcement actions to the extent that they are found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

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The full impact of the Dodd-Frank Act is unknown because some rule making efforts are still required to fully implement all of its requirements and the implementation of some enforcement efforts is just beginning. We anticipate continued increases in regulatory expenses as a result of the Dodd-Frank Act.

The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and affects the lending, investment, trading and operating activities of all financial institutions. Based on the text of the Dodd-Frank Act and the implementing regulations, it is anticipated that the costs to banks may increase or fee income may decrease significantly, which could adversely affect our results of operations, financial condition and/or liquidity.

The Consumer Financial Protection Bureau may continue to reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact our business operations.

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to adopt rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. The full scope of the impact of this authority has not yet been determined as the CFPB has not yet released significant supervisory guidance. Any new rules adopted by the CFPB could require the Bank to dedicate significant personnel resources and could have a material adverse effect on our operations.

Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock.

The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing common stock. The issuance of additional shares of common stock could dilute existing stockholders.

A material weakness or significant deficiency in our disclosure or internal controls could have an adverse effect on us.

The Corporation is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting. These control systems are intended to provide reasonable assurance that material information relating to the Corporation is made known to our management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. We may not be able to maintain controls and procedures that are effective at the reasonable assurance level. If that were to happen, our ability to provide timely and accurate information about the Corporation, including financial information, to investors could be compromised and our results of operations could be harmed. Moreover, if the Corporation or its independent registered public accounting firm were to identify a material weakness or significant deficiency in any of those control systems, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of the Corporation’s stock to decline and/or limit the trading market for the common stock.

Customer concern about deposit insurance may cause a decrease in deposits held at the Bank.

Due to the large number of bank failures that have occurred since the 2008 recession, banking customers across the country have become increasingly concerned about the extent to which their deposits are insured by the FDIC. This concern could cause the Bank’s customers to withdraw deposits from the Bank in an effort to ensure that the amount they have on deposit with us is fully-insured. Because the Bank relies heavily on deposits to fund loans and purchase other interest-earning assets, a decrease in deposits could have a materially adverse effect on our funding costs and net income.

The Bank’s funding sources may prove insufficient to replace deposits and support our future growth.

The Bank relies on customer deposits, advances from the FHLB, lines of credit at other financial institutions and brokered funds to fund our operations. Although the Bank has historically been able to replace maturing deposits and advances if desired, no assurance can be given that the Bank would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained and/or our cost of funds will increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our profitability would be adversely affected.

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The Bank’s lending activities subject the Bank to the risk of environmental liabilities.

A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

We may be subject to claims and the costs of defensive actions, and such claims and costs could materially and adversely impact our financial condition and results of operations.

Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons. Also, our employees may knowingly or unknowingly violate laws and regulations. Management may not be aware of any violations until after their occurrence. This lack of knowledge may not insulate us from liability. Claims and legal actions will result in legal expenses and could subject us to liabilities that may reduce our profitability and hurt our financial condition.

We may not be able to keep pace with developments in technology.

We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, mobile banking, and debit cards. Technology changes rapidly. Our ability to compete successfully with other financial institutions may depend on whether we can exploit technological changes. We may not be able to exploit technological changes, and any investment we do make may not make us more profitable.

Our information systems may experience an interruption or a breach in security, including due to cyber-attacks.

Our business depends heavily on the use of computer systems, the Internet and other means of electronic communication and recordkeeping. In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. Moreover, we use third party vendors to provide products and services necessary to conduct our day-to-day operations, which exposes us to the risk that these vendors will not perform in accordance with the service arrangements, including by failing to protect the confidential information we entrust to them. The secure processing, maintenance, and use of our and our customers’ information is critical to our operations and business strategy. Any failure, interruption, or breach in security or operational integrity of our communications or operations systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. Although we have invested in various technologies and continually review processes and practices that are designed to protect our networks, computers, and data from damage or unauthorized access, our computer systems and infrastructure, and those of our third-party vendors, may nevertheless be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. Further, cyber-attacks can originate from a variety of sources and the techniques used are increasingly sophisticated. A breach of any kind could compromise our systems and those of our vendors, and the information stored there could be accessed, damaged, or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruptions in operations, increased expenses, loss of customers and business partners, and damage to our reputation, which could in turn adversely affect our business, financial condition and/or results of operations. Furthermore, as cyber threats continue to evolve and increase, we may be required to expend significant additional financial and operational resources to modify or enhance our protective measures, or to investigate and remediate any identified information security vulnerabilities.

We may not achieve the expected benefits from the Insurance Subsidiary.

We formed the Insurance Subsidiary as a captive insurance company in late 2016 to insure or reinsure certain risks faced by the Company and the Bank. The Insurance Subsidiary is part of our enterprise-wide, multi-year insurance strategy that is intended to better position our risk programs and provide us with increased flexibility in the management of our insurance programs as well as contribute to efficiencies relating to our insurance programs over time. We may experience unanticipated events that could reduce or eliminate the benefits, both operational and financial, that we hope to realize through this entity, including, without limitation, significant insurance claims and/or changes in tax laws. In particular, we may not realize the tax benefits of owning a captive insurance company, which are discussed in the section of Item 1 of this annual report entitled “Supervision and Regulation” under the heading “Laws Related to the Insurance Subsidiary”. Although we believe that we have structured the Insurance Subsidiary’s operations to achieve these benefits, no assurance can be given that our efforts were or will be successful. If we are unable to achieve these benefits, then we will likely suspend the operations of the Insurance Subsidiary.

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It should be noted that the operation by financial holding companies of captive insurance companies having a structure similar to the Insurance Subsidiary and FCBI is a relatively new development. Moreover, we have very little experience operating a captive insurance company. If we are not able to successfully manage the Insurance Subsidiary, either due to our lack of experience or otherwise, then our financial condition and/or results of operations could be materially and adversely impacted.

Our fiscal year 2016 U.S. consolidated federal income tax return is currently being audited.

In April 2018, we were notified by the IRS that our fiscal year 2016 U.S. consolidated federal tax return was selected for audit. As part of its audit, the IRS is reviewing the deductions related to, and the income generated by, the Insurance Subsidiary. Management cannot predict whether any of our tax positions, including those relating to the Insurance Subsidiary, will be challenged by the IRS or, if challenged, whether we will be successful in defending those tax positions. If we are not successful in defending a challenge, then we may be required to amend our tax return and pay additional taxes, interest, fines and/or penalties and our taxable earnings and/or the effective tax rate on our future earnings could increase substantially, any of which could have a material adverse effect on our business, financial condition and results of operations. See Note 12 to the consolidated financial statements presented elsewhere in this report for further information about this risk.

The loss of key personnel could disrupt our operations and result in reduced earnings.

Our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel. Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our current executive officers provide valuable services based on their many years of experience and in-depth knowledge of the banking industry and the market areas we serve. Due to the intense competition for financial professionals, these key personnel would be difficult to replace and an unexpected loss of their services could result in a disruption to the continuity of operations and a possible reduction in earnings.

We are a community bank and our ability to maintain our reputation is critical to the success of our business.

We are a community banking institution, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Risks Relating to Ownership of Our Common Stock

Our ability to pay dividends on the common stock is limited by applicable law, and the payment of dividends is at the discretion of our board of directors.

The Bank had a history of paying dividends on its common stock prior to the Reorganization and the Company has continued paying semi-annual dividends since its incorporation in August 2016. Because the Company is not engaged in any direct business activities, the Company expects to fund dividends, if and when declared by the Company’s board of directors, using cash received from the Bank and the Insurance Subsidiary. No assurance can be given that the Bank or the Insurance Subsidiary will be able to pay dividends to the Company for these purposes at times and/or in amounts requested by the Company. Both federal and Maryland laws impose restrictions on the ability of the Bank to pay dividends, and Tennessee law imposes restrictions on the Insurance Subsidiary’s ability to pay dividends. Further information about these limitations is contained in Item 5 of Part II of this annual report under the heading, “Market Price Analysis and Dividends”.

Notwithstanding the foregoing, stockholders must understand that the declaration and payment of dividends and the amounts thereof are at the discretion of the Company’s board of directors. Thus, even at times when the Company could pay cash dividends on its common stock, neither the payment of such dividends nor the amounts thereof can be guaranteed.

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The shares of common stock are not insured.

The shares of our common stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency.

Our common stock is not heavily traded, and the stock price may fluctuate significantly.

Our common stock is not traded on any exchange. Certain brokers currently make a market in the common stock by trading shares in the over-the-counter market, but such transactions are infrequent and the volume of shares traded is relatively small. Management cannot predict whether these or other brokers will continue to make a market in our common stock. Prices on stock that is not heavily traded, such as our common stock, can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, publicity regarding the banking industry, and various other factors affecting the banking industry may have a significant impact on the market price of the shares of our common stock. Management also cannot predict the extent to which an active public market for our common stock will develop or be sustained in the future. Accordingly, stockholders may not be able to sell their shares of our common stock at the volumes, prices, or times that they desire.

The Company’s Articles of Incorporation and Bylaws and Maryland law may discourage a corporate takeover.

The Company’s Articles of Incorporation (the “Charter”) and Bylaws contain certain provisions designed to enhance the ability of the Company’s board of directors to deal with attempts to acquire control of the Company. First, the board of directors is classified into four classes. Directors of each class serve for staggered four-year periods, and no director may be removed except for cause, and then only by the affirmative vote of a majority of the outstanding voting stock. Second, the board has the authority to classify and reclassify unissued shares of stock of any class or series of stock by setting, fixing, eliminating, or altering in any one or more respects the preferences, rights, voting powers, restrictions and qualifications of, dividends on, and redemption, conversion, exchange, and other rights of, such securities. The board could use this authority, along with its authority to authorize the issuance of securities of any class or series, to issue shares having terms favorable to management to a person or persons affiliated with or otherwise friendly to management. In addition, the Bylaws require any stockholder who desires to nominate a director to abide by strict notice requirements.

Maryland law also contains provisions that are intended to, or could have the effect of, discourage a takeover of the Company. The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder. An interested shareholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of a corporation after the date on which that corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of that corporation and was the beneficial owner, directly or indirectly, of 10% percent or more of the voting power of the then outstanding stock of that corporation at any time within the two-year period immediately prior to the date in question and after the date on which that corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of “control shares”, which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of a corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights. Finally, Maryland law prohibits any person, without the prior approval of the Maryland Commissioner, from acquiring stock of a Maryland bank if that acquisition would affect the power to direct or to cause the direction of the management or policy of the bank, and this law provides that any doubt as to whether a stock acquisition will have such effect must be resolved in favor of filing an application with the Maryland Commissioner. Stock acquired in violation of this law cannot be voted for five years.

Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock. Such provisions will also render the removal of the Company’s board of directors and of management more difficult and, therefore, may serve to perpetuate current management. These provisions could potentially adversely affect the market prices of the Company’s securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

This Item 1B is not applicable because the Company is a “smaller reporting company”.

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 ITEM  2. PROPERTIES

The Bank owns properties at which it operates branches at the following locations:

Main Office	Owings Mills Branch
15226 Hanover Pike	9320 Lakeside Boulevard
Upperco, MD 21155	Owings Mills, MD 21117
Reisterstown Branch	Westminster Branch
25 Westminster Pike	275 Clifton Boulevard
Reisterstown, MD 21136	Westminster, MD 21157

The Bank’s book value investment in land and buildings at December 31, 2019 totaled $4.5 million or 1% of total assets. Other than for banking purposes, the Bank does not invest in real estate. For future expansion purposes, the Bank owns two properties adjacent to its main office at 15216 and 15218 Hanover Pike, Upperco, Maryland 21155. The properties presently consist of two lots, each with a single family residence. One property is rented on a month-to-month lease. The other property has not been rented since 2011. The total rental income for both properties for 2019 was $10,200.

There are no encumbrances on any of these properties. Management believes that all of its properties are adequately insured. In 2019, the properties owned by the Bank in Baltimore County, MD were subject to state and county real estate taxes at a combined rate of 1.24% and the property owned by the Bank in Carroll County, MD was subject to state, county and municipal real estate taxes at combined rate of 1.68%. The Bank expensed $75,474 in real estate taxes on these properties in 2019.

The Bank operates under leases at the following properties:

LocationITEM	Square Feet	Current Annual Rent	Lease Expiration
Greenmount In-Store Branch 2205 Hanover Pike Hampstead, MD 21074	709	$54,544	1/31/2023 with option to renew for one consecutive five-year term
Hampstead Branch 735 Hanover Pike Hampstead, MD 21074 (Land lease)	22,000	$53,200	9/30/2024 with option to renew for five consecutive five-year terms
Atrium Branch 4730 Atrium Court Owings Mills, Maryland 21117	120	$1.00	7/31/2020 with seven one-year renewals remaining
Corporate Offices 4510 Lower Beckleysville Road Suite H Hampstead, MD 20174	4,171	$45,356	6/17/2020, with option to renew for four consecutive five-year terms
Carroll Lutheran Village Branch 300 St. Luke Circle Westminster, MD 21158	1,024	$12,000	5/15/2023, with option to renew for two consecutive five-year terms

Note 6 and Note 7 to the consolidated financial statements included elsewhere in this annual report contain additional information about the Bank’s premises and equipment.

ITEM  3. LEGAL PROCEEDINGS

We are at times, in the ordinary course of business, subject to legal actions. Management, upon the advice of counsel, believes that losses, if any, resulting from current legal actions will not have a material adverse effect on our financial condition or results of operations

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Analysis and Dividends

As of February 27, 2020, the shares of the Company’s common stock were held by approximately 477 stockholders. Although many trades occur through privately-negotiated transactions, the shares of the Company’s common stock are traded in the over-the-counter market by certain broker-dealers and price quotations are available through the OTC Markets Group’s OTC Pink Market (the “Pink Market”) under the symbol “FMFG”. Price quotations reported through the Pink Market do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

The Company’s ability to declare and pay dividends is limited by applicable laws. Subject to these laws, the payment of dividends are at the discretion of the Company’s board of directors, who considers such factors as operating results, financial condition, capital adequacy, regulatory requirements, and stockholder return. As a general corporate law matter, Maryland corporation laws prohibit the Company from paying dividends on our capital stock, including the common stock, unless, after giving effect to a proposed dividend, (i) we will be able to pay our debts as they come due in the normal course of business and (ii) our total assets will be greater than our total liabilities plus, unless our Charter permits otherwise, the amount that would be needed, if we were to be dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the dividend. Notwithstanding our inability to pay dividends pursuant to item (ii) above, we may nevertheless pay dividends out of (a) our net earnings for the fiscal year in which the distribution is made, (b) our net earnings for the preceding fiscal year, or (c) the sum of our net earnings for the preceding eight fiscal quarters.

The Company’s ability to pay dividends will be largely dependent on its receipt of dividends from the Bank and/or the Insurance Subsidiary. Like the Company, the Bank’s ability to declare and pay dividends is subject to limitations imposed by federal and Maryland banking and Maryland corporation laws, and the Insurance Subsidiary’s ability to declare and pay dividends is subject to limitations imposed by Tennessee insurance laws.

Federal law prohibits the payment of a dividend by an insured depository institution if the depository institution is considered “undercapitalized” or if the payment of the dividend would make the institution “undercapitalized”. Maryland state-chartered banks may pay dividends only out of undivided profits or, with the prior approval of the Maryland Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, then cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, bank regulatory agencies have the ability to prohibit a proposed dividend by a financial institution that would otherwise be permitted under applicable law if the regulatory body determines that the payment of the dividend would constitute an unsafe or unsound banking practice. A bank that is considered to be a “troubled institution” is prohibited by federal law from paying dividends altogether.

Under Tennessee insurance law, the Insurance Subsidiary must maintain a minimum level of unimpaired paid-in capital and surplus, and it is prohibited from paying a dividend out of, or other distribution with respect to, capital or surplus without the prior approval of the Tennessee Insurance Department.

Equity Compensation Plan Information

Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information regarding the Corporation’s equity compensation plans required by this Item pursuant to Item 201(d) of Regulation S-K is located in Item 12 of Part III of this annual report and is incorporated herein by reference.

24

ITEM 6. SELECTED FINANCIAL DATA

	2019			2018			2017			2016			2015
OPERATING DATA
Interest income	$	18,702,338		$	17,768,333		$	16,594,803		$	15,351,497		$	14,705,401
Interest expense		3,679,953			2,507,241			1,707,240			1,346,120			1,189,646
Net interest income		15,022,385			15,261,092			14,887,563			14,005,377			13,515,755
Provision for loan losses		40,000			475,000			410,000			-			-
Net interest income after provision for loan losses		14,982,385			14,786,092			14,477,563			14,005,377			13,515,755
Noninterest income		1,493,567			1,365,273			1,337,094			1,465,197			1,986,260
Noninterest expense		10,875,814			10,332,480			10,023,102			9,534,625			8,703,588
Income before income taxes		5,600,138			5,818,885			5,791,555			5,935,949			6,798,427
Income taxes		1,039,334			1,106,209			2,002,314			2,026,820			2,530,205
Net income	$	4,560,804		$	4,712,676		$	3,789,241		$	3,909,129		$	4,268,222
PER SHARE DATA
Net income (Basic)	$	1.54		$	1.61		$	1.30		$	1.35		$	1.49
Dividends	$	0.51		$	0.47		$	0.43		$	0.40		$	0.37
Book value	$	16.63		$	15.41		$	14.32		$	13.46		$	12.57
KEY RATIOS
Return on average assets		1.06	%		1.14	%		0.96	%		1.08	%		1.29	%
Return on average equity		9.52	%		10.77	%		9.26	%		10.26	%		12.26	%
Net yield on interest-earning assets		3.67	%		3.88	%		3.96	%		4.13	%		4.33	%
Efficiency ratio		65.85	%		62.15	%		61.78	%		61.63	%		56.14	%
Average equity to average assets		11.10	%		10.60	%		10.32	%		10.56	%		10.50	%
Dividend payout ratio		33.12	%		29.19	%		33.08	%		29.63	%		24.83	%
AT PERIOD END
Total assets	$	442,215,098		$	417,157,877		$	402,904,469		$	379,831,359		$	345,309,996
Gross loans		362,494,703			343,940,842			332,861,406			296,171,072			268,249,402
Cash and cash equivalents		9,121,352			14,618,237			7,237,385			13,312,915			20,192,839
Securities		56,041,792			44,719,058			46,637,573			52,373,567			40,248,651
Deposits		376,613,314			354,713,003			319,796,424			302,715,136			275,964,737
Borrowings		10,958,118			14,012,000			38,768,507			36,226,159			31,490,619
Stockholders' equity		49,453,516			45,394,707			41,798,932			39,012,277			36,223,361
SELECTED AVERAGE BALANCES
Total assets	$	431,595,287		$	412,586,954		$	396,454,271		$	361,005,005		$	331,522,302
Gross loans		344,793,736			343,573,784			316,724,821			281,709,043			269,406,618
Cash and cash equivalents		20,124,328			12,054,442			12,428,778			13,271,319			15,227,040
Securities		53,049,768			44,471,457			51,508,146			50,876,488			31,998,098
Deposits		367,570,825			339,624,630			315,159,559			284,921,811			265,634,314
Borrowings		11,975,017			26,524,352			38,627,588			36,175,989			29,363,070
Stockholders' equity		47,927,778			43,748,434			40,926,674			38,115,746			34,810,159
ASSET QUALITY
Nonperforming assets	$	-		$	1,209,468		$	2,657,702		$	1,166,889		$	1,429,313
Nonperforming assets/total assets		0.00	%		0.29	%		0.66	%		0.31	%		0.41	%
Allowance for loan losses/total loans		0.72	%		0.73	%		0.73	%		0.79	%		0.95	%

25

Farmers and Merchants Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2019 and 2018, which are presented elsewhere in this annual report.

The Company was incorporated on August 8, 2016 for the purpose of becoming the bank holding company of the Bank in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the IRC. This reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company. Although we use the terms “Company”, “we”, “us”, and “our” in this section of the annual report, the discussion and analysis with respect to periods ending prior to November 1, 2016 relate to the operations of the Bank and its consolidated subsidiaries, and the discussion and analysis with respect to periods ending on and after November 1, 2016 relate to the operations of the Company and its consolidated subsidiaries, including the Bank.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industry in which the Company operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements presented elsewhere in the annual report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses.

26

FINANCIAL CONDITION

Total assets were $442,215,098 at December 31, 2019, an increase of $25,057,221, or 6.0%, over the $417,157,877 recorded at December 31, 2018. The increase was due primarily to an increase of $18,482,208 in loans and an increase of $9,939,783 in securities available for sale, offset by a decrease of $5,496,885 in cash and cash equivalents.

Total liabilities were $392,761,582 at December 31, 2019, an increase of $20,998,412, or 5.6%, over the $371,763,170 recorded at December 31, 2018. The increase was due primarily to an increase of $21,900,311 in deposits and an increase of $2,117,258 in other liabilities, offset by decreases of $3,000,000 in Federal Home Loan Bank (“FHLB”) advances. The increase in deposits was comprised of a $23,958,816 increase in interest-bearing accounts, offset by a $2,058,505 decrease in noninterest-bearing accounts.

Stockholders’ equity was $49,453,516 at December 31, 2019 compared to $45,394,707 at December 31, 2018, an increase of $4,058,809. The increase was due primarily to net income for 2019 of $4,560,804 and an increase in the after-tax unrealized gain on available for sale securities of $610,923, offset by dividends paid, net of reinvestments, of $1,021,471.

Loans

Major categories of loans at December 31, 2019, 2018, 2017, 2016, and 2015, are as follows:

	2019				2018				2017				2016				2015
Real estate:
Commercial	$	240,938,149	67	%	$	238,834,149	70	%	$	234,026,574	70	%	$	206,145,076	69	%	$	186,703,868	69	%
Construction/Land development		18,194,955	5	%		18,265,505	5	%		18,160,366	5	%		14,392,992	5	%		12,820,165	5	%
Residential		76,122,069	21	%		63,024,106	18	%		59,241,416	18	%		54,710,809	18	%		51,290,828	19	%
Commercial		26,947,503	7	%		23,323,073	7	%		23,613,543	7	%		22,152,773	8	%		19,562,302	7	%
Consumer		292,027	0	%		494,009	0	%		554,017	0	%		725,269	0	%		886,175	0	%
		362,494,703	100	%		343,940,842	100	%		335,595,916	100	%		298,126,919	100	%		271,263,338	100	%
Less: Allowance for loan losses		2,593,715				2,509,334				2,458,911				2,363,086				2,583,445
Deferred origination fees net of costs		518,145				530,873				603,299				477,261				430,491
	$	359,382,843			$	340,900,635			$	332,533,706			$	295,286,572			$	268,249,402

The Company had no foreign loans for any of the years presented.

Loans increased by $18,482,208, or 5.4%, to $359,382,843 at December 31, 2019 from $340,900,635 at December 31, 2018. The growth was due to increases in commercial real estate loans of $2,104,000, commercial loans of $3,624,430, and residential real estate loans of $13,097,963, offset by decreases in construction/land development loans of $70,550 and consumer loans of $201,982. The allowance for loan losses increased $84,381 to $2,593,715 at December 31, 2019 as compared to $2,509,334 at December 31, 2018.

27

The following table sets forth at December 31, 2019 the maturity and rate repricing distribution of the loan portfolio. Demand loans and overdrafts are reported as due in one year or less. The table does not take into account prepayments or scheduled principal repayment assumptions, which could shorten the average loan life.

	Maturing		Maturing After
	Within One		One Year But		Maturing After
	Year		Within Five Years		Five Years		Total
Real estate:
Commercial	$	24,276,554	$	122,440,313	$	94,221,282	$	240,938,149
Construction/Land development		6,569,860		11,532,904		92,191		18,194,955
Residential		10,893,629		43,869,381		21,359,059		76,122,069
Commercial		11,804,962		6,608,185		8,534,356		26,947,503
Consumer		26,316		229,231		36,480		292,027
	$	53,571,321	$	184,680,014	$	124,243,368	$	362,494,703
Classified by Sensitivity to Change In Interest Rates
Fixed-Interest Rate Loans	$	36,637,288	$	155,832,490	$	83,154,800	$	275,624,578
Adjustable-Interest Rate Loans		16,934,033		28,847,524		41,088,568		86,870,125
	$	53,571,321	$	184,680,014	$	124,243,368	$	362,494,703

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

An age analysis of past due loans, segregated by class of loans, as of year-end, 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
2019
Real estate:
Commercial	$	224,794	$	-	$	-	$	224,794	$	240,713,355	$	240,938,149	$	-
Construction/Land development		-		-		-		-		18,194,955		18,194,955		-
Residential		59,892		-		-		59,892		76,062,177		76,122,069		-
Commercial		-		-		-		-		26,947,503		26,947,503		-
Consumer		-		-		-		-		292,027		292,027		-
Total	$	284,686	$	-	$	-	$	284,686	$	362,210,017	$	362,494,703	$	-

					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
2018
Real estate:
Commercial	$	-	$	-	$	988,811	$	988,811	$	237,845,338	$	238,834,149	$	-
Construction/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

28

					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
2017
Real estate:
Commercial	$	-	$	-	$	2,245,743	$	2,245,743	$	231,780,831	$	234,026,574	$	-
Construction/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

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

					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
2015
Real estate:
Commercial	$	-	$	-	$	-	$	-	$	186,703,868	$	186,703,868	$	-
Construction/Land development		-		-		956,813		956,813		11,863,352		12,820,165		-
Residential		-		-		-		-		51,290,828		51,290,828		-
Commercial		-		-		-		-		19,562,302		19,562,302		-
Consumer		-		-		-		-		886,175		886,175		-
Total	$	-	$	-	$	956,813	$	956,813	$	270,306,525	$	271,263,338	$	-

29

It is the Company’s policy to place a loan in nonaccrual status when any portion of the principal or interest is 90 days past due and collateral is insufficient to discharge the debt in full. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least six months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.

Year-end non-accrual loans, segregated by class of loans, were as follows:

	2019		2018		2017		2016		2015
Non-accrual loans
Commercial real estate	$	-	$	988,811	$	2,245,743	$	-	$	-
Construction/Land development		-		-		-		752,889		956,813
Total non-accrual loans	$	-	$	988,811	$	2,245,743	$	752,889	$	956,813

At December 31, 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 in 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.

At December 31, 2019, the Company had no loans that were delinquent 90 days or greater. At December 31, 2018, the Company had one residential real estate loan totaling $10,507 that was delinquent 90 days or greater in addition to the nonaccrual loans noted above.

Year-end impaired loans are set forth in the following table:

	2019		2018		2017		2016		2015
Impaired loans no valuation allowance	$	2,135,045	$	3,177,381	$	2,937,439	$	2,348,275	$	2,443,681
Impaired loans with a valuation allowance		-		-		2,245,743		994,469		956,813
Total impaired loans	$	2,135,045	$	3,177,381	$	5,183,182	$	3,342,744	$	3,400,494
Valuation allowance related to impaired loans	$	-	$	-	$	127,213	$	24,167	$	167,211

30

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

At December 31, 2019, the Company had one commercial real estate loan totaling $2,084,988 and one residential loan totaling $50,057 classified as TDRs. The $50,057 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.

At December 31, 2018, the Company had one commercial real estate loan totaling $2,134,570 and one residential loan totaling $54,000 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.

	2019		2018		2017		2016		2015
Restructured loans (TDRs):
Performing as agreed	$	2,135,045	$	2,188,570	$	2,937,439	$	2,348,275	$	2,443,681
Not performing as agreed		-		-		-		241,580		-
Total TDRs	$	2,135,045	$	2,188,570	$	2,937,439	$	2,589,855	$	2,443,681

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 any guarantor, and cash flow projections of the borrower. Special mention, Substandard, and Doubtful grades are assigned to loans with a higher frequency of delinquent payments and/or the collateral and/or cash flow are insufficient to support the loan and such loans are included on the Company’s watch list. The Special mention grade is intended to be a temporary grade. During 2018, the Company decided to shorten the time period loans were in the Special mention category and as a result all loans were moved to Substandard. This change did not have an impact on the allowance for loan losses.

	2019		2018		2017		2016		2015
Special mention	$	-	$	-	$	5,391,589	$	8,962,940	$	6,366,296
Substandard		11,399,425		11,448,021		4,625,568		6,399,618		7,843,897
Doubtful		19,192		78,467		2,274,162		29,742		25,525
Total	$	11,418,617	$	11,526,488	$	12,291,319	$	15,392,300	$	14,235,718

31

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

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

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

The following tables detail activity in the allowance for loan losses by portfolio for the years ended December 31, 2019, 2018, 2017, 2016, and 2015. 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:
December 31, 2019	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,754,372	$	(11,700	)	$	-	$	21,189	$	1,763,861	$	-	$	1,763,861	$	2,084,988	$	238,853,161
Construction and land development		196,374		(17,571	)		-		14,025		192,828		-		192,828		-		18,194,955
Residential		401,626		76,498			-		-		478,124		-		478,124		50,057		76,072,012
Commercial		102,610		(3,995	)		-		9,167		107,782		-		107,782		-		26,947,503
Consumer		10,428		(6,295	)		-		-		4,133		-		4,133		-		292,027
Unallocated		43,924		3,063			-		-		46,987		-		46,987		-		-
	$	2,509,334	$	40,000		$	-	$	44,381	$	2,593,715	$	-	$	2,593,715	$	2,135,045	$	360,359,658

													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			-			-		43,924		-		43,924		-		-
	$	2,458,911	$	475,000		$	(702,115	)	$	277,538	$	2,509,334	$	-	$	2,509,334	$	3,177,381	$	340,763,461

32

													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

													Allowance for loan losses				Outstanding loan
			Provision										ending balance evaluated				balances evaluated
	Beginning		for loan			Charge					Ending		for impairment:				for impairment:
December 31, 2016	balance		losses			offs			Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,718,256	$	29,493		$	(30,000	)	$	-	$	1,717,749	$	7,580	$	1,710,169	$	2,425,089	$	203,719,987
Construction and land development		306,982		97,878			(200,000	)		-		204,860		16,587		188,273		752,889		13,640,103
Residential		322,084		(184,773	)		-			110,126		247,437		-		247,437		-		54,710,809
Commercial		132,362		93,383			(100,485	)		-		125,260		-		125,260		164,766		21,988,007
Consumer		7,900		926			-			-		8,826		-		8,826		-		725,269
Unallocated		95,861		(36,907	)		-			-		58,954		-		58,954		-		-
	$	2,583,445	$	-		$	(330,485	)	$	110,126	$	2,363,086	$	24,167	$	2,338,919	$	3,342,744	$	294,784,175

33

													Allowance for loan losses				Outstanding loan
			Provision										ending balance evaluated				balances evaluated
	Beginning		for loan			Charge					Ending		for impairment:				for impairment:
December 31, 2015	balance		losses			offs			Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,848,163	$	(129,907	)	$	-		$	-	$	1,718,256	$	-	$	1,718,256	$	2,240,046	$	184,463,822
Construction and land development		458,211		48,771			(200,000	)		-		306,982		167,211		139,771		956,813		11,863,352
Residential		278,943		42,299			-			842		322,084		-		322,084		-		51,290,828
Commercial		171,104		(41,096	)		-			2,354		132,362		-		132,362		203,635		19,358,667
Consumer		8,215		(315	)		-			-		7,900		-		7,900		-		886,175
Unallocated		15,613		80,248			-			-		95,861		-		95,861		-		-
	$	2,780,249	$	-		$	(200,000	)	$	3,196	$	2,583,445	$	167,211	$	2,416,234	$	3,400,494	$	267,862,844

	2019			2018			2017			2016			2015
Allowance for loan losses to total loans outstanding		0.72	%		0.73	%		0.73	%		0.79	%		0.95	%
Ratio of net charge-offs to average loans oustanding during the period		-0.01	%		0.12	%		0.10	%		0.08	%		0.07	%

The Company recorded $44,381 in net recoveries in 2019 versus $424,577 in net charge-offs in 2018. The provision for loan losses was $40,000 in 2019 and $475,000 in 2018.

Other Real Estate Owned

Other real estate owned (“OREO”) at December 31, 2019 and 2018 included one property with a carrying value of $0 and $210,150, respectively. The property is land in Cecil County, Maryland and was acquired through foreclosure in 2007. The property consists of 10.43 acres and is currently under contract for a gross sales price of $295,000 with closing expected in 2020. Due to the length of time the property has been held, Maryland regulation required a write-down of the value to $0 in 2019.

	2019		2018		2017		2016		2015
Other Real Estate Owned	$	-	$	210,150	$	265,500	$	414,000	$	472,500

Investment Securities

Investment securities increased $11,322,734, or 25.3%, to $56,041,792 at December 31, 2019 from $44,719,058 at December 31, 2018. At December 31, 2019 and 2018, the Company had classified 65% and 59%, respectively, of the investment portfolio as available for sale. The remaining balance of the portfolio was classified as held to maturity.

34

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

The following table sets forth the carrying value of investment securities at December 31:

	2019		2018		2017
Available for sale
State and municipal	$	512,670	$	1,506,505	$	1,539,207
SBA pools		2,151,797		2,719,372		3,199,846
Mortgage-backed securities		33,867,307		22,366,114		23,190,457
	$	36,531,774	$	26,591,991	$	27,929,510
Held to maturity
State and municipal	$	19,510,018	$	18,127,067	$	18,204,182

The following table sets forth the scheduled maturities of investment securities at December 31, 2019:

	Available for Sale					Held to Maturity
	Amortized Cost		Fair Value		Yield	Amortized Cost		Fair Value		Yield
Within 1 year	$	-	$	-	0.00%	$	257,150	$	261,204	3.61%
Over 1 to 5 years		258,134		258,838	2.25%		562,587		565,140	3.17%
Over 5 to 10 years		250,000		253,832	3.10%		2,717,125		2,782,474	3.73%
Over 10 years		-		-	0.00%		15,973,156		16,489,113	3.19%
		508,134		512,670	2.67%		19,510,018		20,097,931	3.27%
SBA Pools		2,203,834		2,151,797	2.71%		-		-	-
Mortgage-backed securities		33,760,999		33,867,307	2.39%		-		-	-
	$	36,472,967	$	36,531,774	2.41%	$	19,510,018	$	20,097,931	3.27%

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

35

Deposits

Total deposits were $376,613,314 at December 31, 2019 compared to $354,713,003 at December 31, 2018, an increase of $21,900,311, or 6.2%. The increase was due to a $13,691,088 increase in time deposits, a $3,934,154 increase in savings accounts, and a $7,005,488 increase in interest bearing checking accounts, offset by a $671,914 decrease in money market accounts and a $2,058,505 decrease in noninterest-bearing accounts. The following table shows the average balances and average costs of deposits for the years ended December 31:

	2019				2018				2017
	Average Balance		Cost		Average Balance		Cost		Average Balance		Cost
Noninterest bearing demand deposits	$	59,374,960	0.00	%	$	61,972,038	0.00	%	$	60,346,388	0.00	%
Interest bearing demand deposits		56,851,471	0.19	%		48,070,664	0.22	%		42,370,867	0.14	%
Savings and money market deposits		101,375,083	0.40	%		97,644,061	0.25	%		104,943,540	0.23	%
Time deposits		149,969,311	2.01	%		131,937,867	1.42	%		107,498,764	1.00	%
	$	367,570,825	0.96	%	$	339,624,630	0.65	%	$	315,159,559	0.44	%

As of December 31, 2019, certificates of deposit of $100,000 or more mature as follows:

Period	Balance
3 months or less	$	18,391,810
Over 3 months to 6 months		13,301,468
Over 6 months to 12 months		13,544,392
Over 12 months		22,711,878
Total	$	67,949,548

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, lines of credit, including home-equity lines and commercial lines, and letters of credit. Loan commitments generally have interest rates at current market values, fixed expiration dates, and may require a fee. Lines of credit generally have variable interest rates and do not necessarily represent future cash flow requirements because it is unlikely that all customers will draw upon their lines in full at any one time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

For commitments to extend credit, lines of credit, and letters of credit, the Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

At December 31, 2019, the Company’s off-balance sheet financial instruments were as follows:

Loan commitments	$	13,755,488
Unused lines of credit	$	25,929,499
Letters of credit	$	1,935,613

Management does not believe that any of the foregoing arrangements are reasonably likely to have a materially adverse effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

36

Borrowings and Other Contractual Obligations

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

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

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

	At December 31,
	2019			2018			2017
Amount oustanding at year-end:
Securities sold under repurchase agreements	$	10,958,118		$	11,012,000		$	21,768,507
Federal Home Loan Bank advances		-			3,000,000			17,000,000
Federal Home Loan Bank advances mature in:
2018	$	-		$	-		$	14,000,000
2019		-			3,000,000			3,000,000
Weighted average rate paid at December 31:
Securites sold under repurchase agreements		1.49	%		1.07	%		0.65	%
Federal Home Loan Bank advances		0.00	%		1.50	%		1.35	%

	For years ended December 31,
	2019			2018			2017
Maximum amount of borrowings outstanding at any month end:
Securities sold under repurchase agreeents	$	10,958,118		$	22,173,010		$	30,786,064
Federal Home Loan Bank advances		6,500,000			19,000,000			18,000,000
Average amount of borrowings oustanding with respect to:
Securities sold under repurchase agreements	$	9,273,092		$	17,479,418		$	24,702,931
Federal Home Loan Bank advances		2,610,959			8,795,890			13,846,575
Borrowings from FRB and commerical banks		90,966			249,044			78,082
Average rate paid for the year:
Securities sold under repurchase agreements		1.24	%		0.83	%		0.66	%
Federal Home Loan Bank advances		1.62	%		1.50	%		1.20	%
Borrowings from FRB and commerical banks		2.91	%		1.93	%		1.64	%

The terms of the Company’s operating leases, including the future minimum payments under those leases, are disclosed in Note 7 to the consolidated financial statements.

37

RESULTS OF OPERATIONS

Overview

The Company reported net income of $4,560,804 for the year ended December 31, 2019 compared to $4,712,676 for the year ended December 31, 2018. The decrease of $151,872 from 2018 was due to a decrease in net interest income of $238,707 and an increase in noninterest expense of $543,334, offset by an increase in noninterest income of $128,294, a decrease in income taxes of $66,875, and a decrease in the provision for loan losses of $435,000.

Net Interest Income

The primary source of income for the Company is net interest income, which is the difference between interest income on interest-earning assets, such as investment securities and loans, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings.

For the year ended December 31, 2019, the Company recorded net interest income of $15,022,385 compared to $15,261,092 for 2018, a decrease of $238,707. The decrease was attributable to a decline in the net yield on interest-earning assets, offset by an increase in the average balance of interest-earning assets. The net average tax equivalent yield on interest earning assets declined 21 basis points to 3.67% in 2019 when compared to the 3.88% recorded in 2018. Average interest earning assets increased $18,028,572 to $414,714,708 in 2019 from $396,686,136 in 2018.

Total interest income for the year ended December 31, 2019 increased by $934,005 to $18,702,338, compared to $17,768,333 for 2018. The increase was due primarily to the aforementioned increase in average interest earning assets and an increase of 4 basis points in the tax equivalent yield on interest earning assets to 4.55% in 2019 from 4.51% in 2018.

Interest income from loans was $16,894,567 in 2019 compared to $16,401,554 in 2018, an increase of $493,103. This increase was attributable to a $1,219,952 increase in the average balance of loans to $344,793,736 in 2019 from $343,573,784 in 2018 and a 13 basis point increase in the average yield on loans to 4.90% in 2019 from 4.77% in 2018.

For the year ended December 31, 2019, the Company recorded interest income on securities of $1,449,841. For the same period of 2018, interest income on securities was $1,181,480. The $268,361 increase in 2019 was attributable to a $8,578,311 increase in the average balance of securities to $53,049,768 in 2019 from $44,471,457 in 2018 and a 10 basis point increase in the average tax equivalent yield on securities to 3.05% in 2019 from 2.95% in 2018.

Interest income on federal funds sold and other interest-earning assets (FHLB stock and certificates of deposit) increased $172,541 to $357,840 in 2019 compared to $185,299 in 2018. The increase was due to a 3 basis point increase in the average tax equivalent yield to 2.21% in 2019 from 2.18% in 2018, and a $8,230,309 increase in the average balance of federal funds sold and other interest-earning assets to $16,871,204 in 2019 from $8,640,895 in 2018.

Total interest expense increased $1,172,712 to $3,679,953 in 2019 compared to $2,507,241 in 2018. The increase was primarily due to an increase of $15,993,938 in the average balance of interest-bearing liabilities to $320,170,882 in 2019 from $304,176,944 in 2018 and a 33 basis point increase in the cost of interest-bearing liabilities to 1.15% in 2019 from 0.82% in 2018.

38

Interest paid on NOW, savings, and money market deposit accounts increased $158,969 to $507,385 in 2019 compared to $348,416 in 2018. The increase was due to a 8 basis point increase in the cost of funds to 0.32% in 2019 from 0.24% in 2018 and a $12,511,829 increase in the average balance of these deposits to $158,226,554 in 2019 from $145,714,725 in 2018.

Interest paid on time deposits increased $1,135,375 to $3,012,575 in 2019 compared to $1,877,200 in 2018. The increase in interest expense was due to an increase of 59 basis points in the average rate paid to 2.01% in 2019 from 1.42% in 2018 and an increase of $18,031,444 in the average balance to $149,969,311 in 2019 from $131,937,867 in 2018.

Interest paid on securities sold under repurchase agreements decreased $30,240 to $114,641 in 2019 compared to $144,881 in 2018. The decrease was attributable to a $8,206,326 decrease in the average balance of securities sold under repurchase agreements to $9,273,092 in 2019 from $17,479,418 in 2018, offset by an increase of 41 basis points in the average rate to 1.24% in 2019 from 0.83% in 2018.

Interest paid on FHLB advances and other borrowings decreased $91,392 to $45,352 in 2019 from $136,744 in 2018. The decrease was attributable to a $6,343,009 decrease in the average balance of FHLB advances and other borrowings to $2,701,925 in 2019 from $9,044,934 in 2018, offset by an increase of 17 basis points in the average rate to 1.68% in 2019 from 1.51% in 2018.

The following table sets forth certain information relating to the Company’s average interest-earning assets and interest-bearing liabilities for the periods indicated. The yields are calculated by dividing interest income or expense by the average daily balance of assets or liabilities, respectively. Non-accruing loans are included in the average balance.

	2019						2018						2017
	Average Balance		Interest		Yield		Average Balance		Interest		Yield		Average Balance		Interest		Yield
Assets:
Loans	$	344,793,736	$	16,894,657	4.90	%	$	343,573,784	$	16,401,554	4.77	%	$	319,825,707	$	15,189,238	4.75	%
Securities, taxable		34,949,183		875,715	2.51	%		26,807,959		617,249	2.30	%		32,115,690		715,689	2.23	%
Securities, tax exempt		18,100,585		740,077	4.09	%		17,663,498		695,282	3.94	%		18,135,837		883,901	4.87	%
Federal funds sold and other interest earning assets		16,871,204		373,678	2.21	%		8,640,895		188,479	2.18	%		6,090,159		99,840	1.64	%
Total interest-earning assets		414,714,708		18,884,127	4.55	%		396,686,136		17,902,564	4.51	%		376,167,393		16,888,668	4.49	%
Noninterest-earning assets		16,880,579						15,900,818						20,286,878
Total assets	$	431,595,287					$	412,586,954					$	396,454,271
Liabilities and Stockholders' Equity:
NOW, savings, and money market	$	158,226,554		507,385	0.32	%	$	145,714,725		348,416	0.24	%	$	147,314,407		299,586	0.20	%
Certificates of deposit		149,969,311		3,012,575	2.01	%		131,937,867		1,877,200	1.42	%		107,498,764		1,078,722	1.00	%
Securities sold under repurchase agreements		9,273,092		114,641	1.24	%		17,479,418		144,881	0.83	%		24,702,931		161,914	0.66	%
FHLB advances and other borrowings		2,701,925		45,352	1.68	%		9,044,934		136,744	1.51	%		13,924,657		167,018	1.20	%
Total interest-bearing deposits		320,170,882		3,679,953	1.15	%		304,176,944		2,507,241	0.82	%		293,440,759		1,707,240	0.58	%
Noninterest-bearing deposits		59,374,960						61,972,038						60,346,388
Noninterest-bearing liabilities		4,121,667						2,689,538						1,740,450
Total liabilities		383,667,509						368,838,520						355,527,597
Stockholders' equity		47,927,778						43,748,434						40,926,674
Total liabilities and stockholders' equity	$	431,595,287					$	412,586,954					$	396,454,271
Net interest income			$	15,204,174					$	15,395,323					$	15,181,428
Interest rate spread					3.40	%					3.69	%					3.91	%
Net yield on interest-earning assets					3.67	%					3.88	%					4.04	%
Ratio of average interest-earning assets to average interest-bearing liabilities					129.53	%					130.41	%					128.19	%

Interest on tax-exempt investments are reported on a fully taxable equivalent basis

39

The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories of the Company's interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes in net interest income attributed to volume (change in volume multiplied by the prior year's interest rate), and (ii) changes in net interest income attributed to rate (change in rate multiplied by the prior year's volume). The change in interest due to the combined rate and volume changes is allocated proportionally to the change in volume and rate.

RATE/VOLUME ANALYSIS
	Year ended December 31, 2019 compared to 2018									Year ended December 31, 2018 compared to 2017
	Change due to variance in									Change due to variance in
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans	$	58,420		$	434,683		$	493,103		$	1,133,307		$	79,009		$	1,212,316
Securities, taxable		200,268			58,198			258,466			(121,552	)		23,112			(98,440	)
Securities, tax exempt		17,465			27,330			44,795			(22,493	)		(166,126	)		(188,619	)
Federal funds sold and other interest-earning assets		182,248			2,951			185,199			49,541			39,098			88,639
Total interest-earning assets		458,401			523,162			981,563			1,038,803			(24,907	)		1,013,896
Interest expense:
NOW, savings, and money market		31,969			127,000			158,969			(3,286	)		52,116			48,830
Certificates of deposit		282,876			852,499			1,135,375			281,349			517,129			798,478
Securities sold under repurchase agreements		(84,353	)		54,113			(30,240	)		(53,923	)		36,890			(17,033	)
FHLB advances and other borrowings		(105,032	)		13,640			(91,392	)		(67,274	)		37,000			(30,274	)
Total interest-bearing liabilities		125,460			1,047,252			1,172,712			156,866			643,135			800,001
Change in net interest income	$	332,941		$	(524,090	)	$	(191,149	)	$	881,937		$	(668,042	)	$	213,895

Noninterest Income

Total noninterest income increased by $128,294, or 9.4%, to $1,493,567 in 2019 from $1,365,273 in 2018. The increase was primarily a result of a $202,965 increase in bank owned life insurance income due to proceeds received from a policy, a $125,943 increase in mortgage banking income due to an increase in volume originated, and a $27,661 increase in the unrealized gain on equity security, offset by a $154,800 increase in the write-down of other real estate owned required by regulation and a $86,491 lower gain on the sale of SBA loans.

Noninterest Expense

Total noninterest expense increased by $543,334, or 5.3%, to $10,875,814 in 2019 from $10,332,480 in 2018. The increase was due primarily to an increase in salary and employee benefit expenses of $316,548, or 4.9%, to $6,824,811 in 2019 compared to $6,508,263 in 2018, an increase in occupancy expenses of $65,724, or 9.3%, and an increase in other expenses of $178,849, or 7.2%. The increase in salaries and benefits was due primarily to merit increases in salaries paid to existing staff, incentives, and higher payroll taxes and benefits. Occupancy increased primarily as a result of the new lease accounting that was implemented in 2019 along with an increase in actual rent paid. The increase in other expenses was due primarily to an increase of $130,774 in insurance claims reserve, an increase of $54,793 in advertising, and an increase in professional fees of $47,945, offset by a decrease of $94,572 in FDIC assessments. Note 11 to the consolidated financial statements provides additional information about the Company’s other expenses.

40

Income Taxes

Income taxes decreased $66,875 to $1,039,334 in 2019 from $1,106,209 in 2018. Lower income before taxes was the primary driver of the decrease.

The Company’s effective tax rate decreased to 18.6% in 2019, from 19.0% in 2018. The decrease was due to higher percentage of tax-exempt revenue. Note 12 to the consolidated financial statements provides additional information about the Company’s taxes, including a reconciliation of the Company’s effective tax rate to the Federal statutory rate of 21%.

INTEREST RATE RISK

The Company’s principal market risk is exposure to the risk that the interest rates associated with our interest-bearing liabilities and interest-earning assets will fluctuate. This risk arises from the Company’s lending, investing and deposit-taking activities, and is affected by many factors, including economic and financial conditions, movements in interest rates and consumer preferences. Interest rate fluctuation has a direct impact on the Company’s net interest income. Net interest income is susceptible to interest rate risk when deposits and other short-term liabilities have different repricing intervals than do loans, investments and other interest-earning assets. When interest-earning assets mature or reprice faster than interest-bearing liabilities, a decline in interest rates may cause a decline in net interest income. Conversely, when interest-bearing liabilities mature or reprice faster than interest-earning assets, an increase in interest rates may cause a decline in net interest income.

The Company recognizes that there are many types of interest rate risk. Management believes that the three types that pose the greatest potential threat to current and long-term earnings are:

• Repricing risk – the difference in the timing of the scheduled maturity and re-pricing dates of assets and liabilities within a certain time frame;

• Option risk – interest rate related options embedded in the Company’s assets and liabilities which change the cash flow characteristics of the assets and liabilities; and

• Yield curve / basis risk – changes in the relationship between different interest rates with the same maturity or interest rates across a maturity spectrum which create compression or expansion of our net interest margin.

The Company uses earnings at risk and economic value at risk measures to quantify our exposure to these types of interest rate risk. We believe that using simulations that measure all three types of risks in combination is a more efficient tool for measurement, and we therefore do not routinely process models to isolate each risk. Rather, we combine the three types of analyses, which we believe provides a better overall result than a simulation based on a single system and a more economical use of resources than targeted models. Following is a description of the analyses to be utilized:

Earnings at Risk

Earnings at Risk (“EAR”) measures exposure to net changes in net interest income (“NII”), and is considered the Company’s best source of managing short-term interest rate risk (one-year and two-year time frames). EAR is a dynamic analysis, which can capture all the different forms of interest rate risk under many different interest rate scenarios, and using various assumptions for growth, optionality, and yield curve structure.

41

Economic Value of Equity

Economic Value of Equity (“EVE”) is management’s primary analytical tool for measuring long-term interest rate risk, and helps to measure if the long-term safety and soundness of the Company is being compromised for the sake of short-term results. However, the Company also recognizes the inherent difficulties of calculating a definitive value for many sections of the balance sheet as well as the weakness that EVE ignores future events (e.g., growth, etc.). These difficulties, coupled with the nature of our core business, allow the Company to adopt wide limits for this measure.

In order to mitigate the impact of changing interest rates, the Board of Directors has established policies and procedures that include acceptable parameters for the relationship between rate sensitive assets to rate sensitive liabilities as measured by earnings at risk and economic value at risk. The Asset/Liability Committee reviews rate sensitivity measures on a quarterly basis. Material deviations from policy parameters are reported to the Board of Directors and corrective action is initiated and monitored.

Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Based upon the simulation analysis performed at December 31, 2019 and 2018, management estimated the following changes in NII, assuming the indicated rate changes:
 

Change in Rate	2019			2018
400 basis point increase	$	(854,000	)	$	(623,000	)
300 basis point increase		(547,000	)		(384,000	)
200 basis point increase		(310,000	)		(204,000	)
100 basis point increase		(136,000	)		(80,000	)
100 basis point decrease		115,000			193,000
200 basis point decrease		74,000			48,000
300 basis point decrease		84,000			(41,000	)

LIQUIDITY MANAGEMENT

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet depositor withdrawal requirements, to fund loans, and to fund our other debts and obligations as they come due in the normal course of business. We maintain our asset liquidity position internally through short-term investments, the maturity distribution of the investment portfolio, loan repayments, and income from earning assets. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed. The Bank is approved to borrow 75% of eligible pledged single family residential loans and 50% of eligible pledged commercial loans as well as investment securities, or approximately $59.1 million under a secured line of credit with the FHLB. The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately $21.2 million. Finally, the Bank has $18,500,000 ($9,500,000 unsecured and $9,000,000 secured) overnight federal funds lines of credit available from commercial banks. FHLB advances of $0 and $3,000,000 were outstanding as of December 31, 2019 and 2018, respectively. There were no borrowings from the Reserve Bank or our commercial bank lenders at December 31, 2019 and 2018. Management believes that we have adequate liquidity sources to meet all anticipated liquidity needs over the next 12 months. Management knows of no trend or event which is likely to have a material impact on our ability to maintain liquidity at satisfactory levels.

Information about the various financial obligations, including contractual obligations and commitments that may require future cash payments, to which we are subject is set forth above under the captions “Off-Balance Sheet Transactions” and “Borrowings and Other Contractual Obligations”.

42

CAPITAL RESOURCES AND ADEQUACY

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

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).

Additional information regarding the capital requirements that apply to us can be found in Note 13 of the consolidated financial statements and notes thereto included in the Annual Report.

The following table presents actual and required capital ratios as of December 31, 2019 and 2018, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2019 and 2018, based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	51,274		13.88	%	$	38,775		10.50	%	$	36,928		10.00	%
Tier 1 capital (to risk-weighted assets)		48,681		13.18	%		31,389		8.50	%		29,543		8.00	%
Common equity tier 1 (to risk-weighted assets)		48,681		13.18	%		25,850		7.00	%		24,003		6.50	%
Tier 1 leverage (to average assets)		48,681		10.94	%		17,798		4.00	%		22,247		5.00	%
December 31, 2018
Total capital (to risk-weighted assets)	$	47,857		13.50	%	$	34,996		9.88	%	$	35,439		10.00	%
Tier 1 capital (to risk-weighted assets)		45,348		12.80	%		27,908		7.88	%		28,351		8.00	%
Common equity tier 1 (to risk-weighted assets)		45,348		12.80	%		22,593		6.38	%		23,036		6.50	%
Tier 1 leverage (to average assets)		45,348		10.86	%		16,698		4.00	%		20,872		5.00	%

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

43

RECENT ACCOUNTING PRONOUNCEMENTS

Management has the responsibility for the selection and use of appropriate accounting policies. The significant accounting policies used by the Company are described in the notes to the consolidated financial statements.

The following accounting guidance has been approved by the Financial Accounting Standards Board (the “FASB”) and would apply to the Company if the Company entered into an applicable activity.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 841).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, 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.

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. ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective Dates” extended the implementation date to 2023 for SEC registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The Company has engaged a third-party vendor to assist in the implementation of this ASU.

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 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.

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

44

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank is a “smaller reporting company” as defined in Exchange Act Rule 12b-2 and, accordingly, is not required to include the information required by this item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Report of Independent Registered Public Accounting Firm	46
Consolidated Balance Sheets at December 31, 2019 and 2018	47
Consolidated Statements of Income for the years ended December 31, 2019 and 2018	48
Consolidated Statement of Comprehensive Income for the years ended December 31, 2019 and 2018	49
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2019 and 2018	50
Consolidated Statement of Cash Flows for the years ended December 31, 2019 and 2018	51
Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018	53

45

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Farmers and Merchants Bancshares, Inc.

Hampstead, Maryland

Opinion on the Financial Statements

      We have audited the accompanying consolidated balance sheets of Farmers and Merchants Bancshares, Inc. (the Company) as of December 31, 2019 and 2018, and the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

      These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on the Company's financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

      We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.

      Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 1997.

Baltimore, Maryland

March 6, 2020

8100 Sandpiper Circle, Suite 308, Baltimore, Maryland  21236

443-725-5395  Fax 443-725-5074

Website:  www.Rowles.com

46

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31,	2019		2018
Assets
Cash and due from banks	$	6,664,307	$	11,480,608
Federal funds sold and other interest-bearing deposits		2,457,045		3,137,629
Cash and cash equivalents		9,121,352		14,618,237
Certificate of deposit in other bank		100,000		100,000
Securities available for sale		36,531,774		26,591,991
Securities held to maturity		19,510,018		18,127,067
Equity security at fair value		532,321		503,827
Federal Home Loan Bank stock, at cost		376,200		575,800
Mortgage loans held for sale		242,000		573,638
Loans, less allowance for loan losses of $2,593,715 and $2,509,334		359,382,843		340,900,635
Premises and equipment		5,036,851		5,075,310
Accrued interest receivable		1,019,540		990,529
Deferred income taxes		1,036,078		1,179,454
Other real estate owned		-		210,150
Bank owned life insurance		7,145,477		7,053,354
Other assets		2,180,644		657,885
	$	442,215,098	$	417,157,877
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing	$	60,659,015	$	62,717,520
Interest-bearing		315,954,299		291,995,483
Total deposits		376,613,314		354,713,003
Securities sold under repurchase agreements		10,958,118		11,012,000
Federal Home Loan Bank of Atlanta advances		-		3,000,000
Accrued interest payable		346,214		311,489
Other liabilities		4,843,936		2,726,678
		392,761,582		371,763,170
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018		29,740		16,830
Additional paid-in capital		27,812,991		27,324,794
Retained earnings		21,568,161		18,621,382
Accumulated other comprehensive income (loss)		42,624		(568,299	)
		49,453,516		45,394,707
	$	442,215,098	$	417,157,877

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

47

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31,	2019			2018
Interest income
Loans, including fees	$	16,894,657		$	16,401,554
Investment securities - taxable		869,457			610,951
Investment securities - tax exempt		580,384			570,529
Federal funds sold and other interest earning assets		357,840			185,299
Total interest income		18,702,338			17,768,333
Interest expense
Deposits		3,519,960			2,225,616
Securities sold under repurchase agreements		114,641			144,881
Federal Home Loan Bank advances and other borrowings		45,352			136,744
Total interest expense		3,679,953			2,507,241
Net interest income		15,022,385			15,261,092
Provision for loan losses		40,000			475,000
Net interest income after provision for loan losses		14,982,385			14,786,092
Noninterest income
Service charges on deposit accounts		663,675			670,653
Mortgage banking income		397,710			271,767
Bank owned life insurance income		364,729			161,764
Unrealized gain (loss) on equity security		16,232			(11,429	)
Write down of other real estate owned		(210,150	)		(55,350	)
Gain on sale of SBA loans		139,535			226,026
Other fees and commissions		121,836			101,842
Total noninterest income		1,493,567			1,365,273
Noninterest expense
Salaries		5,472,609			5,194,871
Employee benefits		1,352,202			1,313,392
Occupancy		771,917			706,193
Furniture and equipment		614,543			632,330
Other		2,664,543			2,485,694
Total noninterest expense		10,875,814			10,332,480
Income before income taxes		5,600,138			5,818,885
Income taxes		1,039,334			1,106,209
Net income	$	4,560,804		$	4,712,676
Earnings per share - basic and diluted	$	1.54		$	1.61

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

48

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31,	2019			2018
Net income	$	4,560,804		$	4,712,676
Other comprehensive income (loss), net of income taxes:
Securities available for sale
Net unrealized gain (loss) arising during the period		842,856			(254,609	)
Income tax (expense) benefit		(231,933	)		70,061
Total other comprehensive loss		610,923			(184,548	)
Total comprehensive income	$	5,171,727		$	4,528,128

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

49

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

					Additional					Accumulated other			Total
	Common stock				paid-in		Retained			comprehensive			stockholders'
	Shares		Par value		capital		earnings			income (loss)			equity
Balance, December 31, 2017		1,667,813	$	16,678	$	26,869,796	$	15,306,625		$	(394,167	)	$	41,798,932
Net income		-		-		-		4,712,676			-			4,712,676
Unrealized loss on securities available for sale net of income tax benefit of $70,061		-		-		-		-			(184,548	)		(184,548	)
Reclassification due to adoption of ASU No. 2016-01		-		-		-		(10,416	)		10,416			-
Shares Issued		50		1		1,549		-			-			1,550
Cash dividends, $0.47 per share		-		-		-		(1,387,503	)		-			(1,387,503	)
Dividends reinvested		15,134		151		453,449		-			-			453,600
Balance, December 31, 2018		1,682,997		16,830		27,324,794		18,621,382			(568,299	)		45,394,707
Net income		-		-		-		4,560,804			-			4,560,804
Unrealized loss on securities available for sale net of income tax expense of $231,933		-		-		-		-			610,923			610,923
Reclassification due to adoption of ASU No. 2016-02		-		-		-		(91,447	)		-			(91,447	)
Cash dividends, $0.51 per share		-		-		-		(1,509,895	)		-			(1,509,895	)
Dividends reinvested		22,705		227		488,197		-			-			488,424
Stock Dividend		1,268,317		12,683		-		(12,683	)		-			-
Balance, December 31, 2019		2,974,019	$	29,740	$	27,812,991	$	21,568,161		$	42,624		$	49,453,516

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

50

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31,	2019			2018
Cash flows from operating activities
Interest received	$	18,648,337		$	17,714,259
Fees and commissions received		1,455,827			1,044,262
Interest paid		(3,645,228	)		(2,376,372	)
Proceeds from sale of mortgage loans held for sale		20,046,955			13,093,197
Origination of mortgage loans held for sale		(19,715,317	)		(13,339,135	)
Cash paid to suppliers and employees		(10,019,091	)		(9,372,508	)
Income taxes paid		(1,055,967	)		(1,399,920	)
Cash provided by operating activities		5,715,516			5,363,783
Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale		8,507,098			4,943,748
Held to maturity		1,101,420			223,000
Purchase of securities
Available for sale		(17,761,884	)		(4,007,664	)
Held to maturity		(2,457,087	)		(122,313	)
Loans made to customers, net of principal collected		(19,952,309	)		(11,427,440	)
Proceeds from sale of SBA loans		1,582,364			2,883,963
Redemption of stock in FHLB of Atlanta		199,600			487,800
Purchases of premises and equipment		(256,561	)		(191,744	)
Cash used by investing activities		(29,037,359	)		(7,210,650	)
Cash flows from financing activities
Net increase (decrease) in Noninterest-bearing deposits		(2,058,505	)		(1,685,613	)
Interest-bearing deposits		23,958,816			36,602,192
Securities sold under repurchase agreements		(53,882	)		(10,756,507	)
Federal Home Loan Bank of Atlanta advances		(3,000,000	)		(14,000,000	)
Dividends paid, net of reinvestments		(1,021,471	)		(933,903	)
Common stock issued		-			1,550
Cash provided by financing activities		17,824,958			9,227,719
Net increase (decrease) in cash and cash equivalents		(5,496,885	)		7,380,852
Cash and cash equivalents at beginning of period		14,618,237			7,237,385
Cash and cash equivalents at end of period	$	9,121,352		$	14,618,237

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

51

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31,	2019			2018
Reconciliation of net income to net cash provided by operating activities
Net income	$	4,560,804		$	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		344,171			380,461
Provision for loan losses		40,000			475,000
Lease expense in excess of rent paid		40,912			-
Write down of other real estate owned		210,150			55,350
Write down of other assets		-			4,500
Equity security dividends reinvested		(12,262	)		(11,375	)
Unrealized (gain) loss on equity security		(16,232	)		11,429
Gain on sale of SBA loans		(139,535	)		(226,026	)
Deferred income taxes		(53,841	)		(111,360	)
Amortization of premiums and accretion of discounts, net		130,575			123,253
Increase (decrease) in
Deferred loan fees		(12,728	)		(72,426	)
Accrued interest payable		34,725			130,869
Other liabilities		557,902			366,692
Decrease (increase) in
Mortgage loans held for sale		331,638			(245,938	)
Accrued interest receivable		(29,011	)		29,727
Bank owned life insurance cash surrender value		(92,123	)		(161,764	)
Other assets		(179,629	)		(97,285	)
Cash provided by operating activities	$	5,715,516		$	5,363,783

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

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

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 is a series investment, 100% owned by the Company, in 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.

Business

The Bank provides banking services to individuals and businesses located in Baltimore County, Maryland, Carroll County, Maryland and surrounding areas of northern Maryland. The Insurance Subsidiary is a captive insurance entity that provides insurance coverage for the Bank. Reliable Community Financial Services, Inc. is licensed to provide a wide range of investment and insurance products to its customers, but is inactive.

Reclassifications

Certain reclassifications have been made to the 2018 financial statements to conform to the current year presentation. These reclassifications had no effect on net income.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, money market funds, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Comprehensive income

Comprehensive income includes net income and the unrealized gains or losses on investment securities available for sale, net of income taxes.

Investment securities

As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost, which is cost adjusted for amortization of premiums and accretion of discounts. Discounts are accreted through maturity. Premiums are amortized through the earliest call date. Securities held to meet liquidity needs or which may be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders' equity on an after-tax basis. Gains and losses on disposal are determined using the specific-identification method. The Company amortizes premiums and accretes discounts using the interest method.

Equity security at fair value

On January 1, 2018, the Company adopted the new accounting standard for financial instruments, which 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. The adoption of this guidance resulted in a $10,416 decrease to retained earnings and a $10,416 increase to accumulated other comprehensive income (loss) during the year ended December 31, 2018.

53

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Federal Home Loan Bank stock

As a member of the Federal Home Loan Bank of Atlanta (the “FHLB”), the Bank is required to purchase FHLB stock in an amount that is based on the Bank’s total assets. Additional stock is purchased and redeemed based on the outstanding FHLB advances to the Bank. The stock is recorded at cost on the balance sheet. 

Loans and allowance for loan losses

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

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

The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined based on probable losses on impaired loans; (ii) historical valuation allowances determined based on historical loan loss experience for impaired loans with similar characteristics; and (iii) adjustments to the historical valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company.

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

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool over the prior eight to twenty quarters. As of December 31, 2019 and 2018, management used a twenty quarter period for the historical loss ratio. The historical loss ratios are updated quarterly based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.

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

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

54

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Mortgage loans held for sale and mortgage banking income

Mortgage loans held for sale are carried at the lower of aggregate cost or fair value based on the current fair value of each outstanding loan. Sales of loans are recorded when the proceeds are received, with any gain or loss recorded in mortgage banking income.

The Company sells its mortgage loans to third party investors servicing released. Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third party investors to put the mortgage loans back to the Company.

Premises and equipment

Land is carried at cost. Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation on buildings and equipment is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful lives of the asset, whichever is shorter.

Other real estate owned

Real estate acquired through foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell on the date acquired. Losses incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated value of the property are included with any gains or losses on sale in noninterest income.

 Bank owned life insurance

The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Revenue recognition

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the standard which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of the standard. The Company’s services that fall within the scope of standard are presented within noninterest revenue and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the standard include service charges on deposits, interchange income, and the sale of other real estate owned. The implementation of the standard had no significant impact on our financial statements.

Operating Leases

On January 1, 2019, the Company adopted FASB ASU 2016-02, “Leases (Topic 842).” 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. 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.

55

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Income taxes

The provision for income taxes includes income taxes payable for the current year and deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. 

Per share data

Earnings per share are determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. In September 2019, the Company’s Board of Directors’ declared a 75% stock dividend that was paid on October 31, 2019. Weighted average shares were 2,952,904 and 2,925,631 for 2019 and 2018, respectively. Diluted earnings per share is derived by dividing net income available by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. No potentially dilutive stock equivalents were outstanding at December 31, 2019 or 2018.

Subsequent events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of December 31, 2019 for items that should potentially be recognized or disclosed in these financial statements as prescribed by FASB Accounting Standards Codification Topic 855, Subsequent Events.

On March 6, 2020, the Company issued a press release in which it announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) with Carroll Bancorp, Inc. (“Carroll”) pursuant to which Carroll will be merged with and into the Company, with the Company as the surviving corporation (the “Merger”) and, as soon as possible thereafter, Carroll Community Bank, a Maryland commercial bank and wholly-owned subsidiary of Carroll (“Carroll Bank”), will be merged with and into the Bank, with the Bank as the surviving insured depository institution (the “Bank Merger”). Based on financial results as of December 31, 2019, the combined company would have pro forma total assets of $620 million, total deposits of $521 million, and total loans of $512 million. The Merger has been unanimously approved by the boards of directors of both companies. The closing of the Merger is subject to various conditions, including approval of the Merger Agreement by Carroll’s stockholders, the companies’ receipt of regulatory approvals, and other customary closing conditions. Currently, the Merger is expected to close in the third quarter of 2020, after all such conditions are met. The Merger Agreement provides that Carroll’s stockholders will receive cash merger consideration in the aggregate amount of $25 million, subject to a dollar-for-dollar reduction if and to the extent that Carroll’s tangible book value prior to the closing does not equal or exceed $18,200,000. Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 contains, under the heading “Risks Relating to Our Pending Merger with Carroll Bancorp, Inc.”, a discussion of the most significant risks relating to the Merger.

56

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Cash and Cash Equivalents

The Company normally carries balances with other banks that exceed the federally insured limit.  The average balance carried in excess of the limit, including unsecured federal funds sold to the same banks, was $8,500,311 and $5,349,977 during the years ended December 31, 2019 and 2018, respectively.

Deposits held in noninterest-bearing transaction accounts are aggregated with any interest-bearing deposits the owner may hold in the same category. The combined total is insured up to $250,000.

Banks are required to carry noninterest-bearing cash reserves of specified percentages of deposit balances. The Company's normal balances of cash on hand and on deposit with other banks are sufficient to satisfy the reserve requirements.

3. Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	cost		gains		losses		value
Available for sale
State and municipal	$	508,134	$	4,536	$	-	$	512,670
SBA pools		2,203,834		-		52,037		2,151,797
Mortgage-backed securities		33,760,999		255,843		149,535		33,867,307
	$	36,472,967	$	260,379	$	201,572	$	36,531,774
Held to maturity
State and municipal	$	19,510,018	$	588,393	$	480	$	20,097,931
December 31, 2018
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

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
December 31, 2019	cost		value		cost		value
Within one year	$	-	$	-	$	257,150	$	261,204
Over one to five years		258,134		258,838		562,587		565,140
Over five to ten years		250,000		253,832		2,717,125		2,782,474
Over ten years		-		-		15,973,156		16,489,113
		508,134		512,670		19,510,018		20,097,931
Mortgage-backed securities and SBA pools, due in monthly installments		35,964,833		36,019,104		-		-
	$	36,472,967	$	36,531,774	$	19,510,018	$	20,097,931
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

57

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Investment Securities (Continued)

Securities with a carrying value of $11,441,474 and $11,706,765 as of December 31, 2019 and 2018, respectively, were pledged as collateral for securities sold under repurchase agreements.

The following table sets forth the Company's gross unrealized losses on a continuous basis for investment securities, by category and length of time.

December 31, 2019	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	$	251,618	$	480	$	-	$	-	$	251,618	$	480
SBA pools		-		-		2,151,797		52,037		2,151,797		52,037
Mortgage-backed securities		10,643,624		58,063		7,295,788		91,472		17,939,412		149,535
Total	$	10,895,242	$	58,543	$	9,447,585	$	143,509	$	20,342,827	$	202,052

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 December 31, 2019, management did not have the intent to sell any of the securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the these factors, as of December 31, 2019, management believes the unrealized losses detailed in the table above are temporary and, accordingly, none of these unrealized losses have been recognized in the Company’s consolidated statement of income.

In 2019 and 2018, the Company had no security sales.

58

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Related Party Transactions

Certain executive officers and directors of the Company, including members of their immediate families and companies in which they are significant owners (more than 10%), were indebted to the Company. The loans were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers who are not related to the Company. During the years ended December 31, 2019 and 2018, the activity of these loans was as follows:

	2019			2018
Balance, beginning of year	$	13,955,097		$	15,577,316
Additions		5,934,975			2,069,000
Amounts collected		(5,338,836	)		(2,669,653	)
Change in related parties		-			(1,021,566	)
Balance, end of year	$	14,551,236		$	13,955,097

Unused lines of credit to related parties totaled $337,000 and $634,724 at December 31, 2019 and 2018, respectively.

Deposits at the Company from related parties totaled $16,237,540 and $14,665,183 at December 31, 2019 and 2018, respectively.

Payments to companies controlled by directors totaled $22,469 in 2019 and $4,144 in 2018.

5. Loans

Major categories of loans at December 31, 2019 and 2018 are as follows:

	2019		2018
Real estate:
Commercial	$	240,938,149	$	238,834,149
Construction and land development		18,194,955		18,265,505
Residential		76,122,069		63,024,106
Commercial		26,947,503		23,323,073
Consumer		292,027		494,009
		362,494,703		343,940,842
Less: Allowance for loan losses		2,593,715		2,509,334
Deferred origination fees net of costs		518,145		530,873
	$	359,382,843	$	340,900,635

The maturity and rate repricing distribution of the loan portfolio as of December 31, 2019 and 2018, is as follows:

	2019		2018
Variable rate, immediately	$	80,832,310	$	65,523,966
Due within one year		42,583,270		42,060,188
Due over one to five years		155,924,323		153,190,636
Due over five years		83,154,800		83,166,052
	$	362,494,703	$	343,940,842

59

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Loans (Continued)

Year-end nonaccrual loans, segregated by class of loans, were as follows:

	2019		2018
Commercial real estate	$	-	$	988,811

At December 31, 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 in 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.

An age analysis of past due loans, segregated by class of loans, as of year-end, 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
December 31, 2019
Real estate:
Commercial	$	224,794	$	-	$	-	$	224,794	$	240,713,355	$	240,938,149	$	-
Construction and land development		-		-		-		-		18,194,955		18,194,955		-
Residential		59,892		-		-		59,892		76,062,177		76,122,069		-
Commercial		-		-		-		-		26,947,503		26,947,503		-
Consumer		-		-		-		-		292,027		292,027		-
Total	$	284,686	$	-	$	-	$	284,686	$	362,210,017	$	362,494,703	$	-
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

Year-end 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
December 31, 2019
Commercial real estate	$	2,084,988	$	2,084,988	$	-	$	2,084,988	$	-	$	2,631,185	$	106,874
Residential real estate		50,057		50,057		-		50,057		-		25,029		2,876
	$	2,135,045	$	2,135,045	$	-	$	2,135,045	$	-	$	2,656,213	$	109,750
December 31, 2018
Commercial real estate	$	3,867,381	$	3,177,381	$	-	$	3,177,381	$	-	$	3,177,381	$	120,193

60

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Loans (Continued)

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. 

At December 31, 2019, the Company had one commercial real estate loan totaling $2,084,988 and one residential loan totaling $50,057 classified as TDRs. The $50,057 loan was restructured as a TDR during 2018. Both 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 loan totaling $54,000 classified as TDRs. The $54,000 loan was restructured as a TDR during 2018. Both 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 Bank's credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. This classification is intended to be temporary while the Bank learns more about the condition of the borrower and the collateral.

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.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Loans (Continued)

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 Bank 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 Bank management.

Doubtful

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

Loans by credit grade, segregated by loan type, at year-end, are as follows:

			Above						Pass		Special
December 31, 2019	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total
Real estate:
Commercial	$	-	$	2,769,944	$	91,274,940	$	110,566,629	$	27,438,005	$	-	$	8,888,631	$	-	$	240,938,149
Construction and land development		-		216,000		4,737,737		8,572,151		4,669,067		-		-		-		18,194,955
Residential		39,817		1,633,783		30,767,418		34,784,120		6,386,377		-		2,510,554		-		76,122,069
Commercial		153,848		20,000		11,682,299		11,995,143		3,096,213		-		-		-		26,947,503
Consumer		2,327		99,385		91,620		60,049		19,214		-		240		19,192		292,027
	$	195,992	$	4,739,112	$	138,554,014	$	165,978,092	$	41,608,876	$	-	$	11,399,425	$	19,192	$	362,494,703

			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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Loans (Continued)

The following tables detail activity in the allowance for loan losses by portfolio for the years ended December 31, 2019 and 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:
December 31, 2019	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,754,372	$	(11,700	)	$	-	$	21,189	$	1,763,861	$	-	$	1,763,861	$	2,084,988	$	238,853,161
Construction and land development		196,374		(17,571	)		-		14,025		192,828		-		192,828		-		18,194,955
Residential		401,626		76,498			-		-		478,124		-		478,124		50,057		76,072,012
Commercial		102,610		(3,995	)		-		9,167		107,782		-		107,782		-		26,947,503
Consumer		10,428		(6,295	)		-		-		4,133		-		4,133		-		292,027
Unallocated		43,924		3,063			-		-		46,987		-		46,987		-		-
	$	2,509,334	$	40,000		$	-	$	44,381	$	2,593,715	$	-	$	2,593,715	$	2,135,045	$	360,359,658

													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			-			-		43,924		-		43,924		-		-
	$	2,458,911	$	475,000		$	(702,115	)	$	277,538	$	2,509,334	$	-	$	2,509,334	$	3,177,381	$	340,763,461

Loans with a balance of approximately $80 million were pledged as collateral to the FHLB as of December 31, 2019. Loans with a balance of approximately $46 million were pledged as collateral to the Federal Reserve Bank of Richmond (the “FRB”) as of December 31, 2019. At December 31, 2019 and 2018, the Company serviced participation loans for others totaling $24.2 and $31.7 million, respectively.

The Company makes loans to customers located primarily in Baltimore County and Carroll County, Maryland and in surrounding areas of northern Maryland. Although the loan portfolio is diversified, many loans are secured by real estate and its performance will be influenced by the economy of the region, including local real estate markets.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Premises and Equipment

A summary of premises and equipment is as follows:

	Useful lives (In years)			2019		2018
Land and improvements		-		$	1,952,998	$	1,952,998
Buildings and improvements	15	-	39		5,659,635		5,659,635
Furniture and equipment	3	-	10		4,053,075		3,796,514
					11,665,708		11,409,147
Accumulated depreciation and amortization					6,628,857		6,333,837
				$	5,036,851	$	5,075,310
Depreciation and amortization expense				$	295,020	$	322,705

Software with a net book value of $47,802 and $73,022 as of December 31, 2019 and 2018, respectively, is included in other assets. Amortization expense of $49,151 and $57,756 was recorded in 2019 and 2018, respectively.

7. Commitments and Contingencies

Lease Commitments

The Company has an operating lease for the land on which the Hampstead branch is located. The initial term of the lease expired on September 30, 2009 and the lease has been renewed for three five year terms with an expiration date of September 30, 2024. The lease has options to renew for five additional consecutive five-year terms. Effective in July 2012, the Company entered into an operating lease for certain facilities where the Greenmount branch is located. The initial term of the lease was for five years and, effective January 2018, the lease has been renewed for one five-year term with an option to renew for an additional five-year term. The Company has an operating lease for its Atrium branch facility with a term of one year and nine one-year renewals. The lease was renewed in 2019 for another year. The Company entered into an operating lease for the corporate headquarters in June 2015. In July 2019, the lease was amended to increase the amount of space. The lease expires in June 2020 with options to renew for four additional consecutive five year terms. In May 2018, the Company entered into a lease for its Carroll Lutheran Village branch with a term of five years and the option to renew for two additional five year terms.

The following table shows operating lease right of use assets and operating lease liabilities as of December 31, 2019:

	Consolidated Balance
	Sheet classification	December 31, 2019
Operating lease right of use asset	Other assets	$	1,392,281
Operating lease liabilities	Other liabilities	$	1,559,356

Operating lease cost included in occupancy expense in the statement of income was $195,039 during 2019 and $138,778 during 2018.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

7. Commitments and Contingencies (continued)

Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2019 are as follows:

Year	Amount
2020	$	165,099
2021		175,784
2022		185,622
2023		191,939
2024		197,586
Thereafter		911,190
Total lease payments		1,827,220
Less imputed interest		(267,864	)
Present value of operating lease liabilities	$	1,559,356

For operating leases as of December 31, 2019, the weighted average remaining lease term is 9.51 years and the weighted average discount rate is 3.25%. During 2019, cash paid for amounts included in the measurement of lease liabilities was $154,127.

Credit Commitments

Outstanding loan commitments, unused lines of credit, and letters of credit as of December 31, were as follows:

	2019		2018
Loan commitments
Construction and land development	$	1,322,275	$	6,800,240
Commercial		4,102,000		1,143,217
Commercial real estate		7,560,714		2,853,913
Residential		770,499		1,557,500
	$	13,755,488	$	12,354,870
Unused lines of credit
Home-equity lines	$	3,700,404	$	3,594,847
Commercial lines		22,229,095		23,389,326
	$	25,929,499	$	26,984,173
Letters of credit	$	1,935,613	$	1,905,553

Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

7. Commitments and Contingencies (continued)

Insurance Reserves

The Insurance Subsidiary insures risks of the Bank (primarily professional liability) that are not available in typical commercially available policies. In addition, the Insurance Subsidiary, as one protected cell of a protected cell captive insurance company (‘CIC”), is responsible for a portion of all claims filed by the other protected cells in the CIC. The Company records liabilities for claims incurred but not reported based on historical loss information and claim emergence patterns. Total liabilities related to Insurance Subsidiary claims at December 31, 2019 and 2018 were $191,951 and $48,618, respectively, and are included in other liabilities in the Consolidated Balance Sheet.

8. Retirement Plans

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or more with six months of service are eligible for participation in the plan. The Company matches employee contributions up to 4% of total compensation and may make additional discretionary contributions. Employee and employer contributions are 100% vested when made. The Company's contributions to this plan were $193,109 and $173,848 for 2019 and 2018, respectively.

The Company has entered into agreements with 12 employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. For this plan, the Company expensed $5,873 and $5,673 in 2019 and 2018, respectively.

The Company adopted supplemental executive retirement plans for three of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses, including interest, of $145,964 and $240,609 in 2019 and 2018, respectively, for these plans.

Retirement plan expenses are included in employee benefits on the Consolidated Statements of Income.

9. Interest-Bearing Deposits

Major classifications of interest-bearing deposits are as follows:

	2019		2018
NOW	$	63,299,218	$	56,293,730
Money market		54,323,501		54,995,415
Savings		47,572,517		43,638,363
Certificates of deposit, $250,000 or more		33,251,181		23,335,007
Other time deposits		117,507,882		113,732,968
	$	315,954,299	$	291,995,483

As of December 31, 2019, certificates of deposit mature as follows:

Year	Amount
2020	$	96,757,612
2021		34,086,443
2022		12,142,807
2023		5,993,296
2024		1,778,905
	$	150,759,063

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Borrowed Funds

Borrowed funds consist of securities sold under repurchase agreements, which represent overnight or term borrowings from customers, advances from the FHLB of Atlanta, the FRB, and overnight borrowings from a commercial bank. The government agency securities that are the collateral for these agreements are owned by the Company and maintained in the custody of an unaffiliated agent designated by the Company. Additional information is as follows:

	2019		2018
Amounts outstanding at year-end:
Securities sold under repurchase agreements	$	10,958,118	$	11,012,000

Federal Home Loan Bank advances are summarized as follows:

Maturity date	Interest Rate	Amount
9/23/2019	1.25%		-		2,000,000
11/22/2019	1.99%		-		1,000,000
	Total	$	-	$	3,000,000

Weighted average rate paid at December 31:
Securities sold under repurchase agreements		1.49	%		1.07	%
Federal Home Loan Bank advances		0.00	%		1.50	%
Maximum month-end amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	10,958,118		$	22,173,010
Federal Home Loan Bank advances		6,500,000			19,000,000
Average amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	9,273,092		$	17,479,418
Federal Home Loan Bank advances		2,610,959			8,795,890
Borrowings from FRB and commercial banks		90,966			249,044
Average rate paid during the year ended December 31:
Securities sold under repurchase agreements		1.24	%		0.83	%
Federal Home Loan Bank advances		1.62	%		1.50	%
Borrowings from FRB and commercial banks		2.91	%		1.93	%
Investment securities underlying the repurchase agreements at December 31:
Carrying value	$	11,441,474		$	11,706,765
Estimated fair value		11,859,595			11,710,458
Loans and investment securities pledged to the Federal Home Loan Bank at December 31:
Carrying value - loans	$	80,432,808		$	63,305,452
Loans pledged to the Federal Reserve Bank at December 31:
Carrying value	$	46,086,041		$	50,682,236

The Company is approved to borrow approximately $59.1 million against eligible pledged single family residential loans, eligible pledged multi-family loans, eligible pledged commercial loans, and eligible pledged securities under a secured line of credit with the FHLB. In addition, the Company has a facility with the FRB whereby the Company can borrow up to $21.2 million. The Company also has available an unsecured federal funds line of credit of $9.5 million and a secured federal funds line of credit of $9 million from commercial banks.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

11. Other Noninterest Expenses

Other noninterest expenses include the following:

	2019		2018
Professional services	$	448,704	$	400,759
Advertising		292,301		237,508
Automated teller machine and debit card expenses		254,792		210,644
Directors fees		212,161		197,116
Telephone		204,486		193,631
Stationery, printing, and supplies		181,823		190,057
Insurance claims		178,500		47,726
Postage, delivery, and armored carrier		154,583		179,677
Internet banking fees		152,750		155,208
Correspondent bank services		128,622		94,763
Travel and conferences		52,152		50,553
Liability insurance		49,447		43,414
Maryland state regulatory assessment		48,794		47,967
Dues and subscriptions		41,261		44,603
Remote deposit expenses		31,278		31,923
Federal Deposit Insurance Corporation premiums		30,571		125,143
Credit reports		29,825		26,860
Payroll preparation		21,406		21,652
Other real estate owned		13,408		42,762
Other		137,679		143,728
	$	2,664,543	$	2,485,694

12. Income Taxes

The components of income tax expense are as follows:

	2019			2018
Current
Federal	$	756,984		$	834,327
State		336,191			383,242
		1,093,175			1,217,569
Deferred		(53,841	)		(111,360	)
	$	1,039,334		$	1,106,209

68

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

12. Income Taxes (Continued)

The components of the deferred tax expense are as follows:

	2019			2018
Depreciation	$	10,501		$	(6,049	)
Provision for loan losses		(11,007	)		287
Other real estate owned allowance for loss		(57,828	)		(15,231	)
Nonaccrual interest		31,691			(8,888	)
Prepaid captive insurance premium		21,373			(9,325	)
Write-down of equity securities		9,767			(4,383	)
Capitol loss carryover		(5,300	)		-
Lease liability, net of right of use asset		(11,258	)		-
Post-retirement benefits		(41,780	)		(67,771	)
	$	(53,841	)	$	(111,360	)

The components of the net deferred tax asset are as follows:

Deferred tax assets
Allowance for loan losses	$	637,848	$	626,841
Other real estate owned allowance for loss		286,182		228,354
Write-down of equity securities		2,864		12,631
Capital loss carryover		5,300		-
Nonaccrual interest		-		31,692
Post-retirement benefits		544,442		502,661
Unrealized loss on securities available for sale		-		215,751
Lease liability, net of right of use asset		45,975		-
		1,522,611		1,617,930
Deferred tax liabilities
Prepaid captive insurance premium		295,039		273,665
Unrealized gain on securities available for sale		16,182		-
Depreciation		175,312		164,811
		486,533		438,476
Net deferred tax asset	$	1,036,078	$	1,179,454

The differences between the federal income tax rate in effect each year and the effective tax rate for the Company are reconciled as follows:

Statutory federal income tax rate	21.0	%	21.0	%
Increase (decrease) resulting from:
Federal tax-exempt income	(7.0	)	(6.5	)
State income taxes, net of federal income tax benefit	4.4		4.7
Nondeductible expenses	0.1		0.1
Other	0.1		(0.3	)
	18.6	%	19.0	%

69

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

12. Income Taxes (Continued)

Included in Federal tax-exempt income is the insurance premium revenue of the Insurance Subsidiary.

Our fiscal year 2016 U.S. consolidated federal tax return is under audit by the IRS. As part of its audit, the IRS is reviewing the deductions related to, and the income generated by, the Insurance Subsidiary. The IRS has not completed its audit and has not communicated its position with respect to our tax treatment of the Insurance Subsidiary. If the IRS were to disagree with our tax treatment of the Insurance Subsidiary and we do not prevail in any challenge to this decision, then we could be required to pay taxes, interest, and penalties totaling approximately $2.1 million as of December 31, 2019. Management believes that it is more than likely that the Company would prevail in any challenge to our tax treatment of the Insurance Subsidiary and, therefore, a reserve for uncertain tax positions has not been recorded.

The Company does not have other material uncertain tax positions and did not recognize any adjustments for unrecognized tax benefits. The Company remains subject to examination of income tax returns for the years ending after December 31, 2015.

13. Capital Standards

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

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

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

Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (1) a Common Equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10%; and (4) a Tier 1 leverage ratio of 5%.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

13. Capital Standards

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

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 December 31, 2019 and 2018, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2019 and 2018, 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.

As of December 31, 2019 the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank's category. Capital ratios of the Company are substantially the same as the Bank’s.

The FDIC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action. The following table presents actual and required capital ratios as of December 31, 2019 and 2018, for the Bank under the Basel III Capital Rules.

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	51,274		13.88	%	$	38,775		10.50	%	$	36,928		10.00	%
Tier 1 capital (to risk-weighted assets)		48,681		13.18	%		31,389		8.50	%		29,543		8.00	%
Common equity tier 1 (to risk-weighted assets)		48,681		13.18	%		25,850		7.00	%		24,003		6.50	%
Tier 1 leverage (to average assets)		48,681		10.94	%		17,798		4.00	%		22,247		5.00	%

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	47,857		13.50	%	$	34,996		9.88	%	$	35,439		10.00	%
Tier 1 capital (to risk-weighted assets)		45,348		12.80	%		27,908		7.88	%		28,351		8.00	%
Common equity tier 1 (to risk-weighted assets)		45,348		12.80	%		22,593		6.38	%		23,036		6.50	%
Tier 1 leverage (to average assets)		45,348		10.86	%		16,698		4.00	%		20,872		5.00	%

71

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Fair Value

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

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

The fair value hierarchy is as follows:

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

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

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

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

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

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

● Other real estate owned (“OREO”): Nonrecurring fair value adjustments to OREO reflect full or partial write-downs that are based on the OREO’s observable market price or current appraised value of the real estate. Since the market for OREO is not active, OREO subjected to nonrecurring fair value adjustments based on the current appraised value of the real estate are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value. State of Maryland regulations require that OREO is written down to $0 after a certain period of time.

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Fair Value (Continued)

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Carrying Value:
	Level 1		Level 2		Level 3		Total
December 31, 2019
Recurring
Available for sale securities
State and municipal	$	-	$	512,670	$	-	$	512,670
SBA pools		-		2,151,797		-		2,151,797
Mortgage-backed securities		-		33,867,307		-		33,867,307
	$	-	$	36,531,774	$	-	$	36,531,774
Equity security at fair value	$	532,321	$	-	$	-	$	532,321
Nonrecurring
Other real estate owned	$	-	$	-	$	-	$	-
Impaired loans		-		-		2,135,045		2,135,045
December 31, 2018
Recurring
Available for sale securities
State and municipal	$	-	$	1,506,505	$	-	$	1,506,505
SBA pools		-		2,719,372		-		2,719,372
Mortgage-backed securities		-		22,366,114		-		22,366,114
	$	-	$	26,591,991	$	-	$	26,591,991
Equity security at fair value	$	503,827	$	-	$	-	$	503,827
Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,177,381		3,177,381

Reconciliation of Level 3 Inputs
	Other Real			Impaired
	Estate Owned			Loans
December 31, 2018 fair value	$	210,150		$	3,177,381
Additions		-			-
Advances		-			-
Write-downs/charge-offs		(210,150	)		-
Recoveries		-			15,299
Loan loss provision		-			(15,299	)
Principal payments received		-			(1,042,336	)
December 31, 2019 fair value	$	-		$	2,135,045

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Fair Value (continued)

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

	December 31, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 2 inputs
Securities held to maturity	$	19,510,018	$	20,097,931	$	18,127,067	$	18,033,093
Mortgage loans held for sale		242,000		245,857		573,638		582,248
Federal Home Loan Bank stock		376,200		376,200		575,800		575,800
Level 3 inputs
Loans, net		359,382,843		359,346,031		340,900,635		337,385,842
Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	60,659,015	$	60,659,015	$	62,717,520	$	62,717,520
Securities sold under repurchase agreements		10,958,118		10,958,118		11,012,000		11,012,000
Level 2 inputs
Interest-bearing deposits		315,954,299		313,622,299		291,995,483		281,761,483
Federal Home Loan Bank advances		-		-		3,000,000		2,971,000

The fair value of mortgage loans held for sale is determined by the expected sales price. Beginning in the first quarter of 2018, the fair value of loans were determined using an exit price methodology as prescribed by FASB Accounting Standards Update 2016-01, which became effective in the first quarter of 2018. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level 3).

In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. 

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

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Parent Company Financial Information

The condensed financial statements for the Company (parent only) are presented below:

Balance Sheets
December 31,	2019		2018
Assets
Cash and cash equivalents	$	64,152	$	64,243
Investment in subsidiaries		49,389,364		45,330,464
	$	49,453,516	$	45,394,707
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	$	29,740	$	16,830
Additional paid-in capital		27,812,991		27,324,794
Retained earnings		21,568,161		18,621,382
Accumulated other comprehensive income		42,624		(568,299	)
		49,453,516		45,394,707
	$	49,453,516	$	45,394,707

Statements of Income
Years Ended December 31,	2019		2018
Income
Cash dividends from subsidiary	$	1,331,917	$	1,541,225
Total income		1,331,917		1,541,225
Noninterest expense		537		492
Income before before income taxes and equity in undistributed income of subsidiaries		1,331,380		1,540,733
Income taxes (benefit)		-		-
Income before before equity in undistributed income of subsidiaries		1,331,380		1,540,733
Equity in undistributed income of subsidiaries		3,229,424		3,171,943
Net Income	$	4,560,804	$	4,712,676

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Parent Company Financial Information (continued)

Statements of Cash Flows
Years Ended December 31,	2019			2018
Cash flows from operating activities
Net Income	$	4,560,804		$	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries		(3,229,424	)		(3,171,943	)
Other		-			7,479
Cash provided by operating activities		1,331,380			1,548,212
Cash flows from investing activities
Contibution of capital to subsdiaries		(310,000	)		(600,000	)
Cash used by investing activities		(310,000	)		(600,000	)
Cash flows from financing activities
Proceeds from sale of common stock		-			1,550
Dividends paid, net of reinvestments		(1,021,471	)		(933,903	)
Cash provided by financing activities		(1,021,471	)		(932,353	)
Net increase (decrease) in cash and cash equivalents		(91	)		15,859
Cash and cash equivalents at beginning of period		64,243			48,384
Cash and cash equivalents at end of period	$	64,152		$	64,243

76

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

16. Quarterly Results of Operations

	Three Months Ended
	Unaudited
2019	December 31		September 30			June 30		March 31
Interest income	$	4,776,334	$	4,719,012		$	4,659,456	$	4,547,536
Interest expense		977,295		956,411			924,864		821,383
Net interest income		3,799,039		3,762,601			3,734,592		3,726,153
Provision for loan losses		40,000		(13,000	)		-		13,000
Net income		1,060,786		1,177,910			1,225,821		1,096,287
Earnings per share - basic and diluted	$	0.36	$	0.40		$	0.42	$	0.37

2018	December 31		September 30			June 30		March 31
Interest income	$	4,599,891	$	4,525,190		$	4,385,506	$	4,257,746
Interest expense		726,549		664,018			580,913		535,761
Net interest income		3,873,342		3,861,172			3,804,593		3,721,985
Provision for loan losses		450,000		(100,000	)		75,000		50,000
Net income		1,136,805		1,308,688			1,145,065		1,122,118
Earnings per share - basic and diluted	$	0.39	$	0.45		$	0.39	$	0.38

17. Litigation

In the ordinary course of its business, the Company is periodically party to various legal actions normally associated with a financial institution. Management does not believe that any of these normal course proceedings are likely to have a material adverse effect on the financial condition or liquidity of the Company.

77

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

An evaluation of the effectiveness of these disclosure controls as of December 31, 2019 was carried out under the supervision and with the participation of the Company’s management, including the PEO and the PFO. Based on that evaluation, the Company’s management, including the PEO and the PFO, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the fourth quarter of 2019, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of December 31, 2019. Management’s report on the Company’s internal control over financial reporting is included on the following page. The Company’s is a “smaller reporting company” as defined by Rule 12b-2 under the Exchange Act and, accordingly, its independent registered public accounting firm is not required to attest to the foregoing management report.

78

Management’s Report on Internal Control Over Financial Reporting

Management of Farmers and Merchants Bank (the “Bank”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The Bank’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, reports on internal control over financial reporting issued by management of “smaller reporting companies”, as defined by Exchange Act Rule 12b-2, are exempt from the auditor attestation requirements imposed by Section 404(b) of the Sarbanes-Oxley Act of 2002. The Bank is a smaller reporting company. Accordingly, this annual report on Form 10-K does not include an attestation report of the Bank’s registered public accounting firm regarding internal control over financial reporting.

The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Bank’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2019 based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2019, the Bank’s internal control over financial reporting is effective.

March 6, 2020

/s/James R. Bosley, Jr.	/s/Mark C. Krebs
James R. Bosley, Jr.	Mark C. Krebs
President & Chief Executive Officer	Executive Vice President & Chief Financial Officer
(Principal Executive Officer)	(Principal Financial Officer)

79

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Company has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. This Code of Ethics is applicable to all directors and employees. A copy of this Codes of Ethics is available on our website, www.fmb1919.bank, and may be accessed by clicking on “Investor Relations”, then “Corporate Overview” and then “Code of Ethics”.

All other information required by this item is incorporated herein by reference to the following sections of the Company’s definitive proxy statement for the 2020 annual meeting of stockholders that was filed with the SEC pursuant to Regulation 14A (the “2020 Proxy Statement”):

● ELECTION OF DIRECTORS (Proposal 1);

● CONTINUING DIRECTORS;

● QUALIFICATIONS FOR DIRECTOR NOMINEES AND CURRENT DIRECTORS;

● EXECUTIVE OFFICERS;

● SECTION 16(a) BENEFICIAL OWNERSHIP AND REPORTING COMPLIANCE; and

● CORPORATE GOVERNANCE (under “Committees of the Board of Directors - Audit Committee”).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections of the 2020 Proxy Statement entitled “DIRECTOR COMPENSATION” and “EXECUTIVE COMPENSATION”.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The Company has not adopted or implemented any equity compensation plans or arrangements.

All other information required by this item is incorporated herein by reference to the section of the 2020 Proxy Statement entitled “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the sections of the 2020 Proxy Statement entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “CORPORATE GOVERNANCE MATTERS” (under “Director Independence”).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section of the 2020 Proxy Statement entitled “AUDIT FEES AND SERVICES”.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1), (2) and (c) Financial Statements.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2019 and 2018

Consolidated Statements of Income for the years ended December 31, 2019 and 2018

Consolidated Statement of Comprehensive Income for the years ended December 31, 2019 and 2018

Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2019 and 2018

Consolidated Statement of Cash Flows for the years ended December 31, 2019 and 2018

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

80

(a)(3) and (b) Exhibits.

The exhibits filed or furnished with this annual report are listed in the following Exhibit Index:

Exhibit Description

2.1 Plan of Reorganization and Share Exchange, dated as of August 15, 2016, by and between Farmers and Merchants Bancshares, Inc. and Farmers and Merchants Bank (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 10)

3.1(i) Articles of Incorporation (incorporated by reference to Exhibit 3.1(i) to the Company’s Registration Statement on Form 10)

3.1(ii) Articles of Share Exchange, dated as of October 20, 2016, by and between Farmers and Merchants Bancshares, Inc. and Farmers and Merchants Bank (incorporated by reference to Exhibit 3.1(ii) to the Company’s Registration Statement on Form 10)

3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10)

10.1 Supplemental Executive Retirement Agreement, dated as of December 30, 2010, between Farmers and Merchants Bank and James R. Bosley, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 10)

10.2 First Amendment to Supplemental Executive Retirement Agreement, dated as of February 22, 2011, between Farmers and Merchants Bank and James R. Bosley, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form 10)

10.3 Supplemental Executive Retirement Agreement, dated as of December 30, 2010, between Farmers and Merchants Bank and Christopher T. Oswald (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form 10)

10.4 First Amendment to Supplemental Executive Retirement Agreement, dated as of February 22, 2011, between Farmers and Merchants Bank and Christopher T. Oswald (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form 10)

10.5 Performance Driven Retirement Plan Agreement, dated as of November 17, 2015, between Farmers and Merchants Bank and Mark C. Krebs (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form 10)

21 Subsidiaries (filed herewith)

23.1 Consent of Independent Registered Public Accounting Firm (filed herewith)

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

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

32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

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

81

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FARMERS AND MERCHANTS BANCSHARES, INC.
Dated: March 6, 2020	By:	/s/ James R. Bosley, Jr.
		James R. Bosley, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

/s/ James R. Bosley, Jr.	/s/ Roger D. Cassell
James R. Bosley, Jr., Director, President and Chief Executive Officer	Roger D. Cassell, Director
(Principal Executive Officer)	March 6, 2020
March 6, 2020
/s/ Steven W. Eline	/s/ Edward A. Halle, Jr.
Steven W. Eline, Director	Edward A. Halle, Jr., Director
March 6, 2020	March 6, 2020
/s/ Ronald W. Hux	/s/ Mark C. Krebs
Ronald W. Hux, Director	Mark C. Krebs, Treasurer and Chief Financial Officer
March 6, 2020	(Principal Financial Officer and Principal Accounting Officer)
	March 6, 2020
/s/ Bruce L. Schindler	/s/ J. Lawrence Mekulski
Bruce L. Schindler, Director	J. Lawrence Mekulski, Director
March 6, 2020	March 6, 2020
/s/ Teresa L. Smack	/s/ John J. Schuster, Jr.
Teresa L. Smack, Director	John J. Schuster, Jr., Director
March 6, 2020	March 6, 2020
/s/ Louna S. Primm	/s/ Paul F. Wooden, Jr.
Louna S. Primm, Director	Paul F. Wooden, Jr., Director
March 6, 2020	March 6, 2020

82

EX-21

Exhibit 21

SUBSIDIARIES

Subsidiaries of Farmers and Merchants Bancshares, Inc.

Farmers and Merchants Bank, a Maryland commercial bank (the “Bank”)

Series Protected Cell FCB-4, a series of First Community Bankers Insurance, Co., LLC, a Tennessee limited liability company.

Subsidiaries of the Bank

Reliable Community Financial Services, Inc., a Maryland corporation

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Farmers and Merchants Bancshares, Inc.

Hampstead, Maryland

We hereby consent to the incorporation by reference in the Registration Statement on Form S-1 (File No. 333-217918) of Farmers and Merchants Bancshares, Inc. of our report dated March 6, 2020 relating to the consolidated balance sheets of Farmers and Merchants Bancshares, Inc. and Subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2019, which appears in the Annual Report on Form 10-K for the year ended December 31, 2019.

/s/ Rowles & Company, LLP

Baltimore, Maryland

March 6, 2020

EX-31.1

Exhibit 31.1

Certifications of the Principal Executive Officer

Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James R. Bosley, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Farmers and Merchants Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     March 6, 2020	/s/ James R. Bosley, Jr.
	James R. Bosley, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certifications of the Principal Financial Officer

Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Mark C. Krebs, certify that:

1. I have reviewed this annual report on Form 10-K of Farmers and Merchants Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     March 6, 2020	/s/ Mark C. Krebs
	Mark C. Krebs, Treasurer and Chief Financial Officer
	(Principal Financial Officer)

EX-32

Exhibit 32

Certification of Periodic Report

Pursuant to 18 U.S.C. § Section 1350

As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to, and for purposes only of, 18 U.S.C. § 1350, each of the undersigned hereby certifies that (i) the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Farmers and Merchants Bancshares, Inc.

Date:     March 6, 2020	/s/ James R. Bosley, Jr.
	James R. Bosley, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

Date:     March 6, 2020	/s/ Mark C. Krebs
	Mark C. Krebs, Treasurer and Chief Financial Officer
	(Principal Financial Officer)

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Note 12 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

	2019			2018
Current
Federal	$	756,984		$	834,327
State		336,191			383,242
		1,093,175			1,217,569
Deferred		(53,841	)		(111,360	)
	$	1,039,334		$	1,106,209

Schedule of Components of Deferred Tax Expense Benefit [Table Text Block]

	2019			2018
Depreciation	$	10,501		$	(6,049	)
Provision for loan losses		(11,007	)		287
Other real estate owned allowance for loss		(57,828	)		(15,231	)
Nonaccrual interest		31,691			(8,888	)
Prepaid captive insurance premium		21,373			(9,325	)
Write-down of equity securities		9,767			(4,383	)
Capitol loss carryover		(5,300	)		-
Lease liability, net of right of use asset		(11,258	)		-
Post-retirement benefits		(41,780	)		(67,771	)
	$	(53,841	)	$	(111,360	)

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

Deferred tax assets
Allowance for loan losses	$	637,848	$	626,841
Other real estate owned allowance for loss		286,182		228,354
Write-down of equity securities		2,864		12,631
Capital loss carryover		5,300		-
Nonaccrual interest		-		31,692
Post-retirement benefits		544,442		502,661
Unrealized loss on securities available for sale		-		215,751
Lease liability, net of right of use asset		45,975		-
		1,522,611		1,617,930
Deferred tax liabilities
Prepaid captive insurance premium		295,039		273,665
Unrealized gain on securities available for sale		16,182		-
Depreciation		175,312		164,811
		486,533		438,476
Net deferred tax asset	$	1,036,078	$	1,179,454

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

Statutory federal income tax rate	21.0	%	21.0	%
Increase (decrease) resulting from:
Federal tax-exempt income	(7.0	)	(6.5	)
State income taxes, net of federal income tax benefit	4.4		4.7
Nondeductible expenses	0.1		0.1
Other	0.1		(0.3	)
	18.6	%	19.0	%

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Note 7 - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Components of Lease Assets and Liabilities [Table Text Block]

	Consolidated Balance
	Sheet classification	December 31, 2019
Operating lease right of use asset	Other assets	$	1,392,281
Operating lease liabilities	Other liabilities	$	1,559,356

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

Year	Amount
2020	$	165,099
2021		175,784
2022		185,622
2023		191,939
2024		197,586
Thereafter		911,190
Total lease payments		1,827,220
Less imputed interest		(267,864	)
Present value of operating lease liabilities	$	1,559,356

Schedule of Credit Commitments [Table Text Block]

	2019		2018
Loan commitments
Construction and land development	$	1,322,275	$	6,800,240
Commercial		4,102,000		1,143,217
Commercial real estate		7,560,714		2,853,913
Residential		770,499		1,557,500
	$	13,755,488	$	12,354,870
Unused lines of credit
Home-equity lines	$	3,700,404	$	3,594,847
Commercial lines		22,229,095		23,389,326
	$	25,929,499	$	26,984,173
Letters of credit	$	1,935,613	$	1,905,553

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Note 16 - Quarterly Results of Operations (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Quarterly Financial Information [Table Text Block]

	Three Months Ended
	Unaudited
2019	December 31		September 30			June 30		March 31
Interest income	$	4,776,334	$	4,719,012		$	4,659,456	$	4,547,536
Interest expense		977,295		956,411			924,864		821,383
Net interest income		3,799,039		3,762,601			3,734,592		3,726,153
Provision for loan losses		40,000		(13,000	)		-		13,000
Net income		1,060,786		1,177,910			1,225,821		1,096,287
Earnings per share - basic and diluted	$	0.36	$	0.40		$	0.42	$	0.37

2018	December 31		September 30			June 30		March 31
Interest income	$	4,599,891	$	4,525,190		$	4,385,506	$	4,257,746
Interest expense		726,549		664,018			580,913		535,761
Net interest income		3,873,342		3,861,172			3,804,593		3,721,985
Provision for loan losses		450,000		(100,000	)		75,000		50,000
Net income		1,136,805		1,308,688			1,145,065		1,122,118
Earnings per share - basic and diluted	$	0.39	$	0.45		$	0.39	$	0.38

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Note 4 - Related Party Transactions

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

4. Related Party Transactions

Certain executive officers and directors of the Company, including members of their immediate families and companies in which they are significant owners (more than

10%

), were indebted to the Company. The loans were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers who are

not

related to the Company. During the years ended

December 31, 2019

and

2018,

the activity of these loans was as follows:

	2019			2018
Balance, beginning of year	$	13,955,097		$	15,577,316
Additions		5,934,975			2,069,000
Amounts collected		(5,338,836	)		(2,669,653	)
Change in related parties		-			(1,021,566	)
Balance, end of year	$	14,551,236		$	13,955,097

Unused lines of credit to related parties totaled

$337,000

and

$634,724

at

December 31, 2019

and

2018,

respectively.

Deposits at the Company from related parties totaled

$16,237,540

and

$14,665,183

at

December 31, 2019

and

2018,

respectively.

Payments to companies controlled by directors totaled

$22,469

in

2019

and

$4,144

in

2018.

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Note 8 - Retirement Plans

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

8. Retirement Plans

The Company has a profit sharing plan qualifying under Section

401

(k) of the Internal Revenue Code. All employees age

21

or more with

six

months of service are eligible for participation in the plan. The Company matches employee contributions up to

4%

of total compensation and

may

make additional discretionary contributions. Employee and employer contributions are

100%

vested when made. The Company's contributions to this plan were

$193,109

and

$173,848

for

2019

and

2018,

respectively.

The Company has entered into agreements with

12

employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. For this plan, the Company expensed

$5,873

and

$5,673

in

2019

and

2018,

respectively.

The Company adopted supplemental executive retirement plans for

three

of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses, including interest, of

$145,964

and

$240,609

in

2019

and

2018,

respectively, for these plans.

Retirement plan expenses are included in employee benefits on the Consolidated Statements of Income.

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Consolidated Balance Sheets (Parentheticals) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Allowance for loan losses	$ 2,593,715	$ 2,509,334
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, share authorized (in shares)	5,000,000	5,000,000
Common stock, share issued (in shares)	2,974,019	1,682,997
Common stock, share outstanding (in shares)	2,974,019	1,682,997

XML

Consolidated Statements of Changes in Stockholders' Equity (Parentheticals) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Unrealized gain (loss) on securities available for sale, tax expense (benefit)	$ (231,933)	$ 70,061
Cash dividends (in dollars per share)	$ 0.51	$ 0.47

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Note 14 - Fair Value - Reconciliation of Level 3 Inputs (Details)	12 Months Ended
	Dec. 31, 2019 USD ($)
Other Real Estate Owned [Member]
Fair value beginning balance	$ 210,150
Additions
Advances
Write-downs/charge-offs	(210,150)
Fair Value Recoveries
Loan loss provision
Principal payments received
Fair value ending balance
Impaired Loans [Member]
Fair value beginning balance	3,177,381
Additions
Advances
Write-downs/charge-offs
Fair Value Recoveries	15,299
Loan loss provision	(15,299)
Principal payments received	(1,042,336)
Fair value ending balance	$ 2,135,045

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Note 13 - Capital Standards (Details Textual)	Dec. 31, 2019	Dec. 31, 2018
Common Equity Tier One Capital Required to be Well Capitalized Ratio	6.50%	6.50%
Tier One Risk Based Capital Required to be Well Capitalized to Risk Weighted Assets	8.00%	8.00%
Capital Required to be Well Capitalized to Risk Weighted Assets	10.00%	10.00%
Tier One Leverage Capital Required to be Well Capitalized to Average Assets	5.00%	5.00%

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Note 16 - Quarterly Results of Operations - Summary of Quarterly Results (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Total income	$ 4,776,334	$ 4,719,012	$ 4,659,456	$ 4,547,536	$ 4,599,891	$ 4,525,190	$ 4,385,506	$ 4,257,746	$ 18,702,338	$ 17,768,333
Interest expense	977,295	956,411	924,864	821,383	726,549	664,018	580,913	535,761	3,679,953	2,507,241
Net interest income	3,799,039	3,762,601	3,734,592	3,726,153	3,873,342	3,861,172	3,804,593	3,721,985	15,022,385	15,261,092
Provision for loan losses	40,000	(13,000)	0	13,000	450,000	(100,000)	75,000	50,000	40,000	475,000
Net Income	$ 1,060,786	$ 1,177,910	$ 1,225,821	$ 1,096,287	$ 1,136,805	$ 1,308,688	$ 1,145,065	$ 1,122,118	$ 4,560,804	$ 4,712,676
Earnings per share - basic and diluted (in dollars per share)	$ 0.36	$ 0.40	$ 0.42	$ 0.37	$ 0.39	$ 0.45	$ 0.39	$ 0.38	$ 1.54	$ 1.61

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Note 7 - Commitments and Contingencies (Details Textual)	1 Months Ended	12 Months Ended
	Jan. 31, 2018	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Jul. 01, 2019	May 31, 2018	Jul. 01, 2012	Sep. 30, 2009
Operating Lease, Cost		$ 195,039	$ 138,778
Operating Lease, Weighted Average Remaining Lease Term		9 years 186 days
Operating Lease, Weighted Average Discount Rate, Percent		3.25%
Operating Lease, Payments		$ 154,127
First Community Bankers Insurance Co., LLC [Member]
Liability for Claims and Claims Adjustment Expense, Ending Balance		$ 191,951	$ 48,618
Operating Lease for Hampstead Branch [Member]
Lessee, Operating Lease, Number of Renewal Terms							3
Lessee, Operating Lease, Renewal Term		5 years					5 years
Lessee, Operating Lease, Additional Renewal Term Number		5
Operating Lease for Certain Facilities of Greenmount Branch [Member]
Lessee, Operating Lease, Renewal Term	5 years
Lessee, Operating Lease, Term of Contract						5 years
Lessee, Operating Lease, Option to Renew, Term of Contract	5 years
Operating Lease for Its Atrium Branch Facility [Member]
Lessee, Operating Lease, Renewal Term		1 year
Lessee, Operating Lease, Term of Contract		1 year
Lessee, Operating Lease, Additional Renewal Term Number		9
Operating Lease for the Corporate Headquarters [Member]
Lessee, Operating Lease, Renewal Term				5 years
Lessee, Operating Lease, Additional Renewal Term Number				4
Lease for Carroll Lutheran Village Branch [Member]
Lessee, Operating Lease, Renewal Term					5 years
Lessee, Operating Lease, Term of Contract					5 years
Lessee, Operating Lease, Additional Renewal Term Number					2

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Note 5 - Loans - Maturity and Rate Repricing Distribution of the Loan Portfolio (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Variable rate, immediately	$ 80,832,310	$ 65,523,966
Due within one year	42,583,270	42,060,188
Due over one to five years	155,924,323	153,190,636
Due over five years	83,154,800	83,166,052
	$ 362,494,703	$ 343,940,842

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Note 5 - Loans - Loans by Credit Grade (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Loans	$ 362,494,703	$ 343,940,842
Excellent [Member]
Loans	195,992	1,016,648
Above Average [Member]
Loans	4,739,112	4,915,980
Average [Member]
Loans	138,554,014	149,320,353
Acceptable [Member]
Loans	165,978,092	149,689,041
Pass [Member]
Loans	41,608,876	27,472,332
Special Mention [Member]
Loans
Substandard [Member]
Loans	11,399,425	11,448,021
Doubtful [Member]
Loans	19,192	78,467
Commercial Real Estate Portfolio Segment [Member]
Loans	240,938,149	238,834,149
Commercial Real Estate Portfolio Segment [Member] | Excellent [Member]
Loans
Commercial Real Estate Portfolio Segment [Member] | Above Average [Member]
Loans	2,769,944	3,632,231
Commercial Real Estate Portfolio Segment [Member] | Average [Member]
Loans	91,274,940	101,633,803
Commercial Real Estate Portfolio Segment [Member] | Acceptable [Member]
Loans	110,566,629	104,454,812
Commercial Real Estate Portfolio Segment [Member] | Pass [Member]
Loans	27,438,005	20,356,642
Commercial Real Estate Portfolio Segment [Member] | Special Mention [Member]
Loans
Commercial Real Estate Portfolio Segment [Member] | Substandard [Member]
Loans	8,888,631	8,756,661
Commercial Real Estate Portfolio Segment [Member] | Doubtful [Member]
Loans
Construction and Land Development [Member]
Loans	18,194,955	18,265,505
Construction and Land Development [Member] | Excellent [Member]
Loans
Construction and Land Development [Member] | Above Average [Member]
Loans	216,000
Construction and Land Development [Member] | Average [Member]
Loans	4,737,737	8,190,212
Construction and Land Development [Member] | Acceptable [Member]
Loans	8,572,151	7,871,642
Construction and Land Development [Member] | Pass [Member]
Loans	4,669,067	2,203,651
Construction and Land Development [Member] | Special Mention [Member]
Loans
Construction and Land Development [Member] | Substandard [Member]
Loans
Construction and Land Development [Member] | Doubtful [Member]
Loans
Residential Portfolio Segment [Member]
Loans	76,122,069	63,024,106
Residential Portfolio Segment [Member] | Excellent [Member]
Loans	39,817	35,926
Residential Portfolio Segment [Member] | Above Average [Member]
Loans	1,633,783	1,178,899
Residential Portfolio Segment [Member] | Average [Member]
Loans	30,767,418	26,856,131
Residential Portfolio Segment [Member] | Acceptable [Member]
Loans	34,784,120	30,169,305
Residential Portfolio Segment [Member] | Pass [Member]
Loans	6,386,377	2,093,825
Residential Portfolio Segment [Member] | Special Mention [Member]
Loans
Residential Portfolio Segment [Member] | Substandard [Member]
Loans	2,510,554	2,690,020
Residential Portfolio Segment [Member] | Doubtful [Member]
Loans
Commercial Portfolio Segment [Member]
Loans	26,947,503	23,323,073
Commercial Portfolio Segment [Member] | Excellent [Member]
Loans	153,848	977,054
Commercial Portfolio Segment [Member] | Above Average [Member]
Loans	20,000	24,180
Commercial Portfolio Segment [Member] | Average [Member]
Loans	11,682,299	12,373,503
Commercial Portfolio Segment [Member] | Acceptable [Member]
Loans	11,995,143	7,130,122
Commercial Portfolio Segment [Member] | Pass [Member]
Loans	3,096,213	2,818,214
Commercial Portfolio Segment [Member] | Special Mention [Member]
Loans
Commercial Portfolio Segment [Member] | Substandard [Member]
Loans
Commercial Portfolio Segment [Member] | Doubtful [Member]
Loans
Consumer Portfolio Segment [Member]
Loans	292,027	494,009
Consumer Portfolio Segment [Member] | Excellent [Member]
Loans	2,327	3,668
Consumer Portfolio Segment [Member] | Above Average [Member]
Loans	99,385	80,670
Consumer Portfolio Segment [Member] | Average [Member]
Loans	91,620	266,704
Consumer Portfolio Segment [Member] | Acceptable [Member]
Loans	60,049	63,160
Consumer Portfolio Segment [Member] | Pass [Member]
Loans	19,214
Consumer Portfolio Segment [Member] | Special Mention [Member]
Loans
Consumer Portfolio Segment [Member] | Substandard [Member]
Loans	240	1,340
Consumer Portfolio Segment [Member] | Doubtful [Member]
Loans	$ 19,192	$ 78,467

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Note 8 - Retirement Plans (Details Textual)	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Number of Employees Covered by Life Insurance Policy	12
Other Postretirement Benefits Cost (Reversal of Cost)	$ 5,873	$ 5,673
Employee Benefits and Share-based Compensation	$ 1,352,202	1,313,392
Supplemental Employee Retirement Plan [Member]
Number of Employees Participating in Plan	3
Employee Benefits and Share-based Compensation	$ 145,964	240,609
Profit Sharing Plan [Member]
Defined Contribution Plan, Employer Matching Contribution, Percent of Match	4.00%
Defined Contribution Plan, Employers Matching Contribution, Annual Vesting Percentage	100.00%
Defined Contribution Plan, Employer Discretionary Contribution Amount	$ 193,109	$ 173,848

XML

Note 10 - Borrowed Funds - Outstanding Advances (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Securities sold under repurchase agreements	$ 10,958,118	$ 11,012,000
Amount		$ 3,000,000
Federal Home Loan Bank advances	0.00%	1.50%
Federal Home Loan Bank advances	$ 6,500,000	$ 19,000,000
Federal Home Loan Bank, Advances, Activity for Year, Average Balance of Agreements Outstanding	$ 2,610,959	$ 8,795,890
Average rate, federal Home Loan Bank advances	1.62%	1.50%
Investment securities underlying the repurchase agreements at year end: Carrying value	$ 11,441,474	$ 11,706,765
Investment securities underlying the repurchase agreements at year end: Estimated fair value	11,859,595	11,710,458
Loans pledged to the Federal Home Loan Bank at year-end: Carrying value - loans	80,432,808	63,305,452
Loans pledged to the Federal Reserve Bank at year-end: Carrying value	$ 46,086,041	$ 50,682,236
Securities Sold under Agreements to Repurchase [Member]
Securities sold under repurchase agreements	1.49%	1.07%
Securities sold under repurchase agreements	$ 10,958,118	$ 22,173,010
Short-term Debt, Average Outstanding Amount	$ 9,273,092	$ 17,479,418
Average rate, securities sold under repurchase agreements	1.24%	0.83%
Borrowings from FRB and Commercial Banks [Member]
Short-term Debt, Average Outstanding Amount	$ 90,966	$ 249,044
Average rate, securities sold under repurchase agreements	2.91%	1.93%
Federal Home Loan Bank Advances at 1.25% Due in 2019 [Member]
Interest Rate	1.25%
Maturity date	Sep. 23, 2019
Amount		$ 2,000,000
Federal Home Loan Bank Advances at 1.99% Due in 2019 [Member]
Interest Rate	1.99%
Maturity date	Nov. 22, 2019
Amount		$ 1,000,000

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Note 3 - Investment Securities - Gross Unrealized Losses on Continuous Basis for Investment Securities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Less than 12 months Fair value	$ 10,895,242	$ 4,474,342
Less than 12 months Unrealized losses	58,543	55,418
12 months or more Fair value	9,447,585	23,787,341
12 months or more Unrealized losses	143,509	982,580
Total Fair value	20,342,827	28,261,683
Total Unrealized losses	202,052	1,037,998
US States and Political Subdivisions Debt Securities [Member]
Less than 12 months Fair value	251,618	3,435,052
Less than 12 months Unrealized losses	480	42,080
12 months or more Fair value		3,740,467
12 months or more Unrealized losses		177,781
Total Fair value	251,618	7,175,519
Total Unrealized losses	480	219,861
SBA Pools [Member]
Less than 12 months Fair value		443,288
Less than 12 months Unrealized losses		6,707
12 months or more Fair value	2,151,797	2,276,084
12 months or more Unrealized losses	52,037	53,332
Total Fair value	2,151,797	2,719,372
Total Unrealized losses	52,037	60,039
Collateralized Mortgage Backed Securities [Member]
Less than 12 months Fair value	10,643,624	596,002
Less than 12 months Unrealized losses	58,063	6,631
12 months or more Fair value	7,295,788	17,770,790
12 months or more Unrealized losses	91,472	751,467
Total Fair value	17,939,412	18,366,792
Total Unrealized losses	$ 149,535	$ 758,098

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Note 2 - Cash and Cash Equivalents (Details Textual) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Cash, Uninsured Amount	$ 8,500,311	$ 5,349,977
Cash, FDIC Insured Amount	$ 250,000

XML

Note 5 - Loans - Major Categories of Loans (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Loans	$ 362,494,703	$ 343,940,842
Allowance for loan losses	2,593,715	2,509,334
Deferred origination fees net of costs	518,145	530,873
	359,382,843	340,900,635
Commercial Real Estate Portfolio Segment [Member]
Loans	240,938,149	238,834,149
Construction and Land Development [Member]
Loans	18,194,955	18,265,505
Residential Portfolio Segment [Member]
Loans	76,122,069	63,024,106
Commercial Portfolio Segment [Member]
Loans	26,947,503	23,323,073
Consumer Portfolio Segment [Member]
Loans	$ 292,027	$ 494,009

XML

Note 4 - Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Related Party Transactions [Table Text Block]

	2019			2018
Balance, beginning of year	$	13,955,097		$	15,577,316
Additions		5,934,975			2,069,000
Amounts collected		(5,338,836	)		(2,669,653	)
Change in related parties		-			(1,021,566	)
Balance, end of year	$	14,551,236		$	13,955,097

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Note 12 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

12. Income Taxes

The components of income tax expense are as follows:

	2019			2018
Current
Federal	$	756,984		$	834,327
State		336,191			383,242
		1,093,175			1,217,569
Deferred		(53,841	)		(111,360	)
	$	1,039,334		$	1,106,209

The components of the deferred tax expense are as follows:

	2019			2018
Depreciation	$	10,501		$	(6,049	)
Provision for loan losses		(11,007	)		287
Other real estate owned allowance for loss		(57,828	)		(15,231	)
Nonaccrual interest		31,691			(8,888	)
Prepaid captive insurance premium		21,373			(9,325	)
Write-down of equity securities		9,767			(4,383	)
Capitol loss carryover		(5,300	)		-
Lease liability, net of right of use asset		(11,258	)		-
Post-retirement benefits		(41,780	)		(67,771	)
	$	(53,841	)	$	(111,360	)

The components of the net deferred tax asset are as follows:

Deferred tax assets
Allowance for loan losses	$	637,848	$	626,841
Other real estate owned allowance for loss		286,182		228,354
Write-down of equity securities		2,864		12,631
Capital loss carryover		5,300		-
Nonaccrual interest		-		31,692
Post-retirement benefits		544,442		502,661
Unrealized loss on securities available for sale		-		215,751
Lease liability, net of right of use asset		45,975		-
		1,522,611		1,617,930
Deferred tax liabilities
Prepaid captive insurance premium		295,039		273,665
Unrealized gain on securities available for sale		16,182		-
Depreciation		175,312		164,811
		486,533		438,476
Net deferred tax asset	$	1,036,078	$	1,179,454

The differences between the federal income tax rate in effect each year and the effective tax rate for the Company are reconciled as follows:

Statutory federal income tax rate	21.0	%	21.0	%
Increase (decrease) resulting from:
Federal tax-exempt income	(7.0	)	(6.5	)
State income taxes, net of federal income tax benefit	4.4		4.7
Nondeductible expenses	0.1		0.1
Other	0.1		(0.3	)
	18.6	%	19.0	%

Included in Federal tax-exempt income is the insurance premium revenue of the Insurance Subsidiary.

Our fiscal year

2016

U.S. consolidated federal tax return is under audit by the IRS. As part of its audit, the IRS is reviewing the deductions related to, and the income generated by, the Insurance Subsidiary. The IRS has

not

completed its audit and has

not

communicated its position with respect to our tax treatment of the Insurance Subsidiary. If the IRS were to disagree with our tax treatment of the Insurance Subsidiary and we do

not

prevail in any challenge to this decision, then we could be required to pay taxes, interest, and penalties totaling approximately

$2.1

million as of

December 31, 2019.

Management believes that it is more than likely that the Company would prevail in any challenge to our tax treatment of the Insurance Subsidiary and, therefore, a reserve for uncertain tax positions has

not

been recorded.

The Company does

not

have other material uncertain tax positions and did

not

recognize any adjustments for unrecognized tax benefits. The Company remains subject to examination of income tax returns for the years ending after

December 31,

2015

.

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Note 16 - Quarterly Results of Operations

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Quarterly Financial Information [Text Block]

16. Quarterly Results of Operations

	Three Months Ended
	Unaudited
2019	December 31		September 30			June 30		March 31
Interest income	$	4,776,334	$	4,719,012		$	4,659,456	$	4,547,536
Interest expense		977,295		956,411			924,864		821,383
Net interest income		3,799,039		3,762,601			3,734,592		3,726,153
Provision for loan losses		40,000		(13,000	)		-		13,000
Net income		1,060,786		1,177,910			1,225,821		1,096,287
Earnings per share - basic and diluted	$	0.36	$	0.40		$	0.42	$	0.37

2018	December 31		September 30			June 30		March 31
Interest income	$	4,599,891	$	4,525,190		$	4,385,506	$	4,257,746
Interest expense		726,549		664,018			580,913		535,761
Net interest income		3,873,342		3,861,172			3,804,593		3,721,985
Provision for loan losses		450,000		(100,000	)		75,000		50,000
Net income		1,136,805		1,308,688			1,145,065		1,122,118
Earnings per share - basic and diluted	$	0.39	$	0.45		$	0.39	$	0.38

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Note 9 - Interest-bearing Deposits - Classification of Interest-Bearing Deposits (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
NOW	$ 63,299,218	$ 56,293,730
Money market	54,323,501	54,995,415
Savings	47,572,517	43,638,363
Certificates of deposit, $250,000 or more	33,251,181	23,335,007
Other time deposits	117,507,882	113,732,968
Interest-bearing Deposit Liabilities	$ 315,954,299	$ 291,995,483

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Note 11 - Other Noninterest Expenses - Summary of Other Noninterest Expense (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Professional services	$ 448,704	$ 400,759
Advertising	292,301	237,508
Automated teller machine and debit card expenses	254,792	210,644
Directors fees	212,161	197,116
Telephone	204,486	193,631
Stationery, printing, and supplies	181,823	190,057
Insurance claims	178,500	47,726
Postage, delivery, and armored carrier	154,583	179,677
Internet banking fees	152,750	155,208
Correspondent bank services	128,622	94,763
Travel and conferences	52,152	50,553
Liability insurance	49,447	43,414
Maryland state regulatory assessment	48,794	47,967
Dues and subscriptions	41,261	44,603
Remote deposit expenses	31,278	31,923
Federal Deposit Insurance Corporation premiums	30,571	125,143
Credit reports	29,825	26,860
Payroll preparation	21,406	21,652
Other real estate owned	13,408	42,762
Other	137,679	143,728
	$ 2,664,543	$ 2,485,694

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Note 5 - Loans (Details Textual)	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Financing Receivable, Number of Loans, Nonaccrual Status	0
Impaired Financing Receivable, Related Allowance
Financing Receivable, Allowance for Credit Loss, Writeoff		$ 702,115
Participating Mortgage Loans, Participation Liabilities, Amount	24,200,000	$ 31,700,000
Federal Home Loan Bank of Atlanta [Member]
Loans Pledged as Collateral	80,000,000
Federal Home Loan Bank of Richmond [Member]
Loans Pledged as Collateral	46,000,000
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Number of Loans, Nonaccrual Status		2
Financing Receivable, Nonaccrual		$ 988,811
Loans and Leases Receivable, Impaired, Interest Lost on Nonaccrual Loans		115,168
Impaired Financing Receivable, Related Allowance
Number of Loans Classified as TDR	1	1
Financing Receivable, Troubled Debt Restructuring	$ 2,084,988	$ 2,134,570
Financing Receivable, Allowance for Credit Loss, Writeoff		690,000
Commercial Real Estate Portfolio Segment [Member] | Nonaccrual Loans [Member]
Impaired Financing Receivable, Related Allowance		0
Allowance for Loan and Lease Losses Write-offs, Net, Total		$ 690,000
Residential Portfolio Segment [Member]
Impaired Financing Receivable, Related Allowance
Number of Loans Classified as TDR	1	1
Financing Receivable, Troubled Debt Restructuring	$ 50,057	$ 54,000
Financing Receivable, Troubled Debt Restructuring, Premodification	50,057	54,000
Financing Receivable, Allowance for Credit Loss, Writeoff
Commercial Real Estate and Residential Loans Classified As TDR [Member]
Financing Receivable, Allowance for Credit Loss, Writeoff	$ 0	$ 0

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Note 3 - Investment Securities - Contractual Maturities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Available for Sale Amortized cost, Within one year		$ 375,000
Available for Sale Fair value, Within one year		375,653
Held to Maturity Amortized cost, Within one year	257,150	1,009,284
Held to Maturity Fair value, Within one year	261,204	1,011,165
Available for Sale Amortized cost, Over one to five years	258,134	260,587
Available for Sale Fair value, Over one to five years	258,838	249,920
Held to Maturity Amortized cost, Over one to five years	562,587	590,522
Held to Maturity Fair value, Over one to five years	565,140	598,528
Available for Sale Amortized cost, Over five to ten years	250,000	870,424
Available for Sale Fair value, Over five to ten years	253,832	880,932
Held to Maturity Amortized cost, Over five to ten years	2,717,125	1,858,695
Held to Maturity Fair value, Over five to ten years	2,782,474	1,876,364
Available for Sale Amortized cost, Over ten years
Available for Sale Fair value, Over ten years
Held to Maturity Amortized cost, Over ten years	15,973,156	14,668,566
Held to Maturity Fair value, Over ten years	16,489,113	14,547,036
Available for Sale Amortized cost, total maturity	508,134	1,506,011
Available for Sale Fair value, total maturity	512,670	1,506,505
Held to Maturity Amortized cost, total maturity	19,510,018	18,127,067
Held to Maturity Fair value, total maturity	20,097,931	18,033,093
Available for Sale Amortized cost, due in monthly installments	35,964,833	25,870,029
Available for Sale Fair value, due in monthly installments	36,019,104	25,085,486
Held to Maturity Amortized cost, due in monthly installments
Held to Maturity Fair value, due in monthly installments
Available for Sale Amortized cost Total	36,472,967	27,376,040
Available for Sale Fair value Total	36,531,774	26,591,991
Held to Maturity Amortized cost Total	19,510,018	18,127,067
Held to Maturity Fair value Total	$ 20,097,931	$ 18,033,093

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Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($)			12 Months Ended
	Mar. 04, 2020	Sep. 16, 2019	Dec. 31, 2019	Dec. 31, 2018	Jan. 01, 2019
Deferred Income Tax Assets, Net, Total			$ 1,036,078	$ 1,179,454
Stock Dividends, Percent		75.00%
Dividends Payable, Date to be Paid		Oct. 31, 2019
Weighted Average Number of Shares Outstanding, Basic, Total			2,952,904	2,925,631
Subsequent Event [Member] | Carroll Bancorp, Inc.[Member]
Business Acquisition, Pro Forma Total Assets	$ 512,000,000
Business Combination, Consideration Transferred, Total	25,000,000
Business Combination, Contingent Consideration Arrangements, Range of Outcomes, Value, High	$ 18,200,000
Accounting Standards Update 2016-01 [Member]
Reclassification Due to Adoption of ASU
Accounting Standards Update 2016-02 [Member]
Reclassification Due to Adoption of ASU			$ (91,447)
Operating Lease, Right-of-Use Asset					$ 1,400,855
Operating Lease, Liability, Total					1,527,019
Deferred Income Tax Assets, Net, Total					34,717
Retained Earnings [Member] | Accounting Standards Update 2016-01 [Member]
Reclassification Due to Adoption of ASU				(10,416)
Retained Earnings [Member] | Accounting Standards Update 2016-02 [Member]
Reclassification Due to Adoption of ASU			(91,447)
Cumulative Effect of New Accounting Principle in Period of Adoption					$ 91,447
AOCI Attributable to Parent [Member] | Accounting Standards Update 2016-01 [Member]
Reclassification Due to Adoption of ASU				$ 10,416
AOCI Attributable to Parent [Member] | Accounting Standards Update 2016-02 [Member]
Reclassification Due to Adoption of ASU
First Community Bankers Insurance Co., LLC [Member]
Percentage of Ownership			100.00%

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Note 13 - Capital Standards

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

13. Capital Standards

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

The Basel III Capital Rules became effective for the Bank on

January 

1,

2015

(subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier

1

capital, Tier

1

capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier

1

capital to adjusted quarterly average assets (as defined).

In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier

1

capital. Common Equity Tier

1

capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (

1

) a Common Equity Tier

1

risk-based capital ratio of

6.5%;

(

2

) a Tier

1

risk-based capital ratio of

8%;

(

3

) a total risk-based capital ratio of

10%;

and (

4

) a Tier

1

leverage ratio of

5%.

The implementation of the capital conservation buffer began on

January 

1,

2016,

at the

0.625%

level and was phased in over a

four

-year period (increasing by that amount on each subsequent

January 

1,

until it reached

2.5%

on

January 

1,

2019

). The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does

not

have current applicability to the Bank.

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

December 

31,

2019

and

2018,

for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of

December 

31,

2019

and

2018,

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.

As of

December 

31,

2019

the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. There have been

no

conditions or events since that notification that management believes have changed the Bank's category. Capital ratios of the Company are substantially the same as the Bank’s.

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

December 

31,

2019

and

2018,

for the Bank under the Basel III Capital Rules.

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	51,274		13.88	%	$	38,775		10.50	%	$	36,928		10.00	%
Tier 1 capital (to risk-weighted assets)		48,681		13.18	%		31,389		8.50	%		29,543		8.00	%
Common equity tier 1 (to risk-weighted assets)		48,681		13.18	%		25,850		7.00	%		24,003		6.50	%
Tier 1 leverage (to average assets)		48,681		10.94	%		17,798		4.00	%		22,247		5.00	%

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	47,857		13.50	%	$	34,996		9.88	%	$	35,439		10.00	%
Tier 1 capital (to risk-weighted assets)		45,348		12.80	%		27,908		7.88	%		28,351		8.00	%
Common equity tier 1 (to risk-weighted assets)		45,348		12.80	%		22,593		6.38	%		23,036		6.50	%
Tier 1 leverage (to average assets)		45,348		10.86	%		16,698		4.00	%		20,872		5.00	%

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Note 17 - Litigation

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Legal Matters and Contingencies [Text Block]

17. Litigation

In the ordinary course of its business, the Company is periodically party to various legal actions normally associated with a financial institution. Management does

not

believe that any of these normal course proceedings are likely to have a material adverse effect on the financial condition or liquidity of the Company.

XML

Note 5 - Loans (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

	2019		2018
Real estate:
Commercial	$	240,938,149	$	238,834,149
Construction and land development		18,194,955		18,265,505
Residential		76,122,069		63,024,106
Commercial		26,947,503		23,323,073
Consumer		292,027		494,009
		362,494,703		343,940,842
Less: Allowance for loan losses		2,593,715		2,509,334
Deferred origination fees net of costs		518,145		530,873
	$	359,382,843	$	340,900,635

Maturity and Rate Repricing Distribution of the Loans and Leases Receivable [Table Text Block]

	2019		2018
Variable rate, immediately	$	80,832,310	$	65,523,966
Due within one year		42,583,270		42,060,188
Due over one to five years		155,924,323		153,190,636
Due over five years		83,154,800		83,166,052
	$	362,494,703	$	343,940,842

Financing Receivable, Nonaccrual [Table Text Block]

	2019		2018
Commercial real estate	$	-	$	988,811

Financing Receivable, Past Due [Table Text Block]

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
December 31, 2019
Real estate:
Commercial	$	224,794	$	-	$	-	$	224,794	$	240,713,355	$	240,938,149	$	-
Construction and land development		-		-		-		-		18,194,955		18,194,955		-
Residential		59,892		-		-		59,892		76,062,177		76,122,069		-
Commercial		-		-		-		-		26,947,503		26,947,503		-
Consumer		-		-		-		-		292,027		292,027		-
Total	$	284,686	$	-	$	-	$	284,686	$	362,210,017	$	362,494,703	$	-
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 Financing Receivables [Table Text Block]

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded		Interest
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
December 31, 2019
Commercial real estate	$	2,084,988	$	2,084,988	$	-	$	2,084,988	$	-	$	2,631,185	$	106,874
Residential real estate		50,057		50,057		-		50,057		-		25,029		2,876
	$	2,135,045	$	2,135,045	$	-	$	2,135,045	$	-	$	2,656,213	$	109,750
December 31, 2018
Commercial real estate	$	3,867,381	$	3,177,381	$	-	$	3,177,381	$	-	$	3,177,381	$	120,193

Financing Receivable Credit Quality Indicators [Table Text Block]

			Above						Pass		Special
December 31, 2019	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total
Real estate:
Commercial	$	-	$	2,769,944	$	91,274,940	$	110,566,629	$	27,438,005	$	-	$	8,888,631	$	-	$	240,938,149
Construction and land development		-		216,000		4,737,737		8,572,151		4,669,067		-		-		-		18,194,955
Residential		39,817		1,633,783		30,767,418		34,784,120		6,386,377		-		2,510,554		-		76,122,069
Commercial		153,848		20,000		11,682,299		11,995,143		3,096,213		-		-		-		26,947,503
Consumer		2,327		99,385		91,620		60,049		19,214		-		240		19,192		292,027
	$	195,992	$	4,739,112	$	138,554,014	$	165,978,092	$	41,608,876	$	-	$	11,399,425	$	19,192	$	362,494,703

			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

Financing Receivable, Allowance for Credit Loss [Table Text Block]

												Allowance for loan losses				Outstanding loan
			Provision									ending balance evaluated				balances evaluated
	Beginning		for loan			Charge				Ending		for impairment:				for impairment:
December 31, 2019	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,754,372	$	(11,700	)	$	-	$	21,189	$	1,763,861	$	-	$	1,763,861	$	2,084,988	$	238,853,161
Construction and land development		196,374		(17,571	)		-		14,025		192,828		-		192,828		-		18,194,955
Residential		401,626		76,498			-		-		478,124		-		478,124		50,057		76,072,012
Commercial		102,610		(3,995	)		-		9,167		107,782		-		107,782		-		26,947,503
Consumer		10,428		(6,295	)		-		-		4,133		-		4,133		-		292,027
Unallocated		43,924		3,063			-		-		46,987		-		46,987		-		-
	$	2,509,334	$	40,000		$	-	$	44,381	$	2,593,715	$	-	$	2,593,715	$	2,135,045	$	360,359,658

													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			-			-		43,924		-		43,924		-		-
	$	2,458,911	$	475,000		$	(702,115	)	$	277,538	$	2,509,334	$	-	$	2,509,334	$	3,177,381	$	340,763,461

XML

Note 15 - Parent Company Financial Information (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Condensed Balance Sheet [Table Text Block]

Balance Sheets
December 31,	2019		2018
Assets
Cash and cash equivalents	$	64,152	$	64,243
Investment in subsidiaries		49,389,364		45,330,464
	$	49,453,516	$	45,394,707
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	$	29,740	$	16,830
Additional paid-in capital		27,812,991		27,324,794
Retained earnings		21,568,161		18,621,382
Accumulated other comprehensive income		42,624		(568,299	)
		49,453,516		45,394,707
	$	49,453,516	$	45,394,707

Condensed Income Statement [Table Text Block]

Statements of Income
Years Ended December 31,	2019		2018
Income
Cash dividends from subsidiary	$	1,331,917	$	1,541,225
Total income		1,331,917		1,541,225
Noninterest expense		537		492
Income before before income taxes and equity in undistributed income of subsidiaries		1,331,380		1,540,733
Income taxes (benefit)		-		-
Income before before equity in undistributed income of subsidiaries		1,331,380		1,540,733
Equity in undistributed income of subsidiaries		3,229,424		3,171,943
Net Income	$	4,560,804	$	4,712,676

Condensed Cash Flow Statement [Table Text Block]

Statements of Cash Flows
Years Ended December 31,	2019			2018
Cash flows from operating activities
Net Income	$	4,560,804		$	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries		(3,229,424	)		(3,171,943	)
Other		-			7,479
Cash provided by operating activities		1,331,380			1,548,212
Cash flows from investing activities
Contibution of capital to subsdiaries		(310,000	)		(600,000	)
Cash used by investing activities		(310,000	)		(600,000	)
Cash flows from financing activities
Proceeds from sale of common stock		-			1,550
Dividends paid, net of reinvestments		(1,021,471	)		(933,903	)
Cash provided by financing activities		(1,021,471	)		(932,353	)
Net increase (decrease) in cash and cash equivalents		(91	)		15,859
Cash and cash equivalents at beginning of period		64,243			48,384
Cash and cash equivalents at end of period	$	64,152		$	64,243

XML

Note 11 - Other Noninterest Expenses (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Other Nonoperating Income (Expense) [Table Text Block]

	2019		2018
Professional services	$	448,704	$	400,759
Advertising		292,301		237,508
Automated teller machine and debit card expenses		254,792		210,644
Directors fees		212,161		197,116
Telephone		204,486		193,631
Stationery, printing, and supplies		181,823		190,057
Insurance claims		178,500		47,726
Postage, delivery, and armored carrier		154,583		179,677
Internet banking fees		152,750		155,208
Correspondent bank services		128,622		94,763
Travel and conferences		52,152		50,553
Liability insurance		49,447		43,414
Maryland state regulatory assessment		48,794		47,967
Dues and subscriptions		41,261		44,603
Remote deposit expenses		31,278		31,923
Federal Deposit Insurance Corporation premiums		30,571		125,143
Credit reports		29,825		26,860
Payroll preparation		21,406		21,652
Other real estate owned		13,408		42,762
Other		137,679		143,728
	$	2,664,543	$	2,485,694

XML

Note 6 - Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Property, Plant and Equipment [Table Text Block]

	Useful lives (In years)			2019		2018
Land and improvements		-		$	1,952,998	$	1,952,998
Buildings and improvements	15	-	39		5,659,635		5,659,635
Furniture and equipment	3	-	10		4,053,075		3,796,514
					11,665,708		11,409,147
Accumulated depreciation and amortization					6,628,857		6,333,837
				$	5,036,851	$	5,075,310
Depreciation and amortization expense				$	295,020	$	322,705

XML

Note 5 - Loans

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

5. Loans

Major categories of loans at

December 31, 2019

and

2018

are as follows:

	2019		2018
Real estate:
Commercial	$	240,938,149	$	238,834,149
Construction and land development		18,194,955		18,265,505
Residential		76,122,069		63,024,106
Commercial		26,947,503		23,323,073
Consumer		292,027		494,009
		362,494,703		343,940,842
Less: Allowance for loan losses		2,593,715		2,509,334
Deferred origination fees net of costs		518,145		530,873
	$	359,382,843	$	340,900,635

The maturity and rate repricing distribution of the loan portfolio as of

December 31, 2019

and

2018,

is as follows:

	2019		2018
Variable rate, immediately	$	80,832,310	$	65,523,966
Due within one year		42,583,270		42,060,188
Due over one to five years		155,924,323		153,190,636
Due over five years		83,154,800		83,166,052
	$	362,494,703	$	343,940,842

Year-end nonaccrual loans, segregated by class of loans, were as follows:

	2019		2018
Commercial real estate	$	-	$	988,811

At

December 31, 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 in

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.

An age analysis of past due loans, segregated by class of loans, as of year-end, 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
December 31, 2019
Real estate:
Commercial	$	224,794	$	-	$	-	$	224,794	$	240,713,355	$	240,938,149	$	-
Construction and land development		-		-		-		-		18,194,955		18,194,955		-
Residential		59,892		-		-		59,892		76,062,177		76,122,069		-
Commercial		-		-		-		-		26,947,503		26,947,503		-
Consumer		-		-		-		-		292,027		292,027		-
Total	$	284,686	$	-	$	-	$	284,686	$	362,210,017	$	362,494,703	$	-
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

Year-end 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
December 31, 2019
Commercial real estate	$	2,084,988	$	2,084,988	$	-	$	2,084,988	$	-	$	2,631,185	$	106,874
Residential real estate		50,057		50,057		-		50,057		-		25,029		2,876
	$	2,135,045	$	2,135,045	$	-	$	2,135,045	$	-	$	2,656,213	$	109,750
December 31, 2018
Commercial real estate	$	3,867,381	$	3,177,381	$	-	$	3,177,381	$	-	$	3,177,381	$	120,193

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. 

At

December 31, 2019,

the Company had

one

commercial real estate loan totaling

$2,084,988

and

one

residential loan totaling

$50,057

classified as TDRs. The

$50,057

loan was restructured as a TDR during

2018.

Both 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 loan totaling

$54,000

classified as TDRs. The

$54,000

loan was restructured as a TDR during

2018.

Both 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 Bank's credit position at some future date. Special mention loans are

not

adversely classified and do

not

expose the Bank to sufficient risk to warrant adverse classification. This classification is intended to be temporary while the Bank learns more about the condition of the borrower and the collateral.

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 Bank 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 Bank management.

Doubtful

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

Loans by credit grade, segregated by loan type, at year-end, are as follows:

			Above						Pass		Special
December 31, 2019	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total
Real estate:
Commercial	$	-	$	2,769,944	$	91,274,940	$	110,566,629	$	27,438,005	$	-	$	8,888,631	$	-	$	240,938,149
Construction and land development		-		216,000		4,737,737		8,572,151		4,669,067		-		-		-		18,194,955
Residential		39,817		1,633,783		30,767,418		34,784,120		6,386,377		-		2,510,554		-		76,122,069
Commercial		153,848		20,000		11,682,299		11,995,143		3,096,213		-		-		-		26,947,503
Consumer		2,327		99,385		91,620		60,049		19,214		-		240		19,192		292,027
	$	195,992	$	4,739,112	$	138,554,014	$	165,978,092	$	41,608,876	$	-	$	11,399,425	$	19,192	$	362,494,703

			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 following tables detail activity in the allowance for loan losses by portfolio for the years ended

December 31, 2019

and

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:
December 31, 2019	balance		losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively
Real estate:
Commercial	$	1,754,372	$	(11,700	)	$	-	$	21,189	$	1,763,861	$	-	$	1,763,861	$	2,084,988	$	238,853,161
Construction and land development		196,374		(17,571	)		-		14,025		192,828		-		192,828		-		18,194,955
Residential		401,626		76,498			-		-		478,124		-		478,124		50,057		76,072,012
Commercial		102,610		(3,995	)		-		9,167		107,782		-		107,782		-		26,947,503
Consumer		10,428		(6,295	)		-		-		4,133		-		4,133		-		292,027
Unallocated		43,924		3,063			-		-		46,987		-		46,987		-		-
	$	2,509,334	$	40,000		$	-	$	44,381	$	2,593,715	$	-	$	2,593,715	$	2,135,045	$	360,359,658

													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			-			-		43,924		-		43,924		-		-
	$	2,458,911	$	475,000		$	(702,115	)	$	277,538	$	2,509,334	$	-	$	2,509,334	$	3,177,381	$	340,763,461

Loans with a balance of approximately

$80

million were pledged as collateral to the FHLB as of

December 31, 2019.

Loans with a balance of approximately

$46

million were pledged as collateral to the Federal Reserve Bank of Richmond (the “FRB”) as of

December 31, 2019.

At

December 31, 2019

and

2018,

the Company serviced participation loans for others totaling

$24.2

and

$31.7

million, respectively.

The Company makes loans to customers located primarily in Baltimore County and Carroll County, Maryland and in surrounding areas of northern Maryland. Although the loan portfolio is diversified, many loans are secured by real estate and its performance will be influenced by the economy of the region, including local real estate markets.

XML

Note 9 - Interest-bearing Deposits

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Deposit Liabilities Disclosures [Text Block]

9. Interest-Bearing Deposits

Major classifications of interest-bearing deposits are as follows:

	2019		2018
NOW	$	63,299,218	$	56,293,730
Money market		54,323,501		54,995,415
Savings		47,572,517		43,638,363
Certificates of deposit, $250,000 or more		33,251,181		23,335,007
Other time deposits		117,507,882		113,732,968
	$	315,954,299	$	291,995,483

As of

December 31, 2019,

certificates of deposit mature as follows:

Year	Amount
2020	$	96,757,612
2021		34,086,443
2022		12,142,807
2023		5,993,296
2024		1,778,905
	$	150,759,063

XML

Note 14 - Fair Value - Summarizes Financial Assets Measured at Fair Value (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Fair value, available for sale	$ 36,531,774	$ 26,591,991
Equity security at fair value	532,321	503,827
Fair Value, Recurring [Member]
Fair value, available for sale	36,531,774	26,591,991
Equity security at fair value	532,321	503,827
Fair Value, Nonrecurring [Member]
Other real estate owned		210,150
Impaired loans	2,135,045	3,177,381
Fair Value, Inputs, Level 1 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
Equity security at fair value	532,321	503,827
Fair Value, Inputs, Level 1 [Member] | Fair Value, Nonrecurring [Member]
Other real estate owned
Impaired loans
Fair Value, Inputs, Level 2 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	36,531,774	26,591,991
Equity security at fair value
Fair Value, Inputs, Level 2 [Member] | Fair Value, Nonrecurring [Member]
Other real estate owned
Impaired loans
Fair Value, Inputs, Level 3 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
Equity security at fair value
Fair Value, Inputs, Level 3 [Member] | Fair Value, Nonrecurring [Member]
Other real estate owned		210,150
Impaired loans	2,135,045	3,177,381
US States and Political Subdivisions Debt Securities [Member]
Fair value, available for sale	512,670	1,506,505
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	512,670	1,506,505
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	512,670	1,506,505
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
SBA Pools [Member]
Fair value, available for sale	2,151,797	2,719,372
SBA Pools [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	2,151,797	2,719,372
SBA Pools [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
SBA Pools [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	2,151,797	2,719,372
SBA Pools [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
Collateralized Mortgage Backed Securities [Member]
Fair value, available for sale	33,867,307	22,366,114
Collateralized Mortgage Backed Securities [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	33,867,307	22,366,114
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale	33,867,307	22,366,114
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Recurring [Member]
Fair value, available for sale

XML

Note 12 - Income Taxes - Reconciliation of Effective Income Tax Rate (Details)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Statutory federal income tax rate	21.00%	21.00%
Federal tax-exempt income	(7.00%)	(6.50%)
State income taxes, net of federal income tax benefit	4.40%	4.70%
Nondeductible expenses	0.10%	0.10%
Other	0.10%	(0.30%)
	18.60%	19.00%

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Note 15 - Parent Company Financial Information - Statements of Cash Flows (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Cash flows from operating activities
Net Income	$ 1,060,786	$ 1,177,910	$ 1,225,821	$ 1,096,287	$ 1,136,805	$ 1,308,688	$ 1,145,065	$ 1,122,118	$ 4,560,804	$ 4,712,676
Adjustments to reconcile net income to net cash provided by operating activities
Cash provided by operating activities									5,715,516	5,363,783
Cash flows from investing activities
Cash used by investing activities									(29,037,359)	(7,210,650)
Cash flows from financing activities
Proceeds from sale of common stock										1,550
Dividends paid, net of reinvestments									(1,021,471)	(933,903)
Cash provided by financing activities									17,824,958	9,227,719
Net increase (decrease) in cash and cash equivalents									(5,496,885)	7,380,852
Cash and cash equivalents at beginning of period				14,618,237				7,237,385	14,618,237	7,237,385
Cash and cash equivalents at end of period	9,121,352				14,618,237				9,121,352	14,618,237
Parent Company [Member]
Cash flows from operating activities
Net Income									4,560,804	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries									(3,229,424)	(3,171,943)
Other										7,479
Cash provided by operating activities									1,331,380	1,548,212
Cash flows from investing activities
Contibution of capital to subsdiaries									(310,000)	(600,000)
Cash used by investing activities									(310,000)	(600,000)
Cash flows from financing activities
Dividends paid, net of reinvestments									(1,021,471)	(933,903)
Cash provided by financing activities									(1,021,471)	(932,353)
Net increase (decrease) in cash and cash equivalents									(91)	15,859
Cash and cash equivalents at beginning of period				$ 64,243				$ 48,384	64,243	48,384
Cash and cash equivalents at end of period	$ 64,152				$ 64,243				$ 64,152	$ 64,243

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Consolidated Balance Sheets - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Assets:
Cash and due from banks	$ 6,664,307	$ 11,480,608
Federal funds sold and other interest-bearing deposits	2,457,045	3,137,629
Cash and cash equivalents	9,121,352	14,618,237
Certificate of deposit in other bank	100,000	100,000
Securities available for sale	36,531,774	26,591,991
Securities held to maturity	19,510,018	18,127,067
Equity security at fair value	532,321	503,827
Federal Home Loan Bank stock, at cost	376,200	575,800
Mortgage loans held for sale	242,000	573,638
Loans, less allowance for loan losses of $2,593,715 and $2,509,334	359,382,843	340,900,635
Premises and equipment	5,036,851	5,075,310
Accrued interest receivable	1,019,540	990,529
Deferred income taxes	1,036,078	1,179,454
Other real estate owned		210,150
Bank owned life insurance	7,145,477	7,053,354
Other assets	2,180,644	657,885
	442,215,098	417,157,877
Deposits:
Noninterest-bearing	60,659,015	62,717,520
Interest-bearing	315,954,299	291,995,483
Total deposits	376,613,314	354,713,003
Securities sold under repurchase agreements	10,958,118	11,012,000
Federal Home Loan Bank of Atlanta advances		3,000,000
Accrued interest payable	346,214	311,489
Other liabilities	4,843,936	2,726,678
	392,761,582	371,763,170
Stockholders' equity:
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	29,740	16,830
Additional paid-in capital	27,812,991	27,324,794
Retained earnings	21,568,161	18,621,382
Accumulated other comprehensive income (loss)	42,624	(568,299)
	49,453,516	45,394,707
	$ 442,215,098	$ 417,157,877

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Consolidated Statements of Changes in Stockholders' Equity - USD ($)	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance (in shares) at Dec. 31, 2017	1,667,813
Balance at Dec. 31, 2017	$ 16,678	$ 26,869,796	$ 15,306,625	$ (394,167)	$ 41,798,932
Net income			4,712,676		4,712,676
Unrealized gain (loss) on securities available for sale net of income tax expense (benefit)				(184,548)	(184,548)
Reclassification due to adoption of ASU | Accounting Standards Update 2016-01 [Member]			(10,416)	10,416
Shares Issued (in shares)	50
Shares Issued	$ 1	1,549			1,550
Cash dividends			(1,387,503)		(1,387,503)
Dividends reinvested (in shares)	15,134
Dividends reinvested	$ 151	453,449			453,600
Balance (in shares) at Dec. 31, 2018	1,682,997
Balance at Dec. 31, 2018	$ 16,830	27,324,794	18,621,382	(568,299)	45,394,707
Net income			4,560,804		4,560,804
Unrealized gain (loss) on securities available for sale net of income tax expense (benefit)				610,923	610,923
Reclassification due to adoption of ASU | Accounting Standards Update 2016-02 [Member]			(91,447)		(91,447)
Cash dividends			(1,509,895)		(1,509,895)
Dividends reinvested (in shares)	22,705
Dividends reinvested	$ 227	488,197			488,424
Stock Dividend (in shares)	1,268,317
Stock Dividend	$ 12,683
Stock Dividend			(12,683)
Balance (in shares) at Dec. 31, 2019	2,974,019
Balance at Dec. 31, 2019	$ 29,740	$ 27,812,991	$ 21,568,161	$ 42,624	$ 49,453,516

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Note 5 - Loans - Non-accrual Loans (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Commercial Real Estate Portfolio Segment [Member]
Commercial real estate		$ 988,811

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Note 5 - Loans - Allowance for Loan Losses (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Beginning balance	$ 2,509,334	$ 2,458,911
Provision for loan losses	40,000	475,000
Charge offs		(702,115)
Recoveries	44,381	277,538
Ending balance	2,593,715	2,509,334
Allowance for loan losses, individually
Allowance for loan losses, collectively	2,593,715	2,509,334
Outstanding loan, individually	2,135,045	3,177,381
Outstanding loan, collectively	360,359,658	340,763,461
Commercial Real Estate Portfolio Segment [Member]
Beginning balance	1,754,372	1,867,397
Provision for loan losses	(11,700)	372,315
Charge offs		(690,000)
Recoveries	21,189	204,660
Ending balance	1,763,861	1,754,372
Allowance for loan losses, individually
Allowance for loan losses, collectively	1,763,861	1,754,372
Outstanding loan, individually	2,084,988	3,177,381
Outstanding loan, collectively	238,853,161	235,656,768
Construction and Land Development [Member]
Beginning balance	196,374	223,274
Provision for loan losses	(17,571)	(78,496)
Charge offs		(12,115)
Recoveries	14,025	63,711
Ending balance	192,828	196,374
Allowance for loan losses, individually
Allowance for loan losses, collectively	192,828	196,374
Outstanding loan, individually
Outstanding loan, collectively	18,194,955	18,265,505
Residential Portfolio Segment [Member]
Beginning balance	401,626	247,953
Provision for loan losses	76,498	153,673
Charge offs
Recoveries
Ending balance	478,124	401,626
Allowance for loan losses, individually
Allowance for loan losses, collectively	478,124	401,626
Outstanding loan, individually	50,057
Outstanding loan, collectively	76,072,012	63,024,106
Commercial Portfolio Segment [Member]
Beginning balance	102,610	87,353
Provision for loan losses	(3,995)	6,090
Charge offs
Recoveries	9,167	9,167
Ending balance	107,782	102,610
Allowance for loan losses, individually
Allowance for loan losses, collectively	107,782	102,610
Outstanding loan, individually
Outstanding loan, collectively	26,947,503	23,323,073
Consumer Portfolio Segment [Member]
Beginning balance	10,428	7,027
Provision for loan losses	(6,295)	3,401
Charge offs
Recoveries
Ending balance	4,133	10,428
Allowance for loan losses, individually
Allowance for loan losses, collectively	4,133	10,428
Outstanding loan, individually
Outstanding loan, collectively	292,027	494,009
Unallocated Financing Receivables [Member]
Beginning balance	43,924	25,907
Provision for loan losses	3,063	18,017
Charge offs
Recoveries
Ending balance	46,987	43,924
Allowance for loan losses, individually
Allowance for loan losses, collectively	46,987	43,924
Outstanding loan, individually
Outstanding loan, collectively

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Note 7 - Commitment and Contingencies - Operating Lease Assets and Liabilities (Details)	Dec. 31, 2019 USD ($)
Other Assets [Member]
Operating Lease, Right-of-Use Asset	$ 1,392,281
Other Liabilities [Member]
Operating Lease, Liability, Total	$ 1,559,356

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Note 4 - Related Party Transactions (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Loans and Leases Receivable, Related Parties, Ending Balance	$ 14,551,236	$ 13,955,097	$ 15,577,316
Related Party Deposit Liabilities	16,237,540	14,665,183
Payments to Fund Long-term Loans to Related Parties	22,469	4,144
Unused lines of Credit [Member]
Loans and Leases Receivable, Related Parties, Ending Balance	$ 337,000	$ 634,724

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Note 3 - Investment Securities (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Security Owned and Pledged as Collateral, Fair Value, Total	$ 11,441,474	$ 11,706,765
Proceeds from Sale and Maturity of Marketable Securities, Total	$ 0	$ 0

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Note 12 - Income Taxes - Components of Income Tax Expense (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Current
Federal	$ 756,984	$ 834,327
State	336,191	383,242
Current Income Tax Expense (Benefit), Total	1,093,175	1,217,569
Deferred	(53,841)	(111,360)
Income Tax Expense (Benefit), Total	$ 1,039,334	$ 1,106,209

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Note 7 - Commitment and Contingencies - Outstanding Loan Commitments, Unused Lines of Credit, and Letters of Credit (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Letter of Credit [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	$ 1,935,613	$ 1,905,553
Loan Origination Commitments [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	13,755,488	12,354,870
Unused lines of Credit [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	25,929,499	26,984,173
Unused lines of Credit [Member] | Home Equity Loan [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	3,700,404	3,594,847
Unused lines of Credit [Member] | Commercial Lines [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	22,229,095	23,389,326
Construction and Land Development [Member] | Loan Origination Commitments [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	1,322,275	6,800,240
Commercial Portfolio Segment [Member] | Loan Origination Commitments [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	4,102,000	1,143,217
Commercial Real Estate Portfolio Segment [Member] | Loan Origination Commitments [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	7,560,714	2,853,913
Residential Portfolio Segment [Member] | Loan Origination Commitments [Member]
Outstanding loan commitments, unused lines of credit, and letters of credit	$ 770,499	$ 1,557,500

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Note 10 - Borrowed Funds (Details Textual) $ in Millions	Dec. 31, 2019 USD ($)
Unsecured Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 9.5
Secured Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	9.0
Federal Home Loan Bank Advances [Member]
Line of Credit Facility, Maximum Borrowing Capacity	59.1
Federal Reserve Bank Advances [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 21.2

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Note 15 - Parent Company Financial Information

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Condensed Financial Information of Parent Company Only Disclosure [Text Block]

15. Parent Company Financial Information

The condensed financial statements for the Company (parent only) are presented below:

Balance Sheets
December 31,	2019		2018
Assets
Cash and cash equivalents	$	64,152	$	64,243
Investment in subsidiaries		49,389,364		45,330,464
	$	49,453,516	$	45,394,707
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	$	29,740	$	16,830
Additional paid-in capital		27,812,991		27,324,794
Retained earnings		21,568,161		18,621,382
Accumulated other comprehensive income		42,624		(568,299	)
		49,453,516		45,394,707
	$	49,453,516	$	45,394,707

Statements of Income
Years Ended December 31,	2019		2018
Income
Cash dividends from subsidiary	$	1,331,917	$	1,541,225
Total income		1,331,917		1,541,225
Noninterest expense		537		492
Income before before income taxes and equity in undistributed income of subsidiaries		1,331,380		1,540,733
Income taxes (benefit)		-		-
Income before before equity in undistributed income of subsidiaries		1,331,380		1,540,733
Equity in undistributed income of subsidiaries		3,229,424		3,171,943
Net Income	$	4,560,804	$	4,712,676

Statements of Cash Flows
Years Ended December 31,	2019			2018
Cash flows from operating activities
Net Income	$	4,560,804		$	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries		(3,229,424	)		(3,171,943	)
Other		-			7,479
Cash provided by operating activities		1,331,380			1,548,212
Cash flows from investing activities
Contibution of capital to subsdiaries		(310,000	)		(600,000	)
Cash used by investing activities		(310,000	)		(600,000	)
Cash flows from financing activities
Proceeds from sale of common stock		-			1,550
Dividends paid, net of reinvestments		(1,021,471	)		(933,903	)
Cash provided by financing activities		(1,021,471	)		(932,353	)
Net increase (decrease) in cash and cash equivalents		(91	)		15,859
Cash and cash equivalents at beginning of period		64,243			48,384
Cash and cash equivalents at end of period	$	64,152		$	64,243

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Note 3 - Investment Securities (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Marketable Securities [Table Text Block]

	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	cost		gains		losses		value
Available for sale
State and municipal	$	508,134	$	4,536	$	-	$	512,670
SBA pools		2,203,834		-		52,037		2,151,797
Mortgage-backed securities		33,760,999		255,843		149,535		33,867,307
	$	36,472,967	$	260,379	$	201,572	$	36,531,774
Held to maturity
State and municipal	$	19,510,018	$	588,393	$	480	$	20,097,931
December 31, 2018
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

Investments Classified by Contractual Maturity Date [Table Text Block]

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
December 31, 2019	cost		value		cost		value
Within one year	$	-	$	-	$	257,150	$	261,204
Over one to five years		258,134		258,838		562,587		565,140
Over five to ten years		250,000		253,832		2,717,125		2,782,474
Over ten years		-		-		15,973,156		16,489,113
		508,134		512,670		19,510,018		20,097,931
Mortgage-backed securities and SBA pools, due in monthly installments		35,964,833		36,019,104		-		-
	$	36,472,967	$	36,531,774	$	19,510,018	$	20,097,931
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

Schedule of Unrealized Loss on Investments [Table Text Block]

December 31, 2019	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	$	251,618	$	480	$	-	$	-	$	251,618	$	480
SBA pools		-		-		2,151,797		52,037		2,151,797		52,037
Mortgage-backed securities		10,643,624		58,063		7,295,788		91,472		17,939,412		149,535
Total	$	10,895,242	$	58,543	$	9,447,585	$	143,509	$	20,342,827	$	202,052

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

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Note 11 - Other Noninterest Expenses

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Other Income and Other Expense Disclosure [Text Block]

11. Other Noninterest Expenses

Other noninterest expenses include the following:

	2019		2018
Professional services	$	448,704	$	400,759
Advertising		292,301		237,508
Automated teller machine and debit card expenses		254,792		210,644
Directors fees		212,161		197,116
Telephone		204,486		193,631
Stationery, printing, and supplies		181,823		190,057
Insurance claims		178,500		47,726
Postage, delivery, and armored carrier		154,583		179,677
Internet banking fees		152,750		155,208
Correspondent bank services		128,622		94,763
Travel and conferences		52,152		50,553
Liability insurance		49,447		43,414
Maryland state regulatory assessment		48,794		47,967
Dues and subscriptions		41,261		44,603
Remote deposit expenses		31,278		31,923
Federal Deposit Insurance Corporation premiums		30,571		125,143
Credit reports		29,825		26,860
Payroll preparation		21,406		21,652
Other real estate owned		13,408		42,762
Other		137,679		143,728
	$	2,664,543	$	2,485,694

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Note 3 - Investment Securities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

3. Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	cost		gains		losses		value
Available for sale
State and municipal	$	508,134	$	4,536	$	-	$	512,670
SBA pools		2,203,834		-		52,037		2,151,797
Mortgage-backed securities		33,760,999		255,843		149,535		33,867,307
	$	36,472,967	$	260,379	$	201,572	$	36,531,774
Held to maturity
State and municipal	$	19,510,018	$	588,393	$	480	$	20,097,931
December 31, 2018
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

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
December 31, 2019	cost		value		cost		value
Within one year	$	-	$	-	$	257,150	$	261,204
Over one to five years		258,134		258,838		562,587		565,140
Over five to ten years		250,000		253,832		2,717,125		2,782,474
Over ten years		-		-		15,973,156		16,489,113
		508,134		512,670		19,510,018		20,097,931
Mortgage-backed securities and SBA pools, due in monthly installments		35,964,833		36,019,104		-		-
	$	36,472,967	$	36,531,774	$	19,510,018	$	20,097,931
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

$11,441,474

and

$11,706,765

as of

December 31, 2019

and

2018,

respectively, were pledged as collateral for securities sold under repurchase agreements.

The following table sets forth the Company's gross unrealized losses on a continuous basis for investment securities, by category and length of time.

December 31, 2019	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	$	251,618	$	480	$	-	$	-	$	251,618	$	480
SBA pools		-		-		2,151,797		52,037		2,151,797		52,037
Mortgage-backed securities		10,643,624		58,063		7,295,788		91,472		17,939,412		149,535
Total	$	10,895,242	$	58,543	$	9,447,585	$	143,509	$	20,342,827	$	202,052

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

December 31, 2019,

management did

not

have the intent to sell any of the securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the these factors, as of

December 31, 2019,

management believes the unrealized losses detailed in the table above are temporary and, accordingly,

none

of these unrealized losses have been recognized in the Company’s consolidated statement of income.

In

2019

and

2018,

the Company had

no

security sales.

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Note 7 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

7. Commitments and Contingencies

Lease Commitments

The Company has an operating lease for the land on which the Hampstead branch is located. The initial term of the lease expired on

September 30, 2009

and the lease has been renewed for

three five

year terms with an expiration date of

September 30, 2024.

The lease has options to renew for

five

additional consecutive

five

-year terms. Effective in

July 2012,

the Company entered into an operating lease for certain facilities where the Greenmount branch is located. The initial term of the lease was for

five

years and, effective

January 2018,

the lease has been renewed for

one

five

-year term with an option to renew for an additional

five

-year term. The Company has an operating lease for its Atrium branch facility with a term of

one

year and

nine one

-year renewals. The lease was renewed in

2019

for another year. The Company entered into an operating lease for the corporate headquarters in

June 2015.

In

July 2019,

the lease was amended to increase the amount of space. The lease expires in

June 2020

with options to renew for

four

additional consecutive

five

year terms. In

May 2018,

the Company entered into a lease for its Carroll Lutheran Village branch with a term of

five

years and the option to renew for

two

additional

five

year terms.

The following table shows operating lease right of use assets and operating lease liabilities as of

December 31, 2019:

	Consolidated Balance
	Sheet classification	December 31, 2019
Operating lease right of use asset	Other assets	$	1,392,281
Operating lease liabilities	Other liabilities	$	1,559,356

Operating lease cost included in occupancy expense in the statement of income was

$195,039

during

2019

and

$138,778

during

2018.

Future undiscounted lease payments for operating leases with initial terms of

one

year or more as of

December 31, 2019

are as follows:

Year	Amount
2020	$	165,099
2021		175,784
2022		185,622
2023		191,939
2024		197,586
Thereafter		911,190
Total lease payments		1,827,220
Less imputed interest		(267,864	)
Present value of operating lease liabilities	$	1,559,356

For operating leases as of

December 31, 2019,

the weighted average remaining lease term is

9.51

years and the weighted average discount rate is

3.25%.

During

2019,

cash paid for amounts included in the measurement of lease liabilities was

$154,127.

Credit Commitments

Outstanding loan commitments, unused lines of credit, and letters of credit as of

December 31,

were as follows:

	2019		2018
Loan commitments
Construction and land development	$	1,322,275	$	6,800,240
Commercial		4,102,000		1,143,217
Commercial real estate		7,560,714		2,853,913
Residential		770,499		1,557,500
	$	13,755,488	$	12,354,870
Unused lines of credit
Home-equity lines	$	3,700,404	$	3,594,847
Commercial lines		22,229,095		23,389,326
	$	25,929,499	$	26,984,173
Letters of credit	$	1,935,613	$	1,905,553

Loan commitments and lines of credit are agreements to lend to a customer as long as there is

no

violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and

may

require payment of a fee. Lines of credit generally have variable interest rates. Such lines do

not

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

third

party.

The maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is

not

aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments.

Insurance Reserves

The Insurance Subsidiary insures risks of the Bank (primarily professional liability) that are

not

available in typical commercially available policies. In addition, the Insurance Subsidiary, as

one

protected cell of a protected cell captive insurance company (‘CIC”), is responsible for a portion of all claims filed by the other protected cells in the CIC. The Company records liabilities for claims incurred but

not

reported based on historical loss information and claim emergence patterns. Total liabilities related to Insurance Subsidiary claims at

December 

31,

2019

and

2018

were

$191,951

and

$48,618,

respectively, and are included in other liabilities in the Consolidated Balance Sheet.

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Note 13 - Capital Standards (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations [Table Text Block]

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	51,274		13.88	%	$	38,775		10.50	%	$	36,928		10.00	%
Tier 1 capital (to risk-weighted assets)		48,681		13.18	%		31,389		8.50	%		29,543		8.00	%
Common equity tier 1 (to risk-weighted assets)		48,681		13.18	%		25,850		7.00	%		24,003		6.50	%
Tier 1 leverage (to average assets)		48,681		10.94	%		17,798		4.00	%		22,247		5.00	%

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	47,857		13.50	%	$	34,996		9.88	%	$	35,439		10.00	%
Tier 1 capital (to risk-weighted assets)		45,348		12.80	%		27,908		7.88	%		28,351		8.00	%
Common equity tier 1 (to risk-weighted assets)		45,348		12.80	%		22,593		6.38	%		23,036		6.50	%
Tier 1 leverage (to average assets)		45,348		10.86	%		16,698		4.00	%		20,872		5.00	%

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Note 9 - Interest-bearing Deposits (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Deposit Liabilities, Type [Table Text Block]

	2019		2018
NOW	$	63,299,218	$	56,293,730
Money market		54,323,501		54,995,415
Savings		47,572,517		43,638,363
Certificates of deposit, $250,000 or more		33,251,181		23,335,007
Other time deposits		117,507,882		113,732,968
	$	315,954,299	$	291,995,483

Time Deposit Maturities [Table Text Block]

Year	Amount
2020	$	96,757,612
2021		34,086,443
2022		12,142,807
2023		5,993,296
2024		1,778,905
	$	150,759,063

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Note 5 - Loans - Impaired Loans (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Unpaid Contractual Principal Balance	$ 2,135,045
Recorded Investment With No Allowance	2,135,045
Recorded Investment With Allowance
Total Recorded Investment	2,135,045
Related Allowance
Average Recorded Investment	2,656,213
Interest Recognized	109,750
Commercial Real Estate Portfolio Segment [Member]
Unpaid Contractual Principal Balance	2,084,988	$ 3,867,381
Recorded Investment With No Allowance	2,084,988	3,177,381
Recorded Investment With Allowance
Total Recorded Investment	2,084,988	3,177,381
Related Allowance
Average Recorded Investment	2,631,185	3,177,381
Interest Recognized	106,874	$ 120,193
Residential Portfolio Segment [Member]
Unpaid Contractual Principal Balance	50,057
Recorded Investment With No Allowance	50,057
Recorded Investment With Allowance
Total Recorded Investment	50,057
Related Allowance
Average Recorded Investment	25,029
Interest Recognized	$ 2,876

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Note 6 - Premises and Equipment - Premises and Equipment (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Property, Plant and Equipment, Gross	$ 11,665,708	$ 11,409,147
Accumulated depreciation and amortization	6,628,857	6,333,837
Property, Plant and Equipment, Net	5,036,851	5,075,310
Depreciation and amortization expense	$ 295,020	322,705
Minimum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)
Maximum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)
Land and Land Improvements [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)	0 years
Property, Plant and Equipment, Gross	$ 1,952,998	1,952,998
Building and Building Improvements [Member]
Property, Plant and Equipment, Gross	$ 5,659,635	5,659,635
Building and Building Improvements [Member] | Minimum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)	15 years
Building and Building Improvements [Member] | Maximum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)	39 years
Furniture and Fixtures [Member]
Property, Plant and Equipment, Gross	$ 4,053,075	$ 3,796,514
Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)	3 years
Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant and Equipment, Estimated Useful Lives (Year)	10 years

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Note 13 - Capital Standards - Capital Requirements (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Capital	$ 51,274	$ 47,857
Capital to Risk Weighted Assets	13.88%	13.50%
Capital Required for Capital Adequacy	$ 38,775	$ 34,996
Capital Required for Capital Adequacy to Risk Weighted Assets	10.50%	9.88%
Capital Required to be Well Capitalized	$ 36,928	$ 35,439
Capital Required to be Well Capitalized to Risk Weighted Assets	10.00%	10.00%
Tier One Risk Based Capital	$ 48,681	$ 45,348
Tier One Risk Based Capital to Risk Weighted Assets	13.18%	12.80%
Tier One Risk Based Capital Required for Capital Adequacy	$ 31,389	$ 27,908
Tier One Risk Based Capital Required for Capital Adequacy to Risk Weighted Assets	8.50%	7.88%
Tier One Risk Based Capital Required to be Well Capitalized	$ 29,543	$ 28,351
Tier One Risk Based Capital Required to be Well Capitalized to Risk Weighted Assets	8.00%	8.00%
Common Equity Tier One Capital	$ 48,681	$ 45,348
Common Equity Tier One Capital Ratio	13.18%	12.80%
Common Equity Tier One Capital Required for Capital Adequacy	$ 25,850	$ 22,593
Common Equity Tier One Capital Required for Capital Adequacy Ratio	7.00%	6.38%
Common Equity Tier One Capital Required to be Well-Capitalized	$ 24,003	$ 23,036
Common Equity Tier One Capital Required to be Well Capitalized Ratio	6.50%	6.50%
Tier One Leverage Capital	$ 48,681	$ 45,348
Tier One Leverage Capital to Average Assets	10.94%	10.86%
Tier One Leverage Capital Required for Capital Adequacy	$ 17,798	$ 16,698
Tier One Leverage Capital Required for Capital Adequacy to Average Assets	4.00%	4.00%
Tier One Leverage Capital Required to be Well Capitalized	$ 22,247	$ 20,872
Tier One Leverage Capital Required to be Well Capitalized to Average Assets	5.00%	5.00%

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Note 12 - Income Taxes - Components of Deferred Tax Expense (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Depreciation	$ 10,501	$ (6,049)
Provision for loan losses	(11,007)	287
Other real estate owned allowance for loss	(57,828)	(15,231)
Nonaccrual interest	31,691	(8,888)
Prepaid captive insurance premium	21,373	(9,325)
Write-down of equity securities	9,767	(4,383)
Capitol loss carryover	(5,300)
Lease liability, net of right of use asset	(11,258)
Post-retirement benefits	(41,780)	(67,771)
	$ (53,841)	$ (111,360)

XML

Consolidated Statements of Cash Flows - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Cash flows from operating activities
Interest received	$ 18,648,337	$ 17,714,259
Fees and commissions received	1,455,827	1,044,262
Interest paid	(3,645,228)	(2,376,372)
Proceeds from sale of mortgage loans held for sale	20,046,955	13,093,197
Origination of mortgage loans held for sale	(19,715,317)	(13,339,135)
Cash paid to suppliers and employees	(10,019,091)	(9,372,508)
Income taxes paid	(1,055,967)	(1,399,920)
Cash provided by operating activities	5,715,516	5,363,783
Cash flows from investing activities
Available for sale	(8,507,098)	(4,943,748)
Held to maturity	1,101,420	223,000
Available for sale	(17,761,884)	(4,007,664)
Held to maturity	(2,457,087)	(122,313)
Loans made to customers, net of principal collected	(19,952,309)	(11,427,440)
Proceeds from sale of SBA loans	1,582,364	2,883,963
Redemption of stock in FHLB of Atlanta	199,600	487,800
Purchases of premises and equipment	(256,561)	(191,744)
Cash used by investing activities	(29,037,359)	(7,210,650)
Cash flows from financing activities
Net increase (decrease) in Noninterest-bearing deposits	(2,058,505)	(1,685,613)
Interest-bearing deposits	23,958,816	36,602,192
Securities sold under repurchase agreements	(53,882)	(10,756,507)
Federal Home Loan Bank of Atlanta advances	(3,000,000)	(14,000,000)
Dividends paid, net of reinvestments	(1,021,471)	(933,903)
Common stock issued		1,550
Cash provided by financing activities	17,824,958	9,227,719
Net increase (decrease) in cash and cash equivalents	(5,496,885)	7,380,852
Cash and cash equivalents at beginning of period	14,618,237	7,237,385
Cash and cash equivalents at end of period	9,121,352	14,618,237
Reconciliation of net income to net cash provided by operating activities
Net income	4,560,804	4,712,676
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	344,171	380,461
Provision for loan losses	40,000	475,000
Lease expense in excess of rent paid	40,912
Write down of other real estate owned	210,150	55,350
Write down of other assets		4,500
Equity security dividends reinvested	(12,262)	(11,375)
Unrealized (gain) loss on equity security	(16,232)	11,429
Gain on sale of SBA loans	(139,535)	(226,026)
Deferred income taxes	(53,841)	(111,360)
Amortization of premiums and accretion of discounts, net	130,575	123,253
Increase (decrease) in
Deferred loan fees	(12,728)	(72,426)
Accrued interest payable	34,725	130,869
Other liabilities	557,902	366,692
Decrease (increase) in
Mortgage loans held for sale	331,638	(245,938)
Accrued interest receivable	(29,011)	29,727
Bank owned life insurance cash surrender value	(92,123)	(161,764)
Other assets	(179,629)	(97,285)
Cash provided by operating activities	$ 5,715,516	$ 5,363,783

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Note 15 - Parent Company Financial Information - Balance Sheets (Details) (Parentheticals) - $ / shares	Dec. 31, 2019	Dec. 31, 2018
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, share authorized (in shares)	5,000,000	5,000,000
Common stock, share issued (in shares)	2,974,019	1,682,997
Common stock, share outstanding (in shares)	2,974,019	1,682,997
Parent Company [Member]
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, share authorized (in shares)	5,000,000	5,000,000
Common stock, share issued (in shares)	2,974,019	1,682,997
Common stock, share outstanding (in shares)	2,974,019	1,682,997

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Note 14 - Fair Value - Estimated Fair Value of Financial Instruments (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Fair value, held to maturity	$ 20,097,931	$ 18,033,093
Reported Value Measurement [Member] | Fair Value, Inputs, Level 2 [Member]
Fair value, held to maturity	19,510,018	18,127,067
Mortgage loans held for sale	242,000	573,638
Federal Home Loan Bank stock	376,200	575,800
Interest-bearing deposits	315,954,299	291,995,483
Federal Home Loan Bank advances		3,000,000
Reported Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Loans, net	359,382,843	340,900,635
Reported Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Noninterest-bearing deposits	60,659,015	62,717,520
Securities sold under repurchase agreements	10,958,118	11,012,000
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 2 [Member]
Fair value, held to maturity	20,097,931	18,033,093
Mortgage loans held for sale	245,857	582,248
Federal Home Loan Bank stock	376,200	575,800
Interest-bearing deposits	313,622,299	281,761,483
Federal Home Loan Bank advances		2,971,000
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Loans, net	359,346,031	337,385,842
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Noninterest-bearing deposits	60,659,015	62,717,520
Securities sold under repurchase agreements	$ 10,958,118	$ 11,012,000

XML

Consolidated Statements of Income - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Interest income:
Loans, including fees	$ 16,894,657	$ 16,401,554
Investment securities - taxable	869,457	610,951
Investment securities - tax exempt	580,384	570,529
Federal funds sold and other interest earning assets	357,840	185,299
Total interest income	18,702,338	17,768,333
Interest expense:
Deposits	3,519,960	2,225,616
Securities sold under repurchase agreements	114,641	144,881
Federal Home Loan Bank advances and other borrowings	45,352	136,744
Total interest expense	3,679,953	2,507,241
Net interest income	15,022,385	15,261,092
Provision for loan losses	40,000	475,000
Net interest income after provision for loan losses	14,982,385	14,786,092
Noninterest income:
Mortgage banking income	397,710	271,767
Bank owned life insurance income	364,729	161,764
Unrealized gain (loss) on equity security	16,232	(11,429)
Write down of other real estate owned	(210,150)	(55,350)
Gain on sale of SBA loans	139,535	226,026
Total noninterest income	1,493,567	1,365,273
Noninterest expense:
Salaries	5,472,609	5,194,871
Employee benefits	1,352,202	1,313,392
Occupancy	771,917	706,193
Furniture and equipment	614,543	632,330
Other	2,664,543	2,485,694
Total noninterest expense	10,875,814	10,332,480
Income before income taxes	5,600,138	5,818,885
Income taxes	1,039,334	1,106,209
Net income	$ 4,560,804	$ 4,712,676
Earnings per share - basic and diluted (in dollars per share)	$ 1.54	$ 1.61
Deposit Account [Member]
Noninterest income:
Noninterest revenue	$ 663,675	$ 670,653
Financial Service, Other [Member]
Noninterest income:
Noninterest revenue	$ 121,836	$ 101,842

XML

Note 2 - Cash and Cash Equivalents

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Cash and Cash Equivalents Disclosure [Text Block]

2. Cash and Cash Equivalents

The Company normally carries balances with other banks that exceed the federally insured limit.  The average balance carried in excess of the limit, including unsecured federal funds sold to the same banks, was $

8,500,311

and

$5,349,977

during the years ended

December 31, 2019

and

2018,

respectively.

Deposits held in noninterest-bearing transaction accounts are aggregated with any interest-bearing deposits the owner

may

hold in the same category. The combined total is insured up to

$250,000.

Banks are required to carry noninterest-bearing cash reserves of specified percentages of deposit balances. The Company's normal balances of cash on hand and on deposit with other banks are sufficient to satisfy the reserve requirements.

XML

Note 6 - Premises and Equipment

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

6. Premises and Equipment

A summary of premises and equipment is as follows:

	Useful lives (In years)			2019		2018
Land and improvements		-		$	1,952,998	$	1,952,998
Buildings and improvements	15	-	39		5,659,635		5,659,635
Furniture and equipment	3	-	10		4,053,075		3,796,514
					11,665,708		11,409,147
Accumulated depreciation and amortization					6,628,857		6,333,837
				$	5,036,851	$	5,075,310
Depreciation and amortization expense				$	295,020	$	322,705

Software with a net book value of

$47,802

and

$73,022

as of

December 31, 2019

and

2018,

respectively, is included in other assets. Amortization expense of

$49,151

and

$57,756

was recorded in

2019

and

2018,

respectively.

XML

Note 10 - Borrowed Funds

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Debt Disclosure [Text Block]

10. Borrowed Funds

Borrowed funds consist of securities sold under repurchase agreements, which represent overnight or term borrowings from customers, advances from the FHLB of Atlanta, the FRB, and overnight borrowings from a commercial bank. The government agency securities that are the collateral for these agreements are owned by the Company and maintained in the custody of an unaffiliated agent designated by the Company. Additional information is as follows:

	2019		2018
Amounts outstanding at year-end:
Securities sold under repurchase agreements	$	10,958,118	$	11,012,000

Federal Home Loan Bank advances are summarized as follows:

Maturity date	Interest Rate	Amount
9/23/2019	1.25%		-		2,000,000
11/22/2019	1.99%		-		1,000,000
	Total	$	-	$	3,000,000

Weighted average rate paid at December 31:
Securities sold under repurchase agreements		1.49	%		1.07	%
Federal Home Loan Bank advances		0.00	%		1.50	%
Maximum month-end amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	10,958,118		$	22,173,010
Federal Home Loan Bank advances		6,500,000			19,000,000
Average amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	9,273,092		$	17,479,418
Federal Home Loan Bank advances		2,610,959			8,795,890
Borrowings from FRB and commercial banks		90,966			249,044
Average rate paid during the year ended December 31:
Securities sold under repurchase agreements		1.24	%		0.83	%
Federal Home Loan Bank advances		1.62	%		1.50	%
Borrowings from FRB and commercial banks		2.91	%		1.93	%
Investment securities underlying the repurchase agreements at December 31:
Carrying value	$	11,441,474		$	11,706,765
Estimated fair value		11,859,595			11,710,458
Loans and investment securities pledged to the Federal Home Loan Bank at December 31:
Carrying value - loans	$	80,432,808		$	63,305,452
Loans pledged to the Federal Reserve Bank at December 31:
Carrying value	$	46,086,041		$	50,682,236

The Company is approved to borrow approximately

$59.1

million against eligible pledged single family residential loans, eligible pledged multi-family loans, eligible pledged commercial loans, and eligible pledged securities under a secured line of credit with the FHLB. In addition, the Company has a facility with the FRB whereby the Company can borrow up to

$21.2

million. The Company also has available an unsecured federal funds line of credit of

$9.5

million and a secured federal funds line of credit of

$9

million from commercial banks.

XML

Note 14 - Fair Value (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Fair Value Measurements, Recurring and Nonrecurring [Table Text Block]

	Carrying Value:
	Level 1		Level 2		Level 3		Total
December 31, 2019
Recurring
Available for sale securities
State and municipal	$	-	$	512,670	$	-	$	512,670
SBA pools		-		2,151,797		-		2,151,797
Mortgage-backed securities		-		33,867,307		-		33,867,307
	$	-	$	36,531,774	$	-	$	36,531,774
Equity security at fair value	$	532,321	$	-	$	-	$	532,321
Nonrecurring
Other real estate owned	$	-	$	-	$	-	$	-
Impaired loans		-		-		2,135,045		2,135,045
December 31, 2018
Recurring
Available for sale securities
State and municipal	$	-	$	1,506,505	$	-	$	1,506,505
SBA pools		-		2,719,372		-		2,719,372
Mortgage-backed securities		-		22,366,114		-		22,366,114
	$	-	$	26,591,991	$	-	$	26,591,991
Equity security at fair value	$	503,827	$	-	$	-	$	503,827
Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,177,381		3,177,381

Fair Value, Assets Measured on Non-recurring Basis, Unobservable Input Reconciliation [Table Text Block]

Reconciliation of Level 3 Inputs
	Other Real			Impaired
	Estate Owned			Loans
December 31, 2018 fair value	$	210,150		$	3,177,381
Additions		-			-
Advances		-			-
Write-downs/charge-offs		(210,150	)		-
Recoveries		-			15,299
Loan loss provision		-			(15,299	)
Principal payments received		-			(1,042,336	)
December 31, 2019 fair value	$	-		$	2,135,045

Fair Value, by Balance Sheet Grouping [Table Text Block]

	December 31, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 2 inputs
Securities held to maturity	$	19,510,018	$	20,097,931	$	18,127,067	$	18,033,093
Mortgage loans held for sale		242,000		245,857		573,638		582,248
Federal Home Loan Bank stock		376,200		376,200		575,800		575,800
Level 3 inputs
Loans, net		359,382,843		359,346,031		340,900,635		337,385,842
Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	60,659,015	$	60,659,015	$	62,717,520	$	62,717,520
Securities sold under repurchase agreements		10,958,118		10,958,118		11,012,000		11,012,000
Level 2 inputs
Interest-bearing deposits		315,954,299		313,622,299		291,995,483		281,761,483
Federal Home Loan Bank advances		-		-		3,000,000		2,971,000

XML

Note 10 - Borrowed Funds (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Debt [Table Text Block]

	2019		2018
Amounts outstanding at year-end:
Securities sold under repurchase agreements	$	10,958,118	$	11,012,000

Maturity date	Interest Rate	Amount
9/23/2019	1.25%		-		2,000,000
11/22/2019	1.99%		-		1,000,000
	Total	$	-	$	3,000,000

Weighted average rate paid at December 31:
Securities sold under repurchase agreements		1.49	%		1.07	%
Federal Home Loan Bank advances		0.00	%		1.50	%
Maximum month-end amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	10,958,118		$	22,173,010
Federal Home Loan Bank advances		6,500,000			19,000,000
Average amount outstanding during the year ended December 31:
Securities sold under repurchase agreements	$	9,273,092		$	17,479,418
Federal Home Loan Bank advances		2,610,959			8,795,890
Borrowings from FRB and commercial banks		90,966			249,044
Average rate paid during the year ended December 31:
Securities sold under repurchase agreements		1.24	%		0.83	%
Federal Home Loan Bank advances		1.62	%		1.50	%
Borrowings from FRB and commercial banks		2.91	%		1.93	%
Investment securities underlying the repurchase agreements at December 31:
Carrying value	$	11,441,474		$	11,706,765
Estimated fair value		11,859,595			11,710,458
Loans and investment securities pledged to the Federal Home Loan Bank at December 31:
Carrying value - loans	$	80,432,808		$	63,305,452
Loans pledged to the Federal Reserve Bank at December 31:
Carrying value	$	46,086,041		$	50,682,236

XML

Note 5 - Loans - Past Due Loans (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Loans, past due	$ 284,686	$ 1,024,318
Loans, current	362,210,017	342,916,524
Loans	362,494,703	343,940,842
Loans, 90 days past due and still accruing		10,507
Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	284,686
Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due		25,000
Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due		999,318
Commercial Real Estate Portfolio Segment [Member]
Loans, past due	224,794	988,811
Loans, current	240,713,355	237,845,338
Loans	240,938,149	238,834,149
Loans, 90 days past due and still accruing
Commercial Real Estate Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	224,794
Commercial Real Estate Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due
Commercial Real Estate Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due		988,811
Construction and Land Development [Member]
Loans, past due
Loans, current	18,194,955	18,265,505
Loans	18,194,955	18,265,505
Loans, 90 days past due and still accruing
Construction and Land Development [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due
Construction and Land Development [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due
Construction and Land Development [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due
Residential Portfolio Segment [Member]
Loans, past due	59,892	10,507
Loans, current	76,062,177	63,013,599
Loans	76,122,069	63,024,106
Loans, 90 days past due and still accruing		10,507
Residential Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	59,892
Residential Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due
Residential Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due		10,507
Commercial Portfolio Segment [Member]
Loans, past due		25,000
Loans, current	26,947,503	23,298,073
Loans	26,947,503	23,323,073
Loans, 90 days past due and still accruing
Commercial Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due
Commercial Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due		25,000
Commercial Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due
Consumer Portfolio Segment [Member]
Loans, past due
Loans, current	292,027	494,009
Loans	292,027	494,009
Loans, 90 days past due and still accruing
Consumer Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due
Consumer Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due
Consumer Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due

XML

Note 6 - Premises and Equipment (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Amortization of Intangible Assets, Total	$ 49,151	$ 57,756
Other Assets [Member]
Intangible Assets, Net (Excluding Goodwill), Total	$ 47,802	$ 73,022

XML

Document And Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2019	Mar. 05, 2020	Jun. 30, 2019
Document Information [Line Items]
Entity Registrant Name	Farmers & Merchants Bancshares, Inc.
Entity Central Index Key	0001698022
Trading Symbol	fmfg
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		2,974,019
Entity Public Float			$ 48,037,034
Entity Shell Company	false
Document Type	10-K
Document Period End Date	Dec. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Amendment Flag	false
Title of 12(g) Security	Common stock, par value $.01 per share

XML

Note 15 - Parent Company Financial Information - Balance Sheets (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Assets	$ 442,215,098	$ 417,157,877
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	29,740	16,830
Additional paid-in capital	27,812,991	27,324,794
Retained earnings	21,568,161	18,621,382
Accumulated other comprehensive income (loss)	42,624	(568,299)
Stockholders' Equity Attributable to Parent	49,453,516	45,394,707	$ 41,798,932
Liabilities and Equity	442,215,098	417,157,877
Parent Company [Member]
Cash and cash equivalents	64,152	64,243
Investment in subsidiaries	49,389,364	45,330,464
Assets	49,453,516	45,394,707
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 shares in 2019 and 1,682,997 shares in 2018	29,740	16,830
Additional paid-in capital	27,812,991	27,324,794
Retained earnings	21,568,161	18,621,382
Accumulated other comprehensive income (loss)	42,624	(568,299)
Stockholders' Equity Attributable to Parent	49,453,516	45,394,707
Liabilities and Equity	$ 49,453,516	$ 45,394,707

XML

Consolidated Statements of Comprehensive Income - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Net income	$ 4,560,804	$ 4,712,676
Securities available for sale
Net unrealized gain (loss) arising during the period	842,856	(254,609)
Income tax (expense) benefit	(231,933)	70,061
Total other comprehensive loss	610,923	(184,548)
Total comprehensive income	$ 5,171,727	$ 4,528,128

XML

Note 14 - Fair Value (Details Textual)	12 Months Ended
	Dec. 31, 2019
Other Real Estate Owned [Member]
Expected Sales Costs to Appraised Value, Percentage	10.00%
Impaired Loans [Member]
Expected Sales Costs to Appraised Value, Percentage	10.00%

XML

Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Significant Accounting Policies [Text Block]

1. Summary of Significant Accounting Policies

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

may

affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

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 is a series investment,

100%

owned by the Company, in 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.

Business

The Bank provides banking services to individuals and businesses located in Baltimore County, Maryland, Carroll County, Maryland and surrounding areas of northern Maryland. The Insurance Subsidiary is a captive insurance entity that provides insurance coverage for the Bank. Reliable Community Financial Services, Inc. is licensed to provide a wide range of investment and insurance products to its customers, but is inactive.

Reclassifications

Certain reclassifications have been made to the

2018

financial statements to conform to the current year presentation. These reclassifications had

no

effect on net income.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, money market funds, and federal funds sold. Generally, federal funds are purchased and sold for

one

-day periods.

Comprehensive income

Comprehensive income includes net income and the unrealized gains or losses on investment securities available for sale, net of income taxes.

Investment securities

As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost, which is cost adjusted for amortization of premiums and accretion of discounts. Discounts are accreted through maturity. Premiums are amortized through the earliest call date. Securities held to meet liquidity needs or which

may

be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders' equity on an after-tax basis. Gains and losses on disposal are determined using the specific-identification method. The Company amortizes premiums and accretes discounts using the interest method.

Equity security at fair value

On

January 1, 2018,

the Company adopted the new accounting standard for financial instruments, which 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. The adoption of this guidance resulted in a

$10,416

decrease to retained earnings and a

$10,416

increase to accumulated other comprehensive income (loss) during the year ended

December 31, 2018.

Federal Home Loan Bank stock

As a member of the Federal Home Loan Bank of Atlanta (the “FHLB”), the Bank is required to purchase FHLB stock in an amount that is based on the Bank’s total assets. Additional stock is purchased and redeemed based on the outstanding FHLB advances to the Bank. The stock is recorded at cost on the balance sheet. 

Loans and allowance for loan losses

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

Past due status is based on the contractual terms of the loan. Management

may

make an exception to reporting a loan as past due, if the past due status is solely due to the loan being past maturity, the Company intends to extend the loan, and the borrower is making principal and interest payments in accordance with the terms of the matured note. The accrual of interest is discontinued when any portion of the principal or interest is

90

days past due and collateral is insufficient to discharge the debt in full. If collection of principal is evaluated as doubtful, all payments are applied to principal. Loans are considered impaired when, based on current information, management considers it unlikely that the collection of principal and interest payments will be made according to contractual terms. Generally, loans are

not

reviewed for impairment until the accrual of interest has been discontinued or the loans are included on the watch list.

The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that

may

become uncollectible. The Company’s allowance for loan losses consists of

three

elements: (i) specific valuation allowances determined based on probable losses on impaired loans; (ii) historical valuation allowances determined based on historical loan loss experience for impaired loans with similar characteristics; and (iii) adjustments to the historical valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company.

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

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool over the prior

eight

to

twenty

quarters. As of

December 31, 2019

and

2018,

management used a

twenty

quarter period for the historical loss ratio. The historical loss ratios are updated quarterly based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.

Adjustments to the historical valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such adjustments are determined by evaluating, among other things: (i) the impact of economic conditions on the portfolio; (ii) changes in asset quality, including delinquency trends; (iii) the impact of changing interest rates on portfolio risk; (iv) changes in legislative and regulatory policy; (v) the composition and concentrations of credit; and (vi) the effectiveness of the internal loan review function as well as changes to policies and experience of loan personnel. Management evaluates these qualitative factors on a quarterly basis. Each factor could result in an adjustment that is positive, negative, or

no

impact.

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

Mortgage loans held for sale and mortgage banking income

Mortgage loans held for sale are carried at the lower of aggregate cost or fair value based on the current fair value of each outstanding loan. Sales of loans are recorded when the proceeds are received, with any gain or loss recorded in mortgage banking income.

The Company sells its mortgage loans to

third

party investors servicing released. Upon sale and delivery, loans are legally isolated from the Company and the Company has

no

ability to restrict or constrain the ability of

third

party investors to pledge or exchange the mortgage loans. The Company does

not

have the entitlement or ability to repurchase the mortgage loans or unilaterally cause

third

party investors to put the mortgage loans back to the Company.

Premises and equipment

Land is carried at cost. Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation on buildings and equipment is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful lives of the asset, whichever is shorter.

Other real estate owned

Real estate acquired through foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell on the date acquired. Losses incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated value of the property are included with any gains or losses on sale in noninterest income.

 

Bank owned life insurance

The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Revenue recognition

On

January 1, 2018,

the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)

2014

-

09

Revenue from Contracts with Customers and all subsequent amendments to the standard which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of the standard. The Company’s services that fall within the scope of standard are presented within noninterest revenue and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the standard include service charges on deposits, interchange income, and the sale of other real estate owned. The implementation of the standard had

no

significant impact on our financial statements.

Operating Leases

On

January 1, 2019,

the Company adopted FASB ASU

2016

-

02,

“Leases (Topic

842

).” 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. 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.

Income taxes

The provision for income taxes includes income taxes payable for the current year and deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

A tax position is recognized as a benefit only if it is “more likely than

not”

that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than

50%

likely of being realized on examination. For tax positions

not

meeting the “more likely than

not”

test,

no

tax benefit is recorded. 

Per share data

Earnings per share are determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. In

September 2019,

the Company’s Board of Directors’ declared a

75%

stock dividend that was paid on

October 31, 2019

.

Weighted average shares were

2,952,904

and

2,925,631

for

2019

and

2018,

respectively. Diluted earnings per share is derived by dividing net income available by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.

No

potentially dilutive stock equivalents were outstanding at

December 31, 2019

or

2018.

Subsequent events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of

December 31, 2019

for items that should potentially be recognized or disclosed in these financial statements as prescribed by FASB Accounting Standards Codification Topic

855,

Subsequent Events.

On

March 6, 2020,

the Company issued a press release in which it announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) with Carroll Bancorp, Inc. (“Carroll”) pursuant to which Carroll will be merged with and into the Company, with the Company as the surviving corporation (the “Merger”) and, as soon as possible thereafter, Carroll Community Bank, a Maryland commercial bank and wholly-owned subsidiary of Carroll (“Carroll Bank”), will be merged with and into the Bank, with the Bank as the surviving insured depository institution (the “Bank Merger”). Based on financial results as of

December 31, 2019,

the combined company would have pro forma total assets of

$620

 million, total deposits of

$521

 million, and total loans of

$512

 million. The Merger has been unanimously approved by the boards of directors of both companies. The closing of the Merger is subject to various conditions, including approval of the Merger Agreement by Carroll’s stockholders, the companies’ receipt of regulatory approvals, and other customary closing conditions. Currently, the Merger is expected to close in the

third

quarter of

2020,

after all such conditions are met. The Merger Agreement provides that Carroll’s stockholders will receive cash merger consideration in the aggregate amount of

$25

million, subject to a dollar-for-dollar reduction if and to the extent that Carroll’s tangible book value prior to the closing does

not

equal or exceed

$18,200,000.

Item

1A

of Part I of the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2019

contains, under the heading “

Risks Relating to Our Pending Merger with Carroll Bancorp, Inc.

”, a discussion of the most significant risks relating to the Merger.

XML

Note 12 - Income Taxes - Components of Deferred Tax Assets and Liabilities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Deferred tax assets
Allowance for loan losses	$ 637,848	$ 626,841
Other real estate owned allowance for loss	286,182	228,354
Write-down of equity securities	2,864	12,631
Capital loss carryover	5,300
Nonaccrual interest		31,692
Post-retirement benefits	544,442	502,661
Unrealized loss on securities available for sale		215,751
Lease liability, net of right of use asset	45,975
Deferred Tax Assets, Net of Valuation Allowance, Total	1,522,611	1,617,930
Deferred tax liabilities
Prepaid captive insurance premium	295,039	273,665
Unrealized gain on securities available for sale	16,182
Depreciation	175,312	164,811
Deferred Tax Liabilities, Total	486,533	438,476
Net deferred tax asset	$ 1,036,078	$ 1,179,454

XML

Note 15 - Parent Company Financial Information - Statements of Income (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Interest income:
Total income	$ 4,776,334	$ 4,719,012	$ 4,659,456	$ 4,547,536	$ 4,599,891	$ 4,525,190	$ 4,385,506	$ 4,257,746	$ 18,702,338	$ 17,768,333
Noninterest expense									10,875,814	10,332,480
Income before before income taxes and equity in undistributed income of subsidiaries									5,600,138	5,818,885
Income taxes (benefit)									1,039,334	1,106,209
Net Income	$ 1,060,786	$ 1,177,910	$ 1,225,821	$ 1,096,287	$ 1,136,805	$ 1,308,688	$ 1,145,065	$ 1,122,118	4,560,804	4,712,676
Parent Company [Member]
Interest income:
Cash dividends from subsidiary									1,331,917	1,541,225
Total income									1,331,917	1,541,225
Noninterest expense									537	492
Income before before income taxes and equity in undistributed income of subsidiaries									1,331,380	1,540,733
Income taxes (benefit)
Income before before equity in undistributed income of subsidiaries									1,331,380	1,540,733
Equity in undistributed income of subsidiaries									3,229,424	3,171,943
Net Income									$ 4,560,804	$ 4,712,676

XML

Note 4 - Related Party Transactions - Related Party Loan Activity (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Balance, beginning of year	$ 13,955,097	$ 15,577,316
Additions	5,934,975	2,069,000
Amounts collected	(5,338,836)	(2,669,653)
Change in related parties		(1,021,566)
Balance, end of year	$ 14,551,236	$ 13,955,097

XML

Note 3 - Investment Securities - Investments in Debt Securities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Amortized cost, available for sale	$ 36,472,967	$ 27,376,040
Unrealized gains, available for sale	260,379	44,755
Unrealized losses, available for sale	201,572	828,804
Fair value, available for sale	36,531,774	26,591,991
Amortized cost, held to maturity	19,510,018	18,127,067
Fair value, held to maturity	20,097,931	18,033,093
US States and Political Subdivisions Debt Securities [Member]
Amortized cost, available for sale	508,134	1,506,011
Unrealized gains, available for sale	4,536	11,161
Unrealized losses, available for sale		10,667
Fair value, available for sale	512,670	1,506,505
Amortized cost, held to maturity	19,510,018	18,127,067
Unrealized gains, held to maturity	588,393	115,220
Unrealized losses, held to maturity	480	209,194
Fair value, held to maturity	20,097,931	18,033,093
SBA Pools [Member]
Amortized cost, available for sale	2,203,834	2,779,411
Unrealized gains, available for sale
Unrealized losses, available for sale	52,037	60,039
Fair value, available for sale	2,151,797	2,719,372
Collateralized Mortgage Backed Securities [Member]
Amortized cost, available for sale	33,760,999	23,090,618
Unrealized gains, available for sale	255,843	33,594
Unrealized losses, available for sale	149,535	758,098
Fair value, available for sale	$ 33,867,307	$ 22,366,114

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Note 7 - Commitment and Contingencies - Operating Lease Liabilities (Details)	Dec. 31, 2019 USD ($)
2020	$ 165,099
2021	175,784
2022	185,622
2023	191,939
2024	197,586
Thereafter	911,190
Total lease payments	1,827,220
Less imputed interest	(267,864)
Other Liabilities [Member]
Operating Lease, Liability, Total	$ 1,559,356

XML

Note 9 - Interest-bearing Deposits - Certificates of Deposit Maturity Schedule (Details)	Dec. 31, 2019 USD ($)
2020	$ 96,757,612
2021	34,086,443
2022	12,142,807
2023	5,993,296
2024	1,778,905
Time Deposits	$ 150,759,063

XML

Note 12 - Income Taxes (Details Textual) $ in Millions	12 Months Ended
	Dec. 31, 2019 USD ($)
Income Tax Examination, Penalties and Interest Expense, Total	$ 2.1
Open Tax Year	2015 2016 2017 2018 2019

XML

Note 14 - Fair Value

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

14. Fair Value

Accounting standards define fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants. The price in the principal market used to measure the fair value of the asset or liability is

not

adjusted for transaction costs. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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

The fair value hierarchy is as follows:

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

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

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

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

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

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

● Other real estate owned (“OREO”): Nonrecurring fair value adjustments to OREO reflect full or partial write-downs that are based on the OREO’s observable market price or current appraised value of the real estate. Since the market for OREO is not active, OREO subjected to nonrecurring fair value adjustments based on the current appraised value of the real estate are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value. State of Maryland regulations require that OREO is written down to $0 after a certain period of time.

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

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of

December 31, 2019

and

2018,

segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Carrying Value:
	Level 1		Level 2		Level 3		Total
December 31, 2019
Recurring
Available for sale securities
State and municipal	$	-	$	512,670	$	-	$	512,670
SBA pools		-		2,151,797		-		2,151,797
Mortgage-backed securities		-		33,867,307		-		33,867,307
	$	-	$	36,531,774	$	-	$	36,531,774
Equity security at fair value	$	532,321	$	-	$	-	$	532,321
Nonrecurring
Other real estate owned	$	-	$	-	$	-	$	-
Impaired loans		-		-		2,135,045		2,135,045
December 31, 2018
Recurring
Available for sale securities
State and municipal	$	-	$	1,506,505	$	-	$	1,506,505
SBA pools		-		2,719,372		-		2,719,372
Mortgage-backed securities		-		22,366,114		-		22,366,114
	$	-	$	26,591,991	$	-	$	26,591,991
Equity security at fair value	$	503,827	$	-	$	-	$	503,827
Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,177,381		3,177,381

Reconciliation of Level 3 Inputs
	Other Real			Impaired
	Estate Owned			Loans
December 31, 2018 fair value	$	210,150		$	3,177,381
Additions		-			-
Advances		-			-
Write-downs/charge-offs		(210,150	)		-
Recoveries		-			15,299
Loan loss provision		-			(15,299	)
Principal payments received		-			(1,042,336	)
December 31, 2019 fair value	$	-		$	2,135,045

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

	December 31, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 2 inputs
Securities held to maturity	$	19,510,018	$	20,097,931	$	18,127,067	$	18,033,093
Mortgage loans held for sale		242,000		245,857		573,638		582,248
Federal Home Loan Bank stock		376,200		376,200		575,800		575,800
Level 3 inputs
Loans, net		359,382,843		359,346,031		340,900,635		337,385,842
Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	60,659,015	$	60,659,015	$	62,717,520	$	62,717,520
Securities sold under repurchase agreements		10,958,118		10,958,118		11,012,000		11,012,000
Level 2 inputs
Interest-bearing deposits		315,954,299		313,622,299		291,995,483		281,761,483
Federal Home Loan Bank advances		-		-		3,000,000		2,971,000

The fair value of mortgage loans held for sale is determined by the expected sales price. Beginning in the

first

quarter of

2018,

the fair value of loans were determined using an exit price methodology as prescribed by FASB Accounting Standards Update

2016

-

01,

which became effective in the

first

quarter of

2018.

The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level

3

).

In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. 

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

The fair value of credit commitments are considered to be the same as the contractual amounts, and are

not

included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.

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Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

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 is a series investment,

100%

owned by the Company, in 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.

Business Description, Policy [Policy Text Block]

Business

The Bank provides banking services to individuals and businesses located in Baltimore County, Maryland, Carroll County, Maryland and surrounding areas of northern Maryland. The Insurance Subsidiary is a captive insurance entity that provides insurance coverage for the Bank. Reliable Community Financial Services, Inc. is licensed to provide a wide range of investment and insurance products to its customers, but is inactive.

Reclassification, Policy [Policy Text Block]

Reclassifications

Certain reclassifications have been made to the

2018

financial statements to conform to the current year presentation. These reclassifications had

no

effect on net income.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, money market funds, and federal funds sold. Generally, federal funds are purchased and sold for

one

-day periods.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive income

Comprehensive income includes net income and the unrealized gains or losses on investment securities available for sale, net of income taxes.

Investment, Policy [Policy Text Block]

Investment securities

As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost, which is cost adjusted for amortization of premiums and accretion of discounts. Discounts are accreted through maturity. Premiums are amortized through the earliest call date. Securities held to meet liquidity needs or which

may

be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders' equity on an after-tax basis. Gains and losses on disposal are determined using the specific-identification method. The Company amortizes premiums and accretes discounts using the interest method.

Equity Securities, Policy [Policy Text Block]

Equity security at fair value

On

January 1, 2018,

the Company adopted the new accounting standard for financial instruments, which 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. The adoption of this guidance resulted in a

$10,416

decrease to retained earnings and a

$10,416

increase to accumulated other comprehensive income (loss) during the year ended

December 31, 2018.

Federal Home Loan Bank stocks [Policy Text Block]

Federal Home Loan Bank stock

As a member of the Federal Home Loan Bank of Atlanta (the “FHLB”), the Bank is required to purchase FHLB stock in an amount that is based on the Bank’s total assets. Additional stock is purchased and redeemed based on the outstanding FHLB advances to the Bank. The stock is recorded at cost on the balance sheet. 

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

Loans and allowance for loan losses

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

Past due status is based on the contractual terms of the loan. Management

may

make an exception to reporting a loan as past due, if the past due status is solely due to the loan being past maturity, the Company intends to extend the loan, and the borrower is making principal and interest payments in accordance with the terms of the matured note. The accrual of interest is discontinued when any portion of the principal or interest is

90

days past due and collateral is insufficient to discharge the debt in full. If collection of principal is evaluated as doubtful, all payments are applied to principal. Loans are considered impaired when, based on current information, management considers it unlikely that the collection of principal and interest payments will be made according to contractual terms. Generally, loans are

not

reviewed for impairment until the accrual of interest has been discontinued or the loans are included on the watch list.

The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that

may

become uncollectible. The Company’s allowance for loan losses consists of

three

elements: (i) specific valuation allowances determined based on probable losses on impaired loans; (ii) historical valuation allowances determined based on historical loan loss experience for impaired loans with similar characteristics; and (iii) adjustments to the historical valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company.

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

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool over the prior

eight

to

twenty

quarters. As of

December 31, 2019

and

2018,

management used a

twenty

quarter period for the historical loss ratio. The historical loss ratios are updated quarterly based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.

Adjustments to the historical valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such adjustments are determined by evaluating, among other things: (i) the impact of economic conditions on the portfolio; (ii) changes in asset quality, including delinquency trends; (iii) the impact of changing interest rates on portfolio risk; (iv) changes in legislative and regulatory policy; (v) the composition and concentrations of credit; and (vi) the effectiveness of the internal loan review function as well as changes to policies and experience of loan personnel. Management evaluates these qualitative factors on a quarterly basis. Each factor could result in an adjustment that is positive, negative, or

no

impact.

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

Mortgage Banking Activity [Policy Text Block]

Mortgage loans held for sale and mortgage banking income

Mortgage loans held for sale are carried at the lower of aggregate cost or fair value based on the current fair value of each outstanding loan. Sales of loans are recorded when the proceeds are received, with any gain or loss recorded in mortgage banking income.

The Company sells its mortgage loans to

third

party investors servicing released. Upon sale and delivery, loans are legally isolated from the Company and the Company has

no

ability to restrict or constrain the ability of

third

party investors to pledge or exchange the mortgage loans. The Company does

not

have the entitlement or ability to repurchase the mortgage loans or unilaterally cause

third

party investors to put the mortgage loans back to the Company.

Property, Plant and Equipment, Policy [Policy Text Block]

Premises and equipment

Land is carried at cost. Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation on buildings and equipment is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful lives of the asset, whichever is shorter.

Real Estate Owned, Valuation Allowance, Policy [Policy Text Block]

Other real estate owned

Real estate acquired through foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell on the date acquired. Losses incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated value of the property are included with any gains or losses on sale in noninterest income.

Bank Owned Life Insurance, Policy [Policy Text Block]

 

Bank owned life insurance

The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Revenue from Contract with Customer [Policy Text Block]

Revenue recognition

On

January 1, 2018,

the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)

2014

-

09

Revenue from Contracts with Customers and all subsequent amendments to the standard which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of the standard. The Company’s services that fall within the scope of standard are presented within noninterest revenue and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the standard include service charges on deposits, interchange income, and the sale of other real estate owned. The implementation of the standard had

no

significant impact on our financial statements.

Lessee, Leases [Policy Text Block]

Operating Leases

On

January 1, 2019,

the Company adopted FASB ASU

2016

-

02,

“Leases (Topic

842

).” 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. 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.

Income Tax, Policy [Policy Text Block]

Income taxes

The provision for income taxes includes income taxes payable for the current year and deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

A tax position is recognized as a benefit only if it is “more likely than

not”

that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than

50%

likely of being realized on examination. For tax positions

not

meeting the “more likely than

not”

test,

no

tax benefit is recorded. 

Earnings Per Share, Policy [Policy Text Block]

Per share data

Earnings per share are determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. In

September 2019,

the Company’s Board of Directors’ declared a

75%

stock dividend that was paid on

October 31, 2019

.

Weighted average shares were

2,952,904

and

2,925,631

for

2019

and

2018,

respectively. Diluted earnings per share is derived by dividing net income available by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.

No

potentially dilutive stock equivalents were outstanding at

December 31, 2019

or

2018.

Subsequent Events, Policy [Policy Text Block]

Subsequent events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of

December 31, 2019

for items that should potentially be recognized or disclosed in these financial statements as prescribed by FASB Accounting Standards Codification Topic

855,

Subsequent Events.

On

March 6, 2020,

the Company issued a press release in which it announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) with Carroll Bancorp, Inc. (“Carroll”) pursuant to which Carroll will be merged with and into the Company, with the Company as the surviving corporation (the “Merger”) and, as soon as possible thereafter, Carroll Community Bank, a Maryland commercial bank and wholly-owned subsidiary of Carroll (“Carroll Bank”), will be merged with and into the Bank, with the Bank as the surviving insured depository institution (the “Bank Merger”). Based on financial results as of

December 31, 2019,

the combined company would have pro forma total assets of

$620

 million, total deposits of

$521

 million, and total loans of

$512

 million. The Merger has been unanimously approved by the boards of directors of both companies. The closing of the Merger is subject to various conditions, including approval of the Merger Agreement by Carroll’s stockholders, the companies’ receipt of regulatory approvals, and other customary closing conditions. Currently, the Merger is expected to close in the

third

quarter of

2020,

after all such conditions are met. The Merger Agreement provides that Carroll’s stockholders will receive cash merger consideration in the aggregate amount of

$25

million, subject to a dollar-for-dollar reduction if and to the extent that Carroll’s tangible book value prior to the closing does

not

equal or exceed

$18,200,000.

Item

1A

of Part I of the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2019

contains, under the heading “

Risks Relating to Our Pending Merger with Carroll Bancorp, Inc.

”, a discussion of the most significant risks relating to the Merger.