FMFG 10-Q Quarterly Report June 30, 2024

FARMERS & MERCHANTS BANCSHARES, INC.

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fmfg20240630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For quarterly period ended June 30, 2024

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

	For the transition period from _______________ to ________________

Commission file number 000-55756

Farmers and Merchants Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland

81-3605835

(State or other jurisdiction of

incorporation or organization)

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

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

(Address of principal executive offices) (Zip Code)

( 410 ) 374-1510

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,144,974 as of August 14, 2024.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated balance sheets at June 30, 2024 (unaudited) and December 31, 2023	3
Consolidated statements of income (unaudited) for the three and six months ended June 30, 2024 and 2023	4
Consolidated statements of comprehensive income (loss) (unaudited) for the three and six months ended June 30, 2024 and 2023	5
Consolidated statements of changes in stockholders’ equity (unaudited) for the three and six months ended June 30, 2024 and 2023	6
Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2024 and 2023	7
Notes to financial statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3. Quantitative and Qualitative Disclosures About Market Risk	51
Item 4. Controls and Procedures	51

PART II – OTHER INFORMATION	52
Item 1. Legal Proceedings	52
Item 1A. Risk Factors	52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3. Defaults upon Senior Securities	52
Item 4. Mine Safety Disclosures	52
Item 5. Other Information	52
Item 6. Exhibits	52
SIGNATURES	53

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30,			December 31,
	2024			2023 *
	(Unaudited)
Assets

Cash and due from banks	$	24,212,716		$	44,404,473
Federal funds sold and other interest-bearing deposits		297,604			285,864
Cash and cash equivalents		24,510,320			44,690,337
Certificates of deposit in other banks		100,000			100,000
Securities available for sale, at fair value		157,524,568			164,084,673
Securities held to maturity, at amortized cost (allowance for credit losses of $ 126,631 and $ 35,627 )		20,135,893			20,163,622
Equity security, at fair value		508,333			507,130
Restricted stock, at cost		1,395,900			863,500
Loans, less allowance for credit losses of $ 4,082,098 and $ 4,285,247		546,036,461			523,308,044
Premises and equipment, net		7,455,924			6,583,452
Accrued interest receivable		2,191,090			2,180,734
Deferred income taxes, net		8,061,994			8,312,482
Other real estate owned, net		1,242,365			1,242,365
Bank owned life insurance		15,115,536			14,930,754
Goodwill and other intangibles, net		7,030,260			7,034,424
Other assets		7,247,205			5,939,309
	$	798,555,849		$	799,940,826

Liabilities and Stockholders' Equity

Deposits
Noninterest-bearing	$	108,907,898		$	115,284,706
Interest-bearing		542,301,597			565,678,145
Total deposits		651,209,495			680,962,851
Securities sold under repurchase agreements		2,758,183			6,760,493
Federal Home Loan Bank of Atlanta advances		15,000,000			5,000,000
Federal Reserve Bank advances		54,000,000			33,000,000
Long-term debt, net of issuance costs		12,270,747			13,212,378
Accrued interest payable		2,217,250			1,482,773
Other liabilities		6,557,384			7,344,040
		744,013,059			747,762,535
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,144,974 and 3,116,966 shares in 2024 and 2023, respectively		31,450			31,170
Additional paid-in capital		30,832,609			30,398,080
Retained earnings		40,703,077			39,433,185
Accumulated other comprehensive loss		( 17,024,346	)		( 17,684,144	)
		54,542,790			52,178,291
	$	798,555,849		$	799,940,826

* Derived from audited consolidated financial statements

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

- 3 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2024			2023			2024			2023

Interest income
Loans, including fees	$	7,237,816		$	6,368,721		$	14,119,727		$	12,414,269
Investment securities - taxable		1,592,316			769,999			3,171,382			1,532,207
Investment securities - tax exempt		137,593			139,528			274,371			279,372
Federal funds sold and other interest earning assets		212,043			105,974			680,350			210,903
Total interest income		9,179,768			7,384,222			18,245,830			14,436,751

Interest expense
Deposits		3,231,886			1,735,965			6,332,812			2,770,816
Securities sold under repurchase agreements		13,035			7,501			36,044			11,839
Federal Home Loan Bank advances		31,929			208,536			44,517			412,983
Federal Reserve Bank advances		640,846			13,000			1,262,529			13,263
Long-term debt		128,705			148,390			262,305			299,952
Total interest expense		4,046,401			2,113,392			7,938,207			3,508,853
Net interest income		5,133,367			5,270,830			10,307,623			10,927,898

Recovery of credit losses		-			( 225,000	)		-			( 495,000	)

Net interest income after recovery of credit losses		5,133,367			5,495,830			10,307,623			11,422,898

Noninterest income
Service charges on deposit accounts		217,427			204,726			412,101			391,433
Mortgage banking income		18,376			33,636			23,327			58,929
Bank owned life insurance income		94,462			88,742			184,782			171,847
Fair value adjustment on equity security		( 2,430	)		( 7,341	)		( 5,971	)		( 1,574	)
Loss on sale of debt securities		( 31,922	)		-			( 31,922	)		-
Gain on insurance proceeds		-			-			142,794			-
Other fees and commissions		78,047			83,487			153,264			165,029
Total noninterest income		373,960			403,250			878,375			785,664

Noninterest expense
Salaries		1,993,580			1,850,494			3,969,767			3,726,938
Employee benefits		441,546			541,173			1,047,859			1,135,230
Occupancy		277,690			202,147			524,017			416,263
Furniture and equipment		327,884			252,924			570,305			492,651
Other		1,082,561			838,909			2,123,780			1,672,000
Total noninterest expense		4,123,261			3,685,647			8,235,728			7,443,082

Income before income taxes		1,384,066			2,213,433			2,950,270			4,765,480
Income taxes		305,557			543,316			651,774			1,194,512
Net income	$	1,078,509		$	1,670,117		$	2,298,496		$	3,570,968

Earnings per share - basic	$	0.35		$	0.54		$	0.74		$	1.16
Earnings per share - diluted	$	0.35		$	0.54		$	0.74		$	1.16

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2024			2023			2024			2023

Net income	$	1,078,509		$	1,670,117		$	2,298,496		$	3,570,968

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

Securities available for sale
Net unrealized gain (loss) arising during the period		1,012,337			( 2,994,650	)		( 561,876	)		( 807,464	)
Reclassification adjustment for realized losses included in net income		31,922			-			31,922			-
Total unrealized gain (loss) on investment securities available for sale		1,044,259			( 2,994,650	)		( 529,954	)		( 807,464	)
Income tax (expense) benefit		( 287,355	)		824,053			145,830			222,194
Net unrealized gain (loss) on investment securities available for sale		756,904			( 2,170,597	)		( 384,124	)		( 585,270	)

Total unrealized gain on derivatives		327,405			274,986			1,440,306			61,465
Income tax expense		( 98,497	)		( 75,670	)		( 396,384	)		( 16,914	)

Net unrealized gain on derivatives		228,908			199,316			1,043,922			44,551

Total other comprehensive income (loss)		985,812			( 1,971,281	)		659,798			( 540,719	)

Total comprehensive income (loss)		2,064,321			( 301,164	)		2,958,294			3,030,249

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Three and six months Ended June 30, 2024 and 2023

(Unaudited)

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

Three months ended June 30, 2023
Balance, March 31, 2023		3,071,214	$	30,712	$	29,549,914	$	36,851,782		$	( 15,675,267	)	$	50,757,141
Net income		-		-		-		1,670,117			-			1,670,117
Other comprehensive loss		-		-		-		-			( 1,971,281	)		( 1,971,281	)
Cash dividends, $0.33 per share		-		-		-		( 1,013,499	)		-			( 1,013,499	)
Dividends reinvested		19,154		192		391,574		-			-			391,766

Balance, June 30, 2023		3,090,368	$	30,904	$	29,941,488	$	37,508,400		$	( 17,646,548	)	$	49,834,244

Six months ended June 30, 2023
Balance, December 31, 2022		3,071,214	$	30,712	$	29,549,914	$	35,300,166		$	( 17,105,829	)	$	47,774,963
Net income		-		-		-		3,570,968			-			3,570,968
Other comprehensive loss		-		-		-		-			( 540,719	)		( 540,719	)
Cash dividends, $ 0.33 per share		-		-		-		( 1,013,499	)		-			( 1,013,499	)
Reclassification due to the adoption of ASU 2016-13
Dividends reinvested		19,154		192		391,574		( 7,843	)		-			383,923

Balance, June 30, 2023		3,090,368	$	30,904	$	29,941,488	$	37,508,400		$	( 17,646,548	)	$	49,834,244

Three months ended June 30, 2024
Balance, March 31, 2024		3,116,966	$	31,170	$	30,402,618	$	40,653,172		$	( 18,010,158	)	$	53,076,802
Net income		-		-		-		1,078,509			-			1,078,509
Stock-based compensation		-		-		4,538		-			-			4,538
Other comprehensive gain		-		-		-		-			985,812			985,812
Cash dividends, $0.33 per share		-		-		-		( 1,028,604	)		-			( 1,028,604	)
Dividends reinvested		28,008		280		425,453		-			-			425,733

Balance, June 30, 2024		3,144,974	$	31,450	$	30,832,609	$	40,703,077		$	( 17,024,346	)	$	54,542,790

Six months ended June 30, 2024
Balance, December 31, 2023		3,116,966	$	31,170	$	30,398,080	$	39,433,185		$	( 17,684,144	)	$	52,178,291
Net income		-		-		-		2,298,496			-			2,298,496
Stock-based compensation		-		-		9,076		-			-			9,076
Other comprehensive gain		-		-		-		-			659,798			659,798
Cash dividends, $ 0.33 per share		-		-		-		( 1,028,604	)		-			( 1,028,604	)
Dividends reinvested		28,008		280		425,453		-			-			425,733

Balance, June 30, 2024		3,144,974	$	31,450	$	30,832,609	$	40,703,077		$	( 17,024,346	)	$	54,542,790

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,	2024			2023

Reconciliation of net income to net cash provided by operating activities
Net income	$	2,298,496		$	3,570,968
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		285,948			256,738
Recovery of credit losses		-			( 495,000	)
(Accretion) amortization of right of use asset and lease liability		2,893			( 2,245	)
Equity security dividends reinvested		( 7,174	)		( 5,918	)
Unrealized loss on equity security		5,971			1,574
Gain on sale of premises and equipment		-			( 9,000	)
Gain on insurance proceeds		( 142,794	)		-
Gain (loss) on fair value hedge		65			( 32,005	)
Loss on sale of security		31,922			-
Stock based compensation		9,076			-
Amortization of debt issuance costs		2,813			2,812
Amortization of premiums and (accretion of discounts), net		( 489,221	)		12,127
Bank owned life insurance cash surrender value		( 184,782	)		( 171,847	)
Increase (decrease) in
Deferred loan fees and costs, net		41,015			8,295
Accrued interest payable		734,477			771,053
Other liabilities		( 245,769	)		( 896,980	)
Decrease (increase) in
Mortgage loans held for sale		-			428,355
Accrued interest receivable		( 10,356	)		( 9,643	)
Other assets		( 405,923	)		( 125,480	)
Net cash provided by operating activities		1,926,657			3,303,804

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,	2024			2023

Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale		9,165,014			5,612,435
Held to maturity		-			330,000
Proceeds from sale of securities
Available for sale		521,162			-
Purchase of securities
Available for sale		( 3,269,141	)		-
Loans made to customers, net of principal collected		( 22,702,071	)		( 13,951,062	)
(Purchase) redemption of stock in FHLB of Atlanta		( 532,400	)		255,000
Proceeds from sale of premises and equipment		-			9,000
Proceeds from insurance		142,794			-
Purchases of premises, equipment and software		( 1,132,363	)		( 102,439	)
Net cash used in investing activities		( 17,807,005	)		( 7,847,066	)

Cash flows from financing activities
Net increase (decrease) in
Noninterest-bearing deposits		( 6,376,808	)		( 5,723,680	)
Interest-bearing deposits		( 23,373,236	)		13,977,308
Securities sold under repurchase agreements		( 4,002,310	)		( 1,112,365	)
Federal Home Loan Bank of Atlanta advances		10,000,000			( 6,000,000	)
Federal Reserve Bank advances		21,000,000			10,000,000
Long-term debt principal payments		( 944,444	)		( 944,444	)
Dividends paid, net of reinvestments		( 602,871	)		( 629,576	)
Net cash (used in) provided by financing activities		( 4,299,669	)		9,567,243

Net (decrease) increase in cash and cash equivalents		( 20,180,017	)		5,023,981

Cash and cash equivalents at beginning of period		44,690,337			7,263,537
Cash and cash equivalents at end of period	$	24,510,320		$	12,287,518

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	7,200,065		$	2,784,686
Cash paid during the period for income taxes		190,000			1,300,848
Supplemental disclosure of non-cash transactions:
Net unrealized loss on securities available for sale		( 529,953	)		( 807,464	)
Additions to right of use assets obtained in exchange for lease liabilities		704,577			-

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(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. The Insurance Subsidiary is a series investment, 100 % owned by Farmers and Merchants Bancshares, Inc. in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions, including insurance premium paid by the Bank that were received by the Insurance Subsidiary through an intermediary, have been eliminated.

As used in these notes, the terms the “Company”, “we”, “us”, or “our” refer to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.

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 (“GAAP”) 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- and six-month periods ended June 30, 2024 do not necessarily reflect the results that may be expected for the fiscal year ending December 31, 2024 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, 2023, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2023 that was filed with the Securities and Exchange Commission (the “SEC”).

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segments items by reportable segment and a description of its composition, all annual disclosures required by ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect that the adoption of ASU 2023-07 will have a material impact on its consolidated financial statements.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect that the adoption of ASU 2023-09 will have a material impact on its consolidated financial statements.

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

Summary of Significant Accounting Policies

There have been no changes to significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 was issued.

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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		Allowance for		Net Amortized
June 30, 2024	cost		gains		losses		value		Credit Losses		Amount

*Available for sale*

State and municipal	$	500,000	$	-	$	16,982	$	483,018	$	-	$	483,018
SBA pools		720,085		1,897		6,857		715,125		-		715,125
Corporate bonds		8,814,018		-		1,153,555		7,660,463		-		7,660,463
Mortgage-backed securities		170,808,981		621,265		22,764,284		148,665,962		-		148,665,962
	$	180,843,084	$	623,162	$	23,941,678	$	157,524,568	$	-	$	157,524,568

*Held to maturity*

State and municipal	$	20,262,524	$	592	$	1,371,384	$	18,891,732	$	126,631	$	20,135,893

	Amortized		Unrealized		Unrealized		Fair		Allowance for		Net Carrying
December 31, 2023	cost		gains		losses		value		Credit Losses		Amount

*Available for sale*

State and municipal	$	500,000	$	-	$	15,192	$	484,808	$	-	$	484,808
SBA pools		776,686		1,160		11,136		766,710		-		766,710
Corporate bonds		9,853,988		-		1,283,559		8,570,429		-		8,570,429
Mortgage-backed securities		175,742,562		1,025,623		22,505,459		154,262,726		-		154,262,726
	$	186,873,236	$	1,026,783	$	23,815,346	$	164,084,673	$	-	$	164,084,673

*Held to maturity*

State and municipal	$	20,199,249	$	39,537	$	1,175,565	$	19,063,221	$	35,627	$	20,163,622

The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to securities issued by states and political subdivisions, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts. Unrated bonds were underwritten similar to commercial loans and the financial condition of the issuer is monitored periodically. Expected credit losses on commercial loans are applied to unrated bonds. The duration of each bond is used as the remaining life in the calculation of expected credit losses.

- 11 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities (continued)

The following table summarizes Moody's and/or Standard & Poor's bond ratings (the Company’s primary credit quality indicators) for our portfolio of held-to-maturity securities issued by states and political subdivisions as of June 30, 2024 and December 31, 2023 at amortized cost:

	June 30, 2024		December 31, 2023
AAA	$	2,794,320	$	2,785,955
AA		10,477,327		10,434,388
A		3,816,717		3,808,365
BAA		253,557		250,661
Not rated		2,920,603		2,919,880
Total	$	20,262,524	$	20,199,249

Historical loss rates associated with securities having similar grades as those in our portfolio have generally not been significant. Furthermore, as of June 30, 2024, there were no past due principal or interest payments associated with these securities and none are on nonaccrual.

The following table details activity in the allowance for credit losses on held-to-maturity securities for the three- and six-month periods ended June 30, 2024 and 2023:

	Three Months		Six Months		Three Months			Six Months
	Ended		Ended		Ended			Ended
	June 30, 2024		June 30, 2024		June 30, 2023			June 30, 2023

Beginning balance	$	31,670	$	35,627	$	60,592		$	-
Impact of adopting ASC 326		-		-		-			51,990
Credit loss (recovery) provision		94,961		91,004		( 10,147	)		( 1,545	)
Ending balance	$	126,631	$	126,631	$	50,445		$	50,445

Accrued interest receivable on available for sale securities totaled $ 397,928 and $ 418,549 as of June 30, 2024 and December 31, 2023, respectively, and accrued interest receivable on held to maturity securities totaled $ 121,670 and $ 121,670 as of June 30, 2024 and December 31, 2023, respectively. Both are grouped in accrued interest receivable on the balance sheet.

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities (continued)

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

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
June 30, 2024	cost		value		cost		value

Within one year	$	1,754,504	$	1,729,691	$	230,000	$	229,593
Over one to five years		500,000		483,018		671,211		656,312
Over five to ten years		7,059,514		5,930,774		6,470,309		6,107,565
Over ten years		-		-		12,891,004		11,898,262
		9,314,018		8,143,483		20,262,524		18,891,732
Mortgage-backed securities and
SBA pools, due in monthly installments		171,529,066		149,381,085		-		-
	$	180,843,084	$	157,524,568	$	20,262,524	$	18,891,732

Securities with a carrying value of $ 69,086,427 and $ 50,371,861 as of June 30, 2024 and December 31, 2023, respectively, were pledged as collateral for borrowings, securities sold under repurchase agreements and other collateralized deposits.

During the three- and six-month periods ended June 30, 2024, there was one sale of an available for sale security with a principal balance of $ 521,162 , resulting in a loss of $ 31,922 . There were no sales of securities for the six-month period ended June 30, 2023.

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

June 30, 2024	Less than 12 months				12 months or more				Total
Description of investments	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

State and municipal	$	-	$	-	$	483,018	$	16,982	$	483,018	$	16,982
SBA pools		-		-		405,234		6,857		405,234		6,857
Corporate bonds		-		-		7,660,463		1,153,555		7,660,463		1,153,555
Mortgage-backed securities		26,179,412		584,502		97,718,937		22,179,782		123,898,349		22,764,284
Total	$	26,179,412	$	584,502	$	106,267,652	$	23,357,176	$	132,447,064	$	23,941,678

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities (continued)

December 31, 2023	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	$	246,608	$	3,392	$	238,200	$	11,800	$	484,808	$	15,192
SBA pools		-		-		659,869		11,136		659,869		11,136
Corporate bonds		341,264		58,736		8,229,165		1,224,823		8,570,429		1,283,559
Mortgage-backed securities		23,840,242		378,379		104,657,869		22,127,080		128,498,111		22,505,459
Total	$	24,428,114	$	440,507	$	113,785,103	$	23,374,839	$	138,213,217	$	23,815,346

As of June 30, 2024, management did not have the intent to sell any of the securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on these factors, as of June 30, 2024, management believes that the unrealized losses detailed in the table above are temporary and, accordingly, none of these unrealized losses have been recognized in the Company’s consolidated statement of income.

4.	Loans and Allowance for Credit Losses

Major categories of loans are as follows:

	June 30,		December 31,
	2024		2023
Real estate:
Commercial	$	375,004,980	$	361,942,511
Construction and land development		19,712,262		20,446,150
Residential		110,929,552		112,789,631
Commercial		44,917,520		32,823,072
Consumer		168,469		165,136
		550,732,783		528,166,500
Less: Allowance for credit losses		4,082,098		4,285,247
Deferred origination fees net of costs		614,224		573,209
	$	546,036,461	$	523,308,044

For purposes of monitoring the performance of the loan portfolio and estimating the allowance for credit losses, the Company's loans receivable portfolio is segmented as follows: (i) commercial real estate; (ii) construction and land development; (iii) residential; (iv) commercial and industrial; (v) and consumer.

- 14 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally do not exceed 80%.

Construction and land development real estate loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally do not exceed 80%.

Residential real estate mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the collateral.

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral. The Company's consumer loans consist primarily of installment loans made to individuals for personal, family and household purposes. These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

- 15 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

The following tables present the amortized cost basis of loans on nonaccrual status as of June 30, 2024 and December 31, 2023:

	Nonaccrual		Nonaccrual
	With No		With
	Allowance		Allowance
	for Credit Loss		for Credit Loss
June 30, 2024
Real estate:
Commercial	$	-	$	403,853
Construction and land development		-		-
Residential		-		-
Commercial		-		-
Consumer		-		-
	$	-	$	403,853

December 31, 2023
Real estate:
Commercial	$	-	$	502,961
Construction and land development		-		-
Residential		-		-
Commercial		-		152,449
Consumer		-		-
	$	-	$	655,410

The Company did not recognize any interest income on nonaccrual loans during the six months ended June 30, 2024 or the six months ended June 30, 2023.

At June 30, 2024, the Company had one nonaccrual commercial real estate loan totaling $ 403,853 . Gross interest income of $ 25,556 would have been recorded for the six months ended June 30, 2024 if this nonaccrual loan had been current and performing in accordance with the original terms. The Company allocated $ 332,551 of its allowance for credit losses to this nonaccrual loan. During the six months ended June 30, 2024, one nonaccrual commercial loan totaling $ 152,449 was charged off.

At December 31, 2023, the Company had one nonaccrual commercial real estate loan totaling $ 502,961 and one nonaccrual commercial loan totaling $ 152,449 . The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of $ 45,856 would have been recorded in 2023 if these nonaccrual loans had been current and performing in accordance with their original terms. The Company allocated $ 450,000 of its allowance for credit losses to these nonaccrual loans.

- 16 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

An age analysis of past due loans, segregated by type of loan, is as follows:

					90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
June 30, 2024
Real estate:
Commercial	$	1,999,801	$	-	$	403,853	$	2,403,654	$	372,601,326	$	375,004,980	$	-
Construction and land development		-		-		-		-		19,712,262		19,712,262		-
Residential		-		-		-		-		110,929,552		110,929,552		-
Commercial		-		-		-		-		44,917,520		44,917,520		-
Consumer		-		-		-		-		168,469		168,469		-
Total	$	1,999,801	$	-	$	403,853	$	2,403,654	$	548,329,129	$	550,732,783	$	-

December 31, 2023
Real estate:
Commercial	$	-	$	-	$	502,961	$	502,961	$	361,439,550	$	361,942,511	$	-
Construction and land development		-		-		-		-		20,446,150		20,446,150		-
Residential		161,431		-		-		161,431		112,628,200		112,789,631		-
Commercial		-		-		152,449		152,449		32,670,623		32,823,072		-
Consumer		1,163		-		-		1,163		163,973		165,136		-
Total	$	162,594	$	-	$	655,410	$	818,004	$	527,348,496	$	528,166,500	$	-

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2024 and December 31, 2023:

June 30, 2024
Real estate:
Commercial	$	2,441,900
Construction and land development		-
Residential		272,741
Commercial		-
Consumer		-
	$	2,714,641

December 31, 2023
Real estate:
Commercial	$	2,515,103
Construction and land development		-
Residential		275,622
Commercial		152,449
Consumer		-
	$	2,943,174

- 17 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

From time to time, loans to borrowers experiencing financial difficulty may be modified. Generally, the modifications we grant are extensions of terms, deferrals of payments for an extended period or interest rate reductions. Occasionally, we may modify a loan by providing principal forgiveness. In some cases, we will modify a loan by providing multiple types, or combinations, of concessions.

The following table presents the amortized cost basis of loans at June 30, 2024 that were both experiencing financial difficulty and modified during the quarter ended June 30, 2024, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of loans is also presented below. We modified two commercial real estate loans totalling $ 2,038,047 to the same borrower who was experiencing financial distress during the three- and six-month periods ended June 30, 2024. The terms of the loans were extended by 12 months. One of the loans was delinquent at June 30, 2024 but was not in default.

For the Three- and			Total Class
Six- months ended	Term		of Financing
June 30, 2024	Extension		Receivable

Commercial real estate	$	2,038,047		0.54	%

Total	$	2,038,047		0.37	%

There were no modifications to borrowers experiencing financial distress during the three- or six-month periods ended June 30, 2023. There were no payment defaults of modified loans during the previous 12 months.

Accrued interest receivable on loans totaled $ 1,590,226 and $ 1,539,332 at June 30, 2024 and December 31, 2023, respectively, and is included in accrued interest receivable on the balance sheets. Accrued interest receivable is not included as part of the amortized costs of loans for the allowance for credit losses estimate.

Credit Quality Indicators

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, Acceptable, and Pass/Watch grades are assigned to loans with limited or no delinquent payments and more than sufficient collateral and/or cash flow.

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

Special Mention

A special mention loan is a loan that management believes 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.

- 18 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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 a loan that management believes is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Such 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. Substandard loans require more intense supervision by Company management.

Doubtful

A doubtful loan is a loan that management believes has all of 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.

- 19 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

Loans by credit grade, segregated by loan type, and year originated as of June 30, 2024 are as follows:

	Term Loans Amortized Cost Basis by Origination
															Revolving
													Revolving		Loans Converted
	2024		2023		2022		2021		2020		Prior		Loans		to Term		Total
Commercial Real Estate

Pass	$	22,686,513	$	27,392,484	$	73,202,038	$	55,321,128	$	20,083,107	$	163,931,870	$	3,126,023	$	-	$	365,743,163
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		9,261,817		-		-		9,261,817
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	22,686,513	$	27,392,484	$	73,202,038	$	55,321,128	$	20,083,107	$	173,193,687	$	3,126,023	$	-	$	375,004,980

Construction and Land Development

Pass	$	1,328,425	$	3,105,220	$	6,547,833	$	1,476,429	$	975,009	$	6,279,346	$	-	$	-	$	19,712,262
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,328,425	$	3,105,220	$	6,547,833	$	1,476,429	$	975,009	$	6,279,346	$	-	$	-	$	19,712,262

Residential Real Estate

Pass	$	6,454,708	$	10,227,748	$	18,247,913	$	9,810,190	$	7,338,084	$	50,556,839	$	6,651,326	$	-	$	109,286,808
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		1,642,744		-		-		1,642,744
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	6,454,708	$	10,227,748	$	18,247,913	$	9,810,190	$	7,338,084	$	52,199,583	$	6,651,326	$	-	$	110,929,552

Commercial

Pass	$	7,147,076	$	5,587,940	$	6,378,892	$	2,844,724	$	843,019	$	1,438,325	$	20,677,544	$	-	$	44,917,520
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	7,147,076	$	5,587,940	$	6,378,892	$	2,844,724	$	843,019	$	1,438,325	$	20,677,544	$	-	$	44,917,520

Consumer

Pass	$	47,217	$	65,919	$	15,627	$	2,146	$	3,957	$	2,026	$	-	$	-	$	136,892
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		3,459		-		1,124		-		-		-		-		4,583
Doubtful		-		-		-		-		-		-		26,994		-		26,994
Total	$	47,217	$	69,378	$	15,627	$	3,270	$	3,957	$	2,026	$	26,994	$	-	$	168,469

Aggregate total

Pass	$	37,663,939	$	46,379,311	$	104,392,303	$	69,454,617	$	29,243,176	$	222,208,406	$	30,454,893	$	-	$	539,796,645
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		3,459		-		1,124		-		10,904,561		-		-		10,909,144
Doubtful		-		-		-		-		-		-		26,994		-		26,994
Total	$	37,663,939	$	46,382,770	$	104,392,303	$	69,455,741	$	29,243,176	$	233,112,967	$	30,481,887	$	-	$	550,732,783

Charge-offs	$	-	$	3,330	$	-	$	-	$	-	$	152,449	$	-	$	-	$	155,779

- 20 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

Loans by credit grade, segregated by loan type, and year originated as of December 31, 2023 are as follows:

	Term Loans Amortized Cost Basis by Origination
															Revolving
													Revolving		Loans Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial Real Estate

Pass	$	27,500,909	$	73,944,442	$	54,973,818	$	20,540,492	$	25,102,276	$	147,755,491	$	2,694,268	$	-	$	352,511,696
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		9,430,815		-		-		9,430,815
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	27,500,909	$	73,944,442	$	54,973,818	$	20,540,492	$	25,102,276	$	157,186,306	$	2,694,268	$	-	$	361,942,511

Construction and Land Development

Pass	$	3,359,456	$	6,519,085	$	4,623,119	$	642,571	$	309,038	$	4,992,881	$	-	$	-	$	20,446,150
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	3,359,456	$	6,519,085	$	4,623,119	$	642,571	$	309,038	$	4,992,881	$	-	$	-	$	20,446,150

Residential Real Estate

Pass	$	10,109,347	$	18,603,074	$	9,870,791	$	6,793,326	$	16,218,714	$	40,015,758	$	9,501,733	$	-	$	111,112,743
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		1,676,888		-		-		1,676,888
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	10,109,347	$	18,603,074	$	9,870,791	$	6,793,326	$	16,218,714	$	41,692,646	$	9,501,733	$	-	$	112,789,631

Commercial

Pass	$	7,016,763	$	8,074,370	$	3,264,342	$	1,225,297	$	884,537	$	910,042	$	11,295,272	$	-	$	32,670,623
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		152,449		-		-		-		152,449
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	7,016,763	$	8,074,370	$	3,264,342	$	1,225,297	$	1,036,986	$	910,042	$	11,295,272	$	-	$	32,823,072

Consumer

Pass	$	92,295	$	32,771	$	4,179	$	4,895	$	7,226	$	2	$	-	$	-	$	141,368
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		6,106		-		1,524		-		-		-		-		-		7,630
Doubtful		-		-		-		-		-		-		16,138		-		16,138
Total	$	98,401	$	32,771	$	5,703	$	4,895	$	7,226	$	2	$	16,138	$	-	$	165,136

Aggregate total

Pass	$	48,078,770	$	107,173,742	$	72,736,249	$	29,206,581	$	42,521,791	$	193,674,174	$	23,491,273	$	-	$	516,882,580
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		6,106		-		1,524		-		152,449		11,107,703		-		-		11,267,782
Doubtful		-		-		-		-		-		-		16,138		-		16,138
Total	$	48,084,876	$	107,173,742	$	72,737,773	$	29,206,581	$	42,674,240	$	204,781,877	$	23,507,411	$	-	$	528,166,500

Charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

- 21 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

The following table details activity in the allowance for credit losses and loan balances by portfolio as of and for the three- and six-month periods ended June 30, 2024 and 2023 and for the year ended December 31, 2023. 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 credit losses ending				Outstanding loan balances
			Provision for										balance evaluated for impairment:				evaluated:
Six months ended	Beginning		(recovery of)			Charge					Ending
June 30, 2024	balance		credit losses			offs			Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	2,449,988	$	101,967		$	-		$	-	$	2,551,955	$	392,551	$	2,159,404	$	2,441,900	$	372,563,080
Construction and land development		253,173		( 48,220	)		-			-		204,953		-		204,953		-		19,712,262
Residential		1,012,938		( 157,307	)		-			12,000		867,631		-		867,631		272,741		110,656,811
Commercial		493,502		96,720			( 152,449	)		-		437,773		-		437,773		-		44,917,520
Consumer		2,080		4,209			( 3,330	)		-		2,959		-		2,959		-		168,469
Unallocated		73,566		( 56,739	)		-			-		16,827		-		16,827		-		-
	$	4,285,247	$	( 59,370	)	$	( 155,779	)	$	12,000	$	4,082,098	$	392,551	$	3,689,547	$	2,714,641	$	548,018,142

															Allowance for credit losses ending				Outstanding loan balances
						Provision for									balance evaluated for impairment:				evaluated:
Six months ended	Beginning		Impact of ASC			(recovery of)			Charge				Ending
June 30, 2023	balance		326 Adoption			credit losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	2,818,582	$	( 350,838	)	$	205,358		$	-	$	-	$	2,673,102	$	250,000	$	2,423,102	$	502,961	$	366,708,230
Construction and land development		164,596		280,179			( 153,094	)		-		11,925		303,606		-		303,606		-		24,940,684
Residential		793,919		538,435			( 609,314	)		-		375,048		1,098,088		74,208		1,023,880		278,101		111,776,676
Commercial		337,303		135,200			5,148			-		-		477,651		152,449		325,202		152,449		31,721,432
Consumer		4,706		( 4,537	)		3,786			-		-		3,955		-		3,955		-		182,095
Unallocated		31,092		( 31,092	)		90,434			-		-		90,434		-		90,434		-		-
	$	4,150,198	$	567,347		$	( 457,682	)	$	-	$	386,973	$	4,646,836	$	476,657	$	4,170,179	$	933,511	$	535,329,117

- 22 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

															Allowance for credit losses ending				Outstanding loan balances
						Provision for									balance evaluated for impairment:				evaluated:
	Beginning		Impact of ASC			(recovery of)			Charge				Ending
December 31, 2023	balance		326 Adoption			credit losses			offs		Recoveries		balance		Individually		Collectively		Individually		Collectively

Real estate:
Commercial	$	2,818,582	$	( 448,483	)	$	79,889		$	-	$	-	$	2,449,988	$	297,551	$	2,152,437	$	2,515,103	$	359,427,408
Construction and land development		164,596		277,317			( 200,665	)		-		11,925		253,173		-		253,173		-		20,446,150
Residential		793,919		508,579			( 676,608	)		-		387,048		1,012,938		-		1,012,938		275,622		112,514,009
Commercial		337,303		133,838			22,361			-		-		493,502		152,449		341,053		152,449		32,670,623
Consumer		4,706		( 4,526	)		1,900			-		-		2,080		-		2,080		-		165,136
Unallocated		31,092		( 31,092	)		73,566			-		-		73,566		-		73,566		-		-
	$	4,150,198	$	435,633		$	( 699,557	)	$	-	$	398,973	$	4,285,247	$	450,000	$	3,835,247	$	2,943,174	$	525,223,326

Loans acquired from Carroll Community Bank in 2020 were measured at fair value at the acquisition date with no carryover of any allowance for credit losses. The following table provides activity for the accretable credit discount of purchased loans:

	Three Months			Six Months			Three Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2024			June 30, 2024			June 30, 2023			June 30, 2023


Beginning balance	$	463,960		$	539,338		$	818,740		$	930,973
Accretion		( 67,116	)		( 142,494	)		( 102,402	)		( 214,635	)
Ending balance	$	396,844		$	396,844		$	716,338		$	716,338

The following table provides activity for the amortizable yield premium of purchased loans:

	Three Months			Six Months			Three Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2024			June 30, 2024			June 30, 2023			June 30, 2023


Beginning balance	$	437,936		$	509,087		$	772,817		$	878,756
Amortization		( 63,351	)		( 134,502	)		( 96,657	)		( 202,596	)
Ending balance	$	374,585		$	374,585		$	676,160		$	676,160

- 23 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

At June 30, 2024 and December 31, 2023, the aggregate principal balance of purchased loans was $ 68,069,276 and $ 74,146,002 , respectively, and the aggregate carrying value was $ 68,047,017 and $ 74,115,751 , respectively.

The following table details activity in the allowance for credit losses on unfunded loan commitments for the three- and six-month periods ended June 30, 2024 and 2023:

	Three Months			Six Months			Three Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2024			June 30, 2024			June 30, 2023			June 30, 2023


Beginning balance	$	203,847		$	227,643		$	76,471		$	-
Impact of adopting ASC 326		-			-			-			85,073
Credit loss recovery		( 7,838	)		( 31,634	)		( 27,171	)		( 35,773	)
Ending balance	$	196,009		$	196,009		$	49,300		$	49,300

The following table provides a summary of all of the components of the allowance for credit losses:

	Three Months Ended June 30, 2024											Six Months Ended June 30, 2024
	Held to maturity securities		Loans			Unfunded loan commitments			Total			Held to maturity securities		Loans			Unfunded loan commitments			Total

Beginning balance	$	31,670	$	4,317,837		$	203,847		$	4,553,354		$	35,627	$	4,285,247		$	227,643		$	4,548,517
Provision (recovery) of credit losses		94,961		( 87,123	)		( 7,838	)		-			91,004		( 59,370	)		( 31,634	)		-
Charge-offs		-		( 154,616	)		-			( 154,616	)		-		( 155,779	)		-			( 155,779	)
Recoveries		-		6,000			-			6,000			-		12,000			-			12,000
Ending balance	$	126,631	$	4,082,098		$	196,009		$	4,404,738		$	126,631	$	4,082,098		$	196,009		$	4,404,738

- 24 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans and Allowance for Credit Losses (continued)

	Three Months Ended June 30, 2023												Six Months Ended June 30, 2023
	Held to maturity securities			Loans			Unfunded loan commitments			Total			Held to maturity securities			Loans			Unfunded loan commitments			Total

Beginning balance	$	60,592		$	4,822,643		$	76,471		$	4,959,706		$	-		$	4,150,198		$	-		$	4,150,198
Impact of adopting ASC 326		-			-			-			-			51,990			567,347			85,073			704,410
Provision (recovery) of credit losses		( 10,147	)		( 187,682	)		( 27,171	)		( 225,000	)		( 1,545	)		( 457,682	)		( 35,773	)		( 495,000	)
Charge-offs		-			-			-			-			-			-			-			-
Recoveries		-			11,875			-			11,875			-			386,973			-			386,973
Ending balance	$	50,445		$	4,646,836		$	49,300		$	4,746,581		$	50,445		$	4,646,836		$	49,300		$	4,746,581

5.	Goodwill and Other Intangibles

The Company’s acquisitions of Carroll Bancorp, Inc. and Carroll Community Bank in 2020 (collectively, the “Merger”) resulted in the recording of goodwill and a core deposit intangible (“CDI”). The following table presents the changes in both assets for the six-month periods ended June 30, 2024 and 2023:

	Goodwill		CDI			Total

Balance at December 31, 2022	$	6,978,208	$	64,544		$	7,042,752
Amortization		-		( 4,164	)		( 4,164	)
Balance at June 30, 2023	$	6,978,208	$	60,380		$	7,038,588


Balance at December 31, 2023	$	6,978,208	$	56,216		$	7,034,424
Amortization		-		( 4,164	)		( 4,164	)
Balance at June 30, 2024	$	6,978,208	$	52,052		$	7,030,260

The CDI is being amortized over 10 years on a straight-line basis. Annual amortization will be $ 8,328 per year through year nine and $ 6,246 in year 10. Because the Merger was a tax-free reorganization, neither the goodwill nor the CDI is deductible for income tax purposes. A goodwill impairment analysis is performed annually.

- 25 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6.	Capital Standards

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

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

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

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

The implementation of the capital conservation buffer began on January 1, 2015, at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank.

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

- 26 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6.	Capital Standards (continued)

On September 17, 2019, the Federal Deposit Insurance Corporation (the “FDIC”) finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

On April 6, 2020, in a joint statement, the FDIC, Board of Governors of the Federal Reserve System and the Office of Comptroller of the Currency issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the federal CARES Act. Under the interim final rules, the community bank leverage ratio was reduced to 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company has not opted-in to the CBLR framework.

As of June 30, 2024 the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. Capital ratios of the Company are substantially the same as the Bank’s.

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

- 27 -

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 June 30, 2024 and December 31, 2023, for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2024 and December 31, 2023, based on the 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.

6.	Capital Standards (continued)

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
June 30, 2024	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	80,669		12.88	%	$	65,769		10.50	%	$	62,637		10.00	%
Tier 1 capital (to risk-weighted assets)		76,269		12.18	%		53,242		8.50	%		50,110		8.00	%
Common equity tier 1 (to risk-weighted assets)		76,269		12.18	%		43,846		7.00	%		40,714		6.50	%
Tier 1 leverage (to average assets)		76,269		9.58	%		31,857		4.00	%		39,821		5.00	%

						Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized
December 31, 2023	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	79,988		13.45	%	$	62,437		10.50	%	$	59,464		10.00	%
Tier 1 capital (to risk-weighted assets)		75,440		12.69	%		50,544		8.50	%		47,571		8.00	%
Common equity tier 1 (to risk-weighted assets)		75,440		12.69	%		41,625		7.00	%		38,651		6.50	%
Tier 1 leverage (to average assets)		75,440		9.42	%		32,051		4.00	%		40,063		5.00	%

7.	Derivative Financial Instruments

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and other terms of the individual interest rate swap agreements.

Fair Value Hedges: Interest rate swaps with notional amounts totaling $ 55.2 million as of June 30, 2024 were designated as fair value last of layer hedges of certain government agency mortgage backed securities. There were no interest rate swaps prior to 2023. The hedges were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps.

- 28 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7.	Derivative Financial Instruments (continued)

The following table presents the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2024 and December 31, 2023:

Line item in

Carrying

the balance sheet

Carrying

amount of fair

Carrying

amount of fair

in which the

amount of the

value hedging

amount of the

value hedging

hedged item is

hedged assets

adjustment

hedged assets

adjustment

included

June 30, 2024

December 31, 2023

Securities available

63,126,375

( 123,286

)

69,920,575

( 1,609,248

)

The Company presents derivative positions gross on the balance sheet. The following table reflects the derivatives recorded on the balance sheet at June 30, 2024 and December 31, 2023:

	June 30, 2024		December 31, 2023
	Fair		Fair
	Value		Value

Included in other assets:
Derivatives designated as hedges:
Interest rate swaps related to securities available for sale	$	327,535	$	-

Total included in other assets	$	327,535	$	-

Included in other liabilities:
Derivatives designated as hedges:
Interest rate swaps related to securities available for sale	$	450,756	$	1,563,527

Total included in other liabilities	$	450,756	$	1,563,527

- 29 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7.	Derivative Financial Instruments (continued)

The effect of fair value hedge accounting on the statement of income for the three- and six-month periods ended June 30, 2024 and 2023 are as follows:

	Fair Value Hedging Relationships

Total amounts of income and expense line items presented in the statements of income in
which the effects of the fair value hedge is recorded are as follows:

		Three Months Ended June 30, 2024		Six Months Ended June 30, 2024		Three Months Ended June 30, 2023			Six Months Ended June 30, 2023

		Interest		Interest		Interest			Interest
		Income		Income		Income			Income

The effects of fair value hedging:
Loss (gain) on fair value hedging relationships:
Hedged items		$	11,594	$	65	$	( 2,108	)	$	32,005
Interest rate contracts designated as hedging instruments			176,762		356,972		32,356			41,741
Net gain on fair value hedging relationships included in interest income from investment securities- taxable		$	188,356	$	357,037	$	30,248		$	73,746

8.	Fair Value

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

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

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value (continued)

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

●

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

●

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

●

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

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

●

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

●

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

●

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.

●

Collateral-dependent loans: Nonrecurring fair value adjustments to collateral-dependent loans reflect full or partial write-downs and reserves that are based on the collateral-dependent loan’s observable market price or current appraised value of the collateral. Because the market for collateral-dependent 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.

●

Fair value hedges: The market value based on independent third party valuation sources that uses observable and traded prices of interest rate swaps from leading banks and brokers.

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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 at June 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Carrying Value:
June 30, 2024	Level 1		Level 2		Level 3		Total

Recurring:
Available for sale securities
State and municipal	$	-	$	483,018	$	-	$	483,018
SBA pools		-		715,125		-		715,125
Corporate bonds		-		7,660,463		-		7,660,463
Mortgage-backed securities		-		148,665,962		-		148,665,962
	$	-	$	157,524,568	$	-	$	157,524,568

Fair value hedge in other assets	$	-	$	327,535	$	-	$	327,535

Equity security at fair value
Mutual fund	$	508,333	$	-	$	-	$	508,333

Fair value hedge in other liabilities	$	-	$	450,756	$	-	$	450,756

Nonrecurring:
Other real estate owned, net	$	-	$	-	$	1,242,365	$	1,242,365
Collateral-dependent loans, net	$	-	$	-	$	2,059,349	$	2,059,349

	Carrying Value:
December 31, 2023	Level 1		Level 2		Level 3		Total

Recurring:
Available for sale securities
State and municipal	$	-	$	484,808	$	-	$	484,808
SBA pools		-		766,710		-		766,710
Corporate bonds		-		8,570,429		-		8,570,429
Mortgage-backed securities		-		154,262,726		-		154,262,726
	$	-	$	164,084,673	$	-	$	164,084,673

Equity security at fair value
Mutual fund	$	507,130	$	-	$	-	$	507,130

Fair value hedge in other liabilities	$	-	$	1,563,527	$	-	$	1,563,527

Nonrecurring:
Other real estate owned, net	$	-	$	-	$	1,242,365	$	1,242,365
Collateral-dependent loans, net	$	-	$	-	$	205,410	$	205,410

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value (continued)

The following table provides information describing the unobservable inputs used in level 3 fair value measurements at June 30, 2024 and December 31, 2023:

June 30, 2024:
Assets	Fair Value		Valuation Technique	Unobservable Inputs	Range (Average)

Collateral-dependent loans	$	2,059,349	Third party appraisals	Marketability/selling	0 %	to	20 %	( 10 %)
			and in-house real estate	costs and current market
			valuations of fair value	conditions

Other real estate owned	$	1,242,365	Third party appraisals	Marketability/selling	0 %	to	10 %	( 5 %)
			and in-house real estate	costs and current market
			valuations of fair value	conditions

December 31, 2023:
Assets	Fair Value		Valuation Techniques	Unobservable Input	Average

Collateral-dependent loans	$	205,410	Third party appraisals	Marketability/selling	0 %	to	20 %	( 10 %)
			and in-house real estate	costs and current market
			valuations of fair value	conditions

Other real estate owned	$	1,242,365	Third party appraisals	Marketability/selling	0 %	to	10 %	( 5 %)
			and in-house real estate	costs and current market
			valuations of fair value	conditions

- 33 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.	Fair Value (continued)

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

	June 30, 2024				December 31, 2023
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	24,510,320	$	24,510,320	$	44,690,337	$	44,690,337
Level 2 inputs
Certificates of deposit in other banks		100,000		100,000		100,000		100,000
Accrued interest receivable		2,191,090		2,191,090		2,180,734		2,180,734
Securities available for sale		157,524,568		157,524,568		164,084,673		164,084,673
Securities held to maturity, net		17,265,693		15,894,901		17,293,422		16,193,020
Equity security		508,333		508,333		507,130		507,130
Restricted stock		1,395,900		1,395,900		863,500		863,500
Bank owned life insurance		15,115,536		15,115,536		14,930,754		14,930,754
Fair value hedge		327,535		327,535		-		-
Level 3 inputs
Securities held to maturity, net		2,870,200		2,870,200		2,870,200		2,870,200
Loans, net		546,036,461		532,558,685		523,308,044		507,138,253

Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	108,907,898	$	108,907,898	$	115,284,706	$	115,284,706
Securities sold under repurchase agreements		2,758,183		2,758,183		6,760,493		6,760,493
Level 2 inputs
Interest-bearing deposits		542,301,597		542,792,597		565,678,145		566,925,060
Federal Home Loan Bank advances		15,000,000		14,848,000		5,000,000		4,754,000
Federal Reserve Bank advances		54,000,000		53,651,745		33,000,000		32,996,852
Long-term debt, net		12,270,747		11,627,000		13,212,378		12,428,000
Accrued interest payable		2,217,250		2,217,250		1,482,773		1,482,773
Fair value hedge		450,756		450,756		1,563,527		1,563,527

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

9.	Earnings per Share

Earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. The following table shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common shareholders. There were 294 and 250 restricted stock units included in weighted average dilutive shares for the three- and six-month periods ended June 30, 2024, respectively. There were no dilutive shares for the three- or six-month periods ended June 30, 2023.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2024		2023		2024		2023

Net income	$	1,078,509	$	1,670,117	$	2,298,496	$	3,570,968

Weighted average shares outstanding - basic		3,120,967		3,073,319		3,118,966		3,072,272

Effect of dilutive restricted stock units		294		-		250		-

Weighted average shares outstanding - diluted		3,121,261		3,073,319		3,119,216		3,072,272

Earnings per share - basic	$	0.35	$	0.54	$	0.74	$	1.16
Earnings per share - diluted	$	0.35	$	0.54	$	0.74	$	1.16

10.

Retirement Plans

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or older with six months of service are eligible for participation in the plan. The Company matches employee contributions up to 4 % of total compensation and may make additional discretionary contributions. Employee and employer contributions are 100 % vested when made. The Company’s contributions to this plan were $ 68,063 and $ 65,775 for the three-month periods ended June 30, 2024 and 2023, respectively, and $ 148,353 and $ 143,450 for the six-month periods ended June 30, 2024 and 2023, 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. Some of the policies provide benefits subsequent to the employee’s employment with the Company. For this plan, the Company expensed $ 1,976 and $ 1,834 for the three-month periods ended June 30, 2024 and 2023, respectively, and $ 3,952 and $ 3,668 for the six-month periods ended June 30, 2024 and 2023, respectively.

The Company adopted supplemental executive retirement plans for four 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 $ 66,000 and $ 79,400 for the three-month periods ended June 30, 2024 and 2023, respectively, and $ 132,000 and $ 152,000 for the six-month periods ended June 30, 2024 and 2023, respectively.

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

- 35 -

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

11.

Borrowed Funds

Borrowed funds consist of securities sold under repurchase agreements, which represent overnight or term borrowings from customers, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”), term borrowings from a commercial bank, and overnight borrowings from commercial banks.

Additional information is as follows:

		June 30,		December 31,
		2024		2023
Amount oustanding at period-end:
Securities sold under repurchase agreements		$	2,758,183	$	6,760,493
Federal Home Loan Bank advances mature in:	2025		15,000,000		5,000,000
Federal Reserve Bank advances mature in:	2024		-		33,000,000
	2025		54,000,000		-
Long-term debt (net of issuance costs)			12,270,747		13,212,378

The Bank is approved to borrow 75 % of eligible pledged single-family residential loans and 50 % of eligible pledged commercial loans as well as investment securities, or approximately $ 60.7 million under a secured line of credit with the FHLB. The Bank also has two facilities with the Reserve Bank. Under the first facility, which has been in place for over 10 years and is collateralized by loans, the Bank can borrow approximately $ 30.9 million. The second facility is the Bank Term Funding Program (“BTFP”) that the Reserve Bank created in 2023. The BTFP facility allows securities to be pledged at par, provides fixed rates for up to one-year terms, and allows prepayments in whole or in part at any time. Effective March 11, 2024, no new advances can be obtained through the BTFP facility. Finally, the Bank has $ 23,500,000 ($ 14,500,000 unsecured and $ 9,000,000 secured) of overnight federal funds lines of credit available from commercial banks.

FHLB advances of $ 15,000,000 and $ 5,000,000 were outstanding as of June 30, 2024 and December 31, 2023, respectively. BTFP advances of $ 54,000,000 and $ 33,000,000 were outstanding as of June 30, 2024 and December 31, 2023, respectively. The Company borrowed $ 17,000,000 to facilitate the Merger in 2020. There were no borrowings from the Reserve Bank other than the BTFP advances noted above or our commercial bank lenders at June 30, 2024 or December 31, 2023.

12.

Stock-Based Compensation

On August 22, 2023, the Board of Directors approved the Farmers and Merchants Bancshares, Inc. 2023 Equity Compensation Plan (the “Equity Plan”). The Equity Plan allows the Board of Directors or its Compensation Committee to grant awards that may be payable in shares of common stock or the cash equivalent thereof.

The Company complies with the provisions of ASC Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock compensation cost. The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

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Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

12.

Stock-Based Compensation (continued)

During the year ended December 31, 2023, 2,000 fully vested shares of common stock and 3,000 restricted stock units (the “RSUs”) were granted to one executive officer. One-third of the RSUs will vest on September 22, 2024, one-third will vest on September 22, 2025, and one-third will vest on September 22, 2026, provided that, in each case, the grantee is employed and in good standing with the Company on the applicable vesting date.

A summary of the Company’s restricted stock unit grant activity as of June 30, 2024 is shown below:

	Number of		Grant Date
	Shares		Fair Value per Share

Balance at December 31, 2023		3,000		18.15
Granted		-		-
Vested		-		-
Forefeited		-		-
Balance at June 30, 2024		3,000		18.15

The compensation cost charged to income in respect of awards granted under the Equity Plan was $ 4,538 and $ 9,075 for the three- and six-month periods ended June 30, 2024, respectively. As of June 30, 2024, there was $ 40,836 of unrecognized compensation cost related to the unvested RSUs, which is expected to be recognized over a period of 27 months.

- 37 -

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

Introduction

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2023 (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; 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.

- 38 -

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

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

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

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

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

Estimates and Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year ended December 31, 2023, which were included in Item 8 of Part II of the Form 10-K. On an on-going basis, management evaluates estimates, including those related to credit losses and intangible assets, impairment 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 credit losses on loans represents management’s estimate of expected credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit 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 collateral dependent loans, estimated losses on pools of homogeneous loans based on historical loss experience, consideration of current economic trends and conditions and reasonable and supportable forecasts, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.

- 39 -

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 impaired 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, 2023.

Financial Condition

Total assets decreased by $1,384,977, or 0.2%, to $798,555,849 at June 30, 2024 from $799,940,826 at December 31, 2023. The decrease in total assets was due primarily to a decrease of $20,180,017 in cash and cash equivalents and a decrease of $6,587,834 in debt securities, offset by an increase of $22,728,417 in loans.

Total liabilities decreased by $3,749,476, or 0.5%, to $744,013,059 at June 30, 2024 from $747,762,535 at December 31, 2023. The decrease was due primarily to a $29,753,356 decrease in deposits, a $4,002,310 decrease in securities sold under repurchase agreements and a $941,631 decrease in long-term debt, offset by a $21,000,000 increase in advances from the Federal Reserve Bank of Richmond (the “Reserve Bank”) and a $10,000,000 increase in advances from the Federal Home Loan Bank (the “FHLB”).

Stockholders’ equity increased by $2,364,499, or 4.5%, to $54,542,790 at June 30, 2024 from $52,178,291 at December 31, 2023. The increase was due to net income of $2,298,496, a decrease of $659,798 in accumulated other comprehensive loss and an increase of $9,076 for stock-based compensation paid to an executive officer, offset by dividends paid, net of reinvestments, of $602,871.

- 40 -

Loans

Major categories of loans at June 30, 2024 and December 31, 2023 were as follows:

	June 30,				December 31,
	2024				2023

Real estate:
Commercial	$	375,004,980	68	%	$	361,942,511	69	%
Construction/Land development		19,712,262	4	%		20,446,150	4	%
Residential		110,929,552	20	%		112,789,631	21	%
Commercial		44,917,520	8	%		32,823,072	6	%
Consumer		168,469	0	%		165,136	0	%
		550,732,783	100	%		528,166,500	100	%
Less: Allowance for credit losses on loans		4,082,098				4,285,247
Deferred origination fees net of costs		614,224				573,209
	$	546,036,461			$	523,308,044

Loans increased by $22,728,417, or 4.3%, to $546,036,461 at June 30, 2024 from $523,308,044 at December 31, 2023. The increase was due primarily to an increase of $13,062,469 in commercial real estate loans and an increase of $12,094,448 in commercial loans, offset by decreases of $1,860,079 in residential real estate loans and $733,888 in construction/land development loans. The allowance for credit losses on loans decreased by $203,149, or 4.7%, to $4,082,098 at June 30, 2024 from $4,285,247 at December 31, 2023.

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 credit losses on loans. 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.

The following table provides the provision for (recovery of) credit losses for the six-month periods ended June 30, 2024 and 2023:

Three Months Ended June 30, 2024										Six Months Ended June 30, 2024
Held to maturity securities		Loans			Unfunded loan commitments			Total		Held to maturity securities		Loans			Unfunded loan commitments			Total

$	94,961	$	(87,123	)	$	(7,838	)	$	-	$	91,004	$	(59,370	)	$	(31,634	)	$	-

Three Months Ended June 30, 2023												Six Months Ended June 30, 2023
Held to maturity securities			Loans			Unfunded loan commitments			Total			Held to maturity securities			Loans			Unfunded loan commitments			Total

$	(10,147	)	$	(187,682	)	$	(27,171	)	$	(225,000	)	$	(1,545	)	$	(457,682	)	$	(35,773	)	$	(495,000	)

- 41 -

The following table provides the recoveries from loans written off in prior periods and charge-offs for the three- and six-month periods ended June 30, 2024 and 2023:

	Three Months Ended June 30, 2024										Six Months Ended June 30, 2024
	Held to maturity securities		Loans			Unfunded loan commitments		Total			Held to maturity securities		Loans			Unfunded loan commitments		Total

Charge-offs	$	-	$	(154,616	)	$	-	$	(154,616	)	$	-	$	(155,779	)	$	-	$	(155,779	)
Recoveries		-		6,000			-		6,000			-		12,000			-		12,000

	Three Months Ended June 30, 2023								Six Months Ended June 30, 2023
	Held to maturity securities		Loans		Unfunded loan commitments		Total		Held to maturity securities		Loans		Unfunded loan commitments		Total

Charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Recoveries		-		11,875		-		11,875		-		386,973		-		386,973

Watch list loans include loans classified as Special Mention, Substandard, and Doubtful. As of June 30, 2024, the Company had $8,194,504 of loans on a watch list, other than collateral-dependent loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2023, the Company had $8,340,746 of such loans. Watch List loans are subject to ongoing management attention and their classifications are reviewed regularly.

Management believes that the $4.1 million reserve at June 30, 2024 is adequate to cover the expected losses in the loan portfolio. The Company’s loan portfolio grew by $22.6 million during the first six months of 2024. There was excess reserve at December 31, 2023, which has been absorbed by the growth. The allowance for credit losses on loans was 0.74% of the loan portfolio at June 30, 2024 compared to 0.81% at December 31, 2023. The decrease in the percentage is due primarily to a $152,449 fully reserved loan being charged off and removed from the reserve.

Investment Securities

Investments in debt securities decreased by $6,587,834, or 3.6, to $177,660,461 at June 30, 2024 from $184,248,295 at December 31, 2023. At June 30, 2024 and December 31, 2023, the Company had classified 89% and 89% of the investment portfolio as available for sale, respectively. The balance of the portfolio was classified as held to maturity.

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

- 42 -

Other Real Estate Owned

Other real estate owned (“OREO”) at June 30, 2024 and December 31, 2023 included one property with a carrying value of $1,242,365. The property is an apartment building in Baltimore, Maryland that was acquired in the Merger. The property is being marketed for sale.

	June 30,		December 31,
	2024		2023

Other Real Estate Owned	$	1,242,365	$	1,242,365

Deposits

Total deposits decreased by $29,753,356, or 4.4%, to $651,209,495 at June 30, 2024 from $680,962,851 at December 31, 2023. The decrease in deposits was due primarily to a $15,993,609 decrease in interest-bearing checking accounts, an $11,483,808 decrease in money market accounts, a $14,579,734 decrease in savings accounts and a $6,376,808 decrease in noninterest-bearing checking accounts, offset by a $7,196,795 increase in certificates of deposit. Generally, the decreases are due to the competition for deposits among all financial institutions due to higher interest rates.

The following table shows the average balances and average costs of deposits for the six-month periods ended June 30, 2024 and 2023:

	June 30, 2024					June 30, 2023
	Average					Average
	Balance		Cost			Balance		Cost

Noninterest bearing demand deposits	$	113,311,143		0.00	%	$	122,819,264		0.00	%
Interest bearing demand deposits		128,937,766		0.70	%		131,807,475		0.40	%
Savings and money market deposits		154,394,095		0.64	%		179,967,388		0.29	%
Time deposits		258,688,041		4.17	%		193,840,056		2.31	%
	$	655,331,045		1.93	%	$	628,434,183		0.88	%

Liquidity Management

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet depositor withdrawal requirements, to fund loans, and to fund our other debts and obligations as they come due in the normal course of business. We maintain our asset liquidity position internally through short-term investments, the maturity distribution of the investment portfolio, loan repayments, and income from earning assets. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed.

The Bank is approved to borrow 75% of eligible pledged single-family residential loans and 50% of eligible pledged commercial loans as well as investment securities, or approximately $60.7 million under a secured line of credit with the FHLB. The Bank also has two facilities with the Reserve Bank. Under the first facility, which has been in place for over 10 years and is collateralized by loans, the Bank can borrow approximately $30.9 million. The second facility is the Bank Term Funding Program (“BTFP”) that the Reserve Bank created in 2023. The BTFP facility allows securities to be pledged at par, provides fixed rates for up to one-year terms, and allows prepayments in whole or in part at any time. Effective, March 11, 2024, no new advances are available under the BTFP facility. Finally, the Bank has $23,500,000 ($14,500,000 unsecured and $9,000,000 secured) of overnight federal funds lines of credit available from commercial banks.

- 43 -

FHLB advances of $15,000,000 and $5,000,000 were outstanding as of June 30, 2024 and December 31, 2023. BTFP advances of $54,000,000 and $33,000,000 were outstanding as of June 30, 2024 and December 31, 2023, respectively. The Company borrowed $17,000,000 to facilitate the Merger in 2020 as more fully described below. There were no borrowings from the Reserve Bank other than the BTFP advances noted above or our commercial bank lenders at June 30, 2024 or December 31, 2023. 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. Uninsured deposits were approximately $140,045,000, or 22% of total deposits, at June 30, 2024.

Borrowings and Other Contractual Obligations

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

On September 30, 2020, the Company borrowed $17,000,000 from First Horizon Bank (“FHN”) for the purpose of funding a portion of the consideration that was payable to the stockholders of Carroll in the Merger. Net of issuance costs, the amount of the net long-term debt was $12,270,747 and $13,212,378 as of June 30, 2024 and December 31, 2023, respectively. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. Quarterly interest-only payments were made through October 1, 2021. During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $615,000, which is 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:

		June 30,			December 31,
		2024			2023
Amount oustanding at period-end:
Securities sold under repurchase agreements		$	2,758,183		$	6,760,493
Federal Home Loan Bank advances mature in:	2025		15,000,000			5,000,000
Federal Reserve Bank advances mature in:	2024		-			33,000,000
	2025		54,000,000			-
Long-term debt (net of issuance costs)			12,270,747			13,212,378
Weighted average rate paid at period-end:
Securites sold under repurchase agreements			1.25	%		1.25	%
Federal Home Loan Bank advances			1.00	%		1.00	%
Federal Reserve Bank advances			4.76	%		4.83	%
Long-term debt			4.10	%		4.10	%

- 44 -

The advances from the Reserve Bank and the FHLB and the long-term debt outstanding at June 30, 2024 will require the following principal payments:

Year ending December 31, 2024		$	944,445
Year ending December 31, 2025			80,333,333

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 June 30, 2024 and December 31, 2023 are as follows:

	June 30,		December 31,
	2024		2023

Loan commitments
Construction and land development	$	11,820,823	$	8,575,337
Commercial		9,653,000		17,877,375
Commercial real estate		17,810,000		7,277,500
Residential		3,240,000		2,195,000
	$	42,523,823	$	35,925,212

Unused lines of credit
Home-equity lines	$	12,697,743	$	11,395,790
Commercial lines		45,505,546		46,610,690
	$	58,203,289	$	58,006,480

Letters of credit	$	1,222,832	$	1,339,391

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 Six Months Ended June 30, 2024 and 2023

General

Net income for the six months ended June 30, 2024 was $2,298,496 compared to $3,570,968 for the same period of 2023. The decrease of $1,272,472, or 35.6%, was primarily due to a $620,275 decrease in net interest income, a $792,646 increase in noninterest expense and a $495,000 decrease in the recovery of credit losses, offset by a $92,711 increase in noninterest income.

- 45 -

Net Interest Income

Net interest income was $10,307,623 for the six months ended June 30, 2024 compared to $10,927,898 for the same period of 2023. The net yield on interest earning assets decreased to 2.70% for the six months ended June 30, 2024 from 3.09% for the same period of 2023. Higher interest expense on deposits and borrowings was the driving factor in the lower net interest income. The Federal Reserve rate increases of 5.25% since March 2022 caused the cost of deposits and borrowings to increase significantly.

Total interest income for the six months ended June 30, 2024 was $18,245,830 compared to $14,436,751 for the same period of 2023, an increase of $3.8 million, or 26.4%.

Total interest income on loans for the six months ended June 30, 2024 increased by $1,705,458 when compared to the same period of 2023 due to a $9.5 million higher average loan balance for the six months ended June 30, 2024 when compared to the same period of 2023 and a higher loan yield of 5.25% for the six months ended June 30, 2024 versus 4.70% for the same period of 2023. Investment income for the six months ended June 30, 2024 increased by $1,634,174, or 90.2%, when compared to the same period of 2023 due to an increase in the fully-taxable equivalent yield to 3.40% for the six months ended June 30, 2024 compared to 2.24% for the same period of 2023, and a $38.1 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 67 basis points to 4.76% for the six months ended June 30, 2024 from 4.09% for the same period of 2023. The average balance of total interest-earning assets increased by $66.5 million to $772.3 million for the six months ended June 30, 2024 compared to $705.8 million for the same period of 2023.

Total interest expense for the six months ended June 30, 2024 was $7,938,207 compared to $3,508,853 for the same period of 2023, an increase of $4,429,354, or 126.2%. The increase was due to a $73.1 million increase in the average balance of interest-bearing liabilities to $618.9 million for the six months ended June 30, 2024 compared to $545.8 million for the same period of 2023, and a higher overall cost of funds on interest bearing deposits and borrowings of 2.57% for the six months ended June 30, 2024 compared to 1.29% for the same period of 2023. Cost of funds for time deposits increased to 4.17% for the six months ended June 30, 2024 from 2.31% for the same period of 2023. Costs of funds attributable to long-term debt and FHLB, Reserve Bank and other borrowings increased to 4.41% for the six months ended June 30, 2024 from 4.07% for the same period of 2023.

Average noninterest-earning assets increased by $1.0 million to $19.9 million for the six months ended June 30, 2024 compared to $18.9 million in the same period of 2023. Average noninterest-bearing deposits decreased by $9.5 million to $113.3 million during the six months ended June 30, 2024 compared to $122.8 million in the same period of 2023. The average balance in stockholders’ equity increased by $2.4 million for the six months ended June 30, 2024 when compared with the same period of 2023.

- 46 -

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 six-month periods ended June 30, 2024 and 2023. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

	Six Months Ended							Six Months Ended
	June 30, 2024							June 30, 2023
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets :
Loans	$	537,916,405	$	14,119,727		5.25	%	$	528,367,564	$	12,414,269		4.70	%
Securities, taxable (1)		188,528,262		3,173,788		3.37	%		150,112,394		1,534,613		2.04	%
Securities, tax exempt (1)		18,064,766		341,448		3.78	%		18,370,406		355,798		3.87	%
Deposits at other financial institutions and other interest-earning assets (1)		27,809,311		727,295		5.23	%		8,935,974		118,902		2.66	%
Total interest-earning assets		772,318,744		18,362,258		4.76	%		705,786,338		14,423,582		4.09	%
Noninterest-earning assets		19,855,062							18,882,574
Total assets	$	792,173,806						$	724,668,912

Liabilities and Stockholders ’ Equity :
NOW, savings, and money market	$	283,331,861		943,052		0.67	%	$	311,774,863		527,666		0.34	%
Certificates of deposit		258,688,041		5,389,760		4.17	%		193,840,056		2,243,150		2.31	%
Securities sold under repurchase agreements		5,780,388		36,044		1.25	%		4,543,985		11,839		0.52	%
FHLB advances		5,686,813		44,517		1.57	%		20,679,558		412,983		3.99	%
FRB advances and other borrowings		52,846,154		1,262,529		4.78	%		519,337		13,263.00		5.11	%
Long-term debt		12,606,642		262,305		4.16	%		14,489,906		299,952		4.14	%
Total interest-bearing liabilities		618,939,899		7,938,207		2.57	%		545,847,705		3,508,853		1.29	%

Noninterest-bearing deposits		113,311,143							122,819,264
Noninterest-bearing liabilities		7,730,927							6,200,054
Total liabilities		739,981,969							674,867,023
Stockholders' equity		52,191,837							49,801,889
Total liabilities and stockholders' equity	$	792,173,806						$	724,668,912

Net interest income			$	10,424,051							10,914,729

Interest rate spread						2.19	%						2.80	%

Net yield on interest-earning assets						2.70	%						3.09	%

Ratio of average interest-earning assets to Average interest-bearing liabilities						124.78	%						129.30	%

(1) - Interest on tax-exempt securities and other tax-exempt investments are reported on a fully taxable equivalent basis. The federal, state and combined tax rates used were 21.00%, 8.25% and 27.5175% respectively.

Provision for Credit Losses

The provision for credit losses was $0 for the six months ended June 30, 2024. For the six months ended June 30, 2023, a recovery of $495,000 was recorded.

- 47 -

Noninterest Income

Noninterest income for the six months ended June 30, 2024 was $878,375 compared to $785,664 for the same period of 2023, an increase of $92,711, or 11.8%. The increase was due primarily to an increase of $142,794 on insurance proceeds from the storm damage to the Bank’s Upperco, Maryland location, offset by a $35,602 decrease in mortgage banking income.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2024 totaled $8,235,728 compared to $7,443,082 for the same period of 2023, an increase of $792,646, or 10.7%. The increase was due primarily to an increase in salaries and benefits of $155,458 as a result of hiring several new employees and normal annual salary increases, an increase in other expenses of $451,780, and an increase in occupany and furniture and equipment costs of $185,408. The increase in other expenses was due primarily to an increase in professional fees paid to consultants related to the upcoming core conversion along with increases in Federal Deposit Insurance Corporation assessments. The increase in occupancy and furniture and equipment was due primarily to the renovations and new equipment for the Upperco location which was placed in service at the end of the first quarter.

Income Tax Expense

Income tax expense for the six months ended June 30, 2024 was $651,774 compared to $1,194,512 for the same period of 2023. The effective tax rate was 22.1% for the six months ended June 30, 2024 compared to 25.1% for the same period of 2023. The decrease in the effective tax rate was due to a higher percentage of tax exempt revenue in 2024 versus 2023.

Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023

General

Net income for the three months ended June 30, 2024 was $1,078,509 compared to $1,670,117 for the same period of 2023. The decrease of $591,608, or 35.4%, was due to a $137,463 decrease in net interest income, a $437,614 increase in noninterest expense, a $225,000 decrease in the recovery of credit losses and a $29,290 decrease in noninterest income, offset by a $237,759 decrease in income taxes.

Net Interest Income

Net interest income was $5,133,367 for the three months ended June 30, 2024 compared to $5,270,830 for the same period of 2023. The net yield on interest earning assets decreased to 2.71% for the three months ended June 30, 2024 from 3.00% for the same period of 2023. Higher interest expense on deposits and borrowings was the driving factor in the lower net interest income. The Federal Reserve rate increases of 5.25% since March 2022 caused the cost of deposits and borrowings to increase significantly.

Total interest income for the three months ended June 30, 2024 was $9,179,768 compared to $7,384,222 for the same period of 2023, an increase of $1.8 million, or 24.3%.

Total interest income on loans for the three months ended June 30, 2024 increased by $869,095 when compared to the same period of 2023 due to a $10.1 million higher average loan balance for the three months ended June 30, 2024 when compared to the same period of 2023 and a higher loan yield of 5.35% for the three months ended June 30, 2024 versus 4.80% for the same period of 2023. Investment income for the three months ended June 30, 2024 increased by $816,628, or 86.1%, when compared to the same period of 2023 due to an increase in the fully-taxable equivalent yield to 3.45% for the three months ended June 30, 2024 compared to 2.27% for the same period of 2023, and a $37.7 million higher average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 63 basis points to 4.83% for the three months ended June 30, 2024 from 4.20% for the same period of 2023. The average balance of total interest-earning assets increased by $57.0 million to $764.4 million for the three months ended June 30, 2024 compared to $707.4 million for the same period of 2023.

- 48 -

Total interest expense for the three months ended June 30, 2024 was $4,046,401 compared to $2,113,392 for the same period of 2023, an increase of $1,933,009, or 91.5%. The increase was due to a $62.5 million increase in the average balance of interest-bearing liabilities to $611.0 million for the three months ended June 30, 2024 compared to $548.5 million for the same period of 2023, and a higher overall cost of funds on interest bearing deposits and borrowings of 2.65% for the three months ended June 30, 2024 compared to 1.54% for the same period of 2023. Cost of funds for time deposits increased to 4.32% for the three months ended June 30, 2024 from 2.76% for the same period of 2023. Cost of funds attributable to long-term debt and FHLB, Reserve Bank and other borrowings increased to 4.41% for the three months ended June 30, 2024 from 4.20% for the same period of 2023.

Average noninterest-earning assets increased by $1.3 million to $20.1 million for the three months ended June 30, 2024 compared to $18.8 million in the same period of 2023. Average noninterest-bearing deposits decreased by $7.4 million to $113.2 million during the three months ended June 30, 2024 compared to $120.6 million in the same period of 2023. The average balance in stockholders’ equity increased by $1.9 million for the three months ended June 30, 2024 when compared with the same period of 2023.

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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 June 30, 2024 and 2023. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

	Three Months Ended							Three Months Ended
	June 30, 2024							June 30, 2023
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets :
Loans	$	541,267,252	$	7,237,816		5.35	%	$	531,172,647	$	6,368,721		4.80	%
Securities, taxable (1)		186,701,726		1,593,519		3.41	%		148,752,039		771,193		2.07	%
Securities, tax exempt (1)		18,077,408		171,322		3.79	%		18,355,423		177,020		3.86	%
Deposits at other financial institutions and other interest-earning assets (1)		18,394,612		226,579		4.93	%		9,150,832		110,170		4.82	%
Total interest-earning assets		764,440,998		9,229,236		4.83	%		707,430,941		7,427,104		4.20	%
Noninterest-earning assets		20,069,194							18,780,691
Total assets	$	784,510,192						$	726,211,632

Liabilities and Stockholders ’ Equity :
NOW, savings, and money market	$	278,227,072		467,417		0.67	%	$	302,592,016		306,274		0.40	%
Certificates of deposit		255,803,177		2,764,469		4.32	%		207,403,977		1,429,691		2.76	%
Securities sold under repurchase agreements		4,180,846		13,035		1.25	%		3,238,673		7,501		0.93	%
FHLB advances		6,373,626		31,929		2.00	%		19,989,011		208,537		4.17	%
FRB advances and other borrowings		54,000,000		640,846		4.75	%		989,011		13,000		5.26	%
Long-term debt		12,388,099		128,705		4.16	%		14,271,363		148,389		4.16	%
Total interest-bearing liabilities		610,972,820		4,046,401		2.65	%		548,484,051		2,113,392		1.54	%

Noninterest-bearing deposits		113,185,463							120,571,321
Noninterest-bearing liabilities		7,920,724							6,618,321
Total liabilities		732,079,007							675,673,693
Stockholders' equity		52,431,185							50,537,939
Total liabilities and stockholders' equity	$	784,510,192						$	726,211,632

Net interest income			$	5,182,835							5,313,712

Interest rate spread						2.18	%						2.66	%

Net yield on interest-earning assets						2.71	%						3.00	%

Ratio of average interest-earning assets to Average interest-bearing liabilities						125.12	%						128.98	%

Provision for Credit Losses

The provision for credit losses was $0 for the three months ended June 30, 2024. For the three months ended June 30, 2023, a recovery of $225,000 was recorded.

Noninterest Income

Noninterest income for the three months ended June 30, 2024 was $373,960 compared to $403,250 for the same period of 2023, a decrease of $29,290, or 7.3%. The decrease was due primarily to a $31,922 realized loss on the sale of debt securities.

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Noninterest Expense

Noninterest expense for the three months ended June 30, 2024 totaled $4,123,261 compared to $3,685,647 for the same period of 2023, an increase of $437,614, or 11.9%. The increase was due primarily to an increase in salaries and benefits of $43,459 as a result of hiring several new employees and normal annual salary increases, an increase in other expenses of $243,652, and an increase in occupany and furniture and equipment costs of $150,503. The increase in other expenses was due primarily to an increase in professional fees paid to consultants related to the upcoming core conversion along with increases in Federal Deposit Insurance Corporation assessments. The increase in occupancy and furniture and equipment was due primarily to the renovations and new equipment for the Upperco location which was placed in service at the end of the first quarter.

Income Tax Expense

Income tax expense for the three months ended June 30, 2024 was $305,557 compared to $543,316 for the same period of 2023. The effective tax rate was 22.1% for the three months ended June 30, 2024 compared to 24.5% for the same period of 2023. The decrease in the effective tax rate is due to a higher percentage of tax exempt revenue in 2024 versus 2023.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Farmers and Merchants Bancshares, Inc. is a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, is not required to include the information required by this item.

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 June 30, 2024 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.

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During the quarter ended June 30, 2024, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None of the directors or officers of the Company notified the Company that, during the quarter ended June 30, 2024, they adopted or terminated (i) any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) promulgated under the Exchange Act or (ii) any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of the SEC’s Regulation S-K.

Item 6.

Exhibits

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

Exhibit	Description

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

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

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

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

104	The cover page of Farmers and Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

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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: August 14, 2024	/s/ Gary A. Harris
	Gary A. Harris
	Chief Executive Officer
	(Principal Executive Officer)


Date August 14, 2024	/s/ Mark C. Krebs
	Mark C. Krebs
	Treasurer and Chief Financial Officer
	(Principal Financial Officer & Principal Accounting Officer)

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TABLE OF CONTENTS

Part I Item 1 Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities, Use Of Proceeds and Issuer Purchases Of Equity Securities Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

31.1 Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith) 31.2 Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith) 32 Certification of the Principal Executive Officer and the Principal Financial Office pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

FMFG 10-Q Quarter ended June 30, 2024

Exhibits