UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended March 31, |
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _______________ to ________________ |
Commission file number 000-55756
Farmers and Merchants Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 81-3605835 | ||
(State or other jurisdiction of | (I. R. S. Employer Identification No.) | ||
incorporation or organization) |
4510 Lower Beckleysville Road, Suite H, Hampstead, Maryland 21074
(Address(Address of principal executive offices) (Zip Code)
(410) 374-1510
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☑ | Smaller reporting company ☑ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,974,0193,011,255 as of May 12, 2020.13, 2021.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Table of Contents
Page | ||
PART I | 3 | |
Item 1. Financial Statements | 3 | |
Consolidated balance sheets at March 31, | 3 | |
Consolidated statements of income (unaudited) for the three months ended March 31, 2021 and 2020 | 4 | |
Consolidated statements of comprehensive income (unaudited) for the three months ended March 31, 2021 and 2020 | 5 | |
Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2021 and 2020 | 6 | |
Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2021 and 2020 | 7 | |
Notes to financial statements (unaudited) | 9 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||
Item 4. Controls and Procedures | ||
PART II – OTHER INFORMATION | ||
Item 1. Legal Proceedings | ||
Item 1A. Risk Factors | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 45 | |
Item 3. Defaults upon Senior Securities | 45 | |
Item 4. Mine Safety Disclosures | 45 | |
Item 5. Other Information | 45 | |
Item 6. Exhibits | ||
SIGNATURES | 46 |
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, | December 31, | March, 31 | December 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | Assets | |||||||||||||||
Cash and due from banks | $ | 17,409,858 | $ | 6,664,307 | $ | 41,378,357 | $ | 39,898,557 | ||||||||
Federal funds sold and other interest-bearing deposits | 5,233,944 | 2,457,045 | 535,535 | 1,077,113 | ||||||||||||
Cash and cash equivalents | 22,643,802 | 9,121,352 | 41,913,892 | 40,975,670 | ||||||||||||
Certificate of deposit in other bank | 100,000 | 100,000 | 350,000 | 850,000 | ||||||||||||
Securities available for sale | 40,666,044 | 36,531,774 | 74,928,865 | 54,477,286 | ||||||||||||
Securities held to maturity | 19,017,782 | 19,510,018 | 21,865,447 | 23,078,519 | ||||||||||||
Equity security at fair value | 543,600 | 532,321 | 545,713 | 552,566 | ||||||||||||
Federal Home Loan Bank stock, at cost | 611,300 | 376,200 | ||||||||||||||
Restricted stock, at cost | 675,400 | 900,500 | ||||||||||||||
Mortgage loans held for sale | 1,481,450 | 242,000 | 1,682,700 | 1,673,350 | ||||||||||||
Loans, less allowance for loan losses of $2,740,150 and $2,593,715 | 358,319,859 | 359,382,843 | ||||||||||||||
Loans, less allowance for loan losses of $3,423,088 and $3,296,538 | 519,239,304 | 521,690,514 | ||||||||||||||
Premises and equipment | 5,136,920 | 5,036,851 | 6,343,681 | 7,736,556 | ||||||||||||
Accrued interest receivable | 1,065,397 | 1,019,540 | 1,883,429 | 2,057,491 | ||||||||||||
Deferred income taxes | 988,558 | 1,036,078 | 1,464,784 | 1,219,668 | ||||||||||||
Other real estate owned | 1,411,605 | 1,411,605 | ||||||||||||||
Bank owned life insurance | 7,187,489 | 7,145,477 | 15,067,461 | 11,297,342 | ||||||||||||
Goodwill and other intangibles | 7,057,326 | 7,059,408 | ||||||||||||||
Other assets | 1,839,179 | 2,180,644 | 1,952,747 | 2,336,607 | ||||||||||||
$ | 459,601,380 | $ | 442,215,098 | $ | 696,382,354 | $ | 677,317,082 | |||||||||
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | |||||||||||||||
Deposits | ||||||||||||||||
Noninterest-bearing | $ | 61,153,068 | $ | 60,659,015 | $ | 121,925,868 | $ | 103,155,113 | ||||||||
Interest-bearing | 328,611,361 | 315,954,299 | 481,315,407 | 470,246,434 | ||||||||||||
Total deposits | 389,764,429 | 376,613,314 | 603,241,275 | 573,401,547 | ||||||||||||
Securities sold under repurchase agreements | 9,708,344 | 10,958,118 | 12,648,269 | 24,753,972 | ||||||||||||
Federal Home Loan Bank of Atlanta advances | 5,000,000 | - | 5,000,000 | 5,000,000 | ||||||||||||
Long-term debt | 16,974,687 | 16,973,280 | ||||||||||||||
Accrued interest payable | 349,725 | 346,214 | 357,961 | 409,622 | ||||||||||||
Other liabilities | 4,356,888 | 4,843,936 | 5,046,750 | 5,049,178 | ||||||||||||
409,179,386 | 392,761,582 | 643,268,942 | 625,587,599 | |||||||||||||
Stockholders' equity | ||||||||||||||||
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 2,974,019 in 2020 and 2019 | 29,740 | 29,740 | ||||||||||||||
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,011,255 in 2021 and 2020 | 30,113 | 30,113 | ||||||||||||||
Additional paid-in capital | 27,812,991 | 27,812,991 | 28,294,139 | 28,294,139 | ||||||||||||
Retained earnings | 22,411,468 | 21,568,161 | 24,728,529 | 22,698,954 | ||||||||||||
Accumulated other comprehensive income | 167,795 | 42,624 | 60,631 | 706,277 | ||||||||||||
50,421,994 | 49,453,516 | 53,113,412 | 51,729,483 | |||||||||||||
$ | 459,601,380 | $ | 442,215,098 | $ | 696,382,354 | $ | 677,317,082 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended | Three months ended | |||||||||||||||
March 31 | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Interest income | ||||||||||||||||
Loans, including fees | $ | 4,322,654 | $ | 4,160,086 | $ | 5,984,657 | $ | 4,322,654 | ||||||||
Investment securities - taxable | 210,506 | 152,317 | 211,224 | 210,506 | ||||||||||||
Investment securities - tax exempt | 144,084 | 160,607 | 160,574 | 144,084 | ||||||||||||
Federal funds sold and other interest earning assets | 32,792 | 74,526 | 14,137 | 32,792 | ||||||||||||
Total interest income | 4,710,036 | 4,547,536 | 6,370,592 | 4,710,036 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 906,199 | 775,531 | 595,520 | 906,199 | ||||||||||||
Securities sold under repurchase agreements | 38,194 | 25,299 | 13,511 | 38,194 | ||||||||||||
Federal Home Loan Bank advances and other borrowings | 109 | 20,553 | 188,106 | 109 | ||||||||||||
Total interest expense | 944,502 | 821,383 | 797,137 | 944,502 | ||||||||||||
Net interest income | 3,765,534 | 3,726,153 | 5,573,455 | 3,765,534 | ||||||||||||
Provision for loan losses | 125,000 | 13,000 | 120,000 | 125,000 | ||||||||||||
Net interest income after provision for loan losses | 3,640,534 | 3,713,153 | 5,453,455 | 3,640,534 | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges on deposit accounts | 158,555 | 152,060 | 159,191 | 158,555 | ||||||||||||
Mortgage banking income | 62,257 | 32,719 | 256,267 | 62,257 | ||||||||||||
Bank owned life insurance income | 42,012 | 40,386 | 70,119 | 42,012 | ||||||||||||
Unrealized gain on equity security | 8,510 | 7,845 | ||||||||||||||
Gain on sale of SBA loans | - | 130,015 | ||||||||||||||
Gain on sale of premises and equipment | 37,613 | - | ||||||||||||||
Unrealized gain(loss) on equity security | (8,669 | ) | 8,510 | |||||||||||||
Gain on premium call of debt security | 8,569 | - | ||||||||||||||
Other fees and commissions | 30,668 | 29,371 | 33,855 | 30,668 | ||||||||||||
Total noninterest income | 302,002 | 392,396 | 556,945 | 302,002 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries | 1,354,919 | 1,326,783 | 1,626,338 | 1,354,919 | ||||||||||||
Employee benefits | 447,104 | 381,964 | 472,888 | 447,104 | ||||||||||||
Occupancy | 183,152 | 214,420 | 250,212 | 183,152 | ||||||||||||
Furniture and equipment | 160,449 | 155,147 | 196,683 | 160,449 | ||||||||||||
Acquisition | 179,824 | - | - | 179,824 | ||||||||||||
Other | 620,865 | 676,972 | 849,003 | 620,865 | ||||||||||||
Total noninterest expense | 2,946,313 | 2,755,286 | 3,395,124 | 2,946,313 | ||||||||||||
Income before income taxes | 996,223 | 1,350,263 | 2,615,276 | 996,223 | ||||||||||||
Income taxes | 152,916 | 253,976 | 585,701 | 152,916 | ||||||||||||
Net income | $ | 843,307 | $ | 1,096,287 | $ | 2,029,575 | $ | 843,307 | ||||||||
Earnings per share - basic and diluted | $ | 0.28 | $ | 0.37 | $ | 0.67 | $ | 0.28 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Net income | $ | 843,307 | $ | 1,096,287 | $ | 2,029,575 | $ | 843,307 | ||||||||
Other comprehensive income, net of income taxes: | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Net unrealized gain arising during the period | 172,691 | 412,306 | ||||||||||||||
Income tax expense | 47,520 | 113,456 | ||||||||||||||
Total other comprehensive income | 125,171 | 298,850 | ||||||||||||||
Net unrealized gain (loss) arising during the period | (890,761 | ) | 172,691 | |||||||||||||
Income tax expense (benefit) | (245,115 | ) | 47,520 | |||||||||||||
Total other comprehensive income (loss) | (645,646 | ) | 125,171 | |||||||||||||
Total comprehensive income | $ | 968,478 | $ | 1,395,137 | $ | 1,383,929 | $ | 968,478 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Three months endedMonths Ended March 31, 20202021 and 20192020
(Unaudited except for year-end amounts)
Additional | Accumulated other | Total | Additional | Accumulated other | Total | |||||||||||||||||||||||||||||||||||||||||||
Common stock | paid-in | Retained | comprehensive | stockholders' | Common stock | paid-in | Retained | comprehensive | stockholders' | |||||||||||||||||||||||||||||||||||||||
Shares | Par value | capital | earnings | income | equity | Shares | Par value | capital | earnings | income | equity | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 1,682,997 | $ | 16,830 | $ | 27,324,794 | $ | 18,621,382 | $ | (568,299 | ) | $ | 45,394,707 | ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 1,096,287 | - | 1,096,287 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities available for sale net of income tax expense of $113,456 | - | - | - | - | 298,850 | 298,850 | ||||||||||||||||||||||||||||||||||||||||||
Reclassification due to adoption of ASU No. 2016-02 | - | - | - | (91,447 | ) | - | (91,447 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | 1,682,997 | $ | 16,830 | $ | 27,324,794 | $ | 19,626,222 | $ | (269,449 | ) | $ | 46,698,397 | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | 2,974,019 | $ | 29,740 | $ | 27,812,991 | $ | 21,568,161 | $ | 42,624 | $ | 49,453,516 | 2,974,019 | $ | 29,740 | $ | 27,812,991 | $ | 21,568,161 | $ | 42,624 | $ | 49,453,516 | ||||||||||||||||||||||||||
Net income | - | - | - | 843,307 | - | 843,307 | - | - | - | 843,307 | - | 843,307 | ||||||||||||||||||||||||||||||||||||
Unrealized gain on securities available for sale net of income tax expense of $47,520 | - | - | - | - | 125,171 | 125,171 | - | - | - | - | 125,171 | 125,171 | ||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | 2,974,019 | $ | 29,740 | $ | 27,812,991 | $ | 22,411,468 | $ | 167,795 | $ | 50,421,994 | 2,974,019 | $ | 29,740 | $ | 27,812,991 | $ | 22,411,468 | $ | 167,795 | $ | 50,421,994 | ||||||||||||||||||||||||||
Balance, December 31, 2020 | 3,011,255 | $ | 30,113 | $ | 28,294,139 | $ | 22,698,954 | $ | 706,277 | $ | 51,729,483 | |||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 2,029,575 | - | 2,029,575 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities available for sale net of income tax benefit of $245,115 | - | - | - | - | (645,646 | ) | (645,646 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 3,011,255 | $ | 30,113 | $ | 28,294,139 | $ | 24,728,529 | $ | 60,631 | $ | 53,113,412 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | 2020 | 2019 | 2021 | 2020 | ||||||||||||
Cash flows from operating activities | ||||||||||||||||
Interest received | $ | 4,640,609 | $ | 4,508,539 | $ | 6,941,426 | $ | 4,640,609 | ||||||||
Fees and commissions received | 251,480 | 214,151 | 449,313 | 251,480 | ||||||||||||
Interest paid | (940,991 | ) | (782,666 | ) | (927,563 | ) | (940,991 | ) | ||||||||
Proceeds from sale of mortgage loans held for sale | 3,148,200 | 1,488,092 | 12,646,573 | 3,148,200 | ||||||||||||
Origination of mortgage loans held for sale | (4,387,650 | ) | (1,331,919 | ) | (12,655,923 | ) | (4,387,650 | ) | ||||||||
Cash paid to suppliers and employees | (3,112,503 | ) | (2,865,997 | ) | (3,329,986 | ) | (3,112,503 | ) | ||||||||
(400,855 | ) | 1,230,200 | 3,123,840 | (400,855 | ) | |||||||||||
Cash flows from investing activities | ||||||||||||||||
Proceeds from maturity and call of securities | ||||||||||||||||
Available for sale | 2,412,263 | 1,438,497 | 10,454,122 | 2,412,263 | ||||||||||||
Held to maturity | 500,000 | 200,000 | 1,580,000 | 500,000 | ||||||||||||
Purchase of securities | ||||||||||||||||
Available for sale | (6,434,692 | ) | (5,062,430 | ) | (31,974,384 | ) | (6,434,692 | ) | ||||||||
Held to maturity | - | (132,187 | ) | (342,061 | ) | - | ||||||||||
Maturity of certificates of deposit | 500,000 | - | ||||||||||||||
Loans made to customers, net of principal collected | 958,785 | 4,403,357 | 1,932,622 | 958,785 | ||||||||||||
Proceeds from sale of loans | - | 1,483,594 | ||||||||||||||
Redemption (purchase) of stock in FHLB of Atlanta | (235,100 | ) | 72,100 | |||||||||||||
Redemption(purchase) of restricted stock | 225,100 | (235,100 | ) | |||||||||||||
Purchase of bank owned life insurance | (3,700,000 | ) | - | |||||||||||||
Proceeds from sale of premises and equipment | 1,359,613 | - | ||||||||||||||
Purchases of premises, equipment and software | (179,292 | ) | (33,464 | ) | (36,909 | ) | (179,292 | ) | ||||||||
(2,978,036 | ) | 2,369,467 | (20,001,897 | ) | (2,978,036 | ) | ||||||||||
Cash flows from financing activities | ||||||||||||||||
Net increase (decrease) in | ||||||||||||||||
Noninterest-bearing deposits | 494,053 | (2,285,616 | ) | 18,770,755 | 494,053 | |||||||||||
Interest-bearing deposits | 12,657,062 | 12,760,098 | 11,151,227 | 12,657,062 | ||||||||||||
Securities sold under repurchase agreements | (1,249,774 | ) | (1,879,205 | ) | (12,105,703 | ) | (1,249,774 | ) | ||||||||
Federal Home Loan Bank of Atlanta advances | 5,000,000 | - | - | 5,000,000 | ||||||||||||
16,901,341 | 8,595,277 | |||||||||||||||
17,816,279 | 16,901,341 | |||||||||||||||
Net increase in cash and cash equivalents | 13,522,450 | 12,194,944 | 938,222 | 13,522,450 | ||||||||||||
Cash and cash equivalents at beginning of period | 9,121,352 | 14,618,237 | 40,975,670 | 9,121,352 | ||||||||||||
Cash and cash equivalents at end of period | $ | 22,643,802 | $ | 26,813,181 | $ | 41,913,892 | $ | 22,643,802 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | 2020 | 2019 | 2021 | 2020 | ||||||||||||
Reconciliation of net income to net cash provided by operating activities | ||||||||||||||||
Net income | $ | 843,307 | $ | 1,096,287 | $ | 2,029,575 | $ | 843,307 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||||||
Depreciation and amortization | 89,852 | 90,167 | 117,030 | 89,852 | ||||||||||||
Provision for loan losses | 125,000 | 13,000 | 120,000 | 125,000 | ||||||||||||
Lease expense in excess of rent paid | 8,672 | 11,083 | 7,780 | 8,672 | ||||||||||||
Equity security dividend reinvested | (2,769 | ) | (3,045 | ) | ||||||||||||
Unrealized gain on equity security | (8,510 | ) | (7,845 | ) | ||||||||||||
Gain on sale of loans | - | (130,015 | ) | |||||||||||||
Decrease (increase) in mortgage loans held for sale | (1,239,450 | ) | 156,173 | |||||||||||||
Equity security dividends reinvested | (1,816 | ) | (2,769 | ) | ||||||||||||
Unrealized loss (gain) on equity security | 8,669 | (8,510 | ) | |||||||||||||
Gain on sale of premises and equipment | (37,613 | ) | - | |||||||||||||
Gain on premium call of debt security | (8,569 | ) | - | |||||||||||||
Amortization of debt issuance costs | 1,407 | - | ||||||||||||||
Amortization of premiums and accretion of discounts, net | 53,086 | 19,721 | 69,559 | 53,086 | ||||||||||||
Increase (decrease) in | ||||||||||||||||
Deferred loan fees | (20,801 | ) | (11,680 | ) | 410,480 | (20,801 | ) | |||||||||
Accrued interest payable | 3,511 | 38,717 | (51,661 | ) | 3,511 | |||||||||||
Other liabilities | (458,358 | ) | (115,566 | ) | 27,154 | (458,358 | ) | |||||||||
Decrease (increase) in | ||||||||||||||||
Mortgage loans held for sale | (9,350 | ) | (1,239,450 | ) | ||||||||||||
Accrued interest receivable | (45,857 | ) | (24,271 | ) | 174,062 | (45,857 | ) | |||||||||
Bank owned life insurance cash surrender value | (42,012 | ) | (40,386 | ) | (70,119 | ) | (42,012 | ) | ||||||||
Other assets | 293,474 | 137,860 | 337,252 | 293,474 | ||||||||||||
$ | 3,123,840 | $ | (400,855 | ) | ||||||||||||
$ | (400,855 | ) | $ | 1,230,200 |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. | Principles of consolidation |
The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), and one subsidiary of the Bank, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions have been eliminated. This includes the insurance premium paid by the Bank to the Insurance Subsidiary through an intermediary. Effective October 1, 2020, the Company acquired Carroll Bancorp, Inc. and its wholly-owned subsidiary, Carroll Community Bank (collectively, “Carroll”), both of which were based in Eldersburg, Maryland, through a series of merger transactions (the “Merger”). The results of operations and assets acquired and liabilities assumed from Carroll are included only from the effective date of the Merger. The comparability of the Company's results of operations for the three-months ended March 31, 2021, and 2020 have been impacted by the Merger.
2. | Basis of Presentation |
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three months ended March 31, 20202021 do not necessarily reflect the results that may be expected for the entire fiscal year ending December 31, 20202021 or any future interim period. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2019,2020, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019. 2020.
RecentSummary of Significant Accounting PronouncementsPolicies
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 841).” Among other things, in the amendments in ASU 2016-02, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;The accounting and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presentedreporting policies reflected in the financial statements.statements conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Management makes estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of commitments and contingent liabilities at the balance sheet date, and revenues and expenses during the year. These estimates and assumptions may affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
Loans and allowance for loan losses
Loans are stated at the current amount of unpaid principal, adjusted for deferred origination costs, deferred origination fees, premiums and discounts on acquired loans, and the allowance for loan losses. Interest on loans is accrued based on the principal amounts outstanding. Origination fees and costs, along with premiums and accretable discounts, are amortized to income over the terms of loans.
Past due status is based on the contractual terms of the loan. Management may make an exception to reporting a loan as past due, if the past due status is 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 modified retrospective approach wouldaccrual 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 require any transition accountingreviewed for leases that expired beforeimpairment until the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company adoptedaccrual of interest has been discontinued or 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.loans are included on the watch list.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
| Basis of Presentation (continued) |
The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company’s allowance for loan losses consists of three elements: (i) segregating the loan portfolio into pools based upon similar characteristics and risk profiles and applying a loss factor to the pools, based on historical losses within those pools, (ii) applying qualitative factors to the loan pools that consider economic and other factors, both internal and external, affecting the Company and the pools, and (iii) determining specific reserves based on individual evaluation of impaired loans that are not included in the pools discussed above.
The allowances established for probable 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 March 31, 2021 and December 31, 2020, management used a 20-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.
Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
2. | Basis of Presentation (continued) |
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount, which we will then reclassify as accretable discount to be recognized into interest income over the remaining life of the loan.
Loans acquired through business combinations that meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.
Goodwill and other intangible assets
Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible asset, core deposit intangible (“CDI”) has a finite life and is amortized over 10 years on a straight line basis.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,Accounting Standards Update (“ASU”) 2016‑13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective Dates” extended the implementation date to 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
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in ASC Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirementsConsolidated Financial Statements (Continued)
(Unaudited)
2. Basis of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 was effective for us on January 1, 2020, with early adoption permitted, and did not have a material impact on the Company’s financial statements.Presentation (continued)
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 bewas 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 was effective for us on January 1, 2020, with early adoption permitted, and did not have a material impact on the Company’s financial statements.
Subsequent EventsIn December 2019, FASB released ASU 2019-12, “Income Taxes (Topic 740)”, which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. ASU 2019-12 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The standard did not have a significant impact on the Company’s financial statements.
OnIn March 11, 2020, the World Health Organization declared a pandemic as a resultFASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”: Facilitation of the global spreadEffects of Reference Rate Reform on Financial Reporting. This ASU Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform, on financial reporting. The risk of termination of the coronavirus, commonly referredLondon Interbank Offered Rate (LIBOR), has caused regulators to as COVID-19.undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. The spread of the disease quickly acceleratedCompany has identified its products that utilize LIBOR and has begun efforts to transition to an alternative reference rate. The Company continues to evaluate systems to assist in the United States andtransaction to date, all 50 states have reported cases. The U.S. and state governments reacted to the pandemic by issuing shelter-at-home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.new rate.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
As a result of the pandemic effecting the states and local markets in which it operates, the Company successfully implemented its Pandemic Contingency Plan with the goal of protecting the health, safety and financial well-being of its associates and customers. As part of its plan to protect the financial well-being of its customers, the Company chose to participate and educate its customers on the government sponsored plans established to provide financial assistance to businesses.
The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. We acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program. We developed an SBA PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access. Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible. We were able to fund 172 loan applications for approximately $25.3 million from the first tranche of PPP designated funds. Congress allocated additional funding to the PPP on April 23, 2020. Due to our advance preparation and software implementation, we were able to quickly gain approval for an additional 78 loan applications for approximately $5.1 million through May 11, 2020. In total, we have gained approval for over $30 million dollars to 250 small businesses. Approximately 68% of the loans were under $100,000 in size. We will continue to provide access to the PPP and process applications for as long as the PPP is open and funds are available so that we can assist as many small business owners in our markets as possible. These loans are 100% guaranteed by the SBA, have up to a two-year maturity, provide for a six-month deferral period, and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount. We anticipate receiving approximately $1,257,000 in fees.
In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements, which were all subsequent to quarter end, have been to internal, non-interest-bearing accounts awaiting use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.
The Company’s allowance for loan losses (the “ALL”) increased $146,435 to $2,740,150 at March 31, 2020 compared to $2,593,715 at December 31, 2019. The ALL to total loans was 0.76% and 0.72% at March 31, 2020 and December 31, 2019, respectively. This increase was driven by the increased provision expense which was adjusted for qualitative factors related to the economic uncertainty and increased unemployment rates related to the COVID-19 pandemic.
The Company has provided loan modifications to its borrowers who are impacted by the COVID-19. Modifications include deferrals of principal and interest for periods up to three months and interest only periods of three months. These deferrals could be extended an additional three months. As of May 6, 2020, the Company has modified loans with an aggregate principal balance of $80.4 million, or 22% of its loan portfolio. The Company is currently evaluating requests for relief on an additional $33.8 million in loans, or 9% of its loan portfolio. The pandemic has had an impact on most industries represented by the Company’s loan portfolio with respect to which these modifications have been made, including retail, mixed use, residential rental, land development, accommodations, senior living, commercial office, and warehouse.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
3.Investment Securities |
|
Investments in debt securities are summarized as follows:
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
March 31, 2020 | cost | gains | losses | value | ||||||||||||||||||||||||||||
March 31, 2021 | cost | gains | losses | value | ||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||
State and municipal | $ | 2,382,514 | $ | 1,218 | $ | 3,104 | $ | 2,380,628 | $ | 959,103 | $ | 14,963 | $ | - | $ | 974,066 | ||||||||||||||||
SBA pools | 2,054,025 | - | 46,398 | 2,007,627 | 1,748,461 | - | 34,590 | 1,713,871 | ||||||||||||||||||||||||
Corporate bonds | 495,000 | - | 9,552 | 485,448 | 6,571,096 | 118,749 | 15,842 | 6,674,003 | ||||||||||||||||||||||||
Mortgage-backed securities | 35,503,008 | 461,811 | 172,478 | 35,792,341 | 65,566,556 | 778,768 | 778,399 | 65,566,925 | ||||||||||||||||||||||||
$ | 40,434,547 | $ | 463,029 | $ | 231,532 | $ | 40,666,044 | $ | 74,845,216 | $ | 912,480 | $ | 828,831 | $ | 74,928,865 | |||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||
State and municipal | $ | 19,017,782 | $ | 63,126 | $ | 434,872 | $ | 18,646,036 | $ | 21,865,447 | $ | 980,859 | $ | 105,130 | $ | 22,741,176 |
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
December 31, 2019 | cost | gains | losses | value | ||||||||||||||||||||||||||||
December 31, 2020 | cost | gains | losses | value | ||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||
State and municipal | $ | 508,134 | $ | 4,536 | $ | - | $ | 512,670 | $ | 962,438 | $ | 24,094 | $ | - | $ | 986,532 | ||||||||||||||||
SBA pools | 2,203,834 | - | 52,037 | 2,151,797 | 1,822,226 | - | 38,419 | 1,783,807 | ||||||||||||||||||||||||
Corporate bonds | 6,692,156 | 108,172 | 2,897 | 6,797,431 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 33,760,999 | 255,843 | 149,535 | 33,867,307 | 44,026,055 | 941,987 | 58,526 | 44,909,516 | ||||||||||||||||||||||||
$ | 36,472,967 | $ | 260,379 | $ | 201,572 | $ | 36,531,774 | $ | 53,502,875 | $ | 1,074,253 | $ | 99,842 | $ | 54,477,286 | |||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||
State and municipal | $ | 19,510,018 | $ | 588,393 | $ | 480 | $ | 20,097,931 | $ | 23,078,519 | $ | 1,177,125 | $ | 10,858 | $ | 24,244,786 |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
3. | Investment Securities (continued) |
Contractual maturities, shown below, will differ from actual maturities because borrowers and issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | |||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
March 31, 2020 | cost | value | cost | value | ||||||||||||||||||||||||||||
March 31, 2021 | cost | value | cost | value | ||||||||||||||||||||||||||||
Within one year | $ | 1,875,000 | $ | 1,875,000 | $ | 256,279 | $ | 257,642 | $ | - | $ | - | $ | 489,060 | $ | 492,666 | ||||||||||||||||
Over one to five years | 752,514 | 739,858 | 561,884 | 561,512 | 4,634,500 | 4,756,528 | 795,231 | 810,700 | ||||||||||||||||||||||||
Over five to ten years | 250,000 | 251,218 | 3,224,291 | 3,246,851 | 2,694,963 | 2,690,665 | 2,025,039 | 2,196,415 | ||||||||||||||||||||||||
Over ten years | - | - | 14,975,328 | 14,580,031 | 200,736 | 200,876 | 18,556,117 | 19,241,395 | ||||||||||||||||||||||||
2,877,514 | 2,866,076 | 19,017,782 | 18,646,036 | 7,530,199 | 7,648,069 | 21,865,447 | 22,741,176 | |||||||||||||||||||||||||
Mortgage-backed securities and SBA pools, due in monthly installments | 37,557,033 | 37,799,968 | - | - | 67,315,017 | 67,280,796 | - | - | ||||||||||||||||||||||||
$ | 40,434,547 | $ | 40,666,044 | $ | 19,017,782 | $ | 18,646,036 | $ | 74,845,216 | $ | 74,928,865 | $ | 21,865,447 | $ | 22,741,176 | |||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
Within one year | $ | - | $ | - | $ | 257,150 | $ | 261,204 | $ | 505,372 | $ | 502,475 | $ | 487,741 | $ | 496,463 | ||||||||||||||||
Over one to five years | 258,134 | 258,838 | 562,587 | 565,140 | 4,646,388 | 4,755,483 | 793,876 | 813,523 | ||||||||||||||||||||||||
Over five to ten years | 250,000 | 253,832 | 2,717,125 | 2,782,474 | 2,300,591 | 2,323,451 | 2,476,827 | 2,687,063 | ||||||||||||||||||||||||
Over ten years | - | - | 15,973,156 | 16,489,113 | 202,243 | 202,554 | 19,320,075 | 20,247,737 | ||||||||||||||||||||||||
508,134 | 512,670 | 19,510,018 | 20,097,931 | 7,654,594 | 7,783,963 | 23,078,519 | 24,244,786 | |||||||||||||||||||||||||
Mortgage-backed securities and SBA pools, due in monthly installments | 35,964,833 | 36,019,104 | - | - | 45,848,281 | 46,693,323 | - | - | ||||||||||||||||||||||||
36,472,967 | $ | 36,531,774 | $ | 19,510,018 | $ | 20,097,931 | $ | 53,502,875 | $ | 54,477,286 | $ | 23,078,519 | $ | 24,244,786 |
Securities with a carrying value of $10,258,55720,890,319 and $11,441,474$34,958,212 as of March 31, 20202021 and December 31, 2019,2020, respectively, were pledged as collateral for government deposits and securities sold under repurchase agreements.
During the three months ended March 31, 2021, the Company received proceeds of $513,845 from the call at a premium of an available for sale investment security. The Company realized an $8,569 gain on the call of the security. There were no sales of securities during the three months ended March 31, 2020.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
3. | Investment Securities (continued) |
The following table sets forth the Company’s gross unrealized losses on a continuous basis for investments in debt securities, by category and length of time, at March 31, 20202021 and December 31, 2019.2020.
March 31, 2020 | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||
Description of investments | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||||||||||||||||||||
State and municipal | $ | 10,322,326 | $ | 437,976 | $ | - | $ | - | $ | 10,322,326 | $ | 437,976 | $ | 2,504,081 | $ | 105,130 | $ | - | $ | - | $ | 2,504,081 | $ | 105,130 | ||||||||||||||||||||||||
SBA pools | - | - | 2,007,627 | 46,398 | 2,007,627 | 46,398 | - | - | 1,713,871 | 34,590 | 1,713,871 | 34,590 | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 485,448 | 9,552 | - | - | 485,448 | 9,552 | 575,060 | 15,842 | - | - | 575,060 | 15,842 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 13,848,896 | 128,364 | 2,366,487 | 44,114 | 16,215,383 | 172,478 | 36,326,921 | 777,706 | 70,835 | 693 | 36,397,756 | 778,399 | ||||||||||||||||||||||||||||||||||||
Total | $ | 24,656,670 | $ | 575,892 | $ | 4,374,114 | $ | 90,512 | $ | 29,030,784 | $ | 666,404 | $ | 39,406,062 | $ | 898,678 | $ | 1,784,706 | $ | 35,283 | $ | 41,190,768 | $ | 933,961 |
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, 2020 | 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 | $ | 719,430 | $ | 10,858 | $ | - | $ | - | $ | 719,430 | $ | 10,858 | ||||||||||||
SBA pools | - | - | 1,783,807 | 38,419 | 1,783,807 | 38,419 | ||||||||||||||||||
Corporate bonds | 502,754 | 2,897 | - | - | 502,754 | 2,897 | ||||||||||||||||||
Mortgage-backed securities | 9,286,525 | 57,987 | 96,652 | 539 | 9,383,177 | 58,526 | ||||||||||||||||||
Total | $ | 10,508,709 | $ | 71,742 | $ | 1,880,459 | $ | 38,958 | $ | 12,389,168 | $ | 110,700 |
Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of March 31, 20202021 and December 31, 2019,2020, management did not have the intent to sell any of the held to maturity or available for sale securities with unrealized losses before a recovery of cost. The unrealized losses detailed in the table above were due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investmentdebt securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the foregoing factors, as of March 31, 20202021 and December 31, 2019,2020, management believes that these unrealized losses are temporary and, accordingly, have not been recognized in the Company’s consolidated statement of income.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. | Loans |
Major categories of loans are as follows:
March 31, | December 31, | |||||||||||||||
2020 | 2019 | March 31, | December 31, | |||||||||||||
2021 | 2020 | |||||||||||||||
Real estate: | ||||||||||||||||
Commercial | $ | 241,137,394 | $ | 240,938,149 | $ | 312,241,779 | $ | 309,284,811 | ||||||||
Construction and land development | 19,574,506 | 18,194,955 | 34,731,150 | 33,641,916 | ||||||||||||
Residential | 75,106,688 | 76,122,069 | 116,700,951 | 121,327,761 | ||||||||||||
Commercial | 25,452,964 | 26,947,503 | 60,064,503 | 61,368,105 | ||||||||||||
Consumer | 285,801 | 292,027 | 258,484 | 288,454 | ||||||||||||
361,557,353 | 362,494,703 | 523,996,867 | 525,911,047 | |||||||||||||
Less: Allowance for loan losses | 2,740,150 | 2,593,715 | 3,423,088 | 3,296,538 | ||||||||||||
Deferred origination fees net of costs | 497,344 | 518,145 | 1,334,475 | 923,995 | ||||||||||||
$ | 358,319,859 | $ | 359,382,843 | $ | 519,239,304 | $ | 521,690,514 |
Commercial loans in the table above include $33.6 million and $31.1 million of Paycheck Protection Program (“PPP”) loans as of March 31, 2021 and December 31, 2020, respectively, which are 100% guaranteed by the Small Business Administration (“SBA”). $21.0 million were originated during the first quarter of 2021. A substantial portion of the PPP loans in the Company’s portfolio are expected to be forgiven by the SBA. During the three months ended March 31, 2021, the Company collected approximately $877,000 in fees from the SBA in connection with the originations of the PPP loans. The fees, net of related origination costs, are being recognized as interest income over the term of the loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means.
Nonaccrual loans, segregated by class of loans, were as follows:
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Real estate: | ||||||||
Commercial | $ | 4,407,829 | $ | 4,407,829 | ||||
Residential | 50,470 | 220,967 | ||||||
$ | 4,458,299 | $ | 4,628,796 |
At March 31, 2020 and December 31, 2019,2021, the Company had noone nonaccrual commercial real estate loan totaling $4,407,829 and one nonaccrual residential real estate loan totaling $50,470. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $61,924 would have been recorded for the three months ended March 31, 2021 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 recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $8,176 at March 31, 2021.
At December 31, 2020, the Company had one nonaccrual commercial real estate loan totaling $4,407,829 and two nonaccrual residential real estate loans totaling $220,967. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $13,395 would have been recorded in 2020 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 recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $8,176 at December 31, 2020.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4.Loans (continued)
An age analysis of past due loans, segregated by type of loan, is as follows:
90 Days | Past Due 90 | 90 Days | Past Due 90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
30 - 59 Days | 60 - 89 Days | or More | Total | Total | Days or More | 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 | Past Due | Past Due | Past Due | Past Due | Current | Loans | and Accruing | |||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 3,836,886 | $ | - | $ | - | $ | 3,836,886 | $ | 237,300,508 | $ | 241,137,394 | $ | - | $ | 181,762 | $ | - | $ | - | $ | 181,762 | $ | 312,060,017 | $ | 312,241,779 | $ | - | ||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | 19,574,506 | 19,574,506 | - | - | - | - | - | 34,731,150 | 34,731,150 | - | ||||||||||||||||||||||||||||||||||||||||||
Residential | 58,834 | - | - | 58,834 | 75,047,854 | 75,106,688 | - | - | - | 50,470 | 50,470 | 116,650,481 | 116,700,951 | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial | - | - | - | - | 25,452,964 | 25,452,964 | - | - | - | - | - | 60,064,503 | 60,064,503 | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer | - | - | - | - | 285,801 | 285,801 | - | - | - | - | - | 258,484 | 258,484 | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 3,895,720 | $ | - | $ | - | $ | 3,895,720 | $ | 357,661,633 | $ | 361,557,353 | $ | - | $ | 181,762 | $ | - | $ | 50,470 | $ | 232,232 | $ | 523,764,635 | $ | 523,996,867 | $ | - | ||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 224,794 | $ | - | $ | - | $ | 224,794 | $ | 240,713,355 | $ | 240,938,149 | $ | - | $ | 182,656 | $ | - | $ | - | $ | 182,656 | $ | 309,102,155 | $ | 309,284,811 | $ | - | ||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | 18,194,955 | 18,194,955 | - | - | - | - | - | 33,641,916 | 33,641,916 | - | ||||||||||||||||||||||||||||||||||||||||||
Residential | 59,892 | - | - | 59,892 | 76,062,177 | 76,122,069 | - | 24,591 | - | 220,967 | 245,558 | 121,082,203 | 121,327,761 | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial | - | - | - | - | 26,947,503 | 26,947,503 | - | - | - | - | - | 61,368,105 | 61,368,105 | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer | - | - | - | - | 292,027 | 292,027 | - | - | - | - | - | 288,454 | 288,454 | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 284,686 | $ | - | $ | - | $ | 284,686 | $ | 362,210,017 | $ | 362,494,703 | $ | - | $ | 207,247 | $ | - | $ | 220,967 | $ | 428,214 | $ | 525,482,833 | $ | 525,911,047 | $ | - |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the three months ended March 31, 20202021 and the year ended December 31, 2019,2020, are set forth in the following table:
Unpaid | Recorded | Recorded | ||||||||||||||||||||||
Contractual | Investment | Investment | Total | Average | ||||||||||||||||||||
Principal | With No | With | Recorded | Related | Recorded | |||||||||||||||||||
Balance | Allowance | Allowance | Investment | Allowance | Investment | |||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | $ | 2,071,836 | $ | 2,071,836 | $ | - | $ | 2,071,836 | $ | - | $ | 2,078,412 | ||||||||||||
Residential | 49,342 | 49,342 | - | 49,342 | - | 24,671 | ||||||||||||||||||
$ | 2,121,178 | $ | 2,121,178 | $ | - | $ | 2,121,178 | $ | - | $ | 2,103,083 | |||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | $ | 2,084,988 | $ | 2,084,988 | $ | - | $ | 2,084,988 | $ | - | $ | 2,631,185 | ||||||||||||
Residential | 50,057 | 50,057 | - | 50,057 | - | 25,029 | ||||||||||||||||||
$ | 2,135,045 | $ | 2,135,045 | $ | - | $ | 2,135,045 | $ | - | $ | 2,656,214 |
Unpaid | Recorded | Recorded | ||||||||||||||||||||||||||
Contractual | Investment | Investment | Total | Average | ||||||||||||||||||||||||
Principal | With No | With | Recorded | Related | Recorded | Interest | ||||||||||||||||||||||
Balance | Allowance | Allowance | Investment | Allowance | Investment | Recognized | ||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||
Commercial real estate | $ | 7,140,572 | $ | 6,689,472 | $ | - | $ | 6,689,472 | $ | - | $ | 6,750,585 | $ | 34,931 | ||||||||||||||
Construction and land development | 1,709,030 | 1,554,070 | - | 1,554,070 | 1,560,122 | 22,477 | ||||||||||||||||||||||
Residential real estate | 933,422 | 634,245 | - | 634,245 | - | 722,454 | 8,943 | |||||||||||||||||||||
$ | 9,783,024 | $ | 8,877,787 | $ | - | $ | 8,877,787 | $ | - | $ | 9,033,161 | $ | 66,351 | |||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||
Commercial real estate | $ | 7,246,478 | $ | 6,811,698 | $ | - | $ | 6,811,698 | $ | - | $ | 4,448,343 | $ | 352,938 | ||||||||||||||
Construction and land development | 1,719,010 | 1,566,174 | - | 1,566,174 | - | 783,087 | 22,520 | |||||||||||||||||||||
Residential real estate | 1,121,649 | 810,663 | - | 810,663 | - | 430,360 | 10,646 | |||||||||||||||||||||
$ | 10,087,137 | $ | 9,188,535 | $ | - | $ | 9,188,535 | $ | - | $ | 5,661,790 | $ | 386,104 |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4.Loans (continued)
Impaired loans include certaintroubled debt restructurings (“TDRs”), which are loans that have been modified in troubled debt restructurings (“TDRs”) whereto provide 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 March 31, 2020,2021, the Company had onetwo commercial real estate loanloans totaling $2,071,836$2,236,410 and one residential real estate loan totaling $49,342$43,371 that were classified as TDRs. All are included in impaired loans above. At March 31, 2020, the commercial real estate loan is2021, all three loans were paying as agreed while the residential real estate loan was 30 to 59 days delinquent.agreed. There have been no charge-offs or allowances associated with these twothree loans.
At December 31, 2019,2020, the Company had onetwo commercial real estate loanloans totaling $2,084,988$2,252,316 and one residential real estate loan totaling $50,057 that were$44,733 classified as TDRs. One of the commercial real estate loans with a principal balance of $182,656 was restructured as a TDR during 2020. All three loans are included in impaired loans above. Each loan is paying as agreed. There have been no charge-offs or allowances associated with these twothree loans.
Section 4013 of the CARESU.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. As of May 6, 2020, the Company has modified loans, due to the pandemic and at the borrower’s request, with an aggregate principal balance of $80.4March 31, 2021, $15.9 million, or 22%3% of itsthe Company’s loan portfolio. The Company is currently evaluating requests for relief on an additional $33.8 million in loans, or 9% of its loan portfolio. Allportfolio, were granted three-month deferrals. None of these modifications are not be accounted forloans were classified as TDRs sinceas of March 31, 2021 because they currently meetmet the guidelines of the CARES Act. See Note 2 to the financial statements included elsewhere in this report for additional information. criteria discussed above.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
As part of our portfolio risk management, the Company assigns a risk grade to each loan. The factors used to determine the grade are the payment history of the loan and the borrower, the value of the collateral and net worth of the guarantor, and cash flow projections of the borrower. Excellent, Above Average, Average and Acceptable grades are assigned to loans with limited or no delinquent payments and more than sufficient collateral and/or cash flow.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4.Loans (continued)
A description of the general characteristics of loans characterized as watch list or classified is as follows:
Pass/Watch
Loans graded as Pass/Watch are secured by generally acceptable assets which reflect above-average risk. The loans warrant closer scrutiny by management than is routine, due to circumstances affecting the borrower, the borrower’s industry, or the overall economic environment. Borrowers may reflect weaknesses such as inconsistent or weak earnings, break even or moderately deficit cash flow, thin liquidity, minimal capacity to increase leverage, or volatile market fundamentals or other industry risks. Such loans are typically secured by acceptable collateral, at or near appropriate margins, with realizable liquidation values.
Special Mention
A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.
Substandard
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Doubtful
A doubtful loan has all the weaknesses inherent in a substandard loan with the added characteristic that the weaknesses, based on currently existing facts, conditions, and values, make collection or liquidation in full highly questionable and improbable.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4.Loans (continued)
Loans by credit grade, segregated by loan type, are as follows:
Above | Pass | Special | Above | Pass | Special | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | Excellent | average | Average | Acceptable | watch | mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | Excellent | average | Average | Acceptable | watch | mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | - | $ | 2,638,429 | $ | 83,131,894 | $ | 107,599,125 | $ | 38,927,221 | $ | - | $ | 8,840,725 | $ | - | $ | 241,137,394 | $ | - | $ | 1,873,700 | $ | 93,290,918 | $ | 98,509,276 | $ | 103,568,341 | $ | 5,833,439 | $ | 9,166,105 | $ | - | $ | 312,241,779 | ||||||||||||||||||||||||||||||||||||
Construction and land development | - | - | 2,468,630 | 11,206,356 | 5,899,520 | - | - | - | 19,574,506 | - | - | 4,706,281 | 14,536,262 | 13,934,537 | - | 1,554,070 | - | 34,731,150 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 39,853 | 1,509,432 | 29,534,359 | 35,577,567 | 5,964,205 | - | 2,481,272 | - | 75,106,688 | 39,307 | 966,298 | 59,224,226 | 41,881,282 | 11,863,371 | - | 2,726,467 | - | 116,700,951 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | - | 20,000 | 6,649,244 | 15,520,228 | 3,263,492 | - | - | - | 25,452,964 | 33,580,025 | - | 7,412,065 | 13,927,259 | 5,145,154 | - | - | - | 60,064,503 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 8,714 | 96,856 | 75,772 | 56,794 | 18,408 | - | - | 29,257 | 285,801 | 10,457 | 106,140 | 104,017 | 5,332 | 14,767 | - | - | 17,771 | 258,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 48,567 | $ | 4,264,717 | $ | 121,859,899 | $ | 169,960,070 | $ | 54,072,846 | $ | - | $ | 11,321,997 | $ | 29,257 | $ | 361,557,353 | $ | 33,629,789 | $ | 2,946,138 | $ | 164,737,507 | $ | 168,859,411 | $ | 134,526,170 | $ | 5,833,439 | $ | 13,446,642 | $ | 17,771 | $ | 523,996,867 |
Above | Pass | Special | Above | Pass | Special | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | Excellent | average | Average | Acceptable | watch | mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | 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 | $ | - | $ | 2,010,472 | $ | 96,178,011 | $ | 87,860,036 | $ | 108,045,730 | $ | 5,951,177 | $ | 9,239,385 | $ | - | $ | 309,284,811 | ||||||||||||||||||||||||||||||||||||
Construction and land development | - | 216,000 | 4,737,737 | 8,572,151 | 4,669,067 | - | - | - | 18,194,955 | - | - | 2,962,300 | 15,944,499 | 13,168,844 | - | 1,566,273 | - | 33,641,916 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 39,817 | 1,633,783 | 30,767,418 | 34,784,120 | 6,386,377 | - | 2,510,554 | - | 76,122,069 | 36,285 | 1,026,824 | 63,811,389 | 40,947,548 | 12,579,311 | - | 2,926,404 | - | 121,327,761 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 153,848 | 20,000 | 11,682,299 | 11,995,143 | 3,096,213 | - | - | - | 26,947,503 | 32,088,058 | - | 10,037,516 | 13,532,170 | 5,710,361 | - | - | - | 61,368,105 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 2,327 | 99,385 | 91,620 | 60,049 | 19,214 | - | 240 | 19,192 | 292,027 | 13,729 | 109,955 | 131,171 | 6,671 | 15,663 | - | - | 11,265 | 288,454 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 195,992 | $ | 4,739,112 | $ | 138,554,014 | $ | 165,978,092 | $ | 41,608,876 | $ | - | $ | 11,399,425 | $ | 19,192 | $ | 362,494,703 | $ | 32,138,072 | $ | 3,147,251 | $ | 173,120,387 | $ | 158,290,924 | $ | 139,519,909 | $ | 5,951,177 | $ | 13,732,062 | $ | 11,265 | $ | 525,911,047 |
The principal balance of loans in the Pass/Watch category as of March 31, 2021 and December 31, 2020 include loans that were granted payment deferrals due to COVID -19. The loans were downgraded to the Pass/Watch category if they were in a higher rated category at the time the deferral was granted. Loans that completed their initial 90 day deferral and are making scheduled payments again are being re-evaluated on a loan by loan basis to determine if they warrant upgrading.
The Company’s allowance for loan losses is based on management’s evaluation of the risks inherent in the Company’s loan portfolio and the general economy. The allowance for loan losses is maintained at the amount management considers adequate to cover estimated losses in loans receivable that are deemed probable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience by pools of similar loans, diversification and size of the portfolio, adequacy of the collateral, the amount of non-performing loans and industry trends. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4.Loans (Continued)
The following table details activity in the allowance for loan losses by portfolio for the three-month periods ended March 31, 2021 and 2020 and for the year ended December 31, 2020. 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: | |||||||||||||||||||||||||||||||
March 31, 2021 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 2,230,129 | $ | 323,768 | $ | - | $ | 2,500 | $ | 2,556,397 | $ | - | $ | 2,556,397 | $ | 6,689,472 | $ | 305,552,307 | ||||||||||||||||||
Construction and land development | 201,692 | (39,269 | ) | - | 4,050 | 166,473 | - | 166,473 | 1,554,070 | 33,177,080 | ||||||||||||||||||||||||||
Residential | 644,639 | (154,755 | ) | - | - | 489,884 | - | 489,884 | 634,245 | 116,066,706 | ||||||||||||||||||||||||||
Commercial | 111,390 | (12,143 | ) | - | - | 99,247 | - | 99,247 | - | 60,064,503 | ||||||||||||||||||||||||||
Consumer | 2,138 | 320 | - | - | 2,458 | - | 2,458 | - | 258,484 | |||||||||||||||||||||||||||
Unallocated | 106,550 | 2,079 | - | - | 108,629 | - | 108,629 | - | - | |||||||||||||||||||||||||||
$ | 3,296,538 | $ | 120,000 | $ | - | $ | 6,550 | $ | 3,423,088 | $ | - | $ | 3,423,088 | $ | 8,877,787 | $ | 515,119,080 |
Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | ||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||
March 31, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,763,861 | $ | 149,860 | $ | - | $ | 2,000 | $ | 1,915,721 | $ | - | $ | 1,915,721 | $ | 2,071,836 | $ | 239,065,558 | ||||||||||||||||||
Construction and land development | 192,828 | 13,677 | - | 3,600 | 210,105 | - | 210,105 | - | 19,574,506 | |||||||||||||||||||||||||||
Residential | 478,124 | 1,629 | - | - | 479,753 | - | 479,753 | 49,342 | 75,057,346 | |||||||||||||||||||||||||||
Commercial | 107,782 | (16,720 | ) | - | 15,835 | 106,897 | - | 106,897 | - | 25,452,964 | ||||||||||||||||||||||||||
Consumer | 4,133 | 824 | - | - | 4,957 | - | 4,957 | - | 285,801 | |||||||||||||||||||||||||||
Unallocated | 46,987 | (24,270 | ) | - | - | 22,717 | - | 22,717 | - | - | ||||||||||||||||||||||||||
$ | 2,593,715 | $ | 125,000 | $ | - | $ | 21,435 | $ | 2,740,150 | $ | - | $ | 2,740,150 | $ | 2,121,178 | $ | 359,436,175 |
Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | ||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||
December 31, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,763,861 | $ | 418,806 | $ | - | $ | 47,462 | $ | 2,230,129 | $ | - | $ | 2,230,129 | $ | 6,811,698 | $ | 302,473,113 | ||||||||||||||||||
Construction and land development | 192,828 | (5,536 | ) | - | 14,400 | 201,692 | - | 201,692 | 1,566,174 | 32,075,742 | ||||||||||||||||||||||||||
Residential | 478,124 | 166,515 | - | - | 644,639 | - | 644,639 | 810,663 | 120,517,098 | |||||||||||||||||||||||||||
Commercial | 107,782 | (12,353 | ) | - | 15,961 | 111,390 | - | 111,390 | - | 61,368,105 | ||||||||||||||||||||||||||
Consumer | 4,133 | (1,995 | ) | - | - | 2,138 | - | 2,138 | - | 288,454 | ||||||||||||||||||||||||||
Unallocated | 46,987 | 59,563 | - | - | 106,550 | - | 106,550 | - | - | |||||||||||||||||||||||||||
$ | 2,593,715 | $ | 625,000 | $ | - | $ | 77,823 | $ | 3,296,538 | $ | - | $ | 3,296,538 | $ | 9,188,535 | $ | 516,722,512 |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. | Loans (Continued) |
The following table detailsprovides activity in the allowance for loan losses by portfolio for the three-month periods endedaccretable credit discount of purchased loans:
2021 | ||||
Balance at December 31, 2020 | $ | 2,250,232 | ||
Acquired during the year | - | |||
Accretion | 211,986 | |||
Adjustments | - | |||
Balance at March 31, 2021 | $ | 2,038,246 |
At March 31, 20202021, the nonaccretable discount on purchased impaired loans was $927,000. At March 31, 2021, the remaining yield premium on purchased loans was $1,923,914. At March 31, 2021, the principal balance of purchased loans was $127,932,333 and 2019 and for the year ended December 31, 2019. 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: | |||||||||||||||||||||||||||||||
March 31, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,763,861 | $ | 149,860 | $ | - | $ | 2,000 | $ | 1,915,721 | $ | - | $ | 1,915,721 | $ | 2,071,836 | $ | 239,065,558 | ||||||||||||||||||
Construction and land development | 192,828 | 13,677 | - | 3,600 | 210,105 | - | 210,105 | - | 19,574,506 | |||||||||||||||||||||||||||
Residential | 478,124 | 1,629 | - | - | 479,753 | - | 479,753 | 49,342 | 75,057,346 | |||||||||||||||||||||||||||
Commercial | 107,782 | (16,720 | ) | - | 15,835 | 106,897 | - | 106,897 | - | 25,452,964 | ||||||||||||||||||||||||||
Consumer | 4,133 | 824 | - | - | 4,957 | - | 4,957 | - | 285,801 | |||||||||||||||||||||||||||
Unallocated | 46,987 | (24,270 | ) | - | - | 22,717 | - | 22,717 | - | - | ||||||||||||||||||||||||||
$ | 2,593,715 | $ | 125,000 | $ | - | $ | 21,435 | $ | 2,740,150 | $ | - | $ | 2,740,150 | $ | 2,121,178 | $ | 359,436,175 |
Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | ||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||
March 31, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,754,372 | $ | 3,524 | $ | - | $ | 1,000 | $ | 1,758,896 | $ | - | $ | 1,758,896 | $ | 3,163,793 | $ | 233,630,509 | ||||||||||||||||||
Construction and land development | 196,374 | (29,317 | ) | - | 3,375 | 170,432 | - | 170,432 | - | 15,914,131 | ||||||||||||||||||||||||||
Residential | 401,626 | 32,059 | - | - | 433,685 | - | 433,685 | - | 63,019,749 | |||||||||||||||||||||||||||
Commercial | 102,610 | (3,482 | ) | - | 2,500 | 101,628 | - | 101,628 | - | 22,095,306 | ||||||||||||||||||||||||||
Consumer | 10,428 | (5,569 | ) | - | - | 4,859 | - | 4,859 | - | 367,293 | ||||||||||||||||||||||||||
Unallocated | 43,924 | 15,785 | - | - | 59,709 | - | 59,709 | - | - | |||||||||||||||||||||||||||
$ | 2,509,334 | $ | 13,000 | $ | - | $ | 6,875 | $ | 2,529,209 | $ | - | $ | 2,529,209 | $ | 3,163,793 | $ | 335,026,988 |
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 |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)carrying value was $126,891,001.
5. | Goodwill and Other Intangibles |
The acquisition of Carroll in October of 2020 resulted in the recording of goodwill and CDI. The following table presents the changes in both assets:
Goodwill | CDI | Total | ||||||||||
Balance at December 31, 2020 | $ | 6,978,208 | $ | 81,200 | $ | 7,059,408 | ||||||
Acquired during the year | - | - | - | |||||||||
Amortization | - | (2,082 | ) | (2,082 | ) | |||||||
Adjustments | - | - | - | |||||||||
Balance at March 31, 2021 | $ | 6,978,208 | $ | 79,118 | $ | 7,057,326 |
The CDI is being amortized over 10 years on a straight line basis. Annual amortization will be $8,328 for each of the years ended December 31, 2021 through 2029 and $6,246 in 2030. Since the acquisition was a tax-free reorganization, goodwill and CDI are not deductible for income tax purposes.
6. | Lease Commitments |
The Company and its subsidiaries are obligated under operating leases for certain office premises.
The following table shows operating lease right of use assets and operating lease liabilities as of March 31, 20202021 and December 31, 2020:
Consolidated Balance | Consolidated Balance | |||||||||||||||||
Sheet classification | March 31, 2020 | December 31, 2019 | Sheet classification | March 31, 2021 | December 31, 2020 | |||||||||||||
Operating lease right of use asset | Other assets | $ | 1,354,918 | $ | 1,392,281 | Other assets | $ | 1,205,469 | $ | 1,242,832 | ||||||||
Operating lease liabilities | Other liabilities | 1,530,666 | 1,559,356 | Other liabilities | 1,414,384 | 1,443,966 |
Operating lease cost included in occupancy expense in the statement of income for the three-month periodsthree months ended March 31, 2021 and 2020 was $49,930 and 2019 was $49,791, respectively.
Farmers and $47,807, respectively.Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
6. | Lease Commitments (continued) |
Future minimum payments under the agreements, including those option years for which the Company is reasonably certain to renew, are as follows:
Year | Amount | Amount | ||||||
2020 | $ | 149,884 | ||||||
2021 | 210,955 | $ | 159,920 | |||||
2022 | 221,497 | 221,497 | ||||||
2023 | 228,531 | 228,531 | ||||||
2024 | 234,910 | 234,910 | ||||||
2025 | 241,483 | |||||||
Thereafter | 1,140,679 | 899,195 | ||||||
Total lease payments | 2,186,456 | 1,985,536 | ||||||
Less imputed interest | (655,790 | ) | (571,152 | ) | ||||
Present value of operating lease liabilities | $ | 1,530,666 | $ | 1,414,384 |
For operating leases as of March 31, 2020,2021, the weighted average remaining lease term is 9.38.3 years and the weighted average discount rate is 3.25%. During the three-month periodsthree months ended March 31, 20202021 and 2019,2020, cash paid for amounts included in the measurement of lease liabilities was $42,150 and $41,119, and $36,724, respectively.
7. Capital Standards |
|
Farmers and Merchants Bancshares, Inc. and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balanceoff‑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.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
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-weightedrisk‑weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.
Under the revised prompt corrective action requirements, as of January 1, 2015, insuredInsured depository institutions are required to meet the following in order to qualify as “well capitalized”: (i) a common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a total risk-based capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
7. Capital Standards (continued)
The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank. As of March 31, 2020,2021, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-inphased‑in basis.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
The following table presents actual and required capital ratios as of March 31, 20202021 and December 31, 20192020 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 20202021 and December 31, 20192020 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Capital ratios of the Company are substantially the same as the Bank’s.
Minimum | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital Adequacy | To Be Well | Minimum | To Be Well | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Phase-In Schedule | Capitalized | Actual | Capital Adequacy | Capitalized | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 51,985 | 14.09 | % | $ | 38,741 | 10.50 | % | $ | 36,896 | 10.00 | % | $ | 65,177 | 12.59 | % | $ | 54,344 | 10.50 | % | $ | 51,756 | 10.00 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 49,245 | 13.35 | % | 31,362 | 8.50 | % | 29,517 | 8.00 | % | 61,754 | 11.93 | % | 43,993 | 8.50 | % | 41,405 | 8.00 | % | ||||||||||||||||||||||||||||||
Common equity tier 1 (to risk-weighted assets) | 49,245 | 13.35 | % | 25,827 | 7.00 | % | 23,982 | 6.50 | % | |||||||||||||||||||||||||||||||||||||||
Common equity tier 1 (to risk- weighted assets) | 61,754 | 11.93 | % | 36,229 | 7.00 | % | 33,642 | 6.50 | % | |||||||||||||||||||||||||||||||||||||||
Tier 1 leverage (to average assets) | 49,245 | 10.98 | % | 17,933 | 4.00 | % | 22,416 | 5.00 | % | 61,754 | 9.19 | % | 26,884 | 4.00 | % | 33,605 | 5.00 | % |
Minimum | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital Adequacy | To Be Well | Minimum | To Be Well | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Phase-In Schedule | Capitalized | Actual | Capital Adequacy | Capitalized | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 51,274 | 13.88 | % | $ | 38,775 | 10.50 | % | $ | 36,928 | 10.00 | % | $ | 63,400 | 12.62 | % | $ | 52,732 | 10.50 | % | $ | 50,221 | 10.00 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 48,681 | 13.18 | % | 31,389 | 8.50 | % | 29,543 | 8.00 | % | 60,104 | 11.97 | % | 42,688 | 8.50 | % | 40,177 | 8.00 | % | ||||||||||||||||||||||||||||||
Common equity tier 1 (to risk-weighted assets) | 48,681 | 13.18 | % | 25,850 | 7.00 | % | 24,003 | 6.50 | % | |||||||||||||||||||||||||||||||||||||||
Common equity tier 1 (to risk- weighted assets) | 60,104 | 11.97 | % | 35,155 | 7.00 | % | 32,644 | 6.50 | % | |||||||||||||||||||||||||||||||||||||||
Tier 1 leverage (to average assets) | 48,681 | 10.94 | % | 17,798 | 4.00 | % | 22,247 | 5.00 | % | 60,104 | 9.05 | % | 26,569 | 4.00 | % | 33,211 | 5.00 | % |
To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. As of March 31, 2020,2021, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the Bank’s category.
The FDIC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 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.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
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. |
● | 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. |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
8.Fair Value (continued) |
|
The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of March 31, 20202021 and December 31, 2019,2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Carrying Value: | Carrying Value: | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||
Recurring | ||||||||||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
State and municipal | $ | - | $ | 2,380,628 | $ | - | $ | 2,380,628 | $ | - | $ | 974,066 | $ | - | $ | 974,066 | ||||||||||||||||
SBA pools | - | 2,007,627 | - | 2,007,627 | - | 1,713,871 | - | 1,713,871 | ||||||||||||||||||||||||
Corporate bonds | - | 485,448 | - | 485,448 | - | 6,674,003 | - | 6,674,003 | ||||||||||||||||||||||||
Mortgage-backed securities | - | 35,792,341 | - | 35,792,341 | - | 65,566,925 | - | 65,566,925 | ||||||||||||||||||||||||
$ | - | $ | 40,666,044 | $ | - | $ | 40,666,044 | $ | - | $ | 74,928,865 | $ | - | $ | 74,928,865 | |||||||||||||||||
Equity security at fair value | ||||||||||||||||||||||||||||||||
Mutual fund | $ | 543,600 | $ | - | $ | - | $ | 543,600 | ||||||||||||||||||||||||
Equity security at fair value Mutual fund | $ | 545,713 | $ | - | $ | - | $ | 545,713 | ||||||||||||||||||||||||
Nonrecurring | ||||||||||||||||||||||||||||||||
Other real estate owned | $ | - | $ | - | $ | 1,411,605 | $ | 1,411,605 | ||||||||||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 2,121,178 | $ | 2,121,178 | - | - | 8,895,055 | 8,895,055 | ||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
Recurring | ||||||||||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
State and municipal | $ | - | $ | 512,670 | $ | - | $ | 512,670 | $ | - | $ | 986,532 | $ | - | $ | 986,532 | ||||||||||||||||
SBA pools | - | 2,151,797 | - | 2,151,797 | - | 1,783,807 | - | 1,783,807 | ||||||||||||||||||||||||
Corporate Bonds | - | 6,797,431 | 6,797,431 | |||||||||||||||||||||||||||||
Mortgage-backed securities | - | 33,867,307 | - | 33,867,307 | - | 44,909,516 | - | 44,909,516 | ||||||||||||||||||||||||
$ | - | $ | 36,531,774 | $ | - | $ | 36,531,774 | $ | - | $ | 54,477,286 | $ | - | $ | 54,477,286 | |||||||||||||||||
Equity security at fair value | ||||||||||||||||||||||||||||||||
Mutual fund | $ | 532,321 | $ | - | $ | - | $ | 532,321 | ||||||||||||||||||||||||
Equity security at fair value Mutual fund | $ | 552,566 | $ | - | $ | - | $ | 552,566 | ||||||||||||||||||||||||
Nonrecurring | ||||||||||||||||||||||||||||||||
Other real estate owned | $ | - | $ | - | $ | 1,411,605 | $ | 1,411,605 | ||||||||||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 2,135,045 | $ | 2,135,045 | - | - | 9,188,535 | 9,188,535 |
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| 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:
March 31, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
Carrying | Estimated | Carrying | Estimated | Carrying | Estimated | Carrying | Estimated | |||||||||||||||||||||||||
Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||
Level 2 inputs | ||||||||||||||||||||||||||||||||
Securities held to maturity | $ | 19,017,782 | $ | 18,646,036 | $ | 19,510,018 | $ | 20,097,931 | $ | 21,865,447 | $ | 22,741,176 | $ | 23,078,519 | $ | 24,244,786 | ||||||||||||||||
Mortgage loans held for sale | 1,481,450 | 1,501,296 | 242,000 | 245,857 | 1,682,700 | 1,707,273 | 1,673,350 | 1,705,781 | ||||||||||||||||||||||||
Federal Home Loan Bank stock | 611,300 | 611,300 | 376,200 | 376,200 | ||||||||||||||||||||||||||||
Restricted stock | 675,400 | 675,400 | 900,500 | 900,500 | ||||||||||||||||||||||||||||
Level 3 inputs | ||||||||||||||||||||||||||||||||
Loans, net | 358,319,859 | 358,411,804 | 359,382,843 | 359,346,031 | 519,239,304 | 524,654,970 | 521,690,514 | 527,132,047 | ||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||
Level 1 inputs | ||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | $ | 61,153,068 | $ | 61,153,068 | $ | 60,659,015 | $ | 60,659,015 | $ | 121,925,868 | $ | 121,925,868 | $ | 103,155,113 | $ | 103,155,113 | ||||||||||||||||
Securities sold under repurchase agreements | 9,708,344 | 9,708,344 | 10,958,118 | 10,958,118 | 12,648,269 | 12,648,269 | 24,753,972 | 24,753,972 | ||||||||||||||||||||||||
Level 2 inputs | ||||||||||||||||||||||||||||||||
Interest-bearing deposits | 328,611,361 | 340,381,361 | 315,954,299 | 313,622,299 | 481,315,407 | 471,734,407 | 470,246,434 | 474,096,434 | ||||||||||||||||||||||||
Federal Home Loan Bank advances | 5,000,000 | 5,250,000 | - | - | 5,000,000 | 5,042,000 | 5,000,000 | 5,136,000 | ||||||||||||||||||||||||
Long-term debt | 16,974,687 | 17,019,840 | 16,973,280 | 17,018,416 |
The fair value of mortgage loans held for sale is determined by the expected sales price. The fair value of loans were determined using an exit price methodology. 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.
Farmers and Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| Earnings per Share |
Basic earnings per share is determined by dividing net income available to stockholders by the weighted-average number of shares of common stock outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents, giving retroactive effect to stock dividends declared during the period. Diluted earnings per share is determined in the same manner, except that the weighted-average number of shares of common stock outstanding is adjusted for the dilutive effect of outstanding common stock equivalents. The following table sets forth the calculation of basic and diluted earnings per share for the three-month periodthree ended March 31, 20202021 and 2019.2020. There were no common stock equivalents outstanding for the three-month periodsthree month period ended March 31, 20202021 or 2019.2020.
Three Months Ended | ||||||||||||||||
Three Months Ended | Three Months Ended | March 31 | ||||||||||||||
March 31, 2020 | March 31, 2019 | 2021 | 2020 | |||||||||||||
Net income | $ | 843,307 | $ | 1,096,287 | $ | 2,029,575 | $ | 843,307 | ||||||||
Weighted average shares outstanding | 2,974,019 | 2,945,245 | 3,011,255 | 2,974,019 | ||||||||||||
Earnings per share - basic and diluted | $ | 0.28 | $ | 0.37 | $ | 0.67 | $ | 0.28 |
| 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 $66,64976,924 and $61,817$66,649 for the three-month periods ended March 31, 20202021 and 2019,2020, 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 $1,5891,661 and $1,468$1,589 for the three-month periods ended March 31, 20202021 and 2019,2020, 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 $51,30042,000 and $30,600$51,300 for the three-month periods ended March 31, 2021 and 2020, and 2019, respectively.respectively, related to these plans.
Retirement plan expenses are included in employee benefits on the consolidated statements of income.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2019.2020 (the “Form 10-K”). References in this report to “us”, “we”, “our”, and “the Company” are to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.
Forward-Looking Statements
This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions;conditions, including those impacted and/or driven by the COVID-19 pandemic; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports that Farmers and Merchants Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.
Farmers and Merchants Bancshares, Inc.
Farmers and Merchants Bancshares, Inc. is a Maryland corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended. The Company was incorporated on August 8, 2016 for the purpose of becoming the holding company of Farmers and Merchants Bank (the “Bank”) in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the “Reorganization”). The Reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company.
The Company’s primary business activities are serving as the parent company of the Bank and holding a series investment in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed protected cell captive insurance company (“FCBI”). The Company owns 100% of one series of membership interests issued by FCBI, which series is deemed a “protected cell” under Tennessee law and has been designated “Series Protected Cell FCB-4” (such series investment is hereinafter referred to as the “Insurance Subsidiary”).
The Bank is a Maryland commercial bank chartered on October 24, 1919 that is engaged in a general commercial and retail banking business. The Bank has had one inactive subsidiary, Reliable Community Financial Services, Inc., a Maryland corporation that was incorporated in April 1992 to facilitate the sale of fixed rate annuity products and later positioned to sell a full array of investment and insurance products.
The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (FCBI)(i.e., FCBI) that was formed on November 9, 2016 to better manage our risk programs, provide insurance efficiencies, and add operating income by both keeping insurance premiums paid with respect to such risks within our affiliated group of entities and realizing certain tax benefits that are unique to captive insurance companies. The Company’s investment in the Insurance Subsidiary represents one series of membership interests in FCBI. As a “series” limited liability company, FCBI is authorized by state law and its governing instruments to issue one or more series of membership interests, each of which, for all purposes under state law, is deemed to be a legal entity separate and apart from FCBI and its other series.
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 the Bank, with the Bank as the surviving insured depository institution (the “Bank Merger” and, together with the Merger, the “Merger Transactions”).
Our ability to consummate the Merger Transactions 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. 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 Reports on Form 8-K filed with the SEC on March 6, 2020 and March 11, 2020.
You should keep in mind that discussions in this report that refer to the Company’s business, operations and risks in the future refer to the Company as a stand-alone entity, and that these considerations will be different with respect to the combined company after the closing of the Merger Transactions.
The Company maintains an Internet site at www.fmb1919.bank on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
Estimates and Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year ended December 31, 2019,2020, which were included in Item 8 of Part II of Farmers and Merchants Bancshares, Inc.’s Annual Report onthe Form 10-K for the year ended December 31, 2019.10-K. On an on-going basis, management evaluates estimates, including those related to loan losses and intangible assets, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.
The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.
Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.
Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2019.2020.
COVID-19 Pandemic
The COVID-19 pandemic has been wreaking havoc on the U.S. economy since the World Health Organization declared it a pandemic on March 11, 2020. The full impact and its effect on the banking industry, including the Company, will not be known for several quarters, but will be significant.
The U.S. and state governments reacted to the outbreak of the pandemic by issuing shelter-at-home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.
Although states, including Maryland, have eased many of the previously-imposed COVID-19 restrictions, including stay-at-home orders and the required closure of non-essential businesses, and many individuals have been vaccinated, there are still a significant number of active infections throughout the Country, including in the State of Maryland, and individuals continue to become infected. As a result, it is possible that states, including Maryland, will re-implement some or all of the COVID-19 related restrictions that have been lifted and again require some or all non-essential businesses to close or drastically alter their business operations, which could have a material adverse impact on our customers and, thus, our financial condition and results of operations.
Paycheck Protection Program
The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. We acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program. We developed an SBADuring 2020, we made over $31 million in PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access. Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible. We were able to fund 172 loan applications for approximately $25.3 million fromloans. . During the first tranchequarter of 2021, we made an additional $21 million of PPP designated funds. Congress allocated additional funding to theloans. All PPP on April 23, 2020. Due to our advance preparation and software implementation, we were able to quickly gain approval for an additional 78 loan applications for approximately $5.1 million through May 11, 2020. In total, we have gained approval for over $30 million dollars to 250 small businesses. Approximately 68% of the loans were under $100,000 in size. We will continue to provide access to the PPP and process applications for as long as the PPP is open and funds are available so that we can assist as many small business owners in our markets as possible. These loans are 100% guaranteed by the SBA, have up to a two-yearfive-year maturity, provide for a six-month deferral period, and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The majority of the PPP loans made in 2020 have been forgiven as of March 31, 2021 The SBA also established processing fees from 1% to 5%, depending on the loan amount. We anticipate receiving approximately $1,257,000received $877,000 in fees.fees during the three months ended March 31, 2021 which, net of related origination costs, will be amortized into interest income over the life of the loans.
In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements were to internal, non-interest-bearing accounts for use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.
Financial Condition
Total assets increased by $17,386,282$19,065,272, or 3.9% during the first quarter of 20202.8%, to $459,601,380$696,382,354 at March 31, 20202021 from $442,215,098$677,317,082 at December 31, 2019.2020. The increase in total assets was due primarily to increases of $13,522,450 in cash and cash equivalents and $3,642,034$19,238,507 in debt securities.securities and $3,770,119 in bank owned life insurance, offset by decreases of $2,451,210 in loans and $1,392,875 in premises and equipment due to the sale of a former branch location.
Total liabilities increased $16,417,804$17,681,343, or 4.2% during the first quarter of 20202.8%, to $409,179,386$643,268,942 at March 31, 20202021 from $392,761,582$625,587,599 at December 31, 2019.2020. The increase was due primarily to a $13,151,115$29,839,728 increase in deposits, and a $5,000,000 increase in FHLB advances, offset by a reduction of $1,249,774$12,105,703 decrease in securities sold under repurchase agreements. The increase in deposits was due to an inflow of funds from depositors who have received numerous government stimulus funds.
Stockholders’ equity increased by $968,478 during the first quarter of 2020$1,383,929 to $50,421,994$53,113,412 at March 31, 20202021 from $49,453,516$51,729,483 at December 31, 2019.2020. The increase was due primarily to net income for the three-month period ended March 31, 2021 of $843,307 and an increase$2,029,575, offset by a decrease of $125,171$645,646 in accumulated other comprehensive income.
Loans
Major categories of loans at March 31, 20202021 and December 31, 2019 are2020 were as follows:
March 31, | December 31, | March 31 | December 31, | |||||||||||||||||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||
Commercial | $ | 241,137,394 | 67 | % | $ | 240,938,149 | 67 | % | $ | 312,241,779 | 60 | % | $ | 309,284,811 | 59 | % | ||||||||||||||||
Construction/Land development | 19,574,506 | 5 | % | 18,194,955 | 5 | % | 34,731,150 | 7 | % | 33,641,916 | 6 | % | ||||||||||||||||||||
Residential | 75,106,688 | 21 | % | 76,122,069 | 21 | % | 116,700,951 | 22 | % | 121,327,761 | 23 | % | ||||||||||||||||||||
Commercial | 25,452,964 | 7 | % | 26,947,503 | 7 | % | 60,064,503 | 11 | % | 61,368,105 | 12 | % | ||||||||||||||||||||
Consumer | 285,801 | 0 | % | 292,027 | 0 | % | 258,484 | 0 | % | 288,454 | 0 | % | ||||||||||||||||||||
361,557,353 | 100 | % | 362,494,703 | 100 | % | 523,996,867 | 100 | % | 525,911,047 | 100 | % | |||||||||||||||||||||
Less: Allowance for loan losses | 2,740,150 | 2,593,715 | 3,423,088 | 3,296,538 | ||||||||||||||||||||||||||||
Deferred origination fees net of costs | 497,344 | 518,145 | 1,334,475 | 923,995 | ||||||||||||||||||||||||||||
$ | 358,319,859 | $ | 359,382,843 | $ | 519,239,304 | $ | 521,690,514 |
Loans decreased by $1,062,984$2,451,210, or 0.3%0.5%, to $358,319,859$519,239,304 at March 31, 20202021 from $359,382,843$521,690,514 at December 31, 2019.2020. The declinedecrease was due primarily to a $1,015,381 decrease in residential loans and a $1,494,539$4,626,810 decrease in commercial loans offset by a $1,379,551$2,956,968 increase in construction/land developmentcommercial real estate loans. The allowance for loan losses increased $146,435$126,550 to $2,740,150$3,423,088 at March 31, 20202021 from $2,593,715$3,296,538 at December 31, 2019.2020. Deferred origination fees increased to $1,334,475 at March 31, 2021 from $923,995 at December 31, 2020 due to the origination of the PPP loans.
The Company has adopted policies and procedures that seek to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Company’s policy is to make the majority of its loan commitments in the market area it serves. Management believes that this tends to reduce risk because management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.
An age analysis of past due loans, segregated by class of loans, as of March 31, 20202021 and December 31, 2019,2020, is as follows:
90 Days | Past Due 90 | 90 Days | Past Due 90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
30 - 59 Days | 60 - 89 Days | or more | Total | Total | Days or More | 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 | Past Due | Past Due | Past Due | Past Due | Current | Loans | and Accruing | |||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commerical | $ | 3,836,886 | $ | - | $ | - | $ | 3,836,886 | $ | 237,300,508 | $ | 241,137,394 | $ | - | $ | 181,762 | $ | - | $ | - | $ | 181,762 | $ | 312,060,017 | $ | 312,241,779 | $ | - | ||||||||||||||||||||||||||||
Construction/Land development | - | - | - | - | 19,574,506 | 19,574,506 | - | - | - | - | - | 34,731,150 | 34,731,150 | - | ||||||||||||||||||||||||||||||||||||||||||
Residential | 58,834 | - | - | 58,834 | 75,047,854 | 75,106,688 | - | - | - | 50,470 | 50,470 | 116,650,211 | 116,700,951 | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial | - | - | - | - | 25,452,964 | 25,452,964 | - | - | - | - | - | 60,064,503 | 60,064,503 | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer | - | - | - | - | 285,801 | 285,801 | - | - | - | - | - | 258,484 | 258,484 | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 3,895,720 | $ | - | $ | - | $ | 3,895,720 | $ | 357,661,633 | $ | 361,557,353 | $ | - | $ | 181,762 | $ | - | $ | 50,470 | $ | 232,232 | $ | 523,764,365 | $ | 523,996,867 | $ | - |
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: | ||||||||||||||||||||||||||||
Commerical | $ | 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 | ||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Commerical | $ | 182,656 | $ | - | $ | - | $ | 182,656 | $ | 309,102,155 | $ | 309,284,811 | $ | - | ||||||||||||||
Construction/Land development | - | - | - | - | 33,641,916 | 33,641,916 | - | |||||||||||||||||||||
Residential | 24,591 | - | 220,967 | 245,558 | 121,082,203 | 121,327,761 | - | |||||||||||||||||||||
Commercial | - | - | - | - | 61,368,105 | 61,368,105 | - | |||||||||||||||||||||
Consumer | - | - | - | - | 288,454 | 288,454 | - | |||||||||||||||||||||
Total | $ | 207,247 | $ | - | $ | 220,967 | $ | 428,214 | $ | 525,482,833 | $ | 525,911,047 | $ | - |
It is the Company’s policy to place a loan in nonaccrual status whenever there is substantial doubt about the ability of the borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan, and the overall economic situation of the borrower when making a nonaccrual decision. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least sixnine months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.
At March 31, 2020 and December 31, 2019,2021, the Company had noone nonaccrual commercial real estate loan totaling $4,407,829 and one nonaccrual residential real estate loan totaling $50,470. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $61,924 would have been recorded for the three months ended March 31, 2021 if these nonaccrual loans orhad 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 recorded investment of the nonaccrual loans that were delinquent 90 days or greater.was net of charge-offs and a nonaccretable discount totaling $8,176 at March 31, 2021.
Impaired loans as of MarchAt December 31, 2020, the Company had one nonaccrual commercial real estate loan totaling $4,407,829 and two nonaccrual residential real estate loans totaling $220,967. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of $13,395 would have been recorded in 2020 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 recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling $8,176 at December 31, 2019 are set forth in the following table:2020.
March 31 | December 31, | |||||||
2020 | 2019 | |||||||
Impaired loans with no valuation allowance | $ | 2,121,178 | $ | 2,135,045 | ||||
Impaired loans with a valuation allowance | - | - | ||||||
Total impaired loans | $ | 2,121,178 | $ | 2,135,045 |
Impaired loans include certainas of March 31, 2021 and December 31, 2020 are set forth in the following table:
March 31 | December 31, | |||||||
2021 | 2020 | |||||||
Impaired loans with no valuation allowance | $ | 8,877,787 | $ | 9,188,535 | ||||
Impaired loans with a valuation allowance | - | - | ||||||
Total impaired loans | $ | 8,877,787 | $ | 9,188,535 | ||||
Valuation allowance related to impaired loans | $ | - | $ | - |
Impaired loans that have been modified ininclude troubled debt restructurings (“TDRs”) where, which are loans that were modified to provide 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.
Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. As of March 31, 2021, $15.9 million, or 3% of the Company’s loan portfolio, were granted three-month deferrals. None of these loans were classified as TDRs as of March 31, 2021 because they met the criteria discussed above.
The Company has provided loan modifications to its borrowers who are impacted by the COVID-19 pandemic. Modifications include deferrals of principal and interest for periods up to three months and interest only periods of three months. These deferrals can be extended for an additional three months, subject to approval by the Company. As of March 31, 2021, $15.9 million, or 3% of the Company’s loan portfolio, were granted three-month deferrals. None of these loans were classified as TDRs as of March 31, 2021 because they met the criteria discussed above.
The Company continues to prudently work with borrowers that have been negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. See Notes 2 andNote 4 to the financial statements included elsewhere in this report for additional information.
At March 31, 2020,2021, the Company had onetwo commercial real estate loanloans totaling $2,071,836$2,236,410 and one residential real estate loan totaling $49,342$43,371 that were classified as TDRs. All are included in impaired loans above. At March 31, 2020, the commercial real estate loan is2021, all three loans were paying as agreed while the residential real estate loan was 30 to 59 days delinquent.agreed. There have been no charge-offs or allowances associated with these twothree loans.
At December 31, 2019,2020, the Company had onetwo commercial real estate loanloans totaling $2,084,988$2,252,316 and one residential real estate loan totaling $50,057 that were$44,733 classified as TDRs. One of the commercial real estate loans with a principal balance of $182,656 was restructured as a TDR during 2020. All three loans 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.three loans
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Restructured loans (TDRs): | ||||||||
Performing as agreed | $ | 2,071,836 | $ | 2,135,045 | ||||
Not performing as agreed | 49,342 | - | ||||||
Total TDRs | $ | 2,121,178 | $ | 2,135,045 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Restructured loans (TDRs): | ||||||||
Performing as agreed | $ | 2,279,781 | $ | 2,297,049 | ||||
Not performing as agreed | - | - | ||||||
Total TDRs | $ | 2,279,781 | $ | 2,297,049 |
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with Accounting Standards Codification (“ASC”)ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.
The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors.
Although management believes that, based on information currently available, the Company’s allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Company’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions at the time management determined the current level of the allowance for loan losses.
The following table details activity in the allowance for loan losses by portfolio for the three monthsthree-month periods ended March 31, 20202021 and 20192020 and the year ended December 31, 2019.2020. 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 | Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | Provision | ending balance evaluated | balances evaluated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate: | $ | 1,763,861 | $ | 149,860 | $ | - | $ | 2,000 | $ | 1,915,721 | $ | - | $ | 1,915,721 | $ | 2,071,836 | $ | 239,065,558 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 2,230,129 | $ | 323,768 | $ | - | $ | 2,500 | $ | 2,556,397 | $ | - | $ | 2,556,397 | $ | 6,689,472 | $ | 305,552,307 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | 192,828 | 13,677 | - | 3,600 | 210,105 | - | 210,105 | - | 19,574,506 | 201,692 | (39,269 | ) | - | 4,050 | 166,473 | - | 166,473 | 1,554,070 | 33,177,080 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 478,124 | 1,629 | - | - | 479,753 | - | 479,753 | 49,342 | 75,057,346 | 644,639 | (154,755 | ) | - | - | 489,884 | - | 489,884 | 634,245 | 116,066,706 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 107,782 | (16,720 | ) | - | 15,835 | 106,897 | - | 106,897 | - | 25,452,964 | 111,390 | (12,143 | ) | - | - | 99,247 | - | 99,247 | - | 60,064,503 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 4,133 | 824 | - | - | 4,957 | - | 4,957 | - | 285,801 | 2,138 | 320 | - | - | 2,458 | - | 2,458 | - | 258,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unallocated | 46,987 | (24,270 | ) | - | - | 22,717 | - | 22,717 | - | - | 106,550 | 2,079 | - | - | 108,629 | - | 108,629 | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 2,593,715 | $ | 125,000 | $ | - | $ | 21,435 | $ | 2,740,150 | $ | - | $ | 2,740,150 | $ | 2,121,178 | $ | 359,436,175 | $ | 3,296,538 | $ | 120,000 | $ | - | $ | 6,550 | $ | 3,423,088 | $ | - | $ | 3,423,088 | $ | 8,877,787 | $ | 515,119,080 |
Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | ||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||
March 31, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,754,372 | $ | 3,524 | $ | - | $ | 1,000 | $ | 1,758,896 | $ | - | $ | 1,758,896 | $ | 3,163,793 | $ | 233,630,509 | ||||||||||||||||||
Construction and land development | 196,374 | (29,317 | ) | - | 3,375 | 170,432 | - | 170,432 | - | 15,914,131 | ||||||||||||||||||||||||||
Residential | 401,626 | 32,059 | - | - | 433,685 | - | 433,685 | - | 63,019,749 | |||||||||||||||||||||||||||
Commercial | 102,610 | (3,482 | ) | - | 2,500 | 101,628 | - | 101,628 | - | 22,095,306 | ||||||||||||||||||||||||||
Consumer | 10,428 | (5,569 | ) | - | - | 4,859 | - | 4,859 | - | 367,293 | ||||||||||||||||||||||||||
Unallocated | 43,924 | 15,785 | - | - | 59,709 | - | 59,709 | - | - | |||||||||||||||||||||||||||
$ | 2,509,334 | $ | 13,000 | $ | - | $ | 6,875 | $ | 2,529,209 | $ | - | $ | 2,529,209 | $ | 3,163,793 | $ | 335,026,988 |
Allowance for loan losses | Outstanding loan | Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | Provision | ending balance evaluated | balances evaluated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | 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 | $ | 1,763,861 | $ | 149,860 | $ | - | $ | 2,000 | $ | 1,915,721 | $ | - | $ | 1,915,721 | $ | 2,071,836 | $ | 239,065,558 | |||||||||||||||||||||||||||||||||||
Construction and land development | 196,374 | (17,571 | ) | - | 14,025 | 192,828 | - | 192,828 | - | 18,194,955 | 192,828 | 13,677 | - | 3,600 | 210,105 | - | 210,105 | - | 19,574,506 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 401,626 | 76,498 | - | - | 478,124 | - | 478,124 | 50,057 | 76,072,012 | 478,124 | 1,629 | - | - | 479,753 | - | 479,753 | 49,342 | 75,057,346 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 102,610 | (3,995 | ) | - | 9,167 | 107,782 | - | 107,782 | - | 26,947,503 | 107,782 | (16,720 | ) | - | 15,835 | 106,897 | - | 106,897 | - | 25,452,964 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 10,428 | (6,295 | ) | - | - | 4,133 | - | 4,133 | - | 292,027 | 4,133 | 824 | - | - | 4,957 | - | 4,957 | - | 285,801 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Unallocated | 43,924 | 3,063 | - | - | 46,987 | - | 46,987 | - | - | 46,987 | (24,270 | ) | - | - | 22,717 | - | 22,717 | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 2,509,334 | $ | 40,000 | $ | - | $ | 44,381 | $ | 2,593,715 | $ | - | $ | 2,593,715 | $ | 2,135,045 | $ | 360,359,658 | $ | 2,593,715 | $ | 125,000 | $ | - | $ | 21,435 | $ | 2,740,150 | $ | - | $ | 2,740,150 | $ | 2,121,178 | $ | 359,436,175 |
Allowance for loan losses | Outstanding loan | |||||||||||||||||||||||||||||||||||
Provision | ending balance evaluated | balances evaluated | ||||||||||||||||||||||||||||||||||
Beginning | for loan | Charge | Ending | for impairment: | for impairment: | |||||||||||||||||||||||||||||||
December 31, 2020 | balance | losses | offs | Recoveries | balance | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,763,861 | $ | 418,806 | $ | - | $ | 47,462 | $ | 2,230,129 | $ | - | $ | 2,230,129 | $ | 6,811,698 | $ | 302,473,113 | ||||||||||||||||||
Construction and land development | 192,828 | (5,536 | ) | - | 14,400 | 201,692 | - | 201,692 | 1,566,174 | 32,075,742 | ||||||||||||||||||||||||||
Residential | 478,124 | 166,515 | - | - | 644,639 | - | 644,639 | 810,663 | 120,517,098 | |||||||||||||||||||||||||||
Commercial | 107,782 | (12,353 | ) | - | 15,961 | 111,390 | - | 111,390 | - | 61,368,105 | ||||||||||||||||||||||||||
Consumer | 4,133 | (1,995 | ) | - | - | 2,138 | - | 2,138 | - | 288,454 | ||||||||||||||||||||||||||
Unallocated | 46,987 | 59,563 | - | - | 106,550 | - | 106,550 | - | - | |||||||||||||||||||||||||||
$ | 2,593,715 | $ | 625,000 | $ | - | $ | 77,823 | $ | 3,296,538 | $ | - | $ | 3,296,538 | $ | 9,188,535 | $ | 516,722,512 |
The provision for loan losses was $120,000 and $125,000 for the three months ended March 31, 2021 and 2020, and $13,000 for the three months ended March 31, 2019.respectively.
During the three-month periods ended March 31, 20202021 and March 31, 2019,2020, the Company had no loan charge-offs. Recoveriesrecoveries from loans written off in prior periods totaledtotaling $6,550 and $21,435, respectively, and $6,875 for the three-month periods ended March 31, 2020 and 2019, respectively.no loan charge-offs in either period.
As of March 31, 2020,2021, the Company had $9,200,820$9,469,300 of loans on a watch list, other than impaired loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2019,2020, the Company had $9,264,380$9,546,879 of such loans. These loans are subject to ongoing management attention and their classifications are reviewed regularly. Watch list loans include loans classified as Special Mention, Substandard, and Doubtful.
Investment Securities
Investments in debt securities increased by $3,642,034$19,238,507 or 6.5%24.8% to $59,683,826$96,794,312 at March 31, 20202021 from $56,041,792$77,555,805 at December 31, 2019.2020. At March 31, 20202021 and December 31, 2019,2020, the Company had classified 68%77% and 65%70%, respectively, of the investment portfolio as available for sale. The balance of the portfolio was classified as held to maturity.
Securities classified as available for sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the Company’s asset/liability management strategy. Available for sale debt securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of income taxes. Securities classified as held to maturity, which managementthe Company has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company records unrealized gains and losses on equity securities in earnings. The Company does not currently follow a strategy of making security purchases with a view to near-term sales, and, therefore, does not own trading securities. The Company manages the investment portfolio within policies that seek to achieve desired levels of liquidity, manage interest rate sensitivity, meet earnings objectives, and provide required collateral for deposit and borrowing activities.
The following table sets forth the carrying value of investments in debt securities at March 31, 20202021 and December 31, 2019:2020:
March 31 | December 31, | March 31, | December 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Available for sale | ||||||||||||||||
State and municipal | $ | 2,380,628 | $ | 512,670 | $ | 974,066 | $ | 986,532 | ||||||||
SBA pools | 2,007,627 | 2,151,797 | 1,713,871 | 1,783,807 | ||||||||||||
Corporate Bonds | 485,448 | - | ||||||||||||||
Corporate bonds | 6,674,003 | 6,797,431 | ||||||||||||||
Mortgage-backed securities | 35,792,341 | 33,867,307 | 65,566,925 | 44,909,516 | ||||||||||||
$ | 40,666,044 | $ | 36,531,774 | $ | 74,928,865 | $ | 54,477,286 | |||||||||
Held to maturity | ||||||||||||||||
State and municipal | $ | 19,017,782 | $ | 19,510,018 | $ | 21,865,447 | $ | 23,078,519 |
The following table sets forth the scheduled maturities of investments in debt securities at March 31, 2020:2021:
Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | |||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||
Within 1 year | $ | 1,875,000 | $ | 1,875,000 | $ | 256,279 | $ | 257,642 | $ | - | $ | - | $ | 489,060 | $ | 492,666 | ||||||||||||||||
Over 1 to 5 years | 752,514 | 739,858 | 561,884 | 561,512 | 4,634,500 | 4,756,528 | 795,231 | 810,700 | ||||||||||||||||||||||||
Over 5 to 10 years | 250,000 | 251,218 | 3,224,291 | 3,246,851 | 2,694,963 | 2,690,665 | 2,025,039 | 2,196,415 | ||||||||||||||||||||||||
Over 10 years | - | - | 14,975,328 | 14,580,031 | 200,736 | 200,876 | 18,556,117 | 19,241,395 | ||||||||||||||||||||||||
2,877,514 | 2,866,076 | 19,017,782 | 18,646,036 | 7,530,199 | 7,648,069 | 21,865,447 | 22,741,176 | |||||||||||||||||||||||||
SBA Pools | 2,054,025 | 2,007,627 | - | - | 1,748,461 | 1,713,871 | - | - | ||||||||||||||||||||||||
Mortgage-backed securities | 35,503,008 | 35,792,341 | - | - | 65,566,556 | 65,566,925 | - | - | ||||||||||||||||||||||||
$ | 40,434,547 | $ | 40,666,044 | $ | 19,017,782 | $ | 18,646,036 | $ | 74,845,216 | $ | 74,928,865 | $ | 21,865,447 | $ | 22,741,176 |
SBA pools and mortgage-backed securities are due in monthly installments.
Other Real Estate Owned
Other real estate owned (“OREO”) at March 31, 2021 and December 31, 2020 included two properties with an aggregate carrying value of $1,411,605. The Bank owns onefirst property is an apartment building in Baltimore, Maryland with a carrying value of $1,411,605 that was obtained in the Merger. The property is under an optional sales contract with no projected closing date. The other property is land in Cecil County, Maryland thatwith a carrying value of $0. It was acquired through foreclosure in 20072007. The latter property consists of 10.43 acres and is classified as other real estate owned (“OREO”). The Bank was required by statute to write this property down during 2019 to $0 duecurrently under contract for a gross sales price of $295,000 with closing expected in 2021. Due to the length of time that itthe property has been held, byMaryland banking law required a write-down of the Bank. The property is under contractvalue to be sold by the end of 2020.$0 in 2019.
Deposits
Total deposits increased by $13,151,115$29,839,728, or 3.5%5.2%, to $389,764,429$603,241,275 at March 31, 20202021 from $376,613,314$573,401,547 at December 31, 2019.2020. The increase in deposits was due to an $18,770,755 increase in noninterest-bearing accounts, a $6,557,268$16,890,659 increase in savings accounts, and a $1,784,145 increase in interest bearing checking accounts, offset by a $5,219,590 increase in time deposits, a $1,315,375 increase$2,131,913 decrease in money market accounts and a $494,053 increase in noninterest-bearing accounts, offset by a $435,171$5,473,918 decrease in savings accounts.time deposits.
The following table shows the average balances and average costs of deposits for the three monthsthree-month periods ended March 31, 20202021 and 2019:2020:
March 31, 2020 | March 31, 2019 | March 31, 2021 | March 31, 2020 | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Balance | Cost | Balance | Cost | Balance | Cost | Balance | Cost | |||||||||||||||||||||||||
Noninterest bearing demand deposits | $ | 59,982,921 | 0.00 | % | $ | 58,107,801 | 0.00 | % | $ | 111,624,572 | 0.00 | % | $ | 59,982,921 | 0.00 | % | ||||||||||||||||
Interest bearing demand deposits | 63,806,965 | 0.35 | % | 53,649,964 | 0.32 | % | 83,532,279 | 0.26 | % | 63,806,965 | 0.35 | % | ||||||||||||||||||||
Savings and money market deposits | 102,211,943 | 0.32 | % | 100,148,340 | 0.30 | % | 199,036,116 | 0.15 | % | 102,211,943 | 0.32 | % | ||||||||||||||||||||
Time deposits | 156,493,583 | 1.97 | % | 143,504,411 | 1.83 | % | 194,296,941 | 0.96 | % | 156,493,583 | 1.97 | % | ||||||||||||||||||||
$ | 382,495,412 | 0.95 | % | $ | 355,410,516 | 0.87 | % | $ | 588,489,908 | 0.40 | % | $ | 382,495,412 | 0.95 | % |
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 familysingle-family residential loans and 50% of eligible pledged commercial loans as well as investment securities, or approximately $58.7$82.3 million under a secured line of credit with the FHLB.Federal Home Loan Bank (“FHLB”). The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately $21.4$29.5 million. Finally, the Bank has an $18,500,000$23,500,000 ($9,500,00014,500,000 unsecured and $9,000,000 secured) of overnight federal funds linelines of credit available from two commercial banks. FHLB advances of $5,000,000 and $0 were outstanding as of March 31, 20202021 and December 31, 2019, respectively.2020. The Company borrowed $17,000,000 to facilitate the acquisition of Carroll as more fully described below. There were no borrowings from the Reserve Bank or our commercial bank lenders at March 31, 20202021 and December 31, 2019.2020. Management believes that we have adequate liquidity sources to meet all anticipated liquidity needs over the next 12 months. Management knows of no trend or event which is likely to have a material impact on our ability to maintain liquidity at satisfactory levels.
Borrowings and Other Contractual Obligations
The Company’s contractual obligations consist primarily of borrowings and operating leases for various facilities.
On September 30, 2020, the Company borrowed $17,000,000 from First Horizon Bank (“FHN”) for the purpose of funding a portion of the merger consideration that was payable to the stockholders of Carroll when it was merged with and into the Company on October 1, 2020. Net of issuance costs, the amount of the net long-term debt was $16,974,687 and $16,973,280 as of March 31, 2021 and December 31, 2020, respectively. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. The Company is required to make quarterly interest-only payments through October 1, 2021. The Company expects that the amount of these quarterly interest-only payments to be $174,250. During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $646,472, which will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to FHN.
Securities sold under agreements to repurchase represent overnight borrowings from customers. Securities owned by the Company which are used as collateral for these borrowings are primarily U.S. government agency securities.
Specific information about the Company’s borrowings and contractual obligations is set forth in the following table:
March 31 | December 31, | September 30, | December 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Amount oustanding at period-end: | ||||||||||||||||
Securities sold under repurchase agreements | $ | 9,708,344 | $ | 10,958,118 | $ | 12,648,269 | $ | 24,753,972 | ||||||||
Federal Home Loan Bank advances mature in 2025 | 5,000,000 | - | ||||||||||||||
Federal Home Loan Bank advances | 5,000,000 | 5,000,000 | ||||||||||||||
Long-term debt (net of issuance costs) | 16,974,687 | 16,973,280 | ||||||||||||||
Weighted average rate paid at period-end: | ||||||||||||||||
Securites sold under repurchase agreements | 1.47 | % | 1.49 | % | 0.45 | % | 0.61 | % | ||||||||
Federal Home Loan Bank advances | 1.00 | % | 0.00 | % | 1.00 | % | 1.00 | % | ||||||||
Long-term debt | 4.10 | % | 4.10 | % |
The Federal Home Loan Bank advances and the long-term debt outstanding at March 31, 2021 will require the following principal payments:
Year ending December 31, 2022 | 1,888,889 | |||
Year ending December 31, 2023 | 1,888,889 | |||
Year ending December 31, 2024 | 1,888,889 | |||
Year ending December 31, 2025 | 16,333,333 |
Capital Resources and Adequacy
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balanceoff‑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-weightedrisk‑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 6 to the consolidated financial statements presented elsewhere in this report and in Item 1 of Part I of Farmers and Merchants Bancshares, Inc.’s Annual Report onthe Form 10-K for the year ended December 31, 2019 under the heading, “Supervision and Regulation – Capital Requirements”.
The following table presents actual and required capital ratios as of March 31, 20202021 and December 31, 20192020 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 20202021 and December 31, 2019,2020, 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 | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital Adequacy | To Be Well | Minimum | To Be Well | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Phased In Schedule | Capitalized | Actual | Capital Adequacy | Capitalized | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2021 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 51,985 | 14.09 | % | $ | 38,741 | 10.50 | % | $ | 36,896 | 10.00 | % | $ | 65,177 | 12.59 | % | $ | 54,344 | 10.50 | % | $ | 51,756 | 10.00 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 49,245 | 13.35 | % | 31,362 | 8.50 | % | 29,517 | 8.00 | % | 61,754 | 11.93 | % | 43,993 | 8.50 | % | 41,405 | 8.00 | % | ||||||||||||||||||||||||||||||
Common equity tier 1 (to risk- weighted assets) | 49,245 | 13.35 | % | 25,827 | 7.00 | % | 23,982 | 6.50 | % | 61,754 | 11.93 | % | 36,229 | 7.00 | % | 33,642 | 6.50 | % | ||||||||||||||||||||||||||||||
Tier 1 leverage (to average assets) | 49,245 | 10.98 | % | 17,933 | 4.00 | % | 22,416 | 5.00 | % | 61,754 | 9.19 | % | 26,884 | 4.00 | % | 33,605 | 5.00 | % | ||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 51,274 | 13.88 | % | $ | 38,775 | 10.50 | % | $ | 36,928 | 10.00 | % | $ | 63,400 | 12.62 | % | $ | 52,732 | 10.50 | % | $ | 50,221 | 10.00 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 48,681 | 13.18 | % | 31,389 | 8.50 | % | 29,543 | 8.00 | % | 60,104 | 11.97 | % | 42,688 | 8.50 | % | 40,177 | 8.00 | % | ||||||||||||||||||||||||||||||
Common equity tier 1 (to risk- weighted assets) | 48,681 | 13.18 | % | 25,850 | 7.00 | % | 24,003 | 6.50 | % | 60,104 | 11.97 | % | 35,155 | 7.00 | % | 32,644 | 6.50 | % | ||||||||||||||||||||||||||||||
Tier 1 leverage (to average assets) | 48,681 | 10.94 | % | 17,798 | 4.00 | % | 22,247 | 5.00 | % | 60,104 | 9.05 | % | 26,569 | 4.00 | % | 33,211 | 5.00 | % |
The Company intends to fund future growth primarily with cash, federal funds, maturities of investment securities and deposit growth. Management knows of no other trend or event that will have a material impact on capital.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as of March 31, 20202021 and December 31, 20192020 are as follows:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Loan commitments | ||||||||
Construction and land development | $ | 1,165,500 | $ | 1,322,275 | ||||
Commercial | 3,467,000 | 4,102,000 | ||||||
Commercial real estate | 2,792,000 | 7,560,714 | ||||||
Residential | 285,000 | 770,499 | ||||||
$ | 7,709,500 | $ | 13,755,488 | |||||
Unused lines of credit | ||||||||
Home-equity lines | $ | 3,768,471 | $ | 3,700,404 | ||||
Commercial lines | 23,697,296 | 22,229,095 | ||||||
$ | 27,465,767 | $ | 25,929,499 | |||||
Letters of credit | $ | 2,203,399 | $ | 1,935,613 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Loan commitments | ||||||||
Construction and land development | $ | 425,000 | $ | 4,668,250 | ||||
Commercial | 2,233,720 | 1,000,000 | ||||||
Consumer | 30,000 | - | ||||||
Commercial real estate | 25,968,100 | 15,772,020 | ||||||
Residential | 6,677,250 | 4,668,750 | ||||||
$ | 35,334,070 | $ | 26,109,020 | |||||
Unused lines of credit | ||||||||
Home-equity lines | $ | 13,777,640 | $ | 13,716,894 | ||||
Commercial lines | 27,787,549 | 23,996,679 | ||||||
$ | 41,565,189 | $ | 37,713,573 | |||||
Letters of credit | $ | 1,553,018 | $ | 1,891,428 |
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.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended March 31, 20202021 and 20192020
General
Net income for the three months ended March 31, 20202021 was $843,307,$2,029,575, compared to $1,096,287$843,307 for the same period of 2019.2020. The decreaseincrease of $252,980$1,186,268, or 23.1%140.7%, was due to a $191,027$1,807,921 increase in net interest income, a $254,943 increase in noninterest expenses,income, and a $112,000 increase$5,000 decrease in the loan loss provision, and a decrease in noninterest income of $90,394, offset by a $39,381$448,811 increase in net interest incomenoninterest expenses and a $101,060 decrease$432,785 increase in income taxes. Included in noninterest expense is $179,824 of
The Company incurred significant one-time expenses incurredcosts during 2020 in connection with the pendingCompany’s acquisition of Carroll Bank. Without theseCarroll. The table below provides a comparison of the Company’s results for the first quarter of 2021 versus the same period of the prior year with and without $179,824 of acquisition costs net income would have been $973,648 forincurred during the three months ended March 31,first quarter of 2020.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2020 | March 31, 2019 | March 31, 2021 | March 31, 2020 | |||||||||||||||||||||
Excluding | Excluding | |||||||||||||||||||||||
As Reported | Acquisition Costs | As Reported | As Reported | As Reported | Acquisition Costs | |||||||||||||||||||
Income before taxes | $ | 996,223 | $ | 1,176,047 | $ | 1,350,263 | $ | 2,615,276 | $ | 996,223 | $ | 1,176,047 | ||||||||||||
Income taxes | 152,916 | 202,399 | 253,976 | 585,701 | 152,916 | 202,399 | ||||||||||||||||||
Net income | $ | 843,307 | $ | 973,648 | $ | 1,096,287 | $ | 2,029,575 | $ | 843,307 | $ | 973,648 | ||||||||||||
Earnings per share | $ | 0.28 | $ | 0.33 | $ | 0.37 | $ | 0.67 | $ | 0.28 | $ | 0.33 | ||||||||||||
Return on average assets | 0.75 | % | 0.87 | % | 1.05 | % | 1.19 | % | 0.75 | % | 0.87 | % | ||||||||||||
Return on average equity | 6.72 | % | 7.76 | % | 9.49 | % | 15.37 | % | 6.72 | % | 7.76 | % |
Net Interest Income
Net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings, was $3,765,534$5,573,455 for the three months ended March 31, 2020,2021, compared to $3,726,153$3,765,534 for the same period of 2019.2020.
Total interest income for the three months ended March 31, 20202021 was $4,710,036$6,370,592, compared to $4,547,536$4,710,036 for the same period of 2019,2020, an increase of $162,500$1,660,556, or 3.6%35.3%.
Total interest income on loans for the three months ended March 31, 20202021 increased by $162,568$1,662,003 when compared to the same period of 20192021 due to a $20.4$162.8 million higher average loan balance for the first three months of 20202021 when compared to the same period of 2019,2020, offset by a lower loan yield of 4.74%4.54% for the first three months of 20202021 versus 4.83%4.74% for the same period of 2019.2020. Investment income for the first three months of 20202021 increased by $41,666$17,208, or 13.3%4.9%, when compared to the same period of 20192020 due to a $10.2$49.3 million higher average investment balance, offset by a decrease in fully-taxable equivalent yield to 2.86%1.60% for three months ended March 31, 2020,2021, compared to 2.93%2.86% for the same period of 2019.2020. The fully-taxable equivalent yield on total interest-earning assets decreased 1350 basis points to 4.42%3.92% for the three months ended March 31, 20202021 compared to 4.55%4.42% for the same period of 2019.2020. The average balance of total interest-earning assets increased by $28.2$225.4 million to $430.0$655.4 million for the three months ended March 31, 2020,2021, compared to $401.8$430.0 million for the same period of 2019.2020.
Total interest expense for the three months ended March 31, 20202021 was $944,502,$797,137, compared to $821,383$944,502 for the same period of 2019, an increase2020, a decrease of $123,119,$147,365, or 15.0%15.6%. The increasedecrease was due to a higherlower overall cost of funds on interest bearing deposits and borrowings of 1.13%0.63% for the three months ended March 31, 2020,2021, compared to 1.06%1.13% for the same period of 2019, and2020, offset by a $22.4$176.2 million increase in the average balance of interest-bearing liabilities to $333.0$509.3 million in the first three months of 2020,2021, compared to $310.6$333.0 million in the same period of 2019.2020. Cost of funds for time deposits increaseddecreased to 1.97%0.96% for the three months ended March 31, 20202021 from 1.83%1.97% for the same period of 2019.2020. Securities sold under repurchase agreements cost of funds increaseddecreased to 1.47%0.52% for the first three months of 20202021 from 1.14%1.47% for the first three months of 2020.
Average noninterest-earning assets increased by $2.0$5.2 million to $17.8$23.0 million in the first three months of 2020,2021, compared to $15.8$17.8 million in the same period of 2019.2020. Average noninterest-bearing deposits increased by $1.9$51.6 million to $60.0$111.6 million during the first three months of 2020,2021, compared to $58.1$60.0 million in the same period of 2019.2020. The average balance in stockholders’ equity increased by $4.0$2.6 million for the three months ended March 31, 2020,2021, when compared with the same period of 2019.
In August 2019 the FRB began reducing rates after having raised them numerous times from 2015 to 2018 to a peak fed funds range of 2.25% to 2.50%. Two more cuts occurred in 2019 and two have occurred in 2020 reducing the federal funds range to 0.00% to 0.25% As a result, yields on loans and investments have decreased. Our cost of funds, while not lower for the three months ended March 31, 2020 compared to the same period in 2019, is lower than the last three quarters of 2019 and will continue to decline as higher rate certificates of deposit mature and are replaced by lower rate certificates. Management will closely monitor its asset-liability position so that it can respond to any future changes in interest rates and/or changes to the Bank’s interest rate spread.2020.
The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the three-month periods ended March 31, 20202021 and 2019.2020. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||||
Balance | Interest | Yield | Balance | Interest | Yield | Balance | Interest | Yield | Balance | Interest | Yield | |||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 364,706,926 | $ | 4,322,654 | 4.74 | % | $ | 344,347,514 | $ | 4,160,086 | 4.83 | % | $ | 527,459,924 | $ | 5,984,657 | 4.54 | % | $ | 364,706,926 | $ | 4,322,654 | 4.74 | % | ||||||||||||||||||||||||
Securities, taxable | 37,155,531 | 211,746 | 2.28 | % | 27,673,598 | 153,887 | 2.22 | % | 83,279,735 | 212,244 | 1.02 | % | 37,155,531 | 211,746 | 2.28 | % | ||||||||||||||||||||||||||||||||
Securities, tax exempt | 18,023,848 | 183,275 | 4.07 | % | 17,287,806 | 175,390 | 4.06 | % | 21,150,879 | 206,367 | 3.90 | % | 18,023,848 | 183,275 | 4.07 | % | ||||||||||||||||||||||||||||||||
Federal funds sold and other interest-earning assets | 10,125,466 | 34,059 | 1.35 | % | 12,497,670 | 76,972 | 2.46 | % | 23,532,775 | 14,818 | 0.25 | % | 10,125,466 | 34,059 | 1.35 | % | ||||||||||||||||||||||||||||||||
Total interest-earning assets | 430,011,771 | 4,751,734 | 4.42 | % | 401,806,588 | 4,566,335 | 4.55 | % | 655,423,313 | 6,418,086 | 3.92 | % | 430,011,771 | 4,751,734 | 4.42 | % | ||||||||||||||||||||||||||||||||
Noninterest-earning assets | 17,754,285 | 15,776,177 | 23,003,563 | 17,754,285 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 447,766,056 | $ | 417,582,765 | $ | 678,426,876 | $ | 447,766,056 | ||||||||||||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||
NOW, savings, and money market | $ | 166,018,908 | 136,947 | 0.33 | % | $ | 153,798,304 | 118,448 | 0.31 | % | $ | 282,568,395 | 130,585 | 0.18 | % | $ | 166,018,908 | 136,947 | 0.33 | % | ||||||||||||||||||||||||||||
Certificates of deposit | 156,493,583 | 769,252 | 1.97 | % | 143,504,411 | 657,083 | 1.83 | % | 194,296,941 | 464,935 | 0.96 | % | 156,493,583 | 769,252 | 1.97 | % | ||||||||||||||||||||||||||||||||
Securities sold under repurchase agreements | 10,391,770 | 38,194 | 1.47 | % | 8,845,852 | 25,299 | 1.14 | % | 10,445,266 | 13,511 | 0.52 | % | 10,391,770 | 38,194 | 1.47 | % | ||||||||||||||||||||||||||||||||
Long-term debt | 16,973,984 | 175,656 | 4.14 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||
FHLB advances and other borrowings | 131,958 | 109 | 0.33 | % | 4,457,778 | 20,553 | 1.84 | % | 5,000,000 | 12,450 | 1.00 | % | 131,958 | 109 | 0.33 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 333,036,219 | 944,502 | 1.13 | % | 310,606,345 | 821,383 | 1.06 | % | 509,284,586 | 797,137 | 0.63 | % | 333,036,219 | 944,502 | 1.13 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 59,982,921 | 58,107,801 | 111,624,572 | 59,982,921 | ||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities | 4,539,576 | 2,648,888 | 4,694,670 | 4,539,576 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 397,558,716 | 371,363,034 | 625,603,828 | 397,558,716 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 50,207,340 | 46,219,731 | 52,823,048 | 50,207,340 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 447,766,056 | $ | 417,582,765 | $ | 678,426,876 | $ | 447,766,056 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 3,807,232 | $ | 3,744,952 | $ | 5,620,949 | $ | 3,807,232 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread | 3.29 | % | 3.49 | % | 3.29 | % | 3.29 | % | ||||||||||||||||||||||||||||||||||||||||
Net yield on interest-earning assets | 3.54 | % | 3.73 | % | 3.43 | % | 3.54 | % | ||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to Average interest-bearing liabilities | 129.12 | % | 129.36 | % | 128.69 | % | 129.12 | % |
Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis. |
Noninterest Income
Noninterest income for the three months ended March 31, 20202021 was $302,002,$556,945, compared to $392,396$302,002 for the same period of 2019, a decrease2020, an increase of $90,394$254,943, or 23.0%84.4%. The decreaseincrease was primarily a result of a $130,015 lower$194,010 increase in mortgage banking income, a $28,107 increase in bank owned life insurance income, and a $37,613 gain on the sale of SBA loans, offset by a $29,538 increase in mortgage banking income.former Carroll branch office.
Noninterest Expense
Noninterest expense for the three months ended March 31, 20202021 totaled $2,946,313$3,395,124, compared to $2,755,286$2,946,313 for the same period of 2019,2020, an increase of $191,027$448,811, or 6.9%15.2%. The increase was due primarily to, costs incurred related to the pending acquisition of Carroll Bank of $179,824, increases in salaries and benefits of $93,276, offset by decreases$297,203, in occupancy, furniture and equipment of $31,268$103,294, and in other of $56,107.$228,138, offset by a decrease in costs incurred related to the acquisition of Carroll of $179,824. The increases are all a result of the employees, locations, and customers added from the acquisition of Carroll.
Income Tax Expense
Income tax expense for the three months ended March 31, 20202021 was $152,916,$585,701, compared to $253,976$152,916 for the same period of 2019.2020. The effective tax rate was 15.3%22.4% for the three months ended March 31, 2020,2021, compared to 18.8%15.3% for the same period of 2019.2020. The decreaseincrease in income tax expense was due primarily to lowerhigher income before income taxes and a higherlower percentage of tax exempt revenue for the three months ended March 31, 20202021 when compared to the same period in 2019.
2020.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is interest rate fluctuation and we have procedures in place to evaluate and mitigate this risk. This market risk and our procedures are described in Item 7 of Part II of Farmers and Merchants Bancshares, Inc.’s Annual Reportthe on Form 10-K for the year ended December 31, 2019 under the heading, “Interest Rate Risk”, which provides information as of December 31, 2019.2020. Management believes that no material changes in market risk or our procedures used to evaluate and mitigate these risks have occurred since December 31, 2019.2020.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including Farmers and Merchants Bancshares, Inc.’s principal executive officer (“PEO”) and the principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls as of March 31, 20202021 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
During the quarter ended March 31, 2020,2021, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Part II – OTHER INFORMATION
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Form 10-K. Except as set forth below, managementManagement does not believe that any material changes in our risk factors have occurred since they were last disclosed.
Risks Related to Our Pending Merger with Carroll Bancorp, Inc.
The COVID-19 pandemic and resulting adverse economic conditions could increase the risks associated with the Company’s proposed merger with Carroll Bancorp, Inc.
Our ability to consummate our proposed acquisition of Carroll and the Bank’s ability to consummate its proposed acquisition of Carroll Bank are both subject to certain conditions, including, among others, our receipt of required regulatory approvals and our receipt of funding from a third-party lender necessary to pay the merger consideration (the “Holding Company Loan”), we cannot guaranty that we or Carroll will be able to satisfy all of these conditions. A bank regulator’s decision to approve an acquisition is based on, among many other factors, its review of various current and estimated financial information regarding the purchaser and the target and how the proposed acquisition will impact the purchaser’s financial condition and results of operations. Likewise, a third-party lender’s decision to make a loan to the purchaser like the Holding Company Loan is based in large part on the current and estimated financial condition and results of operations of the borrower. The ongoing COVID-19 pandemic and the risks that it presents to the Company, to Carroll, and to their respective customers could heighten the risks associated with the Merger Transactions, including, without limitation, risks related to the satisfaction of the conditions to closing the Merger Transactions in the anticipated timeframe or at all, including risks related to the failure to obtain necessary regulatory and Carroll stockholder approvals, the Company’s failure to close on the Holding Company Loan, and the possibility that the Merger Transactions do not close, including in circumstances in which Carroll would be obligated to pay the Company a termination fee or other expenses and vice versa; risks related to the ability to realize the anticipated benefits of the Merger Transactions, including the possibility that the expected synergies from the Merger Transactions will not be realized or will not be realized within the expected time period; the risk that the businesses will not be integrated successfully; disruption from the transaction making it more difficult to maintain business and operational relationships; negative effects of the consummation of the Merger Transactions on the market price of the Company’s common stock; significant transaction costs; unknown liabilities; the risk of litigation and/or regulatory actions related to the Merger Transactions; other business effects, including the effects of industry, market, economic, political or regulatory conditions; future interest rates; changes in tax laws, regulations, rates and policies; competitive developments; and other risk factors detailed from time to time in the Company’s filings with the SEC. We cannot predict the impacts that COVID-19 will have on us or on Carroll or whether any such impacts will delay or impair our ability to consummate the Merger Transactions.
Risks Relating to the Company and its Affiliates
The novel coronavirus (“COVID-19”) pandemic and resulting adverse economic conditions have already adversely impacted the Company’s business and results, and could have a more material adverse impact on its business, financial condition, and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Almost all states, including Maryland, where the Company is headquartered, have issued “stay-at-home orders” and have declared states of emergency.
Although banks have generally been permitted to continue operating, the COVID-19 pandemic has caused disruptions to the Company’s business and could cause material disruptions to its business and operations in the future. Impacts to the business have included increases in costs and reductions in operating effectiveness due to additional health and safety precautions implemented at the Company’s branches and the transition of a portion of its workforce to home locations, decreases in customer traffic in its branches, and increases in requests for and the making of loan modifications. The Company anticipates that additional future impacts to its business will include increases in our customers’ inability to make scheduled loan payments and increases in requests for forbearance. Further, loan payment deferment programs implemented by the Company or under government stimulus programs, like the Paycheck Protection Program (the “PPP”), may mask credit deterioration in its loan portfolio by making less applicable standard measures of identifying developing financial weakness in a client or portfolio, such as past due monitoring and non-accrual assessments. To the extent that commercial and social restrictions remain in place or increase, the Company’s expenses, delinquencies, charge-offs, foreclosures, and credit losses may materially increase, and the Company could experience reductions in fee income. In addition, any declines in credit quality could significantly affect the adequacy of the Company’s allowance for loan losses, which would lead to increases in the provision for credit losses and related declines in its net income.
Unfavorable economic conditions and increasing unemployment figures may also make it more difficult for the Company to maintain deposit levels and loan origination volume and to obtain additional financing. Furthermore, such conditions have and may continue to cause the value of the Company’s investment portfolio and of collateral associated with its existing loans to decline. In addition, in March 2020 the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25% in part as a result of the pandemic. A prolonged period of very low interest rates could reduce the Company’s net interest income and have a material adverse impact on its cash flows.
While the Company has taken and is continuing to take precautions to protect the safety and well-being of its employees and customers, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can the Company predict the level of disruption which will occur to its employees’ ability to provide customer support and service. The continued or renewed spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct the Company’s business, the business and operations of its third-party service providers who perform critical services for the business, or the businesses of many of the Company’s customers and borrowers. If COVID-19 is not successfully contained, the Company could experience a material adverse effect on its business, financial condition, results of operations, and cash flow.
Among the factors outside the Company’s control that are likely to affect the impact that the COVID-19 pandemic will ultimately have on its business are, without limitation:
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The ongoing COVID-19 pandemic has contributed to severe volatility in the financial markets and meaningfully lower stock prices for many companies, including the Company's common stock. Depending on the extent and duration of the COVID-19 pandemic and perceptions regarding national and global recovery from the pandemic, the price of the Company's common stock may continue to experience volatility and declines.
The Company is continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on the Company. However, if the pandemic continues to spread or otherwise result in a continuation or worsening of the current economic and commercial environments, the Company’s business, financial condition, results of operations, and cash flows could be materially adversely affected.
Our fiscal year 2016, 2017, and 2018 U.S. consolidated federal income tax returns are currently being audited.
In April 2018, we were notified by the IRS that our 2016 U.S. consolidated federal tax return was selected for audit. In April 2020, we were notified by the IRS that our 2017 and 2018 U.S. consolidated federal tax returns were selected for audit. As part of its audits, 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. Defending our tax positions and challenging adverse IRS tax conclusions could require us to expend significant funds and there can be no assurance that we would be successful in any such defense or challenge. 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 of approximately $2.2 million as of March 31, 2020 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. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. |
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None.
Item 4. |
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Not Applicable.
Item 5. |
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None.
Item 6. |
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The exhibits filed or furnished with this quarterly report are listed in the following Exhibit Index:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FARMERS AND MERCHANTS BANCSHARES, INC. | |||
Date: May | /s/ James R. Bosley, Jr. | ||
James R. Bosley, Jr. | |||
| |||
| President and Chief Executive Officer | ||
(Principal Executive Officer) | |||
Date May | /s/ Mark C. Krebs | ||
Mark C. Krebs, | |||
Treasurer and Chief Financial Officer | |||
(Principal Financial Officer & Principal Accounting Officer) |