10-K: Farmers & Merchants Bancshares Reports Strong 2025 Earnings

Farmers and Merchants Bancshares, Inc. reported a significant increase in net income for 2025, driven by higher net interest income and loan growth, despite a decrease in total deposits.

Summary

• Net income increased to $5.8 million in 2025 from $4.3 million in 2024, representing a $1.5 million increase.
• Total assets grew by 3.2% to $872.0 million at December 31, 2025, from $844.6 million in 2024.
• Loans increased by $50.2 million (8.6%) to $633.1 million at December 31, 2025, primarily in commercial real estate and construction/land development.
• Net interest income rose by $3.6 million to $24.4 million in 2025, driven by a 30 basis point increase in the yield on earning assets.
• Total deposits decreased by $38.3 million (5.1%) to $720.5 million at December 31, 2025, primarily due to an $88.5 million reduction in brokered CDs.
• The allowance for credit losses increased slightly to $4.4 million at December 31, 2025, from $4.3 million in 2024.
• Non-accrual loans were $0 at December 31, 2025, a significant reduction from $2.4 million at December 31, 2024.
• The Bank was well capitalized as of December 31, 2025, exceeding all minimum regulatory capital ratios.
• The company issued $12.5 million in 7.875% Fixed to Floating Rate Subordinated Notes due September 25, 2035, using proceeds to repay a $9.9 million Merger Loan.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this as a positive report, reflecting strong earnings growth, robust loan expansion, and excellent asset quality with zero non-accrual loans. However, the decline in total deposits and ongoing IRS audit risks temper the overall sentiment.

Positives

• Net income increased by $1.5 million (35%) year-over-year to $5.8 million in 2025.
• Net interest income increased by $3.6 million in 2025, driven by higher loan yields and growth.
• The loan portfolio experienced robust growth of $50.2 million (8.6%) in 2025.
• Non-accrual loans decreased significantly to $0 at December 31, 2025, from $2.4 million in 2024, indicating improved asset quality.
• The Bank maintains a 'well capitalized' status, exceeding all regulatory capital requirements.
• Stockholders' equity increased by $8.4 million (14.9%) to $64.7 million in 2025.
• Unrealized losses on available-for-sale securities decreased by $3.8 million after-tax.

Negatives

• Total deposits decreased by $38.3 million (5.1%) in 2025, largely due to an $88.5 million reduction in brokered CDs.
• FDIC insurance premiums increased by $187 thousand in 2025 due to higher assessment rates and brokered CDs.
• Noninterest expense increased by $1.4 million in 2025, primarily due to higher salaries, benefits, occupancy, and software maintenance costs.
• Investment securities decreased by $6.4 million (4.4%) in 2025 due to maturities and repayments.
• The company is undergoing IRS audits for tax years 2016-2018 and 2019-2021, with potential liabilities of approximately $3.6 million if appeals are unsuccessful regarding the Insurance Subsidiary's tax treatment.

Risks

• Future success depends on the successful growth of its subsidiaries, primarily the Bank.
• Could be adversely affected by risks associated with future acquisitions and expansions, including increased capital needs, new regulatory requirements, integration challenges, and potential liabilities.
• The majority of business is concentrated in Maryland, much of which involves real estate lending, making the company vulnerable to local economic and real estate market declines.
• High concentrations of commercial real estate (CRE) loans could subject the Bank to increased regulatory scrutiny and directives, potentially forcing capital preservation or limits on future CRE lending.
• The Bank may experience loan losses in excess of its allowance for credit losses, which would reduce earnings.
• Dependence on the accuracy and completeness of information about customers and counterparties, where inaccurate or misleading information could cause losses.
• Accounting estimates and risk management processes rely on analytical and forecasting models, the inadequacy of which could adversely affect financial condition.
• Interest rates and other economic conditions will impact results of operations, with potential for reduced net interest income from interest rate gaps.
• The market value of investment securities could decline, causing a corresponding decline in stockholders' equity.
• Impairment of deferred tax assets could require charges to earnings.
• Operates in a competitive environment, and inability to effectively compete could adversely impact financial condition.
• The banking industry is heavily regulated; significant regulatory changes could adversely affect operations and increase compliance costs.
• The Consumer Financial Protection Bureau (CFPB) may continue to reshape consumer financial laws, potentially increasing regulatory compliance burdens.
• Bank regulators may require higher capital levels, impacting the ability to pay dividends or repurchase stock.
• A material weakness or significant deficiency in disclosure or internal controls could have an adverse effect on the company's reputation and stock price.
• Customer concern about deposit insurance may cause a decrease in deposits held at the Bank.
• The Bank's funding sources may prove insufficient to replace deposits and support future growth, increasing the cost of funds.
• May need to raise additional capital in the future, which may not be available when needed or at all.
• Lending activities subject the Bank to the risk of environmental liabilities from foreclosed properties.
• May be subject to claims and the costs of defensive actions, which could materially impact financial condition.
• May not be able to keep pace with developments in technology, including AI and cloud technologies.
• Information systems may experience an interruption or a breach in security, including due to cyber-attacks or third-party vendor failures.
• May not achieve the expected benefits from the Insurance Subsidiary, including tax benefits, due to unanticipated events or changes in tax laws.
• Certain U.S. consolidated federal income tax returns (2016-2018, 2019-2021) are currently being audited by the IRS, with potential for significant tax liabilities, interest, and penalties if appeals are unsuccessful.
• Compliance with ever-evolving federal and state laws relating to handling of information about individuals (e.g., GLBA, TCPA, CAN-SPAM Act) involves significant expenditure and potential liability.
• Consumers may decide to not use banks to complete their financial transactions (disintermediation), leading to loss of fee income and deposits.
• The loss of key personnel could disrupt operations and result in reduced earnings.
• Ability to maintain reputation as a community bank is critical to success, and negative impacts could adversely affect business.
• Subject to risks from a proxy contest and/or the actions of activist stockholders, leading to costs, disruption, and potential loss of business opportunities.
• Ability to pay dividends on common stock is limited by applicable law and the terms of outstanding subordinated debentures.
• Shares of common stock are not insured by the FDIC or any other governmental or private agency.
• Common stock is not heavily traded, and the stock price may fluctuate significantly.
• The company's Articles of Incorporation and Bylaws and Maryland law may discourage a corporate takeover.
• The stockholder rights agreement could make it difficult for a person or group to acquire more than 11% of outstanding stock without significant dilution.

Future Outlook

The company expects to fund future growth primarily with cash, federal funds, maturities of investment securities, and deposit growth. Management is not aware of any trends or events likely to materially impact its ability to maintain liquidity at satisfactory levels over the next 12 months. The company also anticipates that its capital policy will continue to meet regulatory requirements and support future growth opportunities.

Management Comments

• Management believes that the $4.4 million reserve at December 31, 2025 is appropriate to adequately cover the expected losses in the loan portfolio.
• Management believes that this [local lending policy] 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.
• Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future liquidity requirements.
• Management knows of no other trend or event that will have a material impact on capital.
• Management, upon the advice of counsel, believes that losses, if any, resulting from current legal actions will not have a material adverse effect on our financial condition or results of operations.
• Management believes that all of its properties are adequately insured.
• Management believes that the accounting policies adopted by management are consistent with authoritative GAAP and are consistent with those followed by our peers.
• Management believes that it is more likely than not that the Company will prevail in its appeal regarding the IRS's determination on the tax treatment of the Insurance Subsidiary for 2016, 2017, and 2018.
• Management believes that the Insurance Subsidiary is the focus of these audits [2019, 2020, 2021], but that might not be the case. Management cannot predict whether any of the tax positions taken in our 2019, 2020 or 2021 returns will be challenged by the IRS or, if challenged, whether we will be successful in defending those tax positions.

Industry Context

StockSavvy.ai notes that the banking industry continues to face challenges from evolving regulatory landscapes, including the Dodd-Frank Act and Basel III Capital Rules, which necessitate robust capital management and compliance efforts. The increasing sophistication of cyber threats and the rise of alternative financial transaction methods (disintermediation) also present ongoing competitive and operational pressures. The company's focus on local market lending and community banking aligns with a strategy often employed by smaller institutions to differentiate against larger, more diversified competitors, though it also concentrates geographic risk.

Comparison to Industry Standards

• The Bank's 'well capitalized' status, with a Total Capital Ratio of 12.32%, Tier 1 Capital Ratio of 11.65%, CET1 Ratio of 11.65%, and Tier 1 Leverage Ratio of 9.38% as of December 31, 2025, indicates strong capital health compared to the minimum regulatory thresholds (10%, 8%, 6.5%, and 5% respectively). This positions the company favorably against global benchmarks for financial stability.
• The significant reduction in non-accrual loans to 0.00% at year-end 2025 from 0.41% in 2024 suggests superior asset quality management compared to many regional banks that may still be managing lingering non-performing assets.
• The increase in net interest income and loan growth, coupled with a decrease in the cost of interest-bearing liabilities, demonstrates effective interest rate risk management, potentially outperforming peers struggling with rising funding costs.
• The decline in total deposits, particularly brokered CDs, while offset by other deposit categories, warrants monitoring as deposit stability is a key metric for community banks, and some peers may show stronger organic deposit growth.

Corporate Governance

Legal Proceedings

• The company is periodically subject to various legal actions in the ordinary course of business.
• Management believes that losses, if any, from current legal actions will not have a material adverse effect on financial condition or results of operations.

Related Party Transactions

• Loans to executive officers, directors, and their immediate families/related companies totaled $9.441 million at December 31, 2025, down from $10.460 million in 2024. These loans were made on comparable terms to non-related borrowers.
• Unused lines of credit to related parties totaled $558.0 thousand at December 31, 2025 and 2024.
• Letters of credit issued to related parties totaled $15.8 thousand at December 31, 2025 and 2024.
• Deposits from related parties totaled $11.0 million at December 31, 2025, up from $7.1 million in 2024.
• Payments for goods and services to companies controlled by directors totaled $12.1 thousand in 2025, down from $22.6 thousand in 2024.

Stakeholder Impact

• Shareholders: Positive impact from increased net income and stockholders' equity, but potential dilution from future capital raises and anti-takeover provisions may limit shareholder influence. Ongoing IRS audit risks could impact future earnings and stock price.
• Employees: Increased salaries and benefits in 2025 due to additional staff, indicating positive employment conditions. Stock-based compensation plans offer incentives.
• Customers: Continued provision of a wide range of personal and commercial banking services, including mobile banking and surcharge-free ATM access. However, potential for deposit withdrawals due to concerns about deposit insurance could impact service availability or pricing.
• Creditors: The issuance of Subordinated Notes strengthens the company's capital structure, potentially improving creditworthiness. However, the notes are subordinated to existing and future Senior Indebtedness.
• Regulators: The company maintains 'well capitalized' status and actively manages compliance with various banking and insurance regulations, indicating a cooperative relationship. Ongoing IRS audits represent a point of contention.

Next Steps

• The remaining one-third of restricted stock units will vest on September 22, 2026, provided the grantee is employed and in good standing.
• The company will continue to monitor and manage cybersecurity risks through its program, including annual risk assessments and vendor management reviews.
• The company plans to appeal the IRS's determination regarding the tax treatment of its Insurance Subsidiary for tax years 2016-2018 and potentially for 2019-2021.
• The Subordinated Notes will transition from a fixed interest rate to a floating interest rate (Three-Month Term SOFR plus 458 basis points) on September 26, 2030.
• The company may redeem the Subordinated Notes, in whole or in part, on or after September 26, 2030, on any Interest Payment Date, subject to regulatory approvals.

Key Dates

Recommendation

The company demonstrated strong financial performance in 2025 with significant net income growth, robust loan expansion, and excellent asset quality, evidenced by zero non-accrual loans. Its 'well capitalized' status provides a solid foundation. However, the notable decline in total deposits, particularly brokered CDs, and the ongoing IRS audits with potential multi-million dollar liabilities introduce uncertainty. While the positives are compelling, these headwinds suggest a 'hold' recommendation until there is greater clarity on deposit trends and the resolution of the tax disputes.

Keywords

Farmers and Merchants Bancshares, FMFG, banking, financial services, Maryland bank, commercial real estate loans, deposits, net interest income, SEC filing, 10-K, bank holding company, subordinated notes, capital adequacy, credit risk, cybersecurity, IRS audit, stockholder rights plan, community bank