FARMERS BANK
S i n c e 1919
A N N U A L R E P O R T 2 0 1 7
Our Mission
It is the mission of Farmers Bank
to be unique and distinct from
all other financial institutions,
set apart by excelling in the
following areas:
• To offer a superior level of service
that is responsive, courteous,
cooperative and professional.
• To remain an independent
financial institution founded in
1919, operating seven branches
and serving areas throughout
Western Tidewater and South
Hampton Roads, being sensitive
to the financial needs of our
communities by designing and
offering products to specifically
meet those needs.
• To be good corporate citizens,
serving as leaders to strengthen
our communities and promote
their welfare.
• To employ men and women
who are loyal to the bank and
committed to our direction,
policies and goals.
• To bring to our shareholders
a fair rate of return on their
investments.
DEAR SHAREHOLDER
We are very pleased to announce our third
consecutive year of record earnings. Net
income for 2017 totaled approximately $4.5
million as compared to the prior year of almost
$4.2 million, an increase of 7.58%. These
results include a pre-tax, non-recurring gain of
$590 thousand from the sale of other real estate
owned as well as a one-time charge to earnings
of approximately $200 thousand to account
for the revaluing of our deferred tax asset under
the new Tax Cuts and Jobs Act of 2017.
Our Board of Directors and management
team spent 2017 executing opportunities that
aligned with our strategic vision, producing
successful results. Our partnership with
Manry Rawls, LLC continues to be beneficial
for both organizations and has assisted in
diversifying our revenue sources. As you are
aware, in the first quarter of 2017 we opened
our first branch in Chesapeake. Although this
market is very different from our traditional
footprint, we believe this endeavor will
position us to take advantage of continued
banking consolidation in the Hampton Roads
market. The team we have assembled is well
connected in the Chesapeake area and ensures
our customers receive the level of personalized
service we strive to provide. In March of 2017
we also refinanced the outstanding capital
notes, originally issued in 2013, lowering
our debt service costs by approximately $200
thousand annually.
As we approach our 100th year, we remain
committed to our shareholders, customers and
communities. Part of this commitment is to
offer our customers innovative technology that
will increase convenience and productivity.
As you read this letter, we are finalizing our
latest investment in technology through a core
conversion which includes all customer facing
products. This completes a three-year process of
due diligence, preparation and implementation.
Associated with the transition will be some one-
time expenses that could negatively impact our
operating efficiency ratio in 2018. In addition
to enhanced customer product offerings, this
conversion will result in operating efficiencies
and cost savings for the Bank that will more
than offset the cost of the implementation.
During 2017 we again improved our dividend
payout ratio, growing from 22% in 2016 to
27% in 2017, an additional payout of $.10
per share annually. We have worked to increase
the value of your investment by improving
the liquidity of our stock and increasing our
communication with investors. Those efforts
have resulted in a stock price that trades at a
premium to book value.
As always, our sincere appreciation goes to
you, our shareholders and our loyal customers
for your continued support and confidence in
Farmers Bank. We are truly indebted to our
staff for their dedication to the Company in
the last several months, working diligently to
ensure our core conversion goes smoothly. Our
hope is that 2018 brings health, prosperity and
success for each of you.
Sincerely,
Richard J. Holland, Jr.
C h a i r m a n a n d C E O
Vernon M. Towler
P r e s i d e n t
BOARD OF DIRECTORS
Richard J. Holland, Jr.*
C h a i r m a n
William A. Gwaltney, Jr.*
V i c e C h a i r m a n
,
I n d i k a F a r m s
I n c .
P r e s i d e n t
,
G. Thomas Alphin, Jr.*
C o m m o n w e a l t h G i n ,
C o - O w n e r
E. Warren Beale, Jr.
R e t i r e d E n t r e p r e n e u r
Harold U. Blythe
R e t i r e d B a n k C E O
William L. Chorey
C h o r e y & A s
s o c i a t e s
O w n e r / B r o k e r
R e a l t y ,
L t d .
,
*Farmers Bankshares, Inc. Board Members
David T. Owen*
Wa k e fi e l d F a r m S e r v i c e ,
P r e s i d e n t
I n c .
,
Peter D. Pruden, III
Ta s t e U n l i m i t e d ,
C o - O w n e r
William H. Riddick, III*
A t t o r n e y a t L a w - S m i t h fi e l d
Kent B. Spain*
S u ff o l k I n s u r a n c e C o r p o r a t i o n ,
E x e c u t i v e V i c e P r e s i d e n t
O. A. Spady
Retired Entrepreneur
Vernon M. Towler*
President
SUFFOLK COMMUNITY BOARD
Timothy K. Palmer, Chairman
A t t o r n e y a t L a w & C e r t i fi e d
P u b l i c A c c o u n t a n t
James C. Adams, III
P r e s i d e n t ,
F e a t h e r l i t e C o a c h e s
J. Clifton Harrell, Jr.
P r e s i d e n t ,
S u ff o l k I r o n Wo r k s
Roy A. Runyon, III
D i r e c t o r o f
D e v e l o p m e n t ,
L e t t e r ,
L . C .
R e s e a r c h a n d
Th e G a r t m a n
H. Hadley Whitlock, Jr.
L e n d e r
R e t i r e d C o m m e r c i a l
WESTERN TIDEWATER COMMUNITY BOARD
Vincent Carollo, Chairman
A n n a’ s
J V C H o l d i n g s
R i s t o r a n t e &
L L C
,
Christopher T. Alphin
C o m m o n w e a l t h G i n
Tammy W. Edwards
W i n d s o r H a r d w a r e a n d S u p p l y
C o m p a n y
Randolph H. Pack
S m i t h fi e l d S t a t i o n
V.S. Pittman, II
M a n r y R a w l
L L C
s
,
John T. Randall
P. C .
R a n d a l
P a g e ,
l
EXECUTIVE MANAGEMENT
Richard J. Holland, Jr.
C h i e f
E x e c u t i v e O ffi c e r
Vernon M. Towler
P r e s i d e n t
Patricia T. Allen
S e n i o r V i c e P r e s i d e n t ,
o f
D i r e c t o r
L o a n & D e p o s i t O p e r a t i o n s
BANK OFFICERS
Jeffrey S. Creekmore
S e n i o r V i c e P r e s i d e n t ,
C h e s a p e a k e
M a r k e t E x e c u t i v e
P. Kelley Gowen
S e n i o r V i c e P r e s i d e n t ,
C r e d i t O ffi c e r
C h i e f
Kathy C. Bryant
S e n i o r V i c e P r e s i d e n t ,
H u m a n R e s o u r c e s
o f
D i r e c t o r
a n d R e t a i l
Norman F. Carr, Jr.
S e n i o r V i c e P r e s i d e n t ,
F i n a n c i a l
D i r e c t o r o f
S e r v i c e s
Chad A. Rountree
S e n i o r V i c e P r e s i d e n t ,
We s t e r n T i d e w a t e r M a r k e t
E x e c u t i v e
Thomas L. Woodward, III
E x e c u t i v e V i c e P r e s i d e n t ,
L e n d i n g O ffi c e r
C h i e f
Kristy E. DeJarnette
E x e c u t i v e V i c e P r e s i d e n t ,
C h i e f
F i n a n c i a l
O ffi c e r
Kelley T. Healey
V i c e P r e s i d e n t ,
L o a n s
Eric L. Shaffner
V i c e P r e s i d e n t ,
L o a n s
Sharon A. Smith
V i c e P r e s i d e n t ,
C o m p l i a n c e
Melanie S. Gwaltney
A s
s i s t a n t V i c e P r e s i d e n t ,
O p e r a t i o n s
Blanche E. Hecker
A s
s i s t a n t V i c e P r e s i d e n t ,
R e t a i l
Joanne F. Joyner
A s
s i s t a n t V i c e P r e s i d e n t ,
R e t a i l
Lauren P. Harper
S e n i o r V i c e P r e s i d e n t ,
L o a n s
Kelly M. Clinton
A s
s i s t a n t V i c e P r e s i d e n t ,
C r e d i t
Charles A. Powers II
S e n i o r V i c e P r e s i d e n t ,
L o a n s
William N. Bailey
V i c e P r e s i d e n t ,
I n f o r m a t i o n Te c h n o l o g y
Deborah R. Cagle
V i c e P r e s i d e n t ,
s
B u s i n e s
R e t a i l
D e v e l o p m e n t
&
Pamela N. Ellyson
V i c e P r e s i d e n t ,
M a n a g e m e n t
Tr e a s u r y
Andrea B. Curry
A s
s i s t a n t V i c e P r e s i d e n t ,
I n f o r m a t i o n Te c h n o l o g y
Kelly D. Dewitt
A s
B S A ,
A M L ,
S e c u r i t y O ffi c e r
s i s t a n t V i c e P r e s i d e n t ,
O F A C &
C. Thomas Eure, Jr.
A s
s i s t a n t V i c e P r e s i d e n t ,
B r a n c h A d m i n i s t r a t i o n
Erin W. Park
A s
C o n t r o l
l e r
s i s t a n t V i c e P r e s i d e n t ,
D. Renee Scott
A s
s i s t a n t V i c e P r e s i d e n t ,
R e t a i l
Meghan D. White
A s
L o a n O p e r a t i o n s
s i s t a n t V i c e P r e s i d e n t ,
FARMERS BANK IN THE COMMUNITY
Financial Highlights
At or for the Years Ended December 31,
2017
2016
2015
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 attributable to noncontrolling interest
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)
$16,637
2,150
14,487
-
14,487
5,091
13,358
6,220
1,451
265
$4,504
$1.47
$15.68
3,063,661
$0.40
3,066,709
$456,583
266,753
370,891
25,000
1.10%
9.46%
3.87%
26.01%
65.21%
0.31%
2.17%
-0.06%
$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%
9.52%
14.04%
$50,312
11.64%
16.53%
$49,096
11.53%
18.50%
$49,166
(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
2015
2016
2017
2015
2016
2017
2015
2016
2017
3.50% 3.60% 3.70% 3.80% 3.90%
0.80% 1.00% 1.20%
$- $0.10 $0.20 $0.30 $0.40 $0.50
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2017 and 2016
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 - 49
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, 2017 and 2016, and the related consolidated statements of
operations, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related
notes to the consolidated financial statements (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 audits. We conducted our audits in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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, 2017 and 2016, and the results of its operations and its cash
flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Raleigh, North Carolina
March 13, 2018
5410 Trinity Road, Suite 320, Raleigh, North Carolina 27607
Phone: 919.783.7073 Fax: 919.783.7138 www.elliottdavis.com
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets
December 31,
December 31,
2017
2016
2016
2015
Assets
Assets
Cash and cash equivalents
Cash and cash equivalents
Cash and due from banks
Federal funds sold
Cash and due from banks
Federal Funds sold
Total cash and cash equivalents
of $5,922,333 and $5,755,746, respectively (Note 4)
Total cash and cash equivalents
Available-for-sale securities (Note 3)
Mortgage loans held for sale
Loans held for investment, net of allowance for loan losses
Available-for-sale securities (Note 3)
Mortgage loans held for sale
Premises and equipment, net (Note 5)
Loans held for investment, net of allowance for loan losses
Goodwill (Note 6)
of $5,755,746 and $6,343,636, respectively (Note 4)
Other intangible assets, net (Note 6)
Other real estate owned
Premises and equipment, net (Note 5)
Accrued interest
Other real estate owned
Prepaid expenses
Accrued interest
Net deferred tax asset (Note 12)
Income taxes receivable
Prepaid expenses
Non-marketable equity securities (Note 7)
Net deferred tax asset (Note 11)
Bank-owned annuity contract
Income taxes receivable
Bank-owned life insurance
Other assets
Non-marketable equity securities (Note 6)
Bank-owned annuity contract
Total assets
Bank-owned life insurance
Other assets
Liabilities and Stockholders' Equity
Deposits
Total assets
Noninterest-bearing deposits
Interest-bearing deposits (Note 8)
Total deposits
Liabilities and Stockholders' Equity
Deposits
Federal Home Loan Bank borrowings (Note 10)
Capital notes (Note 9)
Securities sold under agreements to repurchase (Note 10)
Noninterest-bearing deposits
Deferred compensation plans
Accrued interest
Interest-bearing deposits (Note 7)
Deferred revenue on insurance contracts
Other liabilities
Total deposits
Total liabilities
authorized; 3,066,709 and 3,056,363 shares issued and
outstanding at December 31, 2017 and 2016, including
nonvested shares of 13,011 and 8,223 shares, respectively
Federal Home Loan Bank borrowings (Note 9)
Stockholders' equity
Capital notes (Note 8)
Common stock, $0.125 par value; 50,000,000 shares
Securities sold under agreements to repurchase (Note 9)
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
Noncontrolling interest
Stockholders' equity
Common stock, $0.125 par value; 50,000,000 shares
Total equity
Total liabilities and equity
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
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
$
18,473,225
$
440,963
18,914,188
137,803,946
8,808,046
2,329,302
11,137,348
-
125,746,703
1,443,960
266,752,713
3,338,830
4,511,746
3,865,251
742,216
1,787,676
575,618
339,838
112,517
3,569,712
3,028,689
10,544,514
695,335
437,668,601
260,202,399
3,477,251
877,278
1,723,019
358,741
476,106
5,219
4,676,091
3,026,890
10,230,912
179,118
412,423,687
456,582,789
$
$
107,356,868
$
263,533,769
370,890,637
423,561,035
25,000,000
6,000,000
1,617,766
$
1,434,054
250,025
1,126,209
2,222,132
408,540,823
101,552,020
242,359,428
343,911,448
25,000,000
7,888,475
1,125,881
1,323,644
-
183,700
1,401,122
380,834,270
383,340
2,841,759
41,399,842
1,394,861
46,019,802
2,022,164
48,041,966
456,582,789
$
$
8,808,046
2,329,302
11,137,348
$
125,746,703
1,443,960
260,202,399
3,477,251
-
-
877,278
1,723,019
358,741
476,106
5,219
4,676,091
3,026,890
10,230,912
179,118
412,423,687
$
423,561,035
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
$
101,552,020
242,359,428
343,911,448
$
414,933,205
25,000,000
7,888,475
1,125,881
1,323,644
183,700
-
1,401,122
380,834,270
382,047
2,775,106
38,344,408
1,225,204
42,726,765
-
42,726,765
423,561,035
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
3
The accompanying notes are an integral part of these consolidated financial statements.
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
$
423,561,035
$
414,933,205
The accompanying notes are an integral part of these consolidated financial statements.
3
Farmers Bankshare, Inc.
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Consolidated Statements of Operations
Interest income
2016
2015
Years Ended December 31,
Years Ended December 31,
2016
2017
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 federal funds sold
Interest on available-for-sale securities
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
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
Interest expense
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
Net interest income
Provision of loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges
Income from automated teller machines and bank card interchange
Insurance commissions
Net gain on disposition of securities
Income on bank owned life insurance
Net gain on sale of premises and equipment
Income from investment in Manry Rawls, LLC
Income from mortgage loan sales
Other income
Noninterest expense
Total noninterest income
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
Salaries and employee benefits
Equipment expense
Net gain (loss) on sale of premises and equipment
Occupancy expense
Income from investment in Manry Rawls, LLC
Bank franchise tax
Income from mortgage loan sales
Advertising and marketing
Data processing
Other income
Loan related legal and other expenses
Federal Deposit Insurance Corporation assessment
Net loss (gain) on sale and write-downs of other real estate owned
Other
Total noninterest income
Noninterest expense
Total noninterest expense
Income before income taxes & noncontrolling interest
Income tax expense (Note 12)
Net income
Net income attributable to noncontrolling interest
Net income attributable to Farmers Bankshares, Inc.
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
Total noninterest expense
Income before income taxes
Income tax expense (Note 11)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
$
$
12,702,805
11,666
12,275,691
2,068,909
25,016
1,663,470
75,025
2,130,933
115,045
1,494,852
16,636,920
42,293
93,614
1,409,845
16,062,399
470,188
254,702
9,717
5,144
1,207,905
2,149,596
458,418
441,847
7,455
135
2,115,760
14,487,324
14,487,324
-
-
606,359
13,946,639
535,445
2,948,887
61,216
313,602
13,946,639
16,665
66,467
164,715
377,943
5,091,299
660,431
508,393
115,948
321,813
3,901
266,666
595,123
425,360
2,897,635
8,118,119
847,106
801,872
446,039
473,275
1,187,314
132,841
135,617
(490,264)
1,706,369
13,358,288
6,220,335
1,450,815
4,769,520
264,741
4,504,779
$
$
$
$
$
$
6,283,217
709,078
681,131
421,807
588,225
982,496
170,168
1.47
1.47
179,079
0.40
(18,243)
73,136
-
1,458,511
11,528,605
5,315,669
1,128,983
$
$
12,275,691
25,016
2,130,933
1,494,852
42,293
93,614
16,062,399
1,207,905
458,418
441,847
7,455
135
2,115,760
13,946,639
-
13,946,639
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
54,893
1,458,511
11,528,605
5,315,669
1,128,983
4,186,686
$
$
-
$
4,186,686
$
1.37
$
1.37
$
0.30
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
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 Changes in Stockholders' Equity
Preferred
Preferred
Stock
Stock
Common
Series A
Series B
Stock
Capital
Surplus
Retained
Earnings
Income
Total
Accumulated
Other
Comprehensive
8,632,556
457,271
379,323
2,652,804
26,360,240
4,510,249
42,992,443
(8,752,400)
(437,600)
119,844
(19,671)
263
429
14,738
28,071
-
-
-
-
-
-
-
-
-
-
-
3,315,744
(100,173)
(388,226)
(334,113)
-
-
-
-
-
-
-
3,315,744
(3,568,832)
(9,190,000)
15,001
28,500
(388,226)
(334,113)
-
-
(3,568,832)
-
-
-
-
-
-
-
-
-
-
-
2,156
429
(2,156)
29,571
3,360,889
3,360,889
2,078,653
2,078,653
(365,032)
30,000
(365,032)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
2017
$
4,186,686
2016
$
3,774,388
Net income
Other comprehensive loss:
Net income
Other comprehensive loss:
Unrealized holding losses on available-for-sale securities
Tax effect
Net, Unrealized holding gains (losses) on available-for-sale securities
Tax effect
Unrealized holding losses on available-for-sale securities,
net of tax amount
Unrealized holding gains (losses) on available-for-sale securities,
net of tax amount
Reclassification adjustment for realized gains
Tax effect
Reclassification adjustment for net realized gains
Tax effect
Reclassification of accumulated comprehensive loss due to tax rate change
Reclassification adjustment for realized gains, net of tax amount
Reclassification adjustment for net realized gains, net of tax amount
Other comprehensive loss, net of tax
Comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income
$
4,769,520
(1,665,349)
566,219
318,274
(108,213)
(1,099,130)
210,061
(115,948)
(61,216)
39,422
20,812
(76,526)
(229,534)
(1,175,656)
(269,938)
3,011,030
(59,877)
4,709,643
$
$
$
4,186,686
(1,665,349)
566,219
(515,376)
Balances, December 31, 2012
175,228
(340,148)
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Issuance of common stock - stock compensation plan
Issuance of common stock - director stock plan
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on preferred shares
Cash dividends declared on common shares, $0.55 per share
(1,099,130)
(422,821)
(115,948)
143,759
39,422
(279,062)
-
(619,210)
(76,526)
$
3,155,178
(1,175,656)
3,011,030
$
Balances, December 31, 2013
$
-
$
-
$
380,015
$
2,695,613
$
28,853,472
$
941,417
$
32,870,517
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Balances, December 31, 2014
$
-
$
-
$
382,600
$
2,723,028
$
31,849,329
$
3,020,070
$
37,975,027
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.
The accompanying notes are an integral part of these consolidated financial statements.
5
5
The accompanying notes are an integral part of these consolidated financial statements.
6
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Changes in Stockholders' Equity
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Preferred
Preferred
Stock
Stock
Series B
Series B
Accumulated
Other
Capital
Comprehensive
Surplus
Income
Capital
Surplus
Common
Stock
Stock
Series A
Preferred
Capital
Surplus
Series A
Stock
Preferred
Common
Common
Stock
Retained
Stock
Earnings
379,323
$
35,070,594
379,323
-
Retained
Earnings
Non-
Retained
controlling
Earnings
interest
26,360,240
$
-
26,360,240
$
3,315,744
2,652,804
$
2,400,860
2,652,804
-
Accumulated
Other
Comprehensive
Income
Accumulated
Other
Comprehensive
Total
Income
Total
4,510,249
40,607,358
42,992,443
4,510,249
3,315,744
42,992,443
-
Balances, December 31, 2012
8,632,556
$
8,632,556
Balances, December 31, 2015
Balances, December 31, 2012
-
-
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
Issuance of common stock - director stock plan
Stock based compensation
Cash dividends declared on common shares, $0.30 per share
Net income
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Issuance of common stock - stock compensation plan
Issuance of common stock - director stock plan
Preferred stock net accretion, (amortization) and costs
Issuance of common stock - stock compensation plan
Cash dividends declared on preferred shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.55 per share
Balances, December 31, 2013
Preferred stock net accretion, (amortization) and costs
Cash dividends declared on preferred shares
Distribution of interest in Manry Rawls, LLC
Net income
Remeasurements of deferred taxes related to tax reform legislation
Cash dividends declared on common shares, $0.55 per share
Changes in net unrealized gain on securities available for
Investment in Manry Rawls, LLC
Issuance of common stock - director stock plan
sale, net of reclassification adjustment and tax effect
Stock based compensation
Net income
Changes in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effect
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
Net income
Changes in net unrealized gain on securities available for
Balances, December 31, 2014
sale, net of reclassification adjustment and tax effect
Balances, December 31, 2017
Cash dividends declared on common shares, $0.40 per share
-
Balances, December 31, 2013
(8,752,400)
(8,752,400)
-
-
$
119,844
-
-
-
-
$
-
119,844
-
-
-
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
-
-
-
$
-
$
-
-
-
-
-
$
-
381,763
2,754,141
457,271
$
457,271
-
-
-
-
183
101
-
-
-
(437,600)
-
26,217
(5,252)
-
-
-
-
-
382,047
-
-
-
-
47,230
19,423
-
-
(437,600)
2,775,106
$
(19,671)
-
-
-
-
$
-
(19,671)
-
-
-
-
-
-
$
-
270
1,023
-
-
-
2,841,759
-
$
-
-
-
-
-
$
-
383,340
-
$
-
-
$
-
-
-
4,186,686
-
-
-
263
-
429
(912,872)
-
38,344,408
-
263
-
4,504,779
429
-
380,015
-
-
-
(229,534)
-
-
-
-
380,015
-
-
-
2,156
(1,219,811)
-
429
41,399,842
-
$
382,600
-
2,156
429
-
$
-
-
4,186,686
-
-
-
-
-
(1,175,656)
-
14,738
-
28,071
-
1,225,204
$
-
14,738
-
28,071
-
$
-
(59,877)
-
-
229,534
-
2,695,613
-
-
-
-
-
$
2,695,613
-
(2,156)
-
29,571
1,394,861
$
-
-
3,315,744
-
-
-
-
-
-
-
-
$
-
(100,173)
(388,226)
(334,113)
28,853,472
264,741
-
-
-
-
3,360,889
$
-
-
(292,577)
(100,173)
(388,226)
(334,113)
2,050,000
28,853,472
-
-
-
-
3,360,889
-
-
2,022,164
$
(365,032)
31,849,329
(3,568,832)
(1,175,656)
-
26,400
-
(5,151)
-
(912,872)
42,726,765
-
-
-
4,769,520
$
941,417
(59,877)
(292,577)
-
-
2,050,000
$
47,500
2,078,653
20,446
-
-
-
(1,219,811)
48,041,966
(3,568,832)
-
(3,568,832)
(9,190,000)
15,001
28,500
-
-
-
(388,226)
-
(334,113)
32,870,517
-
-
3,360,889
-
941,417
$
2,078,653
-
-
30,000
(365,032)
37,975,027
$
2,078,653
$
-
-
-
-
(2,156)
29,571
-
$
$
2,723,028
$
$
3,020,070
$
382,600
$
2,723,028
(365,032)
31,849,329
$
-
-
-
$
3,020,070
$
37,975,027
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)
-
-
$
$
$
$
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
Net income
cash provided by operating activities
Adjustments to reconcile net income to net
cash provided by operating activities
Distribution of interest in Manry Rawls, LLC
Depreciation
Amortization of intangible assets
Depreciation
Provision for deferred income taxes
Recovery of loan losses
Amortization of investment securities premiums
Provision for deferred income taxes
Net gain on disposition of available-for-sale securities
Net gain on disposition of non-marketable equity securities
Amortization of investment securities premiums
Gain on sales and writedowns on other real estate owned
Net gain on disposition of available-for-sale securities
Gain on sale of premises and equipment
Loss on sales and writedowns on other real estate owned
Gain on sale of mortgages held for sale
Increase in cash value of bank owned life insurance and annuity
(Gain)/loss on sale of premises and equipment
Increase in cash value of annuity
(Gain) on mortgages held for sale
Stock based compensation
Increase in cash value of bank owned life insurance
Issuance of stock to directors
Origination of mortgage loans held for sale
Compensation expense for stock issuance
Proceeds from sale of mortgage loans held for sale
Director expense for stock issuance
Change in operating assets and liabilities:
Change in operating assets and liabilities
Interest receivable
Interest payable
Origination of mortgage loans held for sale
Prepaid expenses
Proceeds from sale of mortgage loans held for sale
Income taxes receivable
Interest receivable
Other assets
Interest payable
Deferred compensation
Other liabilities
Prepaid expenses
Income taxes receivable
Other assets
Deferred compensation
Other liabilities
Proceeds from sales, prepayments and maturities of
Net cash provided by operating activities
Cash flows from investing activities
available-for-sale securities
Net cash provided by operating activities
Purchase of available-for-sale securities
Proceeds from sale of non-marketable equity securities
Purchase of annuity
Purchase of non-marketable equity securities
Proceeds from sale of other real estate owned
Loan originations, net of repayments
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Acquisition of business, net of cash acquired
Cash flows from investing activities
Proceeds from sales, prepayments and maturities of
available-for-sale securities
Net cash used in investing activities
Purchase of available-for-sale securities
Purchase of bank owned life insurance
Proceeds from sale of non-marketable equity securities
Cash flows from financing activities
Purchase of non-marketable equity securities
Cash dividends paid on common shares
Proceeds from sale of other real estate owned
Proceeds from issuance of capital notes
Repayment of capital notes
Loan originations, net of repayments
Repayment of debt related to Manry Rawls, LLC
Proceeds from sale of premises and equipment
Net increase in noninterest-bearing deposits
Purchases of premises and equipment
Net increase in interest-bearing deposits
Net increase in securities sold under agreements to repurchase
Net cash used in investing activities
Net cash provided by financing activities
Cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
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
Change in interest-bearing deposits
Change in securities sold under agreements to repurchase
Years Ended December 31,
2017
Years Ended December 31,
2016
2015
2014
$
4,769,520
$
4,186,686
$
3,774,388
$
3,360,889
(292,577)
475,504
178,889
167,113
567,255
(61,216)
23,597
(578,828)
(16,665)
(67,009)
(313,602)
(1,799)
20,446
47,500
(4,853,323)
6,364,292
454,801
-
92,841
846,954
(422,821)
91,469
58
(210,353)
(324,118)
48,000
40,600
(64,657)
66,325
(216,877)
(107,298)
(286,683)
110,410
820,456
6,750,773
(12,170,944)
12,456,247
(49,249)
(50,427)
29,126
574,279
89,488
136,614
26,461,528
(39,115,533)
55,894
438,081
5,462,847
-
(1,452,129)
811,390
(6,677,814)
61,797
(478,630)
(2,491,216)
(22,442,526)
28,677,043
(28,144,858)
-
425,000
(588,628)
794,531
(2,706,487)
150
(196,235)
(1,739,484)
(1,219,256)
6,000,000
(7,888,475)
(894,750)
5,804,848
21,174,341
491,885
23,468,593
7,776,840
(595,893)
(58,324)
(1,325,000)
5,000,000
(10,000,000)
10,335,526
(17,266,858)
(1,106,497)
11,137,348
18,914,188
$
-
464,346
-
(19,121)
675,237
(115,948)
-
(18,243)
(3,901)
(235,135)
(321,812)
-
(5,151)
26,400
(16,035,951)
15,738,176
51,411
(15,102)
(21,400)
87,104
(6,188)
82,715
139,811
4,653,934
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)
(760,073)
-
(2,040,000)
-
5,131,087
2,902,989
302,779
5,536,782
(5,147,637)
16,284,985
11,137,348
$
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)
(340,492)
-
-
-
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.
7
Net cash provided by or (used in) financing activities
Net decrease in cash and cash equivalents
(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
2017
Years Ended December 31,
2016
2017
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,
$
1,391,000
2,083,271
$
300,000
2,780,525
$
1,061,000
2,130,861
$
1,000,000
3,141,032
Supplemental schedule of non-cash investing activities
net of income tax
Transfer of loans to other real estate owned
Change in unrealized gains on available-for-sale securities,
Contribution of other real estate owned
net of income tax
Income from investment in Manry Rawls, LLC
Income from investment in Manry Rawls, LLC
Loss from investment in Plexus Capital, LLC
Income from investment in Tidewater Homefunding, LLC
Transfer of loans to other real estate owned
Contribution of other real estate owned
Acquisitions
$
$
(619,210)
(59,877)
(127,500)
(30,000)
(66,467)
5,976
(46,988)
(437,428)
-
-
Assets acquired
Liabilities assumed
Net assets
$
10,461,400
4,314,323
6,147,077
$
$
(1,175,656)
(328,605)
$
-
2,078,653
(266,666)
-
-
(175,611)
(1,618,758)
(180,000)
-
$
-
$
-
Goodwill and fair value acquisition adjustments
$
4,511,407
$
-
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
The accompanying notes are an integral part of these consolidated financial statements.
8
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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.
During 2014, the Bank purchased a one-third ownership interest in Manry Rawls, LLC (“Manry Rawls”). Manry Rawls is a
local and independent regional insurance agency offering a wide array of insurance products. In May 2017, the Bank
purchased an additional one-third interest in Manry Rawls, LLC. This additional interest makes the Bank’s total ownership
two-thirds or approximately 67%. Prior to the additional purchase in 2017, the Bank’s proportionate share of Manry
Rawls’ income was recorded as an increase in the investment and other non-interest income. After May 12, 2017 the
acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC)” 805, Business Combinations.
As such, the assets acquired and liabilities assumed in the transactions were recorded at their respective fair values as of the
acquisition date. The results of operations of the acquired business are included in the Company’s Consolidated Statements
of Operations commencing May 12, 2017.
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, its wholly-owned subsidiary, the Bank and Manry Rawls. 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
2017 and 2016, the aggregate amount of daily-required balances was $159,000 and $85,000, respectively.
Investment securities - Investments in debt securities classified as held-to-maturity, if any, are stated at cost, and 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.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
Investment securities (concluded) - 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 investments 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).
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 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 less selling costs) 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 less selling costs if the loan is collateral dependent.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
Allowance for loan losses (concluded) - 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.
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.
Goodwill and other intangibles - Goodwill is not subject to amortization, but is subject to an annual assessment for
impairment by applying a fair-value-based test as required by ASC 350, Goodwill and Other Intangible Assets. Additionally,
under ASC 350, acquired intangible assets are separately recognized if the benefit of the assets can be sold, transferred,
licensed, rented, or exchanged, and amortized over their useful life.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
Goodwill and other intangibles (concluded) - Goodwill is tested for impairment at the reporting unit level on an annual basis
as of September 30, or more often if events or circumstances indicate there may be impairment. Testing is conducted in two
steps: identifying the potential impairment and then, if necessary, identifying the amount of impairment. The first step (step
1) compares the fair value of the reporting unit to its carrying amount. If the fair value is less than the carrying amount, a
second test is conducted by comparing the implied fair value of goodwill with the carrying amount of that goodwill. If the
carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. For our
annual impairment testing conducted during 2017, we identified one reporting unit with goodwill: Manry Rawls. For
purposes of performing step 1 of the goodwill impairment test, the Company primarily uses the income approach to value
the reporting unit. The income approach consists of discounting projected long-term future cash flows, which are derived
from internal forecasts and economic expectations for the respective reporting unit. The significant inputs to the income
approach include expected future cash flows, the long-term target tangible equity to tangible assets ratio, and the discount
rate. Discount rates are unique to the reporting unit and are based upon the cost of capital specific to the industry in which
the reporting unit operates. Management evaluated the sensitivity of the significant assumptions in its impairment analysis,
including consideration of the effect of changes in estimated future cash flows or the discount rate for the reporting unit.
Based on our analysis, we determined there is no goodwill impairment, since the fair value for the reporting unit was in
excess of the respective reporting unit’s carrying value as of September 30, 2017.
The second step (step 2) of impairment testing is necessary only if the reporting unit does not pass step 1. Step 2 compares
the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The
implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination.
Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.
Since the reporting unit did not fail step 1, step 2 was not applicable during 2017 testing. The Company monitored events
and circumstances during the fourth quarter of 2017, and it determined that there were no triggering events requiring an
updated impairment test as of December 31, 2017.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow
projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic
and market conditions, and selecting an appropriate control premium. Selection and weighting of the various fair value
techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings most representative
of fair value.
Intangible assets are amortized or tested for impairment based on whether they have finite or indefinite lives. Intangibles
that have finite lives are amortized on a straight-line basis over their useful life and tested for impairment whenever events or
circumstances indicate the carrying amount of the assets may not be recoverable. The useful life applied to amortize the
customer list intangible, which was created from the acquisition of Manry Rawls, is 15 years. Note 6 provides additional
information related to goodwill and other intangibles.
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. 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 2017.
Mergers and acquisitions - Mergers and acquisitions are accounted for using the acquisition method, as required by ASC
805, Business Combinations. Under this method, the cost of the acquired entity will be allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition. The excess of the cost over the fair value of the
acquired net assets is recognized as goodwill.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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 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, 2017 and 2016.
The years ending on or after December 31, 2014 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 and annuity contracts to fund the expected liabilities under
the contracts.
Revenue recognition on insurance contracts – Insurance commission income is recorded as of the effective date of insurance
coverage or the billing date, whichever is later. Contingent commissions are recognized when determinable, which is
generally when such commissions are received or when the Company receives data from the insurance companies that allows
the reasonable estimation of these amounts. The income effects of subsequent premium and fee adjustments are recorded
when the adjustments become known.
Earnings per common share - Basic earnings per share (EPS) is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects 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.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
Estimation of fair values (concluded) - Loans are valued on the basis of estimated future receipts of principal and interest,
discounted at various rates. Loan prepayments are assumed to occur at the same rate as in previous periods when interest
rates were at levels similar to current levels. Future cash flows for homogeneous categories of consumer loans are
estimated on a portfolio basis and discounted at current rates offered for similar loan terms to new borrowers with
similar credit profiles. A liquidity discount is not considered in determining the fair value of the loan portfolio.
Investment securities are valued at quoted market prices, if available. The fair value of equity investments in the
restricted stock of the FRB and FHLB approximates the carrying value due to the redemptive provisions of these
securities.
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 allowance may be necessary
based on changes in local economic conditions and other factors. Management believes the allowance recorded at
December 31, 2017 and 2016 is 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, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
Recent accounting pronouncements - In August 2015, the FASB issued Accounting Standards Updated (“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 current revenue recognition requirements in Topic
605, “Revenue Recognition.” 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 will apply the guidance using a modified retrospective approach. The Company does not expect these
amendments to have a material effect on its consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments.” The ASU amended the Business Combinations topic to simplify the accounting for
adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to
retrospectively account for those adjustments. The amendments are effective for reporting period beginning after December
15, 2015. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur
after the effective date. The adoption of this guidance did not have a material impact on the Company’s consolidated
financial statements.
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 does not expect the adoption of this ASU to have a material impact on its consolidated
financial statements.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (continued)
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 fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
and early adoption is permitted. The Company expects to adopt this ASU using the modified retrospective method and
practical expedients for transition. The practical expedients allow the Company to largely account for existing leases
consistent with current guidance except from the incremental balance sheet recognition for lessees. The Company has
started an initial evaluation of leasing contracts and activities. The Company has started to develop a methodology to
estimate the right-of-use assets and lease liabilities, which is based on the present value of lease payments. The adoption of
the ASU is not expected to have a material impact to the timing of expense recognition, but the Company will continue to
evaluate the impact. The Company is currently evaluating existing disclosures and may need to provide additional
information as a result of the adoption of the ASU.
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.
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 consolidated financial statements.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 2 - Summary of significant accounting policies (concluded)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the test for
Goodwill Impairment. This ASU is intended to simplify goodwill impairment testing by eliminating the second step of the
analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a
business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying
amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair
value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. The
amendments are effective for public business entities for fiscal years beginning after December 15, 2019. Early adoption is
permitted. The Company does not expect the amendments to the standard to have a material effect on its consolidated
financial statements.
In February 2017, the FASB amended the “Other Income Topic of the Accounting Standards Codification” to clarify the
scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets.
The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new
revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15,
2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Topic 310-20),
Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization
period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these
qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will
continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon
transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to
retained earnings as of assessing the impact that ASU 2017-08 will have on its consolidated financial statements. The
Company does not expect the amendments to the standard to have a material effect on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation- Stock Compensation (Topic 718): Scope of Modification
Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based
payment awards require an entity to apply modification under Topic 718. The amendments are effective for all entities for
annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption
is permitted. The Company does not expect the amendments to the standard to have a material effect on its consolidated
financial statements.
In February 2018, the FASB Issued (2018-02), “Income Statement (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income”, which requires Companies to reclassify the stranded effects in other
comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The
Company has opted to early adopt this pronouncement by retrospective application to each period (or periods) in which the
effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The impact of the reclassification from
other comprehensive income to retained earnings is $229,534.
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Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 3 - Available-for-sale securities
At December 31, 2017 and 2016, securities are as follows:
December 31, 2017
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
December 31, 2016
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Amortized
Cost
$ 51,551,857
17,452,768
48,104,162
18,929,512
$ 136,038,299
Gross
Unrealized
Gains
$ 1,539,085
34,034
109,685
813,123
$ 2,495,927
Gross
Unrealized
Losses
$ 51,202
139,739
539,339
-
$ 730,280
Fair
Value
$ 53,039,740
17,347,063
47,674,508
19,742,635
$ 137,803,946
Amortized
Cost
$ 44,666,648
20,900,403
35,523,943
22,799,340
$ 123,890,334
Gross
Unrealized
Gains
$ 1,280,172
18,158
276,319
1,060,332
$ 2,634,981
Gross
Unrealized
Losses
$ 219,016
228,874
330,722
-
$ 778,612
Fair
Value
$ 45,727,804
20,689,687
35,469,540
23,859,672
$ 125,746,703
At December 31, 2017 and 2016, 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, 2017
Available-for-sale securities:
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Total temporarily impaired
Continuous Unrealized
Losses Existing for:
Fair Value
Less than
12 Months
More than
12 Months
Total
Losses
$ 2,087,083
12,476,225
34,952,462
$ 7,312
61,292
247,227
$ 43,890
78,447
292,112
$ 51,202
139,739
539,339
investment securities
$ 49,515,770
$ 315,831
$ 414,449
$ 730,280
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:
Fair 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
18
18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 3 - Available-for-sale securities (concluded)
State and municipal - The Company’s unrealized losses on state and municipal securities were caused by the interest rate
fluctuations. The severity and duration of these unrealized losses will fluctuate with interest rates in the economy. Based on
the credit quality of the issuers, and because of the Company’s intent to hold the securities until a market price recovery or
maturity, and it is more likely than not that the Company will not be required to sell these securities before their anticipated
recovery, the Company does not consider these investments other than temporarily impaired.
Residential 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. Our mortgage-related securities are
backed by the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation
(“FHLMC”), which are Government Sponsored Entities (“GSE”) or are collateralized by securities backed by these agencies.
The Company intends 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. Because of the preceding factors the
Company does not consider these investments other than temporarily impaired.
At December 31, 2017 and 2016, securities with a carrying value of approximately $52,883,572 and $33,536,180,
respectively, were pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2017
and 2016, securities with a carrying value of $7,312,036 and $7,880,087, respectively, were pledged to the Federal Home
Loan Bank to secure advances. Investment securities with carrying values of $3,054,577 and $3,263,403 were pledged to
secure repurchase agreements at December 31, 2017 and 2016, respectively.
At December 31, 2017, 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
Collateralized mortgage obligations
Total gross realized gains
Gross realized losses on available-for-sale securities were:
Residential mortgage-backed securities
Total gross realized gains
Amortized
Cost
$ 649,032
8,883,189
11,528,874
114,977,204
$ 136,038,299
Fair
Value
$ 653,087
9,223,005
11,921,520
116,006,334
$ 137,803,946
2017
$ 116,397
19,733
$ 136,130
2016
$ 115,948
-
$ 115,948
2017
$ 74,914
$ 74,914
2016
-
$ -
Proceeds from the sale of available-for-sale securities totaled $10,446,016 and $1,282,802 for the years ended December 31,
2017 and 2016, respectively.
19
19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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, 2017 and 2016, 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
2017
2016
$ 35,828,855
$ 37,231,654
31,423,300
64,905,599
40,745,349
4,631,773
13,278,388
190,813,264
55,987,931
23,836,897
1,987,347
272,625,439
(5,922,333)
49,607
$ 266,752,713
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
Real Estate Loans - Real estate loans include construction and land development loans, commercial real estate loans, home
equity lines of credit, multi-family and residential mortgages.
Construction/development lending totaled $35.8 million and $37.2 million at December 31, 2017 and 2016, 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 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 $40.7 million at December 31, 2017 and
2016, respectively.
Commercial real estate loans totaled $96.3 million and $102.0 million at December 31, 2017 and 2016, 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 $4.6 million and $4.9 million at December 31, 2017 and 2016, 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 $13.3 million and $12.7 million at December 31, 2017 and
2016, respectively.
20
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 – Loans and Allowance for Loan Losses (continued)
Commercial and Industrial Loans - At December 31, 2017 and 2016, the Bank’s commercial loan portfolio totaled $55.9
million and $46.1 million, respectively. Commercial loans include both secured and unsecured loans for working capital,
expansion, and other business purposes. Short-term working capital loans are secured by accounts receivable, inventory
and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions
are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower, and the
quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary
sources of repayment. Commercial loans generally provide greater yields and re-price more frequently than other types of
loans, such as real estate loans.
Agricultural Loans – Agricultural loans totaled $23.8 million and $20.9 million at December 31, 2017 and 2016, respectively
and include loans secured by farm equipment, inventory and farm land. Lending decisions are based on an evaluation of
the financial strength, cash flow, management and credit history of the borrower, and the quality of the collateral securing
the loan. Payments on such loans are often dependent on successful operation or management of the farming operation.
Loans to Individuals - Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle
financing, and miscellaneous secured and unsecured personal loans and totaled $1.9 million and $1.5 million at December
31, 2017 and 2016, respectively. Overdrafts totaling $24 thousand and $23 thousand at December 31, 2017 and 2016,
respectively, were reclassified from deposits to loans and are also classified in loans to individual. 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.
21
21
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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.
22
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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.
23
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
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, 2017 and 2016:
Real Estate Credit Exposure as of December 31, 2017
Commercial Real Estate
Owner
occupied
Non-owner
occupied
-
$
2,876
12,549
13,865
1,815
318
31,423
$
(in thousands)
$
-
3,016
33,805
26,085
1,941
59
64,906
$
Construction
-
$
1,927
17,757
13,990
1,902
253
35,829
$
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Residential
1-4 Family Multifamily
Equity lines
of credit
$
$
15
7,083
19,112
10,769
2,764
1,002
40,745
-
$
-
1,125
3,507
-
-
4,632
$
45
6,238
5,918
744
144
189
13,278
$
$
24
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
Other Credit Exposures as of December 31, 2017
Commerical
and industrial Agricultural
Individuals
Total
(in thousands)
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
-
$
4,175
36,645
14,202
930
36
55,988
$
-
$
5,564
12,281
5,289
703
-
23,837
$
Real Estate Credit Exposure as of December 31, 2016
$
$
16
251
1,189
208
323
-
1,987
76
31,130
140,380
88,658
10,523
1,858
272,625
$
$
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
Construction
$
-
2,549
19,093
13,532
1,473
585
37,232
$
Commercial Real Estate
Owner
occupied
Non-owner
occupied
Residential
1-4 Family Multifamily
Equity lines
of credit
(in thousands)
$
$
$
-
3,662
12,139
15,332
2,026
347
33,506
$
$
-
5,702
30,439
28,267
731
3,337
68,476
$
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
Other Credit Exposures as of December 31, 2016
Commerical
and industrial Agricultural
Individuals
Total
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
(in thousands)
-
$
2,143
30,764
12,377
232
534
46,050
$
-
$
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
$
25
25
Farmers Bankshares, Inc.
Note 4 - Loans and Allowance for Loan Losses (continued)
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Nonaccrual loans and past due loans - Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned
Note 4 - Loans and Allowance for Loan Losses (continued)
property and loans past due 90 days or more on which interest is still being accrued. There were no financing receivables
Nonaccrual loans and past due loans - Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned
past due over 90 days accruing interest as of December 31, 2017 or 2016. Nonaccrual loans as of December 31, 2017
property and loans past due 90 days or more on which interest is still being accrued. There were no financing receivables
totaled $834 thousand, or 0.31% of total loans, compared with $2.0 million, or 0.76% of total loans, as of December 31,
past due over 90 days accruing interest as of December 31, 2017 or 2016. Nonaccrual loans as of December 31, 2017
2016. The Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as
totaled $834 thousand, or 0.31% of total loans, compared with $2.0 million, or 0.76% of total loans, as of December 31,
repossessed and foreclosed collateral are aggressively liquidated by the Bank’s management. The total number of loans on
2016. The Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as
nonaccrual status as of December 31, 2017 and 2016 was 9.
repossessed and foreclosed collateral are aggressively liquidated by the Bank’s management. The total number of loans on
nonaccrual status as of December 31, 2017 and 2016 was 9.
For the years ended December 31, 2017 and 2016, the Bank recognized $-0- and $1,741 in interest income on nonaccrual
loans. If interest on those loans had been accrued in accordance with the original terms, interest income would have
For the years ended December 31, 2017 and 2016, the Bank recognized $-0- and $1,741 in interest income on nonaccrual
increased by approximately $59,263 and $99,748 for the years ended December 31, 2017 and 2016, respectively.
loans. If interest on those loans had been accrued in accordance with the original terms, interest income would have
increased by approximately $59,263 and $99,748 for the years ended December 31, 2017 and 2016, respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2017 and 2016:
The following is a breakdown of nonaccrual loans as of December 31, 2017 and 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
Equity lines of credit
Equity lines of credit
Commerical and industrial
Commerical and industrial
Total
Total
December 31,
2017
December 31,
2016
2017
2016
$
252,743
$
287,691
$
252,743
$
287,691
166,192
166,192
-
-
189,863
188,924
36,327
834,049
189,863
188,924
36,327
834,049
184,929
756,874
451,676
336,482
184,929
756,874
451,676
336,482
-
-
2,017,652
$
$
$
$
2,017,652
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, 2017 and 2016:
analysis of past due loans as of December 31, 2017 and 2016:
30-59 Days
30-59 Days
Past Due
Past Due
60-89 Days
Past Due
60-89 Days
Past Due
Greater Than
Greater Than
90 Days
90 Days
Greater Than
90 Days Still
Accruing
Greater Than
90 Days Still
Accruing
Total Past
Due
Total Past
Due
Current
Current
Total Loans
Total Loans
December 31, 2017
December 31, 2017
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
$
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
$
9
9
$
9
(in thousands)
(in thousands)
$
-
$
-
$
-
$
-
$
-
$
-
$
$
-
-
$
35,829
$
$
35,829
35,829
$
35,829
4
-
-
-
-
15
24
4
15
24
73
-
-
-
-
36
-
-
-
-
-
-
-
$
-
-
-
43
$
36
-
-
109
$
-
-
109
$
43
73
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$
-
77
15
24
36
-
-
-
-
-
15
77
31,346
64,906
40,730
4,632
13,254
55,952
23,837
1,978
9
$
272,464
$
161
31,423
64,906
40,745
4,632
13,278
55,988
23,837
1,987
272,625
$
31,346
64,906
40,730
4,632
13,254
55,952
23,837
1,978
$
272,464
26
24
36
-
31,423
64,906
40,745
4,632
13,278
55,988
23,837
1,987
272,625
$
9
161
$
26
26
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
For Years Ended December 31, 2017 and 2016
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
Note 4 - Loans and Allowance for Loan Losses (continued)
Note 4 - Loans and Allowance for Loan Losses (continued)
December 31, 2016
December 31, 2016
December 31, 2016
Mortgage loans on real estate:
Mortgage loans on real estate:
Mortgage loans on real estate:
Construction
Construction
Construction
Commercial real estate:
Commercial real estate:
Commercial real estate:
Non-owner occupied
Non-owner occupied
Non-owner occupied
Owner occupied
Owner occupied
Owner occupied
Residential 1-4 family
Residential 1-4 family
Residential 1-4 family
Multifamily
Multifamily
Multifamily
Equity lines of credit
Equity lines of credit
Equity lines of credit
Commercial and industrial
Commercial and industrial
Commercial and industrial
Agricultural
Agricultural
Agricultural
Individuals
Individuals
Individuals
Total
Total
Total
30-59 Days
30-59 Days
30-59 Days
Past Due
Past Due
Past Due
60-89 Days
60-89 Days
60-89 Days
Past Due
Past Due
Past Due
Greater Than
Greater Than
90 Days
90 Days
Greater Than
90 Days
Greater Than
Greater Than
Greater Than
90 Days Still
90 Days Still
90 Days Still
Accruing
Accruing
Accruing
(in thousands)
(in thousands)
(in thousands)
Total Past
Total Past
Total Past
Due
Due
Due
Current
Current
Current
Total Loans
Total Loans
Total Loans
$
-
-
$
-
$
$
-
-
$
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
$
$
37,232
37,232
37,232
$
$
$
37,232
37,232
37,232
18
18
18
-
-
-
147
147
147
-
-
-
28
28
28
3
3
3
-
-
-
2
198
2
2
198
198
$
$
$
16
16
-
-
-
-
-
-
16
-
-
-
-
-
-
-
-
-
-
16
$
$
-
-
-
-
-
$
16
16
79
79
79
757
757
757
151
151
151
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
987
987
987
$
$
$
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$
-
97
757
314
-
97
97
757
757
314
314
-
-
28
3
28
28
3
3
-
-
-
2
1,201
$
$
2
2
1,201
1,201
$
33,409
67,719
40,381
4,897
12,670
46,047
20,942
1,474
264,771
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
33,506
68,476
68,476
40,695
40,695
4,897
4,897
12,698
12,698
46,050
46,050
20,942
20,942
1,476
1,476
265,972
265,972
Troubled Debt Restructurings - In order to maximize the collection of loan balances, the Bank evaluates troubled loan accounts
Troubled Debt Restructurings - In order to maximize the collection of loan balances, the Bank evaluates troubled loan accounts
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
on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be utilized where
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.
there is a reasonable chance that an appropriate modification would allow the Bank’s customers to continue servicing debt.
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
A loan is a troubled debt restructuring (“TDR”) if both of the following exist: 1) a creditor has granted a concession to the
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
debtor, and, 2) the debtor is experiencing financial difficulties. Non-accruing loans that are modified can be placed back on
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
accrual status when both principal and interest are current and it is probable that the Bank will be able to collect all
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
amounts due (both principal and interest) according to the terms of the loan agreement and a sustained period of payment
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
performance is demonstrated. Interest on troubled debt restructured loans is accrued at the restructured rates when it is
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
anticipated that no loss of original principal will occur and a sustained payment performance period is obtained. For the
anticipated that no loss of original principal will occur and a sustained payment performance period is obtained. For the
years ended December 31, 2017 and 2016, the following table presents a breakdown of the types of concession made by loan
years ended December 31, 2017 and 2016, the following table presents a breakdown of the types of concession made by loan
years ended December 31, 2017 and 2016, the following table presents a breakdown of the types of concession made by loan
class:
class:
class:
Year ended December 31, 2017
Year ended December 31, 2017
Year ended December 31, 2017
Post-
Post-
Post-
Modification
Modification
Modification
Outstanding
Outstanding
Outstanding
Recorded
Recorded
Recorded
Investment
Investment
Investment
Pre-Modification
Pre-Modification
Pre-Modification
Outstanding
Outstanding
Outstanding
Recorded
Recorded
Recorded
Investment
Investment
Investment
Year ended December 31, 2016
Year ended December 31, 2016
Year ended December 31, 2016
Post-
Post-
Post-
Modification
Modification
Modification
Outstanding
Outstanding
Outstanding
Recorded
Recorded
Recorded
Investment
Investment
Investment
Pre-Modification
Pre-Modification
Pre-Modification
Outstanding
Outstanding
Outstanding
Recorded
Recorded
Recorded
Investment
Investment
Investment
Number
of loans
Number
Number
of loans
of loans
Number
Number
Number
of loans
of loans
of loans
Extended payment terms
Extended payment terms
Extended payment terms
Mortgage loans on real estate:
Mortgage loans on real estate:
Mortgage loans on real estate:
Construction
Construction
Construction
Commercial real estate:
Commercial real estate:
Commercial real estate:
Non-owner occupied
Non-owner occupied
Non-owner occupied
Residential 1-4 family
Residential 1-4 family
Residential 1-4 family
Total
Total
Total
1
$
252,743
$
252,743
1
1
$
$
252,743
252,743
$
$
252,743
252,743
1
-
2
1
1
-
-
2
2
102,103
102,103
102,103
-
102,103
102,103
102,103
-
$
-
-
354,846
$
-
-
354,846
$
$
354,846
354,846
$
$
354,846
354,846
1
-
1
2
$
1
1
$
$
297,500
$
297,500
297,500
297,500
$
$
297,500
297,500
-
-
-
-
1
1
$
2
2
-
-
143,575
441,075
143,575
143,575
441,075
441,075
$
$
$
-
-
143,575
441,075
143,575
143,575
441,075
441,075
$
$
27
27
27
27
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
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 2017 or 2016. Within the last 12 months, no loans that
were restructured in 2016 or 2015, subsequently defaulted and were foreclosed upon. These modifications resulted in
specific reserves in the Bank’s allowance for loan losses of $-0- as of December 31, 2017 and 2016.
Troubled Debt Restructurings (concluded) - There were two TDRs that were on non-accrual status and have an unpaid principal
balance of $325,411 as of December 31, 2017. There were two TDRs that were on non-accrual status and had an unpaid
principal balance of $836,041 as of December 31, 2016. Nine TDRs with a current principal balance of $1.3 million and
fifteen TDRs with current principal balance of $5.4 million were considered performing loans and are accruing interest
based on their sustained payment performance as of December 31, 2017 and 2016, 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, 2017 and 2016 the Company held $15,000 and $50,160, 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, 2017 and 2016 was $-0-. The remaining
balance of other real estate owned consists of construction and commercial real estate properties.
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 $2.4 million and $8.1 million as of December 31, 2017 and 2016, 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, 2017 and 2016
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, 2017 and 2016:
December 31, 2017
Impaired loans without a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Residential 1-4 family
Commercial and industrial
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Residential 1-4 family
Equity lines of credit
Total impaired loans
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Residential 1-4 family
Equity lines of credit
Commercial and industrial
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
278
$
278
$
-
$
285
$
17
225
376
-
253
94
940
189
225
444
-
253
94
940
189
-
-
-
55
15
90
77
234
477
238
274
100
955
193
8
17
10
-
-
-
55
$
531
$
531
$
55
$
559
$
17
319
1,316
189
-
2,355
$
319
1,384
189
-
2,423
$
15
90
77
-
237
$
334
1,432
193
238
2,756
$
8
72
-
10
107
$
29
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
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
Equity lines of credit
Commercial and industrial
Agricultural
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
Equity lines of credit
Total impaired loans
Mortgage loans on real estate:
Construction
Commercial real estate:
Non-owner occupied
Owner occupied
Residential 1-4 family
Equity lines of credit
Commercial and industrial
Agricultural
Total impaired loans
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
$
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.
30
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
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, 2017 and 2016, 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, 2017 were watch list trends, unemployment rate trends,
government spending expectations and underwriting and servicing assessments.
The following table’s present changes in the allowance for loan losses for the years ended December 31, 2017 and 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
December 31,
2016
Charge-offs Recoveries
Provision
(in thousands)
December 31,
2017
$
546
$
-
$
-
$
97
$
643
538
2,015
1,113
65
277
901
279
22
5,756
$
42
-
205
-
21
-
-
-
268
$
-
243
162
19
4
6
-
-
434
$
105
(628)
53
17
2
243
106
5
$
-
601
1,630
1,123
101
262
1,150
385
27
5,922
$
31
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (continued)
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
$
The activity in the allowance for loan loss for 2017 and 2016 are summarized by loan class as follows:
As of December 31, 2017
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)
$
55
$
531
$
588
$
35,298
15
90
-
-
77
-
-
-
237
$
319
-
1,316
-
189
-
-
-
2,355
$
586
1,630
1,033
101
185
1,150
385
27
5,685
$
31,104
64,906
39,429
4,632
13,089
55,988
23,837
1,987
270,270
$
32
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 4 - Loans and Allowance for Loan Losses (concluded)
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
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
$
Note 5 - Premises and equipment
At December 31, 2017 and 2016, premises and equipment consist of the following:
Land
Buildings
Equipment, furniture and fixtures
Computer equipment
Software
Less accumulated depreciation
Total premises and equipment, net
2017
$ 456,450
6,151,012
3,038,464
364,542
457,799
10,468,267
(7,129,437)
$ 3,338,830
2016
$ 456,450
6,139,694
2,801,652
243,988
457,799
10,099,583
(6,622,332)
$ 3,477,251
For 2017 and 2016, depreciation charged to operating expense was $475,504 and $464,346, respectively.
33
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 6 – Goodwill and intangible assets
The gross carrying amount and accumulated amortization for the Company’s intangible assets as of December 31,
2017
2016
Gross
Carrying
Accumulated
Amortization
Gross
Carrying
Accumulated
Amortization
Intangible assets subject to amortization
Customer lists
$
4,025,000
$
178,889
$
-
$
-
Total intangible assets subject to amortization
4,025,000
178,889
-
-
Goodwill
Total intangible assets
4,511,746
8,536,746
$
-
178,889
$
$
-
$
-
The aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2017 was
$178,889, compared to $-0- for 2016. The estimated aggregate annual amortization expense for each of the five years
subsequent to December 31, 2017, is $270,635.
During 2017, the Company recorded $4,511,746 in net increases to goodwill and $4,025,000 in intangible assets. These
intangibles were created by the acquisition of Manry Rawls. During 2016, the Company did not record any net increases to
goodwill. The intangible assets acquired are finite-lived, consisting primarily of book-of-business purchases. No impairment
charges were recorded in any year reported. Impairment testing indicated that goodwill was not impaired in 2017.
Balance, December 31, 2016
$
-
Additions to goodwill
Other adjustments
4,511,746
-
Balance, December 31, 2017
$
4,511,746
Note 7 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2017 and 2016:
Federal Home Loan Bank stock
Federal Reserve Bank stock
Community Bankers' Bank stock
Bankers Title, LLC
Manry Rawls, LLC
Plexus Captial, LLC
Tidewater Home Funding, LLC
Senior Housing Crime Prevention Foundation stock
Total non-marketable equity securities
2017
$ 1,443,800
399,750
61,300
-
-
444,024
720,838
500,000
$ 3,569,712
2016
$ 1,436,100
399,150
61,300
99,178
2,030,363
150,000
-
500,000
$ 4,676,091
34
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 8 - 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
At December 31, 2017, the scheduled maturities of time deposits are as follows:
2017
$ 28,369,941
84,752,856
15,573,635
26,115,117
39,809,923
68,912,297
$ 263,533,769
2016
$ 23,462,873
93,516,154
15,559,801
26,919,065
11,626,545
71,274,990
$ 242,359,428
2018
2019
2020
2021
2022
Thereafter
Total time deposits
$ 62,854,342
15,534,026
8,844,683
8,339,582
13,149,587
-
$ 108,722,220
For 2017 and 2016, time deposits individually in excess of $250,000 was $39.8 million and $11.6 million.
Note 9 – 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 were not registered under the Securities Act of 1933 and could not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. The 2013 Notes bore interest at the rate of
5% per year with interest payable quarterly in arrears. The 2013 Notes had a maturity date of December 31, 2018, but were
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 were no assets pledged as collateral for the 2013 Notes.
During 2017, the Company fully repaid the outstanding balance of the 2013 Offering totaling, $7.9 million at the original
investment price to reduce debt service obligations. During 2016, $2.04 million of capital notes were repaid to
accommodate investor’s liquidity needs and to reduce our debt service obligations. Of the capital notes redeemed in 2016,
$600,000 were redeemed at a premium price of 102%, equating to total premium paid of $12,000. An additional $1.4
million of capital notes were redeemed at the original investment price during 2016.
During the second quarter of 2017, the Company closed the private placement of unregistered debt securities (the “2017
Offering”) pursuant to which the Company issued $6.0 million in principal of notes (the “2017 Notes”). The 2017 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 2017 Notes bear interest at the
rate of 3.25% per year with interest payable quarterly in arrears. The 2017 Notes mature on March 31, 2022, but are subject
to prepayment in whole or in part on or after March 31, 2018 at the Company’s sole discretion on 30 days written notice to
the holders. There are no assets pledged as collateral for the 2017 Notes. Of these capital notes, $-0- is due to executive
officers and board members of the Company as of December 31, 2017 and 2016, respectively.
35
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 9 – Capital notes (concluded)
Interest expense of $-0- and $6,201 was paid to these related parties on the capital notes for the years ended December 31,
2017 and 2016, respectively.
Note 10 - 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% during the years ended December 31, 2017 and 2016, 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 $3,054,577 and $3,263,403 at December 31,
2017 and 2016, respectively.
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, 2017 and December 31, 2016 is
presented in the following tables.
December 31, 2017
Repurchase agreements:
Overnight and
continuous
Up to 30
Days
Greater
than 90
Total
30-90 Days
(in thousands)
Small Business Administration Pools
Total borrowings
$
$
1,618
1,618
$
-
$
-
-
$
$
-
-
$
$
-
Gross amount of recognized liabilities for repurchase agreements
$
$
1,618
1,618
$
1,618
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
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, 2017 and 2016, 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 25% of total
assets.
36
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 10 - Securities sold under agreements to repurchase and other borrowings (concluded)
At December 31, 2017 and 2016, Federal Home Loan Bank advances were as follows:
December 31, 2017
Maturity date
January 8, 2019
September 3, 2019
April 15, 2020
July 29, 2020
October 13, 2020
May 17, 2021
Call Feature
-
-
-
-
-
-
Amount
$ 5,000,000
5,000,000
2,500,000
5,000,000
2,500,000
5,000,000
Rate
1.977%
1.999%
2.040%
1.944%
2.176%
1.953%
Total FHLB borrowings/weighted average rate
$ 25,000,000
2.000%
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%
The carrying value of loans pledged as collateral to the Federal Home Loan Bank were $28.7 million and $30.9 million at
December 31, 2017 and 2016, respectively.
During 2017 and 2016, $5 million and $-0- of FHLB advances were repaid.
Note 11 - 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 $476,116 and $400,010 for the plan for 2017
and 2016, 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.
37
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 11 - Employee benefit plans (concluded)
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 $1,434,054 and $1,323,644 as of December
31, 2017 and 2016, respectively. The annuity had a balance of $3,028,689 and $3,026,890 as of December 31, 2017 and
2016, respectively, and is recorded at amortized cost. Salaries and employee benefits expense included $114,410 and
$86,715 of expense related to these arrangements for 2017 and 2016, respectively.
Note 12 - Income taxes
On December 22, 2017 the President of the United States signed into law the Tax Cuts and Jobs Act (the “2017 Tax Act”).
The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a
reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31,
2017.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with
Staff Accounting Bulletin No. 118, which provides guidance for the application of ASC Topic 740, Income Taxes, in the
reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the
income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts
for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a
reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the 2017
Tax Act have been completed and a reasonable estimate could not be determined as of December 31, 2017.
The principal components of the income tax expense as of December 31, 2017 and 2016 are as follows:
Federal - current tax provision
Federal - deferred (benefit)
2017
$ 1,283,702
167,113
$ 1,450,815
2016
$ 1,148,104
(19,121)
$ 1,128,983
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 (income) expenses
Minority investment interest
Remeasurement of deferred taxes under TCJA
Other
Total income tax expense
Amortized
2017
$ 2,114,914
Fair Value
2017
$ 1,807,328
(660,499)
(98,733)
(22,483)
(90,012)
209,879
(2,251)
(589,815)
(100,205)
16,940
-
-
(5,265)
$ 1,450,815
$ 1,128,983
38
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 12 - Income taxes (concluded)
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 real estate owned
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
2017
2016
$ 663,634
301,151
19,285
2,599
4,987
991,656
$ 1,074,456
450,039
20,768
-
8,809
1,554,072
(370,786)
(191,426)
(631,166)
(306,899)
(85,004)
(136,635)
(4,602)
(651,818)
(3,266)
(1,077,966)
Net deferred tax asset
$ 339,838
$ 476,106
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the
temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities
were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a
$209,879 increase in income tax expense for the year ended December 31, 2017 and a corresponding $209,879 decrease in
net deferred tax assets as of December 31, 2017.
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.
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 2014.
39
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 13 - Commitments and contingencies
The Company leases banking premises and various equipment for periods extending through February 2026. Total rental
expense was $374,705 and $207,083 for 2017 and 2016, respectively.
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2017, pertaining to bank premises and
equipment, future minimum rental commitments under various operating leases are as follows:
2018
2019
2020
2021
2022
Thereafter
$ 398,136
389,589
275,139
240,061
49,367
120,038
$ 1,472,330
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 14 - Related party transactions
In the ordinary course of business, the Company 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 2017 and 2016
is as follows:
Beginning balance, January 1
Originations
Repayments
Ending balance, December 31
2017
$ 4,696,223
1,995,396
(594,633)
$ 6,096,986
2016
$ 3,379,712
2,495,310
(1,178,799)
$ 4,696,223
Commitments to extend credit to related parties amounted to $5,569,738 and $7,468,000 at December 31, 2017 and 2016,
respectively.
Deposits from related parties held by the Bank amounted to $7,189,066 and $5,166,750 at December 31, 2017 and 2016,
respectively.
The Bank currently has a loan outstanding to Manry Rawls, LLC with a current principal balance of $2,250,880 and
$1,860,388 as of December 31, 2017 and 2016, respectively. This loan was reflected as an outstanding loan as of December
31, 2016. As of December 31, 2017, this loan is eliminated during the consolidation with Manry Rawls under ASC 805,
Business Combination. This loan is at substantially the same terms as similarly situated customers. See Note 8 for additional
disclosures of related party transactions.
Note 15 - 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
40
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 15 - Credit commitments and concentrations of credit risk (concluded)
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, 2017 and 2016. 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
2017
$ 65,759,153
$ 440,787
$ 1,550,000
2016
$ 59,231,100
$ 359,038
$ 1,850,000
Standby letters of credit outstanding at December 31, 2017 expire between 2018 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).
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.
41
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 16 - 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 ends on January 1, 2019.
The conservation buffer began at the 0.625% level and is 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, 2018, the capital conservation buffer was 6.036%.
Management believes, as of December 31, 2017 and 2016, the Bank met all capital adequacy requirements to which it is
subject.
As of December 31, 2017, 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.
The Bank's actual capital amounts (dollars in thousands) and ratios are presented in the table below:
As of December 31, 2017:
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
$ 45,376
14.0% $ 26,011
8.0% $ 32,513
10.0%
41,312
12.7% 19,508
6.0% 26,011
8.0%
(to Risk-Weighted Assets)
41,312
12.7% 14,631
4.5% 21,134
6.5%
Tier I Leverage Ratio
(to Average Assets)
41,312
9.5% 17,665
4.0% 22,081
5.0%
42
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 16 - Regulatory matters (concluded)
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)
47,872
11.6% 16,452
4.0% 20,565
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 17 - Fair value measurements
The Company refers to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards
Codification (ASC 820) to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. This guidance clarifies that fair value of certain assets and liabilities is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The fair market value measurement specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions.
The three levels of the fair value hierarchy are based on these two types of inputs are as follows:
Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 – Valuation is based on observable inputs including quoted prices in active markets for similar assets and
liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based
valuation techniques for which significant assumptions can be derived primarily from or corroborated by
observable data in the market.
Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are
unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities
recorded at fair value on a recurring basis in the consolidated financial statements:
43
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 17 - Fair value measurements (continued)
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, 2017 and 2016:
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration Pools
Balance as of
December 31, 2017
$ 53,039,740
17,347,063
47,674,508
19,742,635
$ 137,803,946
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
$ -
-
-
-
$ -
$ 53,039,740
17,347,063
47,674,508
19,742,635
$ 137,803,946
$ -
-
-
-
$ -
Level 1
Level 2
Level 3
$ -
-
-
-
$ -
$ 45,727,804
20,689,687
35,469,540
23,859,672
$ 125,746,703
$ -
-
-
-
$ -
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair
value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual
assets. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at
fair value on a nonrecurring basis in the consolidated financial statements:
Impaired Loans - Loans are designated as impaired when, in the judgment of management based on current information and
events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.
The measurement of loss associated with impaired loans can be based on the observable market price of the loan, the fair
value of the collateral or by using the discounted cash flow method. Fair value is measured based on the value of the
collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory,
and accounts receivable. The vast majority of the collateral is real estate.
The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal
conducted by an independent, licensed appraiser outside of the Company. The Company records impaired loans secured by
real estate as Level 3 assets. The value of business equipment is based upon an outside appraisal if deemed significant, or the
net book value on the applicable business’ financial statements if not considered significant using observable market data.
Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports
are recorded as Level 3 assets. Any fair value adjustments are recorded in the period incurred as provision for loan losses on
the Statements of Operations.
44
44
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 17 - Fair value measurements (continued)
Other real estate owned - Other real estate owned is considered held for sale and is adjusted to fair value less estimated
selling costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised
value of the collateral or management’s estimation of the value of the collateral. The Company considers the other real
estate owned as nonrecurring Level 3.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis
during the periods.
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2017
Level 1
Level 2
Level 3
$ 742,216
2,116,082
$ 2,858,298
$ -
-
$ -
$ -
-
$ -
$ 742,216
2,116,082
$ 2,858,298
Description
Assets
Other real estate owned
Mortgage loans held for sale
Impaired loans
Total assets
Balance as of
December 31, 2016
Level 1
Level 2
Level 3
$ 877,278
$ 1,443,960
4,688,019
$ 7,009,257
$ -
$ -
-
$ -
$ -
$ -
-
$ -
$ 877,278
$ 1,443,960
4,688,019
$ 7,009,257
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Assets
Fair Value at
December 31, 2017
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 742,216
2,116,082
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Total assets
$ 2,858,298
Description
Assets
Fair Value at
December 31, 2016
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
$ 877,278
Mortgage loans held for sale 1,443,960
Impaired loans
4,688,019
Discounted appraisals
Discounted cash flows
Discounted appraisals
Discounted cash flows
Collateral discounts
Discount rate
Collateral discounts
Discount rate
10-20%
2%
10-30%
6%
Total Assets
$ 5,565,297
45
45
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 17 - Fair value measurements (concluded)
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December 31,
2017 and 2016. 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 18 - Stock incentive plan
2017
2016
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Dollars in thousands)
$ 18,914
137,804
-
266,753
1,788
3,029
$ 18,914
137,804
-
273,981
1,788
3,029
$ 11,137
125,747
1,444
260,202
1,723
3,027
$ 11,137
125,747
1,444
261,680
1,723
3,027
262,168
108,722
250
25,000
6,000
1,618
262,168
107,817
250
24,923
6,000
1,618
261,010
82,902
184
25,000
7,888
1,126
261,010
82,355
184
25,172
7,888
1,126
The Board of Directors approved a stock incentive plan effective January 1, 2007. The plan authorizes the grant of awards
for a period of ten years, which expired on December 31, 2017. 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 Company granted
restricted stock awards during 2017 and 2016. The Company accounts for this plan in accordance with the Stock
Compensation Topic of the FASB Accounting Standards Codification (ASC 718). The non-vested equity share or non-vested
equity share unit awarded to an employee is measured at its fair value on the grant date. The compensation expense is
recognized over the requisite service period.
The vesting requirements range from three to five years. The compensation expense recognized for the years ended
December 31, 2017 and 2016 was $200,423 and $30,000, respectively. Members of the Board of Directors of the Company
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, 2017 and 2016, the expense related to these issuances was $47,500 and $26,400, respectively.
46
46
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 18 - Stock incentive plan (concluded)
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2017 and
2016, and changes during the years ended December 31, 2017 and 2016, is presented below; the weighted average price is
the weighted average fair value at the date of grant:
Restricted Share Awards
Nonvested - Beginning of the year
Granted
Vested
Forfeited
Nonvested - End of year
Note 19 - Earnings per share
2017
2016
Shares
8,223
8,629
3,397
444
13,011
Weighted
Average Price
$ 8.70
19.75
9.46
8.70
$ 13.43
Shares
13,800
2,703
8,280
-
8,223
Weighted
Average Price
$ 8.70
11.10
8.70
-
$ 8.96
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 attributable to common shareholders
Average common shares outstanding
Basic earnings per share amount
Diluted
2017
2016
$ 4,504,779
$ 4,186,686
3,063,661
3,056,830
$ 1.47
$ 1.37
Net income attributable to common shareholders
$ 4,504,779
$ 4,186,686
Average common shares outstanding
Effect of dilutive unvested restricted stock awards
Average diluted shares outstanding
Diluted earnings per share
Note 20 – Condensed financial statements of parent company
3,063,661
692
3,064,353
3,056,830
2,274
3,059,104
$ 1.47
$ 1.37
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, 2017 and 2016 are presented for the Company as a consolidated entity.
47
47
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 20 – Condensed financial statements of parent company (continued)
Financial information pertaining only to Farmers Bankshares, Inc. is as follows:
Balance Sheets
Assets
Cash
Taxes receivable
Investment in Farmers Bank
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities
Capital notes
Other liabilities
Total liabilities
Stockholders' equity
Common stock, $0.125 par value
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
December 31,
2017
2016
$
968,593
641,415
50,312,294
402,870
$
954,569
554,082
49,096,744
314,660
$
52,325,172
$
50,920,055
$
6,000,000
305,370
6,305,370
$
7,888,475
304,815
8,193,290
383,340
2,841,759
41,399,842
1,394,861
46,019,802
382,047
2,775,106
38,344,408
1,225,204
42,726,765
Total liabilities and stockholders' equity
$
52,325,172
$
50,920,055
Statements of Operations
Income
Operating expenses
Interest expense
Other expenes
Total expenses
Allocated income tax benefits
Income before equity in undistrbuted income of subsidiary
Equity in undistributed income - Farmers Bank
Years Ended December 31,
2017
2016
$
3,464,668
$
3,401,796
254,702
-
254,702
(87,333)
3,297,299
1,207,480
441,847
12,158
454,005
(155,091)
3,102,882
1,083,804
Net income
$
4,504,779
$
4,186,686
48
48
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2017 and 2016
Note 20 – Condensed financial statements of parent company (concluded)
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
Proceeds from issuance of capital notes
Redemption of capital notes
Net cash (used in) financing activities
Increase (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,
2017
2016
$
4,504,779
$
4,186,686
(87,333)
(88,210)
(304,816)
(1,207,480)
2,816,940
(914,441)
6,000,000
(7,888,475)
(2,802,916)
14,024
(155,091)
(147,876)
-
(1,083,804)
2,799,915
(760,073)
(2,040,000)
(2,800,073)
(158)
954,569
954,727
$
968,593
$
954,569
The Company has evaluated subsequent events through March 13, 2018, in connection with the preparation of these
financial statements which is the date the financial statements were available to be issued.
49
49
FARMERS BANK
S i n c e 1919
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