Cultivating Community
FARMERS BANK
Annual Report 2014
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
Bank incorporated by Shirley T. Holland
1922 – First dividend to shareholders
Novem ber 12, 1919 -
1951 – Richard J. Holland, Sr. joins the Bank
1946 – Assets exceeded $2 million
1910
1920
1930
1940
1950
1960
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:
1988 - Richard J. Holland, Sr. nam ed President and Chairman of the Board
1994 – Richard J. Holland, Jr. nam ed President and CEO
1984 - First Co m puter/Assign m ent of Account Nu m bers
1999 - Im plem ented Online Banking
2004 – Hillpoint Branch Opened
2002 – Lakeside Branch Opened
1989 – New Windsor Branch
2013 – Courtland Branch Opened and
2009 – Harbourview Branch Opened
2014 – Partnership with Manry Rawls, LLC
Im plem ented M obile Banking
1970 – Loans exceeded $5 million
1968 – First drive-in teller facility
1970
1980
1990
2000
2010
• 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.
Richard J. Holland, Jr.
Dear Shareholder,
In November 2014 Farmers Bank celebrated ninety-five years of history
and service to our customers, communities and shareholders. Though our
past is deeply rooted in providing traditional banking services to the local
community, your Board of Directors, Management and Staff have spent
much of 2014 strategically planning for the future and focused on increasing
your shareholder value. The collaboration and commitment from these
people have brought you, our shareholders, increased dividends, improved
asset quality, higher earnings and a better positioned financial institution.
We are proud to report the results enclosed in this annual report. Net income
attributable to common shareholders increased by almost nineteen percent,
which was reflected in the nine percent increase in the per share dividends
declared during the year. Contributing to this success was net loan growth
of $17 million in an environment where economic growth and expansion
remains muted. An increase of $15 million, or 21 percent, in non-interest
bearing deposits also significantly aided in lowering our cost of funds and
offsetting loans that re-priced at lower rates. As discussed in our letter from
January, diversifying revenue through our mortgage and insurance offerings
led to improved non-interest income of $425,000, or 31 percent.
In reporting these results, I remind you that our region, state and country
remain in a very challenging economic position. Financial conditions have
not improved enough to support meaningful progress. Regulatory oversight
continues to be a burden on our earnings. Although, regulatory and
compliance costs continue to rise, many of the efforts we put into place
in late 2014 and reported to you in January, will help to offset these
additional expenses.
Remaining a community bank of our size is becoming a novelty, however
your Bank is armed with leadership that is prepared for the challenge.
We enjoy being involved in our communities, where we strive to make
a difference with our services and contributions. Our actions and daily
decisions have the potential to impact lives, homes and businesses in a very
meaningful and constructive way.
Thank you for your loyalty and continued support of the Company. May we
as partners stamp Farmers Bank with a legacy that we can be proud of and
endures for future generations over the next ninety-five years.
Sincerely,
Vernon M. Towler
Richard J. Holland, Jr.
Chairman and CEO
Vernon M. Towler
President
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
E. Warren Beale, Jr.
Manry Rawls, LLC
Harold U. Blythe
Retired Bank CEO
William L. Chorey
Chorey & Associates Realty, Ltd.,
Owner/Broker
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
Patricia T. Allen
Senior Vice President, Director
of Loan & Deposit Operations
Kathy C. Bryant
Senior Vice President, Director of
Human Resources and Retail
Norman F. Carr, Jr.
Senior Vice President,
Smithfield Market
Kristy E. DeJarnette
Senior Vice President,
Chief Financial Officer
Clayton N. Minter
Vice President,
Chief Credit Officer
Chad A. Rountree
Vice President,
Windsor Market
Thomas L. Woodward, III
Vice President,
Chief Lending Officer
Bank Officers
William N. Bailey
Vice President, Information Technology
Lauren P. Harper
Vice President, Loans
Elizabeth D. Jones
Vice President, Loans
James C. Saunders
Vice President, Loans
Andrea B. Curry
Assistant Vice President, Operations
Kelly D. Dewitt
Assistant Vice President, BSA, AML,
OFAC & Security Officer
C. Thomas Eure, Jr.
Assistant Vice President, Operations
Blanche E. Hecker
Assistant Vice President, Retail
Joanne F. Joyner
Assistant Vice President, Retail
Erin W. Park
Assistant Vice President, Controller
D. Renee Scott
Assistant Vice President, Retail
Meghan D. White
Assistant Vice President, Loan Operations
Suffolk Community Board
David E. Russell (Chairman)
President, Tile & Terrazzo, LLC
James C. Adams, III
President, Featherlite Coaches
Alison Dodson Anderson
Owner, A. Dodson’s
Timothy K. Palmer
Attorney at Law & Certified Public Accountant
Roy A. Runyon, III
Director of Research and Development, The Gartman Letter, L.C.
H. Hadley Whitlock, Jr.
Retired Commercial Lender
Western Tidewater Community Board
Vincent Carollo (Chairman)
Anna’s Ristorante & JVC Holdings, LLC
Christopher T. Alphin
Commonwealth Gin
Tammy W. Edwards
Windsor Hardware and Supply Company
Randolph H. Pack
Smithfield Station
V.S. Pittman, II
Manry Rawls, LLC
John T. Randall
Stallings & Randall, P.C.
Suffolk Community Board
Financial Highlights
At or for the Years Ended December 31,
2014
2013
2012
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)
$16,128
3,156
12,972
(850)
13,822
1,763
11,317
4,268
907
$3,361
$5.53
$62.45
608,039
612,156
$426,791
239,325
342,809
30,000
0.90%
8.20%
3.54%
11.97%
71.24%
2.39%
3.29%
-0.68%
10.83%
17.92%
$48,037
$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
$17,371
4,900
12,471
-
12,471
3,381
10,811
5,041
1,310
$3,731
$5.22
$55.85
605,821
607,366
$412,162
221,843
343,350
20,000
$392,343
220,402
325,680
20,000
0.85%
8.30%
3.53%
9.50%
69.16%
2.45%
3.22%
0.23%
0.89%
9.00%
3.26%
21.33%
70.89%
2.13%
3.68%
0.17%
10.37%
18.40%
$43,104
9.55%
17.51%
$42,992
(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
Total Assets
2012
2013
2014
2012
2013
2014
2012
2013
2014
3.20% 3.30% 3.40% 3.50% 3.60%
0.70% 0.80% 0.90% 1.00%
$380,000 $400,000 $420,000 $440,000
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2014 and 2013
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 - 45
Independent Auditors’ Report
Independent Auditors’ Report
To the Board of Directors and Shareholders
To the Board of Directors and Shareholders
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Windsor, Virginia
Windsor, Virginia
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc., which comprise the
consolidated balance sheets as of December 31, 2014 and 2013, 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.
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc., which comprise the
consolidated balance sheets as of December 31, 2014 and 2013, 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.
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.
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.
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.
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, 2014 and 2013, 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.
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, 2014 and 2013, 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
Charlotte, North Carolina
February 19, 2015
February 19, 2015
Farmers Bankshares, Inc.
Consolidated Balance Sheets
Cash and cash equivalents
Cash and due from banks
Federal Funds sold
Total cash and cash equivalents
Available-for-sale securities (Note 3)
Mortgage loans held for sale
Loans held for investment, net of allowance for loan losses
of $8,181,827 and $7,381,066, 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
December 31,
2014
2013
Assets
$
18,946,788
8,631,880
27,578,668
$
20,986,999
10,523,685
31,510,684
136,634,119
986,000
239,325,310
3,806,446
1,498,798
1,725,181
366,467
666,602
-
4,355,547
9,584,982
262,418
399,211,870
140,293,318
-
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
Total assets
$
426,790,538
$
412,162,149
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
Common stock, $0.625 par value; 10,000,000 shares
$
86,085,407
256,723,297
342,808,704
30,000,000
11,253,475
1,929,599
1,104,315
374,802
1,095,387
249,229
388,815,511
$
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
authorized; 612,156 and 608,020 shares issued and
outstanding at December 31, 2014 and 2013, including
nonvested shares of 3,450 and -0- shares, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
382,600
2,723,028
31,849,329
3,020,070
37,975,027
380,015
2,695,613
28,853,472
941,417
32,870,517
Total liabilities and stockholders' equity
$
426,790,538
$
412,162,149
3
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
3
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Interest income
Interest and fees on loans held for investment
Interest on mortgage loans held for sale
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 capital notes
Interest on repurchase agreements
Interest on federal funds purchased
Total interest expense
Net interest income
Recovery of loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges
Income from automated teller machines and bank card interchange
Gain on disposition of securities
Income on bank owned life insurance
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
Other real estate owned
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,
2014
2013
$
11,917,161
2,470
2,815,959
1,269,922
41,970
80,391
16,127,873
$
12,103,930
-
2,559,424
1,163,005
22,270
60,225
15,908,854
1,966,110
614,693
569,160
5,941
3
3,155,907
12,971,966
(850,000)
13,821,966
353,212
450,090
288,847
240,019
20,404
410,752
1,763,324
5,755,188
731,347
615,749
402,681
547,556
843,361
276,056
286,513
288,130
313,914
1,256,677
11,317,172
4,268,118
907,229
3,360,889
-
$
3,360,889
$
$
$
5.53
5.52
0.60
2,690,428
485,607
-
5,366
469
3,181,870
12,726,984
(500,000)
13,226,984
345,983
434,007
109,232
236,542
-
210,990
1,336,754
5,421,728
657,278
594,080
381,498
381,409
772,958
169,653
291,640
120,919
139,758
1,219,103
10,150,024
4,413,714
1,097,970
3,315,744
488,399
2,827,345
$
$
$
$
4.66
4.66
0.55
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
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
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,
2014
2013
$
3,360,889
$
3,315,744
3,438,321
(1,169,029)
(5,298,090)
1,801,351
2,269,292
(3,496,739)
(288,847)
98,208
(190,639)
2,078,653
5,439,541
$
(109,232)
37,139
(72,093)
(3,568,832)
(253,088)
$
Balances, December 31, 2012
8,632,556
457,271
379,323
2,652,804
26,360,240
4,510,249
42,992,443
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Issuance of common stock - stock compensation plan
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
$
-
$
-
$
380,015
$
2,695,613
$
28,853,472
$
941,417
$
32,870,517
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Balances, December 31, 2014
$
-
$
-
$
382,600
$
2,723,028
$
31,849,329
$
3,020,070
$
37,975,027
Preferred
Preferred
Stock
Stock
Common
Series A
Series B
Stock
Capital
Surplus
Retained
Earnings
Income
Total
Accumulated
Other
Comprehensive
(8,752,400)
(437,600)
119,844
(19,671)
263
429
14,738
28,071
-
-
-
-
-
-
-
-
-
-
-
3,315,744
(100,173)
(388,226)
(334,113)
-
-
-
-
-
-
-
3,315,744
(3,568,832)
(9,190,000)
15,001
28,500
(388,226)
(334,113)
-
-
(3,568,832)
-
-
-
-
-
-
-
-
-
-
-
2,156
429
(2,156)
29,571
3,360,889
3,360,889
2,078,653
2,078,653
(365,032)
30,000
(365,032)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
The accompanying notes are an integral part of these consolidated financial statements.
6
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Changes in Stockholders' Equity
Balances, December 31, 2012
8,632,556
457,271
Preferred
Preferred
Stock
Stock
Series A
Series A
Preferred
Preferred
Stock
Stock
Series B
Series B
Common
Common
Stock
Stock
379,323
Accumulated
Other
Comprehensive
Income
Accumulated
Other
Comprehensive
Total
Income
Retained
Earnings
Retained
Earnings
Capital
Surplus
Capital
Surplus
2,652,804
26,360,240
4,510,249
42,992,443
Total
8,632,556
-
457,271
-
379,323
-
2,652,804
-
26,360,240
3,315,744
4,510,249
3,315,744
-
42,992,443
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
Repurchase of perferred stock
Issuance of common stock - stock compensation plan
sale, net of reclassification adjustment and tax effect
Issuance of common stock - director stock plan
Repurchase of perferred stock
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, $0.55 per share
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
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Balances, December 31, 2013
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Balances, December 31, 2014
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Balances, December 31, 2014
-
-
-
-
(8,752,400)
-
-
-
(8,752,400)
119,844
-
-
-
-
119,844
-
$
-
-
$
-
-
-
-
-
-
-
$
-
-
-
-
-
$
-
(437,600)
-
-
-
(437,600)
(19,671)
-
-
-
-
(19,671)
-
$
-
-
-
$
-
-
-
-
-
-
-
$
-
-
-
-
$
-
$
$
2,695,613
$
$
941,417
$
-
-
-
263
-
429
-
-
263
-
429
-
-
380,015
-
-
-
380,015
-
2,156
-
429
-
$
-
-
-
14,738
28,071
-
-
-
-
-
14,738
28,071
-
-
-
-
$
2,695,613
-
(2,156)
29,571
-
-
3,315,744
-
-
-
-
(100,173)
(388,226)
(334,113)
28,853,472
3,360,889
$
(100,173)
(388,226)
(334,113)
28,853,472
-
-
3,360,889
-
(365,032)
31,849,329
-
-
-
-
-
-
-
(3,568,832)
(3,568,832)
-
(3,568,832)
(9,190,000)
15,001
28,500
-
-
-
(388,226)
-
(334,113)
-
32,870,517
-
-
3,360,889
3,315,744
(3,568,832)
(9,190,000)
15,001
28,500
-
(388,226)
(334,113)
32,870,517
-
$
941,417
$
2,078,653
2,078,653
-
-
30,000
(365,032)
37,975,027
2,078,653
$
3,360,889
2,078,653
-
-
-
-
-
-
-
-
-
$
2,723,028
$
3,020,070
$
-
382,600
2,156
429
-
$
-
(2,156)
29,571
-
$
382,600
$
2,723,028
(365,032)
31,849,329
$
-
-
-
$
3,020,070
-
30,000
(365,032)
37,975,027
$
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
Recovery of 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
Origination of mortgage loans held for sale
Proceeds from sale of mortgage loans held for sale
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
Purchase of bank owned life insurance
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 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 financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Years Ended December 31,
2014
2013
$
3,360,889
$
3,315,744
487,942
(850,000)
360,364
884,280
(288,847)
288,130
-
(20,404)
(240,019)
-
30,000
(2,091,950)
1,105,950
71,685
14,875
22,453
(453,136)
49,300
132,860
184,764
3,049,136
17,521,826
(11,308,586)
(3,500,000)
-
(2,099,458)
1,440,628
(18,251,293)
1,235,085
(470,903)
(15,432,701)
-
(340,492)
-
-
10,000,000
-
15,045,762
(15,587,545)
(666,177)
8,451,548
(3,932,017)
448,786
(500,000)
520,557
1,239,767
(109,232)
120,919
(16,801)
-
(236,542)
15,001
28,500
-
-
34,329
(91,231)
285,886
132,830
(3,062)
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
31,510,684
19,450,623
$
27,578,667
$
31,510,684
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,
2014
2013
$
1,000,000
3,141,032
$
460,000
3,273,101
$
(2,078,653)
$
(3,568,832)
(1,618,758)
(180,000)
(1,410,000)
(81,000)
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, 2014 and 2013
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 2014 and 2013, the aggregate amount of daily-required balances was $44,000 and $46,000,
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 disposition 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. 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.
9
9
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 2 - Summary of significant accounting policies (continued)
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 held for investment 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. Loans held for sale are originated and intended for sale
in the secondary market. These loans are carried at the lower of cost or market in the aggregate. Net unrealized losses, if
any, are recognized through charges to income. 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.
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.
10
10
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 2 - Summary of significant accounting policies (continued)
Allowance for loan losses (concluded) - 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. In
April 2014, the Bank invested approximately $1.4 million in return for a one-third ownership in Manry Rawls, LLC.
Manry Rawls, LLC is a local and independent regional insurance agency offering a wide array of insurance products. The
Bank’s propionate share of Manry Rawls’ income is recorded as an increase in the investment and directly to other non-
interest income. Any cash distributions made by Manry Rawls’ would lower the recorded investment at the time of
payment. Income recognized in 2014 was $175,611. The difference between the carrying value of the investment and the
underlying equity in net assets amounts to approximately $923,000 and is considered equity method goodwill. Equity
method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the investment might not be recoverable. No such impairment was identified in 2014.
11
11
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 2 - Summary of significant accounting policies (continued)
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.
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, 2014 and 2013. The years ending on or after December 31, 2011 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.
12
12
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 2 - Summary of significant accounting policies (continued)
Estimation of fair values (concluded) – 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.
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, 2014 and 2013 are sufficient to cover inherent losses in the portfolio.
Recent accounting pronouncements - In January 2014, the FASB issued ASU 2014-04, “Troubled Debt Restructurings by
Creditors (Subtopic 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, 2014 and 2013
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 amendments are effective for fiscal years beginning after December
31, 2014. The adoption of this standard is not expected to have a material impact on the consolidated financial
statements of the Company.
In June 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU
applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or
enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.
The guidance supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition”, most industry-
specific guidance, and some cost guidance Table of Contents 10 included in Subtopic 605-35, “Revenue Recognition-
Construction-Type and Production-Type Contracts”. The core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle,
an entity must apply a five step process including: identification of the contract(s) with a customer, identification of
performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to
the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation.
Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are
not in a contract with a customer have also been amended to be consistent with the guidance on recognition and
measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017
for nonpublic companies. Early adoption is not permitted. The adoption of this standard is not expected to have a
material impact on the consolidated financial statements of the Company.
In August 2014, the FASB issued ASU No. 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic
310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The amendments in this
ASU apply to creditors that hold government-guaranteed mortgage loans and is intended to eliminate the diversity in
practice related to the classification of these guaranteed loans upon foreclosure. The new guidance stipulates that a
mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if (1) the loan has a
government guarantee that is not separable from the loan prior to foreclosure, (2) at the time of foreclosure, the creditor
has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has
the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on
the basis of the fair value of the real estate is fixed. Upon foreclosure, the other receivable should be measured on the
amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this
ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014.
Entities may adopt the amendments on a prospective basis or modified retrospective basis as of the beginning of the
annual period of adoption; however, the entity must apply the same method of transition as elected under ASU 2014-04.
Early adoption is permitted provided the entity has already adopted ASU 2014-04. 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.
14
14
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 3 - Available-for-sale securities
At December 31, 2014 and 2013, securities are as follows:
December 31, 2014
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
December 31, 2013
State and municipal
Residential and mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Amortized
Cost
$ 34,040,522
19,048,941
46,442,057
32,526,739
$ 132,058,259
Gross
Unrealized
Gains
$ 2,010,653
403,228
804,844
1,832,340
$ 5,051,065
Gross
Unrealized
Losses
$ 4,050
28,123
443,032
-
$ 475,205
Fair
Value
$ 36,047,125
19,424,046
46,803,869
34,359,079
$ 136,634,119
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
At December 31, 2014 and 2013, 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, 2014
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
$ 400,388
7,007,611
14,639,068
$ -
-
-
$ 4,050
28,123
443,032
$ 4,050
28,123
443,032
investment securities
$ 22,047,067
$ -
$ 475,205
$ 475,205
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
15
15
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 3 - Available-for-sale securities (concluded)
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, 2014 and 2013, securities with a carrying value of approximately $24,085,310 and $17,016,641,
respectively, are pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2014
and 2013, securities with a carrying value of $19,123,648 and $4,792,267, respectively, are pledged to the Federal Home
Loan Bank to secure advances. Investment securities with carrying values of $2,869,847 and $3,213,431 are pledged to
secure repurchase agreements at December 31, 2014 and 2013, respectively.
At December 31, 2014, 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
State and muncipals
Total gross realized gains
Amortized
Cost
$ -
-
15,509,753
116,548,506
$ 132,058,259
Fair
Value
$ -
-
16,426,280
120,207,839
$ 136,634,119
2014
$ -
288,847
$ 288,847
2013
$ 109,074
158
$ 109,232
There were no gross realized losses on available-for-sale securities during 2014 or 2013.
Proceeds from the sale of available-for-sale securities totaled $3,757,225 and $4,878,319 for the years ended December 31,
2014 and 2013, respectively.
16
16
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013, loans held for investment 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
2014
2013
$ 32,212,181
$ 31,261,147
33,355,157
59,344,528
44,829,015
7,283,745
12,517,764
189,542,390
35,342,391
20,733,384
1,873,436
247,491,601
(8,181,827)
15,536
$ 239,325,310
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
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 $32.2 million and $31.3 million at December 31, 2014 and 2013,
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 $44.8 million and $41.3 million at December 31, 2014 and 2013, respectively.
Commercial real estate loans totaled $92.7 million and $92.8 million at December 31, 2014 and 2013,
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.
17
17
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 4 – Loans and Allowance for Loan Losses (continued)
Commercial and Industrial Loans - At December 31, 2014 and 2013, the Bank’s commercial loan portfolio totaled $35.3
million and $23.1 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 $20.7 million and $19.7 million at December 31, 2014 and 2013,
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 $1.9 million and $2.2 million at
December 31, 2014 and 2013, 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.
18
18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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.
19
19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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
Unfavorable competitive comparisons.
Lack of well-defined secondary repayment source, and
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.
20
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013:
Real Estate Credit Exposure as of December 31, 2014
Commercial Real Estate
Owner
occupied
Non-owner
occupied
-
$
205
4,931
12,496
11,128
4,511
84
-
-
33,355
$
(in thousands)
$
-
111
9,958
21,740
16,581
3,060
7,061
834
-
59,345
$
Construction
-
$
-
5,015
10,387
13,224
2,945
641
-
-
32,212
$
Residential
1-4 Family
-
$
80
12,034
16,979
10,681
2,681
2,374
-
-
44,829
$
Multifamily
-
$
-
69
5,242
1,164
-
809
-
-
7,284
$
Equity lines
of credit
-
$
237
7,289
3,780
975
-
237
-
-
12,518
$
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, 2014 and 2013
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2014
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
Commerical
and industrial Agricultural
Individuals
Total
(in thousands)
-
$
-
2,161
20,179
11,155
1,179
668
-
-
35,342
$
-
$
-
3,907
11,281
4,127
873
546
-
-
20,734
$
-
$
-
599
654
232
388
-
-
-
1,873
$
-
$
633
45,963
102,738
69,267
15,637
12,420
834
-
$
247,492
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
Multifamily
Equity lines
of credit
-
$
103
12,875
13,271
10,428
3,208
1,454
-
-
41,339
$
-
$
-
115
5,164
1,643
-
455
-
-
7,377
$
-
$
537
5,664
3,869
1,064
21
270
-
-
11,425
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
22
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2013
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
Commerical
and industrial Agricultural
Individuals
Total
(in thousands)
$
-
-
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
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 no financing receivables
past due over 90 days accruing interest as of December 31, 2014. 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 were expected to be repaid in full. Nonaccrual loans as of December
31, 2014 totaled $5.9 million, or 2.39% of total loans, compared with $5.6 million, or 2.45% of total loans, as of
December 31, 2013. 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, 2014 and 2013 was 24 and 18, respectively.
For the years ended December 31, 2014 and 2013, the Bank recognized $9,621 and $-0- in 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 $175,472 and $181,249 for the years ended December 31, 2014 and 2013, respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2014 and 2013:
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
23
2014
2013
$
323,067
$
2,896,720
-
2,588,564
1,606,145
808,547
43,609
-
546,046
-
126,654
1,688,240
372,204
455,300
76,954
-
-
-
$
5,915,978
$
5,616,072
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013:
December 31, 2014
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
$
-
$
-
$
-
$
-
$
-
$
32,212
$
32,212
-
-
208
-
-
-
-
-
208
$
-
-
483
-
-
-
-
-
483
$
-
834
-
408
17
-
546
-
1,805
$
-
-
-
-
-
-
-
-
$
-
-
834
691
408
17
-
546
-
2,496
$
33,355
58,511
44,138
6,876
12,501
35,342
20,188
1,873
244,996
$
33,355
59,345
44,829
7,284
12,518
35,342
20,734
1,873
247,492
$
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
$
24
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013, the following table presents a breakdown of the
types of concession made by loan class:
Year ended December 31, 2014
Post-
Modification
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Number
of loans
Year ended December 31, 2013
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
-
-
-
-
-
4
47,144
880,858
435,000
47,394
884,915
433,621
-
-
-
-
-
-
-
-
-
-
$
1,363,002
$
1,365,930
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
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 2014. Within the last 12 months, two loans that were
restructured in 2013, with a total principal balance of $2.1 million subsequently defaulted and were foreclosed upon. Two
loans that were restructured within the last 12 months during 2012 with a total principal balance of $919,100 at
December 31, 2012 subsequently defaulted and were foreclosed upon during 2013. These modifications resulted in
specific reserves in the Bank’s allowance for loan losses of $-0- and $195,008 as of December 31, 2014 and 2013,
respectively.
25
25
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 4 - Loans and Allowance for Loan Losses (continued)
Troubled Debt Restructurings (concluded) - There are two TDRs that are on non-accrual status and have a total current
principal balance of $871,859 as of December 31, 2014. There were three TDRS that were on non-accrual status and had
a total current principal balance of $2.5 million as of December 31, 2013. Nineteen TDRs with a current principal
balance of $9.7 million and twenty TDRs with current principal balance of $9.8 million were considered performing loans
and are accruing interest based on their sustained payment performance as of December 31, 2014 and 2013, 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. Any loans classified as troubled debt restructurings regardless of loan grade are also classified
as impaired loans. The Bank measures impairment based upon discounted expected 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 $15.6 million and $14.8 million as of December 31, 2014 and 2013, 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.
26
26
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013:
December 31, 2014
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
27
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
318
$
318
$
-
$
323
$
20
131
3,224
540
73
17
-
-
-
131
3,224
540
73
17
-
-
-
-
-
-
-
-
-
-
-
187
3,256
250
73
21
-
-
-
1,342
1,342
31
1,373
1,349
4,863
2,181
736
27
250
546
-
1,349
4,863
2,181
963
27
250
546
-
28
1,493
959
283
27
9
236
-
1,369
4,981
2,229
986
28
208
583
-
13
178
13
-
-
-
-
-
67
74
212
95
22
1
8
25
-
$
1,660
$
1,660
$
31
$
1,696
$
87
1,480
8,087
2,721
809
44
250
546
-
15,597
$
1,480
8,087
2,721
1,036
44
250
546
-
15,824
$
28
1,493
959
283
27
9
236
-
3,066
$
1,556
8,237
2,479
1,059
49
208
583
-
15,867
$
87
390
108
22
1
8
25
-
728
$
27
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 4 - Loans and Allowance for Loan Losses (continued)
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
$
28
28
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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
$850,000 and $500,000 for the years ended December 31, 2014 and 2013, respectively. During 2014 and 2013 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 2014 and 2013. 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.
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, 2014 were watch list trends, unemployment rate trends,
government spending expectations and underwriting and servicing assessments.
During 2010 and 2011 the Bank charged-off approximately $2.4 million of principal of a $3.6 million construction loan
due to the deteriorating financial condition of the borrower and a current ruling on a related court case. In 2014 this
court ruling was overturned. The borrower’s payment as a result of the court ruling resulted in a recovery of approximately
$2.2 million which increased the Bank’s allowance for loan losses and is included in recoveries on construction loans in
the 2014 table below.
29
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 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
December 31,
2013
Charge-offs Recoveries
Provision
(Amounts in thousands)
December 31,
2014
$
1,598
$
757
$
2,197
$
(1,930)
$
1,108
893
1,728
1,500
190
292
590
550
40
7,381
$
-
247
32
-
-
34
-
449
-
54
-
17
3
-
2
1,072
$
3
2,723
$
(658)
1,139
417
118
(101)
154
25
(14)
(850)
$
684
2,620
1,939
308
208
713
575
27
8,182
$
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
$
30
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 4 - Loans and Allowance for Loan Losses (concluded)
Allowance for Loan Losses (concluded) - The activity in the allowance for loan loss for 2014 and 2013 are summarized by
loan class as follows:
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)
$
31
$
1,660
$
1,077
$
30,552
28
1,493
959
283
27
9
236
-
3,066
$
1,480
8,087
2,721
809
44
250
546
-
15,597
$
656
1,127
980
25
181
704
339
27
5,116
$
31,875
51,257
42,108
6,475
12,474
35,092
20,187
1,875
231,895
$
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
$
31
As of December 31, 2014
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, 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
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 5 - Premises and equipment
At December 31, 2014 and 2013, 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
2014
$ 456,450
5,837,763
2,643,475
213,776
455,235
9,606,699
(5,800,253)
-
$ 3,806,446
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
For 2014 and 2013, depreciation charged to operating expense was $487,942 and $448,786, respectively.
Note 6 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2014 and 2013:
Federal Home Loan Bank stock
Federal Reserve Bank stock
Community Bankers' Bank stock
Bankers Title, LLC
Manry Rawls, LLC
Senior Housing Crime Prevention Foundation stock
Total non-marketable equity securities
Note 7 - Interest-bearing deposits
Interest-bearing deposits consist of the following:
NOW accounts
Money market accounts
Savings accounts
Certificates of deposits and IRAs $250,000 and over
Certificates of deposits and IRAs under $250,000
Total interest-bearing deposits
2014
$ 1,721,200
397,350
61,300
99,178
1,576,519
500,000
$ 4,355,547
2013
$ 1,371,300
273,900
61,300
49,589
-
500,000
$ 2,256,089
2014
$ 30,262,637
88,955,844
22,848,756
15,900,016
98,756,044
$ 256,723,297
2013
$ 31,415,299
89,663,359
21,580,454
16,232,003
113,419,727
$ 272,310,842
32
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 7 - Interest-bearing deposits (concluded)
At December 31, 2014, the scheduled maturities of time deposits are as follows:
2015
2016
2017
2018
2019
Thereafter
Total time deposits
$ 47,725,228
22,273,100
13,402,487
19,505,366
11,749,879
-
$ 114,656,060
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, 2014 and
2013, respectively. Interest expense of $45,125 and $-0- was paid to these related parties on the capital notes for the years
ended December 31, 2014 and 2013, respectively.
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
2014
$ 1,929,599
$ 2,390,632
0.25%
$ 3,457,523
2013
$ 2,595,776
$ 2,160,045
0.25%
$ 3,148,511
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, 2014 and 2013, 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.
33
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 9 - Securities sold under agreements to repurchase and other borrowings (concluded)
At December 31, 2014 and 2013, Federal Home Loan Bank advances were as follows:
December 31, 2014
Maturity date
August 31, 2015
January 9, 2017
May 29, 2018
January 8, 2019
September 3, 2019
April 15, 2020
October 13, 2020
Call Feature
-
-
One-time call
-
-
-
-
Amount
$ 5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
2,500,000
2,500,000
Rate
3.080%
0.990%
3.690%
1.977%
1.999%
2.040%
2.176%
Total FHLB borrowings/weighted average rate
$ 30,000,000
2.310%
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%
The carrying value of loans pledged as collateral to the Federal Home Loan Bank were $21,447,533 and $31,964,545 at
December 31, 2014 and 2013, respectively.
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 $337,000 and $335,000 for
the plan for 2014 and 2013, 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 $1,104,315 and $971,455 as of December 31, 2014 and 2013, respectively.
Salaries and employee benefits expense included $136,400 and $221,811 of expense related to these arrangements for
2014 and 2013, respectively.
34
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 11 - Income taxes
The principal components of the income tax expense as of December 31, 2014 and 2013 are as follows:
Federal - current tax provision
Federal - deferred (benefit)
2014
$ 546,865
360,364
$ 907,229
2013
$ 577,413
520,557
$ 1,097,970
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-taxable bank owned life insurance
Non-deductible expenses
Other
2014
$ 1,451,160
2013
$ 1,500,663
(473,721)
(73,670)
16,170
(12,710)
(448,919)
-
20,776
25,450
Total income tax expense
$ 907,229
$ 1,097,970
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:
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
2014
2013
$ 1,074,456
384,624
652
42,160
172,440
1,674,332
$ 1,363,456
338,248
26,246
296,570
43,416
2,067,936
(136,987)
(352,450)
(3,904)
(1,555,793)
(2,049,134)
(130,727)
(366,845)
(29,006)
(484,973)
(1,011,551)
Net deferred tax asset (liability)
$ (374,802)
$ 1,056,385
35
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 12 - Commitments and contingencies
The Company leases banking premises and various equipment for periods extending through December 2020. Total rental
expense was $189,521 and $187,351 for 2014 and 2013, respectively.
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2014, pertaining to bank premises and
equipment, future minimum rental commitments under various operating leases are as follows:
2015
2016
2017
2018
2019
Thereafter
$ 128,861
67,734
12,131
6,876
6,876
2,292
$ 224,770
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 2014 and 2013
is as follows:
Beginning balance, January 1
Originations
Repayments
Ending balance, December 31,
2014
$ 3,593,573
1,216,723
(730,743)
$ 4,079,553
2013
$ 2,508,622
1,649,450
(564,499)
$ 3,593,573
Commitments to extend credit to related parties amounted to $7,451,081 and $7,557,701 at December 31, 2014 and
2013, respectively.
Deposits from related parties held by the Bank amounted to $4,478,645 and $8,212,635 at December 31, 2014 and 2013,
respectively.
The Bank currently has a loan outstanding to Mary Rawls, LLC with a current principal balance of $2,844,624 as of
December 31, 2014. This loan is at substantially the same terms as similarly situated customers.
See Note 8 for additional disclosures of related party transactions.
36
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013. 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
2014
$ 49,689,725
$ 300,038
2013
$ 51,266,040
$ 400,566
Standby letters of credit outstanding at December 31, 2014 expire during 2015 and 2016.
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.
37
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014, the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2014, 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, 2014:
Total Capital
(to Risk-Weighted Assets)
$ 48,402
17.9% $ 21,602
8%
$ 27,002
10%
Tier I Capital
(to Risk-Weighted Assets)
45,017
16.7% 10,801
4%
16,201
Tier I Capital
(to Average Assets)
45,017
10.8% 16,623
4%
20,779
6%
5%
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%
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.
38
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 2014 and 2013:
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2014
$ 36,047,125
19,424,046
46,803,869
34,359,079
$ 136,634,119
Level 1
$ -
-
-
-
$ -
Level 2
$ 36,047,125
19,424,046
46,803,869
34,359,079
$ 136,634,119
Level 3
$ -
-
-
-
$ -
39
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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, 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
$ -
-
-
-
$ -
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, 2014
Level 1
Level 2
Level 3
$ 486,000
8,227,915
$ 8,713,915
$ -
-
$ -
$ -
-
$ -
$ 486,000
8,227,915
$ 8,713,915
40
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
Note 16 - Fair value measurements (concluded)
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
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Assets
Fair Value at
December 31, 2014
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 486,000
8,227,915
Total assets
$ 8,713,915
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, 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%
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December
31, 2014 and 2013. 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 held for sale
Loans held for investment, net
Accrued interest receivable
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts
Time deposits
Accrued interest payable
FHLB Advances
Capital notes
Securities sold under agreement to repurchase
41
2014
2013
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Dollars in thousands)
$ 27,579
136,634
986
239,325
1,725
$ 27,579
136,634
986
238,620
1,725
$ 31,511
140,293
-
221,843
1,797
$ 31,511
140,293
-
221,561
1,797
228,153
114,656
249
30,000
11,253
1,930
228,153
115,801
249
30,668
11,253
1,930
213,699
129,652
234
20,000
11,253
2,596
213,699
131,899
234
20,751
11,253
2,596
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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 2014. 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 are five
years. The compensation expense recognized for the years ended December 31, 2014 and 2013 was $30,000 and $15,001,
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, 2014 and 2013, the expense related to these issuances
was $30,000 and $28,500, respectively.
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2014 and
2013, and changes during the years ended December 31, 2014 and 2013, 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
2014
Weighted
Average Price
$ -
43.51
-
-
$ 43.51
Shares
-
3,450
-
-
3,450
2013
Weighted
Average Price
$ 35.75
-
35.75
-
$ -
Shares
420
-
(420)
-
-
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
2014
2013
$ 3,360,889
-
$ 3,360,889
$ 3,315,744
488,399
$ 2,827,345
608,039
607,357
$ 5.53
$ 4.66
$ 3,360,889
$ 2,827,345
608,039
345
608,384
607,357
-
607,357
$ 5.52
$ 4.66
42
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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 (see Note 1). 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 years ending December 31, 2014 and 2013 are presented for the Company as a
consolidated entity.
Financial information pertaining only to Farmers Bankshares, Inc. is as follows:
Balance Sheets
Cash
Taxes receivable
Investment in Farmers Bank
Other assets
Total assets
Assets
December 31,
2014
2013
$
$
954,727
216,758
48,037,325
214,477
49,423,287
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
194,785
11,448,260
$
11,253,475
228,250
11,481,725
382,600
2,723,028
31,849,329
3,020,070
37,975,027
380,015
2,695,613
28,853,472
941,417
32,870,517
Total liabilities and stockholders' equity
$
49,423,287
$
44,352,242
43
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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
Years Ended December 31,
2014
2013
$
929,268
$
170,246
569,159
26,131
34
595,324
(202,410)
536,354
42,201
23,125
14,260
79,586
(14,348)
105,008
Equity in undistributed income - Farmers Bank
Net income
$
2,824,535
3,360,889
$
3,210,736
3,315,744
Statements 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 provided by (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 common shares
Cash dividends paid on preferred shares
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Years Ended December 31,
2014
2013
$
3,360,889
$
3,315,744
(202,410)
(23,614)
(58,003)
(2,824,535)
252,327
-
-
-
-
(340,492)
-
(340,492)
(88,165)
(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
-
$
954,727
$
1,042,892
44
44
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2014 and 2013
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 19, 2015, in connection with the preparation of these
financial statements which is the date the financial statements were available to be issued.
45
45
Branch Locations
www.farmersbankva.com • 757-242-6111
Courtland Post Office
Northern Suffolk Obici House
Courtland
28319 Southampton Parkway, Suite D
Harbour View – Suffolk
6255 College Drive, Suite L
Central Suffolk Water Tower
Downtown Suffolk Seaboard Station
Hillpoint – Suffolk
3100 Godwin Boulevard
Lakeside – Suffolk
1008 West Washington Street
Smithfield Main Street
Windsor 4th of July Celebration
Smithfield
1119 South Church Street, PO Box 888
Windsor
50 East Windsor Boulevard, PO Box 285
FARMERS BANK
www.farmersbankva.com