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

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

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

Three months Ended March 31, 2022 and ~~six months Ended June 30,~~ 2021 ~~and 2020~~

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

The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), and one subsidiary of the Bank, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary constitutes an investment in a series of membership interests, 100% owned by the Company, issued by First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions, ~~have been eliminated. This includes~~including the insurance premium paid by the Bank to the Insurance Subsidiary through an ~~intermediary. Effective~~ ~~October 1, 2020,~~ the Company acquired Carroll Bancorp, Inc. and its wholly-owned subsidiary, Carroll Community Bank (collectively, “Carroll”), both of which were based in Eldersburg, Maryland, through a series of merger transactions (the “Merger”). The results of operations and assets acquired and liabilities assumed from Carroll are included only from the effective date of the Merger. The comparability of the Company's results of operations for the ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2021,~~ ~~and~~ ~~2020~~intermediary, have been ~~impacted by the Merger.~~eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Such adjustments were normal and recurring in nature. The results of operations for the three~~- and~~ ~~six~~- months ended ~~June 30, 2021~~March 31, 2022 do not necessarily reflect the results that may be expected for the fiscal year ending December 31, ~~2021~~2022 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, ~~2020,~~2021, which are included in Farmers and Merchants Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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

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

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

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The Company’s allowance for loan losses consists of three elements: (i) segregating the loan portfolio into pools based upon similar characteristics and risk profiles and applying a loss factor to the pools, based on historical losses within those ~~pools,~~pools; (ii) applying qualitative factors to the loan pools that consider economic and other factors, both internal and external, affecting the Company and the ~~pools,~~pools; and (iii) determining specific reserves based on individual evaluation of impaired loans that are not included in the pools discussed above.

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

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

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

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

Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

Loans acquired through business combinations that meet the specific criteria of ASC 310-30 designated as purchase credit impaired loans are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the ~~reversal~~transfer of a corresponding amount of the nonaccretable discount, which we will then reclassify as accretable discount to be recognized into interest income over the remaining life of the loan.

~~Loans acquired through business combinations that meet the specific criteria of ASC~~ ~~310~~-30 are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. ~~An allowance for loan losses is recorded for any credit deterioration in these loans subsequent~~Subsequent to acquisition, ~~which is evaluated~~a quarterly ~~based on a~~ comparison of the remaining fair value discount to the required allowance under appropriate ~~methodology.~~methodology is performed. If the fair value discount remains in excess of the required allowance, then no adjustment is made. If the fair value falls below the required reserve, then a charge to the provision is recorded for the shortfall as part of the allowance for loan losses.

Goodwill and other intangible assets

Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible asset, the core deposit intangible (“CDI”), has a finite life and is amortized over 10 years on a straight line basis.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.	Basis of Presentation (continued)

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016‑13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective Dates” extended the implementation date to January 1, 2023for ~~SEC registered~~SEC-registered smaller reporting companies and private companies. The Company is considered a smaller reporting company. The Company has engaged a third-party vendor to assist in the implementation of this ASU.

In The CECL model will be run parallel with the current ALLL calculation during ~~December 2019,~~ ~~FASB released ASU~~ ~~2019~~-~~12,~~2022 ~~“Income Taxes (Topic~~beginning with the ~~740~~March 31, 2022 ~~)”, which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic~~ ~~740.~~ ~~ASU~~ ~~2019~~-12 ~~is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after~~ ~~December 15, 2020.~~ ~~The standard did~~ ~~not~~ ~~have a significant impact on~~calculation. Several members of the Company’s ~~financial statements.~~senior management and credit administration teams will participate in the implementation.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. The Company has identified its products that utilize LIBOR and has begun efforts to transition to an alternative reference rate. The Company continues to evaluate systems to assist in the transaction to a new rate.

In March 2022,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have 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.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities

Investments in debt securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
June 30, 2021	cost		gains		losses		value
March 31, 2022									cost		gains		losses		value

*Available for sale*

State and municipal	$	756,552	$	14,425	$	0	$	770,977	$	752,413	$	730	$	5,780	$	747,363
SBA pools		1,682,144		1,957		27,013		1,657,088		1,300,202		1,682		22,049		1,279,835
Corporate bonds		7,955,863		121,417		2,694		8,074,586		10,960,028		15,803		347,754		10,628,077
Mortgage-backed securities		87,980,820		672,743		904,607		87,748,956		143,548,768		27,105		10,514,713		133,061,160
	$	98,375,379	$	810,542	$	934,314	$	98,251,607	$	156,561,411	$	45,320	$	10,890,296	$	145,716,435

*Held to maturity*

State and municipal	$	21,401,599	$	1,013,209	$	56,888	$	22,357,920	$	21,343,559	$	156,037	$	584,827	$	20,914,769

	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
December 31, 2020	cost		gains		losses		value
December 31, 2021									cost		gains		losses		value

*Available for sale*

State and municipal	$	962,438	$	24,094	$	0	$	986,532	$	753,061	$	10,437	$	0	$	763,498
SBA pools		1,822,226		0		38,419		1,783,807		1,418,770		1,656		22,664		1,397,762
Corporate bonds		6,692,156		108,172		2,897		6,797,431		9,225,153		64,595		55,541		9,234,207
Mortgage-backed securities		44,026,055		941,987		58,526		44,909,516		139,765,445		336,084		2,259,080		137,842,449
	$	53,502,875	$	1,074,253	$	99,842	$	54,477,286	$	151,162,429	$	412,772	$	2,337,285	$	149,237,916

*Held to maturity*

State and municipal	$	23,078,519	$	1,177,125	$	10,858	$	24,244,786	$	21,851,975	$	1,020,877	$	67,251	$	22,805,601

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3.	Investment Securities (continued)

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

	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
June 30, 2021	cost		value		cost		value
March 31, 2022									cost		value		cost		value

Within one year	$	499,816	$	511,785	$	0	$	0	$	752,350	$	754,818	$	0	$	0
Over one to five years		4,122,839		4,234,922		796,579		811,970		3,628,616		3,560,563		800,729		800,815
Over five to ten years		4,089,760		4,098,856		2,032,001		2,101,343		7,331,475		7,060,059		1,782,321		1,797,278
Over ten years		0		0		18,573,019		19,444,607		0		0		18,760,509		18,316,676
		8,712,415		8,845,563		21,401,599		22,357,920		11,712,441		11,375,440		21,343,559		20,914,769
Mortgage-backed securities and SBA pools, due in monthly installments		89,662,964		89,406,044		0		0
Mortgage-backed securities and
SBA pools, due in monthly installments										144,848,970		134,340,995		0		0
	$	98,375,379	$	98,251,607	$	21,401,599	$	22,357,920	$	156,561,411	$	145,716,435	$	21,343,559	$	20,914,769

December 31, 2020

Within one year	$	505,372	$	502,475	$	487,741	$	496,463
Over one to five years		4,646,388		4,755,483		793,876		813,523
Over five to ten years		2,300,591		2,323,451		2,476,827		2,687,063
Over ten years		202,243		202,554		19,320,075		20,247,737
		7,654,594		7,783,963		23,078,519		24,244,786
Mortgage-backed securities and SBA pools, due in monthly installments		45,848,281		46,693,323		0		0
	$	53,502,875	$	54,477,286	$	23,078,519	$	24,244,786

Securities with a carrying value of ~~$23,432,296~~ $16,852,733 and ~~$34,958,212~~$14,307,989 as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, were pledged as collateral for government deposits and securities sold under repurchase agreements.

During the ~~six~~three months ended ~~June 30,~~March 31, 2022, there were no sales of securities. During the three months ended March 31, 2021, the Company received proceeds of $~~513,845~~$513,845 from the call at a premium of an available for sale investment ~~security.~~securities. The Company realized an $~~8,569~~$8,569 gain on the call of the ~~security. There were 0 sales of securities during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020.~~securities.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Investment Securities (continued)

The following table sets forth the Company’s gross unrealized losses on a continuous basis for investments in debt securities, by category and length of time, at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

June 30, 2021	Less than 12 months				12 months or more				Total
March 31, 2022													Less than 12 months				12 months or more				Total
Description of investments	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

State and municipal	$	1,538,840	$	56,888	$	0	$	0	$	1,538,840	$	56,888	$	7,738,761	$	412,339	$	924,219	$	178,268	$	8,662,980	$	590,607
SBA pools		0		0		1,338,764		27,013		1,338,764		27,013		0		0		1,039,389		22,049		1,039,389		22,049
Corporate bonds		1,610,022		2,694		0		0		1,610,022		2,694		8,201,181		347,754		0		0		8,201,181		347,754
Mortgage-backed securities		50,748,391		894,680		943,976		9,927		51,692,367		904,607		103,977,709		8,212,229		19,134,680		2,302,484		123,112,389		10,514,713
Total	$	53,897,253	$	954,262	$	2,282,740	$	36,940	$	56,179,993	$	991,202	$	119,917,651	$	8,972,322	$	21,098,288	$	2,502,801	$	141,015,939	$	11,475,123

December 31, 2020	Less than 12 months				12 months or more				Total
December 31, 2021													Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
Description of investments	Fair value		losses		Fair value		losses		Fair value		losses		Fair value		losses		Fair value		losses		Fair value		losses

State and municipal	$	719,430	$	10,858	$	0	$	0	$	719,430	$	10,858	$	1,324,648	$	35,720	$	715,650	$	31,531	$	2,040,298	$	67,251
SBA pools		0		0		1,783,807		38,419		1,783,807		38,419		0		0		1,133,398		22,664		1,133,398		22,664
Corporate bonds		502,754		2,897		0		0		502,754		2,897		5,443,886		55,541		0		0		5,443,886		55,541
Mortgage-backed securities		9,286,525		57,987		96,652		539		9,383,177		58,526		117,840,965		2,034,858		4,781,586		224,222		122,622,551		2,259,080
Total	$	10,508,709	$	71,742	$	1,880,459	$	38,958	$	12,389,168	$	110,700	$	124,609,499	$	2,126,119	$	6,630,634	$	278,417	$	131,240,133	$	2,404,536

Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, management did not have the intent to sell any of the held to maturity or available for sale securities with unrealized losses before a recovery of cost. The unrealized losses detailed in the table above were due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the debt securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the foregoing factors, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, management believes that these unrealized losses are temporary and, accordingly, they have not been recognized in the Company’s consolidated ~~statement~~statements of income. At ~~June 30, 2021,~~March 31, 2022, 46156 available for sale and 320 held to maturity investments had unrealized losses.

At ~~June 30, 2021,~~March 31, 2022, none of the available for sale or held to maturity investments were impaired. In determining whether other-than-temporary impairment exists, management considers many factors, including (1)(i) the length of time and the extent to which the fair value has been less than cost, (2)(ii) the financial condition and near-term prospects of the issuer, and (3)(iii) whether the ~~Bank~~Company intends to sell the security, whether it is more likely than not that the ~~Bank~~Company will be required to sell the security before recovery of its amortized cost basis, and whether the ~~Bank~~Company expects to recover the security’s entire amortized cost basis. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

~~The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than~~ ~~not~~ ~~that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis.~~

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Loans

Major categories of loans are as follows:

	June 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Real estate:
Commercial	$	319,322,780	$	309,284,811	$	329,179,712	$	319,185,116
Construction and land development		31,411,527		33,641,916		20,325,400		28,221,854
Residential		119,493,617		121,327,761		111,993,662		107,436,033
Commercial		51,330,242		61,368,105		26,374,885		31,182,206
Consumer		402,457		288,454		296,151		355,958
		521,960,623		525,911,047		488,169,810		486,381,167
Less: Allowance for loan losses		3,404,168		3,296,538		3,654,318		3,650,268
Deferred origination fees net of costs		1,200,121		923,995		606,635		719,565
	$	517,356,334	$	521,690,514	$	483,908,857	$	482,011,334

Commercial loans in the table above include ~~$26.5~~$4.2 million and ~~$31.1~~$9.7 million of Paycheck Protection Program (“PPP”) loans as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, which are 100% guaranteed by the Small Business Administration (“SBA”). ~~$22.0~~PPP loans totaling $60 million were originated during 2021 and 2020, and we collected approximately $2,323,000 in origination fees from the ~~six~~ ~~months ended~~ ~~June 30, 2021.~~ SBA. A substantial portion of the PPP loans in the Company’s portfolio are expected to be forgiven by the SBA. ~~During the~~ ~~six~~ ~~months ended~~ ~~June 30, 2021,~~ ~~the Company collected approximately $1,037,000 in fees from the SBA in connection with the originations of the PPP loans.~~ The fees, net of related origination costs, are being recognized as interest income over the term of the loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means. Income from PPP loans added approximately $105,000 to net income for the three months ended March 31, 2022 compared to $369,000 for the same period in 2021. As of March 31, 2022, $91,000 of deferred PPP fees, net of income taxes, have not been recognized.

Nonaccrual loans, segregated by class of loans, were as follows:

June 30,

December 31,

2021

2020

Real estate:

Commercial
$ 4,388,004 $ 4,407,829
Residential
31,500 220,967
$ 4,419,504 $ 4,628,796

	March 31,		December 31,
	2022		2021
Commercial real estate	$	4,780,965	$	4,810,965
Residential real estate		31,500		31,500
Commercial		152,449		152,449
	$	4,964,914	$	4,994,914

At ~~June 30, 2021,~~March 31, 2022, the Company had ~~one~~two nonaccrual commercial real estate ~~loan~~loans totaling ~~$4,388,004 and~~$4,780,965, one nonaccrual residential real estate loan totaling ~~$31,500.~~$31,500, and one nonaccrual commercial loan totaling $152,449. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of ~~$124,308~~$59,182 would have been recorded for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 ifhad these nonaccrual loans ~~had~~ been current and performing in accordance with ~~the~~their original terms. The Company allocated $0$281,910 of its allowance for loan losses to these nonaccrual loans. The recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling ~~$8,176~~$27,146 at ~~June 30, 2021.~~March 31, 2022.

At December 31, ~~2020,~~2021, the Company had ~~one~~two nonaccrual commercial real estate loan totaling ~~$4,407,829~~$4,810,965 and ~~two~~one nonaccrual residential real estate ~~loans~~loan totaling ~~$220,967.~~$31,500, and 1 commercial loan totaling $152,449. The real estate loans were secured by real estate and business assets and ~~personal guarantees.~~were personally guaranteed. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of ~~$13,395~~$219,734 would have been recorded in ~~2020~~2021 if these nonaccrual loans had been current and performing in accordance with ~~the~~their original terms. The Company allocated $0$281,910 of its allowance for loan losses to these nonaccrual loans. The ~~recorded investment~~balance of ~~the~~ nonaccrual loans was net of charge-offs and a nonaccretable discount totaling ~~$8,176~~$27,146 at December 31, ~~2020.~~2021.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

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

					90 Days								Past Due 90						90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More		30 - 59 Days		60 - 89 Days		or More		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing		Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
June 30, 2021
March 31, 2022
Real estate:
Commercial	$	0	$	0	$	0	$	0	$	319,322,780	$	319,322,780	$	0	$	0	$	0	$	502,961	$	502,961	$	328,676,751	$	329,179,712	$	0
Construction and land development		0		0		0		0		31,411,527		31,411,527		0		0		0		0		0		20,325,400		20,325,400		0
Residential		0		0		31,500		31,500		119,462,117		119,493,617		0		0		216,082		31,500		247,582		111,746,080		111,993,662		0
Commercial		0		0		0		0		51,330,242		51,330,242		0		0		0		152,449		152,449		26,222,436		26,374,885		0
Consumer		0		0		0		0		402,457		402,457		0		0		0		0		0		296,151		296,151		0
Total	$	0	$	0	$	31,500	$	31,500	$	521,929,123	$	521,960,623	$	0	$	0	$	216,082	$	686,910	$	902,992	$	487,266,818	$	488,169,810	$	0

December 31, 2020
December 31, 2021
Real estate:
Commercial	$	182,656	$	0	$	0	$	182,656	$	309,102,155	$	309,284,811	$	0	$	0	$	0	$	502,961	$	502,961	$	318,682,155	$	319,185,116	$	0
Construction and land development		0		0		0		0		33,641,916		33,641,916		0		0		0		0		0		28,221,854		28,221,854		0
Residential		24,591		0		220,967		245,558		121,082,203		121,327,761		0		0		0		249,161		249,161		107,186,872		107,436,033		217,661
Commercial		0		0		0		0		61,368,105		61,368,105		0		0		0		415,690		415,690		30,766,516		31,182,206		263,241
Consumer		0		0		0		0		288,454		288,454		0		0		0		0		0		355,958		355,958		0
Total	$	207,247	$	0	$	220,967	$	428,214	$	525,482,833	$	525,911,047	$	0	$	0	$	0	$	1,167,812	$	1,167,812	$	485,213,355	$	486,381,167	$	480,902

Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 and the year ended December 31, ~~2020,~~2021, are set forth in the following table:

	Unpaid		Recorded		Recorded										Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average				Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded		Interest		Principal		With No		With		Recorded		Related		Recorded		Interest
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized		Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
June 30, 2021
March 31, 2022
Commercial real estate	$	6,609,506	$	6,609,506	$	0	$	6,609,506	$	0	$	6,634,826	$	56,179	$	6,781,030	$	6,278,069	$	502,961	$	6,781,030	$	129,461	$	6,800,981	$	25,054
Construction and land development		0		0		0		0		0		0		0
Residential real estate		42,005		42,005		0		42,005		0		43,369		857		37,341		37,341		0		37,341		0		38,285		0
Commercial																152,449		0		152,449		152,449		152,449		152,449		378
	$	6,651,511	$	6,651,511	$	0	$	6,651,511	$	0	$	6,678,195	$	57,036	$	6,970,820	$	6,315,410	$	655,410	$	6,970,820	$	281,910	$	6,991,715	$	25,432

December 31, 2020
December 31, 2021
Commercial real estate	$	6,660,145	$	6,660,145	$	0	$	6,660,145	$	0	$	4,448,343	$	345,570	$	6,820,932	$	6,317,971	$	502,961	$	6,820,932	$	129,461	$	6,740,539	$	125,079
Construction and land development		0		0		0		0		0		0		0
Residential real estate		44,733		44,733		0		44,733		0		430,360		2,139		39,228		39,228		0		39,228		0		41,981		1,672
Commercial																152,449		0		152,449		152,449		152,449		76,225		69,005
	$	6,704,878	$	6,704,878	$	0	$	6,704,878	$	0	$	4,878,703	$	347,709	$	7,012,609	$	6,357,199	$	655,410	$	7,012,609	$	281,910	$	6,858,745	$	195,756

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

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

At ~~June 30, 2021,~~March 31, 2022, the Company had two commercial real estate ~~loans~~loan totaling ~~$2,221,502~~$6,278,069 and one residential real estate loan totaling ~~$42,005~~$37,341 that were classified as TDRs. One of the commercial real estate loans with a principal balance of $4,278,004 was restructured as a TDR in 2022. All are included in impaired loans above. At ~~June 30, 2021,~~March 31, 2022, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these loans.

At December 31, 2021, the Company had 1 commercial real estate loan totaling $2,009,967 and 1 residential real estate loan totaling $39,228 classified as TDRs. Both loans are included in impaired loans above and were paying as agreed. There have been no charge-offs or allowances associated with these~~three~~ ~~loans.~~

At ~~December 31, 2020,~~ ~~the Company had~~ ~~two~~ ~~commercial real estate loans totaling $2,252,316 and~~ ~~one~~ ~~residential real estate loan totaling $44,733 classified as TDRs. One of the commercial real estate loans with a principal balance of $182,656 was restructured as a TDR during~~ ~~2020.~~ ~~All~~ ~~three~~ ~~loans are included in impaired loans above. Each loan is paying as agreed. There have been 0 charge-offs or allowances associated with these~~ ~~three~~ loans.

Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term ~~(e.g.~~(i.e., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio. As of ~~June 30, 2021,~~March 31, 2022, ~~$5.1~~one loan totalling $4.3 million, or 1% of the Company’s loan portfolio, ~~were granted~~was operating under a three-month ~~deferrals.~~ ~~None~~ ~~of these loans were~~deferral. This loan was classified as ~~TDRs~~a TDR as of ~~June 30, 2021~~March 31, 2022 because ~~they met~~it did not meet the criteria discussed above.

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

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

~~Farmers and Merchants Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

4.	~~Loans (continued)~~

Pass/Watch

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

Special Mention

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

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

Substandard

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

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

Doubtful

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (continued)

Loans by credit grade, segregated by loan type, are as follows:

			Above							Pass		Special										Above						Pass		Special
June 30, 2021	Excellent		average		Average			Acceptable		watch		mention		Substandard		Doubtful		Total
March 31, 2022																				Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total

Real estate:
Commercial	$	0	$	1,678,287	$	87,503,664		$	113,377,554	$	103,216,843	$	5,700,716	$	7,845,716	$	0	$	319,322,780	$	0	$	98,984	$	69,394,973	$	161,821,022	$	85,424,219	$	3,217,512	$	9,223,002	$	0	$	329,179,712
Construction and land development		0		0		5,758,191			11,984,373		8,893,951		1,841,696		2,933,316		0		31,411,527		0		0		3,711,277		10,967,190		5,646,933		0		0		0		20,325,400
Residential		49,334		902,490		57,430,049			48,605,991		9,981,116		0		2,524,637		0		119,493,617		34,250		611,328		45,120,441		56,566,253		7,270,671		0		2,390,719		0		111,993,662
Commercial		26,227,641		0		6,978,988	��		13,448,027		4,675,586		0		0		0		51,330,242		4,312,074		0		5,666,167		12,613,235		3,630,960		0		152,449		0		26,374,885
Consumer		8,279		227,779		131,465			4,668		13,854		0		0		16,412		402,457		4,553		142,436		118,739		1,249		10,293		0		18,881		0		296,151
	$	26,285,254	$	2,808,556	$	157,802,357		$	187,420,613	$	126,781,350	$	7,542,412	$	13,303,669	$	16,412	$	521,960,623	$	4,350,877	$	852,748	$	124,011,597	$	241,968,949	$	101,983,076	$	3,217,512	$	11,785,051	$	0	$	488,169,810

			Above						Pass		Special										Above						Pass		Special
December 31, 2020	Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total
December 31, 2021																			Excellent		average		Average		Acceptable		watch		mention		Substandard		Doubtful		Total

Real estate:
Commercial	$	0	$	2,010,472	$	96,178,011	$	87,860,036	$	108,045,730	$	5,951,177	$	9,239,385	$	0	$	309,284,811	$	0	$	1,225,732	$	73,924,748	$	146,174,439	$	82,018,890	$	3,345,788	$	12,495,519	$	0	$	319,185,116
Construction and land development		0		0		2,962,300		15,944,499		13,168,844		0		1,566,273		0		33,641,916		0		0		3,853,775		12,452,257		9,973,457		1,942,365		0		0		28,221,854
Residential		36,285		1,026,824		63,811,389		40,947,548		12,579,311		0		2,926,404		0		121,327,761		41,152		708,162		46,358,477		48,295,430		9,570,815		0		2,461,997		0		107,436,033
Commercial		32,088,058		0		10,037,516		13,532,170		5,710,361		0		0		0		61,368,105		9,774,570		0		5,292,721		12,585,396		3,377,070		0		152,449		0		31,182,206
Consumer		13,729		109,955		131,171		6,671		15,663		0		0		11,265		288,454		5,813		168,037		147,903		2,280		11,298		0		0		20,627		355,958
	$	32,138,072	$	3,147,251	$	173,120,387	$	158,290,924	$	139,519,909	$	5,951,177	$	13,732,062	$	11,265	$	525,911,047	$	9,821,535	$	2,101,931	$	129,577,624	$	219,509,802	$	104,951,530	$	5,288,153	$	15,109,965	$	20,627	$	486,381,167

The principal balance of loans in the Pass/Watch category as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 include loans that were granted payment deferrals due to ~~COVID -~~COVID-19. The loans were downgraded to the Pass/Watch category if they were in a higher rated category at the time the deferral was granted. Loans that completed their ~~initial~~ 90 ~~day~~ deferral and are making scheduled payments again are being re-evaluated on a ~~loan by loan~~loan-by-loan basis to determine if they warrant upgrading.

The Company’s allowance for loan losses is based on management’s evaluation of the risks inherent in the Company’s loan portfolio and the general economy. The allowance for loan losses is maintained at the amount management considers adequate to cover estimated losses in loans receivable that are deemed probable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience by pools of similar loans, diversification and size of the portfolio, adequacy of the collateral, the amount of non-performing loans and industry trends. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (Continued)

The following table details activity in the allowance for loan losses by portfolio for the ~~six~~three-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020~~2021 and for the year ended December 31, ~~2020.~~2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

													Allowance for loan losses ending						Outstanding loan balances								Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	��		Provision										balance evaluated for impairment:						evaluated for impairment:						Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
	Beginning		for loan			Charge					Ending		Purchase Credit						Purchase Credit
June 30, 2021	balance		losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
March 31, 2022																									balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	373,796		$	0		$	3,500	$	2,607,425	$	0	$	0	$	2,607,425	$	6,609,506		0	$	312,713,274	$	2,482,930	$	63,130		$	0	$	0	$	2,546,060	$	129,461	$	0	$	2,416,599	$	6,781,030	$	32,991	$	322,365,691
Construction and land development		201,692		(67,611	)		0			8,100		142,181		0		0		142,181		0		1,544,309		29,867,218		214,547		(97,873	)		0		4,050		120,724		0		0		120,724		0		379,349		19,946,051
Residential		644,639		(148,627	)		(18,970	)		0		477,042		0		0		477,042		42,005		511,413		118,940,199		603,558		51,081			0		0		654,639		0		0		654,639		37,341		244,789		111,711,532
Commercial		111,390		(18,184	)		0			15,000		108,206		0		0		108,206		0		0		51,330,242		255,413		12,276			0		0		267,689		152,449		0		115,240		152,449		0		26,222,436
Consumer		2,138		450			0			0		2,588		0		0		2,588		0		0		402,457		4,370		(738	)		0		0		3,632		0		0		3,632		0		0		296,151
Unallocated		106,550		(39,824	)		0			0		66,726		0		0		66,726		0		0		0		89,450		(27,876	)		0		0		61,574		0		0		61,574		0		0		0
	$	3,296,538	$	100,000		$	(18,970	)	$	26,600	$	3,404,168	$	0	$	0	$	3,404,168	$	6,651,511	$	2,055,722	$	513,253,390	$	3,650,268	$	0		$	0	$	4,050	$	3,654,318	$	281,910	$	0	$	3,372,408	$	6,970,820	$	657,129	$	480,541,861

												Allowance for loan losses ending						Outstanding loan balances								Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
			Provision									balance evaluated for impairment:						evaluated for impairment:						Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
	Beginning		for loan			Charge				Ending		Purchase Credit						Purchase Credit
June 30, 2020	balance		losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
March 31, 2021																								balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	1,763,861	$	396,409		$	0	$	44,962	$	2,205,232	$	0	$	0	$	2,205,232	$	2,502,296	$	0	$	233,437,877	$	2,230,129	$	323,768		$	0	$	2,500	$	2,556,397	$	0	$	0	$	2,556,397	$	6,644,339	$	45,233	$	305,552,307
Construction and land development		192,828		22,302			0		7,200		222,330		0		0		222,330		0		0		20,550,954		201,692		(39,269	)		0		4,050		166,473		0		0		166,473		0		1,554,070		33,177,080
Residential		478,124		55,640			0		0		533,764		0		0		533,764		49,342		0		75,045,229		644,639		(154,755	)		0		0		489,884		0		0		489,884		43,371		590,847		116,066,706
Commercial		107,782		(7,709	)		0		15,835		115,908		0		0		115,908		0		0		56,272,588		111,390		(12,143	)		0		0		99,247		0		0		99,247		0		0		60,064,503
Consumer		4,133		(740	)		0		0		3,393		0		0		3,393		0		0		216,190		2,138		320			0		0		2,458		0		0		2,458		0		0		258,484
Unallocated		46,987		9,098			0		0		56,085		0		0		56,085		0		0		0		106,550		2,079			0		0		108,629		0		0		108,629		0		0		0
	$	2,593,715	$	475,000		$	0	$	67,997	$	3,136,712	$	0	$	0	$	3,136,712	$	2,551,638	$	0	$	385,522,838	$	3,296,538	$	120,000		$	0	$	6,550	$	3,423,088	$	0	$	0	$	3,423,088	$	6,687,710	$	2,190,177	$	515,119,080

												Allowance for loan losses ending						Outstanding loan balances								Provision for (recovery										Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
			Provision									balance evaluated for impairment:						evaluated for impairment:						Beginning		of)			Charge					Ending		Purchase Credit						Purchase Credit
	Beginning		for loan			Charge				Ending		Purchase Credit						Purchase Credit
December 31, 2020	balance		losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
December 31, 2021																								balance		loan losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
																																			��
Real estate:
Commercial	$	1,763,861	$	418,806		$	0	$	47,462	$	2,230,129	$	0	$	0	$	2,230,129	$	6,660,245	$	151,453	$	302,473,113	$	2,230,129	$	241,301		$	0		$	11,500	$	2,482,930	$	129,461	$	0	$	2,353,469	$	6,820,932	$	56,825	$	312,307,359
Construction and land development		192,828		(5,536	)		0		14,400		201,692		0		0		201,692		0		1,566,174		32,075,742		201,692		(3,345	)		0			16,200		214,547		0		0		214,547		0		383,666		27,838,188
Residential		478,124		166,515			0		0		644,639		0		0		644,639		215,230		595,433		120,517,098		644,639		(22,111	)		(18,970	)		0		603,558		0		0		603,558		39,228		568,151		106,828,654
Commercial		107,782		(12,353	)		0		15,961		111,390		0		0		111,390		0		0		61,368,105		111,390		129,023			0			15,000		255,413		152,449		0		102,964		152,449		0		31,029,757
Consumer		4,133		(1,995	)		0		0		2,138		0		0		2,138		0		0		288,454		2,138		2,232			0			0		4,370		0		0		4,370		0		0		355,958
Unallocated		46,987		59,563			0		0		106,550		0		0		106,550		0		0		0		106,550		(17,100	)		0			0		89,450		0		0		89,450		0		0		0
	$	2,593,715	$	625,000		$	0	$	77,823	$	3,296,538	$	0	$	0	$	3,296,538	$	6,875,475	$	2,313,060	$	516,722,512	$	3,296,538	$	330,000		$	(18,970	)	$	42,700	$	3,650,268	$	281,910	$	0	$	3,368,358	$	7,012,609	$	1,008,642	$	478,359,916

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4.	Loans (Continued)

The following table provides activity for the accretable credit discount of purchased loans:

2021

Balance at December 31, 2020
$ 2,250,232
Acquired during the year
0
Accretion
409,056
Adjustments
0
Balance at June 30, 2021
$ 1,841,176

	2022

Balance at December 31, 2021	$	1,629,242
Accretion		211,163
Balance at March 31, 2022	$	1,418,079

At ~~June 30, 2021,~~March 31, 2022, the nonaccretable discount on purchased impaired loans was ~~$927,000.~~$241,587, a decrease of $225,000 from December 31, 2021 as a result of a one of the loans paying off in full. At ~~June 30, 2021,~~March 31, 2022 the accretable discount on purchased impaired loans was $86,342 after the accretion of $54,266. At March 31, 2022, the remaining yield premium on purchased loans was ~~$1,737,899.~~$1,257,038. At ~~June 30, 2021,~~March 31, 2022, the principal balance of purchased loans was ~~$120,592,735~~$96,265,413 and the carrying value was ~~$119,562,458.~~$95,862,785. At ~~June 30, 2021,~~March 31, 2022, there were 0 residential real estate loans in the process of foreclosure.

5.	Goodwill and Other Intangibles

The acquisition of Carroll Bancorp, Inc. in October of 2020 resulted in the recording of goodwill and ~~CDI.~~core deposit intangible (“CDI”). The following table presents the changes in both assets:

Goodwill

CDI

Total

Balance at December 31, 2020
$ 6,978,208 $ 81,200 $ 7,059,408
Acquired during the year
0 0 0
Amortization
- (4,134 ) (4,134 )
Adjustments
- - -
Balance at June 30, 2021
$ 6,978,208 $ 77,066 $ 7,055,274

	Goodwill		CDI			Total

Balance at December 31, 2021	$	6,978,208	$	72,872		$	7,051,080
Amortization		-		(2,082	)		(2,082	)
Balance at March 31, 2022	$	6,978,208	$	70,790		$	7,048,998

The CDI is being amortized over 10 years on a ~~straight line~~straight-line basis. Annual amortization will be $8,328 for each of the years ended December 31, ~~2021~~2022 through 2029 and $6,246 in 2030. ~~Since~~Because the Company’s acquisition by merger of Carroll Bancorp, Inc. and Carroll Community Bank was a tax-free reorganization, goodwill and CDI are not deductible for income tax purposes.

6.	Lease Commitments

The Company and its subsidiaries are obligated under operating leases for certain office premises.

The following table shows operating lease right of use assets and operating lease liabilities as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

	Consolidated Balance					Consolidated Balance
	Sheet classification	June 30, 2021		December 31, 2020		Sheet classification	March 31, 2022		December 31, 2021
Operating lease right of use asset	Other assets	$	1,168,107	$	1,242,832	Other assets	$	1,056,020	$	1,093,382
Operating lease liabilities	Other liabilities		1,384,716		1,443,966	Other liabilities		1,276,385		1,311,570

Operating lease cost included in occupancy expense in the statement of income for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 and ~~2020~~2021 was ~~$101,351~~$47,529 and ~~$94,134,~~$49,930, respectively.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6.	Lease Commitments (continued)

A maturity analysis of operating lease liabilities, including those option years for which the Company is reasonably certain to renew, and reconciliation of the undiscounted cash flows to the total operating lease liabilities are as follows:

Year		Amount			Amount

2021		$	107,384
2022			221,497		$	137,059
2023			228,531			187,951
2024			234,910			193,443
2025			241,483			199,107
2026						204,952
Thereafter	Thereafter		899,195			492,394
Total undiscounted cash flow	Total undiscounted cash flow		1,933,000			1,414,906
Discount	Discount		(548,284	)		(138,521	)
Lease liabilities	Lease liabilities	$	1,384,716		$	1,276,385

For operating leases as of ~~June 30, 2021,~~March 31, 2022, the weighted average remaining lease term is ~~8.0~~7.3 years and the weighted average discount rate is 3.25%. During the ~~six~~three-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020,~~2021, cash paid for amounts included in the measurement of lease liabilities was ~~$85,876~~$45,353 and ~~$76,920,~~$42,150, respectively.

7.	Capital Standards

Farmers and Merchants Bancshares, Inc. and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off‑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.

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.

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%.

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have current applicability to the Bank. As of ~~June 30, 2021,~~March 31, 2022, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased‑in basis.

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

The following table presents actual and required capital ratios as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 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, 2021~~March 31, 2022 and December 31, ~~2020~~2021 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Capital ratios of the Company are substantially the same as the Bank’s.

To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. As of ~~June 30, 2021,~~March 31, 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

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

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank 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 Bank’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.

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 FASB ASC 820 based on these two types of inputs are as follows:

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

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

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

Farmers and Merchants Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Basic earnings per share is determined by dividing net income available to stockholders by the weighted-average number of shares of common stock outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents, giving retroactive effect to stock dividends declared during the period. Diluted earnings per share is determined in the same manner, except that the weighted-average number of shares of common stock outstanding is adjusted for the dilutive effect of outstanding common stock equivalents. The following table sets forth the calculation of basic and diluted earnings per share for the three ~~and~~ ~~six~~~~-month periods~~months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021. There were no common stock equivalents outstanding for the ~~six~~three~~-month periods~~ months ended ~~June 30, 2021~~March 31, 2022 or ~~2020.~~2021.

The Company has a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. All employees age 21 or ~~more~~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 ~~$64,824~~$79,740 and ~~$42,941~~$76,924 for the three~~- month periods ended~~ ~~June 30, 2021~~ ~~and~~ ~~2020,~~ ~~respectively, and $~~~~141,748~~ ~~and $109,590 for the~~ ~~six~~-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

The Company has entered into agreements with 12 employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. For this plan, the Company expensed ~~$1,661~~$1,702 and ~~$1,589~~$1,661 for the three-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020,~~ ~~respectively, and~~ ~~$3,322~~ ~~and $3,178 for the~~ ~~six~~~~-month periods ended~~ ~~June 30, 2021~~ ~~and~~ ~~2020.~~2021.

The Company adopted supplemental executive retirement plans for three of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses related to these plans, including interest, of ~~$42,000~~$45,000 and ~~$51,300~~$42,000 for the three-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020,~~2021. ~~respectively, and~~ ~~$84,000~~ ~~and $102,600 for the~~ ~~six~~~~-month periods ended~~ ~~June 30, 2021~~ ~~and~~ ~~2020~~ ~~related to these plans.~~

Retirement plan expenses are included in employee benefits on the consolidated statements of income.

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, ~~2020~~2021 (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, including those impacted and/or driven by the COVID-19 pandemic; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports that Farmers and Merchants Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

Farmers and Merchants Bancshares, Inc.

Farmers and Merchants Bancshares, Inc. is a Maryland corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended. The Company was incorporated on August 8, 2016 for the purpose of becoming the holding company of Farmers and Merchants Bank (the “Bank”) in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the “Reorganization”). The Reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank’s stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company.

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

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

The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (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., and the Bank acquired Carroll Bancshares, Inc.’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, ~~2020,~~2021, 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 loan losses and intangible assets, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

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

Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, ~~2020.~~2021.

~~COVID-19 Pandemic~~

The COVID-19 pandemic has been wreaking havoc on the U.S. economy since the World Health Organization declared it a pandemic on March 11, 2020. The full impact and its effect on the banking industry, including the Company, will not be known for several quarters, but will be significant.

The U.S. and state governments reacted to the outbreak of the pandemic by issuing shelter-at-home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.

Although states, including Maryland, have eased many of the previously-imposed COVID-19 restrictions, including stay-at-home orders and the required closure of non-essential businesses, and many individuals have been vaccinated, there are still a significant number of active infections throughout the Country, including in the State of Maryland, and individuals continue to become infected. As a result, it is possible that states, including Maryland, will re-implement some or all of the COVID-19 related restrictions that have been lifted and again require some or all non-essential businesses to close or drastically alter their business operations, which could have a material adverse impact on our customers and, thus, our financial condition and results of operations.

Paycheck Protection Program

~~The~~In response to ongoing COVID-19 global pandemic that began in 2020, the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which ~~provides~~provided small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. During 2021 and 2020, we ~~made over $31~~originated approximately $60 million in ~~PPP loans. During the first six months of 2021, we made an additional $22 million of PPP loans.~~PPP. All PPP loans are 100% guaranteed by the SBA, have up to a five-year maturity, ~~provide for a six-month deferral period,~~ and have an interest rate of 1%. These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs. The majority of the PPP loans made in 2020 have been forgiven as of ~~June 30, 2021~~March 31, 2022. The SBA also established processing fees from 1% to 5%, depending on the loan amount. ~~We received $1,037,000~~During 2021 and 2020, the Company collected approximately $2,323,000 in fees ~~during~~from the ~~six months ended June 30, 2021 which,~~SBA in connection with the originations of the PPP loans. The fees, net of related origination costs, ~~will be amortized into~~are being recognized as interest income over the ~~life~~term of the ~~loans.~~loans using the straight-line method, with accelerated recognition when the loan pays off before maturity through SBA forgiveness or other means. During the three months ended March 31, 2022, approximately $145,000 fees were recognized, compared to approximately $509,000 in the three months ended March 31, 2021. Approximately $125,000 of fees were unrecognized at March 31, 2022.

~~In April 2020,~~Financial Condition

Total assets increased by $1,246,386, or 0.2%, to $717,923,641 at March 31, 2022 from $716,677,255 at December 31, 2021. The increase in total assets was due primarily to increases of $1,897,523 in loans, $677,087 in cash and cash equivalents, and $2,454,688 in deferred income taxes, offset by a decrease of $4,029,897 in debt securities.

Total liabilities increased $5,661,357, or 0.9%, to $665,717,154 at March 31, 2022 from $660,055,797 at December 31, 2021. The increase was due primarily to a $7,365,983 increase in deposits, offset by a $1,330,319 decrease in securities sold under repurchase agreements.

Stockholders’ equity decreased by $4,414,971 to $52,206,487 at March 31, 2022 from $56,621,458 at December 31, 2021. The decrease was due to an increase of $6,465,773 in accumulated other comprehensive loss as a result of the ~~Bank established eligibility to participate~~decline in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recoursemarket value of available for sale securities due to the ~~Bank. The majority~~significant increase in interest rates, offset by net income for the three-month period ended March 31, 2022 of the PPP loan disbursements were to internal, non-interest-bearing accounts for use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.$2,050,802.

~~Financial Condition~~

Total assets increased by $30,169,573, or 4.5%, to $707,486,655 at June 30, 2021 from $677,317,082 at December 31, 2020. The increase in total assets was due primarily to increases of $42,097,401 in debt securities and $3,853,041 in bank owned life insurance, offset by decreases of $4,334,180 in loans, $8,519,520 in cash and cash equivalents, and $1,431,785 in premises and equipment due to the sale of a former branch location.

Total liabilities increased $27,483,714, or 4.4%, to $653,071,313 at June 30, 2021 from $625,587,599 at December 31, 2020. The increase was due primarily to a $38,728,510 increase in deposits, offset by an $11,067,408 decrease in securities sold under repurchase agreements. The increase in deposits was due to an inflow of funds from depositors who have received numerous government stimulus funds.

Stockholders’ equity increased by $2,685,859 to $54,415,342 at June 30, 2021 from $51,729,483 at December 31, 2020. The increase was due primarily to net income for the six-month period ended June 30, 2021 of $4,061,794, offset by a decrease of $795.990 in accumulated other comprehensive (loss) income and dividends paid, net of reinvestment, of $579,945.

Loans

Major categories of loans at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows:

	June 30,				December 31,				March 31,				December 31,
	2021				2020				2022				2021

Real estate:
Commercial	$	319,322,780	61	%	$	309,284,811	59	%	$	329,179,712	67	%	$	319,185,116	66	%
Construction/Land development		31,411,527	6	%		33,641,916	6	%		20,325,400	4	%		28,221,854	6	%
Residential		119,493,617	23	%		121,327,761	23	%		111,993,662	23	%		107,436,033	22	%
Commercial		51,330,242	10	%		61,368,105	12	%		26,374,885	5	%		31,182,206	6	%
Consumer		402,457	0	%		288,454	0	%		296,151	0	%		355,958	0	%
		521,960,623	100	%		525,911,047	100	%		488,169,810	100	%		486,381,167	100	%
Less: Allowance for loan losses		3,404,168				3,296,538				3,654,318				3,650,268
Deferred origination fees net of costs		1,200,121				923,995				606,635				719,565
	$	517,356,334			$	521,690,514			$	483,908,857			$	482,011,334

Loans ~~decreased~~increased by ~~$4,334,180,~~$1,897,523, or ~~0.8%~~0.4%, to ~~$517,356,334~~$483,908,857 at ~~June 30, 2021~~March 31, 2022 from ~~$521,690,514~~$482,011,334 at December 31, ~~2020.~~2021. The ~~decrease~~increase was due primarily to ~~decreases~~increases of ~~$10,037,863~~$9,994,596 in commercial ~~loans, $2,230,389 in construction/land development~~real estate loans and ~~$1,834,144~~$4,557,629 in residential loans, offset by ~~an increase~~decreases of ~~$10,037,969~~$4,807,321 in commercial ~~real estate~~loans and $7,896,454 in construction/land development loans. The decrease in commercial loans was driven primarily by a decrease of ~~$5,582,359~~$5,494,643 in PPP ~~loans.~~loans and the decrease in construction/land development loans was due primarily to loans that were reclassified to commercial real estate after the construction was completed. The allowance for loan losses increased ~~$107,630~~slightly by $4,050 to ~~$3,404,168~~$3,654,318 at ~~June 30, 2021~~March 31, 2022 from ~~$3,296,538~~$3,650,268 at December 31, ~~2020.~~2021. Deferred origination fees, net of costs, ~~increased~~decreased to ~~$1,200,121~~$606,635 at ~~June 30, 2021~~March 31, 2022 from ~~$923,995~~$719,565 at December 31, ~~2020~~2021 due to the ~~origination~~forgiveness of ~~the~~ PPP loans.

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

An age analysis of past due loans, segregated by class of loans, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021 is as follows:

					90 Days								Past Due 90						90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More		30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing		Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
June 30, 2021
March 31, 2022
Real estate:
Commerical	$	-	$	-	$	-	$	-	$	319,322,780	$	319,322,780	$	-	$	-	$	-	$	502,961	$	502,961	$	328,676,751	$	329,179,712	$	-
Construction/Land development		-		-		-		-		31,411,527		31,411,527		-		-		-		-		-		20,325,400		20,325,400		-
Residential		-		-		31,500		31,500		119,462,117		119,493,617		-		-		216,082		31,500		247,582		111,746,080		111,993,662		-
Commercial		-		-		-		-		51,330,242		51,330,242		-		-		-		152,449		152,449		26,222,436		26,374,885		-
Consumer		-		-		-		-		402,457		402,457		-		-		-		-		-		296,151		296,151		-

Total	$	-	$	-	$	31,500	$	31,500	$	521,929,123	$	521,960,623	$	-	$	-	$	216,082	$	686,910	$	902,992	$	487,266,818	$	488,169,810	$	-

					90 Days								Past Due 90						90 Days								Past Due 90
	30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More		30 - 59 Days		60 - 89 Days		or more		Total				Total		Days or More
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing		Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
December 31, 2020
December 31, 2021
Real estate:
Commerical	$	182,656	$	-	$	-	$	182,656	$	309,102,155	$	309,284,811	$	-	$	-	$	-	$	502,961	$	502,961	$	318,682,155	$	319,185,116	$	-
Construction/Land development		-		-		-		-		33,641,916		33,641,916		-		-		-		-		-		28,221,854		28,221,854		-
Residential		24,591		-		220,967		245,558		121,082,203		121,327,761		-		-		-		249,161		249,161		107,186,872		107,436,033		217,661
Commercial		-		-		-		-		61,368,105		61,368,105		-		-		-		415,690		415,690		30,766,516		31,182,206		263,241
Consumer		-		-		-		-		288,454		288,454		-		-		-		-		-		355,958		355,958		-

Total	$	207,247	$	-	$	220,967	$	428,214	$	525,482,833	$	525,911,047	$	-	$	-	$	-	$	1,167,812	$	1,167,812	$	485,213,355	$	486,381,167	$	480,902

It is the Company’s policy to place a loan in nonaccrual status whenever there is substantial doubt about the ability of the borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan, and the overall economic situation of the borrower when making a nonaccrual decision. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least nine months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.

At ~~June 30, 2021,~~March 31, 2022, the Company had ~~one~~two nonaccrual commercial real estate loan totaling ~~$4,388,004 and~~$4,780,965, one nonaccrual residential real estate loan totaling ~~$31,500.~~$31,500, and one nonaccrual commercial loan totaling $152,449. The loans were secured by real estate, business assets, and personal guarantees. Gross interest income of ~~$124,308~~$59,182 would have been recorded for the three months ended ~~June 30, 2021~~March 31, 2022 if these nonaccrual loans had been current and performing in accordance with the original terms. The Company allocated $0$281,910 of its allowance for loan losses to these nonaccrual loans. The recorded investment of the nonaccrual loans was net of charge-offs and a nonaccretable discount totaling ~~$8,176~~$27,146 at ~~June 30, 2021.~~March 31, 2022.

At December 31, ~~2020,~~2021, the Company had ~~one~~two nonaccrual commercial real estate loan totaling ~~$4,407,829~~$4,810,965 and ~~two~~one nonaccrual residential real estate ~~loans~~loan totaling ~~$220,967.~~$31,500, and one commercial loan totaling $152,449. The real estate loans were secured by real estate and business assets and ~~personal guarantees.~~were personally guaranteed. The commercial loan was secured by business assets and was personally guaranteed. Gross interest income of ~~$13,395~~$219,734 would have been recorded in ~~2020~~2021 if these nonaccrual loans had been current and performing in accordance with ~~the~~their original terms. The Company allocated $0$281,910 of its allowance for loan losses to these nonaccrual loans. The ~~recorded investment~~balance of ~~the~~ nonaccrual loans was net of charge-offs and a nonaccretable discount totaling ~~$8,176~~$27,146 at December 31, ~~2020.~~2021.

Impaired loans as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are set forth in the following table:

	June 30		December 31,		March 31		December 31,
	2021		2020		2022		2021

Impaired loans with no valuation allowance	$	6,651,511	$	6,704,878	$	6,315,410	$	6,357,199
Impaired loans with a valuation allowance		-		-		655,410		655,410
Total impaired loans	$	6,651,511	$	6,704,878	$	6,970,820	$	7,012,609
Valuation allowance related to impaired loans	$	-	$	-	$	281,910	$	281,910

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

Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ~~ASC~~the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for loan losses on its loan portfolio.

The Company has provided loan modifications to its borrowers who are impacted by the COVID-19 pandemic. Modifications include deferrals of principal and interest for periods up to three months and interest only periods of three months. These deferrals can be extended for an additional three months, subject to approval by the Company. As of ~~June 30, 2021, loans totaling $5.1~~March 31, 2022, one loan totalling $4.3 million, or 1% of the Company’s loan portfolio, ~~were granted~~was operating under a three-month ~~deferrals. None of these loans were~~deferral. This loan was classified as ~~TDRs~~a TDR as of ~~June 30, 2021~~March 31, 2022 because ~~they met~~it did not meet the criteria discussed above. See Note 4 to the financial statements included elsewhere in this report for additional information.

At ~~June 30, 2021,~~March 31, 2022, the Company had two commercial real estate ~~loans~~loan totaling ~~$2,221,502~~$6,278,069 and one residential real estate loan totaling ~~$42,005~~$37,341 that were classified as TDRs. One of the commercial real estate loans with a principal balance of $4,278,004 was restructured as a TDR in 2022. All are included in impaired loans above. At ~~June 30, 2021,~~March 31, 2022, all three loans were paying as agreed. There have been no charge-offs or allowances associated with these ~~three~~loans.

At December 31, 2021, the Company had one commercial real estate loan totaling $2,009,967 and one residential real estate loan totaling $39,288 classified as TDRs. Both loans are included in impaired loans above and were paying as agreed. There have been no charge-offs or allowances associated with these loans.

At December 31, 2020, the Company had two commercial real estate loans totaling $2,252,316 and one residential loan totaling $44,733 classified as TDRs. One of the commercial real estate loans with a principal balance of $182,656 was restructured as a TDR during 2020. All three loans are included in impaired loans above. Each loan is paying as agreed. There have been no charge-offs or allowances associated with these three loans

June 30,

December 31,

2021

2020

Restructured loans (TDRs):

Performing as agreed
$ 2,263,507 $ 2,297,049
Not performing as agreed
- -
Total TDRs
$ 2,263,507 $ 2,297,049

	March 31,		December 31,
	2022		2021

Restructured loans (TDRs):
Performing as agreed	$	6,315,410	$	2,049,195
Not performing as agreed		-		-
Total TDRs	$	6,315,410	$	2,049,195

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

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

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

The following table details activity in the allowance for loan losses by portfolio for the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ and the year ended December 31, ~~2020.~~2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

													Allowance for loan losses ending						Outstanding loan balances
			Provision										balance evaluated for impairment:						evaluated for impairment:								Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		for loan			Charge					Ending		Purchase Credit						Purchase Credit						Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
June 30, 2021	balance		losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
March 31, 2022																									balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
																																															��
Real estate:
Commercial	$	2,230,129	$	373,796		$	-		$	3,500	$	2,607,425	$	-	$	-	$	2,607,425	$	6,609,506	$	-	$	312,770,436	$	2,482,930	$	63,130		$	-	$	-	$	2,546,060	$	129,461	$	-	$	2,416,599	$	6,781,030	$	32,991	$	322,365,691
Construction and land development		201,692		(67,611	)		-			8,100		142,181		-		-		142,181		-		1,544,309		29,867,218		214,547		(97,873	)		-		4,050		120,724		-		-		120,724		-		379,349		19,946,051
Residential		644,639		(148,627	)		(18,970	)		-		477,042		-		-		477,042		42,005		511,413		118,883,037		603,558		51,081			-		-		654,639		-		-		654,639		37,341		244,789		111,711,532
Commercial		111,390		(18,184	)		-			15,000		108,206		-		-		108,206		-		-		51,330,242		255,413		12,276			-		-		267,689		152,449		-		115,240		152,449		-		26,222,436
Consumer		2,138		450			-			-		2,588		-		-		2,588		-		-		402,457		4,370		(738	)		-		-		3,632		-		-		3,632		-		-		296,151
Unallocated		106,550		(39,824	)		-			-		66,726		-		-		66,726		-		-		-		89,450		(27,876	)		-		-		61,574		-		-		61,574		-		-		-
	$	3,296,538	$	100,000		$	(18,970	)	$	26,600	$	3,404,168	$	-	$	-	$	3,404,168	$	6,651,511	$	2,055,722	$	513,253,390	$	3,650,268	$	-		$	-	$	4,050	$	3,654,318	$	281,910	$	-	$	3,372,408	$	6,970,820	$	657,129	$	480,541,861

3635

Allowance for loan losses ending

Outstanding loan balances

Provision

balance evaluated for impairment:

evaluated for impairment:

Beginning

for loan

Charge

Ending

Purchase Credit

Purchase Credit

June 30, 2020

balance

losses

offs

Recoveries

balance

Individually

Impaired

Collectively

Individually

Impaired

Collectively

Real estate:

Commercial
$ 1,763,861 $ 396,409 $ - $ 44,962 $ 2,205,232 $ - $ - $ 2,205,232 $ 2,502,296 $ - $ 233,437,877
Construction and land development
192,828 22,302 - 7,200 222,330 - - 222,330 - - 20,550,954
Residential
478,124 55,640 - - 533,764 - - 533,764 49,342 - 75,045,229
Commercial
107,782 (7,709 ) - 15,835 115,908 - - 115,908 - - 56,272,588
Consumer
4,133 (740 ) - - 3,393 - - 3,393 - - 216,190
Unallocated
46,987 9,098 - - 56,085 - - 56,085 - - -
$ 2,593,715 $ 475,000 $ - $ 67,997 $ 3,136,712 $ - $ - $ 3,136,712 $ 2,551,638 $ - $ 385,522,838

												Allowance for loan losses ending						Outstanding loan balances								Provision for (recovery									Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
			Provision									balance evaluated for impairment:						evaluated for impairment:						Beginning		of)			Charge				Ending		Purchase Credit						Purchase Credit
	Beginning		for loan			Charge				Ending		Purchase Credit						Purchase Credit
December 31, 2020	balance		losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively
March 31, 2021																								balance		loan losses			offs		Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	1,763,861	$	418,806		$	-	$	47,462	$	2,230,129	$	-	$	-	$	2,230,129	$	6,660,245	$	151,453	$	302,473,113	$	2,230,129	$	323,768		$	-	$	2,500	$	2,556,397	$	-	$	-	$	2,556,397	$	6,644,339	$	45,233	$	305,552,307
Construction and land development		192,828		(5,536	)		-		14,400		201,692		-		-		201,692		-		1,566,174		32,075,742		201,692		(39,269	)		-		4,050		166,473		-		-		166,473		-		1,554,070		33,177,080
Residential		478,124		166,515			-		-		644,639		-		-		644,639		215,230		595,433		120,517,098		644,639		(154,755	)		-		-		489,884		-		-		489,884		43,771		590,874		116,066,706
Commercial		107,782		(12,353	)		-		15,961		111,390		-		-		111,390		-		-		61,368,105		111,390		(12,143	)		-		-		99,247		-		-		99,247		-		-		60,064,503
Consumer		4,133		(1,995	)		-		-		2,138		-		-		2,138		-		-		288,454		2,138		320			-		-		2,458		-		-		2,458		-		-		258,484
Unallocated		46,987		59,563			-		-		106,550		-		-		106,550		-		-		-		106,550		2,079			-		-		108,629		-		-		108,629		-		-		-
	$	2,593,715	$	625,000		$	-	$	77,823	$	3,296,538	$	-	$	-	$	3,296,538	$	6,875,475	$	2,313,060	$	516,722,512	$	3,296,538	$	120,000		$	-	$	6,550	$	3,423,088	$	-	$	-	$	3,423,088	$	6,688,110	$	2,190,177	$	515,119,080

			Provision for (recovery										Allowance for loan losses ending balance evaluated for impairment:						Outstanding loan balances evaluated for impairment:
	Beginning		of)			Charge					Ending		Purchase Credit						Purchase Credit
December 31, 2021	balance		loan losses			offs			Recoveries		balance		Individually		Impaired		Collectively		Individually		Impaired		Collectively

Real estate:
Commercial	$	2,230,129	$	241,301		$	-		$	11,500	$	2,482,930	$	129,461	$	-	$	2,353,469	$	6,820,932	$	56,825	$	312,307,359
Construction and land development		201,692		(3,345	)		-			16,200		214,547		-		-		214,547		-		383,666		27,838,188
Residential		644,639		(22,111	)		(18,970	)		-		603,558		-		-		603,558		39,228		568,151		106,828,654
Commercial		111,390		129,023			-			15,000		255,413		152,449		-		102,964		152,449		-		31,029,757
Consumer		2,138		2,232			-			-		4,370		-		-		4,370		-		-		355,958
Unallocated		106,550		(17,100	)		-			-		89,450		-		-		89,450		-		-		-
	$	3,296,538	$	330,000		$	(18,970	)	$	42,700	$	3,650,268	$	281,910	$	-	$	3,368,358	$	7,012,609	$	1,008,642	$	478,359,916

The provision for loan losses was ~~$100,000~~$0 and ~~$475,000~~$120,000 for the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

During the three-month periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company had recoveries from loans written off in prior periods totaling ~~$26,660~~$4,050 and ~~$67,997,~~$6,550, respectively, and ~~charge-offs of $18,970 and $0, respectively.~~no charge-offs.

As of ~~June 30, 2021,~~March 31, 2022, the Company had ~~$7,986,257~~$7,731,750 of loans on a watch list, other than impaired loans, for which the borrowers have the potential for experiencing financial difficulties. As of December 31, ~~2020,~~2021, the Company had ~~$9,546,879~~$13,140,695 of such loans. The decrease is due to the pay off in full of three loans totalling approximately $3.4 million and the upgrading of one loan totaling $2.0 million. These loans are subject to ongoing management attention and their classifications are reviewed regularly. Watch list loans include loans classified as Special Mention, Substandard, and Doubtful.

~~The $3.4~~Management believes that the $3.7 million reserve at ~~June 30, 2021~~March 31, 2022 and the ~~$100,000~~$0 provision for the ~~6 month~~three-month period ended ~~June 30, 2021~~March 31, 2022 are appropriate ~~due~~to adequately cover the probable and estimable losses inherent in the loan portfolio. The reserve is materially unchanged from the reserve at December 31, 2021. Excluding PPP loans, the Company’s loan portfolio grew by $7.4 million during the first quarter of 2022, and an increasing portfolio would typically require an increase in the provision. In addition, qualitative factors pertaining to the ~~following factors:~~impact of rising rates and staff experience were given heavier weighting at March 31, 2022 as compared to December 31, 2021 to reflect the potential negative impact of the increase in interest rates during the first quarter and the addition of several new lenders during the quarter. Notwithstanding the foregoing, however, the amount of watch list loans in our portfolio declined by $5.4 million. Watch list loans receive a much higher reserve than the rest of the portfolio, so this decline offset the growth in the portfolio and the impact of the higher qualitative factors. Furthermore, there was no additional deterioration to the three loans that were negatively impacted by COVID -19, so management did not make any changes to their related reserves.

●

~~The loan portfolio excluding PPP loans increased $1.6 million in the first six months of 2021.~~

~~PPP loans are fully insured by the SBA and carry no risk of loss and therefore no reserve.~~

●

~~COVID related payment deferrals – while overall payment deferrals are down from their peak at June 30, 2020, the loans that have had deferrals in 2021 have been given higher reserve percentages:~~

~~A $4.4 million loan has been on deferral for 15 months. The reserve percentage attributed to loans still on payment deferral increase each quarter and is currently at 10%.~~

~~$.7 million of loans were granted COVID related deferrals in the second quarter of 2021.~~

~~$11.4 million of payment deferred loans which began making full payments in the second quarter will have a declining reserve percentage until six full payments have been made.~~

3736

Investment Securities

Investments in debt securities ~~increased~~decreased by ~~$42,097,401~~$4,029,897, or ~~54.3%~~2.36%, to ~~$119,653,206~~$167,059,994 at ~~June 30, 2021~~March 31, 2022 from ~~$77,555,805~~$171,089,891 at December 31, ~~2020.~~2021. At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had classified ~~82% and 70%, respectively,~~87% of the investment portfolio as available for sale. The balance of the portfolio was classified as held to maturity.

Securities classified as available for sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the Company’s asset/liability management strategy. Available for sale debt securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of income taxes. Securities classified as held to maturity, which 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.

The following table sets forth the carrying value of investments in debt securities at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

	June 30,		December 31,		March 31		December 31,
	2021		2020		2022		2021
Available for sale
State and municipal	$	770,977	$	986,532	$	747,363	$	763,498
SBA pools		1,657,088		1,783,807		1,279,835		1,397,762
Corporate bonds		8,074,586		6,797,431		10,628,077		9,234,207
Mortgage-backed securities		87,748,956		44,909,516		133,061,160		137,842,449
	$	98,251,607	$	54,477,286	$	145,716,435	$	149,237,916

Held to maturity
State and municipal	$	21,401,599	$	23,078,519	$	21,343,559	$	21,851,975

The following table sets forth the scheduled maturities of investments in debt securities at ~~June 30, 2021:~~March 31, 2022:

	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value

Within 1 year	$	499,816	$	511,785	$	-	$	-	$	752,350	$	754,818	$	-	$	-
Over 1 to 5 years		4,122,839		4,234,922		796,579		811,970		3,628,616		3,560,563		800,729		800,815
Over 5 to 10 years		4,089,760		4,098,856		2,032,001		2,101,343		7,331,475		7,060,059		1,782,321		1,797,278
Over 10 years		-		-		18,573,019		19,444,607		-		-		18,760,509		18,316,676
		8,712,415		8,845,563		21,401,599		22,357,920		11,712,441		11,375,440		21,343,559		20,914,769
SBA Pools		1,682,144		1,657,088		-		-		1,300,202		1,279,835		-		-
Mortgage-backed securities		87,980,820		87,748,956		-		-		143,548,768		133,061,160		-		-
	$	98,375,379	$	98,251,607	$	21,401,599	$	22,357,920	$	156,561,411	$	145,716,435	$	21,343,559	$	20,914,769

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

Other Real Estate Owned

Other real estate owned (“OREO”) at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 included two properties with an aggregate carrying value of ~~$1,411,605.~~$1,242,365. The first property is an apartment building in Baltimore, Maryland with a carrying value of ~~$1,411,605~~$1,242,365 that was ~~obtained~~acquired in the Merger. The property is under an optional sales contract with no projected closing date. The other property isconsists of 10.43 acres of land in Cecil County, Maryland with a carrying value of ~~$0. It~~$0 that was acquired through foreclosure in 2007. The ~~latter~~ property ~~consists of 10.43 acres and~~ is currently under contract for a gross sales price of $295,000 with closing expected in ~~2021.~~2022. Due to the length of time ~~the~~that this latter property has been held, Maryland banking law required a write-down of the value to $0 in 2019.

Deposits

Total deposits increased by ~~$38,728,510,~~$7,365,983, or ~~6.8%~~1.2%, to ~~$612,130,057~~$633,780,653 at ~~June 30, 2021~~March 31, 2022 from ~~$573,401,547~~$626,414,670 at December 31, ~~2020.~~2021. The increase in deposits was due to a ~~$23,557,714~~$8,453,893 increase in noninterest-bearing accounts, a ~~$17,311,175~~$6,576,470 increase in savings and money market accounts, and a ~~$9,650,921~~$187,207 increase in interest bearing checking accounts, offset by ~~an $11,791,300 decrease~~a $7,851,587decrease in time deposits.

The following table shows the average balances and average costs of deposits for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:

	June 30, 2021					June 30, 2020					March 31, 2022					March 31, 2021
	Average					Average					Average					Average
	Balance		Cost			Balance		Cost			Balance		Cost			Balance		Cost

Noninterest bearing demand deposits	$	116,817,132		0.00	%	$	70,072,698		0.00	%	$	124,549,116		0.00	%	$	111,624,572		0.00	%
Interest bearing demand deposits		112,810,820		0.20	%		68,862,747		0.33	%		130,071,359		0.16	%		83,532,279		0.26	%
Savings and money market deposits		177,924,515		0.17	%		105,378,381		0.29	%		191,851,324		0.11	%		199,036,116		0.15	%
Time deposits		191,615,321		0.91	%		155,964,337		1.88	%		176,031,048		0.53	%		194,296,941		0.96	%
	$	599,167,788		0.38	%	$	400,278,163		0.87	%	$	622,502,847		0.22	%	$	588,489,908		0.40	%

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 ~~$85.5~~$72.7 million under a secured line of credit with the Federal Home Loan Bank (“FHLB”). The Bank also has a facility with the Federal Reserve Bank of Richmond (the “Reserve Bank”) under which the Bank can borrow approximately ~~$30.3~~$27.5 million. 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 $5,000,000 were outstanding as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The Company borrowed $17,000,000 to facilitate the acquisition of Carroll as more fully described below. There were no borrowings from the Reserve Bank or our commercial bank lenders at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Management believes that we have adequate liquidity sources to meet all anticipated liquidity needs over the next 12 months. Management knows of no trend or event which is likely to have a material impact on our ability to maintain liquidity at satisfactory levels.

Borrowings and Other Contractual Obligations

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

On September 30, 2020, the Company borrowed $17,000,000 from First Horizon Bank (“FHN”) for the purpose of funding a portion of the ~~merger~~ consideration that was payable to the stockholders of Carroll ~~when it was merged with and into~~in the ~~Company on October 1, 2020.~~Merger. Net of issuance costs, the amount of the net long-term debt was ~~$16,976,093~~$16,553,090 and ~~$16,973,280~~$16,978,905 as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The loan matures on September 30, 2025. The interest rate on the loan is fixed at 4.10%. ~~The Company is required to make quarterly~~Quarterly interest-only payments were made through October 1, 2021. ~~The Company expects that the amount of these quarterly interest-only payments to be $174,250.~~ During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $646,472, which will be based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9,916,667 will be due at maturity. To secure its obligations under this loan, the Company pledged all of its shares of common stock of the Bank to FHN.

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

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

	June 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Amount oustanding at period-end:
Securities sold under repurchase agreements	$	13,686,564		$	24,753,972		$	4,083,707		$	5,414,026
Federal Home Loan Bank advances		5,000,000			5,000,000			5,000,000			5,000,000
Long-term debt (net of issuance costs)		16,976,093			16,973,280			16,553,090			16,978,905
Weighted average rate paid at period-end:
Securites sold under repurchase agreements		0.48	%		0.61	%		0.30	%		0.61	%
Federal Home Loan Bank advances		1.00	%		1.00	%		1.00	%		1.00	%
Long-term debt		4.10	%		4.10	%		4.10	%		4.10	%

The ~~Federal Home Loan Bank~~FHLB advances and the long-term debt outstanding at ~~June 30, 2021~~March 31, 2022 will require the following principal payments:

~~Year ending December 31, 2022~~			~~1,888,889~~
~~Year ending December 31, 2023~~			~~1,888,889~~
~~Year ending December 31, 2024~~			~~1,888,889~~
~~Year ending December 31, 2025~~			~~16,333,333~~

Year ending December 31, 2022	$	1,461,667
Year ending December 31, 2023		1,888,889
Year ending December 31, 2024		1,888,889
Year ending December 31, 2025		16,333,333

Capital Resources and Adequacy

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

Additional information regarding the capital requirements that apply to us can be found in Note 6 to the consolidated financial statements presented elsewhere in this report and in Item 1 of Part I of the Form 10-K under the heading, “Supervision and Regulation – Capital Requirements”.

The following table presents actual and required capital ratios as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 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, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

						Minimum					To Be Well										Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized					Actual					Capital Adequacy					Capitalized
June 30, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2022																Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	66,196		12.58	%	$	55,251		10.50	%	$	52,620		10.00	%	$	71,541		13.09	%	$	57,396		10.50	%	$	54,663		10.00	%
Tier 1 capital (to risk-weighted assets)		62,792		11.93	%		44,727		8.50	%		42,096		8.00	%		67,887		12.42	%		46,463		8.50	%		43,730		8.00	%
Common equity tier 1 (to risk-weighted assets)		62,792		11.93	%		36,834		7.00	%		34,203		6.50	%
Common equity tier 1 (to risk- weighted assets)																	67,887		12.42	%		38,264		7.00	%		35,531		6.50	%
Tier 1 leverage (to average assets)		62,792		9.00	%		27,896		4.00	%		34,870		5.00	%		67,887		9.60	%		28,290		4.00	%		35,363		5.00	%

December 31, 2020
December 31, 2021

Total capital (to risk-weighted assets)	$	63,400		12.62	%	$	52,732		10.50	%	$	50,221		10.00	%	$	69,957		13.24	%	$	55,471		10.50	%	$	52,830		10.00	%
Tier 1 capital (to risk-weighted assets)		60,104		11.97	%		42,688		8.50	%		40,177		8.00	%		66,307		12.55	%		44,905		8.50	%		42,264		8.00	%
Common equity tier 1 (to risk-weighted assets)		60,104		11.97	%		35,155		7.00	%		32,644		6.50	%
Common equity tier 1 (to risk- weighted assets)																	66,307		12.55	%		36,981		7.00	%		34,339		6.50	%
Tier 1 leverage (to average assets)		60,104		9.05	%		26,569		4.00	%		33,211		5.00	%		66,307		9.27	%		28,614		4.00	%		35,767		5.00	%

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

Off-Balance Sheet Arrangements

In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are as follows:

	June 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021

Loan commitments
Construction and land development	$	3,890,714	$	4,668,250	$	6,639,714	$	6,810,353
Commercial		2,607,079		1,000,000		3,081,000		630,000
Consumer		-		-
Commercial real estate		21,019,909		15,772,020		29,927,351		23,552,400
Residential		930,500		4,668,750		2,453,981		3,804,617
	$	28,448,202	$	26,109,020	$	42,102,046	$	34,797,370

Unused lines of credit
Home-equity lines	$	12,507,053	$	13,716,894	$	12,504,898	$	12,707,519
Commercial lines		22,200,746		23,996,679		34,215,659		28,828,911
	$	34,707,799	$	37,713,573	$	46,720,557	$	41,536,430

Letters of credit	$	1,553,018	$	1,891,428	$	1,479,936	$	1,470,742

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 necessarily 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~~Three Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~

General

Net income for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 was ~~$4,061,794,~~$2,050,802, compared to ~~$1,879,362~~$2,029,575 for the same period of ~~2020.~~2021. The increase of ~~$2,182,432,~~$21,227, or ~~116.1%~~1.05%, was due to a ~~$3,480,039~~$390,634 increase in net interest income ~~a $195,273 increase in noninterest income,~~ and a ~~$375,000~~$120,000 decrease in the loan loss provision, offset by a ~~$1,095,941~~$61,138 decrease in noninterest income, a $404,474 increase in noninterest expenses, and a ~~$771,939~~$23,795 increase in income taxes.

The Company incurred significant one-time costs during 2020 in connection with the Company’s acquisition of Carroll. The table below provides a comparison of the Company’s results for the six months ended June 30, 2021 versus the same period of the prior year with and without $344,920 of acquisition costs incurred during the six months ended June 30, 2020.

Six Months Ended

June 30, 2021

June 30, 2020

Excluding

As Reported

As Reported

Acquisition Costs

Income before taxes
$ 5,217,220 $ 2,262,849 $ 2,607,769
Income taxes
1,155,426 383,487 478,400
Net income
$ 4,061,794 $ 1,879,362 $ 2,129,369
Earnings per share
$ 1.35 $ 0.63 $ 0.72
Return on average assets
1.18 % 0.80 % 0.91 %
Return on average equity
15.18 % 7.39 % 8.38 %

Net Interest Income

Net interest income was ~~$11,115,976~~$5,964,089 for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~$7,635,937~~$5,573,455 for the same period of ~~2020.~~2021.

Total interest income for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 was ~~$12,651,703,~~$6,489,725, compared to ~~$9,465,264~~$6,370,592 for the same period of ~~2020,~~2021, an increase of ~~$3,186,439,~~$119,133, or ~~33.7%~~1.87%.

Total interest income on loans for the ~~six~~three months ended ~~June 30, 2021 increased~~March 31, 2022 decreased by ~~$3,052,396~~$301,295 when compared to the same period of 2021 due to a ~~$151.5~~$42.6 million ~~higher~~lower average loan balance for the ~~first six~~three months ~~of 2021~~ended March 31, 2022 when compared to the same period of ~~2020 primarily due to the acquisition of Carroll,~~2021, offset by a ~~lower~~higher loan yield of ~~4.47%~~4.69% for the ~~first six~~three months ~~of 2021~~ended March 31, 2022 versus ~~4.65%~~4.54% for the same period of ~~2020.~~2021. Investment income for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 increased by ~~$153,397,~~$422,150, or ~~21.9%~~113.50%, when compared to the same period of ~~2020~~2021 due to a ~~$34.9~~$67.9 million higher average investment balance ~~offset by a decrease~~and an increase in fully-taxable equivalent yield to ~~1.99%~~1.95% for ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~2.72%~~1.60% for the same period of ~~2020.~~2021. The fully-taxable equivalent yield on total interest-earning assets decreased 335 basis points to ~~3.92%~~3.87% for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022, compared to ~~4.25%~~3.92% for the same period of ~~2020.~~2021. The average balance of total interest-earning assets increased by ~~$199.5~~$19.3 million to ~~$650.3~~$674.7 million for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~$450.8~~$655.4 million for the same period of ~~2020 primarily due to the acquisition of Carroll.~~2021.

Total interest expense for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 was ~~$1,535,727,~~$525,636, compared to ~~$1,829,327~~$797,137 for the same period of ~~2020,~~2021, a decrease of ~~$293,600,~~$271,501, or ~~16.1%~~34.06%. The decrease was due to a lower overall cost of funds on interest bearing deposits and borrowings of ~~0.60%~~0.40% for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~1.07%~~0.63% for the same period of ~~2020,~~2021, offset by a ~~$172.7~~$14.7 million increase in the average balance of interest-bearing liabilities to ~~$515.8~~$524.0 million infor the ~~first six~~three months ~~of 2021,~~ended March 31, 2022, compared to ~~$343.2~~$509.3 million in the same period of ~~2020.~~2021. Cost of funds for time deposits decreased to ~~0.91%~~0.53% for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 from ~~1.88%~~0.96% for the same period of ~~2020.~~2021. Securities sold under repurchase agreements cost of funds decreased to ~~0.50%~~0.30% for the ~~first six~~three months ~~of 2021~~ended March 31, 2022 from ~~1.50%~~0.52% for the ~~first six months~~same period of ~~2020.~~2021.

Average noninterest-earning assets increased by ~~$22.9~~$12.8 million to ~~$41.9~~$35.8 million infor the ~~first six~~three months ~~of 2021,~~ended March 31, 2022, compared to ~~$17.9~~$23.0 million in the same period of ~~2020.~~2021. Average noninterest-bearing deposits increased by ~~$46.7~~$12.9 million to ~~$116.8~~$124.5 million during the ~~first six~~three months ~~of 2021,~~ended March 31, 2022, compared to ~~$70.1~~$111.6 million in the same period of ~~2020.~~2021. The average balance in stockholders’ equity increased by ~~$2.7~~$3.5 million for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022 when compared with the same period of ~~2020.~~2021.

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, 2021 and 2020. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Average

Average

Balance

Interest

Yield

Balance

Interest

Yield

Assets:

Loans
$ 526,586,402 $ 11,768,317 4.47 % $ 375,105,468 $ 8,715,921 4.65 %
Securities, taxable
74,326,338 543,033 1.46 % 39,914,284 434,268 2.18 %
Securities, tax exempt
20,689,680 403,933 3.90 % 20,159,139 381,238 3.78 %
Federal funds sold and other interest-earning assets
28,720,770 30,971 0.22 % 15,658,843 50,871 0.65 %
Total interest-earning assets
650,323,190 12,746,254 3.92 % 450,837,734 9,582,298 4.25 %
Noninterest-earning assets
40,851,762 17,930,373
Total assets
$ 691,174,952 $ 468,768,107

Liabilities and Stockholders’ Equity:

NOW, savings, and money market
$ 290,735,335 259,248 0.18 % $ 174,241,128 269,892 0.31 %
Certificates of deposit
191,615,321 869,709 0.91 % 155,964,337 1,468,771 1.88 %
Securities sold under repurchase agreements
11,484,379 28,483 0.50 % 10,386,558 77,690 1.50 %
Long-term debt
16,974,687 353,249 4.16 % - - -
FHLB advances and other borrowings
5,000,000 25,038 1.00 % 2,565,934 12,974 1.01 %
Total interest-bearing liabilities
515,809,722 1,535,727 0.60 % 343,157,957 1,829,327 1.07 %

Noninterest-bearing deposits
116,817,132 70,072,698
Noninterest-bearing liabilities
5,033,798 4,708,605
Total liabilities
637,660,652 417,939,260
Stockholders' equity
53,514,300 50,828,847
Total liabilities and stockholders' equity
$ 691,174,952 $ 468,768,107

Net interest income
$ 11,210,527 $ 7,752,971

Interest rate spread
3.32 % 3.18 %

Net yield on interest-earning assets
3.45 % 3.44 %

Ratio of average interest-earning assets to

Average interest-bearing liabilities
126.08 % 131.38 %

~~Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis based upon tax rates of 21% for Federal and 8.25% for State.~~

~~Noninterest Income~~

Noninterest income for the six months ended June 30, 2021 was $1,105,501, compared to $910,228 for the same period of 2020, an increase of $195,273, or 21.5%. The increase was primarily a result of an $84,566 increase in mortgage banking income due to continued low interest rates driving strong residential purchase and refinance activity, a $67,818 increase in bank owned life insurance income due to the Carroll acquisition along with a $3.7 million purchase in the first quarter of 2021, a $59,461 increase in service charges as ATM usage and other bank services returned to normal levels compared to the beginning of the pandemic in 2020, and a $37,613 gain on the sale of a former Carroll branch office, offset by a $63,635 decrease in the gain on sale of SBA loans.

~~Noninterest Expense~~

Noninterest expense for the six months ended June 30, 2021 totaled $6,904,257, compared to $5,808,316 for the same period of 2020, an increase of $1,095,941, or 18.9%. The increase was due primarily to, increases in salaries and benefits of $924,344, in occupancy, furniture and equipment of $181,095, and in other of $335,422, offset by a decrease in costs incurred related to the acquisition of Carroll of $344,920. The increases are all a result of the employees, locations, and customers added from the acquisition of Carroll.

~~Income Tax Expense~~

Income tax expense for the six months ended June 30, 2021 was $1,155,426, compared to $383,487 for the same period of 2020. The effective tax rate was 22.2% for the six months ended June 30, 2021, compared to 17.0% for the same period of 2020. The increase in income tax expense was due primarily to higher income before income taxes and a lower percentage of tax exempt revenue for the six months ended June 30, 2021 when compared to the same period in 2020.

~~Comparison of Operating Results for the Three Months Ended June 30, 2021 and 2020~~

~~General~~

Net income for the three months ended June 30, 2021 was $2,032,219, compared to $1,036,055 for the same period of 2020. The increase of $996,164, or 96.2%, was due to a $1,672,118 increase in net interest income and a $370,000 decrease in the loan loss provision, offset by a $647,130 increase in noninterest expenses, a $59,670 decrease in noninterest income and a $339,154 increase in income taxes.

The Company incurred significant one-time costs during 2020 in connection with the Company’s acquisition of Carroll. The table below provides a comparison of the Company’s results for the second quarter of 2021 versus the same period of the prior year with and without $165,096 of acquisition costs incurred during the second quarter of 2020.

Three Months Ended

June 30, 2021

June 30, 2020

Excluding

As Reported

As Reported

Acquisition Costs

Income before taxes
$ 2,601,944 $ 1,266,626 $ 1,431,722
Income taxes
569,725 230,571 276,001
Net income
$ 2,032,219 $ 1,036,055 $ 1,155,721
Earnings per share
$ 0.67 $ 0.35 $ 0.39
Return on average assets
1.16 % 0.85 % 0.94 %
Return on average equity
15.02 % 8.05 % 8.98 %

~~Net Interest Income~~

~~Net interest income was $5,542,521 for the three months ended June 30, 2021, compared to $3,870,403 for the same period of 2020.~~

~~Total interest income for the three months ended June 30, 2021 was $6,281,111, compared to $4,755,228 for the same period of 2020, an increase of $1,525,883, or 32.1%.~~

Total interest income on loans for the three months ended June 30, 2021 increased by $1,390,393 when compared to the same period of 2020 due to a $140.2 million higher average loan balance for the three months ended June 30, 2021 when compared to the same period of 2020 primarily due to the acquisition of Carroll, offset by a lower loan yield of 4.40% for the three months ended June 30, 2021 versus 4.56% for the same period of 2020. Investment income for the three months ended June 30, 2021 increased by $136,189, or 39.4%, when compared to the same period of 2020 due to a $41.1 million higher average investment balance, offset by a decrease in fully-taxable equivalent yield to 2.00% for three months ended June 30, 2021, compared to 2.15% for the same period of 2020. The fully-taxable equivalent yield on total interest-earning assets decreased 23 basis points to 3.80% for the three months ended June 30, 2021 compared to 4.03% for the same period of 2020. The average balance of total interest-earning assets increased by $193.5 million to $655.2 million for the three months ended June 30, 2021, compared to $471.7 million for the same period of 2020 primarily due to the acquisition of Carroll.

Total interest expense for the three months ended June 30, 2021 was $738,500, compared to $884,825 for the same period of 2020, a decrease of $146,235, or 16.5%. The decrease was due to a lower overall cost of funds on interest bearing deposits and borrowings of 0.57% for the three months ended June 30, 2021, compared to 1.00% for the same period of 2020, offset by a $169.0 million increase in the average balance of interest-bearing liabilities to $522.3 million in the three months ended June 30, 2021, compared to $353.3 million in the same period of 2020 primarily due to the acquisition of Carroll. Cost of funds for time deposits decreased to 0.86% for the three months ended June 30, 2021 from 1.78% for the same period of 2020. Securities sold under repurchase agreements cost of funds decreased to 0.48% for the three months ended June 30, 2021 from 1.52% for the same period of 2020.

Average noninterest-earning assets increased by $20.4 million to $38.6 million for the three months ended June 30, 2021, compared to $18.1 million in the same period of 2020. Average noninterest-bearing deposits increased by $41.8 million to $121.9 million during the three months ended June 30, 2021, compared to $80.2 million in the same period of 2020. The average balance in stockholders’ equity increased by $2.6 million for the three months ended June 30, 2021, when compared with the same period of 2020.

4642

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, 2021~~March 31, 2022 and ~~2020.~~2021. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

															Three Months Ended							Three Months Ended
	Three Months Ended June 30, 2021							Three Months Ended June 30, 2020							March 31, 2022							March 31, 2021
	Average							Average							Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield			Balance		Interest		Yield			Balance		Interest		Yield
Assets:
Loans	$	525,734,302	$	5,783,660		4.40	%	$	385,504,008	$	4,393,267		4.56	%
Securities, taxable		85,334,627		330,789		1.55	%		42,130,062		191,255		1.82	%
Securities, tax exempt		20,233,549		196,176		3.88	%		22,294,431		154,699		2.78	%
Federal funds sold and other interest-earning assets		33,856,811		16,153		0.19	%		21,732,471		16,007		0.29	%
Loans (1)															$	484,840,152	$	5,683,362		4.69	%	$	527,459,924	$	5,984,657		4.54	%
Securities, taxable (2)																152,685,500		645,744		1.69	%		83,279,735		212,244		1.02	%
Securities, tax exempt (2)																19,650,625		192,698		3.92	%		21,150,879		206,367		3.90	%
Federal funds sold and other interest-earning assets (2)																17,541,166		13,117		0.30	%		23,532,775		14,818		0.25	%
Total interest-earning assets		665,159,289		6,326,778		3.80	%		471,660,972		4,755,228		4.03	%		674,717,443		6,534,921		3.87	%		655,423,313		6,418,086		3.92	%
Noninterest-earning assets		38,562,515							18,145,977							35,830,220							23,003,563
Total assets	$	703,721,804						$	489,806,949						$	710,547,663						$	678,426,876

Liabilities and Stockholders’ Equity:
Liabilities and Stockholders’ Equity:
NOW, savings, and money market	$	298,812,807		128,663		0.17	%	$	182,463,181		142,326		0.31	%	$	321,922,683		104,877		0.13	%	$	282,568,395		130,585		0.18	%
Certificates of deposit		188,963,169		404,774		0.86	%		155,435,092		690,138		1.78	%		176,031,048		233,683		0.53	%		194,296,941		464,935		0.96	%
Securities sold under repurchase agreements		12,512,074		14,972		0.48	%		10,381,347		39,496		1.52	%		4,395,100		3,251		0.30	%		10,445,266		13,511		0.52	%
Long-term debt		16,975,038		177,593					-		-		-			16,659,192		171,375		4.11	%		16,973,984		175,656		4.14	%
FHLB advances and other borrowings		5,000,000		12,588		1.01	%		5,000,000		12,865		1.03	%		5,000,000		12,450		1.00	%		5,000,000		12,450		1.00	%
Total interest-bearing liabilities		522,263,088		738,590		0.57	%		353,279,620		884,825		1.00	%		524,008,023		525,636		0.40	%		509,284,586		797,137		0.63	%

Noninterest-bearing deposits		121,919,509							80,162,475							124,549,116							111,624,572
Noninterest-bearing liabilities		5,418,568							4,880,166							5,620,689							4,694,670
Total liabilities		649,601,165							438,322,261							654,177,828							625,603,828
Stockholders' equity		54,120,639							51,484,688							56,369,835							52,823,048
Total liabilities and stockholders' equity	$	703,721,804						$	489,806,949						$	710,547,663						$	678,426,876

Net interest income			$	5,588,188						$	3,870,403						$	6,009,285						$	5,620,949

Interest rate spread						3.24	%						3.03	%						3.47	%						3.29	%

Net yield on interest-earning assets						3.36	%						3.28	%						3.56	%						3.43	%

Ratio of average interest-earning assets to
Average interest-bearing liabilities						127.36	%						133.51	%
Ratio of average interest-earning assets to Average interest-bearing liabilities																				128.76	%						128.69	%

(1) Nonaccrual loans are included in the average balance.

(2) Interest on tax-exempt securities and other tax-exempt investments are reported on fully taxable equivalent basis based upon tax rates of 21% for Federal and 8.25% for State.

Noninterest Income

Noninterest income for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$548,556,~~$495,807, compared to ~~$608,226~~$556,945 for the same period of ~~2020,~~2021, a decrease of ~~$59,670,~~$61,138, or ~~9.8%~~11.0%. The decrease was primarily a result of a ~~$109,444~~$133,579 decrease in mortgage banking income ~~and~~as a $63,635 decrease in the gain on sale of SBA loans, offset by a $39,711 increase in bank owned life insurance income and a $58,825 increase in service charge revenue as ATM usage and other bank services returned to normal levels compared to the beginning of the pandemic in 2020. The decrease in mortgage banking income is the result of residential refinance activity declining ~~from the all-time high levels at the beginning of the pandemic~~due to rising interest rates, offset by a $93,600 increase in the ~~second quarter~~gain on the sale of ~~2020 when the Federal Reserve reduced interest rates to historic lows.~~

SBA loans.

4743

Noninterest Expense

Noninterest expense for the three months ended ~~June 30, 2021~~March 31, 2022 totaled ~~$3,509,133,~~$3,799,598 compared to ~~$2,862,003~~$3,395,124 for the same period of ~~2020,~~2021, an increase of ~~$647,130,~~$404,474, or ~~22.6%~~11.91%. The increase was due primarily to increases in salaries and benefits of ~~$627,141, in occupancy, furniture and equipment of $77,801,~~$152,961 and in other expenses of ~~$107,284, offset by~~$255,366. Salaries and benefits increased due to normal and usual annual salary increases that are effective January 1 of each year as well as an increase in full-time equivalents. The other expense increase was due to a ~~decrease~~$241,809 increase in ~~costs incurred related to the acquisition of Carroll of $165,096. The increases are all~~professional fees as a result of ~~the employees, locations, and customers added from the acquisition of Carroll.~~recruitment fees paid to fill several positions.

Income Tax Expense

Income tax expense for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$569,725,~~$609,496, compared to ~~$230,571~~$585,701 for the same period of ~~2020.~~2021. The effective tax rate was ~~21.9%~~22.9% for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~18.2%~~22.4% for the same period of 2020. The increase in income tax expense was due primarily to higher income before income taxes and a lower percentage of tax exempt revenue for the three months ended June 30, 2021 when compared to the same period in 2020.2021.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk is interest rate fluctuation and we have procedures in place to evaluate and mitigate this risk. This market risk and our procedures are described in Item 7 of Part II the on Form 10-K under the heading, “Interest Rate Risk”, which provides information as of December 31, ~~2020.~~2021. Management believes that no material changes in market risk or our procedures used to evaluate and mitigate these risks have occurred since December 31, ~~2020.~~2021.

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, 2021~~March 31, 2022 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the quarter ended ~~June 30, 2021,~~March 31, 2022, 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 and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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~~101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data ~~Files pursuant to Rule 405 of Regulation S-T (filed herewith)~~File because its XBRL tags are embedded within the Inline XBRL document).

101.SCH	Inline XBRL Taxonomy Extension Schema Document.

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

~~Cover Page Interactive Data File (embedded~~

The cover page of Farmers and Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted in Inline XBRL, included within the ~~Inline XBRL and contained in~~ Exhibit ~~101)~~101 attachments (filed herewith).

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 ~~MERCHANS~~MERCHANTS BANCSHARES, INC.




Date: ~~August 16, 2021~~May 13, 2022		/s/ James R. Bosley, Jr.
		James R. Bosley, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)


~~Date: August 16, 2021~~Date May 13, 2022		/s/ Mark C. Krebs
		Mark C. Krebs
		Treasurer and Chief Financial Officer
		(Principal Financial Officer & Principal Accounting Officer)

5046

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

	~~Page~~

PART I – FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Consolidated balance sheets at ~~June 30, 2021~~ March 31, 2022(unaudited) and December 31, ~~2020~~2021	3

Consolidated statements of income (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022and 2021 ~~and 2020~~	4

Consolidated statements of comprehensive (loss) income (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022and 2021 ~~and 2020~~	5

Consolidated statements of changes in stockholders’ equity (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022and 2021 ~~and 2020~~	6

Consolidated statements of cash flows (unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2022and 2021 ~~and 2020~~	7

Notes to financial statements (unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4844

Item 4. Controls and Procedures	4844

PART II – OTHER INFORMATION	4945

Item 1. Legal Proceedings	4945

Item 1A. Risk Factors	4945

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4945

Item 3. Defaults upon Senior Securities	4945

Item 4. Mine Safety Disclosures	4945

Item 5. Other Information	4945

Item 6. Exhibits	4945
SIGNATURES
~~SIGNATURES~~	5046

		June 30,			December 31,			March 31,			December 31,
		2021			2020			2022			2021*
		(Unaudited)						(Unaudited)
*Assets*	*Assets*						*Assets*

Cash and due from banks		$	31,687,027		$	39,898,557		$	26,506,362		$	25,258,932
Federal funds sold and other interest-bearing deposits			769,123			1,077,113			632,831			1,203,174
Cash and cash equivalents			32,456,150			40,975,670			27,139,193			26,462,106
Certificates of deposit in other banks			350,000			850,000			350,000			350,000
Securities available for sale, at fair value			98,251,607			54,477,286			145,716,435			149,237,916
Securities held to maturity, at cost			21,401,599			23,078,519			21,343,559			21,851,975
Equity security at fair value			547,914			552,566			518,091			543,605
Restricted stock, at cost			675,169			900,500			695,000			675,400
Mortgage loans held for sale			1,317,820			1,673,350			285,000			126,500
Loans, less allowance for loan losses of $3,404,168 and $3,296,538			517,356,334			521,690,514
Loans, less allowance for loan losses of $3,654,318 and $3,650,268									483,908,857			482,011,334
Premises and equipment, net			6,304,771			7,736,556			6,268,709			6,259,421
Accrued interest receivable			1,777,967			2,057,491			1,562,014			1,609,063
Deferred income taxes, net			1,521,861			1,219,668			4,632,138			2,177,450
Other real estate owned			1,411,605			1,411,605
Other real estate owned, net									1,242,365			1,242,365
Bank owned life insurance			15,150,383			11,297,342			11,609,153			11,556,163
Goodwill and other intangibles			7,055,274			7,059,408
Goodwill and other intangibles, net									7,048,998			7,051,080
Other assets			1,908,201			2,336,607			5,604,129			5,522,877
		$	707,486,655		$	677,317,082		$	717,923,641		$	716,677,255

*Liabilities and Stockholders' Equity*	*Liabilities and Stockholders' Equity*						*Liabilities and Stockholders' Equity*

Deposits
Noninterest-bearing		$	126,712,827		$	103,155,113		$	132,629,508		$	124,175,615
Interest-bearing			485,417,230			470,246,434			501,151,145			502,239,055
Total deposits			612,130,057			573,401,547			633,780,653			626,414,670
Securities sold under repurchase agreements			13,686,564			24,753,972			4,083,707			5,414,026
Federal Home Loan Bank of Atlanta advances			5,000,000			5,000,000			5,000,000			5,000,000
Long-term debt, net of issuance costs			16,976,093			16,973,280			16,553,090			16,978,905
Accrued interest payable			154,780			409,622			276,573			295,910
Other liabilities			5,123,819			5,049,178			6,023,131			5,952,286
			653,071,313			625,587,599			665,717,154			660,055,797
Stockholders' equity
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,023,487 in 2021 and 3,011,255 in 2020			30,235			30,113
Common stock, par value $.01 per share, authorized 5,000,000 shares; issued and outstanding 3,037,137 in 2022 and 2021									30,372			30,372
Additional paid-in capital			28,557,249			28,294,139			28,857,422			28,857,422
Retained earnings			25,917,571			22,698,954			31,179,402			29,128,600
Accumulated other comprehensive (loss) income			(89,713	)		706,277
Accumulated other comprehensive loss									(7,860,709	)		(1,394,936	)
			54,415,342			51,729,483			52,206,487			56,621,458
		$	707,486,655		$	677,317,082		$	717,923,641		$	716,677,255

	Three months ended
	March 31,
	2022			2021

Interest income
Loans, including fees	$	5,683,362		$	5,984,657
Investment securities - taxable		644,461			211,224
Investment securities - tax exempt		149,487			160,574
Federal funds sold and other interest earning assets		12,415			14,137
Total interest income		6,489,725			6,370,592

Interest expense
Deposits		338,560			595,520
Securities sold under repurchase agreements		3,251			13,511
Federal Home Loan Bank advances and other borrowings		183,825			188,106
Total interest expense		525,636			797,137
Net interest income		5,964,089			5,573,455

Provision for loan losses		0			120,000

Net interest income after provision for loan losses		5,964,089			5,453,455

Noninterest income
Service charges on deposit accounts		181,466			159,191
Mortgage banking income		122,688			256,267
Bank owned life insurance income		52,990			70,119
Fair value adjustment on equity security		(26,817	)		(8,669	)
Gain on sale of SBA loans		93,600			0
Gain on premium call of debt security		0			8,569
Other fees and commissions		71,880			71,468
Total noninterest income		495,807			556,945

Noninterest expense
Salaries		1,740,395			1,626,338
Employee benefits		511,792			472,888
Occupancy		228,427			250,212
Furniture and equipment		214,615			196,683
Other		1,104,369			849,003
Total noninterest expense		3,799,598			3,395,124

Income before income taxes		2,660,298			2,615,276
Income taxes		609,496			585,701
Net income	$	2,050,802		$	2,029,575

Earnings per share - basic and diluted	$	0.68		$	0.67

	Three months ended					Six months ended
	June 30,					June 30,
	2021			2020		2021			2020

Interest income
Loans, including fees	$	5,783,660		$	4,393,267	$	11,768,317		$	8,715,921
Investment securities - taxable		329,731			191,255		540,955			401,761
Investment securities - tax exempt		152,412			154,699		312,986			298,783
Federal funds sold and other interest earning assets		15,308			16,007		29,445			48,799
Total interest income		6,281,111			4,755,228		12,651,703			9,465,264

Interest expense
Deposits		533,437			832,464		1,128,957			1,738,663
Securities sold under repurchase agreements		14,972			39,496		28,483			77,690
Federal Home Loan Bank advances and other borrowings		190,181			12,865		378,287			12,974
Total interest expense		738,590			884,825		1,535,727			1,829,327
Net interest income		5,542,521			3,870,403		11,115,976			7,635,937

(Recovery of) provision for loan losses		(20,000	)		350,000		100,000			475,000

Net interest income after (recovery of) provision for loan losses		5,562,521			3,520,403		11,015,976			7,160,937

Noninterest income
Service charges on deposit accounts		176,483			117,658		335,674			276,213
Mortgage banking income		240,666			350,110		496,933			412,367
Bank owned life insurance income		82,922			43,211		153,041			85,223
Gain on sale of premises and equipment		0			0		37,613			0
Fair value adjustment on equity security		511			4,535		(8,158	)		13,045
Gain on sale of SBA loans		0			63,635		0			63,635
Gain on premium call of debt security		0			0		8,569			0
Other fees and commissions		47,974			29,077		81,829			59,745
Total noninterest income		548,556			608,226		1,105,501			910,228

Noninterest expense
Salaries		1,844,736			1,296,278		3,471,074			2,651,197
Employee benefits		438,133			359,450		911,021			806,554
Occupancy		245,318			185,394		495,530			368,546
Furniture and equipment		183,689			165,812		380,372			326,261
Acquisition		0			165,096		0			344,920
Other		797,257			689,973		1,646,260			1,310,838
Total noninterest expense		3,509,133			2,862,003		6,904,257			5,808,316

Income before income taxes		2,601,944			1,266,626		5,217,220			2,262,849
Income taxes		569,725			230,571		1,155,426			383,487
Net income	$	2,032,219		$	1,036,055	$	4,061,794		$	1,879,362

Earnings per share - basic and diluted	$	0.67		$	0.35	$	1.35		$	0.63

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

	~~For quarterly period ended June 30, 2021~~

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	~~For the transition period from _______________ to ________________~~

					Additional					Accumulated other			Total
	Common stock				paid-in		Retained			comprehensive			stockholders'
	Shares		Par value		capital		earnings			income (loss)			equity
Three months ended June 30, 2020
Balance, March 31, 2020		2,974,019	$	29,740	$	27,812,991	$	22,411,468		$	167,795		$	50,421,994

Net income		-		0		0		1,036,055			0			1,036,055
Other comprehensive income		-		0		0		0			640,125			640,125
Cash dividends, $0.26 per share		-		0		0		(773,464	)		0			(773,464	)
Dividends reinvested		17,944		180		241,167		0			0			241,347

Balance, June 30, 2020		2,991,963	$	29,920	$	28,054,158	$	22,674,059		$	807,920		$	51,566,057

Six months ended June 30, 2020
Balance, December 31, 2019		2,974,019	$	29,740	$	27,812,991	$	21,568,161		$	42,624		$	49,453,516

Net income		-		0		0		1,879,362			0			1,879,362
Other comprehensive income		-		0		0		0			765,296			765,296
Cash dividends, $0.26 per share		-		0		0		(773,464	)		0			(773,464	)
Dividends reinvested		17,944		180		241,167		0			0			241,347

Balance, June 30, 2020		2,991,963	$	29,920	$	28,054,158	$	22,674,059		$	807,920		$	51,566,057

Three months ended June 30, 2021
Balance, March 31, 2021		3,011,255	$	30,113	$	28,294,139	$	24,728,529		$	60,631		$	53,113,412

Net income		-		0		0		2,032,219			0			2,032,219
Other comprehensive loss		-		0		0		0			(150,344	)		(150,344	)
Cash dividends, $0.28 per share		-		0		0		(843,177	)		0			(843,177	)
Dividends reinvested		12,232		122		263,110		0			0			263,232

Balance, June 30, 2021		3,023,487	$	30,235	$	28,557,249	$	25,917,571		$	(89,713	)	$	54,415,342

Six months ended June 30, 2021
Balance, December 31, 2020		3,011,255	$	30,113	$	28,294,139	$	22,698,954		$	706,277		$	51,729,483

Net income		-		0		0		4,061,794			0			4,061,794
Other comprehensive loss		-		0		0		0			(795,990	)		(795,990	)
Cash dividends, $0.28 per share		-		0		0		(843,177	)		0			(843,177	)
Dividends reinvested		12,232		122		263,110		0			0			263,232

Balance, June 30, 2021		3,023,487	$	30,235	$	28,557,249	$	25,917,571		$	(89,713	)	$	54,415,342

Six Months Ended June 30,	2021			2020

Cash flows from operating activities
Interest received	$	13,180,690		$	9,404,760
Fees and commissions received		914,436			748,326
Interest paid		(1,931,141	)		(1,866,535	)
Proceeds from sale of mortgage loans held for sale		24,664,376			21,655,071
Origination of mortgage loans held for sale		(24,308,846	)		(22,887,047	)
Cash paid to suppliers and employees		(6,385,841	)		(5,413,489	)
Income taxes paid, net of refunds received		(650,000	)		0
		5,483,674			1,641,086

Cash flows from investing activities
Proceeds from maturity and call of securities
Available for sale		17,250,486			6,711,028
Held to maturity		2,078,569			500,000
Purchase of securities
Available for sale		(62,471,145	)		(19,890,543	)
Held to maturity		(342,062	)		(3,065,625	)
Purchases of certificates of deposit		500,000			(1,500,000	)
Loans made to customers, net of principal collected		3,981,211			(26,132,027	)
Proceeds from sale of loans		0			683,885
Redemption(purchase) of stock in FHLB of Atlanta		225,331			(235,100	)
Purchase of bank owned life insurance		(3,700,000	)		0
Proceeds from sale of premises and equipment		1,359,613			0
Purchases of premises, equipment and software		(113,873	)		(148,898	)
		(41,231,870	)		(43,077,280	)

Cash flows from financing activities
Net increase (decrease) in
Noninterest-bearing deposits		23,557,714			25,292,071
Interest-bearing deposits		15,318,315			29,255,715
Securities sold under repurchase agreements		(11,067,408	)		292,803
Federal Home Loan Bank of Atlanta advances		0			5,000,000
Dividends paid, net of reinvestments		(579,945	)		(532,117	)

		27,228,676			59,308,472

Net increase in cash and cash equivalents		(8,519,520	)		17,872,278

Cash and cash equivalents at beginning of period		40,975,670			9,121,352
Cash and cash equivalents at end of period	$	32,456,150		$	26,993,630

Three Months Ended March 31,	2022			2021

Reconciliation of net income to net cash provided by operating activities
Net income	$	2,050,802		$	2,029,575
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		116,110			117,030
Provision for loan losses		0			120,000
Amortization of right of use asset and lease liability, net		2,177			0
Lease expense in excess of rent paid		0			7,780
Equity security dividends reinvested		(1,303	)		(1,816	)
Unrealized loss on equity security		26,817			8,669
Gain on sale of SBA loans		(93,600	)		0
Gain on sale of premises and equipment		0			(37,613	)
Gain on premium call of debt security		0			(8,569	)
Amortization of debt issuance costs		1,406			1,407
Amortization of premiums and accretion of discounts, net		(212,443	)		69,559
Bank owned life insurance cash surrender value		(52,990	)		(70,119	)
Increase (decrease) in
Deferred loan fees and costs, net		(112,930	)		410,480
Accrued interest payable		(19,337	)		(51,661	)
Other liabilities		106,030			27,154
Decrease (increase) in
Mortgage loans held for sale		(158,500	)		(9,350	)
Accrued interest receivable		47,049			174,062
Other assets		(127,624	)		337,252
Cash provided by operating activities	$	1,571,664		$	3,123,840

	2021

Balance at December 31, 2020	$	2,250,232
Acquired during the year		0
Accretion		409,056
Adjustments		0
Balance at June 30, 2021	$	1,841,176

						Minimum					To Be Well										Minimum					To Be Well
(Dollars in thousands)	Actual					Capital Adequacy					Capitalized					Actual					Capital Adequacy					Capitalized
December 31, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2021																Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)	$	63,400		12.62	%	$	52,732		10.50	%	$	50,221		10.00	%	$	69,957		13.24	%	$	55,471		10.50	%	$	52,830		10.00	%
Tier 1 capital (to risk-weighted assets)		60,104		11.97	%		42,688		8.50	%		40,177		8.00	%		66,307		12.55	%		44,905		8.50	%		42,264		8.00	%
Common equity tier 1 (to risk- weighted assets)		60,104		11.97	%		35,155		7.00	%		32,644		6.50	%		66,307		12.55	%		36,981		7.00	%		34,339		6.50	%
Tier 1 leverage (to average assets)		60,104		9.05	%		26,569		4.00	%		33,211		5.00	%		66,307		9.27	%		28,614		4.00	%		35,767		5.00	%

	Carrying Value:								Carrying Value:

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
June 30, 2021
March 31, 2022

Recurring
Recurring:
Available for sale securities
State and municipal	$	0	$	770,977	$	0	$	770,977	$	0	$	747,363	$	0	$	747,363
SBA pools		0		1,657,088		0		1,657,088		0		1,279,835		0		1,279,835
Corporate bonds		0		8,074,586		0		8,074,586		0		10,628,077		0		10,628,077
Mortgage-backed securities		0		87,748,956		0		87,748,956		0		133,061,160		0		133,061,160
	$	0	$	98,251,607	$	0	$	98,251,607	$	0	$	145,716,435	$	0	$	145,716,435

Equity security at fair value
Mutual fund	$	547,914	$	0	$	0	$	547,914	$	518,091	$	0	$	0	$	518,091

Nonrecurring
Other real estate owned	$	0	$	0	$	1,411,605	$	1,411,605
Nonrecurring:
Other real estate owned, net									$	0	$	0	$	1,242,365	$	1,242,365
Impaired loans										0		0	$	373,500	$	373,500

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30				June 30				March 31,
	2021		2020		2021		2020		2022		2021

Net income	$	2,032,219	$	1,036,055	$	4,061,794	$	1,879,362	$	2,050,802	$	2,029,575
Weighted average shares outstanding		3,011,927		2,975,005		3,011,593		2,974,512		3,037,137		3,011,255
Earnings per share - basic and diluted	$	0.67	$	0.35	$	1.35	$	0.63	$	0.68	$	0.67