Opening Doors for Generations
FARMERS BANK
Annual Report 2013
C O U R T E O U S | P R O M P T | R E L I A B L E | S E C U R E
The accompanying notes are an integral part of these consolidated financial statements.
1
Our Mission
It is the mission of Farmers Bank to
be unique and distinct from all other
financial institutions, set apart by
excelling in the following areas:
To offer a superior level of service that is
responsive, courteous, cooperative and
professional.
To remain an independent financial institution
close to the people of Isle of Wight County,
Southampton County, the City of Suffolk and
the surrounding communities, being sensitive to
their financial needs and designing and offering
products to specifically meet those needs.
To be good corporate citizens, serving as leaders
to strengthen our communities and promote
their welfare.
To employ men and women who are loyal to the
bank and committed to our direction, policies
and goals.
To bring our shareholders a fair rate of return on
their investments.
2
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
1
Dear Shareholder,
During the past several years your Board of Directors, Management and
Staff were committed to making Farmers Bank healthier, stronger and well
positioned for the future. We accomplished this goal by concentrating on
credit quality and working diligently to lower classified and non-earning
assets. During 2012 we deleveraged our balance sheet of low yielding
investments that were offset with high costs deposits and borrowings.
We are pleased to inform you that these strategies were effective and have
increased your shareholder value through improved core earnings during
2013. Net income, excluding extraordinary items surpassed those in 2012
by $400,000 or seventeen percent. While loan growth was essentially flat,
problem loans were replaced with higher quality credits. Average non-
interest bearing deposits grew almost sixteen percent, helping to lower our
cost of funds. As many financial institutions have experienced tighter net
interest margins, ours has expanded by almost thirty basis points through
actions taken at the end of 2012 and into 2013.
As previously disclosed in our letter to shareholders earlier this year, all
outstanding preferred stock to the U.S. Treasury’s Capital Purchase Program
was repaid on December 31, 2013. This repayment and the approximately
$11 million in capital notes issued at the holding company level has
positioned us for growth and expansion in 2014 and beyond.
As your Board of Directors and Management shift our focus to strategic
planning for the future we are eager and motivated. We have a management
team that is dedicated to customer service and technology going forward.
We will strive to offer products and services that are convenient, useful and
dependable. We have been opening doors for generations through long
term customer relationships within our communities and understand that
the Bank is successful when our customers are successful. Our Board of
Directors, Management and Staff are active and invested in the communities
in which we serve and are driven to promote and encourage our customers.
Kindly accept my sincere thanks for your loyalty and continued support of
Farmers Bank. Your core business, involvement in our service communities
and promotion of the bank provide a base for stability and growth. You, our
owners, are an asset that we do not take for granted and again we express
our deep appreciation.
Sincerely,
Richard J. Holland Jr.
Chairman and Chief Executive Officer
Farmers Bank
is healthier,
stronger and
well positioned
for the future.
Board of Directors
Richard J. Holland, Jr.
Chairman
William A. Gwaltney, Jr.
Vice Chairman
Indika Farms, Inc., President
G. Thomas Alphin, Jr.
Commonwealth Gin,
Co-Owner
Harold U. Blythe
Retired Bank CEO
William L. Chorey
Chorey & Associates Realty, Ltd.,
Owner/Broker
E. Dana Dickens, III
Hampton Roads Partnership,
Retired President & CEO
David T. Owen
Wakefield Farm Service, Inc.,
President
Peter D. Pruden, III
Taste Unlimited, Co-Owner
William H. Riddick, III
Attorney at Law - Smithfield
Kent B. Spain
Suffolk Insurance Corporation,
Executive Vice President
O. A. Spady
Retired Entrepreneur
Executive Management
Richard J. Holland, Jr.
Chairman of the Board &
Chief Executive Officer
Vernon M. Towler
President &
Chief Lending Officer
Patricia T. Allen
Senior Vice President,
Director of Loan Administration
Kathy C. Bryant
Senior Vice President,
Director of Human Resources
Norman F. Carr, Jr.
Senior Vice President,
Smithfield Market
Kristy E. DeJarnette
Senior Vice President,
Chief Financial Officer
Shirley B. Robinson
Executive Secretary
Bank Officers
William N. Bailey
Vice President, Information Technology
Lauren P. Harper
Vice President, Loans
Elizabeth D. Jones
Vice President, Loans
Clayton N. Minter
Vice President, Chief Credit Officer
William D. Pollard, Jr.
Vice President, Loans
Chad A. Rountree
Vice President, Windsor Market
H. Hadley Whitlock, Jr.
Vice President, Loans
Susan B. Williamson
Vice President, Compliance
Thomas L. Woodward, III
Vice President, Suffolk Market
Andrea B. Curry
Assistant Vice President, Operations
Kelly D. Dewitt
BSA, AML, OFAC & Security Officer
Blanche E. Hecker
Assistant Vice President, Retail
Joanne F. Joyner
Assistant Vice President, Retail
Erin W. Park
Assistant Vice President, Controller
Suffolk Community Board
Pictured left to right:
Timothy K. Palmer
Attorney at Law & Certified Public Accountant
Christie New Craig
Vice Chairman of the Chesapeake School Board and Chief of Staff for Delegate John Cosgrove
Alison Dodson Anderson
Owner, A. Dodson’s
David E. Russell (Chairman)
President, Tile & Terrazzo, LLC
Not Pictured:
James C. Adams, III
President, Featherlite Coaches
Financial Highlights
At or for the Years Ended December 31,
2013
2012
2011
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income taxes
Net income
Per Share and Shares Outstanding (1)
Basic net income
Book value at end of period
Basic weighted average shares outstanding
Shares outstanding at period end
Balance Sheet Data
Total assets
Total loans, net
Total deposits
Borrowings
Selected Performance Ratios
Return on average assets
Return on average stockholders’ equity
Net interest margin (2)
Non-interest income as a percentage of total revenue (3)
Efficiency ratio (4)
Asset Quality Ratios
Nonperforming loans to period-end loans
Allowance for loan losses to period-end loans
Net charge-offs to average loans outstanding
Capital (Bank Only)
Tier 1 leverage ratio
Total risk-based capital ratio
Stockholder’s equity
(Dollars in thousands, except per share data)
$15,909
3,182
12,727
(500)
13,227
1,337
10,150
4,414
1,098
$3,316
$4.66
$54.06
607,357
608,020
$412,162
221,843
343,350
20,000
0.85%
8.30%
3.53%
9.50%
69.16%
2.45%
3.22%
0.23%
10.37%
18.40%
$43,104
$17,371
4,900
12,471
0
12,471
3,381
10,811
5,041
1,310
$3,731
$5.22
$55.85
605,821
607,366
$19,618
6,655
12,963
3,965
8,998
2,793
10,336
1,455
239
$1,216
$1.11
$43.67
605,399
606,658
$392,343
220,402
325,680
20,000
$423,729
223,422
341,713
40,000
0.89%
9.00%
3.26%
21.33%
70.89%
2.13%
3.68%
0.17%
0.27%
3.30%
3.06%
17.72%
69.38%
2.71%
3.80%
2.17%
9.55%
17.51%
$42,992
8.09%
15.89%
$39,290
(1) Computed based on the weighted average number of shares outstanding during each period.
(2) Net interest margin is net interest income divided by average interest earning assets.
(3) Total revenue consists of net interest income and non-interest income.
(4) Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income.
Net Interest Margin
Return on Assets
Tier 1 Leverage Ratio
2011
2012
2013
2011
2012
2013
2011
2012
2013
2.8% 2.9% 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.6%
0.00% 0.25% 0.50% 0.75% 1.00%
0.00% 4.00% 8.00% 12.00%
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2013 and 2012
Contents
Independent Auditors’ Report .........................................................................................................................
Consolidated Balance Sheets ...........................................................................................................................
Consolidated Statements of Operations ..........................................................................................................
Page
2
3
4
Consolidated Statements of Comprehensive Income………………………………………………………………………. .. 5
Consolidated Statements of Changes in Stockholders' Equity .......................................................................
6
Consolidated Statements of Cash Flows .........................................................................................................
7 - 8
Notes to Consolidated Financial Statements ..................................................................................................
9 - 44
Independent Auditors’ Report
To the Board of Directors and Shareholders
Farmers Bankshares, Inc.
Windsor, Virginia
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc. which comprise the
consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to
the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Farmers Bankshares, Inc., as of December 31, 2013 and 2012, and the results of their operations
and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United
States of America.
Charlotte, North Carolina
February 20, 2014
Farmers Bankshares, Inc.
Consolidated Balance Sheets
December 31,
2013
2012
Assets
Cash and cash equivalents
Cash and due from banks
Federal Funds sold
Total cash and cash equivalents
Available-for-sale securities (Note 3)
Loans, net of allowance for loan losses
of $7,381,066 and $8,423,052, respectively (Note 4)
Premises and equipment, net (Note 5)
Other real estate owned
Accrued interest
Prepaid expenses
Income taxes receivable
Net deferred tax asset
Non-marketable equity securities (Note 6)
Bank-owned life insurance
Other assets
$
20,986,999
10,523,685
31,510,684
$
15,001,762
4,448,861
19,450,623
140,293,318
135,547,857
221,842,775
5,038,166
1,788,798
1,796,866
388,920
213,466
1,056,385
2,256,089
5,844,964
131,718
380,651,465
220,402,341
4,749,080
1,178,212
1,831,195
674,806
346,296
-
2,506,839
5,608,421
47,657
372,892,704
Total assets
$
412,162,149
$
392,343,327
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing deposits
Interest-bearing deposits (Note 7)
Total deposits
Federal Home Loan Bank borrowings (Note 9)
Capital notes (Note 8)
Securities sold under agreements to repurchase (Note 9)
Deferred compensation plans
Net deferred tax liability
Other liabilities
Accrued interest
Total liabilities
Stockholders' equity
Non-cummulative perpetual preferred stock (Series A),
no par value, 8,752 shares authorized, issued and outstanding
at December 31, 2012
Non-cummulative perpetual preferred stock (Series B),
no par value, 438 shares authorized, issued and outstanding
at December 31, 2012
Common stock, $0.625 par value; 10,000,000 shares
authorized; 608,020 and 607,336 shares issued and
outstanding at December 31, 2013 and 2012, including
nonvested shares of -0- and 420 shares, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
$
71,039,645
272,310,842
343,350,487
20,000,000
11,253,475
2,595,776
971,455
-
886,085
234,354
379,291,632
-
-
380,015
2,695,613
28,853,472
941,417
32,870,517
$
57,260,973
268,419,434
325,680,407
20,000,000
-
1,747,780
753,184
261,546
582,382
325,585
349,350,884
8,632,556
457,271
379,323
2,652,804
26,360,240
4,510,249
42,992,443
Total liabilities and stockholders' equity
$
412,162,149
$
392,343,327
The accompanying notes are an integral part of these consolidated financial statements.
3
3
The accompanying notes are an integral part of these consolidated financial statements.
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Interest income
Interest and fees on loans
Interest on available-for-sale securities
Interest on tax exempt available-for-sale securities
Interest on federal funds sold
Other interest income
Total interest and dividend income
Interest expense
Interest on deposits
Interest on Federal Home Loan Bank advances
Interest on repurchase agreements
Interest on federal funds purchased
Total interest expense
Net interest income
Provision (recovery) for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges
Gain on disposition of securities
Gain on sale of premises and equipment
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Equipment expense
Occupancy expense
Bank franchise tax
Advertising and marketing
Data processing
Loan related legal and other expenses
Federal Deposit Insurance Corporation assessment
Loss on sale and write-downs of other real estate owned
Prepayment penalty on borrowings
Other
Total noninterest expense
Income before income taxes
Income tax expense (Note 11)
Net income
Preferred stock dividend and accretion of discount
Net income attributable to common shareholders
Basic earnings per common share (Note 18)
Diluted earnings per common share
Cash dividends declared per common share
Years Ended December 31,
2013
2012
$
12,103,930
2,559,424
1,163,005
22,270
60,225
15,908,854
$
13,112,991
3,096,712
1,086,221
11,067
64,402
17,371,393
2,690,428
485,607
5,366
469
3,181,870
12,726,984
(500,000)
13,226,984
345,983
109,232
-
881,539
1,336,754
5,421,728
657,278
594,080
381,498
381,409
772,958
169,653
291,640
120,919
-
1,358,861
10,150,024
4,413,714
1,097,970
3,849,221
1,042,622
4,073
3,914
4,899,830
12,471,563
-
12,471,563
349,856
1,367,954
842,513
820,634
3,380,957
5,028,703
675,422
526,765
320,857
298,086
790,131
350,808
338,193
574,623
557,523
1,349,860
10,810,971
5,041,549
1,310,234
3,315,744
488,399
2,827,345
$
$
$
$
4.66
4.66
0.55
3,731,315
570,257
3,161,058
$
$
$
$
5.22
5.22
0.52
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
4
4
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for-sale securities
Tax effect
Unrealized holding gains (losses) on available-for-sale securities,
net of tax amount
Reclassification adjustment for realized gains
Tax effect
Reclassification adjustment for realized gains, net of tax amount
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Years Ended December 31,
2013
2012
$
3,315,744
$
3,731,315
(5,298,090)
1,801,351
2,464,244
(837,843)
(3,496,739)
1,626,401
(109,232)
37,139
(72,093)
(3,568,832)
(253,088)
$
(1,367,954)
465,104
(902,850)
723,551
4,454,866
$
5
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
5
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Changes in Stockholders' Equity
Balances, December 31, 2011
Preferred
Preferred
Stock
Stock
Series A
Series A
$
8,520,487
Preferred
Preferred
Stock
Stock
Series B
Series B
476,103
$
Common
Stock
Common
Stock
378,636
$
Capital
Surplus
Retained
Earnings
Capital
Surplus
$
$
2,613,991
23,514,208
$
3,786,698
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
$
Total
39,290,123
$
8,520,487
-
$
476,103
-
$
378,636
-
$
2,613,991
-
$
3,731,315
23,514,208
$
3,786,698
3,731,315
Balances, December 31, 2011
Balances, December 31, 2012
Net income
Changes in net unrealized gain on securities available for
Net income
sale, net of reclassification adjustment and tax effect
Changes in net unrealized gain on securities available for
Issuance of common stock - stock compensation plan
sale, net of reclassification adjustment and tax effect
Issuance of common stock - director stock plan
Preferred stock net accretion, (amortization) and costs
Issuance of common stock - stock compensation plan
Cash dividends declared on preferred shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.52 per share
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on preferred shares
Cash dividends declared on common shares, $0.52 per share
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Balances, December 31, 2012
Net income
Issuance of common stock - stock compensation plan
Changes in net unrealized gain on securities available for
Issuance of common stock - director stock plan
sale, net of reclassification adjustment and tax effect
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on preferred shares
Repurchase of perferred stock
Cash dividends declared on common shares, $0.55 per share
Issuance of common stock - stock compensation plan
Balances, December 31, 2013
Issuance of common stock - director stock plan
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on preferred shares
Cash dividends declared on common shares, $0.55 per share
Balances, December 31, 2013
-
-
-
-
-
-
-
112,069
-
-
112,069
8,632,556
-
-
-
-
-
-
-
-
(18,832)
-
-
-
-
(18,832)
457,271
-
-
-
-
263
424
-
-
-
379,323
-
-
-
263
424
-
-
-
-
14,737
24,076
-
-
-
2,652,804
-
-
-
-
-
(93,237)
(477,020)
(315,026)
26,360,240
-
14,737
24,076
-
-
-
3,315,744
8,632,556
-
(8,752,400)
-
-
-
-
119,844
(8,752,400)
-
-
-
$
-
-
119,844
-
-
$
-
457,271
-
(437,600)
-
-
-
-
(19,671)
-
(437,600)
-
$
-
-
-
(19,671)
-
-
$
-
-
379,323
-
-
263
429
-
-
-
-
-
263
$
429
-
-
-
-
2,652,804
-
-
14,738
28,071
-
-
-
-
-
14,738
$
28,071
-
-
-
(100,173)
(388,226)
(334,113)
28,853,472
-
-
-
$
-
(100,173)
(388,226)
(334,113)
28,853,472
$
$
380,015
2,695,613
941,417
$
380,015
$
2,695,613
$
941,417
3,731,315
723,551
-
-
-
(93,237)
(477,020)
(315,026)
26,360,240
3,315,744
4,510,249
(3,568,832)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
39,290,123
3,731,315
723,551
15,000
24,500
(477,020)
(315,026)
42,992,443
3,315,744
(3,568,832)
(9,190,000)
15,001
28,500
-
-
(388,226)
(334,113)
32,870,517
$
-
723,551
15,000
723,551
24,500
-
-
(477,020)
-
(315,026)
-
42,992,443
-
-
3,315,744
4,510,249
(3,568,832)
(9,190,000)
-
15,001
28,500
(3,568,832)
-
$
(388,226)
-
(334,113)
-
32,870,517
-
-
-
-
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
6
6
The accompanying notes are an integral part of these consolidated financial statements.
6
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation
Provision (recovery) for loan losses
Provision for deferred income taxes
Amortization of investment securities premiums
Net gain on disposition of available-for-sale securities
Loss on sales and writedowns on other real estate owned
Capitalization of costs associated with other real estate owned
Gain on sale of premises and equipment
Increase in cash value of bank owned life insurance
Compensation expense for stock issuance
Director expense for stock issuance
Change in operating assets and liabilities
Interest receivable
Interest payable
Prepaid expenses
Income taxes receivable
Other assets
Deferred compensation
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sales, prepayments and maturities of
available-for-sale securities
Purchase of available-for-sale securities
Proceeds from sale of non-marketable equity securities
Purchase of non-marketable equity securities
Proceeds from sale of other real estate owned
Loan originations, net of repayments
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities
Cash dividends paid on preferred shares
Cash dividends paid on common shares
Repurchase of perferred stock
Proceeds from issuance of capital notes
Proceeds from FHLB borrowings
Repayment of FHLB borrowings
Change in noninterest-bearing deposits
Change in interest-bearing deposits
Change in securities sold under agreements to repurchase
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Years Ended December 31,
2013
2012
$
3,315,744
$
3,731,315
448,786
(500,000)
520,557
1,239,767
(109,232)
120,919
(16,801)
-
(236,543)
15,001
28,500
34,329
(91,231)
285,886
132,830
(3,061)
218,271
133,457
5,537,179
26,300,963
(37,584,280)
254,200
(3,450)
614,297
(2,350,434)
-
(737,872)
(13,506,576)
(388,226)
(163,867)
(9,190,000)
11,253,475
5,000,000
(5,000,000)
13,778,672
3,891,408
847,996
20,029,458
12,060,061
438,944
-
406,105
1,846,775
(1,367,954)
574,623
-
(842,513)
(210,442)
15,000
24,500
163,749
(310,515)
235,678
209,127
419,957
112,196
69,183
5,515,728
58,506,561
(21,471,125)
947,200
(4,800)
1,302,938
2,301,638
1,009,886
(364,492)
42,227,806
(477,020)
(315,026)
-
-
-
(20,000,000)
6,837,359
(22,870,054)
812,268
(36,012,473)
11,731,061
19,450,623
7,719,562
$
31,510,684
$
19,450,623
The accompanying notes are an integral part of these consolidated financial statements.
7
7
The accompanying notes are an integral part of these consolidated financial statements.
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flow (concluded)
Supplemental disclosure of cash flow information
Cash paid for
Income taxes
Interest on deposits and other borrowings
Supplemental schedule of non-cash investing activities
Change in unrealized gains on available-for-sale securities,
net of income tax
Transfer of loans to other real estate owned
Contribution of other real estate owned
Years Ended December 31,
2013
2012
$
460,000
3,273,101
$
695,000
5,210,345
$
(3,568,832)
$
723,551
(1,410,000)
(81,000)
(781,166)
-
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
8
8
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 1 - Organization and nature of business
Farmers Bankshares, Inc. (the “Company”) was organized and incorporated under the laws of the Commonwealth of
Virginia on July 26, 2013. On December 31, 2013, the Company was consummated as the Bank Holding Company of
Farmers Bank, Windsor, Virginia (the “Bank”) through a reorganization plan, under the laws of the Commonwealth of
Virginia. As of this date, the Bank became a wholly-owned subsidiary of Farmers Bankshares, Inc. The Bank was formed
on November 12, 1919 and has offices in Windsor, Smithfield, Suffolk, and Courtland, Virginia. Through its banking
subsidiary the Company provides a wide variety of banking services primarily in southeastern Virginia.
The Bank provides small and mid-sized businesses, professionals, corporate executives and entrepreneurs with banking
services comparable to those of the large national and regional institutions. These services include loans that are priced on
a deposit-based relationship, direct access to the Bank's decision makers, and quick, innovative response to customers’
financial needs. If customers have credit requirements that exceed the Bank's credit limits, the Bank seeks to
accommodate those customers by arranging loans on a participation basis with other financial institutions.
Note 2 - Summary of significant accounting policies
Basis of presentation and consolidation - The consolidated financial statements of the Company are prepared in conformity
with accounting principles generally accepted in the United States of America. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, the Bank and FB Properties of Virginia, L.L.C.,
which owns certain Bank assets. All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and cash equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand,
amounts due from banks, interest-bearing deposits with banks and federal funds sold, all of which mature within 90 days
or less. The Company is required by the Federal Reserve to maintain average reserve balances. For the final quarterly
reporting period in 2013 and 2012, the aggregate amount of daily-required balances was $46,000 and $19,000,
respectively.
Investment securities - Investments in debt securities classified as held-to-maturity, if any, are stated at cost, adjusted for
amortization of premiums and accretion of discounts using the interest method. The Company held no such securities
during the periods reported in the financial statements.
Investments in debt securities classified as trading, if any, are stated at fair value. Such securities are purchased and held
principally for the purpose of selling them in the near term. Unrealized holding gains and losses for trading securities are
included in the statements of operations. The Company held no such securities during the periods reported on in the
financial statements.
Investments not classified as either held-to-maturity or trading are classified as available-for-sale. Debt securities classified
as available-for-sale are stated at fair value with unrealized holding gains and losses excluded from earnings and reported as
a component of accumulated other comprehensive income until realized. The income statement line items impacted by
the reclassification of realized gains (losses) on the sale of securities are the gains (losses) on sales of securities and income
tax expense line items in the income statement.
Gains and losses on the sale of securities are determined using the specific identification method and are recognized on a
trade date basis. Other than temporary declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost, if any, are included in earnings as realized losses.
9
9
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Investment securities (concluded) - In determining, whether other-than-temporary impairment exists, management
considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) if the Company expects to recover the amortized cost
basis in the security.
Loans - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan
portfolio is represented by commercial and consumer mortgage loans throughout Southeastern Virginia. The ability of the
Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity generally are stated
at their outstanding unpaid principal balances. Interest income is accrued on the unpaid principal balance for all loan
classes. Discounts and premiums are amortized to income using the interest method. Net deferred fees and costs are
amortized over the lives of the applicable loans using the effective interest rate method.
Allowance for loan losses - The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic
review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
The allowance consists of a specific, a historic and a qualitative, general component. The specific component relates to
loans that are considered impaired. For such loans that are classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of an impaired loan are lower than the carrying value
of that loan. The historic component covers non-classified and criticized loans and is based on historical loss experience
adjusted for qualitative factors. The qualitative reserve of the allowance reflects adjustments to historical experience to
account for current conditions impacting the loan portfolio.
For all classes, a loan is considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment.
The allowance model is applied to determine the specific allowance balance for impaired loans and the general allowance
balance for unimpaired loans grouped by loan type.
10
10
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Allowance for loan losses (concluded) - The Bank’s loan charge-off policy for all loan classes is to charge down loans to net
realizable value once a portion of the loan is determined to be uncollectible, and the underlying collateral shortfall is
assessed. Loans are moved to nonaccrual status when the loan becomes 90 days delinquent or a portion of the loan is
determined to be uncollectible and supporting collateral is not considered to be sufficient to cover potential losses.
Nonaccrual loans are reviewed monthly to determine if all or a portion of the loan is uncollectible. Nonaccrual loans that
are determined to be solely collateral dependent are monitored for possible charge downs to net realizable value upon
determination that they are impaired.
Income recognition on impaired and non-accrual loans - All classes of loans are generally classified as non-accrual if they are
past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-
secured and in the process of collection. All classes of loans that are on a current payment status or past due less than 90
days may also be classified as non-accrual, if repayment in full of principal and/or interest is in doubt.
All classes of loans may be returned to accrual status when all principal and interest amounts contractually due (including
arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms of interest and principal.
When all classes of loans are classified as non-accrual and the future collectibility of the recorded loan balance is doubtful,
collections of interest and principal are generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where
a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would
have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that
amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Other real estate owned - Real estate acquired through, or in lieu of, foreclosure is held for sale and is initially recorded at
fair value less estimated cost to sale at the date of foreclosure, establishing a new cost basis. Principal and interest losses
existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income,
respectively. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at
the lower of carrying amount or fair value less estimated cost to sell. Costs of significant property improvements are
capitalized, whereas costs relating to holding property are expensed. Revenue and expenses from operations associated
with other real estate owned and the impact of any subsequent changes in the carrying value are included in other
expenses.
Premises and equipment - Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated useful lives using the straight-line method.
Useful lives for these assets are within the following ranges, buildings from 10-39 years, equipment, furniture and fixtures
3-15 years, computer equipment 3-7 years and software 3-5 years. For income tax purposes, the accelerated cost recovery
system and the modified accelerated cost recovery system are used.
Non-marketable equity securities - Non-marketable equity securities are restricted securities, carried at cost, and
periodically evaluated for impairment. These securities are restricted, do not have a readily determinable fair value, and
lack a market. Because of the redemption provisions of the Federal Reserve Bank and Federal Home Loan Bank
stock, the Bank estimated that the fair value equaled or exceeded the cost of these investments and the investments were
not impaired.
Income taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements, and consist
of taxes currently due plus deferred taxes related primarily to differences between the basis of investment securities,
deferred loan fees, allowance for loan losses, deferred compensation, interest on non-performing loans and accumulated
depreciation for financial and income tax reporting.
11
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Income taxes (concluded) - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered in income. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be realized. Management has evaluated all other tax
positions that could have a significant effect on the financial statements and determined the Company had no uncertain
income tax positions at December 31, 2013 and 2012. The years ending on or after December 31, 2010 remain subject to
examination by federal and state tax authorities. The Company recognizes interest and/or penalties related to income tax
matters in income tax expense.
Deferred compensation plans - The Company maintains deferred compensation and retirement arrangements with certain
officers. The Company's policy is to accrue the estimated amounts to be paid under the contracts over the expected period
of active employment. The Company purchased life insurance contracts to fund the expected liabilities under the
contracts.
Earnings per common share - Basic earnings per share (EPS) are computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflect the
potential dilution if restricted stock, or other common stock equivalents, would result in the issuance of additional shares
of common stock that share in earnings. Potential common shares that may be issued by the Company relate solely to
outstanding non-vested restricted stock.
Off-balance sheet financial instruments - In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit, standby letters of credit, and financial guarantees written. Such financial instruments are
generally recorded in the financial statements when they become payable. A reserve for these off-balance sheet financial
instruments is considered immaterial as is the fair value of the financial guarantees.
Use of estimates - The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Estimation of fair values - The following notes summarize the major methods and assumptions used in estimating the fair
value of financial instruments:
Short-term financial instruments are valued at their carrying amounts included in the Company’s balance sheet, which
are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach
applies to cash and cash equivalents, deposits in other banks, federal funds sold, and short-term borrowings.
Loans are valued on the basis of estimated future receipts of principal and interest, discounted at various rates. Loan
prepayments are assumed to occur at the same rate as in previous periods when interest rates were at levels similar to
current levels. Future cash flows for homogeneous categories of consumer loans are estimated on a portfolio basis and
discounted at current rates offered for similar loan terms to new borrowers with similar credit profiles. A liquidity
discount is not considered in determining the fair value of the loan portfolio.
Investment securities are valued at quoted market prices, if available. The fair value of equity investments in the
restricted stock of the FRB and FHLB approximates the carrying value due to the redemptive provisions of these
securities.
12
12
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Estimation of fair values (concluded) –
For unquoted securities, the fair value is estimated by the Company on the basis of financial and other information.
The carrying amounts of accrued interest approximate fair value.
The fair value of demand deposits and deposits with no defined maturity is taken to be the amount payable on
demand at the reporting date. The fair value of fixed-maturity deposits is estimated using discounted cash flow
analyses and rates currently offered for deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair values disclosed.
Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate
characteristics. The impact of the Company’s assessment of its own credit risk is not factored into the fair value of the
notes.
The carrying amounts of federal funds purchased and borrowings under repurchase agreements approximate their fair
values.
The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow
analyses based on current rates offered on similar debt instruments.
It is not practicable to separately estimate the fair values for off-balance-sheet credit commitments, including standby
letters of credit and guarantees written, due to the lack of cost-effective, reliable measurement methods for these
instruments.
Certain significant estimates - Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for losses on loans and the valuation of other real estate owned. Management uses
available information to recognize losses on loans and other real estate owned. Future additions to the allowances may be
necessary based on changes in local economic conditions and other factors. Management believes the allowances recorded
at December 31, 2013 and 2012 are sufficient to cover inherent losses in the portfolio.
Recent accounting pronouncements - In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic
220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this
ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive
income. In addition, the amendments require a cross-reference to other disclosures currently required for other
reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies
should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December
15, 2012. The Company has included the required disclosures from ASU 2013-02 in the notes to the consolidated
financial statements.
In January 2014, the FASB issued ASU 2014-4, “Troubled Debt Restructurings by Creditors (Subutopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”. The amendments
in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received
physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor
obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying
all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of
foreclosure or through a similar legal agreement.
13
13
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (concluded)
Recent accounting pronouncements (concluded) - Additionally, the amendments require interim and annual disclosure of
both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in
consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to
local requirements of the applicable jurisdiction. The adoption of this standard is not expected to have a material impact
on the consolidated financial statements of the Company.
Reclassifications - Certain reclassifications have been made to prior period balances to conform to the current year
presentation.
Note 3 - Available-for-sale securities
At December 31, 2013 and 2012, securities are as follows:
December 31, 2013
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
December 31, 2012
State and municipal
Residential and mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Amortized
Cost
$ 35,063,849
19,433,360
46,669,105
37,700,613
$ 138,866,927
Gross
Unrealized
Gains
$ 871,128
225,046
408,420
1,570,008
$ 3,074,602
Gross
Unrealized
Losses
$ 276,408
584,986
786,817
-
$ 1,648,211
Fair
Value
$ 35,658,569
19,073,420
46,290,708
39,270,621
$ 140,293,318
Amortized
Cost
$ 29,965,718
15,559,345
39,214,311
43,974,771
$ 128,714,145
Gross
Unrealized
Gains
$ 2,472,981
575,618
1,016,326
2,827,311
$ 6,892,236
Gross
Unrealized
Losses
$ -
-
58,524
-
$ 58,524
Fair
Value
$ 32,438,699
16,134,963
40,172,113
46,802,082
$ 135,547,857
At December 31, 2013 and 2012, gross unrealized losses and fair value by length of time that the individual securities have
been in a continuous unrealized loss position, are as follows:
December 31, 2013
Available-for-sale securities:
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Total temporarily impaired
Continuous Unrealized
Losses Existing for:
Approximate
Market Value
Less than
12 Months
More than
12 Months
Total
Losses
$ 10,648,954
11,044,258
20,991,354
$ 276,408
584,986
776,449
$ -
-
10,368
$ 276,408
584,986
786,817
investment securities
$ 42,684,566
$ 1,637,843
$ 10,368
$ 1,648,211
14
14
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 3 - Available-for-sale securities (continued)
December 31, 2012
Available-for-sale securities:
Collateralized mortgage obligations
Collateralized mortgage obligations
Total temporarily impaired
investment securities
Continuous Unrealized
Losses Existing for:
Approximate
Market Value
Less than
12 Months
More than
12 Months
Total
Losses
$ 317,490
2,124,623
$ 11,330
-
$ -
47,194
$ 11,330
47,194
$ 2,442,113
$ 11,330
$ 47,194
$ 58,524
State and municipal - The Company’s unrealized losses on state and municipal securities were caused by the interest rate
fluctuations. The severity and duration of these unrealized losses will fluctuate with interest rates in the economy. Based
on the credit quality of the issuers, and because of the Company’s intent to hold the securities until a market price
recovery or maturity, and it is more likely than not that the Company will not be required to sell these securities before
their anticipated recovery, the Company does not consider these investments other than temporarily impaired.
Residential and mortgage-backed securities and collateralized mortgage obligations- The Company’s unrealized losses on residential
and mortgage-backed securities and collateralized mortgage obligations were caused by the interest rate fluctuations. The
severity and duration of these unrealized losses will fluctuate with interest rates in the economy. Because our mortgage-
related securities are backed by FNMA and FHLMC, which are GSEs, or are collateralized by securities backed by these
agencies, and because of the Company’s intent to hold the securities until a market price recovery or maturity, and it is
more likely than not that the Company will not be required to sell these securities before their anticipated recovery, the
Company does not consider these investments other than temporarily impaired.
At December 31, 2013 and 2012, securities with a carrying value of approximately $17,016,641 and $20,514,874,
respectively, are pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2013
and 2012, securities with a carrying value of $4,792,267 and $4,214,038, respectively, are pledged to the Federal Home
Loan Bank to secure advances. Investment securities with carrying values of $3,213,431 and $3,585,603 are pledged to
secure repurchase agreements at December 31, 2013 and 2012, respectively.
At December 31, 2013, the amortized cost and fair value of debt securities by maturity date are as follows:
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Total debt securities
Gross realized gains on available-for-sale securities were:
Residential mortgage-backed securities
Small Business Administration Pools
State and muncipals
Total gross realized gains
15
Amortized
Cost
$ -
193,631
13,065,105
125,608,191
$ 138,866,927
Fair
Value
$ -
199,012
13,447,775
126,646,531
$ 140,293,318
2013
$ 109,074
-
158
$ 109,232
2012
$ 462,214
611,246
294,494
$ 1,367,954
15
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 3 - Available-for-sale securities (concluded)
There were no gross realized losses on available-for-sale securities during 2013 or 2012.
Proceeds from the sale of available-for-sale securities totaled $4,878,319 and $34,386,865 for the years ended December
31, 2013 and 2012, respectively.
Note 4 - Loans and Allowance for Loan Losses
General - The Bank provides to its customers a full range of short- to medium-term commercial, agricultural, Small Business
Administration guaranteed, mortgage, home equity, and personal loans, both secured and unsecured. The Bank also
makes real estate mortgage and construction loans. At December 31, 2013 and 2012, loans consisted of the following:
Mortgage loans on real estate:
Construction
Commercial Real Estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial
Agricultural
Individuals
Total loans
Less: Allowance for loan losses
Net deferred loan fees and costs
Loans, net
2013
2012
$ 31,261,147
$ 33,539,112
34,726,441
58,036,590
41,339,445
7,377,067
11,425,387
184,166,077
23,072,880
19,659,415
2,240,940
229,139,312
(7,381,066)
84,529
$ 221,842,775
33,056,579
56,691,698
42,555,168
8,090,850
10,428,101
184,361,508
23,652,191
18,536,728
2,213,473
228,763,900
(8,423,052)
61,493
$ 220,402,341
Real Estate Loans - Real estate loans include construction and land development loans, commercial real estate loans, home
equity lines of credit and residential mortgages.
Construction/development lending totaled $31.3 million and $33.5 million at December 31, 2013 and 2012,
respectively. The Bank originates one-to-four family residential construction loans for the construction of custom
homes (where the home buyer is the borrower) and provides financing to builders and consumers for the
construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment
from an outside banking entity prior to financing the construction of pre-sold homes. The Bank also makes
commercial real estate construction loans, primarily for owner-occupied properties. The Bank limits its
construction lending risk through adherence to established underwriting procedures. Residential one-to-four
family loans amounted to $41.3 million and $42.6 million at December 31, 2013 and 2012, respectively.
Commercial real estate loans totaled $92.8 million and $89.7 million at December 31, 2013 and 2012,
respectively. This lending has involved loans secured by owner-occupied commercial buildings for office, storage
and warehouse space, as well as non-owner occupied commercial buildings. The Bank generally requires the
personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans
secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four
family residential mortgage loans. Payments on such loans are often dependent on successful operation or
management of the properties.
16
16
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 – Loans and Allowance for Loan Losses (continued)
Commercial and Industrial Loans - At December 31, 2013 and 2012, the Bank’s commercial loan portfolio totaled $23.1
million and $23.7 million, respectively. Commercial loans include both secured and unsecured loans for working capital,
expansion, and other business purposes. Short-term working capital loans are secured by accounts receivable, inventory
and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions
are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower, and the
quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary
sources of repayment. Commercial loans generally provide greater yields and re-price more frequently than other types of
loans, such as real estate loans.
Agricultural Loans – Agricultural loans totaled $19.7 million and $18.5 million at December 31, 2013 and 2012,
respectively and include loans secured by farm equipment, inventory and farm land. Lending decisions are based on an
evaluation of the financial strength, cash flow, management and credit history of the borrower, and the quality of the
collateral securing the loan. Payments on such loans are often dependent on successful operation or management of the
farming operation.
Loans to Individuals - Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle
financing, and miscellaneous secured and unsecured personal loans and totaled $2.2 million at December 31, 2013 and
2012, respectively. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the
collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a
defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are
sensitive to job loss, illness and other personal factors. The Bank manages the risks inherent in consumer lending by
following established credit guidelines and underwriting practices designed to minimize risk of loss.
Loan Approvals - The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations.
The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements,
terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject
to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness
to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the
Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process
with periodic loan reviews by independent, outside professionals experienced in loan review. Responsibility for loan
review and loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan
underwriting and approval. On an annual basis, the Board of Directors of the Bank determines officers lending authority.
Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by
the Board of Directors.
Substantially all of the Bank's loans have been granted to customers in the Hampton Roads area of Virginia.
Credit Review and Evaluation - The Bank outsources the credit risk review function which reports to the Board of Directors.
The focus of the engagement is on policy compliance and proper grading of higher credit risk loans as well as new and
existing loans on a sample basis. Additional reporting for problem/criticized assets has been developed along with an after-
the-fact loan review.
The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the
allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed by the Chief Credit
Officer and reviewed by credit review analysts on a test basis. The Bank strives to maintain the loan portfolio in
accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of the Bank’s
market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies.
17
17
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Credit Review and Evaluation (concluded) - All loans are risk graded on a scale from 1 (highest quality) to 9 (loss).
Acceptable loans at inception are grades 1 through 5. These grades have underwriting requirements that at least meet the
minimum requirements of a secondary market source. If borrowers do not meet credit history requirements, other
mitigating criteria such as substantial liquidity and low loan-to-value ratios could be considered and would generally have
to be met in order to make the loan. The Bank’s loan policy states that a guarantor may be necessary if reasonable doubt
exists as to the borrower’s ability to repay.
The Board of Directors has authorized the loan officers to have individual approval authority for risk grade 1 through 5
loans up to maximum exposure limits for each customer. New or renewed loans that are graded 6 (special mention) or
lower must have approval from the Chief Credit Officer and Chief Lending Officer. Any changes in risk assessments as
determined by loan officers, credit administrators, regulatory examiners and management are also considered.
The risk grades, normally assigned by the loan officers when the loan is originated and reviewed by the Chief Credit
Officer, are based on several factors including historical data, current economic factors, composition of the portfolio, and
evaluations of the total loan portfolio and assessments of credit quality within specific loan types. In some cases the risk
grades are assigned by the Chief Credit Officer or the Chief Lending Officer, depending upon dollar exposure. Because
these factors are dynamic, the provision for loan losses can fluctuate. Credit quality reviews are based primarily on
analyses of borrowers’ cash flows, with asset values considered only as a second source of payment. Credit analysts work
with lenders in underwriting, structuring and risk grading the Bank’s credits. The Chief Lending Officer and the Chief
Credit Officer focus on lending policy compliance, credit risk grading, and credit risk reviews on larger dollar exposures.
Management uses the information developed from the procedures above in evaluating and grading the loan portfolio.
This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in
determining the appropriate levels of the allowance for loan losses. The following is a summary of the credit risk grade
definitions for all loan types:
“1” — Prime – Credits in this category are virtually risk-free and are well-collateralized by cash or cash-equivalent
instruments held by the Bank. The repayment program is well-defined and achievable, and repayment sources are
numerous. No material documentation deficiencies or exceptions exist.
“2” — Good – This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to
borrowers with liquid financial statements. A liquid financial statement is generally a financial statement with substantial
liquid assets, particularly relative to the debts. These loans have excellent sources of repayment, with no significant
identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal
and State regulations (no exceptions of any kind).
“3” — Acceptable 1 – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of
repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the
following characteristics:
Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations
(no exceptions of any kind).
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be
supplemented with verifiable cash flow from other sources.
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or
liquidation value to the net worth of the borrower or guarantor.
18
18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
“4” — Acceptable 2 – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little
identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:
General conformity to the Bank's underwriting requirements, with limited exceptions to the Bank's policy,
product or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any
additional risk associated with the exceptions noted.
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be
supplemented with verifiable cash flow from other sources.
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or
liquidation value to the net worth of the borrower or guarantor.
“5” — Weak Pass – This grade is given to acceptable loans that show signs of weakness in either adequate sources of
repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans
assigned this grade may demonstrate some or all of the following characteristics:
Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that
present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is
greater for this risk grade, the exceptions may be properly mitigated by other documented factors that offset any
additional risks.
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this
time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected
(not historic) performance.
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral
and liquidation value to the net worth of the borrower or guarantor.
“6” — Special Mention – Special Mention loans include the following characteristics:
Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors;
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not
corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses
are the result of deviations from prudent lending practices; or
Loans where adverse economic conditions have developed subsequent to the loan origination that do not
jeopardize liquidation of the debt, but do substantially increase the level of risk, may also warrant this rating.
“7” — Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of
the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should
be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any
number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to:
High debt to worth ratios
Declining or negative earnings trends
Declining or inadequate liquidity
Questionable repayment sources
Lack of well-defined secondary repayment source, and
Unfavorable competitive comparisons.
Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings
capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan
balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited
excessive overdue status or extensions and/or renewals.
19
19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
“8” — Doubtful – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus 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. However, these loans are not yet rated as loss because certain
events may occur which would salvage the debt. Among these events are:
Injection of capital
Alternative financing
Liquidation of assets or the pledging of additional collateral.
The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on
non-accrual status, and no definite repayment schedule exists. Doubtful is a temporary grade where a loss is expected but
is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
“9” — Loss – Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable
assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but
rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be effected in the
future. Probable Loss portions of problem assets should be charged against the Reserve for Loan Losses. Loans may reside
in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar
quarter-end.
The following is a summary of credit quality indicators by class at December 31, 2013 and 2012:
Real Estate Credit Exposure as of December 31, 2013
Commercial Real Estate
Owner
occupied
Non-owner
occupied
$
-
298
5,071
12,937
13,677
161
2,583
-
-
34,727
$
(in thousands)
$
-
175
9,944
22,092
17,573
872
7,381
-
-
58,037
$
Construction
$
-
-
2,840
7,327
8,362
8,735
3,997
-
-
31,261
$
Residential
1-4 Family
$
-
103
12,875
13,271
10,428
3,208
1,454
-
-
41,339
$
Multifamily
$
-
-
115
5,164
1,643
-
455
-
-
7,377
$
Equity lines
of credit
$
-
537
5,664
3,869
1,064
21
270
-
-
11,425
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
20
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2013
Commerical
and industrial Agricultural
Individuals
Total
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
-
$
-
2,067
12,186
7,774
911
135
-
-
23,073
$
-
$
-
3,088
12,998
2,302
465
806
-
-
19,659
$
-
$
-
545
993
302
401
-
-
-
2,241
$
-
$
1,113
42,209
90,837
63,125
14,774
17,081
-
-
$
229,139
Real Estate Credit Exposure as of December 31, 2012
Commercial Real Estate
Owner
occupied
Non-owner
occupied
-
$
385
5,172
10,700
10,255
1,925
4,620
-
-
33,057
$
(in thousands)
$
-
258
10,767
22,074
16,463
1,879
5,251
-
-
56,692
$
Construction
-
$
-
3,658
8,409
9,210
5,503
6,759
-
-
33,539
$
Residential
1-4 Family
$
-
210
16,948
14,399
6,389
1,663
2,696
250
-
42,555
$
Multifamily
-
$
-
807
2,406
4,164
-
714
-
-
8,091
$
Equity lines
of credit
-
$
1,041
5,710
2,789
589
26
273
-
-
10,428
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
21
21
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2012
Commerical
and industrial Agricultural
Individuals
Total
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
-
$
-
3,063
12,997
7,119
379
94
-
-
23,652
$
$
1
-
2,818
7,265
7,557
724
172
-
-
18,537
$
-
$
52
534
869
337
418
-
3
-
2,213
$
$
1
1,946
49,477
81,908
62,083
12,517
20,579
253
-
$
228,764
Nonaccrual loans and past due loans - Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned
property and loans past due 90 days or more on which interest is still being accrued. There were two financing receivables
with total current principal balance of $352,822 past due over 90 days accruing interest as of December 31, 2013. These
two loans were in the process of collection at December 31, 2013 and are expected to be repaid in full. There were no
financing receivables past due over 90 days accruing interest as of December 31, 2012. Nonaccrual loans as of December
31, 2013 totaled $5.6 million, or 2.45% of total loans, compared with $4.9 million, or 2.14% of total loans, as of
December 31, 2012. The Bank aggressively pursues the collection and repayment of all loans. Other nonperforming
assets, such as repossessed and foreclosed collateral are aggressively liquidated by the Bank’s management. The total
number of loans on nonaccrual status as of December 31, 2013 and 2012 was 18 and 15, respectively.
For the years ended December 31, 2013 and 2012, the Bank recognized no interest income on nonaccrual loans. If
interest on those loans had been accrued in accordance with the original terms, interest income would have increased by
approximately $181,249 and $400,000 for the years ended December 31, 2013 and 2012, respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2013 and 2012:
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commerical and industrial
Agricultural
Individuals
Total
2013
2012
$
2,896,720
$
3,200,801
126,654
1,688,240
372,204
455,300
76,954
-
-
-
$
5,616,072
450,000
-
1,161,652
-
47,632
25,018
-
3,097
4,888,200
$
22
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Nonaccrual loans and past due loans (concluded) - All classes of loans are considered past due if the required principal and
interest income have not been received as of the date such payments were due. The following tables present the Bank’s
aged analysis of past due loans as of December 31, 2013 and 2012:
December 31, 2013
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Greater Than
90 Days Still
Accruing
(in thousands)
Total Past
Due
Current
Total Loans
$
162
$
-
$
2,133
$
-
$
2,295
$
28,966
$
31,261
-
-
200
-
-
40
-
-
402
$
-
179
-
-
-
-
-
-
179
$
127
-
-
455
25
-
-
-
2,740
$
-
254
-
-
-
-
99
-
353
$
127
433
200
455
25
40
99
-
3,674
$
34,600
57,604
41,139
6,922
11,400
23,033
19,560
2,241
225,465
$
34,727
58,037
41,339
7,377
11,425
23,073
19,659
2,241
229,139
$
December 31, 2012
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Greater Than
90 Days Still
Accruing
(in thousands)
Total Past
Due
Current
Total Loans
$
29
$
-
$
179
$
-
$
208
$
33,331
$
33,539
482
-
275
-
-
55
-
-
841
$
-
-
250
-
-
-
-
-
250
$
450
-
772
-
-
-
-
-
1,401
$
-
-
-
-
-
-
-
-
$
-
932
-
1,297
-
-
55
-
-
2,492
$
32,125
56,692
41,258
8,091
10,428
23,597
18,537
2,213
226,272
$
33,057
56,692
42,555
8,091
10,428
23,652
18,537
2,213
228,764
$
23
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Troubled Debt Restructurings - In order to maximize the collection of loan balances, the Bank evaluates troubled loan
accounts on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be
utilized where there is a reasonable chance that an appropriate modification would allow the Bank’s customers to continue
servicing debt. A loan is a troubled debt restructuring (“TDR”) if both of the following exist: 1) a creditor has granted a
concession to the debtor, and, 2) the debtor is experiencing financial difficulties. Non-accruing loans that are modified
can be placed back on accrual status when both principal and interest are current and it is probable that the Bank will be
able to collect all amounts due (both principal and interest) according to the terms of the loan agreement and a sustained
period of payment performance is demonstrated. Interest on troubled debt restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal will occur and a sustained payment performance
period is obtained. For the years ended December 31, 2013 and 2012, the following table presents a breakdown of the
types of concession made by loan class:
Year ended December 31, 2013
Post-
Modification
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Number
of loans
Year ended December 31, 2012
Post-
Modification
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Number
of loans
Extended payment terms
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total
-
$
-
$
-
1
2
1
-
-
-
1
-
5
1,414,426
1,712,802
115,200
1,390,611
1,701,451
111,110
-
-
-
-
-
-
750,000
636,008
-
-
$
3,992,428
$
3,839,180
9
1
3
8
-
-
1
2
-
24
$
5,602,459
$
5,321,372
208,842
4,678,564
1,466,022
208,842
4,532,947
1,364,275
-
-
-
-
-
-
172,110
172,110
-
-
$
12,127,997
$
11,599,546
The restructured loans generally include terms to reduce the interest rate and extend payment terms. The Bank did not
forgive any principal associated with any of the above loans during 2013. Within the last 12 months, two loans that were
restructured in 2012, with a total principal balance of $919,100 subsequently defaulted and were foreclosed upon. There
were no loans that were restructured within the last 12 months during 2012 that subsequently defaulted. These
modifications resulted in specific reserves in the Bank’s allowance for loan losses of $195,008 and $240,968 as of
December 31, 2013 and 2012, respectively.
24
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Troubled Debt Restructurings (concluded) - There are three TDRs that are on non-accrual status and have a total current
principal balance of $2.5 million as of December 31, 2013. There were four TDRS that were on non-accrual status and
had a total current principal balance of $3.4 million as of December 31, 2012. Twenty TDRs with a current principal
balance of $9.8 million and twenty-one TDRs with current principal balance of $8.2 million were considered performing
loans and are accruing interest based on their sustained payment performance as of December 31, 2013 and 2012,
respectively.
The specific reserve portion of the allowance for loan losses on TDRs is determined by discounting the restructured cash
flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to
sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank
either establishes a valuation allowance as a component of the allowance for loan losses or charges off the impaired
balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the
portfolio.
Impaired Loans - Management considers certain loans graded “doubtful” (loans graded 8) or “loss” (loans graded 9) to be
individually impaired and may consider “substandard” loans (loans graded 7) individually impaired depending on the
borrower’s payment history. The Bank measures impairment based upon discounted probable cash flows or the value of
the collateral. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation
expenses to determine logical and credible discounts that may be needed. Updated appraisals are required for all
impaired loans and typically at renewal or modification of larger loans if the appraisal is more than 12 months old.
Impaired loans for all classes of loans typically include nonaccrual loans, loans over 90 days past due still accruing,
troubled debt restructured loans and other potential problem loans considered impaired based on other underlying
factors. Potential problem loans totaled $14.8 million and $12.5 million as of December 31, 2013 and 2012, respectively.
These totals include loans which are currently performing and are not included in nonaccrual or restructured loans above,
but about which we have serious doubts as to the borrower’s ability to comply with present repayment terms. These loans
are likely to be included later in nonaccrual, past due or troubled debt restructured loans, so they are considered by
management in assessing the adequacy of the allowance for loan losses. No additional funds are committed to be advanced
in connection with impaired loans.
25
25
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables present the Bank's investment in loans considered to be impaired and related information on those
impaired loans as of December 31, 2013 and 2012:
December 31, 2013
Impaired loans without a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total impaired loans
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
1,431
$
1,504
$
-
$
1,942
$
107
2,583
3,504
897
455
239
-
170
-
2,583
3,504
897
682
239
-
170
-
2,567
2,567
-
3,877
557
-
30
135
636
-
-
3,877
557
-
30
135
636
-
-
-
-
-
-
-
-
-
659
-
568
113
-
30
4
195
-
2,623
3,709
929
700
244
-
172
-
2,584
-
3,942
572
-
31
84
711
-
168
193
45
8
8
-
13
-
92
-
186
30
-
-
3
44
-
$
3,998
$
4,071
$
659
$
4,526
$
199
2,583
7,381
1,454
455
269
135
806
-
17,081
$
2,583
7,381
1,454
682
269
135
806
-
17,381
$
-
568
113
-
30
4
195
-
1,569
$
2,623
7,651
1,501
700
275
84
883
-
18,243
$
168
379
75
8
8
3
57
-
897
$
26
26
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
December 31, 2012
Impaired loans without a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total impaired loans
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
5,972
$
5,972
$
-
$
5,932
$
376
3,463
2,527
1,688
75
225
14
172
-
4,014
2,527
1,760
75
449
14
172
-
788
862
1,158
2,723
1,257
639
48
80
-
3
1,158
2,723
1,257
639
97
80
-
3
-
-
-
-
-
-
-
-
120
78
87
445
229
38
65
-
3
4,060
2,569
1,800
77
227
30
173
-
875
1,184
2,769
947
645
50
94
-
5
223
151
88
5
10
2
12
-
38
72
106
56
42
1
6
-
1
$
6,760
$
6,834
$
120
$
6,807
$
414
4,621
5,250
2,945
714
273
94
172
3
20,832
$
5,172
5,250
3,017
714
546
94
172
3
21,802
$
78
87
445
229
38
65
-
3
1,065
$
5,244
5,338
2,747
722
277
124
173
5
21,437
$
295
257
144
47
11
8
12
1
1,189
$
27
27
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Allowance for Loan Losses - The allowance for loan losses is a reserve established through a provision for loan losses charged
to expense, which represents management’s best estimate for probable losses that have been incurred within the existing
portfolio of loans. The primary risks inherent in the Bank’s loan portfolio, including the adequacy of the allowance or
reserve for loan losses, are based on management’s assumptions regarding, among other factors, general and local
economic conditions, which are difficult to predict and are beyond the Bank’s control. In estimating these risks, and the
related loss reserve levels, management also considers the financial conditions of specific borrowers and credit
concentrations with specific borrowers, groups of borrowers, and industries.
The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans are charged against the
allowance for loan losses in the accounting period in which they are determined by management to be uncollectible.
Recoveries during the period are credited to the allowance for loan losses. The Bank realized negative provisions of
$500,000 for the year ended December 31, 2013. There was no provision for loan losses for the year ended December 31,
2012. During 2012 the Bank received several large recoveries, which were credited to the allowance. The recoveries and
the continued improvement in our credit related trends were the main contributors to the negative provisions in 2013 and
no provision for loan losses during 2012. The provision expense is determined by the Bank’s allowance for loan losses
model. The components of the model are specific reserves for impaired loans and a general allocation for unimpaired
loans. The general allocation has three components, an estimate based on historical loss experience, an additional
estimate based on internal and external environmental factors due to the uncertainty of historical loss experience in
predicting current embedded losses in the portfolio that will be realized in the future and an unallocated portion to cover
uncertainties that could affect management’s estimate of probable losses.
In determining the general allowance allocation, the ratios from the actual loss history for the various categories are
applied to the homogeneous pools of loans in each category. During 2012 management increased the historical look back
period included in its allowance for losses on loans estimation. Management determined increasing the look back period
from eight to twelve quarters was more reflective of the Bank’s historical loss experience in order to estimate losses
inherent in the loan portfolio. The impact of this change in estimation was an increase in the reserve of $1.4 million
during 2012.
The portion of the general allocation on environmental factors includes estimates of losses related to the following:
Current national and local economic conditions
Composition of the nature and volume of the portfolio
Changes in the trend or volume of past due, watch list and classified loans
The existence and effect of concentrations or changes in concentrations upon the portfolio
The existence and effect of granularity in the size of credits in the portfolio
The existence and effect of loan to values in excess of regulatory guidance – percentage of loans in each category
with Reg H exceptions
Cumulative effect of other factors such as loan portfolio quality, underwriting strength and general
determinations about the portfolio held by executive management.
Markets served by the Bank continue to experience softening from the general economy and declines in real estate values.
Other factors impacting the allowance at December 31, 2013 were watch list trends, unemployment rate trends,
government spending expectations and underwriting and servicing assessments.
During 2011 the Bank charged-off approximately $1.9 million of principal on a construction loan of $3.4 million due to
the deteriorating financial condition of the borrower and a current appraisal on the collateral. In 2012 the Bank entered
into an agreement to sell this note to a third party for $2 million. This transaction resulted in a recovery of approximately
$714,000 which increased the Bank’s allowance for loan losses and is included in recoveries on construction loans in the
2012 table below.
28
28
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (continued)
Allowance for Loan Losses (continued) - The following tables present changes in the allowance for loan losses for the years
ended December 31, 2013 and 2012:
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
December 31,
2012
Charge-offs Recoveries
Provision
(Amounts in thousands)
December 31,
2013
$
2,137
$
250
$
23
$
(312)
$
1,598
925
1,227
1,962
354
301
1,138
335
44
8,423
$
-
-
129
227
5
18
-
-
-
37
-
17
7
-
2
631
$
5
89
$
(32)
501
(370)
63
(21)
(537)
215
(7)
(500)
$
893
1,728
1,500
190
292
590
550
40
7,381
$
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
December 31,
2011
Charge-offs Recoveries
Provision
(Amounts in thousands)
December 31,
2012
$
3,842
$
72
$
807
$
(2,440)
$
2,137
678
883
1,665
56
269
1,302
93
27
8,815
$
551
-
790
-
40
132
-
4
1,589
$
67
-
293
-
16
14
-
-
1,197
$
731
344
794
298
56
(46)
242
21
$
-
925
1,227
1,962
354
301
1,138
335
44
8,423
$
29
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 4 - Loans and Allowance for Loan Losses (concluded)
Allowance for Loan Losses (concluded) - The activity in the allowance for loan loss for 2013 and 2012 are summarized by
loan class as follows:
As of December 31, 2013
Mortgage loans on real estate:
Construction
Commercial real estate:
Non owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
As of December 31, 2012
Mortgage loans on real estate:
Construction
Commercial real estate:
Non owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
(Amounts in thousands)
$
659
$
3,998
$
939
$
27,263
-
568
113
-
30
4
195
-
1,569
$
2,583
7,381
1,454
455
269
135
806
-
17,081
$
893
1,160
1,387
190
262
586
355
40
5,812
$
32,144
50,656
39,885
6,922
11,156
22,938
18,853
2,241
212,058
$
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
(Amounts in thousands)
$
120
$
6,760
$
2,017
$
26,779
78
87
445
229
38
65
-
3
1,065
$
4,621
5,250
2,945
714
273
94
172
3
20,832
$
847
1,140
1,517
125
263
1,073
335
41
7,358
$
28,436
51,442
39,610
7,377
10,155
23,558
18,365
2,210
207,932
$
30
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 5 - Premises and equipment
At December 31, 2013 and 2012, premises and equipment consist of the following:
Land
Buildings
Equipment, furniture and fixtures
Computer equipment
Software
Less accumulated depreciation
Construction in progress
Total premises and equipment, net
2013
$ 1,666,727
5,594,344
2,685,561
302,841
463,176
10,712,649
(5,696,414)
21,931
$ 5,038,166
2012
$ 1,666,727
5,370,026
2,205,990
302,841
451,125
9,996,709
(5,247,629)
-
$ 4,749,080
For 2013 and 2012, depreciation charged to operating expense was $448,786 and $438,944, respectively.
During 2012, the Bank sold a parcel of land resulting in a gain of $842,513.
Note 6 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2013 and 2012:
Federal Home Loan Bank stock
Federal Reserve Bank stock
Community Bankers' Bank stock
Bankers Title, LLC
Senior Housing Crime Prevention Foundation stock
Total non-marketable equity securities
2013
$ 1,371,300
273,900
61,300
49,589
500,000
$ 2,256,089
2012
$ 1,535,700
360,250
61,300
49,589
500,000
$ 2,506,839
Note 7 - Interest-bearing deposits
Interest-bearing deposits consist of the following:
NOW accounts
Money market accounts
Savings accounts
Certificates of deposits and IRAs $100,000 and over
Certificates of deposits and IRAs under $100,000
Total interest-bearing deposits
2013
$ 31,415,299
89,663,359
21,580,454
49,470,689
80,181,041
$ 272,310,842
2012
$ 28,379,608
68,840,024
21,414,822
56,496,579
93,288,401
$ 268,419,434
31
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 7 - Interest-bearing deposits (concluded)
At December 31, 2013, the scheduled maturities of time deposits are as follows:
2014
2015
2016
2017
2018
Thereafter
$
48,397,834
27,856,759
22,034,195
11,443,102
19,919,840
-
Total time deposits
$ 129,651,730
Note 8 – Capital notes
During the fourth quarter of 2013, the Company closed the private placement of unregistered debt securities (the “2013
Offering”) pursuant to which the Company issued approximately $11.3 million in principal of notes (the “2013 Notes”).
The 2013 Notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable exemption from registration requirements. The 2013 Notes bear
interest at the rate of 5% per year with interest payable quarterly in arrears. The 2013 Notes mature on December 31,
2018, but are subject to prepayment in whole or in part on or after December 31, 2014 at the Company’s sole
discretion on 30 days written notice to the holders. There are no assets pledged as collateral for the 2013 Notes. The
Company used approximately $6.2 million of the proceeds from the 2013 Offering in December to repay the funds
associated with the United States Treasury’s Capital Purchase Program (see Note 20).
Of these capital notes, $900,000 is due to executive officers and board members of the Bank as of December 31, 2013.
Interest expense of $3,375 was paid to these related parties on the capital notes for the year ended December 31, 2013.
Note 9 - Securities sold under agreements to repurchase and other borrowings
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one
day from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received
in connection with the transaction.
Information concerning securities sold under agreements to repurchase is summarized, as follows:
Balance at December 31,
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
2013
$ 2,595,776
$ 2,160,045
0.25%
$ 3,148,511
2012
$ 1,747,780
$ 1,636,172
0.25%
$ 2,736,487
The Bank has arrangements with various banks which enables the Bank to borrow up to $30,000,000 in federal funds on
an unsecured basis, at a variable rate. At December 31, 2013 and 2012, the Bank had outstanding federal funds
purchased in the amount of $-0-.
The Bank also has arrangements with the Federal Home Loan Bank which enables the Bank to borrow up to twenty-five
percent of total assets.
32
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 9 - Securities sold under agreements to repurchase and other borrowings (concluded)
At December 31, 2013 and 2012, Federal Home Loan Bank advances were as follows:
December 31, 2013
Maturity date
September 2, 2014
August 31, 2015
May 29, 2018
January 8, 2014
Call Feature
-
-
One-time call
-
Amount
$ 5,000,000
5,000,000
5,000,000
5,000,000
Rate
1.963%
3.080%
3.690%
0.280%
Total FHLB borrowings/weighted average rate
$ 20,000,000
2.253%
December 31, 2012
Maturity date
July 8, 2013
September 2, 2014
August 31, 2015
May 29, 2018
Call Feature
-
-
-
One-time call
Amount
$ 5,000,000
5,000,000
5,000,000
5,000,000
Rate
1.380%
1.963%
3.080%
3.690%
Total FHLB borrowings/weighted average rate
$ 20,000,000
2.530%
The carrying value of loans pledged as collateral to the Federal Home Loan Bank were $31,964,545 and $66,322,974 at
December 31, 2013 and 2012, respectively.
During 2012, the Bank prepaid $20 million in FHLB advances with a weighted average rate of 3.04%. These advances
were paid prior to their maturity date in order to enhance future earnings by way of reduction in interest expense. These
repayments resulted in a prepayment penalty on borrowings equaling $557,523.
Note 10 - Employee benefit plans
Profit sharing plan - The Company has a profit sharing plan covering substantially all employees. Contributions to the plan
are determined annually by the Compensation Committee and are the lesser of 10% of the participants' base
compensation or 10% of the net income of the Bank. Employee benefits expense included $335,000 and $315,000 for
the plan for 2013 and 2012, respectively.
Post-retirement benefits - The Company has entered into deferred compensation arrangements with certain key personnel
which call for the payment of benefits upon the retirement or death of the individuals. These arrangements are funded
through life insurance policies on the individuals, with the intent that the proceeds from the life insurance policies
approximate amounts payable under the deferred compensation arrangements. The liabilities associated with these
deferred compensation arrangements were $971,455 and $753,184 as of December 31, 2013 and 2012, respectively.
Salaries and employee benefits expense included $221,811 and $115,736 of expense related to these arrangements for
2013 and 2012, respectively.
33
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 11 - Income taxes
The principal components of the income tax expense as of December 31, 2013 and 2012 are as follows:
Federal - current tax provision
Federal - deferred
2013
$ 577,413
520,557
$ 1,097,970
2012
$ 904,129
406,105
$ 1,310,234
The differences between expected federal income taxes at statutory rates and actual income tax expense are summarized as
follows:
Income tax expense computed at federal statutory rate (34%)
Tax effects of:
Tax-exempt interest
Non-deductible expenses
Other
2013
$ 1,500,663
2012
$ 1,714,127
(448,919)
20,776
25,450
(415,876)
13,470
(1,487)
Total income tax expense
$ 1,097,970
$ 1,310,234
The Bank's deferred tax assets and liabilities and their components are included in other assets and liabilities on the
balance sheets. The components of these deferred tax assets and liabilities are as follows:
2013
2012
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Interest on non-performing loans
Write-down of value related to other real estate owned
Other
Total deferred tax asset
Deferred tax liabilities:
Accumulated accretion on available-for-sale investment
securities
Accumulated depreciation
Net unamortized deferred fees and expenses
Net unrealized gain on available-for-sale securities
Total deferred tax liability
$ 1,363,456
338,248
26,246
296,570
43,416
2,067,936
$ 1,786,428
262,832
118,213
291,820
11,375
2,470,668
(130,727)
(366,845)
(29,006)
(484,973)
(1,011,551)
(127,233)
(260,610)
(20,908)
(2,323,463)
(2,732,214)
Net deferred tax asset (liability)
$ 1,056,385
$ (261,546)
34
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 11 - Income taxes (concluded)
In evaluating whether the Bank will realize the full benefit of its net deferred tax asset, it considers both positive and
negative evidence, including recent earnings trends and projected earnings, asset quality, etc. A valuation allowance is
provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Positive evidence
considered by the Bank includes a long history of earnings and expected continued earnings in 2014 given the
improvement in credit quality metrics. Credit quality metrics during 2013, such as the adversely classified assets ratio, net
charge-offs as a percent of loans and nonaccrual loan balances continually improved providing further positive evidence.
As a result, the Bank has concluded that no valuation allowance is deemed necessary at this time.
Note 12 - Commitments and contingencies
The Company leases banking premises and various equipment for periods extending through December 2017. Total rental
expense was $187,351 and $122,327 for 2013 and 2012, respectively.
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2013, pertaining to bank premises and
equipment, future minimum rental commitments under various operating leases are as follows:
$ 125,765
111,109
90,939
5,002
-
$ 332,815
2014
2015
2016
2017
2018
Various legal claims also arise from time to time in the normal course of business which, in the opinion of management,
will have no material effect on the Company's consolidated financial statements.
Note 13 - Related party transactions
In the ordinary course of business, the Bank has loan and deposit transactions with its executive officers and directors, and
with companies in which the officers and directors have a significant financial interest. These transactions are at
substantially the same rates as similarly situated customers. A summary of related party loan activity during 2013 and 2012
is as follows:
Beginning balance, January 1
Originations
Repayments
Ending balance, December 31,
2013
$ 2,508,622
1,649,450
(564,499)
$ 3,593,573
2012
$ 3,121,031
378,767
(991,176)
$ 2,508,622
Commitments to extend credit to related parties amounted to $7,557,701 and $5,836,917at December 31, 2013 and
2012, respectively.
Deposits from related parties held by the Bank amounted to $8,212,635 and $5,240,773 at December 31, 2013 and 2012,
respectively.
35
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 14 - Credit commitments and concentrations of credit risk
Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is
deemed necessary by the Bank, is based on management's credit evaluation of the customer. Unfunded commitments under
commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are uncollateralized, usually do not contain a specified
maturity date and may not be drawn upon to the total extent to which the Bank is committed.
Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates within one year.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Bank generally holds collateral supporting those commitments if deemed necessary.
The amounts of loan commitments, guarantees and standby letters of credit are set out in the following table as of
December 31, 2013 and 2012. Because many commitments and almost all standby letters of credit and guarantees expire
without being funded in whole or in part, the contract amounts are not estimates of future cash flows. A summary of loan
commitments and standby letters of credit is as follows:
Loan commitments
Standby letters of credit and guarantees written
2013
$ 51,266,040
$ 400,566
2012
$ 46,508,908
$ 487,527
Standby letters of credit outstanding at December 31, 2013 expire during 2014.
Loan commitments, standby letters of credit and written guarantees have off-balance sheet credit risk because only
origination fees and accruals for probable losses, if any, are recognized in the statements of financial position until the
commitments are fulfilled or the standby letters of credit or guarantees expire. Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk
amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and collateral or other
security is of no value. The Bank's policy is to require customers to provide collateral prior to the disbursement of
approved loans. For retail loans, the Bank usually retains a security interest in the property or products financed, which
provides repossession rights in the event of default by the customer. For business loans and financial guarantees, collateral
is usually in the form of inventory or marketable securities (held in trust) or property (notations on title).
Concentrations of credit risk (whether on or off-balance sheet) arising from financial instruments exist in relation to
certain groups of customers. A group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic
or other conditions. A group concentration exists as most of the Bank's customers are located within southeastern
Virginia.
The credit risk amounts represent the maximum accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. The
Bank has experienced little difficulty in accessing collateral when required.
36
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 15 - Regulatory matters
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 possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2013, the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2013, the most recent notification from the Board of Governors of the Federal Reserve Board
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts (dollars in thousands) and ratios are presented in the table below:
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(Dollars in thousands)
Under Prompt Corrective
Well Capitalized
Amount
Ratio
As of December 31, 2013:
Total Capital
(to Risk-Weighted Assets)
$ 45,294
18.4% $ 19,697
8%
$ 24,622
10%
Tier I Capital
(to Risk-Weighted Assets)
42,163
17.1% 9,849
4%
14,773
Tier I Capital
(to Average Assets)
42,163
10.4% 16,270
4%
20,338
6%
5%
As of December 31, 2012:
Total Capital
(to Risk-Weighted Assets)
$ 41,508
17.5% $ 18,967
8%
$ 23,709
10%
Tier I Capital
(to Risk-Weighted Assets)
38,482
16.2% 9,483
4%
14,225
Tier I Capital
(to Average Assets)
38,482
9.5% 16,122
4%
20,152
6%
5%
The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis
are less than $500 million, the Company is not subject to the consolidated capital requirements imposed by the Bank
Holding Company Act. Consequently, the Company does not calculate its financial ratios on a consolidated basis. If
calculated, the capital ratios for the Company on a consolidated basis would no longer be comparable to the capital ratios
of the Bank because the proceeds of the capital notes do not qualify as equity capital on a consolidated basis.
37
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 16 - Fair value measurements
The Company refers to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards
Codification (ASC 820) to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. This guidance clarifies that fair value of certain assets and liabilities is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The fair market value measurement specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions.
The three levels of the fair value hierarchy are based on these two types of inputs are as follows:
Level 1 –
Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 – Valuation is based on observable inputs including quoted prices in active markets for similar assets and
liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based
valuation techniques for which significant assumptions can be derived primarily from or corroborated by
observable data in the market.
Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are
unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities
recorded at fair value on a recurring basis in the consolidated financial statements:
Securities available for sale - Securities available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair
values are measured utilizing independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices
from various sources and may determine the fair value of identical or similar securities by using pricing models that
considers observable market data (Level 2).
The following table presents the balances of available-for-sale securities measured at fair value on a recurring basis as of
December 31, 2013 and 2012:
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2013
$ 35,658,569
19,073,420
46,290,708
39,270,621
$ 140,293,318
Level 1
$ -
-
-
-
$ -
Level 2
$ 35,658,569
19,073,420
46,290,708
39,270,621
$ 140,293,318
Level 3
$ -
-
-
-
$ -
38
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 16 - Fair value measurements (continued)
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2012
$ 32,438,699
16,134,963
40,172,113
46,802,082
$ 135,547,857
Level 1
Level 2
Level 3
$ -
-
-
-
$ -
$ 32,438,699
16,134,963
40,172,113
46,802,082
$ 135,547,857
$ -
-
-
-
$ -
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the
fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of
individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair
value on a nonrecurring basis in the consolidated financial statements:
Impaired Loans - Loans are designated as impaired when, in the judgment of management based on current information
and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be
collected. The measurement of loss associated with impaired loans can be based on the observable market price of the
loan, the fair value of the collateral or by using the discounted cash flow method. Fair value is measured based on the
value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including
equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate.
The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal
conducted by an independent, licensed appraiser outside of the Company. The Company records impaired loans secured
by real estate as Level 3 assets. The value of business equipment is based upon an outside appraisal if deemed significant,
or the net book value on the applicable business’ financial statements if not considered significant using observable market
data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging
reports are recorded as Level 3 assets. Any fair value adjustments are recorded in the period incurred as provision for loan
losses on the Statements of Operations.
Other real estate owned - Other real estate owned is considered held for sale and is adjusted to fair value less estimated
selling costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised
value of the collateral or management’s estimation of the value of the collateral. The Company considers the other real
estate owned as nonrecurring Level 3.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis
during the periods.
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2013
Level 1
Level 2
Level 3
$ 616,000
6,232,267
$ 6,848,267
$ -
-
$ -
$ -
-
$ -
$ 616,000
6,232,267
$ 6,848,267
39
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 16 - Fair value measurements (concluded)
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2012
Level 1
Level 2
Level 3
$ 445,020
5,632,314
$ 6,077,334
$ -
-
$ -
$ -
-
$ -
$ 445,020
5,632,314
$ 6,077,334
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Assets
Fair Value at
December 31, 2013
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 616,000
6,232,267
Total assets
$ 6,848,267
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Description
Assets
Fair Value at
December 31, 2012
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 445,020
5,632,314
Total assets
$ 6,077,334
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-20%
6%
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December
31, 2013 and 2012. FASB Accounting Standards Codification’s Financial Instruments (ASC 825), defines the fair value of
financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The carrying amounts in the table are included in the balance sheets
under the indicated captions.
Financial assets:
Cash and cash equivalents
Investment securities, available-for-sale
Loans, net
Accrued interest receivable
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts
Time deposits
Accrued interest payable
FHLB Advances
Securities sold under agreement to repurchase
2013
2012
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Dollars in thousands)
$ 31,511
140,293
221,843
1,797
$ 31,511
140,293
221,561
1,797
$ 19,451
135,548
220,402
1,831
$ 19,451
135,548
221,723
1,831
213,699
129,652
234
20,000
2,596
213,699
131,899
234
20,751
2,596
175,895
149,785
326
20,000
1,748
175,895
153,522
326
21,196
1,748
40
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 17 - Stock incentive plan
The Board approved a stock incentive plan effective January 1, 2007. The plan authorizes the grant of awards for a period
of ten years. The number of shares authorized for issuance under the plan is limited to 2.25% of the total authorized and
unissued shares of common stock. Three types of awards may be granted under the plan: Incentive Stock Options,
Nonqualified Stock Options and Restricted Stock.
The Bank granted restricted stock awards during 2007, 2008 and 2010. The Bank accounts for this plan in accordance
with the Stock Compensation Topic of the FASB Accounting Standards Codification (ASC 718). The non-vested equity
share or non-vested equity share unit awarded to an employee is measured at its fair value on the grant date. The
compensation expense is recognized over the requisite service period.
The fair value of the shares of restricted stock was determined by an outside appraisal. The vesting requirements range
from 1 to 5 years. The compensation expense recognized for the years ended December 31, 2013 and 2012 was $15,001
and $15,000, respectively. Members of the Board of Directors of the Bank can elect to receive a portion or all of their
director’s fees in the form of common stock. During the year ended December 31, 2013 and 2012, the expense related to
these issuances was $28,500 and $24,500, respectively.
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2013 and
2012, and changes during the years ended December 31, 2013 and 2012, is presented below; the weighted average price is
the weighted average fair value at the date of grant:
Restricted Share Awards
Nonvested - Beginning of the year
Granted
Vested
Forfeited
Nonvested - End of year
Note 18 - Earnings per share
2013
2012
Shares
420
-
(420)
-
-
Weighted
Average Price
$ 35.75
-
35.75
-
$ -
Shares
840
-
(420)
-
420
Weighted
Average Price
$ 35.75
-
35.75
-
$ 35.75
The following shows the weighted average number of shares used in computing earnings per share and the effect on
weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on
income attributable to common shareholders.
Basic
Net income, as reported
Preferred stock dividends and accretion of discount
Net income attributable to common shareholders
Average common shares outstanding
Basic earnings per share amount
Diluted
Net income attributable to common shareholders
Average common shares outstanding
Effect of dilutive unvested restricted stock awards
Average diluted shares outstanding
Diluted earnings per share
41
2013
2012
$ 3,315,744
488,399
$ 2,827,345
$ 3,731,315
570,257
$ 3,161,058
607,357
605,821
$ 4.66
$ 5.22
$ 2,827,345
$ 3,161,058
607,357
-
607,357
605,821
-
605,821
$ 4.66
$ 5.22
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 19 – Condensed financial statements of parent company
On July 26, 2013, the Board of Directors of the Bank approved an Agreement and Plan of Reorganization and Share
Exchange (the “Agreement”) whereby the Bank would become a subsidiary of Farmers Bankshares, Inc., a company
incorporated in Virginia on July 26, 2013 for the purpose of becoming a holding company for the Bank. The Agreement
provided for the statutory share exchange of all of the Bank’s common stock held by stockholders for the common stock of
Farmers Bankshares, Inc., on a one-for-one basis.
The Agreement was approved by the Bank’s stockholders at a special meeting of the Bank’s stockholders held on
September 26, 2013 (the “Special Stockholders’ Meeting”). The holding company reorganization was consummated on
December 31, 2013. Prior to the holding company reorganization, Farmers Bankshares, Inc. conducted no operations
other than obtaining regulatory approval for the holding company reorganization. As this event is considered
reorganization under common control, the consolidated financial statements, discussion of the statements and all other
information presented herein for the year ending December 31, 2013 are presented for the Company as a consolidated
entity.
Financial information pertaining only to Farmers Bankshares, Inc. is as follows:
Balance Sheet
Cash
Taxes receivable
Investment in Farmers Bank
Other assets
Total assets
Assets
December 31,
2013
$
1,042,892
14,348
43,104,139
190,863
44,352,242
$
Liabilities and Stockholders' Equity
Liabilities
Capital notes, 5% due December 31, 2018
Other liabilities
Total liabilities
Stockholders' equity
Common stock, $0.625 par value
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
$
11,253,475
228,250
11,481,725
380,015
2,695,613
28,853,472
941,417
32,870,517
Total liabilities and stockholders' equity
$
44,352,242
42
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 19 – Condensed financial statements of parent company (concluded)
Statements of Operations
Income
Operating expenses
Interest expense
Legal and professional fees
Other expenes
Total expenses
Allocated income tax benefits
Income before equity in undistrbuted income of subsidiary
Year Ended
December 31, 2013
$
170,246
42,201
23,125
14,260
79,586
(14,348)
105,008
Equity in undistributed income - Farmers Bank
Net income
$
3,210,736
3,315,744
Statement of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Taxes receivable
Other assets
Other liabilities
Equity in undistributed net income of Farmers Bank
Net cash used in operating activities
Cash flows from investing activities
Investment in Farmers Bank
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of 5% capital notes due December 31, 2018
Repurchase of preferred stock
Cash dividends paid on preferred shares
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
43
Year Ended
December 31, 2013
$
3,315,744
(14,348)
(190,863)
58,004
(3,210,736)
(42,199)
(4,000,000)
(4,000,000)
11,253,475
(6,127,000)
(41,384)
5,085,091
1,042,892
-
$
1,042,892
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2013 and 2012
Note 20 – Capital Purchase Program (“CPP”)
On January 23, 2009, the Bank issued 8,752 shares of non-cumulative perpetual preferred stock (“Series A”) for $9.2
million and 438 warrants to the U.S Treasury as a condition to its participation in the Capital Purchase Program (“CPP”).
The warrants were exercised immediately upon the issuance of the Series A preferred stock, which resulted in the issuance
of 438 shares of non-cumulative perpetual preferred stock (“Series B”). Proceeds from this sale of preferred stock are used
for general corporate purposes, including supporting the continued, anticipated growth of the Bank.
On January 9, 2013, the Bank redeemed thirty-five percent, or 3,063 of the total 8,752 shares of its Series A Preferred
Stock. The Bank paid $3,085,973 to redeem this portion of the Series A Preferred Stock, consisting of $3,063,000 in
liquidation value and $22,973 of accrued and unpaid dividends associated with the preferred stock being redeemed.
During the fourth quarter of 2013, the Company received approval from the Treasury and its federal regulator to redeem
the Preferred Stock issued to the Treasury. On December 31, 2013, the Bank redeemed the remaining preferred stock, or
5,689 shares of Series A Preferred Stock and 438 shares of Series B Preferred Stock. The Bank paid $6,168,383 to redeem
this portion of the Series A and Series B Preferred Stock, consisting of $6,127,000 in liquidation value and $41,383 of
accrued and unpaid dividends associated with the preferred stock being redeemed.
Note 21 – Subsequent events
The Company has evaluated subsequent events through February 20, 2014, in connection with the preparation of
these financial statements which is the date the financial statements were available to be issued.
44
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Branch Locations
www.farmersbankva.com • 757-242-6111
J H Lee & Sons, Inc.
River Stone Chophouse
Courtland
28319 Southampton Parkway, Suite D
Harbour View – Suffolk
6255 College Drive, Suite L
Nansemond River Golf Club
Harper’s Table
Hillpoint – Suffolk
3100 Godwin Boulevard
Lakeside – Suffolk
1008 West Washington Street
Smithfield Station
Cotton Harvest
Smithfield
1119 South Church Street, PO Box 888
Windsor
50 East Windsor Boulevard, PO Box 285
FARMERS BANK
www.farmersbankva.com