Farmers Merchants Bancshares Inc

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To the Stockholders and Board of Directors

Hampstead, Maryland

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Farmers and Merchants Bancshares, Inc. and its Subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Adoption of New Accounting Standard

As discussed in Notes 1 and 5 to the financial statements, the Company has changed its method of accounting for the allowance for credit losses in 2023 due to the adoption of ASU 2016-13,Financial Instruments–* Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments*, including all related amendments.

Basis for Opinion

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

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

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

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses–** Loans Collectively Evaluated for Losses**

As described in Note 1 – Summary of Significant Accounting Policies and Note 5 – Loans and Allowance for Credit Losses to the consolidated financial statements, the Company changed its method of accounting for credit losses on January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended. The allowance for credit losses on loans (ACLL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms. Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions. The Company’s ACLL related to collectively evaluated loans made up $3.9 million of the total recorded ACLL of $4.3 million as of December 31, 2023. The collectively evaluated ACLL consists of quantitative and qualitative components.

The quantitative component consists of loss estimates derived from an average charge off or loss rate methodology using primarily internal observations of historical loan losses adjusted for estimated prepayment and forecasts of future conditions over a reasonable and supportable period. These estimates consider large amounts of data in tabulating loss and prepayment rates and require complex calculations as well as management judgment in the selection of appropriate inputs.

In addition to the quantitative component, the collectively evaluated ACLL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. Factors considered by management in developing its qualitative estimates include: economic conditions, concentrations of credit, interest rates, ability of staff, loan review, trends in loan quality, policy changes and changes in the nature and/or volume of loans.

Management exercised significant judgment when estimating the ACLL on collectively evaluated loans. We identified the estimation of the collectively evaluated ACLL as a critical audit matter as auditing the collectively evaluated ACLL involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

The primary audit procedures we performed to address this critical audit matter included:

/s/YOUNT, HYDE & BARBOUR, P.C.

We have served as the Company's auditor since 2021.

Richmond, Virginia

March 11, 2024

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

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

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

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Consolidated Statements of Changes in Stockholders’ Equity

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

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

Principles of consolidation

The consolidated financial statements include the accounts of Farmers and Merchants Bancshares, Inc. and its wholly owned subsidiaries, Farmers and Merchants Bank (the “Bank”), and Series Protected Cell FCB-4 (the “Insurance Subsidiary”), andone subsidiary of the Bank, Reliable Community Financial Services, Inc. (collectively the “Company”, “we”, “us”, or “our”). The Insurance Subsidiary is a series investment,100% owned by the Company, in First Community Bankers Insurance Co., LLC, a Tennessee “series” limited liability company and licensed property and casualty insurance company. Intercompany balances and transactions, including insurance premiums paid by the Bank that were received by the Insurance Subsidiary through an intermediary, have been eliminated.

The Bank provides banking services to individuals and businesses located in Baltimore County, Maryland, Carroll County, Maryland and surrounding areas of northern Maryland. The Insurance Subsidiary is a captive insurance entity that provides insurance coverage for the Bank. The Bank chose tonot renew coverage effective on* November 7, 2022,but maydo so in the future, The Insurance Subsidiary is still responsible for claims for events that occurred prior to November 7, 2022.*Reliable Community Financial Services, Inc. is licensed to provide a wide range of investment and insurance products to its customers but is inactive.

On* October 1, 2020,*Farmers and Merchants Bancshares, Inc. acquired Carroll Bancorp, Inc. (“Carroll”) and the Bank acquired Carroll’s wholly-owned subsidiary, Carroll Community Bank, in a series of merger transactions (collectively, the “Merger”). As a result of the Merger, Carroll was merged with and into Farmers and Merchants Bancshares, Inc., with Farmers and Merchants Bancshares, Inc. as the surviving corporation, and Carroll Community Bank merged with and into the Bank, with the Bank as the surviving bank. The Merger was intended to constitute a tax-free reorganization for federal income tax purposes.

Reclassifications

Certain reclassifications have been made to the2022 financial statements to conform to the current year presentation. These reclassifications hadno effect on net income or stockholders’ equity.

Cash and cash equivalents

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

Comprehensive (loss) income

Comprehensive (loss) income includes net income and the unrealized gains or losses on investment securities available for sale and derivative financial instruments, net of income taxes.

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Investment securities

As debt securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities that management has the intent and ability to hold to maturity are recorded at amortized cost, which is cost adjusted for amortization of premiums and accretion of discounts. Discounts are accreted through maturity. Premiums are amortized through the earliest call date. Securities held to meet liquidity needs or that* may*be sold before maturity are classified as available for sale and carriedat fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis. Gains and losses on disposal are determined using the specific-identification method. The Company amortizes premiums and accretes discounts using the interest method. Declines in the fair value of individual available-for-sale securities below their amortized cost due to credit-related factors are recognized as an allowance for credit losses. Credit-related factors affecting the determination of whether impairment has occurred include a downgrading of the security below investment grade by a rating agency or due to potential default, a significant deterioration in the financial condition of the issuer, increase in entity-specific credit spreads. Additionally, on any available-for-sale securities with unrealized losses, the Company evaluates its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Equity security at fair value

The Company owns a mutual fund that is measured at fair value with changes in fair value recognized in noninterest income.

Restricted stock, at cost

Restricted stock consists of Federal Home Loan Bank of Atlanta (the “FHLB”) stock, Community Bankers Bank (“CBB”) stock, and Atlantic Community Bankers Bank (“ACBB”) stock. As a member of the FHLB, the Bank is required to purchase FHLB stock in an amount that is based on the Bank’s total assets. Additional stock is purchased and redeemed based on the outstanding FHLB advances to the Bank. CBB and ACBB require its correspondent banking institutions to hold stock as a condition of membership. The restricted investment in bank stocks is carried at cost. On a quarterly basis, management evaluates the bank stocks for impairment based on assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history, and impact of legislative and regulatory changes.

Loans and allowance for credit losses

Loans are stated at the current amount of unpaid principal, adjusted for deferred origination costs, deferred origination fees, premiums and discounts on acquired loans, and the allowance for credit 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* maymake an exception to reporting a loan as past due, if the past due status is solely due to the loan being past maturity, the Company intends to extend the loan, and the borrower is making principal and interest payments in accordance with the terms of the matured note. The accrual of interest is discontinued when any portion of the principal or interest is90* days past due and collateral is insufficient to discharge the debt in full. If collection of principal is evaluated as doubtful, all payments are applied to principal. Loans are individually evaluated when, based on current information, management considers it unlikely that the collection of principal and interest payments will be made according to contractual terms when due. Generally, loans arenot reviewed for impairment until the accrual of interest has been discontinued, the loans are included on the watch list, or the loans are experiencing financial difficulties.

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As further discussed below, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)2016-13, “Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments,” on* January 1, 2023.FASB Accounting Standards Codification (“ASC”) Topic326* replaced the previous “incurred loss” model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. In connection with the adoption of ASC Topic326, we revised certain accounting policies and implemented certain accounting policy elections. Results for reporting periods beginning after* January 1, 2023will be presented under ASC Topic326,* while periods prior to* January 1, 2023*will be reported in accordance with generally accepted accounting practices in the United States (“GAAP”) applicable for the time period. The revised accounting policies are described below.

Allowance for Credit Losses - Held-to-Maturity Securities: The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account, calculated in accordance with ASC Topic326, which is deducted from the amortized cost basis of held-to-maturity securities to present management’s best estimate of the net amount expected to be collected. Held-to-maturity securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity securities from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on held-to-maturity securities is presented in Note3 – Investment Securities.

Allowance For Credit Losses - Available-for-Sale Securities: For available-for-sale securities in an unrealized loss position, wefirst assess whether (i) we intend to sell the security or (ii) it is more likely thannot that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security’s amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that hasnot been recorded through an allowance for credit losses is recognized in other comprehensive (loss) income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. Prior to the adoption of ASU2016-13, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to* January 1, 2023,*management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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Allowance for Credit Losses - Loans: The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC Topic326, which is deducted from the amortized cost basis of loans to present management’s best estimate of the net amount expected to be collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries donot exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

The amount of the allowance represents management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a loan to an individual borrower that is experiencing financial difficulty will be modified or (ii) such extension or renewal options arenot unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information* maybe made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that donot* share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure isnot probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Portions of the allowance* may*be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, and historical/expected credit loss patterns. For modeling purposes, our loan pools include (i) commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction/land development, (iv) residential – multifamily, (v) residential – single family (vi) residential – single family home equity, (vii) commercial and industrial (viii) consumer and other. We periodically reassess each pool to ensure that the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

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1. Summary of Significant Accounting Policies (continued)

The average charge-off method calculates an estimate of losses based upon past experience, which is applied prospectively across the life of each loan. This method allows for analysis and calculation on a note-by-note basis due to the CECL model calculating future cash flows at the individual note level based upon note characteristics. A forward balance is calculated from each note’s prior period balance, less monthly principal paydown and prepayment amount.

The Company utilizes its own loss data as the source for its historical loss calculations within the CECL model, where appropriate. This information is sourced from call report data and spans back to an effective start date of* March 31, 2000.Loss data will continuously be uploaded into the model across subsequent periods, with results alwaysone* quarter in arrears. Utilization of loss rates across this length of time helps to incorporate results recognized across the full economic cycle and smooth periods of economic recession and recovery. The Company* maydeviate from utilization of its own loss rates on an as-needed basis when said loss rates have historically been non-existent. The Company mayalso deviate from its existing loss rates when said rates areno* longer indicative of the current portfolio composition/quality, such as historical rates impacted by losses resulting from purchased loan portfolios which have since matured or been divested. In these events, the Company will utilize aggregate loss rates recognized from banks of comparable asset size throughout the state of Maryland, incurred across the same period,* March 31, 2000*to present.

The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Significant loan/borrower attributes utilized in our modeling processes include, among other things, (i) origination date, (ii) maturity date, (iii) payment type, (iv) collateral type and amount, (v) current risk grade, (vi) current unpaid balance, (vii) payment status/delinquency history and (viii) expected recoveries of previously charged-off amounts.

Management qualitatively adjusts model results for risk factors that arenot considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor (“Q-Factor”) and other qualitative adjustments* mayincrease or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that maybe considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) any concentrations of credit, (ii) local and national economic and business conditions, (iii) changes in the nature and volume of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified loans, (vi) our credit review function, (vii) changes in lending policies and procedures and, (viii) other factors such as rising interest rates. Management also adjusts model results using a forecast of unemployment and Gross Domestic Product (“GDP”) comparted to the actual unemployment and GDP during the historical loan loss period used in the model. This adjustment is referred to the forward look adjustment. It reverts back to historical losses afterthree* months.

In some cases, management* may*determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures: The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC Topic326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit.No allowance is recognized if we have the unconditional right to cancel the obligation. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Significant loan/borrower attributes utilized in our modeling processes include, among other things, (i) commitment utilization rate, and (ii) collateral type and amount. The allowance is reported as a component of other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of credit loss expense.

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1. Summary of Significant Accounting Policies (continued)

Derivative Financial Instruments: At the inception of a derivative contract, the Company designates the derivative asone ofthree types based on the Company’s intentions and belief as to likely effectiveness as a hedge. Thesethree types are (i) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (ii) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), and (iii) an instrument withno hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income (loss) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivativesnot designated or that donot qualify for hedge accounting are reported currently in earnings, as non-interest income.

Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Accrued settlements on derivativesnot designated or that donot qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

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The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative isno longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction isno longer probable, a hedged firm commitment isno longer firm, or treatment of the derivative as a hedge isno longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability isno longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business.

The Company’s derivative financial instruments are described more fully in Note14.

**Stock-based Compensation:**The Company recognizes in the income statement the grant date fair value of stock awards, restricted stock and restricted stock units. The fair value related to forfeitures of stock awards, restricted stock and restricted stock units are recorded to the income statement as they occur, reducing stock-based compensation expense in that period. The Company classifies stock-based compensation as either an equity award or a liability award. Equity classified awards are valued as of the grant date using either an observable market price or a valuation methodology. Liability classified awards are valued at fair value at each reporting date. For the periods presented, all of the Company’s stock awards, restricted stock, and restricted stock units are classified as equity awards.

During thethird quarter of2023, the Company granted stock awards under the Farmers and Merchants Bancshares, Inc.2023 Equity Compensation Plan (the “Plan). Each share of common stock subject to such awards is valued at the fair market value of such share (as defined in the Plan”) as of the grant date. Outstanding restricted stock units vest inone-third increments on the anniversary date of the grant. Compensation expense is recognized on a straight-line basis over the requisite vesting period for the entire award.

The Company’s stock-based compensation is described more fully in Note16.

Mortgage loans held for sale and mortgage banking income

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

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The Company sells its mortgage loans tothird party investors with servicing released. Upon sale and delivery, loans are legally isolated from the Company and the Company hasno ability to restrict or constrain the ability ofthird party investors to pledge or exchange the mortgage loans. The Company doesnot have the entitlement or ability to repurchase the mortgage loans or unilaterally causethird party investors to put the mortgage loans back to the Company.

Premises and equipment

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

Other real estate owned

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

Bank owned life insurance

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

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 isnot amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual evaluation if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible asset, core deposit intangible (“CDI”) has a finite life and is amortized over10 years on a straight line basis, which is believed to be substantially the same as the interest method.

Revenue recognition

ASC Topic606 doesnot apply to revenue associated with the financial instruments, including revenue from loans and securities. The Company’s services that fall within the scope of Topic606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. A description of the Company’s noninterest revenue streams is discussed below:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for overdraft, monthly service fees, and other deposit account related fees. Overdraft fees are recognized when the overdraft occurs. The Company’s performance obligation for monthly service fees is generally satisfied over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Interchange Income: The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services. The Company’s analysis of its relationship with its interchange debit card provider is agent based.

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As a result, income from debit cardholder transactions is presented net against expenses paid to the interchange debit card provider in service charges on deposit accounts on the consolidated statements of income.

Other Service Charges and Fees: The Company earns fees from its customers for transaction-based services. Services include, safe deposit box, debit/ATM card income, cashier’s check, stop payment and wire transfer fees. In each case, these fees and service charges are recognized in income at the time or within the same period that the services are rendered.

Operating leases

The Company accounts for lease obligations in accordance with ASU2016-02, “Leases (Topic842).” Among other things, in the amendments in ASU2016-02, lessees are required to recognize the following for all leases (with the exception of qualifying short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company has determined it hasno financing or sales type leases as of the balance sheet date.

Advertising costs

Advertising costs are expensed in the period incurred and totaled $270,308** and $258,032 for the years ended December 31, 2023and2022, respectively.

Income taxes

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

A tax position is recognized as a benefit only if it is “more likely thannot” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than50% likely of being realized on examination. For tax positionsnot meeting the “more likely thannot” test,no tax benefit is recorded.

Earnings per share

Earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, giving retroactive effect to any stock dividends. The following table shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock hasno effect on income available to common shareholders. There were 3,000 restricted stock units included in weighted average dilutive shares for the year ended* December 31, 2023as the shares were dilutive. There wereno common stock equivalents outstanding at December 31, 2022.*

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Recent accounting pronouncements

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

The following accounting guidance has been approved by the FASB and would apply to the Company if the Company entered into an applicable activity.

In* November 2023,the FASB issued ASU2023*-07, “Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (CODM), an amount for other segments items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at leastone of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic280. This ASU is effective for fiscal years beginning after* December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024.Early adoption is permitted. The amendments should be applied retrospectively. The Company doesnot* expect the adoption of ASU2023-07 to have a material impact on its consolidated financial statements.

In* December 2023,the FASB issued ASU2023*-09, “Income Taxes (Topic740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater thanfive percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater thanfive percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after* December 15, 2024.Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company doesnot* expect the adoption of ASU2023-09 to have a material impact on its consolidated financial statements.

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Recently Adopted Accounting Developments

During* June 2016,FASB issued ASU2016*-13, “Financial Instruments – Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments”. The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. The Company adopted ASU2016-13 as of* January 1, 2023.*The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and held-to-maturity securities, as well as an adjustment to the Company’s reserve for unfunded loan commitments, was $569,346. The adjustment net of tax recorded to stockholders’ equity totaled $243,494.

In* March 2022,FASB issued ASU2022*-02, “Financial Instruments-Credit Losses (Topic326), Troubled Debt Restructurings and Vintage Disclosures.” ASU2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU2016-13) 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 were applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructurings an entity had the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU2022-02 was effective for the Company on* January 1, 2023,and it didnot* have a material impact on the Company’s consolidated financial statements.

In* March 2022,FASB issued ASU2022*-01, “Derivatives and Hedging (Topic815), Fair Value Hedging - Portfolio Layer Method.” ASU2022-01 clarifies the guidance in ASC Topic815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In2017, FASB issued ASU2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets orone or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that isnot expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU2022-01 renames that method as the “portfolio layer method”. ASU2022-01 was effective for the Company on* January 1, 2023.*

Management believes that the accounting policies adopted by management are consistent with authoritative GAAP and are consistent with those followed by our peers.

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The Company normally carries balances with other banks that exceed the federally insured limit. The average balance carried in excess of the limit, including unsecured federal funds sold to the same banks, was $**1,050,354 and $11,945,635 during the years ended December 31, 2023and2022, respectively.

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

Banks are required to carry noninterest-bearing cash reserves of specified percentages of deposit balances. The Company’s normal balances of cash on hand and on deposit with other banks are sufficient to satisfy the reserve requirements. The FRB reserve requirement was*$0* at* December 31, 2023and2022.*

Debt securities are summarized as follows:

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

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

Historical loss rates associated with securities having similar grades as those in our portfolio have generallynot been significant. Furthermore, as of* December 31, 2023,there wereno* past due principal or interest payments associated with these securities andnone are on nonaccrual.

The following table details activity in the allowance for credit losses on held-to-maturity securities for the year ended* December 31, 2023:*

Available for sale securities accrued interest receivable totaled $418,549 and $310,324 and held to maturity securities accrued interest receivable totaled $121,670 and $122,874 as of* December 31, 2023and2022,* respectively. Both are grouped in accrued interest receivable on the balance sheet.

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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.

Securities with a carrying value of**$50,371,861 and $24,258,980 as of December 31, 2023and2022, respectively, were pledged as collateral for securities sold under repurchase agreements and other collateralized deposits.

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

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Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company should receive full value for the securities. As of* December 31, 2023,management didnot* have the intent to sell any of the securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased as well as other market conditions for each particular security based upon the structure and remaining principal balance. The fair values of the investment securities are expected to recover as the securities approach their maturity dates or repricing dates or if market yields for such investments decline. Based on the these factors, as of* December 31, 2023,*management believes the unrealized losses detailed in the table above are temporary and, accordingly,none of these unrealized losses have been recognized in the Company’s consolidated statement of income.

There wereno security sales in2023 or2022.

Certain executive officers and directors of the Company, including members of their immediate families and related companies were indebted to the Company during2023 and2022. The loans were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers who arenot related to the Company. During the years ended* December 31, 2023and2022,* the activity of these loans was as follows:

Unused lines of credit to related parties totaled**$58,000 and $208,100 at December 31, 2023and2022, respectively.

Letters of credit issued to related parties totaled $15,847 at* December 31, 2023and2022.*

Deposits at the Company from related parties totaled**$8,314,359 and $10,138,362 at December 31, 2023and2022, respectively.

Payments to companies controlled by directors totaled**$6,545 **in2023 and $54,624 in2022.

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Major categories of loans at* December 31, 2023and2022* are as follows:

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

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally donot exceed80%.

Construction and land development real estate loans carry risks that the project willnot be finished according to schedule, the project willnot be finished according to budget and the value of the collateral* may,at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who mayor may**not* be a loan customer,* maybe unable to finish the construction project as planned because of financial pressure unrelated to the project. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally donot* exceed80%.

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

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

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

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The following tables present the amortized cost basis of loans on nonaccrual status and loans past90 days or more still accruing as of* December 31, 2023and2022:*

The Company didnot recognize any interest income on nonaccrual loans during the year ended* December 31, 2023or the year ended December 31, 2022.*

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At* December 31, 2023,the Company hadone non-accrual commercial real estate loan totaling $502,961 andone non-accrual commercial loan totaling $152,449. The commercial loan was secured by business assets and a personal guaranty. Gross interest income of $45,856 would have been recorded in2023* if these non-accrual loans had been current and performing in accordance with the original terms. The Company allocated $450,000 of its allowance for credit losses to these non-accrual loans.

At* December 31, 2022,the Company hadone non-accrual commercial real estate loan totaling $502,961 andone non-accrual commercial loan totaling $152,449. The commercial loan was secured by business assets and a personal guaranty. Gross interest income of $45,856 would have been recorded in2022* if these non-accrual loans had been current and performing in accordance with the original terms. The Company allocated $281,910 of its allowance for credit losses to these non-accrual loans.

An age analysis of past due loans, segregated by class of loans, as of year-end, is as follows:

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

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Impaired loans, segregated by class of loans with average recorded investment and interest recognized for the year ended* December 31, 2022*are set forth in the following table:

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

The following table presents the amortized cost basis of loans at* December 31, 2023that were both experiencing financial difficulty and modified during the year ended December 31, 2023,by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of loans is also presented below. There wasone modification to a borrower experiencing financial difficulty during the year ended December 31, 2023.The term of the loan was extended bythree months. The loans wasnot* delinquent at* December 31, 2023and wasnot* in default.

Accrued interest receivable on loans totaled $1,539,332 and $1,373,078 at* December 31, 2023and2022,* respectively, and is included accrued interest receivable on the balance sheet.

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Credit Quality Indicators

As part of our portfolio risk management, the Company assigns a risk grade to each loan. The factors used to determine the grade are the payment history of the loan and the borrower, the value of the collateral and net worth of the guarantor, and cash flow projections of the borrower. Excellent, Above Average, Average and Acceptable grades are assigned to loans with limited orno delinquent payments and more than sufficient collateral and/or cash flow.

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

Special Mention

A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses* mayresult in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention loans arenot* adversely classified and donot expose the Bank to sufficient risk to warrant adverse classification. This classification is intended to be temporary while the Bank learns more about the condition of the borrower and the collateral.

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

Substandard

A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies arenot corrected.

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

Doubtful

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

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

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The following tables detail activity in the allowance for credit losses by portfolio for the years ended* December 31, 2023and2022.* Allocation of a portion of the allowance toone category of loans doesnot preclude its availability to absorb losses in other categories.

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Loans acquired from Carroll Community Bank in2020 were measured at fair value at the acquisition date withno carryover of any allowance for credit losses. The following table provides activity for the accretable credit discount of purchased loans:

During2022, accretion of $698,269 was recorded.

At* December 31, 2023,the nonaccretable difference on purchased credit impaired loans was $0, a decrease of $233,411 from December 31, 2022as a result of the adoption of ASU2016*-13 for credit losses. At* December 31, 2023,the remaining yield premium on purchased loans was $509,087. Yield premium amortization was $369,669 and $526,377 in2023* and2022, respectively. At* December 31, 2023,*the principal balance of purchased loans was $74,146,002 and the carrying value was $74,115,751.

The following table details activity in the allowance for credit losses on unfunded loan commitments:

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

Loans having an aggregate balance of approximately**$468.3 million were pledged as collateral to the FHLB as of December 31, 2023.Loans having an aggregate balance of approximately$59.7 million were pledged as collateral to the Federal Reserve Bank of Richmond (the “FRB”) as of December 31, 2023.At December 31, 2023and2022, the Company serviced participation loans for others totaling**$15.5 **and $13.5 million, respectively.

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

A summary of premises and equipment is as follows:

In* July 2022,*the Company’s Upperco, Maryland location incurred significant storm damage to the building and its contents. Insurance proceeds of $779,064 were received. Of that amount, $67,850 was used to repair the roof. The remainder, less the book value of the damaged portion of the building and contents of $37,732, resulted in a gain of $673,483.

Software with a net book value of**$66,375 and $90,927 as of December 31, 2023and2022, respectively, is included in other assets. Amortization expense of**$43,528 **and $36,550 was recorded in2023 and2022, respectively.

The Merger resulted in the recording of goodwill and CDI. The following table presents the changes in both assets:

The CDI is being amortized over 10 years on a straight-line basis. Annual amortization will be $8,328 per year and $6,246 in year10. Since the Merger was a tax-free reorganization, neither the goodwill nor CDI is deductible for income tax purposes. A goodwill impairment analysis is performed annually as of* September 30, 2023.*

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Lease Commitments

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

The following table shows operating lease right of use assets and operating lease liabilities as of* December 31, 2023:*

Operating lease cost included in occupancy expense in the statement of income was $**184,300 **during2023 and $188,909 during2022.

Future undiscounted lease payments for operating leases with initial terms ofone year or more as of* December 31, 2023*are as follows:

For operating leases as of* December 31, 2023,the weighted average remaining lease term is 5.57 years and the weighted average discount rate is 3.25%. During the years ended December 31, 2023and2022,* cash paid for amounts included in the measurement of lease liabilities was $190,866** **and $184,554, respectively.

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

Loan commitments and lines of credit are agreements to lend to a customer as long as there isno violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and* mayrequire payment of a fee. Lines of credit generally have variable interest rates. Such lines donot* 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 athird 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 isnot aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments.

Insurance Reserves

Until* November 6, 2022,through reinsurance and pooling arrangements, the Insurance Subsidiary insured risks of the Bank (primarily professional liability) that werenot* available in typical commercially available policies. In addition, the Insurance Subsidiary, asone protected cell of a protected cell captive insurance company, is responsible for a portion of all claims filed by the other captive insurance companies that participate in the pool in which the Insurance Subsidiary participates. The Company records liabilities for claims incurred butnot reported based on historical loss information and claim emergence patterns. Total liabilities related to Insurance Subsidiary claims at* December 31, 2023and2022* were**$332,364 *and $530,720, respectively, and are included in other liabilities in the Consolidated Balance Sheet. The Bank didnot renew the policy through the Insurance Subsidiary after the previous policy expired on November 6, 2022.The Bank may*renew the policy at a later date.

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The Company has a profit sharing plan qualifying under Section401(k) of the Internal Revenue Code. All employees age21 or more withsix months of service are eligible for participation in the plan. The Company matches employee contributions up to 4% of total compensation and* maymake additional discretionary contributions. Employee and employer contributions are 100% vested when made. The Company’s contributions to this plan were**$261,337 **and $256,251 for2023* and2022, respectively.

The Company has entered into agreements with**12 employees to provide certain life insurance benefits payable in connection with policies of life insurance on those employees that are owned by the Company. Each of the agreements provides for the amount of death insurance benefits to be paid to beneficiaries of the insured. Some of the policies provide benefits subsequent to the employee’s employment with the Company. For this plan, the Company expensed$7,337 **and $6,809 in2023 and2022, respectively.

The Company adopted supplemental executive retirement plans forfour of its executives. The plans provide cash compensation to the executive officers under certain circumstances, including a separation of service. The benefits vest over the period from adoption to a specified age for each executive. The Company recorded expenses, including interest, of**$165,751 **and $154,911 in2023 and2022, respectively, for these plans.

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

Major classifications of interest-bearing deposits are as follows:

As of* December 31, 2023,*certificates of deposit mature as follows:

In connection with the Merger, the Company recognized a certificate of deposit premium of $616,377, which is being accreted using the interest method based upon the maturity of each certificate of deposit. Accretion of $69,843 and $160,923 were recorded in2023 and2022, respectively.

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

On* September 30, 2020,Farmers and Merchants Bancshares, Inc. borrowed $17,000,000 from First Horizon Bank (“FHN”) to be used, on October 1, 2020,to fund a portion of the merger consideration paid in the Merger. Net of issuance costs of $28,126, the proceeds of the net long-term debt were $16,971,874. The loan matures on September 30, 2025.The interest rate on the loan is fixed at 4.10%. The Company made quarterly interest-only payments through October 1, 2021.During the remaining term of the loan, the Company is required to make quarterly interest and principal payments of approximately $646,472, which is based on anine*-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:

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The Company is approved to borrow approximately $60.5 million against eligible pledged single family residential loans, eligible pledged multi-family loans, eligible pledged commercial loans, and eligible pledged securities under a secured line of credit with the FHLB. In addition, the Company has a facility with the FRB whereby the Company can borrow up to $25.4 million. The Company also has available an unsecured federal funds line of credit of $14.5 million and a secured federal funds line of credit of $9 million from commercial banks.

The components of income tax expense are as follows:

The components of the deferred tax expense are as follows:

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

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

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

The Internal Revenue Service (the “IRS”) recently audited our fiscal year 2016, 2017 and2018 U.S. consolidated federal tax returns. As part of its audits, the IRS reviewed the deductions related to, and the income generated by, the Insurance Subsidiary. Following the completion of these audits, the IRS notified the Company that it disagrees with our tax treatment of the Insurance Subsidiary. The Company has appealed the determination, and management believes that it is more than likely that the Company will prevail in that appeal. If we donot prevail in our appeal to this decision, then we could be required to pay taxes, interest, and penalties totaling approximately $1.9 million as of* December 31, 2023for the tax years under appeal. In addition, the IRS is auditing our fiscal year 2019, 2020 and2021* U.S. consolidated federal tax returns. Although the IRS hasnot completed these audits, the IRS has notified the Company that it disagrees with our tax treatment of the Insurance Subsidiary. The Company plans to appeal the determination, and management believes that it is more than likely that the Company will prevail in that appeal. If we donot prevail in our appeal of this decision, then we* maybe required to amend the applicable tax return and pay additional taxes, interest, fines and/or penalties totaling approximately $1.5 million as of December 31, 2023for the tax years under audit. For allsix* years under audit, if we donot prevail, the total additional taxes, interest, fines and/or penalties would be approximately $3.4 million. In light of the foregoing, a reserve for uncertain tax positions hasnot been recorded.

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The Company doesnot have other material uncertain tax positions and didnot recognize any adjustments for unrecognized tax benefits. The Company remains subject to examination of income tax returns for the years ending after* December 31, 2020.*

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

The Basel III Capital Rules became effective for the Bank on* January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier1* capital, Tier1 capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier1 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 Tier1 capital. Common Equity Tier1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (i) a Common Equity Tier1 risk-based capital ratio of 6.5%; (ii) a Tier1 risk-based capital ratio of 8%; (iii) a total risk-based capital ratio of 10%; and (iv) a Tier1 leverage ratio of 5%.

The implementation of the capital conservation buffer began on* January 1, 2015,at the0.625%* level and was phased in over afour-year period (increasing by that amount on each subsequent* January 1,until it reached2.5%* 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 doesnot* have current applicability to the Bank.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier1 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.

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

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On* April 6, 2020,in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency issuedtwo* interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act. Under the interim final rules, the community bank leverage ratio was reduced to8% beginning in thesecond quarter and for the remainder of calendar year2020, 8.5% for calendar year2021, and9% thereafter. In order to qualify for the CBLR framework, a community banking organization must have a tier1 leverage ratio of greater than8%, less than*$10* billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and willnot be required to report or calculate risk-based capital. The Company hasnot opted-in to the CBLR framework.

The following table presents actual and required capital ratios as of* December 31, 2023and2022,* for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of* December 31, 2023and2022,* based on the provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

As of* December 31, 2023the most recent notification from the FDIC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain ratios as set forth in the table. There have beenno* conditions or events since that notification that management believes have changed the Bank’s category. Capital ratios of the Company are substantially the same as the Bank’s.

The FDIC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action. The following table presents actual and required capital ratios as of* December 31, 2023and2022,* for the Bank under the Basel III Capital Rules.

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The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps doesnot represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and other terms of the individual interest rate swap agreements.

Fair Value Hedges: Interest rate swaps with notional amounts totaling $59.8 million as of* December 31, 2023were designated as fair value last of layer hedges of certain government agency mortgage backed securities. There wereno* interest rate swaps prior to2023. The hedges were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps.

The following table presents the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges as of* December 31, 2023:*

The Company presents derivative positions gross on the balance sheet. The following table reflects the derivatives recorded on the balance sheet as of* December 31, 2023:*

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The effect of fair value hedge accounting on the statement of income for the year ended* December 31, 2023*is as follows:

In accordance with ASC Topic820, “Fair Value Measurements and Disclosure”, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there areno quoted market prices for the Company’s various financial instruments. In cases where quoted market prices arenot available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates* may**not* be realized in an immediate settlement of the instrument.

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

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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. Thethree levels of the fair value hierarchy under ASC Topic820 based on thesetwo types of inputs are as follows:

The fair value hierarchy is as follows:

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

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The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of* December 31, 2023and2022,* segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

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The following table provides information describing the unobservable inputs used in level3 fair value measurements at* December 31, 2023and2022:*

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The transfer to level2 occurred because quoted prices for similar assets or quoted prices in markets that arenot active was available for this bond at* December 31, 2023.*

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

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

The Company complies with the provisions of ASC Topic718, Compensation-Stock Compensation, in measuring and disclosing stock compensation cost. The measurement objective in ASC Paragraph718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

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

A summary of the Company’s restricted stock unit grant activity as of* December 31, 2023*is shown below:

The compensation cost charged to income in respect of awards granted under the Equity Plan was $42,788 for the year ended* December 31, 2023.As of December 31, 2023,*there was $49,912 of unrecognized compensation cost related to the unvested RSUs, which is expected to be recognized over a period of 33 months.

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

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In the ordinary course of its business, the Company is periodically party to various legal actions normally associated with a financial institution. Management doesnot believe that any of these normal course proceedings are likely to have a material adverse effect on the financial condition or liquidity of the Company.

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