FARMERS BANK
S i n c e 1919
A N N U A L R E P O R T 2 0 1 6
HIGHLIGHTING INDEPENDENCE:
Taste
Taste is an award-winning specialty food store that uses
its 350 employees to cultivate community through a
taste of the good life. The brand has been independent
and family owned since its opening in 1973. Local
customers know the Taste difference comes from their
food promise of using small batch, from scratch house-
made foods from local and seasonal ingredients whenever
possible. We at Farmers Bank have also remained
independent in order to carry out our mission as a
community bank. Our partnership with Taste has been
rewarding as they continue to expand and uphold their
dedication to the local community.
Since 1919 we have been a
community bank extremely focused
on our customers’ needs, attentive
to their desires, empathizing with
their hardships, celebrating their
successes, and genuinely interested
in their stories. While our story
entails growing from a one branch,
small-town bank to seven branches
located throughout the Tidewater
area, we still value those personal
relationships and remain involved
in the evolution of our customers.
We are proud to feature a few of our
customers throughout this annual
report who have demonstrated
values similar to our own. Whether
it be a retail business committed to
expanding a brand, a generational
manufacturer focusing on
diversification, a hard working
farm family, or an organization
committed to helping those in need,
we can service a variety of needs and
respond with flexible solutions.
We value personal
relationships and
remain involved
in the evolution of
our customers.
Dear Shareholder,
One of our favorite stories of 2016
has been our financial success and
ability to return a portion of that
to our shareholders. Again, we are
able to report record earnings of
almost $4.2 million for 2016.
Our board of directors and
management team have remained
determined and focused on our
long-term objectives when making
strategic decisions.
Consolidated net income of
$4.2 million has increased
approximately eleven percent
over our 2015 net income of $3.8
million. We have been successful
with improving net interest income
and holding non-interest expenses
consistent with the prior year.
Even though economic growth
in our local area is still somewhat
stagnant, year over year, we were
able to generate loan growth of
approximately seven and a half
percent and increase non-interest
bearing deposits by five percent.
We believe these successes are a
result of our effort to build new
and existing relationships that
can encompass all of a customer’s
financial needs.
(continued on next page)
HONORING FAMILY:
Richard and Jeffrey
Byrum Family Farms
Farming families hold a special place in not only our
name but our mission as a local community bank.
Though we have always been committed to all types
of commercial and individual customers in our
markets, those that bring the smell of peanuts and
the beauty of cotton to our area each year are some
of our most loyal customers. Richard and Jeffrey
Byrum have lived and worked on their family farm
for their entire lives. Their pride and dedication to
the planting, growing, and harvesting process is one
we admire and are honored to support. Like the
Byrums, our success is a direct result of reaping what
we’ve sowed.
COMMITMENT TO SERVICE:
Suffolk Iron Works
Since being founded in 1894, Suffolk Iron Works
has been family owned and operated. Their 72
employees work to continuously meet the ever-
changing demands of the steel related industry.
Their services range from steel fabrication to
material handling systems and crane and rigging
projects. Their commitment to unmatched service,
unconditional quality, and unshakable integrity
makes them a perfect partner for Farmers Bank.
We are both successful through valuing long-term
relationships with our customers.
(continued from previous page)
We also continue to pursue
expansion into eastern tidewater
to capitalize on the consolidation
of many community banks
in the area. We feel that small
businesses in these markets still
have a desire for the flexibility
and service a traditional,
community bank can offer.
By evaluating new markets in
a disciplined and intentional
manner, we are able to remain
prudent with expenses but
increase franchise value.
Of equal importance is the
improvement in our stock’s
liquidity and value during 2016.
The price of our stock increased
almost 67% from December 31,
2015 to December 31, 2016.
Growing our dividend payout
ratio from 14% in 2015 to 22%
in 2016, increasing transparency,
and remaining attentive have all
supported this accomplishment.
The price of
our stock increased
almost 67% from
2015 to 2016.
While we enjoy reflecting on
the success of the past year, our
sight is already set on the one
that is upon us. Our board and
management are a cohesive
team equipped with the desire
to persevere and a vision for
our future. We want to thank
our loyal staff for always being
attentive to the needs of our
customers and for coming in
everyday committed to the
course we have set. As always, we
appreciate you, our shareholders,
and the confidence you have
placed in our ability to bring
value to your investment.
Richard J. Holland, Jr.
Chairman and CEO
Vernon M. Towler
President
QUALITY PRODUCTS:
Turf and Garden Inc.
Turf and Garden’s green thumbs go all the way back
to 1906. They have been serving the turf industry
with quality products for over one hundred years.
As they have expanded their market, they have
grown to 32 employees servicing the Hampton
Roads, Powell’s Point, and Grafton areas. One
of their best selling products, Southern Belle,
was developed by Turf and Garden and has been
specifically formulated to provide the highest quality
turf in the transition zone. We have found that
Turf and Garden’s focus and devotion to offering
quality products align with Farmers Bank’s guiding
principles and strengthens our loyalty to each other.
SHARING VALUES:
Board of Directors
Gethsemane
Community
Fellowship Church
founded in 1992
We met Dr. Houston several years ago
and have been inspired by his leadership
in Gethsemane Community Fellowship
Church. The church was founded in 1992
and now has over 2,500 members. Their
mission is to reach out to people with the
saving power and love of Jesus Christ and
build them up in the faith. The leaders
and members of this church encourage
those most needy in the Norfolk and
surrounding areas and strive to raise their
community up one member at a time. We
at Famers Bank are privileged to feature
Gethsemane as an organization that shares
our same values.
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.
Entrepreneur
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
Vernon M. Towler*
President
*Farmers Bankshares, Inc. Board Members
Suffolk Community Board
Timothy K. Palmer,
Chairman
Attorney at Law & Certified
Public Accountant
James C. Adams, III
President, Featherlite Coaches
Alison Dodson Anderson
Owner, A. Dodson’s
J. Clifton Harrell, Jr.
President, Suffolk Iron Works
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
Randall & Page, P.C.
Executive Management
Richard J. Holland, Jr.
Chief Executive Officer
Vernon M. Towler
President
Kristy E. DeJarnette
Executive Vice President,
Chief Financial Officer
Bank Officers
Patricia T. Allen
Senior Vice President, Director
of Loan & Deposit Operations
Chad A. Rountree
Senior Vice President, Western Tidewater
Market Executive
Kathy C. Bryant
Senior Vice President, Director of
Human Resources and Retail
Thomas L. Woodward, III
Senior Vice President,
Chief Lending Officer
Norman F. Carr, Jr.
Senior Vice President,
Director of Financial Services
Jeffrey S. Creekmore
Senior Vice President, Chesapeake
Market Executive
William N. Bailey
Vice President,
Information Technology
P. Kelley Gowen
Senior Vice President,
Chief Credit Officer
Lauren P. Harper
Senior Vice President, Loans
Elizabeth D. Jones
Senior Vice President,
Smithfield Market Executive
Charles A. Powers II
Senior Vice President, Loans
James C. Saunders
Senior Vice President,
Suffolk Market Executive
Deborah R. Cagle
Vice President, Retail & Business
Development
Kelley T. Healey, Jr.
Vice President, Loans
Sharon A. Smith
Vice President, Compliance
Andrea B. Curry
Assistant Vice President,
Information Technology
Melanie S. Gwaltney
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
Kelly D. Dewitt
Assistant Vice President, BSA, AML,
OFAC & Security Officer
Susan F. Boone
Corporate Secretary
C. Thomas Eure, Jr.
Assistant Vice President,
Branch Administration
BEING GOOD CITIZENS:
Farmers Bank in
the Community
Part of our mission statement includes being
good corporate citizens, serving as leaders to
strengthen our communities and promote
their welfare. We have a great deal of pride
in the numerous local organizations that
devote themselves to the betterment of
our communities. Though banking is our
top priority, supporting local community
organizations financially and with our time
is a civic duty we do not take lightly. This
year we were able to provide contributions
and sponsorships of $370,658 to local
nonprofit organizations and $15,000 in
scholarships to local graduating seniors.
Franklin-Southampton County Fair
2016 Scholarship Winners
Dick Holland and Vernon Towler with area
high school seniors on 2016 Bank Day
Renee Scott,
Smithfield Branch
Manager and
two Smithfield
High School
JROTC students
Jessica Slaba and
Kristy DeJarnette
with Carrsville
Elementary
School Principal,
Clint Walters
Financial Highlights
At or for the Years Ended December 31,
2016
2015
2014
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
Dividends per share
Shares outstanding at period end
Balance Sheet Data
Total assets
Total loans, net
Total deposits
Borrowings
Selected Performance Ratios (Bank Only)
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)
$16,062
2,116
13,946
-
13,946
2,898
11,528
5,316
1,129
$4,187
$1.37
$13.98
3,056,830
$0.30
3,056,363
$423,561
260,202
343,911
25,000
1.09%
9.01%
3.82%
17.21%
63.78%
0.75%
2.15%
0.22%
$16,044
2,730
13,314
-
13,314
2,919
11,492
4,741
967
$3,774
$1.24
$13.30
3,053,845
$0.18
3,054,092
$414,933
242,032
335,877
25,000
0.99%
8.54%
3.63%
17.98%
66.68%
0.55%
2.54%
0.73%
$16,128
3,156
12,972
(850)
13,822
1,763
11,317
4,268
907
$3,361
$1.11
$12.49
3,040,195
$0.12
3,060,780
$426,791
239,325
342,809
30,000
0.90%
8.20%
3.54%
11.97%
71.24%
2.39%
3.29%
-0.68%
11.64%
16.53%
$49,096
11.53%
18.50%
$49,166
10.83%
17.92%
$48,037
(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
Dividends Per Share
2014
2015
2016
2014
2015
2016
2014
2015
2016
3.40% 3.50% 3.60% 3.70% 3.80% 3.90%
0.00% 0.40% 0.80% 1.20%
$- $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2016 and 2015
Contents
Independent Auditor’s 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 - 48
Independent Auditor’s Report
To the Board of Directors and Shareholders
Farmers Bankshares, Inc.
Windsor, Virginia
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc. and Subsidiary, which
comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the
consolidated financial statements (collectively, the financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the 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 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
Farmers Bankshares, Inc. and Subsidiary as of December 31, 2016, and the results of its operations and its cash flows for the
year then ended in accordance with accounting principles generally accepted in the United States of America.
Other Matter
The consolidated financial statements of the Farmers Bankshares, Inc. and Subsidiary as of and for the year ended
December 31, 2015 were audited by other auditors whose report, dated March 21, 2016, expressed an unmodified opinion.
Raleigh, North Carolina
March 10, 2017
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets
Assets
Assets
2016
2016
December 31,
December 31,
2015
2015
Cash and cash equivalents
Cash and cash equivalents
Cash and due from banks
Cash and due from banks
Federal Funds sold
Federal Funds sold
Total cash and cash equivalents
Total cash and cash equivalents
Available-for-sale securities (Note 3)
Mortgage loans held for sale
Available-for-sale securities (Note 3)
Loans held for investment, net of allowance for loan losses
Mortgage loans held for sale
Loans held for investment, net of allowance for loan losses
of $5,755,746 and $6,343,636, respectively (Note 4)
of $5,755,746 and $6,343,636, respectively (Note 4)
Premises and equipment, net (Note 5)
Other real estate owned
Accrued interest
Premises and equipment, net (Note 5)
Prepaid expenses
Other real estate owned
Net deferred tax asset (Note 11)
Accrued interest
Income taxes receivable
Non-marketable equity securities (Note 6)
Prepaid expenses
Bank-owned annuity contract
Net deferred tax asset (Note 11)
Bank-owned life insurance
Income taxes receivable
Other assets
Non-marketable equity securities (Note 6)
Bank-owned annuity contract
Total assets
Bank-owned life insurance
Other assets
$
8,808,046
$
2,329,302
11,137,348
8,808,046
2,329,302
11,137,348
125,746,703
1,443,960
125,746,703
1,443,960
260,202,399
3,477,251
877,278
260,202,399
1,723,019
3,477,251
358,741
877,278
476,106
1,723,019
5,219
4,676,091
358,741
3,026,890
476,106
10,230,912
5,219
179,118
4,676,091
412,423,687
3,026,890
10,230,912
179,118
412,423,687
423,561,035
25,000,000
7,888,475
1,125,881
$
1,323,644
-
101,552,020
242,359,428
343,911,448
183,700
1,401,122
380,834,270
25,000,000
7,888,475
1,125,881
1,323,644
-
382,047
2,775,106
38,344,408
1,225,204
42,726,765
183,700
1,401,122
380,834,270
$
14,636,916
1,648,069
16,284,985
$
134,739,604
911,050
242,031,797
3,547,672
612,798
1,774,430
337,341
-
92,323
4,519,175
-
9,909,100
172,930
398,648,220
14,636,916
1,648,069
16,284,985
134,739,604
911,050
242,031,797
3,547,672
612,798
1,774,430
337,341
-
92,323
4,519,175
-
9,909,100
172,930
398,648,220
25,000,000
9,928,475
823,102
1,240,929
148,656
198,802
1,108,511
374,325,847
381,763
2,754,141
35,070,594
2,400,860
40,607,358
$
96,420,933
239,456,439
335,877,372
25,000,000
9,928,475
823,102
1,240,929
148,656
198,802
1,108,511
374,325,847
$
$
414,933,205
Liabilities and Stockholders' Equity
Deposits
Total assets
Noninterest-bearing deposits
Interest-bearing deposits (Note 7)
Total deposits
Liabilities and Stockholders' Equity
423,561,035
$
$
101,552,020
242,359,428
343,911,448
$
96,420,933
$
239,456,439
335,877,372
414,933,205
Deposits
Federal Home Loan Bank borrowings (Note 9)
Capital notes (Note 8)
Securities sold under agreements to repurchase (Note 9)
Noninterest-bearing deposits
Deferred compensation plans
Interest-bearing deposits (Note 7)
Net deferred tax liability (Note 11)
Accrued interest
Other liabilities
Total deposits
Total liabilities
Federal Home Loan Bank borrowings (Note 9)
Capital notes (Note 8)
Stockholders' equity
Securities sold under agreements to repurchase (Note 9)
Common stock, $0.125 par value; 50,000,000 shares
Deferred compensation plans
Net deferred tax liability (Note 11)
Accrued interest
Other liabilities
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities
authorized; 3,056,363 and 3,054,092 shares issued and
outstanding at December 31, 2016 and 2015, including
nonvested shares of 8,223 and 13,800 shares, respectively
Stockholders' equity
Total liabilities and stockholders' equity
Common stock, $0.125 par value; 50,000,000 shares
$
423,561,035
$
414,933,205
authorized; 3,056,363 and 3,054,092 shares issued and
outstanding at December 31, 2016 and 2015, including
nonvested shares of 8,223 and 13,800 shares, respectively
3
The accompanying notes are an integral part of these consolidated financial statements.
Capital surplus
Retained earnings
382,047
2,775,106
38,344,408
The accompanying notes are an integral part of these consolidated financial statements.
381,763
2,754,141
35,070,594
3
Accumulated other comprehensive income
Total stockholders' equity
1,225,204
42,726,765
2,400,860
40,607,358
Total liabilities and stockholders' equity
$
423,561,035
$
414,933,205
The accompanying notes are an integral part of these consolidated financial statements.
3
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Interest income
2016
2016
Years Ended December 31,
Years Ended December 31,
2015
2015
Interest income
Interest and fees on loans held for investment
Interest on mortgage loans held for sale
Interest and fees on loans held for investment
Interest on available-for-sale securities
Interest on mortgage loans held for sale
Interest on tax exempt available-for-sale securities
Interest on available-for-sale securities
Interest on federal funds sold
Other interest income
Interest on tax exempt available-for-sale securities
Interest on federal funds sold
Other interest income
Total interest and dividend income
Interest expense
Interest expense
Total interest and dividend income
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
Interest on deposits
Interest on Federal Home Loan Bank advances
Interest on capital notes
Interest on repurchase agreements
Provision of loan losses
Interest on federal funds purchased
Net interest income
Net interest income after provision for loan losses
Total interest expense
Total noninterest income
Net interest income
Provision of loan losses
Noninterest income
Service charges
Income from automated teller machines and bank card interchange
Net gain on disposition of securities
Income on bank owned life insurance
Net gain (loss) on sale of premises and equipment
Net interest income after provision for loan losses
Income from investment in Manry Rawls, LLC
Income from mortgage loan sales
Other income
Noninterest income
Service charges
Income from automated teller machines and bank card interchange
Net gain on disposition of securities
Salaries and employee benefits
Income on bank owned life insurance
Equipment expense
Occupancy expense
Net gain (loss) on sale of premises and equipment
Bank franchise tax
Income from investment in Manry Rawls, LLC
Advertising and marketing
Income from mortgage loan sales
Data processing
Loan related legal and other expenses
Other income
Federal Deposit Insurance Corporation assessment
Net loss (gain) on sale and write-downs of other real estate owned
Other real estate owned
Prepayment penalty on borrowings
Other
Total noninterest income
Noninterest expense
Noninterest expense
Total noninterest expense
Income before income taxes
Income tax expense (Note 11)
Net income attributable to common shareholders
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
Cash dividends declared per common share
Net loss (gain) on sale and write-downs of other real estate owned
Other real estate owned
Prepayment penalty on borrowings
Other
Basic earnings per common share (Note 18)
Diluted earnings per common share
$
$
12,275,691
25,016
12,275,691
2,130,933
25,016
1,494,852
2,130,933
42,293
93,614
1,494,852
16,062,399
42,293
93,614
1,207,905
16,062,399
458,418
441,847
7,455
1,207,905
135
2,115,760
458,418
441,847
7,455
135
2,115,760
13,946,639
13,946,639
-
-
660,431
13,946,639
508,393
115,948
321,813
3,901
13,946,639
266,666
595,123
425,360
2,897,635
660,431
508,393
115,948
321,813
3,901
266,666
595,123
425,360
2,897,635
6,283,217
709,078
681,131
421,807
588,225
982,496
170,168
179,079
(18,243)
73,136
-
1,458,511
11,528,605
5,315,669
1,128,983
$
4,186,686
$
$
$
6,283,217
709,078
681,131
421,807
588,225
982,496
170,168
179,079
(18,243)
73,136
-
0.30
1.37
1.37
1,458,511
11,528,605
5,315,669
1,128,983
$
$
12,000,584
21,202
2,512,889
1,376,381
33,505
99,106
16,043,667
1,589,455
618,542
517,478
4,620
3
2,730,098
13,313,569
-
13,313,569
613,468
514,642
422,821
324,118
(58)
437,428
438,471
168,585
2,919,475
6,134,982
646,016
621,718
495,830
321,175
855,719
192,458
246,032
91,469
51,218
355,592
1,479,326
11,491,535
4,741,509
967,121
$
3,774,388
$
1.24
$
1.23
$
0.18
4
12,000,584
21,202
2,512,889
1,376,381
33,505
99,106
16,043,667
1,589,455
618,542
517,478
4,620
3
2,730,098
13,313,569
-
13,313,569
613,468
514,642
422,821
324,118
(58)
437,428
438,471
168,585
2,919,475
6,134,982
646,016
621,718
495,830
321,175
855,719
192,458
246,032
91,469
51,218
4
355,592
1,479,326
11,491,535
4,741,509
967,121
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Total noninterest expense
Income before income taxes
Income tax expense (Note 11)
Net income attributable to common shareholders
$
4,186,686
$
3,774,388
Basic earnings per common share (Note 18)
Diluted earnings per common share
Cash dividends declared per common share
$
1.37
$
1.37
$
0.30
$
1.24
$
1.23
$
0.18
The accompanying notes are an integral part of these consolidated financial statements.
4
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2016
Years Ended December 31,
2015
Net income
Other comprehensive loss:
Net income
Other comprehensive loss:
Unrealized holding losses on available-for-sale securities
Unrealized holding losses on available-for-sale securities
Tax effect
Tax effect
Unrealized holding losses on available-for-sale securities,
Unrealized holding losses on available-for-sale securities,
net of tax amount
net of tax amount
2016
$
4,186,686
2015
$
3,774,388
$
4,186,686
$
3,774,388
(1,665,349)
566,219
(1,665,349)
566,219
(1,099,130)
(1,099,130)
(515,376)
175,228
(515,376)
175,228
(340,148)
(340,148)
Reclassification adjustment for realized gains
Tax effect
Reclassification adjustment for realized gains
Tax effect
Reclassification adjustment for realized gains, net of tax amount
Reclassification adjustment for realized gains, net of tax amount
Other comprehensive loss, net of tax
Other comprehensive loss, net of tax
Comprehensive income
Comprehensive income
(115,948)
39,422
(76,526)
(1,175,656)
3,011,030
$
(115,948)
39,422
(76,526)
(1,175,656)
3,011,030
$
(422,821)
143,759
(279,062)
(619,210)
3,155,178
$
(422,821)
143,759
(279,062)
(619,210)
3,155,178
$
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.
5
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Changes in Stockholders' Equity
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Preferred
Preferred
Stock
Stock
Series B
Series B
Common
Stock
Common
Common
Stock
Stock
379,323
Capital
Surplus
Retained
Earnings
Capital
Surplus
Capital
Surplus
Stock
Series A
Preferred
Series A
Stock
Preferred
8,632,556
2,652,804
457,271
Retained
Accumulated
Earnings
Other
Comprehensive
26,360,240
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Accumulated
Other
Comprehensive
Total
Income
4,510,249
Total
42,992,443
Balances, December 31, 2012
8,632,556
457,271
382,600
-
$
$
2,723,028
379,323
-
$
-
31,849,329
2,652,804
26,360,240
$
3,315,744
3,020,070
$
37,975,027
4,510,249
3,315,744
42,992,443
Balances, December 31, 2012
(8,752,400)
-
-
-
Balances, December 31, 2014
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Net income
Changes in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effect
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
Repurchase common shares
119,844
Preferred stock net accretion, (amortization) and costs
Issuance of common stock - director stock plan
Issuance of common stock - stock compensation plan
-
-
Cash dividends declared on preferred shares
Stock based compensation
-
Issuance of common stock - director stock plan
-
Cash dividends declared on common shares, $0.55 per share
Forfeiture of restricted stock
Balances, December 31, 2013
$
-
119,844
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on common shares, $0.18 per share
Cash dividends declared on preferred shares
Net income
Cash dividends declared on common shares, $0.55 per share
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
-
-
$
-
Net income
Changes in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effect
Net income
Net income
Issurance of restricted common shares
Issuance of common stock - director stock plan
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Balances, December 31, 2015
(8,752,400)
-
-
-
-
Balances, December 31, 2013
Changes in net unrealized gain on securities available for
Balances, December 31, 2014
sale, net of reclassification adjustment and tax effect
Stock based compensation
Cash dividends declared on common shares, $0.30 per share
-
-
-
(437,600)
-
-
-
-
(908)
(437,600)
(19,671)
502
-
-
-
-
-
(431)
$
-
(19,671)
-
-
381,763
-
$
-
$
-
-
Balances, December 31, 2016
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
-
-
-
-
-
$
-
-
-
-
-
$
-
-
-
183
-
-
-
-
101
$
-
-
382,047
-
-
-
$
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
263
-
-
429
(57,416)
-
-
40,098
263
-
48,000
429
-
431
380,015
-
-
-
-
-
-
380,015
-
2,156
-
429
-
(5,252)
26,217
-
$
$
2,754,141
$
$
$
2,775,106
-
382,600
-
$
2,156
429
-
3,315,744
-
-
-
-
(619,210)
-
-
-
-
3,774,388
-
14,738
-
28,071
-
-
14,738
-
28,071
-
-
-
$
-
-
-
2,695,613
(553,123)
35,070,594
-
$
$
(100,173)
(388,226)
(334,113)
28,853,472
-
-
-
2,400,860
3,360,889
-
-
-
-
(3,568,832)
3,774,388
(619,210)
(58,324)
40,600
48,000
-
941,417
(553,123)
40,607,358
$
$
-
(3,568,832)
(9,190,000)
15,001
28,500
-
-
(388,226)
-
(334,113)
32,870,517
-
-
3,360,889
-
(3,568,832)
4,186,686
$
-
(2,156)
-
29,571
-
-
$
-
2,723,028
(912,872)
38,344,408
-
(1,175,656)
(365,032)
31,849,329
-
-
1,225,204
26,400
(1,175,656)
-
-
-
(5,151)
3,020,070
(912,872)
42,726,765
$
-
$
-
-
(365,032)
31,849,329
$
$
-
$
(2,156)
29,571
-
-
30,000
(365,032)
37,975,027
$
2,078,653
-
-
-
(100,173)
(388,226)
$
(334,113)
28,853,472
-
-
-
3,360,889
-
-
$
2,695,613
$
4,186,686
2,078,653
$
941,417
2,078,653
Total
3,315,744
(3,568,832)
(9,190,000)
15,001
28,500
(388,226)
(334,113)
$
32,870,517
-
-
3,360,889
2,078,653
30,000
(365,032)
-
-
$
382,600
$
2,723,028
$
3,020,070
$
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
The accompanying notes are an integral part of these consolidated financial statements.
6
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Cash flows from operating activities
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Net income
cash provided by operating activities
Adjustments to reconcile net income to net
Depreciation
Provision for deferred income taxes
Amortization of investment securities premiums
Depreciation
Net gain on disposition of available-for-sale securities
Recovery of loan losses
(Gain) loss on sales and writedowns on other real estate owned
Provision for deferred income taxes
(Gain) loss on sale of premises and equipment
Amortization of investment securities premiums
(Gain) on mortgages held for sale
Increase in cash value of bank owned life insurance
Net gain on disposition of available-for-sale securities
Stock based compensation
Loss on sales and writedowns on other real estate owned
Director expense for stock issuance
(Gain)/loss on sale of premises and equipment
Change in operating assets and liabilities
(Gain) on mortgages held for sale
Origination of mortgage loans held for sale
Proceeds from sale of mortgage loans held for sale
Increase in cash value of bank owned life insurance
Interest receivable
Compensation expense for stock issuance
Interest payable
Director expense for stock issuance
Prepaid expenses
Change in operating assets and liabilities
Income taxes receivable
Other assets
Origination of mortgage loans held for sale
Deferred compensation
Proceeds from sale of mortgage loans held for sale
Other liabilities
Interest receivable
Interest payable
Prepaid expenses
Income taxes receivable
Purchase of available-for-sale securities
Other assets
Proceeds from sale of non-marketable equity securities
Deferred compensation
Purchase of annuity
Other liabilities
Purchase of non-marketable equity securities
Proceeds from sale of other real estate owned
Net cash provided by operating activities
Loan originations, net of repayments
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Proceeds from sales, prepayments and maturities of
Proceeds from sales, prepayments and maturities of
Net cash provided by operating activities
Cash flows from investing activities
available-for-sale securities
Cash flows from investing activities
available-for-sale securities
Net cash used in investing activities
Cash flows from financing activities
Purchase of available-for-sale securities
Cash dividends paid on common shares
Purchase of bank owned life insurance
Repurchase of common shares
Proceeds from sale of non-marketable equity securities
Repayment of capital notes
Purchase of non-marketable equity securities
Proceeds from FHLB borrowings
Repayment of FHLB borrowings
Proceeds from sale of other real estate owned
Change in noninterest-bearing deposits
Loan originations, net of repayments
Change in interest-bearing deposits
Proceeds from sale of premises and equipment
Change in securities sold under agreements to repurchase
Purchases of premises and equipment
Net cash provided by or (used in) financing activities
Net cash used in investing activities
Net decrease in cash and cash equivalents
Cash flows from financing activities
Cash and cash equivalents
Beginning of the year
End of year
Cash dividends paid on common shares
Repurchase of common shares
Repayment of capital notes
Proceeds from FHLB borrowings
7
Repayment of FHLB borrowings
Change in noninterest-bearing deposits
Years Ended December 31,
2016
Years Ended December 31,
2015
2015
2014
$
4,186,686
$
3,774,388
$
3,774,388
$
3,360,889
464,346
(19,121)
675,237
(115,948)
(18,243)
(3,901)
(235,135)
(321,812)
(5,151)
26,400
454,801
-
92,841
846,954
(422,821)
91,469
58
(210,353)
(324,118)
48,000
40,600
(16,035,951)
15,738,176
51,411
(15,102)
(21,400)
87,104
(6,188)
(12,170,944)
82,715
12,456,247
139,811
(49,249)
4,653,934
(50,427)
29,126
574,279
89,488
136,614
55,894
5,462,847
23,753,682
(17,101,366)
260,650
(3,026,890)
(417,566)
82,368
(18,499,207)
23,000
(413,024)
(15,338,353)
28,677,043
(28,144,858)
(760,073)
-
(2,040,000)
-
-
-
425,000
(588,628)
794,531
(2,706,487)
150
(196,235)
(1,739,484)
5,131,087
2,902,989
302,779
5,536,782
(5,147,637)
16,284,985
$
11,137,348
(595,893)
(58,324)
(1,325,000)
5,000,000
(10,000,000)
10,335,526
454,801
92,841
846,954
(422,821)
91,469
58
(210,353)
(324,118)
48,000
40,600
(12,170,944)
12,456,247
(49,249)
(50,427)
29,126
574,279
89,488
136,614
55,894
5,462,847
28,677,043
(28,144,858)
425,000
-
(588,628)
794,531
(2,706,487)
150
(196,235)
(1,739,484)
(595,893)
(58,324)
(1,325,000)
5,000,000
(10,000,000)
10,335,526
(17,266,858)
(1,106,497)
(15,017,046)
(11,293,683)
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)
49,301
132,860
184,764
3,049,137
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)
27,578,668
(340,492)
$
16,284,985
7
-
-
-
15,045,762
(15,587,545)
(666,177)
8,451,548
(3,932,016)
The accompanying notes are an integral part of these consolidated financial statements.
10,000,000
The accompanying notes are an integral part of these consolidated financial statements.
Change in interest-bearing deposits
Change in securities sold under agreements to repurchase
Net cash provided by or (used in) financing activities
Net decrease in cash and cash equivalents
(17,266,858)
(1,106,497)
(15,017,046)
(11,293,683)
Cash and cash equivalents
Beginning of the year
End of year
27,578,668
31,510,684
$
16,284,985
$
27,578,668
The accompanying notes are an integral part of these consolidated financial statements.
7
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flow (concluded)
Consolidated Statements of Cash Flow (concluded)
Supplemental disclosure of cash flow information
2015
2014
Years Ended December 31,
2016
Years Ended December 31,
2015
Supplemental disclosure of cash flow information
Cash paid for
Income taxes
Interest on deposits and other borrowings
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
Supplemental schedule of non-cash investing activities
Transfer of loans to other real estate owned
Change in unrealized gains on available-for-sale securities,
Income from investment in Manry Rawls, LLC
net of income tax
Income from investment in Manry Rawls, LLC
Transfer of loans to other real estate owned
Contribution of other real estate owned
$
1,061,000
2,130,861
$
300,000
2,780,525
$
(1,175,656)
(328,605)
$
(266,666)
(619,210)
$
300,000
2,780,525
$
1,000,000
3,141,032
$
(619,210)
-
$
(437,428)
2,078,653
(437,428)
-
-
(175,611)
(1,618,758)
(180,000)
The accompanying notes are an integral part of these consolidated financial statements.
8
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, 2016 and 2015
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, Chesapeake 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 subsidiary, the Bank. 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
2016 and 2015, the aggregate amount of daily-required balances was $85,000 and $98,000, 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 statement of operations.
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. Other-than-temporarily impaired (“OTTI”)
guidance for investment states that an impairment is OTTI if any of the following conditions exist: the entity intends to sell
the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost
basis; or, the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to
sell).
9
9
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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 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, 2016 and 2015
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 sell 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. 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 2016.
11
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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, 2016 and 2015. The years ending on or after December 31, 2013 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.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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, 2016 and 2015 are sufficient to cover inherent losses in the portfolio.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 2 - Summary of significant accounting policies (continued)
Recent accounting pronouncements - In June 2014, the Financial Accounting Standards Board (“FASB”) issues Accounting
Standards Update (“ASU”) No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and
repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The
new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a
transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a
forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to
repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the
transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of
collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments
in this ASU are effective for the first interim or annual period beginning after December 15, 2015; however, the disclosure
for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after
December 15, 2016, and interim period beginning after March 15, 2015. Early adoption is not permitted. The adoption of
the new guidance did not have a material impact on our consolidated financial statements, but new disclosures were added.
In February 2015, FASB issued ASU No. 2015-02, “Consolidation: Topic 810: Amendments to the Consolidation
Analysis.” The amendments to this ASU changes the guidance with respect to the analysis that a reporting entity must
perform to determine whether it should consolidate certain types of legal entities. The amendments include: (1) modifying
the evaluation of limited partnerships and similar legal entities, (2) amending when fees paid to a decision maker should be
included in the variable interest entity analysis, (3) amending the related party relationship guidance, and (4) providing a
scope exception from the consolidation guidance for reporting entities with interest in certain investment funds. The ASU
is effective for interim and annual reporting periods beginning after December 15, 2015, although early adoption is
permitted. The adoption of this standard did not have a material impact on the consolidated financial statements of the
Company.
In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Topic 606”. This ASU is
an update to the original ASU No. 2014-09 and the deferral of the effective date. Both ASU’s apply 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 public business entities. Early adoption is permitted but not
before the original public entity effective date, i.e. annual periods beginning after December 15, 2017. The Company is
currently evaluating the impact of this standard.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 2 - Summary of significant accounting policies (continued)
Recent accounting pronouncements (continued) - In January 2016, the FASB issued ASU No. 2016-01, “Financial
Instruments – Overall: Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities.” This
ASU addresses certain aspects of recognition, measurement, presentation and disclosure. The amendments in this ASU (1)
require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the
impairment assessment of equity investments without readily determinable fair value; (3) require public business entities to
use exit prices, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (4)
require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets
on the balance sheet or the accompanying notes to the financial statements; (5) eliminate the requirement to disclose the
method(s) and significant assumptions used to estimate the fair value for financial statements measured at amortized cost on
the balance sheet; (6) require separate presentation in other comprehensive income of the portion of the total change in the
fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to
measure the liability at fair value in accordance with the fair value option for financial instruments; and (7) state that a
valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with
other deferred tax assets. The amendments in this ASU are effective for public business entities for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the
instrument-specific credit risk provision. The Company is currently evaluating the impact of this standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU replaces ASC 840, Leases and was issued
in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on
the balance sheet for those leases classified as operating leases under previous GAAP. The ASU requires that a lessee should
recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the
underlying asset for the lease term on the balance sheet. For leases with a term of twelve months or less, a lessee is permitted
to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee
makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.
The ASU is effective for interim and annual periods beginning after December 15, 2018, using a modified retrospective
approach, and early adoption is permitted. The Company is currently evaluating the impact of this standard.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-
09"), which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification
initiative. ASU 2016-09 changes seven aspects of the accounting for share-based payment award transactions, including: (1)
accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4)
minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows
when an employer withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic entities
only); and (7) intrinsic value (nonpublic entities only). ASU 2016-09 is effective for fiscal years beginning after December 15,
2016 and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the
entire ASU 2016-09 is adopted. The Company is currently evaluating the impact of this standard.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instructions.” This ASU
changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated
credit losses expected to occur over the remaining life. The main objective of this ASU is to provide financial statement
users with more decision-useful information about the expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments
in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects
expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform
credit loss estimates. The changes are effective for annual and interim periods in fiscal years beginning after December 15,
2020. An entity may early adopt the standard for annual and interim periods in fiscal years beginning after December 15,
2018. The Company is currently evaluating the impact of this standard.
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15
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 2 - Summary of significant accounting policies (concluded)
Recent accounting pronouncements (concluded) - In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flow.”
This ASU is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.
The guidance addresses: (1) debt prepayment on debt extinguishment costs; (2) settlement of zero-coupon debt instruments;
(3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance
claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance
policies; (6) distributions received from equity method investments; (7) beneficial interest in securitizations transactions; and
(8) separately identifiable cash flows and application of the predominance principle. The amendments in this update are
effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those
years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact
of this standard.
In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers.” The corrections in this ASU is intended to make a limited number of revisions to several pieces
of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrects
will be effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within
those years. Early application is not permitted. The Company does not expect these amendments to have a material effect
on its financial statements.
Reclassifications - Certain reclassifications have been made to prior period balances to conform to the current year
presentation with no impact on net income or stockholders’ equity as previously recorded.
Note 3 - Available-for-sale securities
At December 31, 2016 and 2015, securities are as follows:
December 31, 2016
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
December 31, 2015
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Amortized
Cost
$ 44,666,648
20,900,403
35,523,943
22,799,340
$ 123,890,334
Amortized
Cost
$ 41,640,706
15,946,319
46,427,399
27,087,514
$ 131,101,938
Gross
Unrealized
Gains
$ 1,280,172
18,158
276,319
1,060,332
$ 2,634,981
Gross
Unrealized
Gains
$ 2,209,085
27,472
445,531
1,463,204
$ 4,145,292
Gross
Unrealized
Losses
$ 219,016
228,874
330,722
-
$ 778,612
Gross
Unrealized
Losses
$ 15,586
88,728
403,312
-
$ 507,626
Fair
Value
$ 45,727,804
20,689,687
35,469,540
23,859,672
$ 125,746,703
Fair
Value
$ 43,834,205
15,885,063
46,469,618
28,550,718
$ 134,739,604
16
16
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 3 - Available-for-sale securities (continued)
At December 31, 2016 and 2015, 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, 2016
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
$ 7,180,210
17,317,089
21,853,226
$ 204,603
228,874
134,214
$ 14,413
-
196,508
$ 219,016
228,874
330,722
investment securities
$ 46,350,525
$ 567,691
$ 210,921
$ 778,612
December 31, 2015
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
$ 521,665
14,269,851
23,041,626
$ 15,586
88,728
77,196
$ -
-
326,116
$ 15,586
88,728
403,312
investment securities
$ 37,833,142
$ 181,510
$ 326,116
$ 507,626
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 mortgage-backed securities and collateralized mortgage obligations- The Company’s unrealized losses on residential
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 Government Sponsored Entities (“GSE”), 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.
17
17
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 3 - Available-for-sale securities (concluded)
At December 31, 2016 and 2015, securities with a carrying value of approximately $33,536,180 and $27,905,116,
respectively, are pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2016
and 2015, securities with a carrying value of $7,880,087 and $14,632,536, respectively, are pledged to the Federal Home
Loan Bank to secure advances. Investment securities with carrying values of $3,263,403 and $4,030,844 are pledged to
secure repurchase agreements at December 31, 2016 and 2015, respectively.
At December 31, 2016, 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:
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Total gross realized gains
Amortized
Cost
$ 968,551
7,115,544
12,556,757
103,249,482
$ 123,890,334
Fair
Value
$ 989,856
7,437,657
13,075,397
104,243,793
$ 125,746,703
2016
$ 115,948
-
-
$ 115,948
2015
$ 20,870
295,885
106,066
$ 422,821
There were no gross realized losses on available-for-sale securities during 2016 or 2015.
Proceeds from the sale of available-for-sale securities totaled $1,282,802 and $10,516,241 for the years ended December 31,
2016 and 2015, respectively.
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18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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, 2016 and 2015, 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
2016
2015
$ 37,231,654
$ 32,098,516
33,505,956
68,475,757
40,695,206
4,897,337
12,697,734
197,503,644
46,050,448
20,942,170
1,475,755
265,972,017
(5,755,746)
(13,872)
$ 260,202,399
32,488,510
60,588,745
42,636,675
5,223,426
12,388,863
185,424,735
40,233,731
20,859,784
1,839,447
248,357,697
(6,343,636)
17,736
$ 242,031,797
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 $37.2 million and $32.1 million at December 31, 2016 and 2015,
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
$40.7 million and $42.6 million at December 31, 2016 and 2015, respectively.
Commercial real estate loans totaled $102.0 million and $93.1 million at December 31, 2016 and 2015,
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.
Multifamily loans totaled $4.9 million and $5.2 million at December 31, 2016 and 2015, respectively. These loans
are residential housing projects containing five or more rental units. Traditional multifamily projects charge market
rents and are located in both city and suburban markets. Equity lines of credit are open-ended revolving lines of
credit secured by the equity in a borrower’s residence. Equity lines of credit totaled $12.7 million and $12.4
million at December 31, 2016 and 2015, respectively.
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19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 – Loans and Allowance for Loan Losses (continued)
Commercial and Industrial Loans - At December 31, 2016 and 2015, the Bank’s commercial loan portfolio totaled $46.1
million and $40.2 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 $20.9 million and $20.9 million at December 31, 2016 and 2015, 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 $1.5 million and $1.8 million at December
31, 2016 and 2015, 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.
20
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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 high 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.
21
21
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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.
22
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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 Allowance 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, 2016 and 2015:
Real Estate Credit Exposure as of December 31, 2016
Commercial Real Estate
Owner
occupied
Non-owner
occupied
-
$
-
3,662
12,139
15,332
2,026
347
-
-
33,506
$
(in thousands)
$
-
-
5,702
30,439
28,267
731
3,337
-
-
68,476
$
Construction
-
$
-
2,549
19,093
13,532
1,473
585
-
-
37,232
$
Residential
1-4 Family
Multifamily
Equity lines
of credit
-
$
29
7,826
19,319
9,746
2,471
1,304
-
-
40,695
$
-
$
-
33
3,671
1,193
-
-
-
-
4,897
$
-
$
82
6,513
4,727
781
124
471
-
-
12,698
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
23
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2016
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
Commerical
and industrial Agricultural
Individuals
Total
-
$
-
2,143
30,764
12,377
232
534
-
-
46,050
$
(in thousands)
-
$
-
4,164
12,126
3,836
766
50
-
-
20,942
$
-
$
-
266
586
266
358
-
-
-
1,476
$
-
$
111
32,858
132,864
85,330
8,181
6,628
-
-
$
265,972
Real Estate Credit Exposure as of December 31, 2015
Commercial Real Estate
Owner
occupied
Non-owner
occupied
Residential
1-4 Family Multifamily
Equity lines
of credit
-
$
106
5,291
10,899
10,986
5,123
84
-
-
32,489
$
(in thousands)
$
-
$
-
59
9,445
25,870
19,355
705
4,941
214
-
60,589
$
56
9,231
18,479
9,917
3,380
1,574
-
-
42,637
$
-
$
-
51
5,132
40
-
-
-
-
5,223
$
-
$
117
6,630
4,258
1,014
148
222
-
-
12,389
$
Construction
-
$
-
2,924
14,118
13,210
1,548
298
-
-
32,098
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
24
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2015
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Doubtful
Loss
Commerical
and industrial Agricultural
Individuals
Total
(in thousands)
-
$
-
2,145
23,293
12,840
254
1,702
-
-
40,234
$
-
$
-
4,368
12,376
3,125
991
-
-
-
20,860
$
-
$
-
676
497
294
372
-
-
-
1,839
$
$
-
338
40,761
114,922
70,781
12,521
8,821
214
-
$
248,358
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, 2016 or 2015. Nonaccrual loans as of December 31, 2016
totaled $2.0 million, or 0.76% of total loans, compared with $1.4 million, or 0.55% of total loans, as of December 31, 2015.
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, 2016 and 2015 was 12.
For the years ended December 31, 2016 and 2015, the Bank recognized $1,741 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 $99,748 and $114,677 for the years ended December 31, 2016 and 2015, respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2016 and 2015:
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
25
2016
2015
$
287,691
$
297,846
184,929
756,874
451,676
-
336,482
-
-
-
-
311,615
733,616
-
24,813
-
-
-
$
2,017,652
$
1,367,890
25
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
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
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
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, 2016 and 2015:
analysis of past due loans as of December 31, 2016 and 2015:
December 31, 2016
December 31, 2016
Mortgage loans on real estate:
Mortgage loans on real estate:
Construction
Construction
Commercial real estate:
Commercial real estate:
Non-owner occupied
Non-owner occupied
Owner occupied
Owner occupied
Residential 1-4 family
Residential 1-4 family
Multifamily
Multifamily
Equity lines of credit
Equity lines of credit
Commercial and industrial
Commercial and industrial
Agricultural
Agricultural
Individuals
Individuals
Total
Total
30-59 Days
30-59 Days
Past Due
Past Due
60-89 Days
60-89 Days
Past Due
Past Due
Greater Than
90 Days
Greater Than
90 Days
Greater
Greater
Than 90
Than 90
Days Still
Days Still
(in thousands)
(in thousands)
Total Past
Total Past
Due
Due
Current
Current
Total Loans
Total Loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
37,232
$
37,232
$
37,232
37,232
$
$
18
18
-
-
147
147
-
-
28
28
3
3
-
-
2
2
198
198
$
$
-
-
-
-
16
16
-
-
-
-
-
-
-
-
-
-
$
16
$
16
79
79
757
757
151
151
-
-
-
-
-
-
-
-
-
-
$
987
987
$
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
$
-
97
757
314
-
28
3
97
757
314
-
28
3
-
-
33,409
33,409
67,719
67,719
40,381
40,381
4,897
4,897
12,670
12,670
46,047
46,047
20,942
20,942
1,474
1,474
264,771
$
264,771
33,506
68,476
40,695
4,897
12,698
46,050
20,942
1,476
265,972
33,506
68,476
40,695
4,897
12,698
46,050
20,942
1,476
$
265,972
$
2
2
$
1,201
1,201
$
$
30-59 Days
30-59 Days
Past Due
Past Due
60-89 Days
60-89 Days
Past Due
Past Due
Greater Than
Greater Than
90 Days
90 Days
Current
Current
Total Loans
Total Loans
Greater Than
Greater Than
90 Days Still
90 Days Still
Accruing
Accruing
(in thousands)
(in thousands)
Total Past
Total Past
Due
Due
December 31, 2015
December 31, 2015
Mortgage loans on real estate:
Mortgage loans on real estate:
Construction
Construction
Commercial real estate:
Commercial real estate:
Non-owner occupied
Non-owner occupied
Owner occupied
Owner occupied
Residential 1-4 family
Residential 1-4 family
Multifamily
Multifamily
Equity lines of credit
Equity lines of credit
Commercial and industrial
Commercial and industrial
Agricultural
Agricultural
Individuals
Individuals
Total
Total
$
19
$
19
$
-
$
-
$
$
298
298
-
-
-
-
126
126
-
-
51
51
9
9
-
-
-
-
205
205
$
$
-
-
-
-
108
108
-
-
-
-
-
-
-
-
-
-
108
108
$
$
-
-
312
312
601
601
-
-
-
-
-
-
-
-
-
-
1,211
1,211
$
$
$
-
$
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
$
-
$
317
$
317
-
312
835
-
-
312
835
-
51
9
51
9
-
-
1,524
$
-
-
1,524
$
31,781
$
31,781
$
32,098
$
32,098
32,489
60,277
41,802
5,223
12,338
40,225
20,860
1,839
246,834
32,489
60,277
41,802
5,223
12,338
40,225
20,860
1,839
246,834
$
32,489
60,589
42,637
5,223
12,389
40,234
20,860
1,839
248,358
$
32,489
60,589
42,637
5,223
12,389
40,234
20,860
1,839
248,358
$
$
$
26
26
26
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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, 2016 and 2015, the following table presents a breakdown of the types of concession made by loan
class:
Year ended December 31, 2016
Post-
Modification
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Number
of loans
Year ended December 31, 2015
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
-
-
1
-
-
-
-
-
2
$
297,500
$
297,500
-
$
-
$
-
-
-
-
-
143,575
143,575
-
-
-
-
-
-
-
-
-
-
$
441,075
$
441,075
-
2
-
-
-
-
-
-
2
-
-
2,499,716
2,499,716
-
-
-
-
-
-
-
-
-
-
-
-
$
2,499,716
$
2,499,716
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 2016 or 2015. Within the last 12 months, no loans that
were restructured in 2015 or 2014, subsequently defaulted and were foreclosed upon. These modifications resulted in
specific reserves in the Bank’s allowance for loan losses of $-0- and $592,950 as of December 31, 2016 and 2015,
respectively.
27
27
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
Troubled Debt Restructurings (concluded) - There were two TDRs that were on non-accrual status and have a total current
principal balance of $836,041 as of December 31, 2016. There was one TDRs that was on non-accrual status and had a
total current principal balance of $297,846 as of December 31, 2015. Fifteen TDRs with a current principal balance of $5.4
million and eighteen TDRs with current principal balance of $10.5 million were considered performing loans and are
accruing interest based on their sustained payment performance as of December 31, 2016 and 2015, 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.
Other real estate owned - At December 31, 2016 and 2015 the Company held $50,160 and $-0-, respectively of foreclosed
residential real estate. The recorded investment in one-to-four family residential loans secured by residential real estate
properties where formal foreclosure procedures were in process as of December 31, 2016 and 2015 was $-0- and $279,832,
respectively.
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 problem loans considered impaired based on other underlying factors. Potential problem
loans totaled $8.1 million and $12.0 million as of December 31, 2016 and 2015, 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.
28
28
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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, 2016 and 2015:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
590
$
590
$
-
$
579
$
31
286
833
696
-
134
250
50
-
286
1,729
763
-
604
250
50
-
1,154
1,154
106
2,703
944
-
336
-
-
-
106
2,703
944
-
673
-
-
-
-
-
-
-
-
-
-
-
112
18
172
146
-
107
-
-
-
217
1,749
858
-
141
250
50
-
1,203
109
2,764
959
-
343
-
-
-
7
67
19
-
6
10
3
-
58
7
111
58
-
14
-
-
-
$
1,744
$
1,744
$
112
$
1,782
$
89
392
3,536
1,640
-
470
250
50
-
8,082
$
392
4,432
1,707
-
1,277
250
50
-
9,852
$
18
172
146
-
107
-
-
-
555
$
326
4,513
1,817
-
484
250
50
-
9,222
$
14
178
77
-
20
10
3
-
391
$
29
December 31, 2016
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
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
December 31, 2015
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
$
-
$
-
$
-
$
-
$
-
129
1,745
417
-
-
-
-
-
129
2,032
749
-
-
-
-
-
1,503
1,503
1,304
5,302
1,323
-
25
250
-
-
1,304
5,302
1,323
-
25
250
-
-
-
-
-
-
-
-
-
-
108
57
637
322
-
25
2
-
-
130
2,100
764
-
-
-
-
-
1,535
1,326
5,338
1,341
-
26
250
-
-
8
77
2
-
-
-
-
-
75
71
254
68
-
-
10
-
-
$
1,503
$
1,503
$
108
$
1,535
$
75
1,433
7,047
1,740
-
25
250
-
-
11,998
$
1,433
7,334
2,072
-
25
250
-
-
12,617
$
57
637
322
-
25
2
-
-
1,151
$
1,456
7,438
2,105
-
26
250
-
-
12,810
$
79
331
70
-
-
10
-
-
565
$
30
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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 no provisions for the years
ended December 31, 2016 and 2015, respectively. 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 regulatory 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 some uncertainty from the general economy and a slow real estate
market. Other factors impacting the allowance at December 31, 2016 were watch list trends, unemployment rate trends,
government spending expectations and underwriting and servicing assessments.
31
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (continued)
Allowance for Loan Losses (continued) - The following table’s present changes in the allowance for loan losses for the years
ended December 31, 2016 and 2015:
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,
2015
Charge-offs Recoveries
Provision
(in thousands)
December 31,
2016
$
1,101
$
41
$
-
$
(514)
$
546
514
1,931
1,425
99
163
756
330
25
6,344
$
-
896
159
-
46
-
-
-
224
55
267
1
6
-
1
1,143
$
2
555
$
24
756
(208)
(301)
159
139
(51)
(4)
$
-
538
2,015
1,113
65
277
901
279
22
5,756
$
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,
2014
Charge-offs Recoveries
Provision
(in thousands)
December 31,
2015
$
1,108
$
-
$
-
$
(7)
$
1,101
684
2,620
1,939
308
208
713
575
27
8,182
$
-
542
1,559
189
-
-
-
-
-
379
12
56
8
-
4
2,294
$
1
456
$
(170)
(147)
666
(32)
(101)
35
(245)
1
$
-
514
1,931
1,425
99
163
756
330
25
6,344
$
32
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 4 - Loans and Allowance for Loan Losses (concluded)
Allowance for Loan Losses (concluded) - The activity in the allowance for loan loss for 2016 and 2015 are summarized by loan
class as follows:
As of December 31, 2016
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, 2015
Mortgage loans on real estate:
Construction
Commercial real estate:
Non owner occupied
Owner occupied
Residential 1-4 family
Multifamily
Equity lines of credit
Commercial and industrial
Agricultural
Individuals
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
(in thousands)
$
112
$
1,744
$
434
$
35,488
18
172
146
-
107
-
-
-
555
$
392
3,536
1,640
-
470
250
50
-
8,082
$
520
1,843
967
65
170
901
279
22
5,201
$
33,114
64,940
39,055
4,897
12,228
45,800
20,892
1,476
257,890
$
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
(in thousands)
$
108
$
1,503
$
993
$
30,595
57
637
322
-
25
2
-
-
1,151
$
1,433
7,047
1,740
-
25
250
-
-
11,998
$
457
1,294
1,103
99
138
754
330
25
5,193
$
31,056
53,542
40,897
5,223
12,364
39,984
20,860
1,839
236,360
$
33
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 5 - Premises and equipment
At December 31, 2016 and 2015, premises and equipment consist of the following:
Land
Buildings
Equipment, furniture and fixtures
Computer equipment
Software
Less accumulated depreciation
Total premises and equipment, net
2016
$ 456,450
6,139,694
2,801,652
243,988
457,799
10,099,583
(6,622,332)
$ 3,477,251
2015
$ 456,450
5,877,372
2,723,595
213,776
457,799
9,728,992
(6,181,320)
$ 3,547,672
For 2016 and 2015, depreciation charged to operating expense was $464,346 and $454,801, respectively.
Note 6 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2016 and 2015:
Federal Home Loan Bank stock
Federal Reserve Bank stock
Community Bankers' Bank stock
Bankers Title, LLC
Manry Rawls, LLC
Plexus Captial, 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
Business interest checking
Savings accounts
Certificates of deposits and IRAs $250,000 and over
Certificates of deposit and IRAs under $250,000
Total interest-bearing deposits
2016
$ 1,436,100
399,150
61,300
99,178
2,030,363
150,000
500,000
$ 4,676,091
2015
$ 1,446,500
398,250
61,300
99,178
2,013,947
-
500,000
$ 4,519,175
2016
$ 23,462,873
93,516,154
15,559,801
26,919,065
11,626,545
71,274,990
$ 242,359,428
2015
$ 31,768,251
88,156,146
-
24,655,033
12,733,288
82,143,721
$ 239,456,439
34
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 7 - Interest-bearing deposits (concluded)
At December 31, 2016, the scheduled maturities of time deposits are as follows:
2017
2018
2019
2020
2021
Thereafter
Total time deposits
$ 29,312,238
23,294,929
14,003,521
7,857,180
8,433,667
-
$ 82,901,535
For 2016 and 2015, time deposits individually in excess of $250,000 was $11.63 million and $12.73 million.
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.
During 2016 and 2015, the Company repaid $2.040 million and $1.325 million of capital notes to accommodate investor’s
liquidity needs and to reduce our debt service obligations. In 2016 and 2015, $600,000 and $925,000 of the capital notes
were redeemed at a premium price of 102%, equating to total premium paid of $12,000 and $18,500. An additional $1.440
million and $400,000 of capital notes were redeemed at the original investment price during 2016 and 2015.
Of these capital notes, $-0- and $400,000 is due to executive officers and board members of the Bank as of December 31,
2016 and 2015, respectively. Interest expense of $6,201 and $25,188 was paid to these related parties on the capital notes
for the years ended December 31, 2016 and 2015, respectively.
Note 9 - Securities sold under agreements to repurchase and other borrowings
The Bank utilizes securities sold under agreement to repurchase to facilitate the needs of customers. Securities sold under
agreements to repurchase, 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. The average interest rate was 0.50% and 0.27% during the years ended December 31, 2016 and 2015,
respectively.
The Bank monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing
the applicable security and the customer’s fractional interest in that security, and the Bank segregates the security from its
general assets in accordance with regulations governing custodial holding of securities. The primary risk with the Bank’s
repurchase agreements is market risk associated with the investments securing the transactions, as the Bank may be required
to provide additional collateral based on air value changes of the underlying investments. Securities pledged as collateral
under repurchase agreements are maintained with the Bank’s safekeeping agent. The carrying value of available for sale
investment securities pledged as collateral under repurchase agreement was $3,263,403 and $4,090,844 at December 31,
2016 and 2015, respectively.
35
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 9 - Securities sold under agreements to repurchase and other borrowings (continued)
The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged
included in short-term borrowings in the Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015 is
presented in the following tables.
December 31, 2016
Repurchase agreements:
Overnight and
continuous
Up to 30
Days
Greater
than 90
Total
30-90 Days
(in thousands)
Small Business Administration Pools
Total borrowings
$
$
1,126
1,126
$
-
$
-
$
-
$
-
$
-
$
-
Gross amount of recognized liabilities for repurchase agreements
$
$
1,126
1,126
$
1,126
December 31, 2015
Repurchase agreements:
Overnight and
continuous
Up to 30
Days
Greater
than 90
Total
30-90 Days
(in thousands)
Small Business Administration Pools
Total borrowings
$
$
823
823
$
-
$
-
$
-
$
-
$
-
$
-
Gross amount of recognized liabilities for repurchase agreements
$
$
$
823
823
823
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, 2016 and 2015, the Bank had no outstanding federal funds purchased.
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.
At December 31, 2016 and 2015, Federal Home Loan Bank advances were as follows:
December 31, 2016
Maturity date
January 9, 2017
January 8, 2019
September 3, 2019
April 15, 2020
July 29, 2020
October 13, 2020
Call Feature
-
-
-
-
-
-
Amount
$ 5,000,000
5,000,000
5,000,000
2,500,000
5,000,000
2,500,000
Rate
0.990%
1.977%
1.999%
2.040%
1.944%
2.176%
Total FHLB borrowings/weighted average rate
$ 25,000,000
1.800%
36
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 9 - Securities sold under agreements to repurchase and other borrowings (concluded)
December 31, 2015
Maturity date
January 9, 2017
January 8, 2019
September 3, 2019
April 15, 2020
July 29, 2020
October 13, 2020
Call Feature
-
-
-
-
-
-
Amount
$ 5,000,000
5,000,000
5,000,000
2,500,000
5,000,000
2,500,000
Rate
0.990%
1.977%
1.999%
2.040%
1.944%
2.176%
Total FHLB borrowings/weighted average rate
$ 25,000,000
1.800%
The carrying value of loans pledged as collateral to the Federal Home Loan Bank were $30,933,711 and $32,310,989 at
December 31, 2016 and 2015, respectively.
During 2015, the Company prepaid $5 million in FHLB advances with a weighted average rate of 3.69%. These advances
were paid prior to their maturity date in order to enhance future earning by way of reduction in interest expense. These
repayments resulted in a prepayment penalty on borrowings equaling $355,592. During 2016, there were no repayments of
FHLB advances.
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 $400,010 and $378,300 for the plan for 2016
and 2015, 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. In 2016, the Company amended
one of these plans and froze the other plan while creating a new plan for this executive, such that upon the executives’
retirement, the Company will provide for a monthly retirement payment for their lifetime. The agreements provide that a
retirement benefit is payable upon a defined normal retirement age while in service to the Company and a lesser benefit is
payable upon early retirement. Other benefits are payable upon disability, death or change in control.
The agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply
with Section 409A of the Internal Revenue Code. However, the Company has elected to finance the retirement benefits by
purchasing annuities that have been designed to provide a future source of funds for the lifetime retirement benefits of the
agreements. The primary impetus for utilizing these annuities is a substantial savings in compensation expense for the
Company as opposed to a typically designed supplemental retirement plan.
The liabilities associated with these deferred compensation arrangements were $1,323,644 and $1,240,929 as of December
31, 2016 and 2015, respectively. The annuity had a balance of $3,026,890 and $-0- as of December 31, 2016 and 2015,
respectively, and is recorded at amortized cost. Salaries and employee benefits expense included $86,715 and $140,614 of
expense related to these arrangements for 2016 and 2015, respectively.
37
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 11 - Income taxes
The principal components of the income tax expense as of December 31, 2016 and 2015 are as follows:
Federal - current tax provision
Federal - deferred (benefit)
2016
$ 1,148,104
(19,121)
$ 1,128,983
2015
$ 874,280
92,841
$ 967,121
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
2016
$ 1,807,328
2015
$ 1,612,112
(589,815)
(100,205)
16,940
(5,265)
(550,810)
(102,512)
7,594
737
Total income tax expense
$ 1,128,983
$ 967,121
The Bank's deferred tax assets and liabilities and their components are included 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
Other
Total deferred tax asset
Deferred tax liabilities:
Available-for-sale investment securities
Accumulated depreciation
Accumulated accretion
Net unamortized deferred fees and expenses
Total deferred tax liability
2016
2015
$ 1,074,456
450,039
20,768
8,809
1,554,072
$ 1,074,456
421,916
10,257
11,733
1,518,362
(631,166)
(306,899)
(1,236,806)
(288,462)
(136,635)
(133,272)
(3,266)
(1,077,966)
(8,478)
(1,667,018)
Net deferred tax asset (liability)
$ 476,106
$ (148,656)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Management considers recoverable taxes paid in prior years,
projected future taxable income, and tax planning strategies in making this assessment. It is management’s belief that the
realization of the net deferred tax assets is more likely than not.
38
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 11 - Income taxes (concluded)
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability
related to uncertain tax positions.
The Company and its subsidiaries file income tax returns with the federal government. With few exceptions, the Company
is no longer subject to federal income tax examinations by tax authorities for years before 2013.
Note 12 - Commitments and contingencies
The Company leases banking premises and various equipment for periods extending through February 2026. Total rental
expense was $207,083 and $179,854 for 2016 and 2015, respectively.
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2016, pertaining to bank premises and
equipment, future minimum rental commitments under various operating leases are as follows:
2017
2018
2019
2020
2021
Thereafter
$ 219,731
207,047
167,265
161,641
157,630
36,898
$ 950,212
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 2016 and 2015
is as follows:
Beginning balance, January 1
Originations
Repayments
Ending balance, December 31
2016
$ 3,379,712
2,495,310
(1,178,799)
$ 4,696,223
2015
$ 4,079,553
963,765
(1,663,606)
$ 3,379,712
Commitments to extend credit to related parties amounted to $7,468,000 and $8,685,848 at December 31, 2016 and 2015,
respectively.
Deposits from related parties held by the Bank amounted to $5,166,750 and $5,227,190 at December 31, 2016 and 2015,
respectively.
The Bank currently has a loan outstanding to Manry Rawls, LLC with a current principal balance of $1,860,388 and
39
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 13 - Related party transactions (concluded)
$2,260,211 as of December 31, 2016 and 2015, respectively. This loan is at substantially the same terms as similarly situated
customers.
See Note 8 for additional disclosures of related party transactions.
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 Bank also has commitments, as detailed below, to invest in a private investment fund that focuses on investments and
partnerships with middle market businesses that need capital for growth.
The amounts of loan commitments, guarantees and standby letters of credit are set out in the following table as of December
31, 2016 and 2015. 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
Capital commitment to private investment funds
2016
$ 59,231,100
$ 359,038
$ 1,850,000
2015
$ 50,152,525
$ 726,327
$ -
Standby letters of credit outstanding at December 31, 2016 expire during 2017 and 2020.
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).
40
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 14 - Credit commitments and concentrations of credit risk (concluded)
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.
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.
In July 2013, the FDIC and other federal banking agencies approved the final rules implementing the Basel Committee on
Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). On January 1, 2015, the Company
became subject to the Basel III Capital Rules which revises definitions of regulatory capital, the new minimum regulatory
capital ratios, and various regulatory capital adjustments and deductions according to transition provision and timelines.
The revised rules now require the bank to maintain (i) a minimum ratio of Common Tier 1 capital to risk-weighted assets of
at least 4.5%, plus 2.5% “capital conservation buffer” (conservation buffer will be phased in), (ii) minimum ratio of Tier 1
capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio of total capital to risk-weighted assets of at 8.0%, and
(iv) a minimum leverage ratio of 4.0%. A transition period for the capital conservation buffer under Basel III for all banking
organizations began on January 1, 2016 and end January 1, 2019. The conservation buffer will begin at the 0.625% level
and be phased in over a four-year period (increasing on each subsequent January 1, until it reaches 2.5% on January 1,
2019). As of January 1, 2017, the capital conservation buffer was 8.525%.
Management believes, as of December 31, 2016 and 2015, the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2016, 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, Common Equity 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.
41
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 15 - Regulatory matters (concluded)
The Bank's actual capital amounts (dollars in thousands) and ratios are presented in the table below:
As of December 31, 2016:
Total Capital
(to Risk-Weighted Assets)
Tier I Risk-Based Capital
(to Risk-Weighted Assets)
Common Equity Risk-Based Capital
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(Dollars in thousands)
Under Prompt Corrective
Well Capitalized
Amount
Ratio
$ 51,814
16.4% $ 25,229
8.0% $ 31,536
10.0%
47,872
15.2% 18,922
6.0% 25,229
8.0%
(to Risk-Weighted Assets)
47,872
15.2% 14,191
4.5% 20,498
6.5%
Tier I Leverage Ratio
(to Average Assets)
As of December 31, 2015:
Total Capital
(to Risk-Weighted Assets)
Tier I Risk-Based Capital
(to Risk-Weighted Assets)
Common Equity Risk-Based Capital
47,872
11.6% 16,452
4.0% 20,565
5.0%
$ 50,194
18.5% $ 21,709
8.0% $ 21,137
10.0%
46,766
17.2% 16,282
6.0% 21,709
8.0%
(to Risk-Weighted Assets)
46,766
17.2% 12,211
4.5% 17,639
6.5%
Tier I Leverage Ratio
(to Average Assets)
46,766
11.5% 16,226
4.0% 20,283
5.0%
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.
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.
42
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 16 - Fair value measurements (continued)
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, 2016 and 2015:
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2016
$ 45,727,804
20,689,687
35,469,540
23,859,672
$ 125,746,703
Level 1
Level 2
Level 3
$ -
-
-
-
$ -
$ 45,727,804
20,689,687
35,469,540
23,859,672
$ 125,746,703
$ -
-
-
-
$ -
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2015
$ 43,834,205
15,885,063
46,469,618
28,550,718
$ 134,739,604
Level 1
$ -
-
-
-
$ -
Level 2
$ 43,834,205
15,885,063
46,469,618
28,550,718
$ 134,739,604
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:
43
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 16 - Fair value measurements (continued)
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
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2016
Level 1
Level 2
Level 3
$ 877,278
4,688,019
$ 5,565,297
$ -
-
$ -
$ -
-
$ -
$ 877,278
4,688,019
$ 5,565,297
Balance as of
December 31, 2015
Level 1
Level 2
Level 3
$ 612,798
8,556,119
$ 9,168,917
$ -
-
$ -
$ -
-
$ -
$ 612,798
8,556,119
$ 9,168,917
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Assets
Fair Value at
December 31, 2016
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 877,278
4,688,019
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Total assets
$ 5,565,297
44
44
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 16 - Fair value measurements (concluded)
Description
Assets
Fair Value at
December 31, 2015
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 612,798
8,556,119
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Total Assets
$ 9,168,917
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December 31,
2016 and 2015. 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. The capital notes are valued at amortized cost based on the lack of marketability due to
transfer restrictions.
Financial assets:
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans held for investment, net
Accrued interest receivable
Annuity
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
Note 17 - Stock incentive plan
2016
2015
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Dollars in thousands)
$ 11,137
125,747
1,444
260,202
1,723
3,027
$ 11,137
125,747
1,444
261,680
1,723
3,027
$ 16,285
134,740
911
242,032
1,774
-
$ 16,285
134,740
911
242,453
1,774
-
261,010
82,902
184
25,000
7,888
1,126
261,010
82,355
184
25,172
7,888
1,126
241,000
94,877
199
25,000
9,928
823
241,000
94,933
199
25,220
9,928
823
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 2016. 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.
45
45
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 17 - Stock incentive plan (concluded)
The vesting requirements are five years. The compensation expense recognized for the years ended December 31, 2016 and
2015 was $30,000 and $48,000, respectively. The expected future expense related to vesting issuances is $8,000. 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, 2016 and 2015, the expense related to these issuances was $26,400 and
$40,600, respectively.
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2016 and
2015, and changes during the years ended December 31, 2016 and 2015, is presented below; the weighted average price is
the weighted average fair value at the date of grant:
2016
2015
Shares
13,800
2,703
8,280
-
8,223
Weighted
Average Price
$ 8.70
11.10
8.70
-
$ 8.96
Shares
17,250
-
-
3,450
13,800
Weighted
Average Price
$ 8.70
-
-
8.70
$ 8.70
Restricted Share Awards
Nonvested - Beginning of the year
Granted
Vested
Forfeited
Nonvested - End of year
Note 18 - Earnings per share
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
2016
2015
$ 4,186,686
-
$ 4,186,686
$ 3,774,388
-
$ 3,774,388
3,056,830
3,053,845
$ 1.37
$ 1.24
Net income attributable to common shareholders
$ 4,186,686
$ 3,774,388
Average common shares outstanding
Effect of dilutive unvested restricted stock awards
Average diluted shares outstanding
Diluted earnings per share
3,056,830
2,274
3,059,104
3,053,845
5,271
3,059,116
$ 1.37
$ 1.23
46
46
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
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 ended December 31, 2016 and 2015 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,
2016
2015
$
$
954,569
554,082
49,096,744
314,660
50,920,055
954,727
398,991
49,167,346
166,783
50,687,847
$
$
Liabilities and Stockholders' Equity
Liabilities
Capital notes, 5% due December 31, 2018
Other liabilities
Total liabilities
Stockholders' equity
Common stock, $0.125 par value
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
$
7,888,475
304,815
8,193,290
$
9,928,475
152,014
10,080,489
382,047
2,775,106
38,344,408
1,225,204
42,726,765
381,763
2,754,141
35,070,594
2,400,860
40,607,358
Total liabilities and stockholders' equity
$
50,920,055
$
50,687,847
47
47
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2016 and 2015
Note 19 – Condensed financial statements of parent company (concluded)
Statements of Operations
Income
Operating expenses
Interest expense
Other expenes
Total expenses
Allocated income tax benefits
Years Ended December 31,
2016
2015
$
3,401,796
$
2,409,178
441,847
12,158
454,005
(155,091)
517,478
18,500
535,978
(182,233)
Income before equity in undistrbuted income of subsidiary
3,102,882
2,055,433
Equity in undistributed income - Farmers Bank
Net income
1,083,804
4,186,686
$
1,718,955
3,774,388
$
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 operating activities
Cash flows from financing activities
Cash dividends paid on common shares
Redemption of capital notes
Net cash (used in) financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Note 21 – Subsequent events
Years Ended December 31,
2016
2015
$
4,186,686
$
3,774,388
(155,091)
(147,876)
-
(1,083,804)
2,799,915
(760,073)
(2,040,000)
(2,800,073)
(158)
(182,233)
47,693
-
(1,718,955)
1,920,893
(595,893)
(1,325,000)
(1,920,893)
-
954,727
954,727
$
954,569
$
954,727
The Company has evaluated subsequent events through March 10, 2017, in connection with the preparation of these
financial statements which is the date the financial statements were available to be issued. On February 10, 2017 the Bank
entered into an agreement to purchase a 15% ownership in Tidewater Home Funding, LLC, a licensed mortgage lender
headquartered in Chesapeake, Virginia. The Bank paid $473,850 for the Class B Membership Interest and $350,000 for
the Class A Membership Interest. The Class A Membership Interest bears interest at a rate of 6.00% annually.
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Branch Locations
Chesapeake
1403 Greenbrier Parkway, Suite 110
Courtland
28319 Southampton Parkway, Suite D
Smithfield
1119 South Church Street, PO Box 888
Suffolk – Harbour View
6255 College Drive, Suite L
Suffolk – Hillpoint
3100 Godwin Boulevard
Suffolk – Lakeside
1008 West Washington Street
Windsor
50 East Windsor Boulevard, PO Box 285
www.farmersbankva.com
757-242-6111
FARMERS BANK
S i n c e 1919
www.farmersbankva.com