FARMERS AND MERCHANTS BANCSHARES, INC. REPORTS EARNINGS OF $3,421,623 OR $1.09 PER SHARE FOR THE NINE MONTHS ENDED Form 8 K

FARMERS AND MERCHANTS BANCSHARES, INC. REPORTS EARNINGS OF $3,421,623 OR $1.09 PER SHARE FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2024

HAMPSTEAD, MARYLAND (October 22, 2024) - Farmers and Merchants Bancshares, Inc. (the "Company"), the parent company of Farmers and Merchants Bank (the "Bank" and, together with the Company, "we", "us" and "our"), announced that net income for the nine months ended September 30, 2024 was $3,421,623, or $1.09 per common share (basic and diluted), compared to $5,003,107, or $1.63 per common share (basic and diluted), for the same period in 2023. Higher interest expense as a result of the Federal Reserve rate increases over the last two years was the primary reason for the decline in net income. The Company's return on average equity during the nine months ended September 30, 2024 was 8.53% compared to 13.45% for the same period in 2023. The Company's return on average assets during the nine months ended September 30, 2024 was 0.57% compared to 0.91% for the same period in 2023. Loan growth for the nine months ended September 30, 2024 was $49 million, an annualized growth rate of 12.5%.

Net income for the three months ended September 30, 2024 was $1,123,127, or $0.36 per common share (basic and diluted), compared to $1,432,139, or $0.46 per common share (basic and diluted), for the third quarter of 2023. The Company's return on average equity during the three months ended September 30, 2024 was 8.05% compared to 11.54% for the same period in 2023. The Company's return on average assets during the three months ended September 30, 2024 was 0.56% compared to 0.77% for the same period in 2023.

Net interest income for the nine months ended September 30, 2024 was $722,419 lower when compared to the same period in 2023 due to a decrease in the net interest margin to 2.67% for the nine months ended September 30, 2024 from 3.04% for the same period in 2023. The decline in the net interest margin was partially offset by a $62.7 million increase in average interest earning assets to $775.9 million for the nine months ended September 30, 2024 from $713.2 million for the same period in 2023. Higher interest expense was the driving factor in the lower net interest income. The Federal Reserve interest rate decreased by 0.50% in late September after aggregate increases of 5.25% from March 2022 through August 2023. The net aggregate increase of 4.75% caused the cost of deposits and borrowings to increase by 119 basis points to 2.71% for the nine months ended September 30, 2024 from 1.52% for the same period in 2023. In addition, average interest bearing liabilities increased by $69.9 million to $624.5 million for the nine months ended September 30, 2024 from $554.6 million for the same period in 2023. The taxable equivalent yield on total average interest-earning assets increased 64 basis points to 4.86% for the nine months ended September 30, 2024 from 4.22% for the same period in 2023, partially offsetting the higher cost of funds. Despite the recent Federal Reserve rate decrease and the projected decreases in November and December of 2024, no significant improvement in the net interest margin is expected during the remainder of 2024.

The Bank entered into several interest rate swaps structured as fair value hedges during 2023 and 2024, some in combination with the purchase of mortgage backed securities, which are intended to offset the impact of higher interest expense by improving interest income on debt securities. The notional amount of interest rate swaps outstanding at September 30, 2024 was approximately $99 million. Our loan portfolio is comprised primarily of commercial real estate loans with fixed rates for five-year terms. As those loans reprice, our net interest margin should improve. In addition, our current strategy is to increase the diversification of our portfolio with commercial and industrial loans, which are typically adjustable rate loans and would provide an immediate higher yield in today's interest rate environment.

No provision was recorded for credit losses for the nine months ended September 30, 2024. For the nine months ended September 30, 2023, we recorded a $570,000 recovery.

Noninterest income increased by $160,505 for the nine months ended September 30, 2024 when compared to the same period in 2023, primarily as a result of a $142,794 gain on insurance proceeds for our Upperco location and a $34,180 increase in service charges on deposit accounts, offset by $31,922 loss on the sale of debt securities. Noninterest expense was $1,117,921 higher in the nine months ended September 30, 2024 when compared to the same period in 2023, due primarily to a $488,857 increase in other expenses, a $311,155 increase in occupancy and furniture and equipment costs, and a $317,909 increase in salaries and benefits. The increase in other expenses was due primarily to costs associated with our core system conversion that is projected to be completed in the fourth quarter of 2024, ATM related expenses, and legal fees incurred for stockholder matters. Also, the Bank's FDIC assessment expense increased due to higher FDIC assessment rates. 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 and the new Towson location that was placed in service during the second quarter. The increase in salaries and benefits was due to normal annual salary increases as well as the hiring of several new employees primarily in the commercial loan production department.

Income taxes decreased by $668,351 during the nine months ended September 30, 2024 when compared to the same period in 2023 due to lower earnings before taxes. The effective tax rate decreased to 22.5% for the nine months ended September 30, 2024 from 24.9% for the same period last year due to an increase in the amount of nontaxable income included in pretax income year over year.

Total assets increased to $818 million at September 30, 2024 from $800 million at December 31, 2023. Loans increased to $572 million at September 30, 2024 from $523 million at December 31, 2023, an annualized rate of increase of 12.5%. Investments in debt securities decreased to $180 million at September 30, 2024 from $184 million at December 31, 2023. Deposits decreased to $674 million at September 30, 2024 from $681 million at December 31, 2023. The Company's tangible equity was $52 million at September 30, 2024 compared to $45 million at December 31, 2023.

The book value of the Company's common stock increased to $18.81 per share at September 30, 2024 from to $16.74 per share at December 31, 2023. Book value per share at September 30, 2024 was reflective of the $14 million unrealized loss, net of income taxes, on the Bank's available for sale ("AFS") investment portfolio as a result of the significant rise in interest rates over the last 30 months. Changes in the market value of the AFS investment portfolio, net of income taxes, are reflected in the Company's equity, but are not included in the income statement. The AFS investment portfolio is comprised of 62% government agency mortgage backed securities which are fully guaranteed, 33% investment grade non agency mortgage backed securities, 1% investment grade corporate and municipal bonds, and 4% subordinated debt of other community banks. There is no indication of credit deterioration in any of the bonds and we intend to hold these investments to maturity, so no actual losses are anticipated. There is no impact on regulatory capital because the Bank elected many years ago to not include in the calculation of regulatory capital changes in the market value of the AFS investment portfolio regardless of whether they are positive or negative.

The Bank began utilizing the Federal Reserve Bank's Bank Term Funding Program ("BTFP") during the second quarter of 2023 and had borrowings of $54,000,000 outstanding at September 30, 2024, with a maturity date of January 15, 2025, an increase of $21,000,000 from December 31, 2023. Eligible collateral for the BTFP includes mortgage backed securities which are valued at par instead of market providing greater availability than other facilities. The BTFP also provides competitive fixed rates for up to a one-year term and advances can be refinanced or paid off in full or in part at any time. The Federal Reserve Bank stopped new BTFP advances on March 11, 2024. This facility, along with our Federal Home Loan Bank facility, other borrowing lines available, unpledged securities, brokered deposit access, and cash, provided us with access to approximately $332 million of liquidity at September 30, 2024.

Gary A. Harris, President and CEO, commented "We are pleased that our loan portfolio has grown at an annualized rate of 12.5% during the first nine months of the year, demonstrating that our investment in additional loan production staff and facilities is paying off. Our asset quality remains high and our liquidity position remains strong. Due to the sunsetting of our existing core operating system, our core system conversion will occur on October 28, 2024. While it will increase our expenses in 2024, the new system will be a substantial digital upgrade that will position the bank for future growth, provide for significant efficiency gains and an enhanced customer experience moving forward. The Federal Reserve interest rate decreased by 50 basis points in September and additional cuts are expected over the remainder of 2024 and 2025. These cuts are too late in 2024 to have any significant impact on our net interest margin, but should provide for improvement in 2025."

About the Company

The Company is a financial holding company and the parent company of the Bank. The Bank was chartered in Maryland in 1919 and has over 100 years of service to the community. The Bank serves the deposit and financing needs of both consumers and businesses in Carroll and Baltimore Counties along the Route 30, Route 795, Route 140, Route 26, and Route 45 corridors. The main office is located in Upperco, Maryland, with seven additional branches in Owings Mills, Hampstead, Greenmount, Reisterstown, Westminster, Eldersburg, and Towson. Certain broker-dealers make a market in the common stock of Farmers and Merchants Bancshares, Inc., and trades are reported through the OTC Markets Group's Pink Market under the symbol "FMFG".

Forward-Looking Statements

The statements contained herein that are not historical facts are forward-looking statements (as defined by the Private Securities Litigation Reform Act of 1995) based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. These statements are evidenced by terms such as "anticipate," "estimate," "should," "will," "expect," "believe," "intend," and similar expressions. Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports filed by Farmers and Merchants Bancshares, Inc. with the Securities and Exchange Commission entitled "Risk Factors".

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

		September 30,			December 31, *
		2024			2023
Assets
Cash and due from banks		$	16,271,388			$	44,404,473
Federal funds sold and other interest-bearing deposits			570,479				285,864
Cash and cash equivalents			16,841,867				44,690,337
Certificates of deposit in other banks			100,000				100,000
Securities available for sale, at fair value			159,499,031				164,084,673
Securities held to maturity, at amortized cost less allowance for credit
losses of $36,894 and $35,627			20,197,994				20,163,622
Equity security, at fair value			531,958				507,130
Restricted stock, at cost			1,016,000				863,500
Mortgage loans held for sale			759,200				-
Loans, less allowance for credit losses of $4,190,882 and $4,285,247			571,562,379				523,308,044
Premises and equipment, net			7,441,171				6,583,452
Accrued interest receivable			2,362,330				2,180,734
Deferred income taxes, net			6,736,681				8,312,482
Other real estate owned, net			1,226,245				1,242,365
Bank owned life insurance			15,218,368				14,930,754
Goodwill and other intangibles, net			7,028,178				7,034,424
Other assets			7,009,579				5,939,309
		$	817,530,981			$	799,940,826
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing		$	108,442,303			$	115,284,706
Interest-bearing			565,302,419				565,678,145
Total deposits			673,744,722				680,962,851
Securities sold under repurchase agreements			2,885,496				6,760,493
Federal Home Loan Bank of Atlanta advances			5,000,000				5,000,000
Federal Reserve Bank advances			54,000,000				33,000,000
Long-term debt, net of issuance costs			11,799,931				13,212,378
Accrued interest payable			2,581,429				1,482,773
Other liabilities			8,357,055				7,344,040
			758,368,633				747,762,535
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,145,974 in 2024 and 3,116,966 shares in 2023			31,460				31,170
Additional paid-in capital			30,837,137				30,398,080
Retained earnings			41,826,204				39,433,185
Accumulated other comprehensive loss			(13,532,453	)			(17,684,144	)
			59,162,348				52,178,291
		$	817,530,981			$	799,940,826

* - Derived from audited consolidated financial statements

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

		Three Months Ended September 30,			Nine Months Ended September 30,
		2024			2023			2024			2023
Interest income
Loans, including fees		$	7,901,509			$	6,609,039			$	22,021,236			$	19,023,308
Investment securities - taxable			1,623,113				996,586				4,794,495				2,528,793
Investment securities - tax exempt			141,258				137,254				415,629				416,626
Federal funds sold and other interest earning assets			180,572				258,818				860,922				469,721
Total interest income			9,846,452				8,001,697				28,092,282				22,438,448
Interest expense
Deposits			3,910,840				2,239,808				10,243,652				5,010,624
Securities sold under repurchase agreements			13,069				12,110				49,113				23,949
Federal Home Loan Bank advances and other borrowings			64,713				39,289				109,230				452,272
Federal Reserve Bank advances			647,882				378,500				1,910,411				391,763
Long-term debt			125,103				145,001				387,408				444,953
Total interest expense			4,761,607				2,814,708				12,699,814				6,323,561
Net interest income			5,084,845				5,186,989				15,392,468				16,114,887
Recovery of credit losses			-				(75,000	)			-				(570,000	)
Net interest income after recovery of credit losses			5,084,845				5,261,989				15,392,468				16,684,887
Noninterest income
Service charges on deposit accounts			209,078				195,566				621,179				586,999
Mortgage banking income			43,035				33,585				66,362				92,514
Bank owned life insurance income			102,831				89,748				287,614				261,595
Loss on sale of debt securities			-				-				(31,922	)			-
Fair value adjustment of equity security			19,808				(13,769	)			13,837				(15,343	)
Loss on disposition of furniture and equipment			(5,157	)			-				(5,157	)			-
Gain on insurance proceeds			-				-				142,794				-
Other fees and commissions			81,425				78,096				234,688				243,125
Total noninterest income			451,020				383,226				1,329,395				1,168,890
Noninterest expense
Salaries			1,878,411				1,916,804				5,848,178				5,643,742
Employee benefits			548,892				348,048				1,596,751				1,483,278
Occupancy			274,580				229,135				798,597				645,398
Furniture and equipment			327,198				246,896				897,503				739,547
Other			1,042,142				1,005,065				3,165,922				2,677,065
Total noninterest expense			4,071,223				3,745,948				12,306,951				11,189,030
Income before income taxes			1,464,642				1,899,267				4,414,912				6,664,747
Income taxes			341,515				467,128				993,289				1,661,640
Net income		$	1,123,127			$	1,432,139			$	3,421,623			$	5,003,107
Earnings per share - basic		$	0.36			$	0.46			$	1.09			$	1.63
Earnings per share - diluted		$	0.36			$	0.46			$	1.09			$	1.63

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