Farmers & Merchants Bancshares, Inc. (FMFG) stock intrinsic value fair value estimate & owner earnings analysis

Farmers and Merchants Bancshares is the holding company for Farmers and Merchants Bank, a community bank serving Baltimore County and Carroll County in northern Maryland. Its shares trade over the counter under the symbol FMFG. It takes local deposits, lends against commercial real estate, construction, residential and business loans (its loan book grew by $50.2 million in 2025), and holds a securities portfolio of about $140 million. It also owns a small captive insurance subsidiary that insured the bank itself; the bank stopped renewing that coverage in November 2022. How we measured earnings. We start from cash generated by operations and remove swings in accrued interest, other assets and liabilities, and mortgage loans held for sale, then subtract stock compensation and the equipment and software spending needed to keep the bank running. Growth in loans and deposits is not treated as an expense. Per share, that gives $1.70 (2018), $1.61 (2019), $1.26 (2020), $2.74 (2021), $2.32 (2022), $1.59 (2023), $0.80 (2024) and $1.90 (2025). We judged the level from 2022 through 2025, whose median is about $1.75 per share. We used these four years because they come after the 2020 acquisition of Carroll Bancorp changed the size of the business and include both the strong 2022 and the weak 2024, when funding costs squeezed earnings. Adding 2021 would have lifted the median to $1.90. As a check, we rebuilt cash earnings from net income, depreciation and the bank's many non-cash items. The two agree once non-cash income such as accretion on securities and the increase in the value of bank-owned life insurance is taken out, since those items raise reported profit but do not bring in cash. Base case: $32.07 per share. Earnings of about $1.75 per share grow 1.5% a year for ten years, then stay flat. The 1.5% is at or below what the bank has actually delivered (owner earnings per share rose from $1.70 in 2018 to $1.90 in 2025, about 1.6% a year), and the bank retains most of its profit (about $1.3 million of dividends paid against $5.8 million of 2025 net income). Last year's actual growth was very large (0.80 to 1.90) because 2024 was depressed, so we do not extend it; we start from the multi-year level instead. We assume the bank's deposit franchise keeps earning at that level afterward and credit no share gains, no new markets and no margin improvement. The IRS has disagreed with the bank's tax treatment of its captive insurance subsidiary for 2016, 2017 and 2018, and the bank has appealed. We deduct about $0.63 per share for the roughly $2.0 million of taxes, interest and penalties the bank says it could owe if the appeal fails. No reserve has been recorded for it. Bear case: $12.20 per share. Earnings fall to the 2024 low of about $0.80 per share and never grow. Named pressures behind this: funding costs are high (about $17.7 million of interest paid in 2025), $57.7 million was borrowed from the Federal Home Loan Bank of Atlanta in 2025, and $12.5 million of 7.875% subordinated notes were issued in September 2025. The bank held three non-accrual commercial real estate loans totaling $2.4 million at the end of 2024, and took a $270 thousand write-down on foreclosed property in 2025, with $1.7 million of foreclosed property still held. We also deduct about $1.13 per share for roughly $3.6 million in total exposure: the $2.0 million above plus approximately $1.6 million the bank estimates it could owe if the IRS also prevails on the 2019 through 2021 returns, which it has selected for audit. Bull case: $43.82 per share. Earnings return to about $2.32 per share, the 2022 level, and grow 1.6% a year for ten years, then stay flat. The evidence is that first-half 2026 diluted earnings were $1.14 per share versus $0.74 in the first half of 2025, that the bank ended 2025 with no non-accrual loans, and that 2022 already reached this level. The IRS appeal is assumed to succeed. What could make this wrong. A single commercial real estate loan problem or a further rise in deposit costs could cut earnings. Part of the tax exposure is unreserved. Our earnings series covers 2018 through 2025 only. Bank earnings are estimated from cash flows, and provisions for credit losses are added back, so an unexpected credit cycle would hit results harder than our cases assume.