M O V I N G F O R W A R D
FARMERS BANK
SERVING THE COMMUNITY SINCE 1919
2019 ANNUAL REPORT
Dear Shareholder,
We are pleased to announce Farmers Bank
ended its 100th year with strong results.
The Company posted record earnings for
the fifth consecutive year, which amounted
to $5,096,105 or $1.65 per share, a 6.47%
increase from the $4,875,252 or $1.59 per
share, reported for 2018. Return on average
assets of 1.10% for 2019 has improved
from the 2018 results of 1.07%. Return on
average equity as of December 31, 2019 was
9.49% as compared to 10.31% for the same
period of the prior year. Return on average
tangible common equity was 11.27% as
of December 31, 2019 and compared to
12.51% as of December 31, 2018.
Given the growth in earnings, our Board
of Directors voted to increase the dividend
paid to shareholders. Dividends declared
were $.46 in 2019 compared to $.42 in
2018. This represents a dividend payout
ratio of 27.63% and a dividend yield of
2.82% based on our share price as of March
1, 2020.
Net interest income was positively impacted
by the rise in interest rates during the first
half of 2019 and increased 3.26% when
compared to annualized results of 2018.
Loan balances declined year over year as
we received several large loan payoffs in the
fourth quarter that occurred in the normal
course of business. This influx of cash and
our growth in average non-interest bearing
deposits has allowed us to control funding
costs by prudently pricing interest bearing
deposit accounts. It has also given us the
ability to repay $10 million in Federal
Home Loan bank borrowings that were
maturing with rates higher than current
market rates.
One of our long-term strategic initiatives
has been to diversify revenue streams. Our
continued expansion into the insurance
industry by investing in acquisitions through
Manry Rawls Insurance has proven to be a
consistently beneficial return. This, along
with other non-interest bearing income
components help to alleviate the pressure
from the flat yield curve by reducing our
reliance on net interest margin. Since 2015,
non-interest income as a percent of total
revenue has grown from 15.8% to 31.8% in
2019. We continue to explore non-interest
income opportunities that will add value for
our customers and contribute to the Bank’s
profitability.
Non-interest expenses remained relatively
flat, with the exception of employee-related
expense. The insurance acquisition through
Manry Rawls and our investment in staff in
the Chesapeake and Virginia Beach markets
accounted for the majority of the increase
in this expense. We are enthusiastic about
the opportunity we see in the Virginia
Beach market, with an added focus on the
southern end of the city. We have received
regulatory approval and are on schedule
to open a storefront location in the Pungo
area by early second quarter. We believe this
market has an unmet need and our brand
of relationship banking is already being well
received by consumers and businesses.
Throughout 2019, we celebrated our Bank’s
100-year anniversary. We reminisced about
all the good times and fond memories of
customers and friends, times spent giving
back to the community, and the robust
economic cycles that ultimately helped
pave the way for growth, prosperity and
expansion. We reflected on the many
challenges experienced during our first
100 years, and how those experiences
and our actions helped solidify the Bank’s
foundation and shape our core values as
an institution. We experienced a great deal
during our first century of existence and in
so doing, emerged a solid, stable and storied
institution well positioned for the future.
Looking ahead into 2020, management
and the Board of Directors are laser focused
on navigating the challenges of the current
banking environment, not the least of
which are margin compression and the need
for economies of scale. A flat yield curve,
historically low interest rates, an increasingly
competitive landscape, together with less
than robust loan demand, will continue
to force downward pressure on the Bank’s
net interest margin. Also, during times of
heightened competition with anemic loan
demand, it is not unusual to see financial
institutions relax underwriting standards in
order to grow loan assets. History has shown
that this path invariably leads to problems
down the road. At Farmers Bank, we will
remain prudent in our underwriting and
strive to continue to demonstrate stable,
positive asset quality trends. Our belief is
that expansion into new markets such as
Chesapeake and Virginia Beach will offer
profitable growth opportunities and yield
the economies of scale necessary to return
an attractive shareholder return. We remain
committed to flexibility and promptness in
serving the needs of our customers while
taking the time to understand their financial
needs with a goal of always bringing
value-added solutions to the relationship.
We understand that convenience is a
top priority for our customers, and we
remain committed to technology offerings,
products and services that consistently
provide a convenient and mutually
beneficial outcome.
We know what has worked for the past one
hundred years will need to evolve to remain
relevant for the next one hundred, but the
principals that have guided the Bank since
its founding will continue to direct the
way we interact with our customers and
communities. Continued consolidation in
the banking industry only serves to further
distinguish the important role that small
banks play in their communities.
We are immensely grateful to our
customers, staff, Board of Directors and
most importantly, you, our shareholders for
your confidence and support.
Sincerely,
Richard J. Holland, Jr.
Chairman
Vernon M. Towler
President and Chief Executive Officer
BOARD OF DIRECTORS
Richard J. Holland, Jr.*
Chairman
David T. Owen*
P r e s i d e n t ,
Wa k e fi e l d F a r m S e r v i c e ,
I n c .
William A. Gwaltney, Jr.*
Vice Chairman
P r e s i d e n t ,
I n d i k a F a r m s ,
I n c .
G. Thomas Alphin, Jr.*
C o - O w n e r ,
C o m m o n w e a l t h G i n
E. Warren Beale, Jr.
R e t i r e d E n t r e p r e n e u r
William L. Chorey
O w n e r / B r o k e r ,
R e a l t y ,
L t d .
C h o r e y & A s s o c i a t e s
John T. Orlando
P r e s i d e n t ,
A d v i s o r y ,
F i n a n c i a l
I n c .
S e c u r i t y
* Denotes Farmers Bankshares, Inc. Board Member
Peter D. Pruden, III
C o - O w n e r ,
Ta s t e U n l i m i t e d
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
O. A. Spady
R e t i r e d E n t r e p r e n e u r
Kent B. Spain*
E x e c u t i v e V i c e P r e s i d e n t ,
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
Vernon M. Towler *
President & Chief Executive Officer
OFFICERS
Vernon M. Towler
P r e s i d e n t & C h i e f
E x e c u t i v e O ffi c e r
Patricia T. Allen
S e n i o r V i c e P r e s i d e n t ,
O p e r a t i o n s
D i r e c t o r o f
Kathy C. Bryant
S e n i o r V i c e P r e s i d e n t ,
D i r e c t o r o f
R e s o u r c e s
H u m a n
a n d R e t a i l
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 ,
L o a n s
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
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
Deborah R. Cagle
R e t a i l
V i c e P r e s i d e n t ,
M a n a g e r
Kelly M. Clinton
V i c e P r e s i d e n t ,
C r e d i t
Kelly D. Dewitt
V i c e P r e s i d e n t ,
O F A C & S e c u r i t y O ffi c e r
B S A ,
A M L ,
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
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 ,
C h i e f
L e n d i n g O ffi c e r
Susan F. Boone
E x e c u t i v e A s
s i s t a n t /
C o r p o r a t e S e c r e t a r y
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
Jamie L. Johnson
A s
C o m p l i a n c e
s i s t a n t V i c e P r e s i d e n t ,
Glynda F. Lawerence
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
D. Renee Scott
A s
R e t a i l
s i s t a n t V i c e P r e s i d e n t ,
Kara H. Smith
A s
Te c h n o l o g 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 ,
Marsha C. Winslow
A s
R e t a i l
s i s t a n t V i c e P r e s i d e n t ,
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
Andrew D. Perkins
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
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
Kelley T. Healey
V i c e P r e s i d e n t ,
L o a n s
Dianne M. Henry
R e t a i l
V i c e P r e s i d e n t ,
Joanne F. Joyner
V i c e P r e s i d e n t ,
R e t a i l
Erin W. Park
V i c e P r e s i d e n t ,
C o n t r o l
l e r
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
Meghan D. White
V i c e P r e s i d e n t ,
L o a n O p e r a t i o n s
Candace D. Delia
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
C. Thomas Eure, Jr.
A s
B u s i n e s
s i s t a n t V i c e P r e s i d e n t ,
A n a l y s t
S y s t e m s
s
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 ,
P a l m e r E l d e r L a w
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 ,
I r o n Wo r k s
S u ff o l k
I n c .
Roy A. Runyon, III
We a l t h A d v i s o r ,
We a l t h A d v i s o r s
B e a c o n H a r b o r
Nicole J. Harrell
A t t o r n e y a t L a w ,
C a n o l e s
K a u f m a n &
Joseph Wayne Scott
C e r t i fi e d P u b l i c A c c o u n t a n t ,
R o b b ,
B r a d s h a w & R a w l
S c o t t ,
s
Mark H. Brinkley
P r e s i d e n t ,
C o n s t r u c t i o n
C . W.
B r i n k l e y ,
Richard L. Evans
P r e s i d e n t ,
C h e s a p e a k e C o n t r o l
s
Brian L. Johnson, M.D.
V i r g i n i a D e r m a t o l o g y
Clay K. White
P r e s i d e n t ,
S t a r r M o t o r s
,
I n c .
I n c .
Charles S. Lowder
C e r t i fi e d P u b l i c A c c o u n t a n t ,
C h a r l e s
L o w d e r & C o .
S .
,
L L C
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
EASTERN TIDEWATER COMMUNITY BOARD
Richard H. Matthews,
Chairman
A t t o r n e y a t L a w ,
C o w a r d ,
P. C .
P e n d e r &
Tracy Colby-Urig
C e r t i fi e d P u b l i c A c c o u n t a n t ,
C o l b y & C o m p a n y
Gregory P. Marshall
P r e s i d e n t ,
D e v e l o p m e n t ,
Ty m a r
I n c .
George Thomas Minton, III
L L C
M i n t o n I n t e r e s t s
O w n e r ,
,
James C. Bowen, Sr.
P r e s i d e n t ,
Tr u c k i n g ,
S o u t h N o r f o l k
I n c .
Rhonda Bridgeman
P r e s i d e n t ,
V i r g i n i a ,
C o m f o r t S y s t e m o f
I n c .
Kelley C. Holland
A t t o r n e y a t L a w ,
W i l
M u l
l e n
l i a m s
Robert R. Kinser
A t t o r n e y a t L a w ,
K i n s e r ,
B a s n i g h t ,
L e f t w i c h & N u c k o l
s
,
P. C .
WESTERN TIDEWATER COMMUNITY BOARD
Vincent Carollo
Chairman
A n n a '
O w n e r ,
J V C H o l d i n g s
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
P. Milton Cook, Jr. D.D.S.
P.
M i l t o n C o o k ,
P. C .
J r .
,
Tammy W. Edwards
P r e s i d e n t ,
a n d S u p p l y C o m p a n y
W i n d s o r H a r d w a r e
Randolph H. Pack
P r e s i d e n t ,
S m i t h fi e l d S t a t i o n
V.S. Pittman, II
P r e s i d e n t ,
M a n r y R a w l
s
,
L L C
John T. Randall
A t t o r n e y a t L a w ,
l
R a n d a l
P a g e ,
P. C .
Sharon C. Stallings
H a m p t o n R o a d s
C E O ,
I n c .
C o n t r a c t i n g ,
T. Craig Stallings
C e r t i fi e d P u b l i c A c c o u n t a n t ,
s o c i a t e s
C r a i g S t a l
a n d A s
l i n g s
Financial Highlights
At or for the Years Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share data)
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
$18,931
3,129
15,802
-
15,802
7,713
17,419
6,096
738
262
$5,096
Per Share and Shares Outstanding (1)
Basic net income
Book value at end of period, excluding minority interest
Basic weighted average shares outstanding
Dividends per share
Shares outstanding at period end
$1.65
$18.17
3,087,868
$0.46
3,092,133
$18,114
2,811
15,303
-
15,303
6,263
15,851
5,715
619
221
$4,875
$1.59
$15.57
3,071,643
$0.42
3,075,860
Balance Sheet Data
Total assets
Total loans, net
Total deposits
Borrowings
` $476,571
261,064
385,517
15,000
$478,211
269,520
386,682
25,000
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
1.14%
9.29%
3.83%
48.81%
72.79%
0.28%
2.13%
0.08%
1.10%
10.05%
3.70%
29.05%
71.49%
0.25%
2.15%
0.00%
$16,637
2,150
14,487
-
14,487
5,091
13,358
6,220
1,451
265
$4,504
$1.47
$15.01
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%
Capital (Bank Only)
Tier 1 leverage ratio
Total risk-based capital ratio
Stockholder’s equity
10.35%
15.09%
$60,395
9.68%
13.89%
$52,139
9.52%
14.04%
$50,312
(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.
Return on Assets
Dividends Per Share
Non-Interest Income as a % of Revenue
2017
2018
2019
2017
2018
2019
2017
2018
2019
1.00% 1.10% 1.20%
$0.36 $0.40 $0.44 $0.48
0% 10% 20% 30% 40% 50% 60%
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2019 and 2018
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 - 52
Independent Auditor’s Report
Independent Auditor’s Report
To the Board of Directors and Shareholders
To the Board of Directors and Shareholders
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Windsor, Virginia
Windsor, Virginia
Report on the Financial Statements
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc. and Subsidiary (the Company),
We have audited the accompanying consolidated financial statements of Farmers Bankshares, Inc. and Subsidiary (the Company),
which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of
which comprise the consolidated balance sheets as of December 31, 2019 and 2018, 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
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).
to the consolidated financial statements (collectively, the financial statements).
Management’s Responsibility for 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
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
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,
internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error.
whether due to fraud or error.
Auditor’s Responsibility
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in
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
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.
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.
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
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
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
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
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
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
used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of Matter
Emphasis of Matter
As discussed in Note 21 to the financial statements, the Company adopted, effective January 1, 2019, new accounting guidance
As discussed in Note 21 to the financial statements, the Company adopted, effective January 1, 2019, new accounting guidance
related to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Our opinion is not modified with
related to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Our opinion is not modified with
respect to this matter.
respect to this matter.
Opinion
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Farmers
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, 2019 and 2018, and the results of their operations and their cash flows for the
Bankshares, Inc. and Subsidiary as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the
years then ended in accordance with accounting principles generally accepted in the United States of America.
years then ended in accordance with accounting principles generally accepted in the United States of America.
Raleigh, North Carolina
Raleigh, North Carolina
March 9, 2020
March 9, 2020
elliottdavis.com
elliottdavis.com
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets
Cash and cash equivalents
Assets
Assets
2019
2016
December 31,
December 31,
2018
2015
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
Available-for-sale securities (Note 3)
Total cash and cash equivalents
Non-marketable equity securities (Note 8)
Loans held for investment, net of allowance for loan losses
of $5,676,680 and $5,916,359, respectively (Note 4)
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 7)
Other intangible assets, net (Note 7)
of $5,755,746 and $6,343,636, respectively (Note 4)
Other real estate owned
Premises and equipment, net (Note 5)
Accrued interest receivable
Other real estate owned
Prepaid expenses
Net deferred tax asset (Note 13)
Accrued interest
Income taxes receivable
Prepaid expenses
Bank-owned annuity contract
Net deferred tax asset (Note 11)
Bank-owned life insurance
Other assets
Income taxes receivable
Non-marketable equity securities (Note 6)
Total assets
Bank-owned annuity contract
Bank-owned life insurance
Other assets
Deposits
Noninterest-bearing deposits
Interest-bearing deposits (Note 9)
Total assets
Total deposits
Liabilities and Stockholders' Equity
Deposits
Federal Home Loan Bank borrowings (Note 11)
Capital notes (Note 10)
Securities sold under agreements to repurchase (Note 11)
Deferred compensation plans (Note 12)
Noninterest-bearing deposits
Accrued interest payable
Other liabilities
Interest-bearing deposits (Note 7)
Total deposits
Total liabilities
Stockholders' equity
Common stock, $0.125 par value; 50,000,000 shares
Federal Home Loan Bank borrowings (Note 9)
Capital notes (Note 8)
Securities sold under agreements to repurchase (Note 9)
Deferred compensation plans
Net deferred tax liability (Note 11)
Accrued interest
Other liabilities
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Noncontrolling interest
Total liabilities
Total stockholders' equity
Total liabilities and stockholders' equity
Stockholders' equity
Common stock, $0.125 par value; 50,000,000 shares
Total Farmers Bankshares, Inc. stockholders' equity
authorized; 3,092,133 and 3,075,860 shares issued and
outstanding at December 31, 2019 and 2018, including
nonvested shares of 27,853 and 17,806 shares, respectively
$
28,232,969
1,776,842
$
30,009,811
8,808,046
2,329,302
11,137,348
145,299,630
5,264,989
125,746,703
1,443,960
261,064,409
5,795,900
6,027,286
4,582,184
260,202,399
672,404
3,477,251
1,806,986
877,278
508,766
16,460
1,723,019
54,235
358,741
2,913,142
476,106
11,156,635
1,397,742
5,219
446,560,768
4,676,091
3,026,890
10,230,912
179,118
412,423,687
476,570,579
$
15,000,000
6,000,000
5,141,855
1,623,228
$
101,552,020
298,985
4,703,525
242,359,428
418,284,653
343,911,448
25,000,000
7,888,475
1,125,881
1,323,644
386,518
3,000,031
50,175,584
2,621,878
56,184,011
2,101,915
58,285,926
476,570,579
183,700
1,401,122
380,834,270
-
$
$
15,353,150
1,137,152
16,490,302
$
157,015,508
4,130,699
269,520,306
2,934,749
4,807,857
3,811,185
672,404
1,978,401
560,160
759,987
3,022
2,961,521
10,851,328
1,713,116
461,720,243
$
478,210,545
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
414,933,205
25,000,000
6,000,000
3,848,904
1,520,980
336,608
4,910,053
428,299,000
$
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
384,484
2,895,515
44,991,893
(383,711)
47,888,181
2,023,364
49,911,545
478,210,545
$
$
116,234,905
269,282,155
385,517,060
$
423,561,035
$
115,871,109
270,811,346
$
386,682,455
Liabilities and Stockholders' 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
The accompanying notes are an integral part of these consolidated financial statements.
Capital surplus
Retained earnings
The accompanying notes are an integral part of these consolidated financial statements.
3
382,047
2,775,106
38,344,408
381,763
2,754,141
35,070,594
Accumulated other comprehensive income
Total stockholders' equity
1,225,204
42,726,765
2,400,860
40,607,358
Total liabilities and stockholders' equity
$
423,561,035
$
414,933,205
The accompanying notes are an integral part of these consolidated financial statements.
3
Farmers Bankshare, Inc.
Farmers Bankshare, Inc.
Consolidated Statements of Operations
Consolidated Statements of Operations
Interest income
Years Ended December 31,
2019
Years Ended December 31,
2018
2016
2015
$
$
Interest income
Total interest and dividend income
Interest and fees on loans held for investment
Interest on taxable available-for-sale securities
Interest and fees on loans held for investment
Interest on tax-exempt available-for-sale securities
Interest on mortgage loans held for sale
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
Interest expense
Other interest income
Interest on deposits
Interest on Federal Home Loan Bank advances
Total interest and dividend income
Interest on capital notes
Interest on repurchase agreements
Interest on federal funds purchased
Total interest expense
Interest on deposits
Interest on Federal Home Loan Bank advances
Interest on capital notes
Interest on repurchase agreements
Provision of loan losses
Interest on federal funds purchased
Net interest income
Interest expense
Net interest income after provision for loan losses
Total interest expense
Noninterest income
Service charges
Net interest income
Income from automated teller machines and bank card interchange
Insurance commissions
Net gain on disposition of available-for-sale securities
Net interest income after provision for loan losses
Income on bank owned life insurance
Other income
Provision of loan losses
Noninterest expense
Total noninterest income
Noninterest income
Service charges
Income from automated teller machines and bank card interchange
Salaries and employee benefits
Net gain on disposition of securities
Equipment expense
Income on bank owned life insurance
Occupancy expense
Bank franchise tax
Net gain (loss) on sale of premises and equipment
Advertising and marketing
Income from investment in Manry Rawls, LLC
Data processing
Income from mortgage loan sales
Loan related legal and other expenses
Other income
Federal Deposit Insurance Corporation assessment
Net loss on sale and write-downs of other real estate owned
Net loss on sale of premises and equipment
Other
Total noninterest income
Noninterest expense
Total noninterest expense
Salaries and employee benefits
Equipment expense
Income before income taxes & noncontrolling interest
Occupancy expense
Income tax expense (Note 13)
Net income
Bank franchise tax
Net income attributable to noncontrolling interest
Advertising and marketing
Net income attributable to Farmers Bankshares, Inc.
Data processing
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 real estate owned
Prepayment penalty on borrowings
Other
Basic earnings per common share (Note 19)
Diluted earnings per common share
12,275,691
25,016
2,130,933
1,494,852
42,293
93,614
16,062,399
14,508,086
2,450,927
$
1,854,664
83,310
34,656
18,931,643
2,509,219
360,806
195,000
27,366
36,549
3,128,940
15,802,703
1,207,905
458,418
441,847
7,455
135
2,115,760
-
13,946,639
-
13,946,639
577,856
576,109
5,554,730
336,269
305,307
363,080
7,713,351
15,802,703
660,431
508,393
10,281,452
115,948
1,117,945
321,813
1,080,292
383,393
3,901
629,307
266,666
1,503,977
595,123
119,542
425,360
49,183
2,897,635
-
14,577
2,239,762
17,419,430
6,096,624
738,359
5,358,265
262,160
5,096,105
$
$
$
1.65
$
1.65
6,283,217
709,078
681,131
421,807
588,225
982,496
170,168
179,079
(18,243)
73,136
-
1,458,511
11,528,605
5,315,669
1,128,983
$
13,289,563
2,593,586
1,993,818
111,489
125,788
18,114,244
2,087,106
505,981
195,000
14,523
8,501
2,811,111
15,303,133
-
15,303,133
598,380
560,452
4,452,749
154,773
306,814
190,168
6,263,336
8,955,428
937,945
931,434
546,656
453,971
1,623,519
100,636
168,164
8,318
-
2,116,497
15,842,568
5,714,901
619,132
5,095,769
220,518
4,875,251
$
$
$
1.59
$
1.59
4
12,000,584
21,202
2,512,889
1,376,381
33,505
99,106
16,043,667
1,589,455
618,542
517,478
4,620
3
2,730,098
13,313,569
-
13,313,569
613,468
514,642
422,821
324,118
(58)
437,428
438,471
168,585
2,919,475
6,134,982
646,016
621,718
495,830
321,175
855,719
192,458
246,032
91,469
51,218
4
355,592
1,479,326
11,491,535
4,741,509
967,121
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Total noninterest expense
Income before income taxes
Income tax expense (Note 11)
Net income attributable to common shareholders
$
4,186,686
$
3,774,388
Basic earnings per common share (Note 18)
Diluted earnings per common share
Cash dividends declared per common share
$
1.37
$
1.37
$
0.30
$
1.24
$
1.23
$
0.18
The accompanying notes are an integral part of these consolidated financial statements.
4
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
Net income
Other comprehensive loss:
Net income
Other comprehensive loss:
Unrealized holding losses on available-for-sale securities
Tax effect
Net unrealized holding (losses) gains 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 adjustment for net realized gains, net of tax amount
Reclassification adjustment for realized gains, net of tax amount
Other comprehensive gain (loss), net of tax
Other comprehensive loss, net of tax
Comprehensive income
Comprehensive income
2016
Years Ended December 31,
2015
2019
$
4,186,686
2018
$
3,774,388
$
5,358,265
$
5,095,769
(1,665,349)
566,219
4,140,813
(869,571)
(1,099,130)
3,271,242
(515,376)
175,228
(340,148)
(2,096,584)
440,283
(1,656,301)
(336,269)
70,616
(265,653)
3,005,589
8,363,854
$
(115,948)
39,422
(76,526)
(1,175,656)
3,011,030
$
(154,773)
32,502
(122,271)
(1,778,572)
3,317,197
$
(422,821)
143,759
(279,062)
(619,210)
3,155,178
$
5
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
5
The accompanying notes are an integral part of these consolidated financial statements.
5
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Changes in Stockholders' Equity
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Preferred
Preferred
Stock
Stock
Series A
Series A
8,632,556
$
8,632,556
Preferred
Preferred
Stock
Stock
Series B
Series B
Capital
Surplus
Common
Stock
383,340
2,841,759
457,271
$
457,271
-
Common
Common
Stock
Retained
Stock
Earnings
379,323
$
379,323
-
41,399,842
Capital
Surplus
Accumulated
Other
Capital
Comprehensive
Surplus
Income (Loss)
2,652,804
$
1,394,861
2,652,804
-
Accumulated
Other
Comprehensive
Income
Accumulated
Other
Comprehensive
Total
Income
Retained
Earnings
Non-
Retained
controlling
Earnings
Interest
26,360,240
$
3,315,744
2,022,164
26,360,240
$
42,992,443
4,510,249
3,315,744
42,992,443
-
-
-
4,875,251
-
220,518
5,095,769
Balances, December 31, 2012
Balances, December 31, 2017
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
Balances, December 31, 2018
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Repurchase of perferred stock
Distribution of interest in Manry Rawls, LLC
Issuance of common stock - stock compensation plan
Issuance of common stock - director stock plan
Issuance of common stock - director stock plan
Stock based compensation
Cash dividends declared on common shares, $0.42 per share
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
Adoption of ASU 2016-02
Balances, December 31, 2013
Preferred stock net accretion, (amortization) and costs
Adoption of ASC 606
Cash dividends declared on preferred shares
Net income
Cash dividends declared on common shares, $0.55 per share
Changes in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect
Distribution of interest in Manry Rawls, LLC
Issuance of common stock - director stock plan
Net income
Changes in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effect
Balances, December 31, 2013
Net income
Net income
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Purchase of additional interest in Manry Rawls, LLC
Stock based compensation
Changes in net unrealized gain on securities available for
Balances, December 31, 2014
sale, net of reclassification adjustment and tax effect
Balances, December 31, 2019
Cash dividends declared on common shares, $0.46 per share
Issurance of restricted common shares
Issuance of common stock - director stock plan
Cash dividends declared on common shares, $0.60 per share
Balances, December 31, 2014
-
-
-
-
-
(8,752,400)
-
-
(8,752,400)
119,844
-
$
-
-
-
$
-
119,844
-
-
$
-
-
-
-
-
-
-
$
-
$
-
-
-
$
-
-
-
-
-
-
-
-
-
(437,600)
384,484
-
-
24,314
29,442
-
-
-
-
187
-
957
(437,600)
-
(19,671)
-
$
2,895,515
-
-
-
$
-
(19,671)
-
-
-
$
-
-
-
-
-
-
-
$
-
$
3,000,031
-
-
-
$
-
386,518
70,456
34,060
1,515
519
-
-
-
-
-
-
-
-
-
-
-
-
263
-
429
-
(1,283,200)
-
263
44,991,893
-
429
-
39,600
380,015
-
1,456,160
-
5,096,105
-
$
-
-
380,015
-
-
2,156
-
429
-
-
-
(1,408,174)
382,600
-
$
50,175,584
2,156
429
-
$
Total
4,510,249
48,041,966
(3,568,832)
(1,778,572)
-
(219,318)
-
24,501
-
30,399
(1,283,200)
-
49,911,545
-
-
39,600
941,417
1,456,160
5,358,265
-
(3,568,832)
-
(3,568,832)
(9,190,000)
15,001
28,500
-
-
(388,226)
-
(334,113)
32,870,517
-
-
3,360,889
-
3,005,589
$
2,078,653
(107,664)
70,975
-
35,575
-
(75,945)
-
941,417
2,078,653
-
30,000
(365,032)
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)
-
-
-
-
-
$
3,020,070
$
37,975,027
-
-
-
-
-
-
-
2,023,364
$
-
-
-
-
-
-
(1,778,572)
-
14,738
-
28,071
-
-
14,738
$
(383,711)
-
28,071
-
-
-
-
3,005,589
2,695,613
-
(2,156)
29,571
-
-
-
-
-
-
-
-
$
$
3,315,744
-
-
-
(219,318)
-
-
-
-
-
-
(100,173)
$
(388,226)
(334,113)
28,853,472
3,360,889
$
(100,173)
(388,226)
262,160
(334,113)
-
28,853,472
-
(107,664)
-
-
-
3,360,889
-
(75,945)
-
$
-
2,621,878
(2,156)
29,571
-
$
$
2,723,028
$
(365,032)
31,849,329
$
2,101,915
-
$
$
(1,408,174)
3,020,070
58,285,926
$
2,078,653
$
382,600
$
2,723,028
(365,032)
31,849,329
$
$
$
2,695,613
$
$
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
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
2019
2015
Years Ended December 31,
Years Ended December 31,
2018
2014
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
Distribution of interest in Manry Rawls, LLC
cash provided by operating activities
Depreciation
Depreciation
Amortization of intangible assets
Deferred income tax expense (benefit)
Recovery of loan losses
Amortization of investment securities premiums
Provision for deferred income taxes
Net gain on disposition of available-for-sale securities
Amortization of investment securities premiums
Loss on sales and writedowns on other real estate owned
Net gain on disposition of available-for-sale securities
Increase in cash value of bank owned life insurance and annuity
Decrease in cash value of annuity
Loss on sales and writedowns on other real estate owned
Stock based compensation
(Gain)/loss on sale of premises and equipment
Issuance of stock to directors
(Gain) on mortgages held for sale
Change in operating assets and liabilities:
Increase in cash value of bank owned life insurance
Compensation expense for stock issuance
Director expense for stock issuance
Change in operating assets and liabilities
Interest receivable
Interest payable
Prepaid expenses
Income taxes receivable
Other assets
Deferred compensation
Origination of mortgage loans held for sale
Other liabilities
Proceeds from sale of mortgage loans held for sale
Interest receivable
Interest payable
Prepaid expenses
Income taxes receivable
Other assets
Deferred compensation
Other liabilities
Purchase of available-for-sale securities
Proceeds from sale of non-marketable equity securities
Purchase of non-marketable equity securities
Purchse of other equity investments, net
Proceeds from sale of other real estate owned
Loan originations, net of repayments
Net cash provided by operating activities
Purchases of premises and equipment
Acquisition of business, net of cash acquired
Proceeds from sales, prepayments and maturities of
Net cash provided by operating activities
Cash flows from investing activities
available-for-sale securities
Cash flows from investing activities
Proceeds from sales, prepayments and maturities of
Net cash provided (used) in investing activities
available-for-sale securities
Cash flows from financing activities
Cash dividends paid on common shares
Purchase of available-for-sale securities
Repayment of FHLB borrowings
Purchase of bank owned life insurance
Net increase in noninterest-bearing deposits
Proceeds from sale of non-marketable equity securities
Net increase (decrease) in interest-bearing deposits
Purchase of non-marketable equity securities
Net increase in securities sold under agreements to repurchase
Net cash provided (used) by financing activities
Proceeds from sale of other real estate owned
Loan originations, net of repayments
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Net cash used in investing activities
Cash flows from financing activities
$
5,095,769
$
3,360,889
(219,318)
511,307
290,945
52,637
660,668
(154,773)
8,318
(306,814)
67,168
30,399
24,501
(190,725)
86,583
15,458
109,495
(559,982)
86,926
1,228,721
6,837,283
21,890,718
(43,859,532)
10,863
(571,850)
-
61,494
(2,767,593)
(565,025)
(200,000)
(26,000,925)
(1,283,200)
-
8,514,241
7,277,577
2,231,138
16,739,756
(2,423,886)
18,914,188
16,490,302
$
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)
-
-
$
5,358,265
$
3,774,388
454,801
-
92,841
846,954
(422,821)
91,469
58
(210,353)
(324,118)
48,000
40,600
(107,664)
560,701
360,002
(55,428)
616,618
(336,269)
-
(305,307)
48,379
35,575
70,975
171,415
(37,623)
51,394
(51,213)
(88,238)
102,248
885,634
7,279,464
(12,170,944)
12,456,247
(49,249)
(50,427)
29,126
574,279
89,488
136,614
55,894
5,462,847
-
39,370,295
(24,130,223)
425,100
(1,431,350)
(128,040)
8,455,897
(2,978,639)
(2,093,385)
17,489,655
(1,377,166)
(10,000,000)
363,796
(1,529,191)
1,292,951
(11,249,610)
13,519,509
28,677,043
(28,144,858)
-
425,000
(588,628)
794,531
(2,706,487)
150
(196,235)
(1,739,484)
16,490,302
30,009,811
$
(595,893)
(58,324)
(1,325,000)
5,000,000
(10,000,000)
10,335,526
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
The accompanying notes are an integral part of these consolidated financial statements.
7
10,000,000
The accompanying notes are an integral part of these consolidated financial statements.
Change in interest-bearing deposits
Change in securities sold under agreements to repurchase
Net cash provided by or (used in) financing activities
Net decrease in cash and cash equivalents
(17,266,858)
(1,106,497)
(15,017,046)
(11,293,683)
Cash and cash equivalents
Beginning of the year
End of year
27,578,668
31,510,684
$
16,284,985
$
27,578,668
The accompanying notes are an integral part of these consolidated financial statements.
7
-
15,045,762
(15,587,545)
(666,177)
8,451,548
(3,932,016)
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flow (concluded)
Consolidated Statements of Cash Flow (concluded)
Supplemental disclosure of cash flow information
Years Ended December 31,
2019
Years Ended December 31,
2018
2015
2014
Cash paid for
Income taxes
Interest
Supplemental disclosure of cash flow information
Cash paid for
Income taxes
Interest on deposits and other borrowings
Supplemental schedule of non-cash investing activities
$
845,000
3,166,563
$
300,000
2,780,525
$
457,000
2,724,528
$
1,000,000
3,141,032
Net, right of use asset and right of use liability
$
39,600
$
-
Supplemental schedule of non-cash investing activities
Supplemental schedule of non-cash investing activities
net of income tax
Change in unrealized gains on available-for-sale securities,
Change in unrealized gains on available-for-sale securities,
net of income tax
Income from investment in Manry Rawls, LLC
Transfer of loans to other real estate owned
Contribution of other real estate owned
Acquisitions
Assets acquired
Liabilities assumed
Net assets
$
3,005,589
(619,210)
$
$
(1,778,572)
$
2,078,653
(437,428)
-
-
$
165,597
(175,611)
(1,618,758)
(180,000)
$
568,351
-
-
$
165,597
$
568,351
Goodwill and fair value acquisition adjustments, net
$
1,219,429
$
296,111
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, 2019 and 2018
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. Through its banking
subsidiary, formed on November 12, 1919, 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.
The Bank purchased a 66% ownership interest in Manry Rawls, LLC (“Manry Rawls”) in May 2017. Manry Rawls is a local
and independent regional insurance agency offering a wide array of insurance products. In January 2019, the Bank
purchased an additional five percent interest in Manry Rawls. This additional interest made the Bank’s total ownership
approximately 72%. 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.
During 2018, the Company acquired The Lankford Agency, an independent insurance agency, which was merged with the
operations of Manry Rawls. The acquisition was accounted for as a business combination under the acquisition method of
accounting in accordance with ASC 805, Business Combinations, and, as such, the assets acquired were recorded at their
respective fair values as of the acquisition date. There were no liabilities assumed with this purchase. The results of
operations of the acquired business are included in the Company’s Consolidated Statements of Operations commencing
October 1, 2018. The total purchase price for the transaction was $200,000 in cash and contingent future payments with a
net present value of $332,989. The allocation of the purchase price results in goodwill of $296,111 and other intangible
assets including customer lists of $236,879.
During 2019, the Company acquired Carolina East Insurance, an independent insurance agency, which was merged with
the operations of Manry Rawls. The acquisition was accounted for as a business combination under the acquisition method
of accounting in accordance with ASC 805, Business Combinations, and as such, the assets acquired were recorded at their
respective fair values as of the acquisition date. There was no liabilities assumed with this purchase. The results of
operations of the acquired business are included in the Company’s Consolidated Statements of Operations commencing
January 2, 2019. The total purchase price for the transaction was $1,150,000 in cash and contingent future payments with a
net present value of $1,200,429 million. The allocation of the purchase price results in goodwill of $1,219,429 and other
intangible assets including customer lists of $1,131,000.
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.
9
9
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Reclassification – Certain amounts in the 2018 consolidated financial statements have been reclassified to conform
to the 2019 presentation. The reclassifications had no effect on net income or stockholders’ equity as previously
reported.
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
2019 and 2018, the aggregate amount of daily-required balances was $82,000 and $63,000, 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 Consolidated Statements of Operations. The Company
held no such securities during the periods reported on in the financial statements.
Debt securities not classified as either held-to-maturity or trading are classified as available-for-sale. Debt securities classified
as available-for-sale are stated at fair value with unrealized holding gains and losses excluded from earnings and reported as a
component of accumulated other comprehensive income until realized.
The income statement line items impacted by the reclassification of realized gains (losses) on the sale of securities are the
gains (losses) on disposition of securities and income tax expense line items in the Consolidated 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 debt
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.
10
10
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Allowance for loan losses (concluded) - 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.
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.
11
11
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
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.
Leases – On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that
modified Topic 842. The Company elected the optional transition method provided by ASU 2018-11 and did not adjust
prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with
such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease
classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The
implementation of the new standard resulted in recognition of a right-of-use asset of $657,157 and lease liability of $618,887
at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and
lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets.
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the
net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental
borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the
underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial
direct costs and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to
extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent
the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and
have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Note 6
provides additional information related to leases.
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.
12
12
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
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 2019, 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 qualitative approach to value the reporting unit. An initial
qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to
calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not,
quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded
book value. 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, 2019.
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 2019 testing. The Company monitored events
and circumstances during the fourth quarter of 2019, and it determined that there were no triggering events requiring an
updated impairment test as of December 31, 2019.
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 7 provides additional
information related to goodwill and other intangibles.
Non-marketable equity securities - Equity securities are carried at fair value, with changes in fair value reported in net income.
Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or a similar investment. On January
1, 2018, the Company adopted a new accounting standard for Financial Instruments (ASU 2016-01), which requires equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation of the
investee) to be measured at fair value with changes in fair value recognized in net income. Upon adoption, equity securities
previously classified as available for sale are presented separately on the balance sheet as Equity securities. The amount of
unrealized gain (loss), net of tax, related to these securities was reclassified from accumulated other comprehensive to
retained earnings as of January 1, 2018. Upon adoption, the amendments related to equity securities without readily
determinable fair values (including disclosure requirements) are being applied prospectively to equity investments that
existed at January 1, 2018. Because of the redemption provisions of the Federal Reserve Bank (FRB) and Federal Home
13
13
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Loan Bank (FHLB) 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 2019 or 2018.
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.
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, 2019 and 2018.
The years ending on or after December 31, 2016 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.
14
14
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
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.
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 FHLB 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, 2019 and 2018 is sufficient to cover inherent losses in the portfolio.
Recent accounting pronouncements - In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other
things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical
15
15
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will
now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques
applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of
expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and
purchased financial assets with credit deterioration. At the FASB’s October 16, 2019 meeting, the Board affirmed its
decision to amend the effective date of this ASU for many companies. As a result of this meeting FASB issued ASU 2019-
10 in November 2019. This ASU provides guidance to defer the effective dates for private companies, non-for-profit
organizations, and certain smaller reporting companies applying standards on current expected credit losses, leases, and
hedging. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will
retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. All other entities will be required to apply the guidance for fiscal years, and interim periods within
those years, beginning after December 15, 2022. Based on the ASU, the Company expects this ASU will be effective for the
Company beginning on January 1, 2023. The Company has engaged a third party to assist with implementation and is
continuing to evaluate the impact that ASU 2016-13 will have on its consolidated financial statements.
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 fiscal years beginning after December 15, 2021. 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 August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic
820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement
uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments
are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company
does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas
of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including
improvements resulting from various Transition Resource Group (or TRG) Meetings. The amendments related to credit
losses will be effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within
those fiscal years. The amendments related to recognition and measurement of financial instruments will be effective for the
Company for fiscal year beginning after December 15, 2019, including interim period within those fiscal years. Early
adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated
financial statements.
In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition
Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20
with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis
for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity
debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with
changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15,
16
16
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
2021, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by
means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the consolidated balance
sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its
consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Accounting Standards Adopted in 2019
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 became effective for the Company on
January 1, 2019. The Company applied the guidance using a modified retrospective approach. See Note 21 for additional
information.
;
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in
ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the
commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis
and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or
control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.
Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and
Topic 606, Revenue from Contracts with Customers. Lessees (for capital and operating leases) and lessors (for sales-type,
direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or
entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach does not require any transition accounting for leases that expired before the earliest comparative
period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent
amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases”) and
ASU 2018-11 (“Leases (Topic 842): Targeted Improvements”). Among these amendments is the provision in ASU 2018-11
that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new
transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for
the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be
in accordance with current U.S. GAAP (Topic 840, Leases). The Company adopted ASU 2018-11 on January 1, 2019 using
modified retrospective method and practical expedients for transition. As the Company owns the majority of its buildings,
the adoption of this ASU did not have a material impact on its consolidated financial statements. Refer to Note 6 for
further discussion.
17
17
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 2 - Summary of significant accounting policies (concluded)
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. 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 adoption of this standard did not have a material impact to the consolidated
financial statements, and as a result, a cumulative effects adjustment was not necessary.
Note 3 - Available-for-sale securities
At December 31, 2019 and 2018, securities are as follows:
December 31, 2019
State and municipal securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Total
December 31, 2018
State and municipal securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Total
Amortized
Cost
$ 51,650,646
38,469,234
41,039,760
10,821,156
$ 141,980,796
Amortized
Cost
$ 65,906,841
24,754,971
52,982,245
13,857,161
$ 157,501,218
Gross
Unrealized
Gains
$ 2,494,430
315,947
248,957
384,566
$ 3,443,900
Gross
Unrealized
Losses
$ 8,196
27,075
87,863
1,932
$ 125,066
Gross
Unrealized
Gains
$ 698,572
71,749
65,203
417,665
$ 1,253,189
Gross
Unrealized
Losses
$ 441,306
467,297
827,298
2,998
$ 1,738,899
Fair
Value
$ 54,136,880
38,758,106
41,200,854
11,203,790
$ 145,299,630
Fair
Value
$ 66,164,107
24,359,423
52,220,150
14,271,828
$ 157,015,508
At December 31, 2019 and 2018, 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, 2019
Available-for-sale securities:
State and municipal securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Total temporarily impaired
Losses Existing for:
Fair Value
Less than
12 Months
More than
12 Months
Total
Losses
$ 977,050
4,881,392
13,858,900
222,119
$ 8,196
78
35,454
307
$ -
26,997
52,409
1,625
$ 8,196
27,075
87,863
1,932
investment securities
$ 19,939,461
$ 44,035
$ 81,031
$ 125,066
18
18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 3 - Available-for-sale securities (continued)
December 31, 2018
Available-for-sale securities:
State and municipal securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Total temporarily impaired
Continuous Unrealized
Losses Existing for:
Fair Value
Less than
12 Months
More than
12 Months
Total
Losses
$ 21,516,251
16,767,519
40,812,165
260,429
$ 357,208
86,217
77,666
2,998
$ 84,098
381,080
749,632
-
$ 441,306
467,297
827,298
2,998
investment securities
$ 79,356,364
$ 524,089
$ 1,214,810
$ 1,738,899
State and municipal securities - 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.
Small Business Administration loan securities - The Company’s unrealized losses on small business administration loans 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.
At December 31, 2019 and 2018, securities with a carrying value of approximately $55,908,435 and $50,922,015,
respectively, were pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2019
and 2018, securities with a carrying value of $3,754,145 and $13,431,015, respectively, were pledged to the FHLB to secure
advances. Investment securities with carrying values of $6,340,534 and $5,874,785 were pledged to secure repurchase
agreements at December 31, 2019 and 2018, respectively.
19
19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 3 - Available-for-sale securities (concluded)
At December 31, 2019, 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 securities
Residential mortgage-backed securities
Total gross realized gains
Gross realized losses on available-for-sale securities were:
State and municipal securities
Residential mortgage-backed securities
Total gross realized losses
Amortized
Cost
$ 976,574
3,083,851
12,685,740
125,234,631
$ 141,980,796
Fair
Value
$ 985,000
3,151,911
13,168,381
127,994,338
$ 145,299,630
2019
$ 296,468
65,954
$ 362,422
2018
$ 154,773
-
$ 154,773
2019
$ 7,367
18,786
$ 26,153
2018
$ -
-
$ -
Proceeds from the sale of available-for-sale securities totaled $21,598,655 and $3,979,003 for the years ended December 31,
2019 and 2018, respectively.
20
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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, 2019 and 2018, 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
2019
2018
$ 41,154,005
$ 37,308,602
24,562,446
26,693,164
59,310,900
63,422,601
34,757,775
39,010,134
4,435,830
5,333,956
11,128,525
10,946,435
175,349,481
182,714,892
57,988,750
60,469,780
24,642,239
23,243,498
8,563,898
8,951,568
266,544,368
275,379,738
(5,676,680)
(5,916,359)
196,721
56,927
$ 261,064,409
$ 269,520,306
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 $41.1 million and $37.3 million at December 31, 2019 and 2018, 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 $34.8 million and $39.0 million at December 31, 2019 and
2018, respectively.
Commercial real estate loans totaled $83.9 million and $90.1 million at December 31, 2019 and 2018, 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.
21
21
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 – Loans and Allowance for Loan Losses (continued)
Multifamily loans totaled $4.4 million and $5.3 million at December 31, 2019 and 2018, 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 $11.1 million and $10.9 million at December 31, 2019 and
2018, respectively.
Commercial and Industrial Loans - At December 31, 2019 and 2018, the Bank’s commercial loan portfolio totaled $58.0
million and $60.5 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 $24.6 million and $23.2 million at December 31, 2019 and 2018, 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 $8.6 million and $8.9 million at December
31, 2019 and 2018, respectively. Overdrafts totaling $37 thousand and $32 thousand at December 31, 2019 and 2018,
respectively, were reclassified from deposits to loans and are also classified in loans to individuals. 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.
22
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
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.
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.
23
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
“4” — Acceptable 2 – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little
identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:
General conformity to the Bank's underwriting requirements, with limited exceptions to the Bank's policy, product
or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk
associated with the exceptions noted.
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be
supplemented with verifiable cash flow from other sources.
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or
liquidation value to the net worth of the borrower or guarantor.
“5” — Weak Pass – This grade is given to acceptable loans that show signs of weakness in either adequate sources of
repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans
assigned this grade may demonstrate some or all of the following characteristics:
Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present
a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater for
this risk grade, the exceptions may be properly mitigated by other documented factors that offset any additional
risks.
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this
time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not
historic) performance.
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral
and liquidation value to the net worth of the borrower or guarantor.
“6” — Special Mention – Special Mention loans include the following characteristics:
Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors;
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected,
weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result
of deviations from prudent lending practices; or
Loans where adverse economic conditions have developed subsequent to the loan origination that do not
jeopardize liquidation of the debt, but do substantially increase the level of risk, may also warrant this rating.
“7” — Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of
the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be
downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of
well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to:
High debt to worth ratios
Declining or negative earnings trends
Declining or inadequate liquidity
Questionable repayment sources
Lack of well-defined secondary repayment source, and
Unfavorable competitive comparisons.
24
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
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.
“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, 2019 and 2018:
Commercial Real Estate
Non-owner
Owner
occupied
occupied
Residential
1-4 Family Multifamily
Equity lines
of credit
(in thousands)
-
$
-
1,490
11,844
11,228
-
-
24,562
$
-
$
-
2,593
33,934
21,482
119
1,183
59,311
$
$
-
15
3,236
20,473
9,518
290
1,226
34,758
$
-
$
-
-
1,647
2,789
-
-
4,436
$
-
$
-
4,670
5,276
799
25
358
11,128
$
Construction
-
$
-
2,875
28,082
9,526
305
366
41,154
$
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
25
25
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
Commerical
and industrial Agricultural
Individuals
Total
(in thousands)
Prime
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
$
301
-
6,161
30,533
19,286
1,699
9
57,989
-
$
-
1,732
11,718
11,192
-
-
24,642
$
16
$
-
207
523
7,558
260
-
8,564
$
$
317
15
22,962
144,030
93,378
2,699
3,143
266,544
$
$
Real Estate Credit Exposure as of December 31, 2018
Commercial Real Estate
Non-owner
Owner
occupied
occupied
Construction
Residential
1-4 Family Multifamily
Equity lines
of credit
(in thousands)
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
$
-
2,448
26,393
7,968
500
-
37,309
$
-
$
1,832
11,136
13,432
-
293
26,693
$
-
$
3,263
34,402
24,369
140
1,249
63,423
$
$
15
5,126
20,766
10,476
1,231
1,396
39,010
$
Other Credit Exposures as of December 31, 2018
Commerical
and industrial Agricultural
Individuals
Total
Good
Acceptable 1
Acceptable 2
Weak Pass
Special Mention
Substandard
(in thousands)
-
$
7,929
35,930
16,243
350
18
60,470
$
-
$
1,962
12,835
8,446
-
-
23,243
$
-
$
186
1,055
7,427
284
-
8,952
$
$
15
27,280
149,863
92,286
2,565
3,371
275,380
$
-
$
-
1,931
3,403
-
-
5,334
$
-
$
4,534
5,415
522
60
415
10,946
$
26
26
Farmers Bankshares, Inc.
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
Note 4 - Loans and Allowance for Loan Losses (continued)
Nonaccrual loans and past due loans - Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned
property and loans past due 90 days or more on which interest is still being accrued. There were no financing receivables
past due over 90 days accruing interest as of December 31, 2019 or 2018. Nonaccrual loans as of December 31, 2019
totaled $753,205, or 0.28% of total loans, compared with $699,604, or 0.25% of total loans, as of December 31, 2018. The
Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as repossessed and
foreclosed collateral are aggressively liquidated by the Bank’s management. The total number of loans on nonaccrual status
as of December 31, 2019 and 2018 was 7 and 10, respectively.
Nonaccrual loans and past due loans - Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned
property and loans past due 90 days or more on which interest is still being accrued. There were no financing receivables
past due over 90 days accruing interest as of December 31, 2019 or 2018. Nonaccrual loans as of December 31, 2019
totaled $753,205, or 0.28% of total loans, compared with $699,604, or 0.25% of total loans, as of December 31, 2018. The
Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as repossessed and
foreclosed collateral are aggressively liquidated by the Bank’s management. The total number of loans on nonaccrual status
as of December 31, 2019 and 2018 was 7 and 10, respectively.
For the years ended December 31, 2019 and 2018, the Bank recognized $-0- in interest income on nonaccrual loans. If
interest on those loans had been accrued in accordance with the original terms, interest income would have increased by
approximately $16,967 and $38,829 for the years ended December 31, 2019 and 2018, respectively.
For the years ended December 31, 2019 and 2018, the Bank recognized $-0- in interest income on nonaccrual loans. If
interest on those loans had been accrued in accordance with the original terms, interest income would have increased by
approximately $16,967 and $38,829 for the years ended December 31, 2019 and 2018, respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2019 and 2018:
The following is a breakdown of nonaccrual loans as of December 31, 2019 and 2018:
December 31,
December 31,
2019
2019
2018
2018
Mortgage loans on real estate:
Mortgage loans on real estate:
Construction
Construction
Commercial real estate:
Commercial real estate:
Non-owner occupied
Non-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
$
$
366,239
366,239
-
-
209,716
209,716
168,786
168,786
8,465
8,465
753,206
753,206
$
$
$
-
$
-
151,523
151,523
327,853
327,853
204,887
204,887
15,341
15,341
699,604
699,604
$
$
All classes of loans are considered past due if the required principal and interest income have not been received as of the
date such payments were due. The following tables present the Bank’s aged analysis of past due loans as of December 31,
2019 and 2018:
All classes of loans are considered past due if the required principal and interest income have not been received as of the
date such payments were due. The following tables present the Bank’s aged analysis of past due loans as of December 31,
2019 and 2018:
30-59 Days
30-59 Days
Past Due
Past Due
60-89 Days
60-89 Days
Past Due
Past Due
Greater Than
Greater Than
90 Days
90 Days
Current
Current
Total Loans
Total Loans
Greater Than
Greater Than
90 Days Still
90 Days Still
Accruing
Accruing
(in thousands)
(in thousands)
Total Past
Total Past
Due
Due
December 31, 2019
Mortgage loans on real estate:
December 31, 2019
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
$
-
$
-
$
-
$
-
$
$
366
366
94
-
84
10
53
54
84
-
10
53
54
-
-
8
8
209
209
-
-
-
-
-
-
94
-
-
-
-
-
-
-
-
-
-
$
94
$
-
-
-
-
113
113
-
-
145
145
-
-
-
-
-
-
624
624
$
$
$
$
94
27
$
-
$
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
$
-
$
366
$
366
84
84
-
-
217
217
53
53
199
199
-
-
-
-
8
8
927
$
927
$
$
40,788
$
40,788
$
$
41,154
41,154
24,478
24,478
59,311
59,311
34,541
34,541
4,383
4,383
10,929
10,929
57,989
57,989
24,642
24,642
8,556
8,556
265,617
$
265,617
$
24,562
24,562
59,311
59,311
34,758
34,758
4,436
4,436
11,128
11,128
57,989
57,989
24,642
24,642
8,564
8,564
266,544
$
266,544
$
27
27
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, 2019 and 2018
For Years Ended December 31, 2019 and 2018
For Years Ended December 31, 2019 and 2018
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, 2018
December 31, 2018
December 31, 2018
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
Greater Than
90 Days
90 Days
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
Due
Due
Total Past
Due
$
$
$
248
248
248
$
$
-
-
$
-
$
$
-
-
$
-
$
-
$
$
-
-
-
-
-
49
49
49
142
142
142
-
-
-
-
-
-
84
84
84
-
-
-
-
-
-
523
523
523
$
$
$
-
-
-
-
-
-
12
12
12
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
12
$
$
12
12
70
70
70
-
-
-
193
193
193
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
263
263
263
$
$
$
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
-
-
$
$
$
248
248
248
70
70
70
49
49
49
347
347
347
-
-
-
-
-
-
84
84
84
-
-
-
-
-
-
798
798
798
$
$
$
Current
Current
Current
Total Loans
Total Loans
Total Loans
$
$
$
37,061
37,061
37,061
$
$
$
37,309
37,309
37,309
26,623
26,623
26,623
63,374
63,374
63,374
38,663
38,663
38,663
5,334
5,334
5,334
10,946
10,946
10,946
60,386
60,386
60,386
23,243
23,243
23,243
8,952
8,952
8,952
274,582
$
274,582
274,582
$
$
26,693
63,423
39,010
5,334
10,946
60,470
23,243
8,952
275,380
$
$
26,693
26,693
63,423
63,423
39,010
39,010
5,334
5,334
10,946
10,946
60,470
60,470
23,243
23,243
8,952
8,952
275,380
275,380
$
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, 2019 and 2018, the following table presents a breakdown of the types of concession made by loan
years ended December 31, 2019 and 2018, the following table presents a breakdown of the types of concession made by loan
years ended December 31, 2019 and 2018, the following table presents a breakdown of the types of concession made by loan
class:
class:
class:
Year ended December 31, 2019
Year ended December 31, 2019
Year ended December 31, 2019
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, 2018
Year ended December 31, 2018
Year ended December 31, 2018
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:
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
Equity lines of credit
Equity lines of credit
Equity lines of credit
Total
Total
Total
-
-
-
-
-
-
1
1
1
1
1
1
$
-
$
-
$
-
-
-
-
165,245
165,245
165,245
165,245
165,245
165,245
$
$
$
$
-
-
$
-
$
-
-
165,245
-
$
$
$
165,245
165,245
165,245
165,245
165,245
1
2
3
6
1
1
2
2
3
3
6
6
$
47,157
$
47,157
$
$
163,607
373,039
47,157
47,157
163,607
163,607
373,039
373,039
583,803
583,803
$
$
163,607
373,039
47,157
47,157
163,607
163,607
373,039
373,039
583,803
583,803
$
$
$
583,803
$
583,803
$
$
28
28
28
28
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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 2019 or 2018. Within the last 12 months, no loans that
were restructured in 2019 or 2018, subsequently defaulted and were foreclosed upon. These modifications resulted in
specific reserves in the Bank’s allowance for loan losses of $-0- and $252 thousand as of December 31, 2019 and 2018,
respectively.
There was one TDR that was on non-accrual status and had an unpaid principal balance of $146,952 as of December 31,
2019. There were two TDRs that were on non-accrual status and had an unpaid principal balance of $249,685 as of
December 31, 2018. Eight TDRs with a current principal balance of $1,000,082 and nine TDRs with current principal
balance of $1,443,281 were considered performing loans and are accruing interest based on their sustained payment
performance as of December 31, 2019 and 2018, 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, 2019 and 2018 the Company held $-0- and $-0-, respectively of foreclosed
residential real estate. The recorded investment in one-to-four family residential loans secured by residential real estate
properties where formal foreclosure procedures were in process as of December 31, 2019 and 2018 was $-0-. The remaining
balance of other real estate owned consists of 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 $3,285,534 and $3,799,751 as of December 31, 2019 and 2018, 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.
29
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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, 2019 and 2018:
December 31, 2019
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
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family
Equity lines of credit
Commercial and industrial
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
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
366
$
366
$
-
$
366
$
-
132
1,137
247
190
1,037
169
8
132
1,137
247
190
1,037
169
8
-
-
-
-
155
169
8
132
1,143
226
190
1,048
170
83
8
55
10
10
55
-
-
$
366
$
366
$
-
$
366
$
-
132
1,137
1,284
359
8
3,286
$
132
1,137
1,284
359
8
3,286
$
-
-
155
169
8
332
$
132
1,143
1,274
360
83
3,358
$
8
55
65
10
-
138
$
30
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (continued)
December 31, 2018
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
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
Residential 1-4 family
Equity lines of credit
Commercial and industrial
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
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(in thousands)
Year to Date
Average
Recorded
Investment
Interest
Income
Recognized
$
263
$
263
$
-
$
313
$
13
212
1,196
615
63
2
81
1,000
352
15
212
1,196
658
63
2
81
1,000
352
15
-
-
-
7
172
252
15
225
1,197
751
63
2
83
1,001
359
15
6
46
26
3
43
7
-
-
-
$
263
$
263
$
-
$
313
$
13
293
1,196
1,615
415
17
3,799
$
293
1,196
1,658
415
17
3,842
$
7
-
172
252
15
446
$
308
1,197
1,752
422
17
4,009
$
6
46
69
10
-
144
$
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.
31
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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, 2019 and 2018, 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, 2019 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, 2019 and 2018:
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,
2018
Charge-offs Recoveries
Provision
(in thousands)
December 31,
2019
$
612
$
-
$
-
$
81
$
693
494
1,372
881
52
431
1,248
392
434
5,916
$
-
-
-
-
15
8
-
313
336
$
-
-
-
37
20
12
6
22
97
$
46
(240)
(143)
(21)
(103)
(27)
21
386
$
-
540
1,132
760
51
340
1,219
413
529
5,677
$
32
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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,
2017
Charge-offs Recoveries
Provision
(in thousands)
December 31,
2018
$
643
$
-
$
-
$
(31)
$
612
601
1,630
1,123
101
262
1,150
385
27
5,922
$
-
-
-
-
-
8
48
-
-
1
53
20
2
6
33
89
$
1
83
$
(107)
(259)
(287)
(69)
215
92
7
439
$
-
494
1,372
881
52
431
1,248
392
434
5,916
$
The activity in the allowance for loan loss for 2019 and 2018 are summarized by loan class as follows:
As of December 31, 2019
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)
$
-
$
366
$
693
$
40,788
-
-
155
-
169
8
132
1,137
1,284
-
359
8
-
-
332
$
-
-
3,286
$
540
1,132
605
51
171
1,211
413
529
5,345
$
24,430
58,174
33,474
4,436
10,769
57,981
24,642
8,564
263,258
$
33
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 4 - Loans and Allowance for Loan Losses (concluded)
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)
$
-
$
263
$
612
$
37,046
7
-
172
-
252
15
293
1,196
1,615
-
415
17
-
-
446
$
-
-
3,799
$
487
1,372
709
52
179
1,233
392
434
5,470
$
26,400
62,227
37,395
5,334
10,531
60,453
23,243
8,952
271,581
$
As of December 31, 2018
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
Note 5 - Premises and equipment
At December 31, 2019 and 2018, premises and equipment consist of the following:
Land
Buildings
Equipment, furniture and fixtures
Computer equipment
Less accumulated depreciation
Total premises and equipment, net
2019
$ 1,433,786
8,038,388
3,147,967
1,360,096
13,980,237
(8,184,337)
$ 5,795,900
2018
$ 456,450
6,151,012
3,075,892
892,140
10,575,494
(7,640,745)
$ 2,934,749
For 2019 and 2018, depreciation charged to operating expense was $560,701 and $511,307, respectively.
Note 6 – Leases
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to
extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent
the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and
have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
34
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 6 – Leases (concluded)
The following tables present information about the Company’s leases:
Lease liabilities
Right-of-use assets
Weighted average remaining lease term (in years)
Weighted average discount rate
Lease Cost
Operating lease cost (1) included in occupany and equipment expense
Total lease cost
(1) Includes short-term leases, which are immaterial.
2019
$ 618,887
657,157
3.36
5.50%
2019
$ 463,767
$ 463,767
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating
lease liabilities as follow:
2020
2021
2022
2023
After 2023
Total lease payments
Less interest
Present value of lease liabilities
$ 271,415
153,070
90,192
82,278
86,520
$ 683,475
(64,588)
$ 618,887
Note 7 – Goodwill and intangible assets
The gross carrying amount and accumulated amortization for the Company’s intangible assets as of December 31,
2019
2018
Gross
Carrying
Accumulated
Amortization
Gross
Carrying
Accumulated
Amortization
Intangible assets subject to amortization
Customer lists
Total intangible assets subject to amortization
Goodwill
Total intangible assets
$
5,392,879
5,392,879
6,027,286
11,420,165
$
$
$
$
810,695
810,695
-
810,695
4,261,879
4,261,879
4,807,857
9,069,736
$
$
$
450,693
450,693
-
450,693
Aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2019 was $360,002,
compared to $271,804 for 2018. The estimated aggregate annual amortization expense for each of the five years subsequent
to December 31, 2019, is $359,525.
35
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 7 – Goodwill and intangible assets (concluded)
Manry Rawls recorded $1,219,429 in increases to goodwill and $1,131,000 in intangible assets with the the acquisition of
Carolina East Insurance Agency, which occurred on January 1, 2019. During 2018, Manry Rawls recorded $296,111 in
increases to goodwill and $236,879 in intangible assets from the acquisition of The Lankford Agency. 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 2019 or 2018.
Balance, December 31, 2018
Additions to goodwill
Other adjustments
$
4,807,857
1,219,429
-
Balance, December 31, 2019
$
6,027,286
Note 8 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2019 and 2018:
FHLB stock
FRB stock
Community Bankers' Bank stock
Plexus Captial, LLC
Tidewater Home Funding, LLC
Senior Housing Crime Prevention Foundation stock
Community Capital Funds
Total non-marketable equity securities
Note 9 - Interest-bearing deposits
Interest-bearing deposits consist of the following:
NOW accounts
Money market accounts
Personal relationship checking
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
2019
$ 1,068,100
403,550
61,300
1,880,856
828,611
500,000
522,572
$ 5,264,989
2018
$ 1,473,600
401,800
61,300
961,007
732,992
500,000
-
$ 4,130,699
2019
$ 23,331,690
90,327,858
1,456,698
23,017,893
29,205,822
47,881,312
54,060,882
$ 269,282,155
2018
$ 20,391,339
95,240,589
993,604.00
24,977,600
27,397,406
42,113,656
59,697,152
$ 270,811,346
36
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 9 - Interest-bearing deposits (concluded)
At December 31, 2019, the scheduled maturities of time deposits are as follows:
2020
2021
2022
2023
2024
Thereafter
Total time deposits
$ 59,850,159
9,406,709
13,604,638
13,387,683
5,693,005
-
$ 101,942,194
Note 10 – Capital notes
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, 2019 and 2018, respectively.
There was no interest expense paid to these related parties on the capital notes for the years ended December 31, 2019 and
2018, respectively.
Note 11 - 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 0.63% and 0.58% during the years ended December 31, 2019 and 2018,
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 $6,340,534 and $5,874,785 at December 31,
2019 and 2018, 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, 2019 and December 31, 2018 is
presented in the following tables.
37
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 11 - Securities sold under agreements to repurchase and other borrowings (continued)
December 31, 2019
Repurchase agreements:
Overnight and
continuous
Up to 30
Days
Greater
than 90
Total
30-90 Days
(in thousands)
Small Business Administration Pools
Total borrowings
$
$
5,142
5,142
$
-
$
-
$
-
$
-
$
-
$
-
Gross amount of recognized liabilities for repurchase agreements
$
$
5,142
5,142
$
5,142
December 31, 2018
Repurchase agreements:
Overnight and
continuous
Up to 30
Days
Greater
than 90
Total
30-90 Days
(in thousands)
Small Business Administration Pools
Total borrowings
$
$
3,849
3,849
$
-
$
-
$
-
$
-
$
-
$
-
Gross amount of recognized liabilities for repurchase agreements
$
$
3,849
3,849
$
3,849
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, 2019 and 2018, the Bank had no outstanding federal funds purchased.
The Bank also has arrangements with the FHLB which enables the Bank to borrow up to 25% of total assets.
At December 31, 2019 and 2018, FHLB advances were as follows:
December 31, 2019
Maturity date
April 15, 2020
July 29, 2020
October 13, 2020
May 17, 2021
Call Feature
-
-
-
-
Amount
$ 2,500,000
5,000,000
2,500,000
5,000,000
Rate
2.040%
1.944%
2.176%
1.953%
Total FHLB borrowings/weighted average rate
$ 15,000,000
2.000%
38
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 11 - Securities sold under agreements to repurchase and other borrowings (concluded)
December 31, 2018
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%
The carrying value of loans pledged as collateral to the FHLB were $24.6 million and $20.8 million at December 31, 2019
and 2018, respectively.
During 2019 and 2018, $10.0 million and $-0- of FHLB advances were repaid.
Note 12 - 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 Company. Employee benefits expense included $534,705 and $454,996 for the plan for
2019 and 2018, respectively.
Post-retirement benefits - The Company has entered into deferred compensation arrangements with certain key personnel
which call for the payment of benefits upon the retirement or death of the individuals. In 2016, the Company amended
one of these plans and froze the other plan while creating a new plan for this executive, such that upon the executives’
retirement, the Company will provide for a monthly retirement payment for their lifetime. The agreements provide that a
retirement benefit is payable upon a defined normal retirement age while in service to the Company and a lesser benefit is
payable upon early retirement. Other benefits are payable upon disability, death or change in control.
The agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply
with Section 409A of the Internal Revenue Code.
However, the Company has elected to finance the retirement benefits by purchasing annuities that have been designed to
provide a future source of funds for the lifetime retirement benefits of the agreements. The primary impetus for utilizing
these annuities is a substantial savings in compensation expense for the Company as opposed to a typically designed
supplemental retirement plan.
The liabilities associated with these deferred compensation arrangements were $1,623,228 and $1,520,980 as of December
31, 2019 and 2018, respectively. The annuity had a balance of $2,913,142 and $2,961,521 as of December 31, 2019 and
2018, respectively, and is recorded at amortized cost. Salaries and employee benefits expense included $127,248 and
$115,956 of expense related to these arrangements for 2019 and 2018, respectively.
39
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 13 - Income taxes
The principal components of the income tax expense as of December 31, 2019 and 2018 are as follows:
Federal - current tax expense
Federal - deferred tax expense (benefit)
2019
$ 793,787
(55,428)
$ 738,359
2018
$ 566,495
52,637
$ 619,132
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 (21%)
Tax effects of:
Tax-exempt interest
Non-taxable bank owned life insurance
Non-deductible expenses
Minority investment interest
Other
Total income tax expense
2019
$ 1,280,291
2018
$ 1,200,129
(448,840)
(59,184)
19,808
(55,053)
1,337
(475,598)
(59,523)
21,112
(46,309)
(20,679)
$ 738,359
$ 619,132
The Company's deferred tax assets and liabilities and their components are included on the Consolidated Balance Sheets.
The components of these deferred tax assets and liabilities are as follows:
Deferred tax assets:
Available-for-sale investment securities
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
2019
2018
$ -
663,634
340,878
14,138
2,599
68,827
1,090,076
$ 101,999
663,634
319,406
20,762
2,599
24,442
1,132,842
(696,955)
(159,624)
-
(226,649)
(75,719)
(80,065)
(141,318)
(1,073,616)
(66,141)
(372,855)
Net deferred tax asset
$ 16,460
$ 759,987
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.
40
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 13 - Income taxes (concluded)
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 2016.
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 2019 and 2018
is as follows:
Beginning balance, January 1
Originations
Repayments
Ending balance, December 31
2019
$ 5,424,545
2,930,229
(1,189,445)
$ 7,165,329
2018
$ 6,096,986
-
(672,441)
$ 5,424,545
Commitments to extend credit to related parties amounted to $4,159,585 and $5,109,850 at December 31, 2019 and 2018,
respectively.
Deposits from related parties held by the Bank amounted to $11,372,117 and $12,068,589 at December 31, 2019 and 2018,
respectively.
The Bank currently has loans outstanding to Manry Rawls, LLC with a current principal balance of $845,567 and
$1,568,824 as of December 31, 2019 and 2018, respectively. These loans are eliminated in consolidation. These loans are
at substantially the same terms as similarly situated customers.
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
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.
41
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 15 - Credit commitments and concentrations of credit risk (concluded)
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, 2019 and 2018. 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, as well as capital commitments to investment funds in which the Company
invests are as follows:
Loan commitments
Standby letters of credit and guarantees written
Capital commitment to private investment funds
2019
$ 75,870,889
6,802,069
4,100,000
2018
$ 76,245,388
519,958
540,000
Standby letters of credit outstanding at December 31, 2019 expire between 2020 and 2023.
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.
42
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
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 Bank 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 ended 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, reaching 2.5% on January 1, 2019).
Management believes, as of December 31, 2019 and 2018, the Bank met all capital adequacy requirements to which it is
subject.
As of December 31, 2019, 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, 2019:
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
$ 51,441
15.1% $ 27,265
8.0% $ 34,082
10.0%
47,164
13.8% 20,449
6.0% 27,265
8.0%
(to Risk-Weighted Assets)
47,164
13.8% 15,337
4.5% 22,153
6.5%
Tier I Leverage Ratio
(to Average Assets)
47,164
10.3% 18,232
4.0% 22,790
5.0%
43
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 16 - Regulatory matters (concluded)
As of December 31, 2018:
Total Capital
(to Risk-Weighted Assets)
Tier I Risk-Based Capital
(to Risk-Weighted Assets)
Common Equity Risk-Based Capital
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
(Dollars in thousands)
Well Capitalized
Amount
Ratio
$ 48,267
13.8% $ 27,923
8.0% $ 34,904
10.0%
43,904
12.6% 20,943
6.0% 27,923
8.0%
(to Risk-Weighted Assets)
43,904
12.6% 15,707
4.5% 22,688
6.5%
Tier I Leverage Ratio
(to Average Assets)
43,904
9.7% 18,146
4.0% 22,682
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.
44
44
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 17 - Fair value measurements (continued)
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities
recorded at fair value on a recurring basis in the consolidated financial statements:
Securities available for sale - Securities available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair
values are measured utilizing independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from
various sources and may determine the fair value of identical or similar securities by using pricing models that considers
observable market data (Level 2).
The following table presents the balances of available-for-sale securities measured at fair value on a recurring basis as of
December 31, 2019 and 2018:
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Balance as of
December 31,
2019
Level 1
Level 2
Level 3
$ 54,136,880
38,758,106
41,200,854
11,203,790
$ 145,299,630
$ -
-
-
-
$ -
$ 51,650,647
38,469,234
41,039,760
10,821,155
$ 145,299,630
$ -
-
-
-
$ -
Description
State and municipal
Residential mortgage-backed securities
Collateralized mortgage obligations
Small Business Administration loan securities
Balance as of
December 31, 2018
$ 66,164,107
24,359,423
52,220,150
14,271,828
$ 157,015,508
Level 1
Level 2
Level 3
$ -
-
-
-
$ -
$ 66,164,107
24,359,423
52,220,150
14,271,828
$ 157,015,508
$ -
-
-
-
$ -
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.
45
45
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 17 - Fair value measurements (continued)
The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal
conducted by an independent, licensed appraiser outside of the Company. The Company records impaired loans secured by
real estate as Level 3 assets. The value of business equipment is based upon an outside appraisal if deemed significant, or the
net book value on the applicable business’ financial statements if not considered significant using observable market data.
Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports
are recorded as Level 3 assets. Any fair value adjustments are recorded in the period incurred as provision for loan losses on
the Statements of Operations.
Other real estate owned - Other real estate owned is considered held for sale and is adjusted to fair value less estimated
selling costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised
value of the collateral or management’s estimation of the value of the collateral. The Company considers the other real
estate owned as nonrecurring Level 3.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis
during the periods.
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2019
Level 1
Level 2
Level 3
$ 672,404
2,953,660
$ 3,626,064
$ -
-
$ -
$ -
-
$ -
$ 672,404
2,953,660
$ 3,626,064
Description
Assets
Other real estate owned
Impaired loans
Total assets
Balance as of
December 31, 2018
Level 1
Level 2
Level 3
$ 672,404
3,353,434
$ 4,025,838
$ -
-
$ -
$ -
-
$ -
$ 672,404
3,353,434
$ 4,025,838
46
46
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 17 - Fair value measurements (concluded)
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Assets
Fair Value at
December 31, 2019
Valuation Technique
Unobservable Input
Range (Weighted
Average)
Other real estate owned
Impaired loans
$ 672,404
2,953,660
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Total assets
$ 3,626,064
Description
Assets
Fair Value at
December 31, 2018
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Other real estate owned
Impaired loans
$ 672,404
3,353,434
Discounted appraisals
Discounted appraisals
Discounted cash flows
Collateral discounts
Collateral discounts
Discount rate
10-20%
10-30%
6%
Total Assets
$ 4,025,838
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December 31,
2019 and 2018. 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 investment, net
Accrued interest receivable
Bank-owned annuity contract
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
2019
2018
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Dollars in thousands)
$ 31,120
145,300
261,064
1,807
2,913
$ 31,120
145,300
267,523
1,807
2,913
$ 16,490
157,016
269,520
1,978
2,961
$ 16,490
157,016
273,701
1,978
2,961
284,685
101,942
299
15,000
6,000
5,142
283,263
102,132
299
14,977
5,809
5,142
284,872
101,810
337
25,000
6,000
3,849
283,762
100,239
337
24,723
5,636
3,849
47
47
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 18 - Stock incentive plan
The Company’s shareholders approved stock incentive plans effective January 1, 2018 and previously January 1, 2007. The
plans authorize the grant of awards for a period of ten years, which expires on December 31, 2028 and previously December
31, 2017. The number of shares authorized for issuance under both of the plans is limited to 2.25% of the total authorized
and unissued shares of common stock. Three types of awards may be granted under the plans: Incentive Stock Options,
Nonqualified Stock Options and Restricted Stock. The Company granted restricted stock awards during 2019 and 2018.
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 four years. The compensation expense recognized for the years ended
December 31, 2019 and 2018 was $220,155 and $167,284, 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, 2019 and 2018, the expense related to these issuances was $82,525 and $57,975, respectively.
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2019 and
2018, and changes during the years ended December 31, 2019 and 2018, 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
2019
2018
Shares
17,806
12,316
2,072
197
27,853
Weighted
Average Price
$ 15.54
17.32
17.09
17.30
$ 16.33
Shares
13,011
9,020
2,864
1,361
17,806
Weighted
Average Price
$ 13.43
20.50
11.91
10.54
$ 15.54
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
2019
2018
$ 5,096,105
$ 4,875,251
3,087,868
3,071,643
$ 1.65
$ 1.59
Net income attributable to common shareholders
$ 5,096,105
$ 4,875,251
Average common shares outstanding
Effect of dilutive unvested restricted stock awards
Average diluted shares outstanding
Diluted earnings per share
3,087,868
2,741
3,090,609
3,071,643
2,784
3,074,427
$ 1.65
$ 1.59
48
48
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 20 – Condensed financial statements of parent company
On July 26, 2013, the Board of Directors of the Bank approved an Agreement and Plan of Reorganization and Share
Exchange (the “Agreement”) whereby the Bank would become a subsidiary of Farmers Bankshares, Inc., a company
incorporated in Virginia on July 26, 2013 for the purpose of becoming a holding company for the Bank. The Agreement
provided for the statutory share exchange of all of the Bank’s common stock held by stockholders for the common stock of
Farmers Bankshares, Inc., on a one-for-one basis.
The Agreement was approved by the Bank’s stockholders at a special meeting of the Bank’s stockholders held on September
26, 2013 (the “Special Stockholders’ Meeting”). The holding company reorganization was consummated on December 31,
2013 (see Note 1). Prior to the holding company reorganization, Farmers Bankshares, Inc. conducted no operations other
than obtaining regulatory approval for the holding company reorganization. As this event is considered reorganization under
common control, the consolidated financial statements, discussion of the statements and all other information presented
herein for the years ended December 31, 2019 and 2018 are presented for the Company as a consolidated entity.
Financial information pertaining only to Farmers Bankshares, Inc. is as follows:
Balance Sheets
Cash
Taxes receivable
Investment in Farmers Bank
Other assets
Total assets
Assets
December 31,
2019
2018
$
$
1,066,093
723,316
60,394,602
367,394
62,551,405
1,066,093
682,365
52,139,723
336,386
54,224,567
$
$
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 (loss)
Total stockholders' equity
$
6,000,000
367,394
6,367,394
$
6,000,000
336,386
6,336,386
386,518
3,000,031
50,175,584
2,621,878
56,184,011
384,484
2,895,515
44,991,893
(383,711)
47,888,181
Total liabilities and stockholders' equity
$
62,551,405
$
54,224,567
49
49
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 20 – Condensed financial statements of parent company (concluded)
Statements of Operations
Income
Operating expenses
Interest expense
Total expenses
Assets
December 31,
2019
2018
$
1,603,174
$
1,478,200
Allocated income tax benefits
Income before equity in undistributed income of subsidiary
Equity in undistributed income - Farmers Bank
195,000
195,000
(40,951)
1,449,125
3,646,980
195,000
195,000
(40,950)
1,324,150
3,551,101
Net income
$
5,096,105
$
4,875,251
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
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of the year
End of year
Years Ended December 31,
2019
2018
$
5,096,105
$
4,875,251
(40,952)
(31,007)
-
(3,646,980)
1,377,166
(1,377,166)
(1,377,166)
-
(40,950)
66,484
31,016
(3,551,101)
1,380,700
(1,283,200)
(1,283,200)
97,500
1,066,093
968,593
$
1,066,093
$
1,066,093
50
50
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 21 – Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest
Income. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:
Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned
on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The
Company's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related
revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely
transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a
point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month
through a direct charge to customers' accounts.
Other Service Charges, Commissions and Fees- Other service charges, commissions and fees are primarily comprised of debit card
income, ATM fees, merchant services income, and other service charges. Debit card income is primarily comprised of
interchange fees earned whenever the Company's debit and credit cards are processed through card payment networks. ATM
fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a
Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit
card transactions, in addition to account management fees. Other service charges include revenue from processing wire
transfers, safe deposit box rentals, cashier's checks, and other services. The Company's performance obligation for other
service charges, commission and fees are largely satisfied, and related revenue recognized, when the services are rendered or
upon completion. Payment is typically received immediately or in the following month.
Insurance Commissions - Insurance income primarily consists of commissions received on insurance product sales. The
Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance
obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the
carrier remits the commission payment to the Company, and the Company recognizes the revenue.
Gain on Sales of OREO - The Company records a gain or loss from the sale of other real estate owned when control of the
property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the
sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their
obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met,
the other real estate owned asset is derecognized and the gain on sale is recorded upon the transfer of control of the property
to the buyer. In determining the gain on the sale, the Company adjusts the transaction price and related gain on sale if a
significant financing component is present.
51
51
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2019 and 2018
Note 21 – Revenue from Contracts with Customers (concluded)
The following table presents the Company’s sources of Non-Interest Income for the twelve months ended December 31,
2019. Items outside the scope of ASC 606 are noted as such.
2019
2018
Non-interest income
Service charges on deposits
Overdraft fees
Other
Income from automated teller machines and bank card interchange
Insurance commissions
Net gain on disposition of securities (outside of scope)
Income on bank owned life insurance (outside of scope)
Other income (outside of scope)
Total non-interest income
$
$
367,172
210,684
576,109
5,554,730
336,269
305,307
363,080
7,713,351
375,771
222,609
560,452
4,452,749
154,773
306,814
190,168
6,263,336
$
$
On January 1, 2019, the Company recorded a net increase to beginning retained earnings of $1,456,160 due to the
cumulative impact of adopting the standard. The adoption did not have a significant impact on the Company’s
Consolidated Financial Statements for the year ended December 31, 2019 and, as a result, comparisons of revenues and
operating profit performance between periods are not materially affected by the adoption of this ASU.
Note 22 – Subsequent events
The Company has evaluated subsequent events through March 9, 2020, in connection with the preparation of these
financial statements which is the date the financial statements were available to be issued.
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53
BRANCH LOCATIONS
Chesapeake
821 North Battlefield Boulevard,
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
Opening Soon
Virginia Beach – Pungo
1776 Princess Anne Road, Unit S
www.farmersbankva.com
757-242-6111
FARMERS BANK
SERVING THE COMMUNITY SINCE 1919
www.farmersbankva.com