2021
Annual
Report
FARMERS BANKSHARES, INC.
WWW.FARMERSBANKVA.COM
Farmers Bank remains
viable, relevant and
important to the
communities we serve
and the people we employ.
Countless customers have
relied on Farmers Bank
to help build their home,
grow a successful business
or save for the future.
2021
As many of you are aware from prior recent
communications, we are currently working through
several challenges that often accompany change.
For many years Farmers Bank operated essentially
as a family business, even as the Company has
grown and our shareholder base and geographic
footprint have expanded, we still consider our
employees, customers and shareholders to be part
of the Farmers Bank family. Leadership changes
are sometimes difficult and growing pains are
often anticipated. We plan to update you on these
challenges at our annual shareholders meeting on
May 12, 2022. In the meantime, we want to use
this communication to highlight the profitable
year that 2021 proved to be and share some of the
positive initiatives we are currently working on and
have planned for the future.
Our seventh year of record net income amounted to
$8,485,959 or $2.72 per share in 2021, a 56.98%
increase from the $5,405,629 or $1.74 per share,
reported for 2020. Return on average assets of
1.44% for 2021 compared favorably to the 2020
results of 1.05%. Return on average equity as of
December 31, 2021, was 12.41% as compared to
8.70% for the same period of the prior year. Return
on average tangible common equity was 14.56% as
of December 31, 2021 and compared favorably to
10.45% as of December 31, 2020.
Dividends increased by 16.67% from $0.48 per
share in 2020 to $0.56 per share in 2021 enhancing
shareholder value in a meaningful way. Our
dividend yield continues to represent an attractive
return, especially in light of the current low interest
rate environment, and our price to tangible book
value is comparable to other community banks in
our peer group.
Our balance sheet continued to be affected in
2021 by excess cash in the economy resulting from
monetary policy and COVID-19 related relief
programs. We again were able to serve our small
business customers through participating in the
second round of the Small Business Administration’s
Paycheck Protection Program. We provided an
additional $12.3 million in PPP loans to 135
customers during 2021. All PPP loans have now
been forgiven or repaid in full. Commercial and
consumer deposit customers continued to have
high levels of cash which caused our balance sheet
liquidity to be inflated. Historically, over the ten-
year period prior to 2020, we saw fluctuations in
deposits averaging approximately $7 million per
year. Since December 31, 2019, our deposits have
increased by $146 million dollars, significantly
above the yearly average in years prior. Many banks
are experiencing this same influx which is driving
fierce competition for loan opportunities and
reducing loan pricing to levels below what a normal
market would dictate. While our loan to deposit
ratio has decreased from 2019 levels, our peer group
has experienced similar percentage declines and our
position within that peer group and our strategic
direction regarding credit have not changed.
The gain on the sale of other real estate owned
boosted 2021 net income by approximately $2.6
million, after tax. Excluding this extraordinary item,
we still posted record earnings of $5.9 million. Our
mortgage and insurance partnerships contributed
significantly to earnings in 2021, the result of our
intentional strategic focus on growing non-interest
income businesses over the last several years. While
the insurance business is relatively predictable,
the mortgage business is inherently cyclical and
is not expected to contribute as significantly in
2022. We are focused on loan growth in our newer
markets of Virginia Beach and Chesapeake and new
opportunities to expand non-interest income.
Non-interest expenses increased approximately
3.95% when comparing 2021 to 2020. Investing
in talent and premises to expand our Virginia
Beach and Pungo markets predominantly drove
this increase. In addition to those expansion costs,
approximately $290 thousand in non-recurring
retirement benefits were expensed in 2021. Moving
forward, we continue to focus on prudent growth as
well as realizing efficiencies within our organization
so we can continue to deliver a superior customer
experience while operating in the most cost-effective
way possible.
Dear Shareholder,
We finalized renovations of our permanent location
in the Pungo area of Virginia Beach and officially
opened that full-service branch in November. We
also hired a seasoned lender and support staff from
the Lynnhaven area of Virginia Beach and plan to
finalize a loan production office in that market by
early second quarter. We have already experienced
some loan growth from that investment and look
forward to this team introducing the Farmers Bank
brand of banking to a new market of customers.
As shareholders you should expect the bank to
provide a fair rate of return on your investment
in the form of dividends and appreciation in the
value of your stock. We feel a great obligation to
deliver on that expectation. Strategic investments
over the last few years have diversified the Bank’s
revenue sources. Our expanded branch network
has introduced the Bank to new communities
that we believe will be the primary source of loan
growth for the next several years. Our talented
and hardworking employees allow us to operate
efficiently and effectively in an increasingly complex
environment. Our capital position allows us to
continue to pursue strategic investments in non-
interest income businesses such as insurance and
possibly wealth management. Strong credit quality
should minimize problems in times of economic
stress. In short, Farmers Bank is well positioned to
thrive for the next 100 years.
Looking back to 2010, there were 104 commercial
banks headquartered in the State of Virginia. As
of 2021, there were 63 remaining. Though there
has been considerable consolidation in the banking
industry, we believe a true community bank
like Farmers Bank remains viable, relevant and
important to the communities we serve and the
people we employ. Countless customers have relied
on Farmers Bank to help build their home, grow
a successful business or save for the future. Our
employees are active in their communities, serving
non-profit causes that improve the quality of life
for everyone. The Bank contributes financially to
worthy causes throughout our footprint, helping
to ensure organizations have the resources they
need to serve the community. With the support of
our shareholders, customers and employees, we are
confident in our ability to continue to successfully
operate as one of the few independent community
banks in southeastern Virginia.
Thank you for the confidence and the support you
have shown with your investment over the years.
We appreciate each of you.
Sincerely,
William A. Gwaltney, Jr.
Chairman
Vernon M. Towler
President and Chief Executive Officer
William A. Gwaltney, Jr.
Chairman /
President, Indika Farms, Inc.
Kent B. Spain
Vice Chairman /
Executive Vice President,
Suffolk Insurance Corporation
FARMERS BANKSHARES, INC. BOARD OF DIRECTORS
G. Thomas Alphin, Jr.
Co-Owner, Commonwealth Gin
E. Warren Beale, Jr.
Director Emeritus / Retired Entrepreneur
William L. Chorey
Owner/Broker, Chorey & Associates Reality, Ltd.
J. Clifton Harrell, Jr.
President, Suffolk Iron Works, Inc.
Richard J. Holland, Jr.
Retired Bank CEO
Gregory P. Marshall
President, Tymar Development, Inc.
Tiffany McMillian-McWaters
Deputy General Counsel, Franchise Group, Inc.
John T. Orlando
President, Financial Security Advisory, Inc.
David T. Owen
President, Wakefield Farm Service, Inc.
William H. Riddick, III
Attorney at Law, Riddick & Pope, PC
O. A. Spady
Retired Entrepreneur
Vernon M. Towler
President & Chief Executive Officer
Vernon M. Towler
President & Chief
Executive Officer
Kathy C. Bryant
Senior Vice President/
Director of Human Resources
and Retail Administration
Kristy E. DeJarnette
Executive Vice President/
Chief Financial Officer
Andrew D. Perkins
Senior Vice President/
Chief Credit Officer
Chad A. Rountree
Senior Vice President/
Western Tidewater Market
Leader
Thomas L. Woodward, III
Executive Vice President/
Chief Lending Officer
C. Thomas Eure, Jr.
Vice President/Director of
Operations and Technology
Susan F. Boone
Executive Assistant/
Corporate Secretary
Steven M. Byrd
Sr. Vice President/Virginia
Beach Market Executive
Jeffrey S. Creekmore
Sr. Vice President/Chesapeake
Market Executive
Lauren P. Harper
Sr. Vice President/Loans
Kelley T. Healey
Sr. Vice President/Loans
Charles A. Powers, II
Sr. Vice President/Loans
Deborah R. Cagle
Vice President/Retail Manager
Kelly M. Clinton
Vice President/Portfolio Manager
Kelly D. DeWitt
Vice President/BSA/AML/OFAC/
Security Officer
Pamela N. Ellyson
Vice President/Dir. Of Treasury
Mgmt. Services
Dianne M. Henry
Vice President/Retail
Jamie L. Johnson
Vice President/Compliance Officer
JoAnne F. Joyner
Vice President/Retail
Erin W. Park
Vice President/Controller
Eric N. Shaffner
Vice President/Loans
Meghan D. White
Vice President/Loan Processing
Manager
Sandra H. Williams
Vice President/Retail
Lauren C. Acey
Asst. Vice President/Retail
Amy A. Copeland
Asst. Vice President/Marketing
Mgr./Project Coordinator
Chantal N. Dalton
Asst. Vice President/Retail
Candace D. Delia
Asst. Vice President/Retail
Melanie S. Gwaltney
Asst. Vice President/
Operations Mgr.
Christina I. Martin
Asst. Vice President/Loans
Donna Renee Scott
Asst. Vice President/Retail
Glynda F. Williams
Asst. Vice President/Retail
OFFICERS
Timothy K. Palmer
Chairman
Attorney at Law & Certified
Public Accountant,
Palmer Elder Law
James C. Adams, III
President, Featherlite Coaches
Mark H. Brinkley
President, C.W. Brinkley, Inc.
Construction
Richard L. Evans
President, Chesapeake Controls
Nicole J. Harrell
Attorney at Law, Kaufman &
Canoles
Brian L. Johnson, M.D.
Virginia Dermatology
Charles S. Lowder
Certified Public Accountant,
Charles S. Lowder & Co., LLC
Roy A. Runyon, III
Wealth Advisor, Beacon Harbor
Wealth Advisors
Joseph Wayne Scott
Certified Public Accountant,
Robb, Scott, Bradshaw & Rawls
Clay K. White
President, Starr Motors, Inc.
SUFFOLK COMMUNITY BOARD
Richard H. Matthews,
Chairman
Attorney at Law, Pender &
Coward, P.C.
James C. Bowen, Sr.
President, South Norfolk
Trucking, Inc.
Rhonda Bridgeman
President, Comfort System of
Virginia, Inc.
William E. Crawley
President, East Coast
Surety Solutions
Jane D. Cullipher
Owner, Cullipher Farms
William B. Higgins
Owner, Jack’s Towing
Kelley C. Holland
General Counsel,
The Hourigan Group
Robert R. Kinser
Attorney at Law,
Basnight, Kinser, Leftwich &
Nuckols, P.C.
Michael R. Meiggs
Retired, Verizon
George Thomas Minton, III
Owner, Minton Interests, LLC
Marvin M. Rollins, III
Vice President, M.M. Rollins &
Company
EASTERN TIDEWATER COMMUNITY BOARD
Vincent Carollo
Chairman
Owner, Anna's Ristorante &
JVC Holdings, LLC
Christopher T. Alphin
Commonwealth Gin
N.F. Carr, Jr.
Retired Banker
P. Milton Cook, Jr. D.D.S.
P. Milton Cook, Jr., P.C.
James H. Lee, IV
Owner, Flaggy Run Farms
Randolph H. Pack
President, Smithfield Station
John T. Randall
Attorney at Law,
Randall Page, P.C.
Sharon C. Stallings
CEO, Hampton Roads
Contracting, Inc.
T. Craig Stallings
Certified Public Accountant,
Craig Stallings and Associates
WESTERN TIDEWATER COMMUNITY BOARD
Financial Highlights
At or for the Years Ended December 31,
2021
2020
2019
(Dollars in thousands, except per share data)
Summary of Operations
Interest income
$17,281
$17,597
$18,931
Interest expense
1,643
2,184
3,129
Net interest income
15,638
15,413
15,802
Provision for loan losses
-
921
-
Net interest income after provision for loan losses
15,638
14,492
15,802
Non-interest income
12,985
9,591
7,713
Non-interest expense
18,082
17,396
17,419
Income before income taxes
10,541
6,687
6,096
Income taxes
1,639
815
738
Net income attributable to noncontrolling interest
416
466
262
Net income
8,486
5,406
$5,096
Per Share and Shares Outstanding (1)
Basic net income
$2.72
$1.74
$1.65
Book value at end of period
$21.42
$20.65
$18.17
Tangible book value at end of period
$18.26
$17.35
$14.74
Basic weighted average shares outstanding
3,124,042
3,104,776
3,087,868
Dividends per share
$0.56
$0.48
$0.46
Shares outstanding at period end
3,129,010
3,108,462
3,092,133
Balance Sheet Data
Total assets
`$623,455
$551,918
$476,571
Total loans, net (excluding SBA PPP loans receviable)
255,629
261,659
261,064
Total deposits
531,625
453,222
385,517
Borrowings
-
10,000
15,000
Selected Performance Ratios (Bank Only)
Return on average assets
1.48%
1.08%
1.14%
Return on average stockholders’ equity
12.16%
8.51%
9.29%
Net interest margin, tax equivalent (2)
3.06%
3.53%
3.83%
Non-interest income as a percentage of total revenue (3)
45.37%
38.36%
32.80%
Efficiency ratio (4)
63.05%
69.09%
72.79%
Asset Quality Ratios
Nonperforming loans to period-end loans
0.42%
0.13%
0.28%
Allowance for loan losses to period-end loans
2.32%
2.23%
2.13%
Net charge-offs to average loans outstanding
0.00%
0.09%
0.08%
Capital (Bank Only)
Tier 1 leverage ratio
10.20%
10.09%
10.35%
Total risk-based capital ratio
17.12%
15.99%
15.09%
Stockholder’s equity
$73,259
$70,488
$60,395
(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.
2019
2020
2021
$- $2,000 $4,000 $6,000 $8,000 $10,000
Net Income
2019
2020
2021
2019
2020
2021
$- $0.20 $0.40 $0.60
0% 20% 40% 60%
Dividends Per Share
Non-Interest Income as a % of Revenue
Farmers Bankshares, Inc.
Consolidated Financial Statements for Years Ended December 31, 2021 and 2020
Contents
Page
Independent Auditor’s Report .....................................................................................................................
2 - 3
Consolidated Balance Sheets ........................................................................................................................
4
Consolidated Statements of Operations ......................................................................................................
5
Consolidated Statements of Comprehensive Income………………………………………………………………………... 6
Consolidated Statements of Changes in Stockholders' Equity ....................................................................
7
Consolidated Statements of Cash Flows ......................................................................................................
8 - 9
Notes to Consolidated Financial Statements ...............................................................................................
10 - 54
Independent Auditor’s Report
To the Board of Directors and Shareholders
Farmers Bankshares, Inc.
Windsor, Virginia
Opinion
We have audited the consolidated financial statements of Farmers Bankshares, Inc. and its subsidiary (the “Company”), which
comprise the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the
consolidated financial statements (collectively, the financial statements).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are required to be independent of the Company and to meet our other ethical
responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting
principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in
the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the
date that the financial statements are issued (or within one year after the date that the financial statements are available to be
issued, when applicable).
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with
GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood
that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial
statements.
In performing an audit in accordance with GAAS, we:
Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and
design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements.
elliottdavis.com
elliottdavis.com
Raleigh, North Carolina
March 11, 2022
Obtain an understanding of internal control relevant to the audit 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 Company’s internal
control. Accordingly, no such opinion is expressed.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made
by management, as well as evaluate the overall presentation of the financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial
doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
4
The accompanying notes are an integral part of these consolidated financial statements.
Farmers Bankshares, Inc.
Consolidated Balance Sheets
2021
2020
Cash and cash equivalents
Cash and due from banks
24,075,806
$
24,284,709
$
Federal funds sold
4,460,303
4,271,919
Total cash and cash equivalents
28,536,109
28,556,628
Available-for-sale securities (Note 3)
293,923,105
203,766,264
Non-marketable equity securities (Note 10)
7,323,386
6,278,781
Small Business Administration Paycheck Protection Program
loans receivable, net of fees (Note 5)
2,768,597
17,003,711
Loans held for investment, net of allowance for loan losses
of $6,141,756 and $6,346,592, respectively (Note 6)
255,629,098
261,658,559
Premises and equipment, net (Note 7)
6,363,087
6,276,519
Goodwill (Note 9)
6,027,286
6,027,286
Other intangible assets, net (Note 9)
3,863,132
4,222,657
Other real estate owned
147,135
672,404
Accrued interest receivable
1,941,039
1,942,222
Prepaid expenses
597,934
545,975
Net deferred tax asset (Note 15)
665,115
-
Bank-owned annuity contract
2,809,491
2,862,424
Bank-owned life insurance
11,662,450
11,378,398
Derivative asset (Note 4)
-
56,295
Other assets
1,198,532
669,810
594,919,387
523,361,305
Total assets
623,455,496
$
551,917,933
$
Deposits
Noninterest-bearing deposits
188,845,643
$
149,636,591
$
Interest-bearing deposits (Note 11)
342,779,067
303,585,736
Total deposits
531,624,710
453,222,327
Federal Home Loan Bank borrowings (Note 13)
-
10,000,000
Capital notes (Note 12)
8,500,000
8,500,000
Securities sold under agreements to repurchase (Note 13)
7,159,577
6,637,320
Deferred compensation plans (Note 14)
1,825,514
1,721,538
Accrued interest payable
146,909
169,172
Income taxes payable
45,770
600,372
Net deferred tax liability (Note 15)
-
217,264
Other liabilities
4,519,276
4,204,192
Total liabilities
553,821,756
485,272,185
Stockholders' equity
Common stock, $0.125 par value; 50,000,000 shares
authorized; 3,129,010 and 3,108,462 shares issued and
outstanding at December 31, 2021 and 2020, including
nonvested shares of 31,380 and 24,236 shares, respectively
391,127
388,559
Capital surplus
3,589,430
3,357,318
Retained earnings
60,855,661
54,102,943
Accumulated other comprehensive income
2,182,210
6,341,023
Total Farmers Bankshares, Inc. stockholders' equity
67,018,428
64,189,843
Noncontrolling interest
2,615,312
2,455,905
Total stockholders' equity
69,633,740
66,645,748
Total liabilities and stockholders' equity
623,455,496
$
551,917,933
$
December 31,
Assets
Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
5
Farmers Bankshare, Inc.
Consolidated Statements of Operations
2021
2020
Interest income
Interest and fees on loans held for investment
12,307,519
$
13,510,590
$
Interest on taxable available-for-sale securities
2,673,409
1,915,830
Interest on tax-exempt available-for-sale securities
2,204,658
1,965,344
Interest on federal funds sold
24,942
84,859
Other interest income
70,249
120,451
Total interest and dividend income
17,280,777
17,597,074
Interest expense
Interest on deposits
1,304,770
1,786,394
Interest on Federal Home Loan Bank advances
25,238
137,700
Interest on capital notes
268,789
223,700
Interest on repurchase agreements
39,047
36,011
Interest on derivative asset
4,821
-
Interest on federal funds purchased
-
271
Total interest expense
1,642,665
2,184,076
Net interest income
15,638,112
15,412,998
Provision of loan losses
-
921,000
Net interest income after provision for loan losses
15,638,112
14,491,998
Noninterest income
Service charges
489,491
456,989
Income from automated teller machines and bank card interchange
706,159
578,673
Insurance commissions
6,149,841
6,348,498
Net gain on disposition of available-for-sale securities
377,017
607,090
Gain on terminated derivative asset
433,138
-
Income on bank owned life insurance
284,052
299,617
Net gain on sale of other real estate owned
3,110,320
-
Net gain on sale of premises and equipment
44,731
-
Other income
1,390,153
1,300,472
Total noninterest income
12,984,902
9,591,339
Noninterest expense
Salaries and employee benefits
10,893,970
10,338,768
Equipment expense
1,176,138
1,192,120
Occupancy expense
816,145
943,872
Bank franchise tax
563,365
524,048
Advertising and marketing
462,782
399,127
Data processing
1,538,795
1,500,773
Loan related legal and other expenses
113,353
131,865
Federal Deposit Insurance Corporation assessment
150,000
120,493
Net loss on sale of premises and equipment
-
26,932
Other
2,367,931
2,218,487
Total noninterest expense
18,082,479
17,396,485
Income before income taxes & noncontrolling interest
10,540,535
6,686,852
Income tax expense (Note 15)
1,638,562
814,662
Net income
8,901,973
$
5,872,190
$
Net income attributable to noncontrolling interest
416,014
466,561
Net income attributable to Farmers Bankshares, Inc.
8,485,959
$
5,405,629
$
Basic earnings per common share (Note 21)
2.72
$
1.74
$
Diluted earnings per common share (Note 21)
2.71
$
1.74
$
Years Ended December 31,
6
The accompanying notes are an integral part of these consolidated financial statements.
Farmers Bankshares, Inc.
Consolidated Statements of Comprehensive Income
2021
2020
Net income
8,901,973
$
5,872,190
$
Other comprehensive income:
Net unrealized holding (losses)/gains on available-for-sale securities
(4,816,044)
5,243,609
Tax effect
1,011,369
(1,101,158)
Unrealized holding (losses)/gains on available-for-sale securities,
net of tax
(3,804,675)
4,142,451
Unrealized (loss) gain on interest rate swap designated as cash flow hedge
(68,117)
68,117
Tax effect
11,822
(11,822)
Unrealized (loss) gain on interest rate swap designated as cash flow
hedge, net of tax
(56,295)
56,295
Reclassification adjustment for net realized gains on
available-for-sale securities
(377,017)
(607,090)
Tax effect
79,174
127,489
Reclassification adjustment for net realized gains, net of tax
(297,843)
(479,601)
Reclassification adjustment for net realized gain
on terminated derivative asset
(433,138)
-
Tax effect
90,959
-
Reclassification adjustment for net realized gains on
terminated derivative asset, net of tax
(342,179)
-
Other comprehensive gain income (loss), net of tax
(4,158,813)
3,719,145
Comprehensive income
4,743,160
$
9,591,335
$
Years Ended December 31,
The accompanying notes are an integral part of these consolidated financial statements.
7
Farmers Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Balances, December 31, 2019
386,518
$
3,000,031
$
50,175,584
$
2,621,878
$
2,101,915
$
58,285,926
$
Net income
-
-
5,405,629
-
466,561
5,872,190
Other comprehensive income
-
-
-
3,719,145
-
3,719,145
Distribution of interest in Manry Rawls, LLC
-
-
-
-
(112,571)
(112,571)
Issuance of common stock - director stock plan
533
65,992
-
-
-
66,525
Stock based compensation
1,508
291,295
-
-
-
292,803
Cash dividends declared on common shares, $0.48 per share
-
-
(1,478,270)
-
-
(1,478,270)
Balances, December 31, 2020
388,559
$
3,357,318
$
54,102,943
$
6,341,023
$
2,455,905
$
66,645,748
$
Net income
-
-
8,485,959
-
416,014
8,901,973
Other comprehensive loss
-
-
-
(4,158,813)
-
(4,158,813)
Distribution of interest in Manry Rawls, LLC
-
-
-
-
(256,607)
(256,607)
Issuance of common stock - director stock plan
832
99,068
-
-
-
99,900
Stock based compensation
1,736
133,044
-
-
-
134,780
Cash dividends declared on common shares, $0.56 per share
-
-
(1,733,241)
-
-
(1,733,241)
Balances, December 31, 2021
391,127
$
3,589,430
$
60,855,661
$
2,182,210
$
2,615,312
$
69,633,740
$
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Non-
controlling
Interest
8
The accompanying notes are an integral part of these consolidated financial statements.
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flows
2021
2020
Cash flows from operating activities
Net income
8,901,973
$
5,872,190
$
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses
-
921,000
Distribution of interest in Manry Rawls, LLC
(256,607)
(112,571)
Depreciation
454,993
530,173
Amortization of intangible assets
359,525
359,527
Deferred income tax expense (benefit)
208,164
(739,945)
Amortization of investment securities premiums
851,607
944,560
Net gain on disposition of available-for-sale securities
(377,017)
(607,090)
Gain on terminated derivative asset
(433,138)
-
Net gain on sale of other real estate owned
(3,110,320)
-
Net gain on sale of premises and equipment
(44,731)
-
Increase in cash value of bank owned life insurance and annuity
(284,052)
(221,763)
Decrease in cash value of annuity
52,933
50,718
Stock based compensation
134,780
292,803
Issuance of stock to directors
99,900
66,525
Change in operating assets and liabilities:
Interest receivable
1,183
(135,236)
Interest payable
(22,263)
(129,813)
Prepaid expenses
(51,959)
(37,209)
Income taxes receivable
-
54,235
Other assets
(528,723)
727,932
Deferred compensation
103,976
98,310
Income taxes payable
(554,602)
600,372
Other liabilities
320,374
(472,401)
Net cash provided by operating activities
5,825,996
8,062,317
Cash flows from investing activities
Proceeds from sales, prepayments and maturities of
available-for-sale securities
50,738,792
55,052,624
Purchase of available-for-sale securities
(146,563,285)
(109,220,208)
Proceeds from terminated derivative asset
427,850
-
Proceeds from sale of non-marketable equity securities
577,900
641,000
Purchase of non-marketable equity securities
(83,400)
(1,203,000)
Purchase of other equity investments, net
(1,539,105)
(451,792)
Proceeds from the sale of other real estate
3,635,589
-
SBA PPP loan originations, net of repayments
14,155,411
(17,003,711)
Increase (decrease) in loans, net
6,109,164
(1,515,150)
Proceeds from sale of premises and equipment
53,501
-
Purchases of premises and equipment
(550,331)
(1,037,725)
Net cash used in investing activities
(73,037,914)
(74,737,962)
Cash flows from financing activities
Cash dividends paid on common shares
(1,733,241)
(1,478,270)
Proceeds from issuance of capital notes
-
8,500,000
Repayment of capital notes
-
(6,000,000)
Repayment of FHLB borrowings
(10,000,000)
(5,000,000)
Net increase in noninterest-bearing deposits
39,209,052
33,401,686
Net increase in interest-bearing deposits
39,193,331
34,303,581
Net increase in securities sold under agreements to repurchase
522,257
1,495,465
Net cash provided by financing activities
67,191,399
65,222,462
Net decrease in cash and cash equivalents
(20,519)
(1,453,183)
Cash and cash equivalents
Beginning of the year
28,556,628
30,009,811
End of year
28,536,109
$
28,556,628
$
Years Ended December 31,
The accompanying notes are an integral part of these consolidated financial statements.
9
Farmers Bankshares, Inc.
Consolidated Statements of Cash Flow (concluded)
2021
2020
Supplemental disclosure of cash flow information
Cash paid for
Income taxes
985,000
$
750,000
$
Interest
1,664,928
2,313,889
Supplemental schedule of non-cash investing activities
Change in unrealized (losses) gains on available-for-sale securities,
net of income tax
(3,518,791)
$
3,719,145
$
Change related to terminated derivative asset, net of income tax
(640,022)
-
Years Ended December 31,
10
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
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 resulted 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. The allocation of the purchase price resulted 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.
11
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
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.
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).
Derivative financial instruments – Derivatives are recognized as either assets or liabilities and are recorded at fair value on the
Company’s consolidated balance sheets. The accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and resulting designation. The Company’s hedging policies permit the use of various derivative financial
instruments to manage interest rate risk or to hedge specified assets and liabilities.
To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being
hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated
as fair value hedges, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item
are included in current earnings. If derivative instruments are designated as cash flow hedges, fair value adjustments related
to the effective portion are recorded in other comprehensive income and are reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur. Actual cash
receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest
income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses
whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or
cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue
hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into
current earnings and the derivative instrument is reclassified to a trading position recorded at fair value.
12
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Derivative financial instruments (concluded) – For derivatives not designated as hedges, changes in fair value are recognized in
earnings, in noninterest income. For additional discussion related to the determination of fair value related to derivative
instruments, see Note 4.
Loans - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio
is represented by commercial and consumer mortgage loans throughout Southeastern Virginia. The ability of the Bank’s
debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans held for investment that management has the intent and ability to hold for the foreseeable future or until maturity
generally are stated at their outstanding unpaid principal balances. Loans held for sale are originated and intended for sale in
the secondary market. These loans are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any,
are recognized through charges to income. Interest income is accrued on the unpaid principal balance for all loan classes.
Discounts and premiums are amortized to income using the interest method. Net deferred fees and costs are amortized over
the lives of the applicable loans using the effective interest rate method.
Allowance for loan losses - The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review
of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available.
The allowance consists of a specific, a historic and a qualitative component. The specific component relates to loans that are
considered impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price less selling costs) of an impaired loan are lower than the carrying value of
that loan. The historic component covers non-classified and criticized loans and is based on historical loss experience adjusted
for qualitative factors. The qualitative reserve of the allowance reflects adjustments to historical experience to account for
current conditions impacting the loan portfolio.
The CARES Act also established the Paycheck Protection Program (“PPP”), which allocated funding for loans guaranteed by
the Small Business Administration (“SBA”). The program approves the SBA to forgive loans made by approved lenders to
eligible borrowers for payroll, mortgage interest, rent and utilities. Due to the unique nature of these provisions, PPP loans
have been disclosed as a separate balance sheet item. PPP loans were evaluated separately for the allowance for loan losses
given the explicit government guarantee. This analysis, which incorporated historical industry experience with similar SBA
guarantees and our personal experience with the beginning of the forgiveness process, concluded a remote likelihood of loss
and therefore no allowance for loan losses has been assigned to these loans.
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.
13
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Allowance for loan losses (concluded) - 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.
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.
14
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Leases (concluded) – 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 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 8 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.
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
2021, we identified one reporting unit with goodwill: Manry Rawls. For purposes 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, 2021.
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 2021 testing. The Company monitored events and
circumstances during the fourth quarter of 2021, and it determined that there were no triggering events requiring an updated
impairment test as of December 31, 2021.
15
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Goodwill and other intangibles (concluded) - 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 insurance acquisitions, is 15 years. Note 9 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. Because of the
redemption provisions of the Federal Reserve Bank (FRB) and Federal Home 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 2021 or 2020.
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, 2021 and 2020.
The years ending on or after December 31, 2018 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.
16
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Earnings per common share - Basic earnings per share (EPS) is computed by dividing income available to common shareholders
by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution
if restricted stock, or other common stock equivalents, would result in the issuance of additional shares of common stock that
share in earnings. Potential common shares that may be issued by the Company relate solely to outstanding non-vested
restricted stock.
Off-balance sheet financial instruments - In the ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial
letters of credit, standby letters of credit, and financial guarantees written. Such financial instruments are generally recorded
in the financial statements when they become payable. A reserve for these off-balance sheet financial instruments is considered
immaterial as is the fair value of the financial guarantees.
Use of estimates - The preparation of financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Estimation of fair values - The following notes summarize the major methods and assumptions used in estimating the fair
value of financial instruments:
Short-term financial instruments are valued at their carrying amounts included in the Company’s balance sheet, which are
reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies
to cash and cash equivalents, deposits in other banks, federal funds sold, and short-term borrowings.
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.
17
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (continued)
Estimation of fair values (concluded) - 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, 2021 and 2020 is sufficient to cover inherent losses in the portfolio.
Impact of COVID-19 - On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was
signed into law. The CARES Act was designed to provide financial relief to the American people and businesses in response
to the economic consequences from the COVID-19 pandemic. The provisions of the CARES Act included an election to not
apply the guidance on accounting for troubled debt restructurings to loan modifications related to the adverse effects of
COVID-19 granted to borrowers that were current as of December 31, 2019. The relief applies to modifications made from
March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency
declared by the President of the United States. The Company elected to adopt these provisions of the CARES Act. The
Company made 66 loan modifications that totaled $37.6 million pursuant to the terms of the CARES Act Section 4013 and
as of December 31, 2020 all loans had returned to their contractual payment structure. No additional modifications were
made during the year ended December 31, 2021.
The CARES Act also established PPP loans, which allocated funding for loans guaranteed by the SBA. The program approves
the SBA to forgive loans made by approved lenders to eligible borrowers for payroll, mortgage interest, rent and utilities. Due
to the unique nature of these provisions, PPP loans have been disclosed as a separate balance sheet item.
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
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. 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.
18
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 2 - Summary of significant accounting policies (concluded)
Recent accounting pronouncements (concluded) - In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill
and Other (Topic 350): Simplifying the test for Goodwill Impairment. This ASU is intended to simplify goodwill impairment
testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the
reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value
of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount
exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated
to that reporting unit. The amendments are effective for 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 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, 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 does not expect the amendments to the standard to have a material effect 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 2020
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 become effective for the
Company on January 1, 2020. These amendments did not have a material effect on the Company’s financial statements.
19
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 3 - Available-for-sale securities
At December 31, 2021 and 2020, securities are as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2021
Cost
Gains
Losses
Value
State and municipal securities
$ 90,566,401
$ 4,746,876
$ - $ 95,313,277
Residential mortgage-backed securities
119,792,643
653,407
1,541,623 118,904,427
Collateralized mortgage obligations
20,529,108
75,378
427,202 20,177,284
Small Business Administration loan securities
60,272,660
307,642
1,052,185 59,528,117
Total
$ 291,160,812
$ 5,783,303
$ 3,021,010 $ 293,923,105
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2020
Cost
Gains
Losses
Value
State and municipal securities
$ 78,341,249 $ 5,323,913
$ - $ 83,665,162
Residential mortgage-backed securities
60,449,227 1,843,843
1,663 62,291,407
Collateralized mortgage obligations
28,816,000 363,163
15,180 29,163,983
Small Business Administration loan securities
28,204,435 468,555
27,278 28,645,712
Total
$ 195,810,911 $ 7,999,474
$ 44,121 $ 203,766,264
At December 31, 2021 and 2020, 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:
Less than
More than
Total
December 31, 2021
Fair Value
12 Months
12 Months
Losses
Available-for-sale securities:
Residential mortgage-backed securities
$ 77,617,538
$ 1,541,623
$ -
$ 1,541,623
Collateralized mortgage obligations
14,477,511
427,202
-
427,202
Small Business Administration loan securities
42,375,872
905,987
146,198
1,052,185
Total temporarily impaired
investment securities
$ 134,470,921
$ 2,874,812
$ 146,198
$ 3,021,010
Losses Existing for:
Continuous Unrealized
20
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 3 - Available-for-sale securities (continued)
Less than
More than
Total
December 31, 2020
Fair Value
12 Months
12 Months
Losses
Available-for-sale securities:
Residential mortgage-backed securities
$ 2,960,384
$ 1,663 $ -
$ 1,663
Collateralized mortgage obligations
3,485,457
15,180 -
15,180
Small Business Administration loan securities
9,751,073
26,966 312
27,278
Total temporarily impaired
investment securities
$ 16,196,914
$ 43,809 $ 312
$ 44,121
Losses Existing for:
Continuous Unrealized
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. The Company’s 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, 2021 and 2020, securities with a carrying value of approximately $61,961,386 and $54,898,106, respectively,
were pledged to the Commonwealth of Virginia to secure public deposits. In addition, at December 31, 2021 and 2020,
securities with a carrying value of $-0- and $3,312,240, respectively, were pledged to the FHLB to secure advances. Investment
securities with carrying values of $11,755,934 and $8,011,482 were pledged to secure repurchase agreements at December 31,
2021 and 2020, respectively.
21
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 3 - Available-for-sale securities (concluded)
At December 31, 2021, the amortized cost and fair value of debt securities by maturity date are as follows:
Amortized
Fair
Cost
Value
Due in one year or less
$ 928,143
$ 950,908
Due from one to five years
163,921
169,400
Due from five to ten years
12,820,411
13,709,798
Due after ten years
277,248,337
279,092,999
Total debt securities
$ 291,160,812
$ 293,923,105
Gross realized gains on available-for-sale securities were:
2021
2020
$ 377,017
$ 518,692
-
88,398
Total gross realized gains
$ 377,017
$ 607,090
State and municipal securities
Residential mortgage-backed securities
Proceeds from the sale of available-for-sale securities totaled $8,513,353 and $11,245,823 for the years ended December 31,
2021 and 2010, respectively.
Note 4 – Derivatives
Cash Flow Hedges of Interest Rate Risk – The Company’s objective in using certain interest rate derivatives are to add stability to
interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may use
interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges
involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over
the life of the agreements without exchange of the underlying notional amount.
The Company entered into an interest rate swap during 2020 to reduce the exposure to variability in interest-related cash
outflows attributable to changes in forecasted rates on short-term FHLB borrowings. These derivative instruments are designed
as cash flow hedges. The hedged item is the LIBOR portion of the series of future adjustable rate borrowings over the term
of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transaction
attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The Company tests for hedging
effectiveness on a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qualify
as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in
the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the
derivatives is recognized directly in earnings. The Company has not recorded any hedge ineffectiveness since inception. The
notional amount of the swap as of December 31, 2020 was $10,000,000 and the fair value was, respectively. In February 2021,
the Company terminated the swap and recorded a gain of $433,138.
Risk Management Objective of Using Derivatives – When using derivatives to hedge cash flow risks, the Company exposes itself
to potential credit risk from the counterparty to the hedging instrument. This credit risk is normally a small percentage of the
notional amount and fluctuates as interest rates change. The Company analyzes and approves credit risk for all potential
derivative counterparties prior to execution of any derivative transaction. The Company seeks to minimize credit risk by
dealing with highly rate counterparties and by obtaining collateralization for exposures above certain predetermined limits. If
significant counterparty risk is determined, the Company would adjust the fair value of the derivative recorded asset balance
to consider such risk.
22
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 5 – Small Business Administration Paycheck Protection Program Loans Receivable
Pursuant to the CARES Act, the SBA provided forgivable loans to small businesses through the Paycheck Protection Program.
These loans have 2 and 5 year terms, an interest rate of 1.00% and carry a 100% guarantee of the SBA. Due to the guarantee
of the SBA, these loans require no allowance for loan loss. The Bank processed 259 Paycheck Protection Program loans,
which totaled $24.9 million in approvals from the SBA. During the third quarter of 2020 the SBA began accepting
applications from borrowers for forgiveness of PPP loans. As of December 31, 2020 the Bank had received $7.6 million in
payments on 45 loans being fully forgiven. There were 214 PPP loans remaining with a recorded investment of $17.0 million
as of December 31, 2020. The Bank received $1.04 million in loan fees from the SBA associated with the processing of PPP
loans through December 31,2020. As of December 31, 2020 the Bank had recognized $556,000 in loan fees and had $483,000
in deferred loan fees remaining that were associated with PPP loans. As of December 31, 2021, the Bank received payments
totaling $17.0 million on the remaining 214 PPP loans being fully forgiven. During 2021, the Bank recognized an additional
$483,000 of loan fees related to the 2020 Paycheck Protection Program loans.
The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, expanded on some of the benefits made available
under the CARES Act, including the PPP program, and provided further economic stimulus. On March 11, 2021, President
Biden signed into law the American Rescue Plan which provided a further $1.9 trillion of pandemic relief. The Bank processed
an additional 135 Paycheck Protection Program loans in 2021, which totaled $12.3 million in approvals from the SBA. As of
December 31, 2021 the Bank had received $9.4 million in payments on 128 loans being fully forgiven. There were 7 PPP
loans remaining with a recorded investment of $2.8 million as of December 31, 2021. The Bank received $630,000 in loan
fees from the SBA associated with the processing of 2021 PPP loans. As of December 31, 2021 the Bank recognized $547,000
in loan fees related to the 2021 PPP loan fees and had $83,000 in deferred loan fees remaining that that were associated with
2021 PPP Loans.
Any loan fees received and associated costs incurred were accounted for in the same manner as other loans and were deferred
with income recognized over the original two year term. As loans are forgiven and repaid by the SBA, the Bank recognizes
any remaining loan fees and costs at the time of forgiveness.
23
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - 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, 2021 and 2020, loans held for investment consisted of the
following:
2021
2020
Construction
$ 31,790,291
$ 29,278,446
Commercial Real Estate:
Non-owner occupied
31,437,963
30,546,095
Owner occupied
76,691,688
78,343,817
Residential 1-4 family
27,816,668
31,145,143
Multifamily
4,578,151
5,725,109
Equity lines of credit
8,606,706
9,183,690
Total mortgage loans on real estate
180,921,467
184,222,300
48,849,981
52,751,952
Agricultural
26,321,058
24,501,916
Individuals
5,471,130
6,276,997
Total loans
261,563,636
267,753,165
(6,141,756)
(6,346,592)
207,218
251,986
Loans, net
$ 255,629,098
$ 261,658,559
Mortgage loans on real estate:
Net deferred loan fees and costs
Commercial and industrial
Less: Allowance for loan losses
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 $31.8 million and $29.3 million at December 31, 2021 and 2020, 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 $27.8 million and $31.1 million at December 31, 2021 and 2020, respectively.
Commercial real estate loans totaled $108.1 million and $108.9 million at December 31, 2021 and 2020, respectively. This
lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well
as non-owner occupied commercial buildings. The Bank generally requires the personal guaranty of borrowers and a
demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be larger in size
and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often
dependent on successful operation or management of the properties.
Multifamily loans totaled $4.6 million and $5.7 million at December 31, 2021 and 2020, 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 $8.6 million and $9.2 million at December 31, 2021 and 2020,
respectively.
24
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 – Loans and Allowance for Loan Losses (continued)
Commercial and Industrial Loans - At December 31, 2021 and 2020, the Bank’s commercial loan portfolio totaled $48.8 million
and $52.8 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 $26.3 million and $24.5 million at December 31, 2021 and 2020, 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 $5.5 million and $6.3 million at December 31, 2021
and 2020, respectively. Overdrafts totaling $17,863 and $12,000 at December 31, 2021 and 2020, 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.
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.
25
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
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.
“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:
26
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
General conformity to the Bank's underwriting requirements, with limited exceptions to the Bank's policy, product
or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk
associated with the exceptions noted.
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be
supplemented with verifiable cash flow from other sources.
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or
liquidation value to the net worth of the borrower or guarantor.
“5” — Weak Pass – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment
or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade
may demonstrate some or all of the following characteristics:
Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present
a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater for
this risk grade, the exceptions may be properly mitigated by other documented factors that offset any additional risks.
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this
time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not
historic) performance.
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral
and liquidation value to the net worth of the borrower or guarantor.
“6” — Special Mention – Special Mention loans include the following characteristics:
Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors;
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected,
weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result
of deviations from prudent lending practices; or
Loans where adverse economic conditions have developed subsequent to the loan origination that do not jeopardize
liquidation of the debt, but do substantially increase the level of risk, may also warrant this rating.
“7” — Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded
to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined
weaknesses requiring corrective action. The weaknesses may include, but are not limited to:
High debt to worth ratios
Declining or negative earnings trends
Declining or inadequate liquidity
Questionable repayment sources
Lack of well-defined secondary repayment source, and
Unfavorable competitive comparisons.
Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings
capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan
balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited
excessive overdue status or extensions and/or renewals.
27
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
“8” — Doubtful – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and
values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur
which would salvage the debt. Among these events are:
Injection of capital
Alternative financing
Liquidation of assets or the pledging of additional collateral.
The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-
accrual status, and no definite repayment schedule exists. Doubtful is a temporary grade where a loss is expected but is
presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
“9” — Loss – Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable
assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather
that it is not practical or desirable to defer writing off the loan even though partial recovery may be effected in the future.
Probable Loss portions of problem assets should be charged against the Allowance for Loan Losses. Loans may reside in this
classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.
The following is a summary of credit quality indicators by class at December 31, 2021 and 2020:
Real Estate Credit Exposures as of December 31, 2021
Construction
Non-owner
occupied
Owner
occupied
Residential
1-4 Family
Multifamily
Equity lines
of credit
Prime
-
$
-
$
-
$
-
$
-
$
-
$
Good
-
-
-
-
-
-
Acceptable 1
2,095
555
2,230
2,136
-
3,807
Acceptable 2
10,802
15,007
39,659
15,247
3,245
4,253
Weak Pass
18,640
15,876
31,852
9,364
1,333
389
Special Mention
253
-
1,855
330
-
119
Substandard
-
-
1,096
740
-
39
31,790
$
31,438
$
76,692
$
27,817
$
4,578
$
8,607
$
Commercial Real Estate
(in thousands)
Other Credit Exposures as of December 31, 2021
Commerical
and industrial
Agricultural
Individuals
Total
Prime
40
$
-
$
9
$
49
$
Good
-
-
-
-
Acceptable 1
6,696
1,027
158
18,704
Acceptable 2
18,078
18,672
334
125,297
Weak Pass
23,628
6,522
4,872
112,476
Special Mention
408
100
98
3,163
Substandard
-
-
-
1,875
48,850
$
26,321
$
5,471
$
261,564
$
(in thousands)
28
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
Real Estate Credit Exposure as of December 31, 2020
Construction
Non-owner
occupied
Owner
occupied
Residential
1-4 Family
Multifamily
Equity lines
of credit
Prime
-
$
-
$
-
$
-
$
-
$
-
$
Good
-
-
-
-
-
-
Acceptable 1
2,182
764
2,944
2,072
-
3,732
Acceptable 2
16,964
10,629
44,726
16,155
3,174
4,910
Weak Pass
9,855
19,035
25,507
11,713
2,551
496
Special Mention
277
118
4,024
272
-
22
Substandard
-
-
1,143
933
-
24
29,278
$
30,546
$
78,344
$
31,145
$
5,725
$
9,184
$
Commercial Real Estate
(in thousands)
Other Credit Exposures as of December 31, 2020
Commerical
and industrial
Agricultural
Individuals
Total
Prime
1,042
$
-
$
9
$
1,051
$
Good
-
-
-
-
Acceptable 1
10,621
1,065
169
23,549
Acceptable 2
19,409
18,091
345
134,403
Weak Pass
19,020
5,227
5,530
98,934
Special Mention
2,658
119
224
7,714
Substandard
2
-
-
2,102
52,752
$
24,502
$
6,277
$
267,753
$
(in thousands)
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 loans past due over 90
days accruing interest as of December 31, 2021. There was one loan with a balance of $196,256 that was past due over 90
days accruing interest as of December 31, 2020. Nonaccrual loans as of December 31, 2021 totaled $1,109,472, or 0.42% of
total loans, compared with $171,515, or 0.06% of total loans, as of December 31, 2020. 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, 2021 and 2020
was 3 and 4, respectively.
For the years ended December 31, 2021 and 2020, 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
$12,743 and $14,310 for the years ended December 31, 2021 and 2020, respectively.
29
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
The following is a breakdown of nonaccrual loans as of December 31, 2021 and 2020:
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, 2021
and 2020:
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Greater Than
90 Days Still
Accruing
Total Past
Due
Current
Total Loans
December 31, 2021
Mortgage loans on real estate:
Construction
-
$
-
$
-
$
-
$
-
$
31,790
$
31,790
$
Commercial real estate:
Non-owner occupied
-
-
1,012
-
1,012
31,438
32,450
Owner occupied
-
-
-
-
-
75,680
75,680
Residential 1-4 family
30
-
-
-
30
27,787
27,817
Multifamily
-
-
-
-
-
4,578
4,578
Equity lines of credit
-
-
-
-
-
8,607
8,607
Commercial and industrial
-
-
-
-
-
48,850
48,850
Agricultural
-
-
-
-
-
26,321
26,321
Individuals
-
-
-
-
-
5,471
5,471
Total
30
$
-
$
1,012
$
-
$
1,042
$
260,522
$
261,564
$
(in thousands)
2021
2020
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
1,012,045
$
-
$
Residential 1-4 family
97,427
169,927
Commercial and industrial
-
1,588
Total
1,109,472
$
171,515
$
December 31,
30
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Greater Than
90 Days Still
Accruing
Total Past
Due
Current
Total Loans
December 31, 2020
Mortgage loans on real estate:
Construction
-
$
-
$
-
$
-
$
-
$
29,278
$
29,278
$
Commercial real estate:
Non-owner occupied
-
-
-
-
-
30,546
30,546
Owner occupied
-
-
-
-
-
78,344
78,344
Residential 1-4 family
165
-
106
196
467
30,678
31,145
Multifamily
-
-
-
-
-
5,725
5,725
Equity lines of credit
-
-
-
-
-
9,184
9,184
Commercial and industrial
-
-
-
-
-
52,752
52,752
Agricultural
-
-
-
-
-
24,502
24,502
Individuals
-
-
-
-
-
6,277
6,277
Total
165
$
-
$
106
$
196
$
467
$
267,286
$
267,753
$
(in thousands)
Troubled Debt Restructurings - In order to maximize the collection of loan balances, the Bank evaluates troubled loan accounts
on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be utilized where
there is a reasonable chance that an appropriate modification would allow the Bank’s customers to continue servicing debt.
A loan is a troubled debt restructuring (“TDR”) if both of the following exist: 1) a creditor has granted a concession to the
debtor, and, 2) the debtor is experiencing financial difficulties. Non-accruing loans that are modified can be placed back on
accrual status when both principal and interest are current and it is probable that the Bank will be able to collect all amounts
due (both principal and interest) according to the terms of the loan agreement and a sustained period of payment performance
is demonstrated. Interest on troubled debt restructured loans is accrued at the restructured rates when it is anticipated that
no loss of original principal will occur and a sustained payment performance period is obtained.
For the years ended December 31, 2021 and 2020, the following table presents a breakdown of the types of concession made
by loan class:
Number
of loans
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of loans
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Extended payment terms
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
1
19,892
$
19,892
$
-
-
$
-
$
Residential 1-4 family
3
166,829
166,829
-
-
-
Equity lines of credit
1
120,094
120,094
-
-
-
Total
5
306,815
$
306,815
$
-
-
$
-
$
Year ended December 31, 2021
Year ended December 31, 2020
31
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - 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 2021 or 2020. Within the last 12 months, no loans that were
restructured in 2021 or 2020, subsequently defaulted and were foreclosed upon. These modifications resulted in specific
reserves in the Bank’s allowance for loan losses of $6,252 and $-0- as of December 31, 2021 and 2020, respectively.
There are no TDRs that are on non-accrual status as of December 31, 2021 and 2020, respectively. Five TDRs with a current
principal balance of $297,779 and five TDRs with current principal balance of $634,088 were considered performing loans
and are accruing interest based on their sustained payment performance as of December 31, 2021 and 2020, 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.
Section 403 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR as
defined by GAPP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days
after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United
States under the National Emergencies Act terminates. Accordingly, we offered short-term modifications made in response
to COVID-19 to borrowers who were current and otherwise not past due during 2020. All modified loans have returned to
their contractual payment schedule. Management will continue to review risk grades and update credit risk if additional
modifications are needed.
Impaired Loans - Management considers certain loans graded “doubtful” (loans graded 8) or “loss” (loans graded 9) to be
individually impaired and may consider “substandard” loans (loans graded 7) individually impaired depending on the
borrower’s payment history. Any loans classified as troubled debt restructurings regardless of loan grade are also classified as
impaired loans. The Bank measures impairment based upon discounted expected cash flows or the value of the collateral.
Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to
determine logical and credible discounts that may be needed. Updated appraisals are required for all impaired loans and
typically at renewal or modification of larger loans if the appraisal is more than 12 months old.
Impaired loans for all classes of loans typically include nonaccrual loans, loans over 90 days past due still accruing, troubled
debt restructured loans and other problem loans considered impaired based on other underlying factors. Potential problem
loans totaled $2,177,096 and $2,135,524 as of December 31, 2021 and 2020, 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.
32
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - 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, 2021 and 2020:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2021
Impaired loans without a related
allowance for loan losses
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
136
$
136
$
-
$
150
$
8
$
Residential 1-4 family
179
179
-
189
9
Equity lines of credit
158
158
-
164
8
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
1,012
1,012
256
1,030
-
Residential 1-4 family
692
692
117
712
44
Total impaired loans
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
1,148
$
1,148
$
256
$
1,180
$
8
$
Residential 1-4 family
871
871
117
901
53
Equity lines of credit
158
158
-
164
8
Total impaired loans
2,177
$
2,177
$
373
$
2,245
$
69
$
Year to Date
(in thousands)
33
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2020
Impaired loans without a related
allowance for loan losses
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
122
$
122
$
-
$
122
$
8
$
Owner occupied
1,101
1,101
-
1,114
52
Residential 1-4 family
193
193
-
263
8
Equity lines of credit
24
24
-
24
1
Impaired loans with a related
allowance for loan losses
Mortgage loans on real estate:
Commercial real estate:
Residential 1-4 family
694
694
78
701
36
Commercial and industrial
2
2
2
83
-
Total impaired loans
Mortgage loans on real estate:
Commercial real estate:
Non-owner occupied
122
$
122
$
-
$
122
$
8
$
Owner occupied
1,101
1,101
-
1,114
52
Residential 1-4 family
887
887
78
964
44
Equity lines of credit
24
24
-
24
1
Commercial and industrial
2
2
2
83
-
Total impaired loans
2,136
$
2,136
$
80
$
2,307
$
105
$
Year to Date
(in thousands)
Allowance for Loan Losses - The allowance for loan losses is a reserve established through a provision for loan losses charged to
expense, which represents management’s best estimate for probable losses that have been incurred within the existing portfolio
of loans. The primary risks inherent in the Bank’s loan portfolio, including the adequacy of the allowance or reserve for loan
losses, are based on management’s assumptions regarding, among other factors, general and local economic conditions, which
are difficult to predict and are beyond the Bank’s control. In estimating these risks, and the related loss reserve levels,
management also considers the financial conditions of specific borrowers and credit concentrations with specific borrowers,
groups of borrowers, and industries.
The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans are charged against the
allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries
during the period are credited to the allowance for loan losses. The Bank realized provisions of $-0- and $921,000 for the years
ended December 31, 2021 and 2020, 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.
34
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
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, a slow real estate market and
many businesses impacted by the COVID-19 pandemic. Other factors impacting the allowance at December 31, 2020 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, 2021 and 2020:
December 31,
2020
Charge-offs
Recoveries
Provision
December 31,
2021
Mortgage loans on real estate:
Construction
583
$
-
$
-
$
9
$
592
$
Commercial real estate:
Non-owner occupied
734
-
15
(53)
696
Owner occupied
1,810
-
-
82
1,892
Residential 1-4 family
709
-
38
(111)
636
Multifamily
105
-
-
(28)
77
Equity lines of credit
162
-
10
(35)
137
Commercial and industrial
1,239
-
-
(120)
1,119
Agricultural
472
-
-
(5)
467
Individuals
533
323
55
261
526
6,347
$
323
$
118
$
-
$
6,142
$
(in thousands)
35
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (continued)
December 31,
2019
Charge-offs
Recoveries
Provision
December 31,
2020
Mortgage loans on real estate:
Construction
693
$
-
$
-
$
(110)
$
583
$
Commercial real estate:
Non-owner occupied
540
52
-
246
734
Owner occupied
1,132
-
-
678
1,810
Residential 1-4 family
760
-
41
(92)
709
Multifamily
51
-
21
33
105
Equity lines of credit
340
-
74
(252)
162
Commercial and industrial
1,219
-
4
16
1,239
Agricultural
413
-
-
59
472
Individuals
529
401
62
343
533
5,677
$
453
$
202
$
921
$
6,347
$
(in thousands)
The activity in the allowance for loan loss for 2021 and 2020 are summarized by loan class as follows:
As of December 31, 2021
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
Mortgage loans on real estate:
Construction
-
$
-
$
592
$
31,790
$
Commercial real estate:
Non-owner occupied
256
1,148
696
31,438
Owner occupied
-
-
1,636
75,544
Residential 1-4 family
117
871
519
26,946
Multifamily
-
-
77
4,578
Equity lines of credit
-
158
137
8,449
Commercial and industrial
-
-
1,119
48,850
Agricultural
-
-
467
26,321
Individuals
-
-
526
5,471
373
$
2,177
$
5,769
$
259,387
$
(in thousands)
36
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 6 - Loans and Allowance for Loan Losses (concluded)
As of December 31, 2020
Reserves for
loans
individually
evaluated for
impairment
Loans
individually
evaluated for
impairment
Reserves for
loans
collectively
evaluated for
impairment
Loans
collectively
evaluated for
impairment
Mortgage loans on real estate:
Construction
-
$
-
$
583
$
29,278
$
Commercial real estate:
Non owner occupied
-
122
734
30,424
Owner occupied
-
1,101
1,810
77,243
Residential 1-4 family
78
887
631
30,258
Multifamily
-
-
105
5,725
Equity lines of credit
-
24
162
9,160
Commercial and industrial
2
2
1,237
52,750
Agricultural
-
-
472
24,502
Individuals
-
-
533
6,277
80
$
2,136
$
6,267
$
265,617
$
(in thousands)
Note 7 - Premises and equipment
At December 31, 2021 and 2020, premises and equipment consist of the following:
2021
2020
Land
$ 1,433,787
$ 1,433,787
Buildings
8,670,502
8,432,870
3,214,681
3,106,662
Computer equipment
918,253
876,526
14,237,223
13,849,845
(7,874,136)
(7,573,326)
$ 6,363,087
$ 6,276,519
Equipment, furniture and fixtures
Less accumulated depreciation
Total premises and equipment, net
For 2021 and 2020, depreciation charged to operating expense was $454,993 and $530,173, respectively.
Note 8 – 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. The right-of-use
asset and lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheet.
37
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 8 – Leases (concluded)
The following tables present information about the Company’s leases:
2021
2020
Lease liabilities
$ 741,670
$ 473,714
779,095
497,152
Weighted average remaining lease term (in years)
3.96
4.38
Weighted average discount rate
5.50%
5.50%
Lease Cost
2021
2020
Operating lease cost (1) included in occupany and equipment expense
$ 311,020
$ 365,433
Total lease cost
$ 311,020
$ 365,433
(1) Includes short-term leases, which are immaterial.
Right-of-use assets
December 31,
December 31,
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating
lease liabilities as of December 31, 2021 is as follow:
2022
$ 232,350
226,245
2024
192,888
2025
129,960
After 2025
49,515
Total lease payments
$ 830,958
Less interest
(89,288)
Present value of lease liabilities
$ 741,670
2023
Note 9 – Goodwill and intangible assets
The gross carrying amount and accumulated amortization for the Company’s intangible assets as of December 31,
Gross
Carrying
Accumulated
Amortization
Gross
Carrying
Accumulated
Amortization
Intangible assets subject to amortization
Customer lists
5,392,879
$
1,529,747
$
5,392,879
$
1,170,222
$
Total intangible assets subject to amortization
5,392,879
1,529,747
5,392,879
1,170,222
Goodwill
6,027,286
-
6,027,286
-
Total intangible assets
11,420,165
$
1,529,747
$
11,420,165
$
1,170,222
$
2021
2020
Aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2021 was $359,525,
compared to $359,527 for 2020. The estimated aggregate annual amortization expense for each of the five years subsequent
to December 31, 2021, is $359,525.
38
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 9 – Goodwill and intangible assets (concluded)
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 2021 or 2020.
Balance, December 31, 2020
6,027,286
$
Additionals to goodwill
-
Other adjustments
-
Balance, December 31, 2021
6,027,286
$
Note 10 - Non-marketable equity securities
Non-marketable equity securities consist of the following at December 31, 2021 and 2020:
2021
2020
FHLB stock
$ 276,100
$ 853,900
FRB stock
498,050
414,750
61,300
61,300
Plexus Captial, LLC
3,846,963
2,448,792
Tidewater Home Funding, LLC
1,356,905
1,456,609
750,000
500,000
Community Capital Funds
534,068
543,430
$ 7,323,386
$ 6,278,781
Community Bankers' Bank stock
Total non-marketable equity securities
Senior Housing Crime Prevention Foundation stock
Note 11 - Interest-bearing deposits
Interest-bearing deposits consist of the following at December 31, 2021 and 2020:
2021
2020
NOW accounts
$ 37,198,537
$ 29,652,019
Money market accounts
128,510,925
114,308,682
Personal relationship checking
1,568,335
1,130,907
Business interest checking
35,098,002
25,654,809
46,299,244
36,144,086
47,345,606
47,839,299
46,758,418
48,855,934
$ 342,779,067
$ 303,585,736
Savings accounts
Total interest-bearing deposits
Certificates of deposits and IRAs $250,000 and over
Certificates of deposit and IRAs under $250,000
39
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 11 - Interest-bearing deposits (concluded)
At December 31, 2021, the scheduled maturities of time deposits are as follows:
2022
$ 61,002,218
2023
13,976,495
2024
6,462,921
2025
5,059,428
2026
7,602,962
Thereafter
-
$ 94,104,024
Total time deposits
Note 12 – 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
were not registered under the Securities Act of 1933 and could not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements. The 2017 Notes bore interest at the rate of 3.25% per year with
interest payable quarterly in arrears. The 2017 Notes had a maturity date of March 31, 2022, but were 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 were no assets pledged as collateral for the 2017 Notes.
In the third quarter of 2020, the Company closed the private placement of unregistered debt securities (the “2020 Offering”)
pursuant to which the Company issued $8.5 million in principal of notes comprised of two different maturity and rate terms
(the “2020 Notes A” and “2020 Notes B”). The 2020 Notes A and B 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 2020 Notes A and 2020 Notes B bear interest at the rate of 3.00% and 3.25%,
respectively, per year with interest payable quarterly in arrears. The 2020 Notes A and 2020 Notes B mature on August 14,
2025 and August 14, 2027, respectively. Both notes permit prepayment in whole or in part on or after August 16, 2021 at
the Company’s sole discretion on 30 days written notice to the holders. There are no assets pledged as collateral for the 2020
Notes A or 2020 Notes B. Of these capital notes, $160,000 and $160,000 is due to executive officers and board members of
the Company as of December 31, 2021 and 2020, respectively.
During 2020, the Company fully repaid the outstanding balance of the 2017 Notes totaling, $6.0 million at the original
investment price to extend the term of the capital structure.
There was $4,800 and $1,200 interest expense paid to these related parties on the capital notes for the years ended December
31, 2021 and 2020, respectively.
Note 13 - 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 0.61% and 0.64% during the years ended December 31, 2021 and 2020, respectively.
40
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 13 - Securities sold under agreements to repurchase and other borrowings (continued)
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 $11,755,934 and $8,011,482 at December 31,
2021 and 2020, 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, 2021 and December 31, 2020 is
presented in the following tables.
December 31, 2021
Overnight and
continuous
Up to 30
Days
30-90 Days
Greater
than 90
Total
Repurchase agreements:
Small Business Administration Pools
7,160
$
-
$
-
$
-
$
7,160
$
Total borrowings
7,160
$
-
$
-
$
-
$
7,160
$
Gross amount of recognized liabilities for repurchase agreements
7,160
$
(in thousands)
December 31, 2020
Overnight and
continuous
Up to 30
Days
30-90 Days
Greater
than 90
Total
Repurchase agreements:
Small Business Administration Pools
6,637
$
-
$
-
$
-
$
6,637
$
Total borrowings
6,637
$
-
$
-
$
-
$
6,637
$
Gross amount of recognized liabilities for repurchase agreements
6,637
$
(in thousands)
The Bank has arrangements with various banks which enables the Bank to borrow up to $40,000,000 in federal funds on an
unsecured basis, at a variable rate. At December 31, 2021 and 2020, 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, 2021 there were no outstanding FHLB advances. At December 31, 2020, FHLB advances were as follows:
December 31, 2020
Maturity date
Amount
Rate
March 29, 2021
10,000,000
0.230%
Total FHLB borrowings/weighted average rate
$ 10,000,000
0.230%
Call Feature
-
The carrying value of loans pledged as collateral to the FHLB were $15.6 million and $20.7 million at December 31, 2021
and 2020, respectively.
41
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 13 - Securities sold under agreements to repurchase and other borrowings (concluded)
During 2021, the Company prepaid $10.0 million in FHLB advances with a weighted average rate of 2.00%. These advances
were paid prior to their maturity date in order to enhance future earnings by way of reduction in interest expense. These
repayments resulted in a prepayment penalty on borrowings equaling $3,833. During 2020, the Company repaid $15.0
million in FHLB advances at the maturity date with no penalties incurred.
Note 14 - 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 $618,795 and $545,000 for the plan for
2021 and 2020, 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 $1,825,514 and $1,721,538 as of December
31, 2021 and 2020, respectively. The annuity had a balance of $2,809,491 and $2,862,424 as of December 31, 2021 and
2020, respectively, and is recorded at amortized cost. Salaries and employee benefits expense included $128,976 and $123,310
of expense related to these arrangements for 2021 and 2020, respectively.
42
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 15 - Income taxes
The principal components of the income tax expense as of December 31, 2021 and 2020 are as follows:
2021
2020
Federal - current tax expense
$ 1,430,398
$ 1,554,607
Federal - deferred tax expense (benefit)
208,164
(739,945)
$ 1,638,562
$ 814,662
The differences between expected federal income taxes at statutory rates and actual income tax expense are summarized as
follows:
2021
2020
$ 2,213,512
$ 1,404,239
Tax effects of:
Tax-exempt interest
(452,843)
(444,552)
(55,096)
(62,903)
Non-deductible expenses
9,491
13,501
Minority investment interest
(87,363)
(97,978)
Other
10,861
2,355
$ 1,638,562
$ 814,662
Total income tax expense
Income tax expense computed at federal statutory rate (21%)
Non-taxable bank owned life insurance
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:
2021
2020
Allowance for loan losses
$ 1,289,769
$ 1,332,785
Deferred compensation
383,358
361,523
29,256
31,492
Other real estate owned
2,599
2,599
Other
97,491
77,020
1,802,473
1,805,419
(580,081)
(1,670,624)
Accumulated depreciation
(242,374)
(223,515)
Accumulated accretion
(72,060)
(72,801)
(242,843)
(55,743)
(1,137,358)
(2,022,683)
$ 665,115
$ (217,264)
Net deferred tax asset (liability)
Deferred tax assets:
Total deferred tax liability
Total deferred tax asset
Deferred tax liabilities:
Available-for-sale investment securities
Net unamortized deferred fees and expenses
Interest on non-performing loans
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.
43
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 15 - 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 2018.
Note 16 - 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 2021 and 2020 is
as follows:
2021
2020
Beginning balance
$ 9,192,027
$ 7,165,329
Originations
1,637,985
4,743,576
Repayments
(1,964,625)
(2,716,878)
Ending balance
$ 8,865,387
$ 9,192,027
Commitments to extend credit to related parties amounted to $5,757,571 and $7,219,970 at December 31, 2021 and 2020,
respectively.
Deposits from related parties held by the Bank amounted to $17,208,728 and $12,287,475 at December 31, 2021 and 2020,
respectively.
Loans outstanding to Manry Rawls, LLC totaled a current principal balance of $-0- and $72,109 as of December 31, 2021 and
2020, respectively. These loans are eliminated in consolidation. These loans are at substantially the same terms as similarly
situated customers.
Note 17 - 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.
44
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 17 - 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, 2021 and 2020. 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:
2021
2020
Loan commitments
$ 102,102,515
$ 77,576,165
Standby letters of credit and guarantees written
6,721,015
6,628,859
Capital commitment to private investment funds
2,180,000
3,500,000
Standby letters of credit outstanding at December 31, 2021 expire between 2022 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.
45
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 18 - 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 was 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, 2021 and 2020, the Bank met all capital adequacy requirements to which it is
subject.
As of December 31, 2021, 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:
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2021:
Total Capital
(to Risk-Weighted Assets)
$ 66,023
17.1% $ 29,947
8.0%
$ 36,559
10.0%
Tier I Risk-Based Capital
(to Risk-Weighted Assets)
61,187
15.9% 21,935
6.0%
29,247
8.0%
Common Equity Risk-Based Capital
(to Risk-Weighted Assets)
61,187
15.9% 16,452
4.5%
23,763
6.5%
Tier I Leverage Ratio
(to Average Assets)
61,187
10.0% 24,422
4.0%
30,527
5.0%
Actual
For Capital
Under Prompt Corrective
Adequacy Purposes
Well Capitalized
(Dollars in thousands)
46
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 18 - Regulatory matters (concluded)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2020:
Total Capital
(to Risk-Weighted Assets)
$ 58,491
16.0% $ 29,265
8.0%
$ 36,581
10.0%
Tier I Risk-Based Capital
(to Risk-Weighted Assets)
53,897
14.7% 21,948
6.0%
29,265
8.0%
Common Equity Risk-Based Capital
(to Risk-Weighted Assets)
53,897
14.0% 16,461
4.5%
23,777
6.5%
Tier I Leverage Ratio
(to Average Assets)
53,897
10.1% 21,375
4.0%
26,718
5.0%
Actual
Adequacy Purposes
Well Capitalized
(Dollars in thousands)
The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are
less than $1 billion, 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 18 - 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.
47
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 19 - 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, 2021 and 2020:
Description
Balance as of
December 31, 2021
Level 1
Level 2
Level 3
State and municipal
$ 95,313,277
$ -
$ 95,313,277
$ -
Residential mortgage-backed securities
118,904,427
-
118,904,427
-
Collateralized mortgage obligations
20,177,284
-
20,177,284
-
Small Business Administration loan securities
59,528,117 -
59,528,117 -
$ 293,923,105
$ -
$ 293,923,105
$ -
Description
Balance as of
December 31, 2020
Level 1
Level 2
Level 3
State and municipal
$ 83,665,162
$ -
$ 83,665,162
$ -
Residential mortgage-backed securities
62,291,407
-
62,291,407
-
Collateralized mortgage obligations
29,163,983
-
29,163,983
-
Small Business Administration loan securities
28,645,712
-
28,645,712
-
$ 203,766,264
$ -
$ 203,766,264
$ -
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:
48
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 19 - Fair value measurements (continued)
Derivatives – Derivative instruments include interest rate swap agreements. Fair values for these instruments are based on
quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted
market prices in an active market are recurring Level 1. During 2021, the Company elected to terminate its interest rate swap
agreement and unwind the derivative held. As a result, the Company received a termination payment of $427,850. The gain
of 433,138 was recognized into income.
Description
Balance as of
December 31, 2020
Level 1
Level 2
Level 3
Cash Flow Hedges
Interest rate swaps
$ 56,295
$ -
$ 56,295
$ -
$ 56,295
$ -
$ 56,295
$ -
Impaired Loans - Loans are designated as impaired when, in the judgment of management based on current information and
events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The
measurement of loss associated with impaired loans can be based on the observable market price of the loan, the fair value of
the collateral or by using the discounted cash flow method. Fair value is measured based on the value of the collateral securing
the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts
receivable. The vast majority of the collateral is real estate.
The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal
conducted by an independent, licensed appraiser outside of the Company. The Company records impaired loans secured by
real estate as Level 3 assets. The value of business equipment is based upon an outside appraisal if deemed significant, or the
net book value on the applicable business’ financial statements if not considered significant using observable market data.
Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports
are recorded as Level 3 assets. Any fair value adjustments are recorded in the period incurred as provision for loan losses on
the Statements of Operations.
Other real estate owned - Other real estate owned is considered held for sale and is adjusted to fair value less estimated selling
costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised value of the
collateral or management’s estimation of the value of the collateral. The Company considers the other real estate owned as
nonrecurring Level 3.
49
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 19 - Fair value measurements (continued)
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during
the periods.
Description
Balance as of
December 31, 2021
Level 1
Level 2
Level 3
Assets
Other real estate owned
$ 147,135
$ -
$ -
$ 147,135
Impaired loans
1,803,680
-
-
1,803,680
Total assets
$ 1,950,815
$ -
$ -
$ 1,950,815
Description
Balance as of
December 31, 2020
Level 1
Level 2
Level 3
Assets
Other real estate owned
$ 672,404
$ -
$ -
$ 672,404
Impaired loans
2,055,237
-
-
2,055,237
Total assets
$ 2,727,641
$ -
$ -
$ 2,727,641
The following table summarized quantitative information about Level 3 fair value measurements:
Description
Fair Value at
December 31, 2021
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Assets
Other real estate owned
$ 147,135 Discounted appraisals
Collateral discounts
10-20%
Impaired loans
1,803,680 Discounted appraisals
Collateral discounts
10-30%
Total assets
$ 1,950,815
Description
Fair Value at
December 31, 2020
Valuation Technique
Unobservable Input
Range
(Weighted Average)
Assets
Other real estate owned
$ 672,404
Discounted appraisals
Collateral discounts
10-20%
Impaired loans
2,055,237 Discounted appraisals
Collateral discounts
10-30%
Total assets
$ 2,727,641
The following table presents the carrying amounts and fair value of the Company's financial instruments as of December 31,
2021 and 2020. 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.
50
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 19 - Fair value measurements (concluded)
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
Financial assets:
Cash and cash equivalents
$ 28,536
$ 28,536
$ 28,557
$ 28,557
Investment securities, available-for-sale
293,923
293,923
203,766
203,766
Loans held for investment & SBA PPP
loans receivable, net
258,398
266,100
278,662
290,205
Accrued interest receivable
1,942
1,942
1,942
1,942
Bank-owned annuity contract
2,809
2,809
2,862
2,862
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts
437,521
435,500
356,527
356,043
Time deposits
94,104
94,368
96,695
97,627
Accrued interest payable
147
147
169
169
FHLB Advances
-
-
10,000
10,296
Capital notes
8,500
7,160
8,500
7,018
Derivative liabilities
-
-
56
56
Securities sold under agreement to repurchase
7,160
7,160
6,637
6,637
2021
2020
(Dollars in thousands)
Note 20 - Stock incentive plan
The Company’s shareholders approved a 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 2021 and 2020. 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, 2021 and 2020 was $221,312 and $231,749, 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, 2021
and 2020, the expense related to these issuances was $99,068 and $66,525, respectively.
51
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 20 - Stock incentive plan (concluded)
A summary of the status of the non-vested shares in relation to our restricted stock awards as of December 31, 2021 and 2020,
and changes during the years ended December 31, 2021 and 2020, is presented below; the weighted average price is the
weighted average fair value at the date of grant:
Restricted Share Awards
Shares
Weighted
Average Price
Shares
Weighted
Average Price
Nonvested - Beginning of the year
24,236
$ 17.10
27,853
$ 16.33
Granted
14,939
15.53
12,944
16.87
Vested
7,795
19.34
16,276
18.60
Forfeited
-
-
285
17.57
Nonvested - End of year
31,380
$ 16.97
24,236
$ 17.10
2021
2020
Note 21 - Earnings per share
The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted
average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income
attributable to common shareholders.
2021
2020
Basic
Net income attributable to common shareholders
$ 8,485,959
$ 5,405,629
Average common shares outstanding
3,124,042
3,104,776
Basic earnings per share amount
$ 2.72
$ 1.74
Diluted
Net income attributable to common shareholders
$ 8,485,959
$ 5,405,629
Average common shares outstanding
3,124,042
3,104,776
Effect of dilutive unvested restricted stock awards
-
-
Average diluted shares outstanding
3,124,042
3,104,776
Diluted earnings per share
$ 2.72
$ 1.74
Note 22 – 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, 2021 and 2020 are presented for the Company as a consolidated entity.
52
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 22 – Condensed financial statements of parent company (continued)
Financial information pertaining only to Farmers Bankshares, Inc. is as follows:
Balance Sheets
Statements of Operations
2021
2020
Cash
1,466,093
$
1,466,093
$
Taxes receivable
826,738
770,292
Investment in Farmers Bank
73,259,290
70,487,898
Other assets
464,644
369,740
Total assets
76,016,765
$
73,094,023
$
Liabilities
Capital notes
8,500,000
$
8,500,000
$
Other liabilities
498,337
404,180
Total liabilities
8,998,337
8,904,180
Stockholders' equity
Common stock
391,127
388,559
Capital surplus
3,589,430
3,357,318
Retained earnings
60,855,661
54,102,943
Accumulated other comprehensive income
2,182,210
6,341,023
Total stockholders' equity
67,018,428
64,189,843
Total liabilities and stockholders' equity
76,016,765
$
73,094,023
$
Liabilities and Stockholders' Equity
Assets
December 31,
2021
2020
Income
2,002,778
$
2,067,529
$
Operating expenses
Interest expense
268,789
223,699
Total expenses
268,789
223,699
Allocated income tax benefits
(56,446)
(46,977)
Income before equity in undistributed income of subsidiary
1,790,435
1,890,807
Equity in undistributed income - Farmers Bank
6,695,524
3,514,822
Net Income
8,485,959
$
5,405,629
$
December 31,
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 22 – Condensed financial statements of parent company (concluded)
Statements of Cash Flows
2021
2020
Cash flows from operating activities
Net income
8,485,959
$
5,405,629
$
Adjustments to reconcile net income to net
cash provided by operating activities
Taxes receivable
(56,446)
(46,976)
Other assets
(94,904)
(2,346)
Other liabilities
94,156
36,785
Equity in undistributed net income of Farmers Bank
(6,695,524)
(3,514,822)
Net cash provided by operating activities
1,733,241
1,878,270
Cash flows from investing activities
Investment in Farmers Bank
-
(2,500,000)
Net cash used by investing activities
-
(2,500,000)
Cash flows from financing activities
Cash dividends paid on common shares
(1,733,241)
(1,478,270)
Proceeds from capital notes issued
-
8,500,000
Redemption of capital notes
-
(6,000,000)
Net cash provided (used) in financing activities
(1,733,241)
1,021,730
Increase in cash and cash equivalents
-
400,000
Cash and cash equivalents
Beginning of the year
1,466,093
1,066,093
End of year
1,466,093
$
1,466,093
$
Years Ended December 31,
Note 23 – 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
53
Farmers Bankshares, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2021 and 2020
Note 23 – Revenue from Contracts with Customers (concluded)
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.
The following table presents the Company’s sources of Non-Interest Income for the twelve months ended December 31, 2021
and 2020. Items outside the scope of ASC 606 are noted as such.
2021
2020
Non-interest income
Service charges on deposits
Overdraft fees
257,240
$
261,607
$
Other
232,251
195,382
Income from automated teller machines and bank card interchange
706,159
578,673
Insurance commissions
6,149,841
6,348,498
Net gain on disposition of securities (outside of scope)
377,017
607,090
Net gain on terminated dervivative asset (out of scope)
433,138
-
Net gain on sale of other real estate owned (outside of scope)
3,110,320
-
Income on bank owned life insurance (outside of scope)
284,052
299,617
Other income (outside of scope)
1,434,884
1,300,472
Total non-interest income
12,984,902
$
9,591,339
$
Note 24 – Subsequent events
The Company has evaluated subsequent events through March 11, 2022.
54
Chesapeake
821 Battlefield Boulevard N.
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
Virginia Beach – Pungo
1776 Princess Anne Road, Unit S
www.farmersbankva.com
757-242-6111
FARMERS BANK
BRANCH LOCATIONS
FARMERS BANKSHARES, INC.
WWW.FARMERSBANKVA.COM