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Essex Bank
growing to Win.
~.~• ~',
Essex Ba~~k
Annapolis Office
(443) 569-7515
Arnold Office
(410) 757-7777
Bowie Office
(301)850-5071
Crofton Office
(410) 721-8444
Rockville Office
(301) 294-9350
Rosedale Office
(410) 574-3303
VIRGINIA REGION
Burgess Office
(804) 453-4268
Callao Office
(804) 529-5546
Centerville Office
(804) 784-4000
Deep Run at Mayland Office
(804) 934-9999
Fairfax Office
(703) 385-4596
Flat Rock Office
(804) 598-6839
Goochland Courthouse Office
(804) 556-6722
King William Office
(804) 769-2265
Louisa Office
(540) 967-5900
Lynchburg Loan Production Office
(434) 485-0090
Mechanicsville Office
(804) 730-3222
Prince Street Office
(804) 443-8510
Tappahannock Office
(804) 443-8500
Virginia Center Office
(804) 262-3991
West Point Office
(804) 843-4347
Winterfield Office
(804) 419-4160
^~~~~ FDIC „-:. EssexBank.com E~ ~I` ~
To Our Shareholders
y~affi~ .
~~~~.~
The past year proved that our
HE world of banking continues to evolve rapidly. Changes in technology,
"Growing to Win"strateg,y
a sluggish economic recovery and ever-increasing regulations confront us
is working to build franchise
value for our shareholders.
Net loans excluding PCl leans
g►'eW to over $748 million
daily. Despite these challenges, we have worked hard to keep one thing at the
top of our priority list—build lasting relationships one customer at a time.
To that end, this past year we instituted a corporate wide campaign called
"Growing to Win': It is atop-to-bottom effort to continue improving our balance
sheet, increase our earnings and focus on building core franchise value through
by December 31, 2015, Ctn
superior customer service. It is a strategy that separates us from our competition
increase Of $88.7 m►llion, ~r
and allows us to continue to build upon our successes.
13.4%, for the yeC7►:... No~7-
This focus on the customer allowed us to expand market share in 2015 in our
interest bearing deposits
increased almost $12 million
core geographic areas of Vrginia and Maryland in both loans and deposits.
Additionally, we continue to expand our branch footprint: in 2015, we added
offices in Bowie, Maryland and Richmond, Vrginia; in March 2016, we opened a
or 14%, fOr the year.
branch in Fairfax, Vrginia where we previously operated a loan production office.
The past year proved that our"Growing to Win"strategy is working to build
franchise value for our shareholders. Net loans excluding PCI loans grew to over
$748 million by December 31, 2015, an increase of $88.7 million, or 13.4%,for
the year. Deposit growth was also significant both in terms of absolute growth
and in deposit mix. Non-interest bearing deposits increased almost $12 million
or 14%, for the year. Interest bearing deposits ended the year at $849 million, an
increase of $14.9 million for the yeacTime deposits less than or equal to $250,000
declined slightly during 2015 while NOW, MMDA and savings accounts increased
approximately $18 million.
Meaningful improvement was also made in the nonperforming asset category as
we managed a 33.5% decrease in nonperforming assets for 2015.This means that
resolution of problem assets is no longer a major part of our strategy as our asset
quality metrics are well within normal operating guidelines for banks of our size
in the mid-Atlantic.
We also continue our focus on holding operating expenses down. Noninterest
expenses declined year over year. While the majority of the decrease was from
—continued
-~:
Resolution of problem assets
the indemnification asset costs being eliminated, credit expenses, OREO expense
is no longer a major part
and salaries and benefits costs were also lower.
of our strategy as our asset
From here, it is all about profitable growth. Growth in designated loan and
quality metrics are well within
normal operating guidelines
deposit types enhances overall franchise value and creates larger earnings per
share.This past year wasjust the beginning of our program of value-added
growth. We have the talent and leadership in our almost 300 associates to meet
for banks of our size in the
the challenges that wait for us and accomplish our goals. Our associates work
mid-Atlantic.
tirelessly to exceed the expectations of our customers and our shareholders. We
are all excited about the future potential of the Company. We thank you for your
trust and continued support.
__
~~ z
John C. Watkins
Chairman of the Board
Rex L. Smith, III
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
~ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2015
or
D TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number 001-32590
COMMUNITY BANKERS TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
9954 Mayland Drive, Suite 2100
Richmond, Virginia
(Address of principal executive offices)
20-2652949
(I.R.S. Employer
Identification No.)
23233
(Zip Code)
Registrant's telephone number, including area code (804) 934-9999
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
The NASDAQ Stcek Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes O No X❑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes q No ❑O
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ❑D
No q
Indicate by check mazk whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x❑ No q
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K O
Indicate by check mazk whether the registrant is a lazge accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting
company. See the definitions of "lazge accelerated filer," "accelerated filer" and "smaller repoRing company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer q
Non-accelerated filer q (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company q
D
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes q No O
Sate the aggregate market value of the voting and non-voting common equity held by non-~liates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently
completed second fiscal quartet $104,931,804
On February 29, 2016, there were 21,869,444 shares of the registrant's common stock, par value $0.01, outstanding, which is the only class of
the registrants common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in conjunction with the registrant's
2016 Annual Meeting of Shareholders aze incorporated into Part III of this Form 10-K.
Item 1. Business
Item 1 A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
TABLE OF CONTENTS
FORM 10-K
December 31, 2015
PART I
PART II
Item 5. Mazket for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item l3. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
Page
c
19
19
20
20
20
22
23
43
44
98
9g
99
99
99
99
99
99
100
ITEM 1. BUSINESS
GENERAL
PARTI
The Company is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the "Bank"), a Virginia state
bank with 21 full-service offices in Virginia and Maryland. The Bank also operates two loan production offices in Virginia.
The Bank was established in 1926. The Bank engages in a general commercial banking business and provides a wide range of
financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts,
commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and
mobile banking products, and safe deposit box facilities. Fourteen full-service offices are located in Virginia, from the Chesapeake Bay
to just west of Richmond, and seven aze located in Maryland along the Baltimore-Washington corridor.
Essex Services, Inc. is a wholly-owned subsidiary of the Bank. Essex Services and its financial consultants offer a broad range of
investment products and alternatives through an affiliation with Infinex Investments, Inc., an independent broker-dealer. It also offers
insurance products through an ownership interest in Bankers Insurance, LLC, an independent insurance agency. Essex Services was
formed to sell title insurance to the Bank's mortgage loan customers.
The Company's corporate headquarters are located at 9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233. The telephone
number of the corporate headquarters is (804) 934-9999.
The Company's common stock trades on the NASDAQ Capital Mazket under the symbol "ESXB".
STRATEGY
The Company's strategy is to be recognized as the premier provider of financial services by exceeding the service expectations of
all of its customers and shareholders while creating a rewarding environment for its employees. The Company will accomplish this goal
while operating in a safe and sound manner to provide a competitive return to its investors.
The Company has adopted and implemented a formal strategic plan that centers on the following key issues:
• Ensuring profitable controlled growth in earnings
• Improving the overall risk profile of the Company through enterprise risk management
• Solidifying strong management practices with a focus on value added
During 2015, the Company focused on diversified growth in its core markets by increasing loan and deposit production, decreasing
operating expenses and increasing net income The Company accomplished these results as it grew loans by approximately $88.7 million
and added two new retail banking offices, which helped add $11.7 million in noninterest bearing deposits. The Company also ternunated
its shazed loss agreement with the Federal Deposit Insurance Corporation (the "FDIC"), which has a significant positive impact on
earnings going forward.
The Company expects to continue this growth through a combination of de novo branching, expansion of loan production offices
and possible acquisitions that are immediately accretive in value.
Other specific priorities, as outlined in the Company's strategic plan, include the following matters:
• Organically growing the size of the loan portfolio
• Changing the deposit mix to more transaction-based accounts by increasing demand deposits
• Utilizing technology to attract new customers and lower costs
• Continuing to reduce non-perfornung assets and other real estate owned
• Enhancing the delivery system of its fee-based products
• Expanding market share throughout Virginia and Maryland
The Company believes that it has the ability and capacity to successful execute its strategies, which will enhance the major profit
drivers of the Company. The implementation of these strategies will lead to an increase in profitability for shareholders.
OPERATIONS
The Company's operating strategy is delineated by business lines and by the functional support areas that help accomplish the
stated goals and financial budget of the organization. A major component of future income is growth in three core business lines —retail
and small business banking, commercial and industrial banking and real estate lending. These core businesses, combined with the
Company's geographic locations, dictate the market position that the Company needs to take to be successful. The majority of new loan
growth will occur in all three lines, although the retail segment primarily provides the funding through core deposit relationship growth.
Retail and Small Business Banking
The Company markets to consumers in geographic azeas azound its branch network not only through existing bricks and mortar,
but also with alternative delivery mechanisms and new product development such as online banking, remote deposit capture, mobile
banking and telephonic banking. In addition, the Company attracts new customers by making its service through these distribution points
convenient. All of the Company's existing markets aze prime targets for expanding the consumer side of its business with full loan and
deposit relationships, and the Company has restructured its retail group to accommodate growth. In addition, the Company is focused
on potential growth in new market areas in which it currently operates loan production offices.
Commercial and Industrial Banki,:g
In the commercial and industrial banking group, the Company focuses on small to mid-sized business customers (sales of $5
million to $15 million each year) who aze not targeted by lazger banks and for whom smaller community banks have limited expertise.
The Company has an experienced team with a strong loan pipeline. The typical relationship consists of working capital lines and
equipment loans with the primary deposit accounts of the customer. Most of these relationships will be new to the Company and create
strong and positive growth potential.
Commercial Real Estate Lending
The Company has historically held a significant concentration in real estate loans. The current strategy is to manage the existing
real estate acquisition, development and construction loans and add income producing property loans to the real estate portfolio. The
Company originates both owner occupied and non-owner occupied borrowings where the cash flows provide significant debt coverage
for the relationship.
COMPETITION
Within its market azeas in Virginia and Maryland, the Company operates in a highly competitive environment, competing for
deposits and loans with commercial corporations, savings banks and other financial institutions, including non-bank competitors, many
of which possess substantially greater financial resources than those available to the Company. Many of these institutions have
significantly higher lending limits than the Company. In addition, there can be no assurance that other financial institutions, with
substantially greater resources than the Company, will not establish operations in its service area. The financial services industry remains
highly competitive and is constantly evolving.
The activities in which the Company engages are highly competitive. Financial institutions such as credit unions, consumer finance
companies, insurance companies, brokerage companies and other financial institutions with varying degrees of regulatory restrictions
compete vigorously for a share of the financial services mazket. Brokerage and insurance companies continue to become more
competitive in the financial services arena and pose an ever increasing challenge to banks. Legislative changes also greatly affect the
level of competition that the Company faces. Federal legislation allows credit unions to use their expanded membership capabilities,
combined with tax-free status, to compete more fiercely for traditional bank business. The tax-free status granted to credit unions
provides them a significant competitive advantage. Many of the largest banks operating in Virginia and Maryland, including some of
the lazgest banks in the country, have offices in the Company's mazket areas. Many of these institutions have capital resources, broader
geographic markets, and legal lending limits substantially in excess of those available to the Company. The Company faces competition
from institutions that offer products and services that it does not or cannot currently offer. Some institutions with which the Company
competes offer interest rate levels on loan and deposit products that the Company is unwilling to offer due to interest rate risk and overall
profitability concerns. The Company expects the level of competition to increase.
Factors such as rates offered on loan and deposit products, types of products offered, and the number and location of branch offices,
as well as the reputation of institutions in the mazket, affect competition for loans and deposits. The Company emphasizes customer
service, establishing long-term relationships with its customers, thereby creating customer loyalty, and providing adequate product lines
for individuals and small to medium-sized business customers.
The Company would not be materially or adversely impacted by the loss of a single customer. The Company is not dependent
upon a single or a few customers.
4
CORPORATE HISTORY
The Company was initially formed as a special purpose acquisition company under the name "Community Bankers Acquisition
Corp." Asa `"Targeted Acquisition Corporation"SM or "TAC,"S"' the Company was formed to effect a merger, capital stock exchange,
asset acquisition or other similar business combination with an operating business in the banking industry. In May 2008, the Company
acquired each of TransCommunity Financial Corporation, a Virginia corporation (TFC), and BOE Financial Services of Virginia, Inc.,
a Virginia corporation (BOE). The Company changed its corporate name in connection with the acquisitions.
Formed in 2001, TFC was a financial holding company and the parent company of TransCommunity Bank, N.A. Until June 2007,
TFC was the holding company for four separately-chartered banking subsidiaries —Bank of Powhatan, Bank of Goochland, Bank of
Louisa and Bank of Rockbridge. In June 2007, these four subsidiaries were consolidated into a new TransCommunity Bank, N.A. Each
former subsidiary then operated as a division of TransCommunity Bank, but retained its name and local identity in the community that
it served.
BOE was incorporated under Virginia law in 2000 to become the holding company for the Bank.
In connection with the May 2008 mergers, each of the Bank, then awholly-owned subsidiary of BOE, and TransCommunity Bank,
N.A., awholly-owned subsidiary of TFC, became awholly-owned subsidiary of the Company, and they were operated initially as
separate banking subsidiaries. In July 2008, TransCommunity Bank was consolidated into the Bank under the Bank's state charter. Until
2010, the former branch offices of TFC operated as sepazate divisions under the Bank's charter, using the names of TFC's former
banking subsidiaries.
In November 2008, the Bank acquired certain fixed assets and assumed all deposit liabilities relating to four former branch offices
of The Community Bank (TCB), a Georgia state-chartered bank, following its failure. The transaction was consummated pursuant to a
Purchase and Assumption Agreement by and among the FDIC, both as Receiver for The Community Bank and in its corporate capacity,
and the Bank. The Bank sold those offices and related deposits to Community &Southern Bank on November 8, 2013.
In January 2009, the Bank acquired substantially all assets and assumed all deposit and certain other liabilities relating to seven
former branch offices of Suburban Federal Savings Bank, Crofton, Maryland (SFSB), following its failure. The transaction was
consummated pursuant to a Purchase and Assumption Agreement by and among the FDIC, both as Receiver for SFSB and in its
corporate capacity, and the Bank. The Bank entered into a shared loss arrangement with the FDIC with respect to loans and real estate
assets acquired. The Bank terminated this arrangement on September 10, 2015.
On January 1, 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to Virginia. As
a result of the reincorporation, the Company's corporate affairs aze now governed by Virginia law. The purpose of the reincorporation
to Virginia was annual cost savings of over $1'75,000 that the Company realizes from the difference between Delawaze's franchise tax
and Virginia's annual corporate fee. The form of the reincorporation was the merger of the then existing Delawaze corporation into a
newly created Virginia corporation. The Company retained the same name and conducts business in the same manner as before the
reincorporation. In addition, all of the issued and outstanding shares of the Company's common stock and preferred stock became
shares of a Virginia corporation. The reincorporation had no effect on the Bank and its operations.
TARP INVESTMENT
In December 2008, the Company issued 17,680 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
"Series A Preferred Stock") and a related common stock warrant to the Treasury for a total price of $17,680,000. The issuance and
receipt of proceeds from the Treasury were made under its voluntary Capital Purchase Program. The Series A Preferred Stock qualified
as Tier 1 capital. The Series A Preferred Stock had a liquidation amount per shaze equal to $1,000. The Series A Preferred Stock paid
cumulative dividends at a rate of 5% per yeaz for the first five yeazs and thereafter at a rate of 9% per year. The Company could have
deferred dividend payments, but the dividend was a cumulative dividend that accrued for payment in the future. The common stock
warrant permitted the Treasury to purchase 780,000 shares of common stock at an exercise price of $3.40 per share.
During 2013 and 2014, the Company repurchased all of the outstanding shares of Series A Preferred Stock. In 2013, the Company
repurchased 7,000 shares and funded it through the earnings of its banking subsidiary. The Company paid the Treasury $7.0 million,
which represented 100°10 of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares. On April
23, 2014, the Company repurchased the remaining 10,680 shares and funded it through an unsecured third-party term loan. The Company
paid the Treasury $10.9 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends
with respect to such shares. The form of all repurchases were redemptions under the terms of the Series A Preferred Stock.
On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the Series A
Preferred Stock. The Company used its own funds to repurchase the warrant.
There aze no other investments from the Company's participation in the Capital Purchase Program that remain outstanding.
EMPLOYEES
As of December 31, 2015, the Company had 236 full-time equivalent employees, including executive officers, loan and other
banking officers, branch personnel, operations personnel and other support personnel. None of the Company's employees is represented
by a union or covered under a collective bargaining agreement. Management of the Company considers its employee relations to be
excellent.
AVAII.ABLE INFORMATION
The Company files with or furnishes to the Securities and Exchange Commission annual, quarterly and current reports, proxy
statements, and various other documents under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The public may
read and copy any materials that the Company files with or furnishes to the SEC at the SEC's Public Reference Room, which is located
at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at (800) SEC-0330. Also, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants, including the Company, that file or furnish documents electronically
with the SEC.
The Company also makes available free of chazge on or through our Internet website (www.cbtrustcorp.com) its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports as filed or
furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such
materials with, or furnishes them to, the SEC.
SUPERVISION AND REGULATION
General
As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (the
"BHCA"), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). Other federal and state laws govern the activities of our bank subsidiary, including the activities in which it may engage, the
investments that it makes, the aggregate amount of loans that it may grant to one borrower, and the dividends it may declaze and pay to
us. Our bank subsidiary is also subject to various consumer and compliance laws. As astate-chartered bank, the Bank is primarily subject
to regulation, supervision and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the
"SCC"). Our bank subsidiazy also is subject to regulation, supervision and examination by the FDIC.
The following description discusses certain provisions of federal and state laws and certain regulations and the potential impact of
such provisions on the Company and the Bank. These federal and state laws and regulations have been enacted generally for the
protection of depositors in banks and not for the protection of shareholders of bank holding companies or banks.
Bank Holding Companies
The Company is registered as a bank holding company under the BHCA and, as a result, is subject to regulation by the Federal
Reserve. Accordingly, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports
regazding its operations and any additional information that the Federal Reserve may require. The BHCA generally limits the activities
of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely
related to banking or to managing or controlling banks as to be a proper incident to it. While federal law pernuts bank holding companies
from any state to acquire banks and bank holding companies located in any other state, or to establish interstate de novo branches, the
Federal Reserve has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation, or the
establishment of any interstate de novo branches, proposed by a bank holding company.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries
by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositor of such depository institutions
and to the FDIC's Deposit Insurance Fund (the "DIF") in the event the depository institution becomes in danger of default or in default.
For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so otherwise.
The Federal Deposit Insurance Act (the "FDIA") also provides that amounts received from the liquidation or other resolution of
any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shazeholders
in the event that a receiver is appointed to distribute the assets of the Bank.
6
The Company was required to register in Virginia with the SCC under the financial institution holding company laws of Virginia.
Accordingly, the Company is subject to regulation and supervision by the SCC.
The Dodd-Frank Act
In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
"Dodd-Frank Act"). The Dodd-Frank Act significantly restructures the financial regulatory regime in the United States and has a broad
impact on the financial services indusvy. While some rulemaking under the Dodd-Frank Act has occurred, many of the act's provisions
require study or rulemaking by federal agencies, a process which will take yeazs to implement fully.
Among other things, the Dodd-Frank Act provides for new capital standards that eliminate the treatment of trust preferred securities
as Tier 1 capital. Existing trust preferred securities are grandfathered for banking entities with less than $15 billion of assets, such as the
Company. The Dodd-Frank Act permanently raises deposit insurance levels to $250,000, and until December 31, 2012 provided
unlimited deposit insurance coverage for transaction accounts. Pursuant to modifications under the Dodd-Frank Act, deposit insurance
assessments will be calculated based on an insured depository institution's assets rather than its insured deposits and the minimum
reserve ratio of the FDIC's DIF is to be raised to 1.35%. The payment of interest on business demand deposit accounts is permitted by
the Dodd-Frank Act. Further, the Dodd-Frank Act bars banking organizations, such as the Company, from engaging in proprietary
trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited
circumstances.
The Dodd-Frank Act established the Consumer Financial Protection Bureau (the "CFPB") as an independent bureau of the Federal
Reserve System. The CFPB has the exclusive authority to prescribe rules governing the provision of consumer financial products and
services, which in the case of the Bank will be enforced by the Federal Reserve. The Dodd-Frank Act also provides that debit card
interchange fees must be reasonable and proportional to the cost incurred by the card issuer with respect to the transaction. This provision
is known as the "Durbin Amendment." In June 2011, the Federal Reserve adopted regulations setting the malcimum permissible
interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional
adjustment of up to one cent per transaction if the card issuer implements certain fraud-prevention standards. The interchange fee
restriction only applies to financial institutions with assets of $10 billion or more and therefore has no effect on the Company.
The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal
Reserve Act, including an expansion of the definition of "covered transactions" and an increase in the amount of time for which collateral
requirements regazding covered transactions must be maintained. These requirements became effective on July 21, 2011. The Dodd-
Frank Act also provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice
any compensation plan of a bank holding company or other "covered financial institution" that provides an insider or other employee
with "excessive compensation" or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm.
In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive
Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve
incentive compensation with the related risk to the financial institution of such behavior.
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new
requirements have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given
the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory
agencies, the full extent of the impact such requirements will have on the operations of the Company and the Bank is unclear. The
changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business
practices, impose more stringent capital requirements, liquidity and leverage ratio requirements, or otherwise adversely affect the
business of the Company and the Bank. These changes may also require the Company to invest significant management attention and
resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.
Capital Requirements
The Federal Reserve has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises.
Under the risk-based capital requirements, the Company and the Bank aze each generally required to maintain a minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the
total capital must be composed of "Tier 1 Capital," which is defined as common equity, retained earnings and qualifying perpetual
preferred stock, less certain intangibles. The remainder may consist of "Tier 2 Capital," which is defined as specific subordinated debt,
some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. In addition, each
of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations.
On July 2, 2013, the Federal Reserve adopted a final rule (the "Basel III Rule") revising the risk-based and leverage capital
requirements and the method for calculating risk-weighted assets to be consistent with the agreements reached by the Basel Committee
on Banking Supervision in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and
certain provisions of the Dodd-Frank Act. The Basel III Rule applies to all depository institutions, top-tier bank holding companies with
7
total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (referred to as "banking
organizations"). For community banking organizations, like the Company, these revised capital requirements began being phased in
beginning on January 1, 2015.
Under the requirements prior to effectiveness of the Basel III Rule, banking organizations must have maintained a minimum ratio
of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organization's
overall safety and soundness. In summary, the capital measures used by the federal banking regulators aze:
• Total risk-based capital ratio (Total Capital Ratio), which is the total of Tier 1 Capital and Tier 2 Capital as a
percentage of total risk-weighted assets;
• Tier 1 risk-based capital ratio (Tier 1 Ratio), which is Tier 1 Capital as a percentage of total risk-weighted assets; and
• Leverage Ratio, which is Tier 1 Capital as a percentage of adjusted average total assets.
Under pre-Basel III Rule regulations, a bank was considered:
• "Well capitalized" if it had a Total Capital Rario of 10% or greater, Tier 1 Ratio of 6% or greater, a Leverage Ratio
of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action
directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;
• "Adequately capitalized" if it had a Total Capital Ratio of 8% or greater, a Tier 1 Ratio of 4% or greater, and a
Leverage Ratio of 4% or greater — or 3% in certain circumstances —and was not well capitalized;
• "Undercapitalized" if it had a Total Capital Ratio of less than 8% or greater, a Tier 1 Ratio of less than 4%, and a
Leverage Ratio of less than 4% — or 3% in certain circumstances;
~ "Significantly undercapitalized" if it had a Total Capital Ratio of less than 6%, a Tier 1 Ratio of less than 3%, or a
Leverage Ratio of less than 3°k; or
• "Critically undercapitalized" if its tangible equity was equal to or less than 2% of average quarterly tangible assets.
Among other things, the Basel III Rule establishes a new common equity tier 1 (CET1) minimum capital requirement, introduces
a "capital conservation buffer" and raises minimum risk-based capital requirements. Under the new rule, CET 1 is defined as comprising
Tier 1 Capital, less non-cumulative perpetual preferred stock and grandfathered trust-preferred and other securities, plus certain
regulatory deductions. The Basel III Rule establishes a new minimum required ratio of CET1 to risk-weighted assets (CET1 Ratio) of
4.5%, and raises the minimum Tier 1 Rado to 6.0% (from the prior 4.0% minimum). Furthermore, the minimum required Leverage
Ratio is increased in the final Basel III Rule to 4.0% for all banking organizations irrespective of differences in composite supervisory
ratings.
In conjunction with the changes in the required minimum capital ratios, the Basel III Rule also changes the definitions of the five
regulatory capitalization categories set forth above, effective January 1, 2015. A table illustrating these changes is set forth below.
Capitalization Category
Well capitalized (prior)
Well capitalized (Basel III)
Adequately capitalized (prior)
Adequately capitalized (Basel III)
Undercapitalized (prior)
Undercapitalized (Basel III)
Significantly undercapitalized (prior)
Significantly undercapitalized (Basel III)
Total Capital
Ratio (%)
Tier 1 Ratio
(%)
CET1 Ratio
(%)
Leverage Ratio
(%)
> 10
> ] 0
> 8
> 8
< 8
< 8
< 6
< 6
> 6
> 8
> 4
> 6
< 4
< 6
< 3
< 4
N/A
> 6.5
N/A
> 4.5
N/A
< 4.5
N/A
< 3
> 5
>_ 5
>_ 4
> 4
< 4
< 4
< 3
< 3
Critically+ undercapitalized_(prior) ________ GAAP tan ible uity _< 2% of average quarterly assets
Critically undercapitalized (Basel III)
Basel III tangible equity (Tier 1 Capital plus non-tier 1 perpetual
referred stock) < 2% of total assets
The new required capital conservation buffer is comprised of an additiona12.5% of CET1 as a percentage ofrisk-weighted assets.
Institutions that do not maintain the required capital buffer will be subject to progressively more stringent limitations on the percentage
of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior
executive management. This capital conservation buffer is in addition to, and not included with, the CET1 Ratio described above. A
table illustrating these limitations on the ratio which can be paid out (defined in the Basel III Rule as "ma~cimum payout ratio") is set
forth below.
Capital Conservation Buffer (CET1 as a percentage of total risk-weighted
as~~~
Greater than 2.5% ..............................................................................
<_ 2.5% and > 1.875% ........................................................................
< 1.875% and > 1.25% ......................................................................
_< 1.25% and > 0.625% ......................................................................
_< 0.625% ............................................................................................
Maximum payout ratio (as a
percentage of eligible retained
income)
No applicable limitation.
60%
40%
20%
0%
The Basel III Rule also introduces new methodologies for determining risk-weighted assets, including higher risk weightings, up
to a maximum of 150%, for exposures that aze more than 90 days past due or aze on nonaccrual status and for certain commercial real
estate facilities that finance the acquisition, development or construction of real property. The Basel III Rule also requires unrealized
gains and losses on certain securities holdings to be included, or excluded, as applicable, for purposes of calculating certain regulatory
capital requirements. Additionally, the Basel III Rule establishes that, for banking organizations with less than $15 billion in assets as
of December 31, 2009, the ability to treat trust preferred securities as rier 1 capital would be permanently grandfathered in.
The risk-based capital standards of the Federal Reserve explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the
agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a
decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a
banking organization's capital adequacy.
The FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable
capital restoration plan or fails to implement a plan accepted by the FDIC. These powers include, but are not limited to, requiring the
institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by
any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding
company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The Bank
presently maintains sufficient capital to remain in compliance with these capital requirements.
Dividends
The Company is a legal entity, separate and distinct from the Bank. A significant portion of the revenues of the Company result
from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the
Company and to the payment of dividends by the Company to its shareholders. The Bank is subject to various statutory restrictions on
its ability to pay dividends to the Company. Under current regulations, prior approval from the Federal Reserve is required if cash
dividends declazed in any given yeaz exceed net income for that year, plus retained net profits of the two preceding years. The payment
of dividends by the Bank or the Company may be limited by other factors, such as requirements to maintain capital above regulatory
guidelines. Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound
practice in conducting its respective business. The payment of dividends, depending on the financial condition of the Bank, or the
Company, could be deemed to constitute such an unsafe or unsound practice.
Under the FDIA, insured depository institutions such as the Bank, are prohibited from making capital distributions, including the
payment of dividends, if, after making such distributions, the institution would become "undercapitalized" (as such term is used in the
statute). Based on the Bank's current financial condition, the Company does not expect that this provision will have any impact on its
ability to receive dividends from the Bank.
Deposit Insurance
The Bank's deposits aze insured by the DIF of the FDIC up to the standazd maximum insurance amount for each deposit insurance
ownership category. As of January 1, 2015, the basic limit on FDIC deposit insurance coverage is $250,000 per depositor. Under the
FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC, subject to administrative and potential judicial hearing and review processes.
The DIF is funded by assessments on banks and other depository institutions. As required by the Dodd-Frank Act, in February
2011, the FDIC approved a final rule that changed the assessment base for DIF assessments from domestic deposits to Tier 1 Capital.
In addition, as also required by the Dodd-Frank Act, the FDIC has adopted a new large-bank pricing assessment scheme, set a target
"designated reserve ratio" (described in more detail below) of 2 percent for the DIF and established a lower assessment rate schedule
when the reserve ratio reaches 1.15 percent and, in lieu of dividends, provides for a lower assessment rate schedule, when the reserve
9
ratio reaches 2 percent and 2.5 percent. An institution's assessment rate depends upon the institution's assigned risk category, which is
based on supervisory evaluations, regulatory capital levels and certain other factors. Initial base assessment rates range from 2.5 to 45
basis points. The FDIC may make the following further adjustments to an institution's initial base assessment rates: decreases for long-
term unsecured debt including most senior unsecured debt and subordinated debt; increases for holding long-term unsecured debt or
subordinated debt issued by other insured depository institutions; and increases for broker deposits in excess of 10 percent of domestic
deposits for institutions not well rated and well capitalized.
The Dodd-Frank Act transferred to the FDIC increased discretion with regazd to managing the required amount of reserves for the
DIF, or the "designated reserve ratio." Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to
1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the designated reserve ratio reach 1.35 percent
by September 2020, and (iii) requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion
by raising the designated reserve ratio from 1.15 percent to 1.35 percent. The FDIA requires that the FDIC consider the appropriate
level for the designated reserve ratio on at least an anneal basis. On October 2010, the FDIC adopted a new DIF restoration plan to
ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act.
Incentive Compensation
In June 2010, the federal banking regulators issued comprehensive final guidance on incentive compensation policies intended to
ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such
organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect
the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's
incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability
to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported
by strong corporate governance, including active and effective oversight by the organization's Boazd of Directors.
The Federal Reserve will review, as part of the regulaz, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that aze not "large, complex banking organizations." These reviews will
be tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be
incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other
actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-
management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking
prompt and effective measures to correct the deficiencies. At December 31, 2015, the Company had not been made aware of any
instances of non-compliance with the new guidance.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (Gramm-Leach-Bliley) drew lines between the types of activities that are pernutted for
banking organizations that aze financial in nature and those that are not pernutted because they are commercial in nature.
Gramm-Leach-Bliley created a new form of financial organization called a financial holding company that may own and control
banks, insurance companies and securities firms, thereby repealing the prohibition in the Glass-Steagall Act on bank affiliations with
companies that are engaged primarily in securities underwriting activities. A financial holding company is authorized to engage in any
activity that is financial in nature or incidental to an activity that is financial in nature or is a complementary activity, including, for
example, insurance, securities transactions (including underwriting, broker/dealer activities and investment advisory services) and
traditional banking-related activities. The Company is currently not a financial holding company under Gramm-Leach-Bliley.
Gramm-Leach-Bliley directed federal banking regulators to adopt rules limiting the ability of banks and other financial institutions
to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies
to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third
party. Pursuant to these rules, financial institutions must provide: initial notices to customers about their privacy policies, including a
description of the conditions under which they may disclose nonpublic personal information to nonaffiliated third pazties and affiliates;
annual notices of their privacy policies to current customers; and a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors. The Company, as a bank holding company, is subject to these rules.
Community Reinvestment Act
Under the Community Reinvestment Act (CRA) and related regulations, depository institutions have an affirmative obligation to
assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking
practice. CRA requires the adoption of a statement for each of its market areas describing the depository institution's efforts to assist in
its community's credit needs. Depository institutions aze periodically examined for compliance with CRA and are periodically assigned
10
ratings in this regard. Banking regulators consider a depository institution's CRA rating when reviewing applications to establish new
branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can
significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution
subsidiaries.
Gramm-Leach-Bliley and federal bank regulators have made various changes to CRA. Among other changes, CRA agreements
with private parties must be disclosed and annual reports must be made to a bank's primary federal regulator. A financial holding
company or any of its subsidiaries will not be permitted to engage in new activities authorized under Gramm-Leach-Bliley if any bank
subsidiary received less than a "satisfactory" rating in its latest CRA examination. The Company believes that it is currently in
compliance with CRA.
Fair Lending; Consumer Laws
In addition to CRA, other federal and state laws regulate various lending and consumer aspects of the banking business.
Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the
Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from
depository and other lending institutions. These agencies have brought litigation against depository insritutions alleging discrimination
against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.
These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors
that they will use to detemune the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing
Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on
prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and
evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a
discriminatory effect, unless the practice could be justified as a business necessity.
Banks and other depository institutions also aze subject to numerous consumer-oriented laws and regulations. These laws, which
include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer
Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure
requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.
Governmental Policies
The Federal Reserve regulates money, credit and interest rates in order to influence general economic conditions. These policies
influence overall growth and distribution of bank loans, investments and deposits. These policies also affect interest rates charged on
loans or paid for dme and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future.
Future Regulatory Uncertainty
Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, the
Company cannot forecast how federal and state regulation of financial institutions may change in the future and impact its operations.
The Company fully expects that the financial institution industry will remain heavily regulated in the near future and that additional
laws or regulations may be adopted further regulating specific banking practices.
ITEM lA. RISK FACTORS
Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore,
the market value of our common stock. The risk factors applicable to us are the following:
Our future success is dependent on our ability to compete effectively in the highly competitive banking and financial services
industry.
We face vigorous competition from other commercial banks, savings banks, credit unions, mortgage banking firms, consumer
finance companies, securities brokerage firms, insurance companies, money market funds and other types of financial institutions for
deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly
larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems,
and offer a wider array of banking services. Many of our nonbank competitors are not subject to the same extensive regulations that
govern us. As a result, these non-bank competitors have advantages over us in providing certain services.
11
While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive
disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing
costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete
effectively, our net interest mazgin and income could be negatively affected. Failure to compete effectively to attract new, or to retain
existing, clients may reduce or limit our margins and our mazket share and may adversely affect our results of operations, financial
condition, and growth.
We may be adversely affected by economic conditions in our market area.
We operate in a mixed market environment with influences from both rural and urban areas. Because our lending operation is
concentrated in localized areas in Virginia and Maryland, we will be affected by the general economic conditions in these mazkets.
Changes in the local economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio, and loan and
deposit pricing. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors
beyond our control would impact these local economic conditions and the demand for banking products and services generally, which
could negatively affect our financial condition and performance. Although we might not have significant credit exposure to all the
businesses in our azeas, the downturn in any of these businesses could have a negative impact on local economic conditions and real
estate collateral values generally, which could negatively affect our profitability.
We may not be able to successfully manage our long-term growth, which may adversely affect our results of operations and
financial condition.
A key aspect of our long-term business strategy is our continued growth and expansion. Our ability to continue to grow depends,
in part, upon our ability to:
• open new branch offices or acquire existing branches or other financial institutions;
• attract deposits to those locations; and
• identify attractive loan and investment opportunities.
We may not be able to successfully implement our growth strategy if we aze unable to identify attractive markets, locations or
opportunities to expand in the future, or if we aze subject to regulatory restrictions on growth or expansion of our operations. Our ability
to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain
cost controls and asset quality and successfully integrate any businesses we acquire into our organization. As we identify opportunities
to implement our growth strategy by opening new branches or acquiring branches or other banks, we may incur increased personnel,
occupancy and other operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate
new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding
earning assets. Thus, any plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our
branching strategy.
Our liquidity needs could adversely affect results of operations and financial condition.
Our primary sources of funds aze deposits and loan repayments. While scheduled loan repayments are a relatively stable source
of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected
by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry
groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs,
inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors,
including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to
customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on
secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales
of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount
Window, as well as additional out-of-mazket time deposits and brokered deposits. While we believe that these sources are currently
adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and
experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments
or liquidate assets should such sources not be adequate.
If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.
An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable
estimate of known and inherent losses in our loan portfolio. Through a periodic review and analysis of the loan portfolio, management
determines the adequacy of the allowance for loan losses by considering such factors as general and industry-specific market conditions,
credit quality of the loan portfolio, the collateral supporting the loans and financial performance of our loan customers relative to their
financial obligations to us. The amount of future losses is impacted by changes in economic, operating and other conditions, including
changes in interest rates, which may be beyond our control. Actual losses may exceed our current estimates. Rapidly growing loan
12
portfolios are, by their nature, unseasoned. Estimating loan loss allowances for an unseasoned portfolio is more difficult than with
seasoned portfolios, and may be more susceptible to changes in estimates and to losses exceeding estimates. Although we believe the
allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses
or assert that our loan loss allowance will be adequate in the future. Future loan losses that are greater than current estimates could have
a material impact on our future financial performance.
Banking regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses
or recognize additional loan chazge-offs, based on credit judgments different than those of our management. Any increase in the amount
of our allowance or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.
Our concentration in loans secured by real estate may increase our future credit losses, which would negatively affect our
financial results.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home
equity, consumer and other loans. Credit risk and credit losses can increase if our loans aze concentrated to borrowers who, as a group,
may be uniquely or disproportionately affected by economic or mazket conditions. Appro~cimately 86.5% of our loans are secured by
real estate, both residential and commercial, substantially all of which aze located in our mazket area. A major change in the region's
real estate mazket, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by
raising interest rates, could adversely affect our customers' ability to pay these loans, which in turn could adversely impact us. Risk of
loan defaults and foreclosures are inherent in the banking industry, and we try to limit our exposure to this risk by carefully underwriting
and monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.
We may incur losses if we are unable to successfully manage interest rate risk.
Our profitability depends insubstantial part upon the spread between the interest rates earned on investments and loans and interest
rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall
based on our view of our financing and liquidity needs. We may selectively pay above-market rates to attract deposits as we have done
in some of our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition
in diverse ways including the pricing of securities, loans and deposits, which, in turn, may affect the growth in loan and retail deposit
volume. We attempt to minimize our exposure to interest rate risk, but cannot eliminate it. Our net interest income will be adversely
affected if mazket interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest earned
on loans and investments. Our net interest spread will depend on many factors that are partly or entirely outside our control, including
competition, federal economic, monetary and fiscal policies and economic conditions generally. Fluctuations in market rates are neither
predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.
Changes in interest rates also affect the value of our loans. An increase in interest rates could adversely affect our borrowers'
ability to pay the principal or interest on existing loans or reduce their desire to borrow more money. This situation may lead to an
increase in non-perfornung assets or a decrease in loan originations, either of which could have a material and negative effect on our
results of operations.
We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our
operations; we depend on our ability to attract and retain key personnel.
We are acustomer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the
relationships maintained with our customers by our president and chief executive officer and other senior officers. The unexpected loss
of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. We do
maintain bank-owned life insurance on key officers that would help cover some of the economic impact of a loss caused by death.
The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel
to develop new customer relationships as well as new financial products and services. Many experienced banking professionals
employed by our competitors aze covered by agreements not to compete or to solicit their e~cisting customers if they were to leave their
current employment. These agreements make the recruitment of these professionals more difficult. The mazket for these people is
competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.
The Federal Reserve adopted final rules subjecting banks and bank holding companies to more stringent capital and liquidity
requirements, the short-term and long-term impact of which is uncertain.
We aze subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital
which we must maintain. In July 2013, the Federal Reserve and the federal banking agencies issued final rules revising risk-based and
leverage capital requirements and the method for calculating risk-weighted assets. The rules implement the Basel III regulatory capital
reforms from the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rules establish a new
common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum Tier 1 risk-based capital
13
requirement (6% of risk-weighted assets) and assign higher risk weightings to loans that aze past due and certain loans financing the
acquisition, development or construction of commercial real estate. We were required to comply with the new rules beginning on
January 1, 2015. These requirements and any other new regulations, could adversely affect our ability to pay dividends, or could require
us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations.
New regulations issued by the Consumer Financial Protection Bureau could adversely affect our earnings.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to
financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules
identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer
financial product or service, or the offering of a consumer financial product or service. For example, the CFPB issued a final rule
effective January 10, 2014, requiring mortgage lenders to make a reasonable and good faith determination based on verified and
documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms,
or to originate "qualified mortgages" that meet specific requirements with respect to terms, pricing and fees. The new rule also contains
new disclosure requirements at mortgage loan origination and in monthly statements.
The requirements under the CFPB's regulations and policies could limit our ability to make certain types of loans or loans to
certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our
profitability.
We are subject to security and operational risks including risks relating to the use of technology that, if not managed properly,
could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation,
increase costs and cause losses. Any such failure also could have a material adverse effect on our business, financial condition
and results of operations.
To conduct our business, we rely heavily on technology-driven products and services and on communications and information
systems. Our future success will depend, in part, on our ability to address customers' needs by using technology to provide products
and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. We have taken
measures to implement backup systems and other safeguards with respect to the physical infrastructure and systems that support our
operations, but our ability to conduct business may be adversely affected by any significant and widespread disruption to its
infrastructure or systems. Our financial, accounting, data processing, check processing, electronic funds transfer, loan processing, online
banking, mobile banking, automated teller machines, backup or other operating systems and facilities may fail to operate properly or
become disabled or damaged as a result of a number of factors including events that aze wholly or partially beyond our control and can
adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer
transaction volume, electrical or telecommunications outages, natural disasters, events arising from local or lazger scale political or
social matters, including terrorist acts, and cyber attacks. We continuously update these systems to support our operations and growth.
This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing
ones.
Information security risks for financial institutions have significantly increased in recent yeazs in part because of the proliferation
of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased
sophistication and activities of organized crime, hackers and other external parties. Our operations rely on the secure processing,
transmission and storage of confidential, proprietary and other information in our computer systems and networks. We rely on digital
technologies, computer and email systems, software and networks to conduct our operations, as well as on the honesty and integrity of
our employees and vendors with access to those elements. In addition, to access our products and services, customers may use computers,
personal smartphones, tablet PCs and other mobile devices that are beyond our control systems. Our technologies, systems and networks
and our customers' devices may be subject to, or the target of, cyber attacks, computer viruses, malicious code, phishing attacks or
information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or
our customers' confidential, proprietary and other information, or otherwise disrupt our or our customers' or other third parties' business
operations.
We also face the risk of unauthorized activity, fraud or theft by employees and/or vendors that could result in disclosure or misuse
of customers' confidential, proprietary or other information. In addition, we face the risk of operational failure, ternunation or capacity
constraints of any of the third parties with which it does business or that facilitate its business activities, including financial intermediaries
that we use to facilitate transactions. Any such failure, ternunation or constraint could adversely affect our ability to effect transactions,
service our customers, manage our exposure to risk or expand our business and could have a significant adverse impact on our liquidity,
financial condition and results of operations.
There can be no assurance that we will not experience material losses related to cyber attacks or other information security
breaches. Cyber security and the continued development and enhancement of our controls, processes and practices designed to protect
our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us, and we may
14
be required to expend significant additional resources to continue to modify or enhance these protective measures or to investigate and
remediate any information security vulnerabilities.
We rely on other companies to provide key components of our business infrastructure.
Third parties provide key components of our business operations such as data processing, recording and monitoring transactions,
online banking interfaces and services, intemet connections and network access. While we have selected these third party vendors
cazefully, we do not control their actions. Any problem caused by these third parties, including poor performance of services, failure to
provide services, disruptions in services provided by a vendor and failure to handle current or higher volumes, could adversely affect
our ability to deliver products and services to our customers and otherwise conduct our business, and may harm our reputation. Financial
or operational difficulties of a third party vendor could also hurt our operations if those difficulties affect the vendor's ability to serve
us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an
unavoidable inherent risk to our business operations.
The operational functions of business counterparties over wWch the Company may have limited or no control may experience
disruptions that could adversely impact the Company.
Multiple major U.S. retailers have recently experienced data systems incursions reportedly resulting in the thefts of credit and
debit card information, online account information, and other financial data of tens of millions of the retailers' customers. Retailer
incursions affect cazds issued and deposit accounts maintained by many banks, including the Bank. Although the Company's systems
are not breached in retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly
steps to avoid significant theft loss to the Bank and its customers. In some cases, the Bank may be required to reimburse customers for
the losses they incur. Other possible points of intrusion or disruption not within the Bank's control include Internet service providers,
electronic mail portal providers, social media portals, distant-server (cloud) service providers, electronic data security providers,
telecommunications companies, and smart phone manufacturers.
We may need to raise capital that may not ultimately be available to us.
Regulatory authorities require us to maintain certain levels of capital to support our operations. While we remained "well
capitalized" at December 31, 2015, we may need to raise additional capital in the future if we incur losses or due to regulatory mandates.
The ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which aze outside our control,
and on our financial performance. Accordingly, we may not be able to raise capital, if and when needed, on terms acceptable to us, or
at all. If we cannot raise capital when needed, our ability to increase our capital ratios could be materially impaired, and we could face
regulatory challenges.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better
serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able
to effectively implement new technology-driven products and services or be successful in marketing these products and services to our
customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material
adverse impact on our business and, in turn, our financial condition and results of operations.
A substantial decline in the value of our securities portfolio may result in an "other-than-temporary" impairment charge.
The total amount of our available-for-sale securities portfolio was $243.3 million at December 31, 2015. The measurement of the
fair value of these securities involves significant judgment due to the complexity of the factors contributing to the measurement. Mazket
volatility makes measurement of the fair value of our securities portfolio even more difficult and subjective. More generally, as market
conditions continue to be volatile, we cannot provide assurance with respect to the amount of future unrealized losses in the portfolio.
To the extent that any portion of the unrealized losses in these portfolios is determined to be other than temporary, and the loss is related
to credit factors, we would recognize a chazge to our earnings in the quarter during which such deternunation is made, and our capital
ratios could be adversely affected.
The repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of
the Dodd-Frank Act beginning on July 21, 2011. As a result, some financial institutions have commenced offering interest on demand
deposits to compete for customers. Our interest expense will increase and net interest margin will decrease if we begin offering interest
15
on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our
financial condition and results of operations.
Consumers may increasingly decide not to use us to complete their financial transactions, which would have a material adverse
impact on our financial condition and operations.
Technology and other changes aze allowing parties to complete financial transactions through alternative methods that historically
have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in
brokerage accounts, mutual funds or general-purpose reloadable prepaid cazds. Consumers can also complete transactions such as paying
bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as
"disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and the related income generated
from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse
effect on our financial condition and results of operations.
Nonperforming assets adversely affect our results of operations and financial condition.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans,
thereby adversely affecting our income and increasing loan administration costs. When we receive collateral through foreclosures and
similaz proceedings, we are required to mark the related loan to the then fair mazket value of the collateral less estimated selling costs,
which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital
levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts and
restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the
borrowers' performance or financial condition, could adversely affect our business, results of operarions and financial condition.
In addition, the resolution of nonperfornung assets requires significant commitments of time from management and staff, which
can be detrimental to performance of their other responsibilities. Such resolution may also require the assistance of third parties, and
thus the expense associated with it. There can be no assurance that we will avoid further increases in nonperforming loans in the future.
We rely upon independent appraisals to determine the value of the real estate which secures a significant portion of our loans,
and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.
A significant portion of our loan portfolio consists of loans secured by real estate (86.5% at December 31, 2015). We rely upon
independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers
may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the
initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing
some of our loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured
by real estate that is less valuable than originally estimated, we may not be able to recover the outstanding balance of the loan and will
suffer a loss.
Our risk-management framework may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks
that we face. These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation. While we assess and
improve this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related
controls will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps
in our risk-management program, or if its controls break down, our results of operations and financial condition may be adversely
affected.
Negative perception of us through social media may adversely affect our reputation and business.
Our reputation is critical to the success of our business. We believe that our brand image has been well received by customers,
reflecring the fact that the brand image, like our business, is based in part on trust and confidence. Our reputation and brand image could
be negatively affected by rapid and widespread distribution of publicity through social media channels. Our reputation could also be
affected by our association with customers affected negatively through social media distribution, or other third parties, or by
circumstances outside of our control. Negative publicity, whether true or untrue, could affect our ability to attract or retain customers,
or cause us to incur additional liabilities or costs, or result in additional regulatory scrutiny.
We are subject to e~ensive government regulation and supervision.
We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect
depositors' funds, federal deposit insurance funds and the banking system as a whole, and not security holders. These regulations affect
16
our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal
regulatory agencies continually review banking laws, regulations and policies for possible changes.
These provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial
industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices,
including our ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and
could expose us to additional costs, including increased compliance costs. These changes also may require us to invest. significant
management attention and resources to make any necessary changes to our operations in order to comply, and could therefore also
materially adversely affect our business, financial condition, and results of operations. Furthermore, failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could
have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards could impact reported earnings.
The authorities that promulgate accounting standazds, including the Financial Accounting Standards Board and Securities and
Exchange Commission, periodically change the financial accounting and reporting standards that govern the prepazation of the
Company's consolidated financial statements. These changes aze difficult to predict and can materially impact how the Company records
and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised
standazd retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also require the
Company to incur additional personnel or technology costs.
Our disclosure controls and procedures and internal controls may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures aze designed to reasonably assure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. We believe that any disclosure controls and procedures or
internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system aze met. These inherent limitarions include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or omission. Additionally, controls can be circumvented by individual
acts, by collusion by two or more people and/or by override of the established controls. Accordingly, because of the inherent limitations
in our control systems and in human nature, misstatements due to error or fraud may occur and not be detected.
We can give no assurances that our deferred tax asset will not become impaired in the future because it is based on projections
of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.
We can give no assurances that our deferred tan asset will not become impaired in the future. At December 31, 2015, we recorded
net deferred income tau assets of $10.1 million. We assess the realization of deferred income tax assets and record a valuation allowance
if it is "more likely than not" that we will not realize all or a portion of the deferred tax asset. We consider all available evidence, both
positive and negative, to deternune whether, based on the weight of that evidence, we need a valuation allowance. Management's
assessment is primarily dependent on historical taxable income and projections of future ta~cable income, which are directly related to
our core earnings capacity and our prospects to generate core earnings in the future. Projections of core earnings and taxable income aze
inherently subject to uncertainty and estimates that may change given an uncertain economic outlook and current banking industry
conditions. Due to the uncertainty of estimates and projections, it is possible that we will be required to record adjustments to the
valuation allowance in future reporting periods.
Deterioration in the soundness of other financial institutions could adversely atTect us.
Ow ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the
financial industry, including brokers and dealers, commercial banks and other institutional clients. As a result, defaults by, or even
rumors or questions about, one or more financial services institutions, or the financial services industry generally, could create market-
wide liquidity problems and could lead to losses or defaults by us or by other institutions. Our credit risk may also be exacerbated when
the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial
instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of
operations.
We may be adversely impacted by changes in the condition of financial markets.
We are directly and induecdy affected by changes in market conditions. Mazket risk generally represents the risk that values of
assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial
instruments associated with our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt,
17
trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to time, thereby
exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, and price deterioration
or changes in value due to changes in mazket perception or actual credit quality of issuers. Accordingly, depending on the instruments
or activities impacted, market risks can have adverse effects on our results of operations and our overall financial condition.
Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.
We aze subject to supervision by several governmental regulatory agencies, including the Federal Reserve Bank of Richmond and
Virginia's Bureau of Financial Institutions. Bank regulations, and the interpretarion and application of them by regulators, aze beyond
our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. In addition, these regulations
may limit our growth and the return to investors by restricting activities such as the payment of dividends, mergers with, or acquisitions
by, other institurions, investments, loans and interest rates, interest rates paid on deposits and the opening of new branch offices.
Although these regulations impose costs on us, they aze intended to protect depositors, and should not be assumed to protect the interest
of shazeholders. The regulations to which we are subject may not always be in the best interest of investors.
The FDIC deposit insurance assessments that we are required to pay may increase in the future, which would have an adverse
effect on earnings.
As an insured depository institution, we aze required to pay quarterly deposit insurance premium assessments to the FDIC to
maintain the level of the FDIC deposit insurance reserve ratio. The past failures of financial institutions have significantly increased the
loss provisions of the DIF, resulting in a decline in the reserve ratio. As a result of recent economic conditions and the enactment of the
Dodd-Frank Act, the FDIC revised its assessment rates, which raised deposit premiums for certain insured depository institutions. If
these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance
premiums may be required. We aze generally unable to control the amount of premiums that we are required to pay for FDIC insurance.
If there aze additional bank or financial institution failures, the FDIC may increase the deposit insurance assessment rates. Any future
assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect earnings and could
negatively affect our stock price.
Our businesses and earnings are impacted by governmental, fiscal and monetary policy.
We are affected by domestic monetary policy. For example, the Federal Reserve Boazd regulates the supply of money and credit
in the United States and its policies determine in lazge part our cost of funds for lending, investing and capital raising activities and the
return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board
also can materially affect the value of financial instruments we hold, such as loans and debt securities, and its policies also can affect
our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by
the fiscal or other policies that aze adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy
are beyond our control and hazd to predict.
Our profitability and the value of any equity investment in us may suffer because of rapid and unpredictable changes in the
higlily regulated environment in which we operate.
We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently
enacted, proposed and future banking and other legislation and regulations have had, and will continue to have, or may have a significant
impact on the financial services industry. These regularions, which aze generally intended to protect depositors and not our shazeholders,
and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and
unpredictably, and can be expected to influence our earnings and growth. Our success depends on our continued ability to maintain
compliance with these regulations. Many of these regulations increase our costs and thus place other financial institutions that may not
be subject to similar regulation in stronger, more favorable competitive positions.
The trading volume in our common stock is less than that of other larger financial services companies.
The trading volume in our common stock is less than that of other larger financial services companies. A public trading mazket
having the desired chazacteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and
sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic
and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our
common stock, or the expectation of these sales, could cause our stock price to fall.
Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts by a
potential purchaser of our common stock that would be willing to pay you a premium for your shares of our common stock.
Our Articles of Incorporation and Bylaws contain provisions that may be deemed to have the effect of discouraging or delaying
uninvited attempts by third parties to gain control of us. These provisions include the ability of our board to set the price, term, and
18
rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability
of shazeholders to call special meetings.
Similazly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from
the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in
control without the support of our incumbent directors. These provisions may also strengthen the position of current management by
restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions
that aze opposed by the current board.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
TTEM 2. PROPERTIES
The Company operates the following offices:
Corporate Headquarters:
Deep Run at Mayland — 9954 Mayland Drive, Suite 21 U0, Richmond, VA 23233
Virginia Branch Offices:
Bon Air — 2730 Buford Road, Richmond, VA 23235
Burgess — 14598 Northumberland Highway, Burgess, VA 22432
Callao — 654 Northumberland Highway, Callao, VA 22435
Centerville — 100 Broad Street Road, Manakin-Sabot, VA 23103
Goochland Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063
Deep Run at Mayland — 9954 Mayland Drive, Richmond, VA 23233
Flat Rock — 2320 Anderson Highway, Powhatan, VA 23139
King William — 4935 Richmond-Tappahannock Highway, Aylett, VA 23009
Louisa — 217 East Main Street, Louisa, VA 23093
Mechanicsville — 6315 Mechanicsville Turnpike, Mechanicsville, VA 23111
Prince Street — 323 Prince Street, Tappahannock, VA 22560
Tappahannock — 1325 Tappahannock Boulevard, Tappahannock, VA 22560
Virginia Center — 9951 Brook Road, Glen Allen, VA 23060
West Point — 16th and Main Street, West Point, VA 23181
Winterfield — 3740 Winterfield Road, Midlothian, VA 23113
Maryland Branch Offices:
Annapolis - 1835 West Street, Annapolis, MD 21401
Arnold — 1460 Ritchie Highway, Arnold, MD 21012
Bowie - 6143 High Bridge Road, Bowie, MD 20720
Catonsville —1000 Ingleside Avenue, Catonsville, MD 21228
Crofton — 2120 Baldwin Avenue, Crofton, MD 21114
Rockville —1101 Nelson Street, Rockville, MD 20850
Rosedale — 1230 Race Road, Rosedale, MD 21237
The Company owns all of the offices listed above, except that it leases its corporate headquarters, its Winterfield office in the
Virginia market and the Arnold, Crofton and Rockville offices in the Maryland market. The Company also has loan production offices
in Fairfax and Lynchburg, Virginia, both of which it leases.
The Company opened its Bowie branch office on January 12, 2015. The Company opened its Bon Air branch office on August 3,
2015. The Company expects to open a branch office in Fairfax, Virginia (10509 Judicial Drive) on Mazch 30, 2016.
The Company closed its branch office in Catonsville, Maryland (1000 Ingleside Avenue) on March 4, 2016.
All of the Company's properties aze in good operating condition and aze adequate for the Company's present and anticipated needs.
19
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company, including its subsidiaries, is a party or of which its property
is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET PRICES FOR SECURITIES
The Company's common stock trades on the NASDAQ Capital Market under the symbol "ESXB".
The following table sets summarizes the high and low sales prices for the Company's common stock for the quarterly periods
during the yeazs ended December 31, 2015 and 2014:
2015
2014
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
High
Low
$ 4.52 $ 4. l2
4.30
4.77
4.88
5.09
5.18
5.50
High
Low
$ 4.1 U $ 3.73
3.85
4.15
4.30
4.54
4.49
4.54
HOLDERS OF RECORD
As of December 31, 2015, there were 2,717 holders of record of the Company's common stock, not including beneficial holders
of securities held in street name.
i7 \~I 17 ~1►`I 17.E
The Company's dividend policy is subject to the discretion of the board of directors and future cash dividend payments to
shareholders will depend upon a number of factors, including future earnings, alternative investment opportunities, financial condition,
cash requirements and general business conditions.
The Company's ability to distribute cash dividends will depend primarily on the ability of its banking subsidiary to pay dividends
to it. The Bank is subject to legal limitations on the amount of dividends that it is permitted to pay under Section 5199(b) of the Revised
Statues (12 U.S.C. 60), and the approval of the Federal Reserve would be required if the total of all dividends declared by a state member
bank in any calendar year shall exceed the total of its net profits of that year combined with its retained net profits of the preceding two
years. Additionally, the Bank is further restricted by Regulation H, Section 208.5, Dividends and Other Distributions, which requires
pre-approval of dividends that exceed undivided profits. Furthermore, neither the Company nor the Bank may declare or pay a cash
dividend on any of its capital stock if it is insolvent or if the payment of the dividend would render the entity insolvent or unable to pay
its obligations as they become due in the ordinary course of business. For additional information on these limitations, see "Supervision
and Regulation —Capital Requirements and Dividends" in Item 1 above.
In addition, the ability of each of the Company and the Bank to distribute cash dividends is subject to restrictions in a third-party
term loan that the Company obtained in Apri12014 to repurchase its then outstanding Series A Preferred Stock. Specifically, neither
the Company nor the Bank can declare or make a dividend if there exists a default, or such action would create a default, under the term
loan, which requires the Company to be in compliance with certain covenants, such as maintenance of minimum regulatory capital
ratios, minimum return on assets, minimum cash on hand and minimum dividend capacity. For additional information on the term loan,
see Note 10 to the Notes to the Consolidated Financial Statements.
Following the payment of a cash dividend in February 2010, the Company determined to suspend the payment of its quarterly
dividend to holders of common stock. While the Company believes that its capital and liquidity levels remain above the averages of its
peers, the Company utilized dividends from the Bank for the payment of capital funding (Series A Preferred Stock) received from the
20
Department of the Treasury until Apri12014, when the Company completed the redemption of such funding. The Company currently
utilizes dividends from the Bank for principal and interest payments with respect to an unsecured third party loan that the Company
obtained at the same time in connection with such redemption. Additional dividends from the Bank would be utilized for the payment
of intercompany expenses and interest payments on trust preferred securities.
The Company does not plan to recommence the payment of its quarterly dividend to holders of common stock at the current time.
The Company believes that the current use of earnings to support growth, maintain current capital levels and support payments under
the third party loan are appropriate for the long-term growth of shazeholder value in the Company.
PURCHASES OF EQUITY SECURITES BY THE ISSUER
The Company does not currently have in place a repurchase program with respect to any of its securities. In addition, the Company
did not repurchase any of its securities during the year ended December 31, 2015.
STOCK PERFORMANCE GRAPH
The stock performance graph set forth below shows the cumulative stockholder return on the Company's common stock during
the period from December 31, 2010, to December 31, 2015, as compared with (i) an overall stock mazket index, the NASDAQ
Composite Index, and (u) a published industry index, the SNL Bank and Thrift Index. T'he graph assumes that $100 was invested on
December 31, 2010 in the Company's common stock and in each of the comparable indices and that dividends were reinvested.
Total Return Performance
soo —
—~-Community Bankers Trust Corporation
500 -
f NASDAQ Composite
f SNL Bank and Thrift
400 --.__....
a~
> 300
x
d
v
c
200
100
0
12/31 /10
12/31 / 11
12/31 /12
12/31 / 13
12/31 / 14
12/31 / 15
Index
Community Bankers Trust Corporation
NASDAQ Composite
SNL Bank and Thrift
Period Ending
12/3U10 12/31/11 12/3U12 12/31/13 12/3U14 12/31/15
511.43
201.40
162.83
420.95
188.03
159.60
358.10
163.75
142.97
252.38
116.82
104.42
109.52
99.21
77.76
100.00
100.00
100.00
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company over each of the past five years ended December 31. The
historical results included below and elsewhere in this report are not indicative of the future performance of the Company and its
subsidiaries.
(dollars in thousands, except per share amounts)
2015
2014
2013
2012
2011
Year Ended December 31
Results of Operations
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses.
Noninterest income
Noninterest expense
(Loss) income before income takes
Income tax (benefit) expense
Net (loss) income
Financial ('onditiun
Assets
FDIC indemnification asset
i'CI loans
Loans, net of unearned income
Deposits
-
Shazeholders' equity
Ratios
Return on average assets
Return on average equity
Non-GAAP return on average tangible assets (1)
Non-GAAP return on average tangible common equity (1)
Efficiency ratio (2)
Equity to assets
Loan to d~osits
Average tangible common equity /average tangible assets (1)
Asset Ouality
Allowance for loan losses (3)
Allowance for loan losses /loans (3)
Allowance for loan losses /nonperforming assets
Allowance for loan losses / nonaccrual loans (3)
Nonperforming assets /loans and other real estate (3)
Per Share Data
Earnings (loss) per shaze, basic
Earnings (loss) per share, diluted
Non-GAAP earnings (loss) per share, diluted (1)
Cash dividends paid
Market value per share
Book value per tangible common share (1)
Price to earnings ratio, diluted
Price to book value ratio
Dividend payout ratio
42,967
41,792
50,045 $
48,725 $
53,719 $
47,552 $
- -
56,035
12,228
7,497 6,933 7,078 9,692
43,807
44,027
40,055
1,498
- 1,200
42,827
42,309
8,233
6,206
49,038
41,303
1,504
7,730
2,148 60
$ (2,497) $ 7,516 $ 5,906 $ 5,582 $ 1,444
41,792
40,055
5,081
5,269
36,817
50,260
(5,124)
10,244
(2,627) 2,728
42,967
4,724
39,288
8,403
2.497
$
1,180,557 $
-
5$,955
748,724
945,519
104,487
(0.22)3'a
(2.31)%
(0.11)%
(1.19)%
111.35%
8.86%
85.42%
9.10%
1,155,734 $ 1,089,532 $ 1,153,288 $ 1,092,496
42,641
97,561
544,718
933,491
18,609
67,460
660,020
918,445,
25,409
73,275
596,173
892,341
33,837
84,637
575,482
107,650
106,659
974,318
115,317
0.67%
7.09%
0.79%
9.09%
78.23%
931%
79.16%
8.70%
0.53%
5.22°Io
0.6696
838%
82.38°Ja
9.79%
75.02°!0
7.90%
0.50%
4.85%
0.65%'0
831%
82.22°k
10.00%a
67.759b
7.77%
$
9,559 $
9,267 $
10,444 $
12,920 $
1.28%a
62.1.5%
89.59%
2.14%
1.40%~
40.10%
55.92%
3.64
1.75%a
56.92%
86.28%a
3.05%
2.25%
39.94%
61.38%
5.52%
$
(0.11) $
0.33 $
0.22 $
0.21 $
(O.l 1)
(0.06)
5.37
4.65
(48.82)
112.4%a
n/a
033
0.40
4.42
4.72
1339
89.5%
n/a
0.22
033
3.76
4.07
17.09
86.0%
n/a
_
0.21
0.33
2.65
3.92
12.62
59.3%
n/a
111,180
0.13°k
132%
0.28%
3.80%
94.23%
10.18%
68.80%
7.25%
14,835
2.72%
36.36%
51.97%
735%
0.02
0.02
0.14
1.15
3.58
57.50
26.5%
n/a
Weighted average shazes outstanding, basic
21,826,845
21,755,448
21,699,964
21,647,372
21,565,366
Weighted average shapes outstanding, diluted
21,826,845
21,980,979
21,922,132
21,717,499
21,565,366
22
Capital Ratios
Leverage Ratio
Common equity tier I capital
Tier 1 risk-based capital ratio
Total risk-based capital ratio
2015
2014
2013
2012
2011
Year Ended December 31
9.40%
11.62°I
12.08%
13.16%
9.36%
n/a
13.52%
14.72%
9.52%
n/a
15.62°l0
16.82%
9.41%
n/a
15.79%
16.87%
8.91%
n/a
15.01 °!o
16.16 /0
(1) Refer to "Item 7. Management's Discussion and Analysis of Financial Condition. and Resul[s of Operations ", section "Non GAAP Measures" for a reconciliarion.
(2) The e~'iciency ratio is calculated by dividing noninterest expense over the sum of net interest income plus noninterest income.
(3) Excludes PCI loans.
TTEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the financial condition at December 31, 2015 and results of operations for the yeaz ended
December 31, 2015 of Community Bankers Trust Corporation (the "Company") should be read in conjunction with the Company's
consolidated financial statements and the accompanying notes to consolidated financial statements included in this report.
GENERAL
Community Bankers Trust Corporation (the "Company") is a bank holding company that was originally incorporated in 2005. On
January 1, 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to Virginia. The form of
the reincorporation was the merger of the then existing Delawaze corporation into a newly created Virginia corporation. The Company
retained the same name and conducts business in the same manner as before the reincorporation.
The Company is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the "Bank"), a Virginia state
bank with 21 full-service offices in Virginia and Maryland. The Bank also operates two loan production offices in Virginia.
The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to
individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial
loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products,
and safe deposit box facilities.
Prior to November 8, 2013, the Bank also had four full-service offices in Georgia. The Bank sold those offices and related deposits
to Community &Southern Bank on November 8, 2013. See Note 30 for additional information.
The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income
is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets
outstanding during the period and the interest rates earned thereon. The Company's cost of funds is a function of the average amount of
interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets
further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.
Additionally, the Bank earns noninterest income from service chazges on deposit accounts and other fee or commission-based services
and products. Other sources of noninterest income can include gains or losses on securities transactions, mortgage loan income, gains
from loan sales, and income from Bank Owned Life Insurance (BOLI) policies. The Company's income is offset by noninterest expense,
which consists of salaries and benefits, occupancy and equipment costs, professional fees, transactions involving bank-owned property,
the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may materially
affect income.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
The Company makes certain forwazd-looking statements in this report that are subject to risks and uncertainties. These forward-
looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market
risk, growth sh~ategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as "the
Company expects," "the Company believes" or words of similaz import.
These forwazd-looking statements are subject to significant uncertainties because they are based upon or aze affected by factors,
including, without limitation, the effects of and changes in the following:
23
• the quality or composition of the Company's loan or investment portfolios, including collateral values and the repayment
abilities of borrowers and issuers;
• assumptions that underlie the Company's allowance for loan losses;
• general economic and market conditions, either nationally or in the Company's market areas;
• the interest rate environment;
• competitive pressures among banks and financial institutions or from companies outside the banking industry;
• real estate values;
• the demand for deposit, loan, aid investment products and other financial services;
• the demand, development and acceptance of new products and services;
• the performance of vendors or other parties with which the Company does business;
• time and costs associated with de novo branching, acquisitions, dispositions and similaz transactions;
• the realization of gains and expense savings from acquisitions, dispositions and similar transactions;
• assumptions and estimates that underlie the accounting for purchased credit impaired loans;
• consumer profiles and spending and savings habits;
~ levels of fraud in the banking industry;
• the level of attempted cyber attacks in the banking industry;
• the securities and credit mazkets;
• costs associated with the integration of banking and other internal operations;
• the soundness of other financial institutions with which the Company does business;
• inflation;
• technology; and
• legislative and regulatory requirements.
These factors and additional risks and uncertainties are described in the "Risk Factors" discussion in Part I, Item 1 A, of this report.
Although the Company believes that its expectations with respect to the forward-looking statements aze based upon reliable
assumptions within the bounds of its lmowledge of its business and operations, there can be no assurance that actual results, performance
or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied
by such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States
(GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on
measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate
value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the
Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses
could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events
that would impact its transactions could change.
24
The following is a summary of the Company's critical accounting policies that are highly dependent on estimates, assumptions
and judgments.
Allowance for Loan Losses on Loans
The allowance for loan losses is established as losses aze estimated to have occurred through a provision for loan losses chazged
to earnings. Loan losses aze charged against the allowance when management believes the uncollectability of aloan balance is confirmed.
Subsequent recoveries, if any, aze credited to the allowance.
The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified
loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of
existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the
borrower's ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that aze
related to future events or expected changes in economic conditions. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, and may
require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their
examinations.
The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for
qualitative factors. The unallocated component is maintained to cover uncertainties that could affect management's estimate of probable
losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the mett►odologies
for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected
future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not
sepazately identify individual consumer and residential loans for impairment disclosures.
Accountine for Certain Loans Acquired in a Transfer
FASB ASC 310, Receivables requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances
in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers
under revolving credit arrangements are excluded from the scope of FASB ASC 310 which limits the yield that may be accreted to the
excess of the undiscounted expected cash flows over the investor's initial investment in the loan. The excess of the contractual cash
flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are
recognized prospectively through an adjustment of the loan's yield over its remaining life. Decreases in expected cash flows are
recognized as impairments through the allowance for loan losses.
The Company's acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the "PCI loans"), subject to FASB
ASC Topic 805, Business Combinations (formerly SFAS 141(R)), are recorded at fair value and no separate valuation allowance was
recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly
SOP 03-3), applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition,
that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of
FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk
chazacteristics including product type, delinquency status and loan documentation requirements among others.
The PCI loans aze subject to credit review standards described above for loans. If and when credit deterioration occurs subsequent
to the acquisition date, a provision for credit loss for PCI loans will be charged to earnings.
25
The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes
undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield.
Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each
pool's contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to
collect from the pool is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment assumptions
aze applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or
pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be
collected over the life of the pool aze recognized as an impairment in the current period through the allowance for loan loss. Subsequent
increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining
increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic
accretion adjusted over the remaining life of the pool.
FDIC Indemnification Asset
During the third quarter of 2015, the Company terminated the shared-loss agreement relating to the single family, residential 1-4
family mortgage assets. As part of this termination, the FDIC paid the Company $3.1 million as consideration for the early termination
of the shazed-loss agreement. All rights and obligations of the parties under the shazed-loss agreements, including the provision to
reimburse recoveries received related to [he agreement that temunated in March 2014, have been eliminated under the termination
agreement. The proceeds from the FDIC were first applied to the outstanding FDIC receivable of $775,000. The remaining FDIC
indemnification asset balance of $13.1 million was chazged-off as additional FDIC indemnification asset amortization expense.
The Company accounted for the shared-loss agreements with the FDIC as an indemnification asset pursuant to the guidance in
FASB ASC 805, Business Combinations. The FDIC indemnification asset was required to be measured in the same manner as the asset
or liability to which it related. The FDIC indemnification asset was measured sepazately from the acquired loans and other real estate
owned assets (OREO) because it was not contractually embedded in the acquired loan and OREO and was not transferable had the
Company chosen to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit
adjustments estimated for each loan pool and other real estate owned and the loss sharing percentages outlined in the shared-loss
agreements. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement
from the FDIC.
Income Taxes
Deferred income tax assets and liabilities aze determined using the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is determined based on the ta~c effects of the temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Positions taken in the Company's tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain
tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be
sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the lazgest amount
of tau benefit that is greater than 50 percent likely of being realized upon settlement with the ta~c authority, assuming full lmowledge of
the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be
challenged by the taking authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing.
Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax
uncertainties aze classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties
during the yeazs ended December 31, 2015, 2014 or 2013. Under FASB ASC 740, Income Taxes, a valuation allowance is provided
when it is more likely than not that some portion of the deferred tax asset will not be realized. In management's opinion, based on a
three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred
tax liabilities, it is more likely than not that the deferred tax assets are realizable.
The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income taxes. All
years from 2012 through 2015 are open to examination by the respective tax authorities.
Other Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value of the real
estate acquired at the date of foreclosure net of estimated selling costs, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less
costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.
Costs to bring a property to salable condition aze capitalized up to the fair value of the property while costs to maintain a property in
salable condition aze expensed as incurred. The Company had $5.5 million and $7.7 million in other real estate, at December 31, 2015
and 2014, respectively.
26
At December 31, 2015, the Company had total assets of $1.181 billion, an increase of $24.8 million, or 2.1%, from total assets of
$1.156 billion at December 31, 2014. Total loans were $807.7 million at December 31, 2015, increasing $80.2 million from $727.5
million at December 31, 2014. Total loans, excluding PCI loans, were $748.7 million at December 31, 2015 versus $660.0 million at
December 31, 2014. Total loans, excluding PCI loans, increased $88.7 million, or 13.4%, during 2015.
The Company's securities portfolio decreased $31.4 million, or 9.8%, from $319.6 million at December 31, 2014 to $288.2 million
at December 31, 2015. Realized gains of $472,000 occurred during 2015 through sales and call activity.
The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under
FASB ASC 320, Investments -Debt and Equity Securities. The market value of the AFS portfolio was $243.3 million and $274.6 million
at December 31, 2015 and 2014, respectively. The Company had a net unrealized gain of $671,000 and $2.2 million in the AFS portfolio
at December 31, 2015 and 2014, respectively.
Noninterest bearing deposits increased $11.7 million, or 13.8%, from $84.6 million at December 31, 2014 to $96.2 million at
December 31, 2015. Interest bearing deposits at December 31, 2015 were $849.3 million, an increase of $14.9 million, or 1.8%, from
December 31, 2014. NOW, MMDA and savings account balances increased $5.1 million, $7.0 million and $5.6 million, respectively,
since December 31, 2014. Time deposits less than or equal to $250,000 declined $7.5 million, or 1.8%, during 2015 while time deposits
over $250,000 increased $4.8 million, or 4.2%, during 2015.
FHLB advances were $95.7 million at December 31, 2015, compared with $96.4 million at December 31, 2014. Ttus $745,000
decrease represented a marginal change yeaz-over-yeaz, as the Company took advantage of the low cost nature of this funding source
while maintaining a $30 million notional value balance sheet swap.
Long term debt totaled $5.7 million at December 31, 2015. This borrowing, initially in the amount of $10.7 million, was obtained
in Apri12014, and the proceeds were used to redeem the Company's remaining outstanding TARP preferred stock. The Company made
$4.0 million in principal payments during 2015.
Shareholders' equity was $104.5 million at December 31, 2015 and $107.7 million at December 31, 2014. The primary reason for
the decline of $3.2 million was the ternunation of the FDIC shazed-loss agreement and the resulting loss during the third quarter of 2015.
Management anticipates that the earn-back period on the elimination of the indemnification assets is approximately two years.
RESULTS OF OPERATIONS
Net Income
Net loss was $2.5 million for the year ended December 31, 2015, compared with net income of $7.5 million and net income
available to common shareholders of $7.3 million for the same period in 2014. T'he $10.0 million, or 133.2%, reduction yeaz over year
was primarily driven by a $13.4 million increase in noninterest expense. Of this $13.4 million increase, $13.1 million related to the
temunation of the FDIC shared-loss agreement during the third quarter of 2015. The Company estimates that the elimination of the
FDIC indemnification asset will result in an increase in net income of approximately $3.0 million over the 12 month period following
its termination due to the elimination of the related amortization expense. Earnings/(loss) per common shaze, basic and fully diluted,
were $(0.11) for the yeaz ended December 31, 2015 versus $0.33 for the same period in 2014.
Net income was $7.5 million for the yeaz ended December 31, 2014, compazed with $5.9 million for the 2013 fiscal yeaz. The
$1.6 million, or 273%, improvement year over yeaz was primarily driven by a $2.5 million reduction in noninterest expenses. Net
income available to common shareholders was $7.3 million for the year ended December 31, 2014, compared with $4.8 million for
fiscal yeaz 2013, an increase of 51.8%. Earnings per common share, basic and fully diluted, were $0.33 per share and $0.22 per share
for the respective time frames.
Net Interest Income
The Company's operating results depend primarily on its net interest income, which is the difference between interest income on
interest earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and
other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing
liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest earning assets and rates paid on
interest bearing deposits and other borrowed funds, referred to as a "rate change."
Net interest income was $40.1 million for the year ended December 31, 2015 versus $41.8 million for the yeaz ended December
31, 2014. This decrease in net interest income was the result of lower interest income of $1.2 million coupled with higher interest
expense of $564,000. This is a decrease of $1.7 million, or 4.2%. While the income on loans, excluding PCI loans, increased $2.4
27
million in 2015 compared with 2014, the income derived from PCI loans dropped by $3.4 million. Cash payments on zero canying
value acquisition, development and construction (ADC) loans were $825,000 greater during 2014 when compared with 2015. Interest
income on securities decreased 2.2%, or $175,000. However, interest income on securities, on atax-equivalent basis, increased 5.3%,
or $439,000, during the same time frame as more of the portfolio was stufted to tax-exempt municipals with higher tax equivalent yield.
Interest spread is the product of yield on earning assets less cost of total interest bearing liabilities. The Company's net interest
spread declined from 4.12% for the year ended December 31, 2014 to 3.77% for the same period in 2015. The tax-equivalent yield on
earning assets dropped 30 basis points, from 4.87% for the year ended December 31, 2014 to 4.57% for the year ended December 31,
2015. The yield on total loans declined 60 basis points, from 5.91% in 2014 to 5.31% in 2015. PCI loan yield fell from 15.94% to
12.39%, and the yield on loans, excluding PCI loans, declined 12 basis points, from 4.77% to 4.65%. The tax-equivalent yield on
securities increased from 2.76% for 2014 to 2.94% for 2015 as the average balance of tax-exempt securities increased $44.4 million
over the time frame and is responsible for the increase in yield on the portfolio.
Net interest income declined $1.2 million to $41.8 million for fiscal 2014 versus fiscal 2013. Overall, interest income declined
$1.3 million, or 2.6%, while interest expense declined $145,000, or 2.0%. The Company's net interest spread declined from 4.25% for
the yeaz ended December 31, 2013 to 4.12% for the same period in 2014. While the cost of interest bearing liabilities improved by two
basis points during the comparison period, the yield on earning assets declined by 15 basis points to 4.87% for the 2014 year. The result
was a net interest margin of 4.18% for the year ended December 31, 2014, compazed with 4.32% for the 2013 year.
Interest and fees on loans were $29.6 million compared with $29.7 million for the yeazs ended December 31, 2014 and 2013,
respectively. While average loan balances increased $35.9 million over this time frame, the yield earned on these balances declined 30
basis points to 4.77%. Competitive pricing to garner quality loans drove lower loan yields. Interest on PCI loans declined $708,000, or
5.9%, from December 31, 2013, while the yield increased 86 basis points to 15.94%. Significant cash payments on loans related to
pools that were previously written down to a zero cazrying value equaled $1.3 million in each of 2013 and 2014. These payments coupled
with lower expected losses influenced the yield increase. Securities interest income declined $551,000, or 6.6%, over the same time
frame. Average balances on securities decreased $12.4 million during fisca12014 versus fisca12013, and the talc equivalent yield on the
portfolio declined only two basis points to 2.76%.
The Company's total loan to deposit ratio was 85.42% at December 31, 2015 versus 79.16% at December 31, 2014. The increase
in the loan to deposit ratio is the direct result of the robust loan growth previously mentioned. The Company's total loan to deposit ratio
was 79.16% at December 31, 2014 versus 75.02% at December 31, 2013.
28
The following table presents the total amount of average balances, interest income from average interest earning assets and the
resulting yields, as well as the interest expense on average interest bearing liabilities, expressed both in dollars and rates. Except as
indicated in the footnote, no tax equivalent adjustments were made. Any non-accruing loans have been included in the table as loans
carrying a zero yield.
NET INTEREST MARGIN ANALYSIS
AVERAGE BALANCE SHEETS
(Dollars in thousands)
Year ended December
Average
Balance
Sheet
Interest
Income/
Expense
2015
Average
Rates
Earned/
Paid
Year ended December 31, 2014
Year ended December 31, 2013
Average
Balance
Sheet
Interest
Income/
Ea~pense
Average
Rates
Earned/
Paid
Average
Balance
Sheet
Average
Rates
Earned/
Interest
Income/
Ex erase Pa1d
ASSETS:
Loans, including fees
PCIloans
Total loans
Interest bearing bank balances
Federal funds sold
Securities (taxable)
Securities (Gu exempt)~'~
Total earning assets
Allowance for loan losses
Non-earning assets
Total assets
$ 687,463 $ 31,990.
7,875
39,865
59
2
5,469
3,268
48,663
63,552
751,015
14,551
I,8S2
220,525
_ __ 76,644
1,064,587
(9,981)
95,190
$ I ,149,796
LIABILTfIES AND SHAREHOLDERS'
EQUITY
4.65 % $ 621,213 $ 29,635
79,140
70,421
11,228
12.39
664,483
691,634
40,863
..531
22,423
19,103
61
0.41
3,453
_
389
0.10
292,618
6,835
268,324
2.48
1,463 4.54 20,294
4.26 32,237
1,011,687
4.57
(10,742)
114,545
$ 1,115,490
4.77 % $ 585,343 $ 29,696
11,936
15.94
41,632
5.91
58
032
3
0.10
7,693
2.55
998
50,384
1,003,271
(12,352)
130,033
$ 1,120,952
49,222
4.87
5.07 °!o
15.08
6.27
0.26
0.10
2.63
4.92
5.02
$ 229,220 $ 698
260
030 % $ 204,386 $ 595
Demand -interest bearing
253
0.31
Savings
Time deposits 523,726 5,025 0.96
0.72
0.76
1.22
4.20
77,138
_ 552,709
834,233
1,855
85,661
7,077
Short-term borrowings
FHLB and other borrowings
Long-term debt
0.29 % $ 238,545 $ 742
277
81,368
0.33
5,010 0.91 546,788
866,701
5,858
1,452
11
55,375
776
288
031 %
0.34
5,351 0,98
0.73
6,370
0.56
8
1.26
700
_
-
836,560
1,516
96,937
7,707
5,983
i2
1,179
323
0.70
0.59
0.91
4.07
Total deposits
83,614
Total interest bearing
liabilities 942,720
94,476
7,497
0.80
80,326
Non-interest bearing deposits
Other liabilities 4,490 4,184 3,933
1,007,787
113,165
Total liabilities
Shareholder' equiCy
1,04t?618
108,110
1,009,525
105,965
928,826
76,515
6,933
0.75
923,528 7,078
-....
-
0.77
Total liabilities and
shazeholders' equity $ 1,149,796
Net interest earnings $ 41, 166
In[emst spread 3.77 9c 4.12 % 4.25 %a
4.32 %
$ 42,289 $ 43,306
$ 1,115,490
$ 1,120,952
4. I8 °I~,
3.87 `7n
Net interest mazgin
°~ Income and yields aze reported on a ta~c equivalent basis assuming a federal tax rate of 34%.
29
The following table presents changes in interest income and interest expense and distinguishes between the changes related to
increases or decreases in average outstanding balances of interest earning assets and interest bearing liabilities (volume), and the changes
related to increases or decreases in average interest rates on such assets and liabilities (rate). No tax equivalent adjustments were made.
EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME
FOR THE YEAR ENDED DECEMBER 31, 2015 AND 2014
(Dollars in thousands)
Interest Income:
2015 compared to 2014
Increase (Decrease)
2014 compared W 2013
Increase (Decrease)
Volume
Rate Total Volume
Rate
Total
Loans, including fees
PCIloans
(2,258)
Interest bearing bank balances and federal funds sold
13
Securities (205) 30
(1,095)
(13)
3,161 $
$
(806) $
2,355
(3,353)
$
I,$20 $
(1,315)
(12)
(1,881) $
607
12
(61)
(708)
(175) (330) (221) (551)
TotalEamingAssets
Interest Expease:
Demand deposits
Savings deposits
Time deposits
Total deposits
1,848
(3,021)
(1,173)
163
(1,483)
(1.,320)
72
21
(263)
(170)
__
3Q
(14)
279
?95
102.
7
16
125
(106)
(14)
58
(62)
(41}
(10)
(3~
(450)
(147)
(24)
~341Z
(512)
367
Other borrowed funds 131
308 439
470 (103)
Total interest-bearing liabilities (39) 603
(145)
$ l,$87 $ (3,624) $ (1,737) $ (245) $ (930) $ (1,175j
564 408 (553)
_ __
Netincreace (decrease)in net interest income
Provision for Loan Losses
Management actively monitors the Company's asset quality and provides specific loss provisions when necessary. Provisions for
loan losses aze charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the
Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount
of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions
that may affect the borrower's ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan
review function and other relevant factors. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above
for further discussion.
Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best
information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if
economic conditions differ from the assumptions used in making the initial determinations.
Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for PCI
loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.
The Company did not record a provision for loan losses in 2015, 2014 or 2013. The Company records a sepazate provision for
loan losses for its loan portfolio and its PCI loan portfolio. There was no provision for loan losses on the PCI loan portfolio during
2015, 2014 or 2013. Likewise, there was no provision for loan losses on the loan portfolio during 2015, 2014 or 2013. With respect to
the loan portfolio, this was the direct result of continued improvement in loan quality as evidenced by the lower net charge-offs than in
prior yeazs coupled with lower levels of classified assets.
The allowance for loan losses, excluding PCI loans, equaled 89.6% of nonaccrual loans at December 31, 2015, compared with
55.9% at December 31, 2014. The ratio of the allowance for loan losses to total nonperforming assets was 62.2% at December 31, 2015
compazed with 40.1% at December 31, 2014. The ratio of the allowance for loan losses to total loans, excluding PCI loans, was 1.28%
at December 31, 2015, compazed with 1.40% at December 31, 2014. Net recoveries were $292,000 in 2015, compared with net chazge-
offs of $1.2 million in 2014.
One loan relationship, aggregating $8.7 million, already identified as "substandazd" was placed on non-accrual status during the
fourth quarter of 2014. This relationship was resolved in the second quarter of 2015 and resulted in a net recovery for the Company.
30
While the PCI loan portfolio contains significant risk, it was considered in determining the initial fair value, which was reflected
in adjustments recorded at the time of the acquisition. See the Asset Quality discussion below for further analysis.
Noninterest Income
Noninterest income was $5.1 million for the year ended December 31, 2015 versus $5.3 million for the year ended December 31,
2014. This is a decrease of $188,000, or 3.6%. Gain on sales of securities decreased $617,000 in 2015 compared with 2014 and was
$472,000 in the current yeaz compared with $1.1 million in 2014. Gains on sales of loans of $69,000 represented a decline of $132,000
in 2015 compared with 2014. Other noninterest income of $736,000 in 2015 was a decrease of $63,000 when compared with 2014.
Partially offsetting these decreases in yeaz-over-yeaz noninterest income was mortgage loan income of $784,000, an increase of $573,000
over the year ended December 31, 2014. The mortgage division began operations in the second quarter of 2014 and has progressively
increased its production. Also increasing for the year ended December 31, 2015 over the year ended December 31, 2014 were service
charges on deposit accounts, which increased $69,000 and were $2.3 million in 2015.
For the yeaz ended December 31, 2014, noninterest income totaled $5.3 million, a $545,000 or 11.5% increase from the fiscal year
ended December 31, 2013. Net gain on the sale of securities and net gain on the sale of loans more than offset a reduction in service
chazge income, year-over-year. Net securities gains equaled $1.1 million in fisca12014 versus $518,000 in fisca12013. The $571,000
increase in net securities gains was partially the result of a divestiture of mortgage backed investments which were subsequently re-
invested into higher yielding municipal securities. Net gain on the sale of loans increased $560,000 from 2013 to 2014. While net loan
sale gains totaled $201,000 in fiscal 2014, the Company recorded a net loss of $359,000 on the sale of loans in fisca12013. Throughout
2013 and 2014, management selectively sold USDA loans to mitigate accelerated premium amortization, due to early payoff of loans
held above paz value. The recorded net loss noted in fiscal 2013 was precipitated by a $614,000 loss on the sale of a non-USDA loan.
These changes, year over year, more than offset a $539,000 reduction in service chazge income. The loss of service fee income was
primarily due to the sale of the Georgia branches.
Noninterest Expenses
Noninterest expenses were $50.3 million for the yeaz ended December 31, 2015. This compazes with noninterest expenses of
$36.8 million for the year ended December 31, 2014. This is an increase of $13.5 million, of which the indemnification asset
amortization write-off was $11.8 million. The second largest increase was in salaries and employee benefits, which increased $2.0
million, primarily through the addition of loan production employees, including the mortgage division that began operations in the
second quarter of 2014. Other real estate expenses were $1.3 million for the year ended December 31, 2015, an increase of $735,000
over $540,000 for the year ended December 31, 2014 due to an increase in write-downs and losses on sales of other real estate of
$704,000. Other operating expenses of $6.5 million for the yeaz ended December 31, 2015 increased $120,000, or 1.9%, over the same
period in 2014.
Noninterest expenses declined $2.5 million, or 6.3%, when comparing fiscal 2013 and fisca12014. The vast shaze of the decline
was evidenced in four categories: OREO expenses, FDIC indemnification asset amortization, data processing fees, and amortization of
intangibles. OREO expenses declined $1.5 million, or 73.5%, during fiscal 2014 when compared to fiscal 2013. The Company
benefitted from a reduction of $654,000, or 10.1%, in indemnification asset amortization during fisca12014 versus the same time frame
in 2013. Data processing fees were $346,000, or 16.7%, lower for the yeaz ended December 31, 2014 compazed with year ended
December 31, 2013, and intangible amortization was $294,000, or 13.4%, lower over the same time frame. These two expense
reductions were due in part to the sale of the Georgia branches. Other operating expenses and salaries and wages increased $401,000,
or 6.7%, and $155,000, or 1.0%, respectively, yeaz over yeaz.
Income Taxes
Income tax reflects a benefit of $2.6 million for the year ended December 31, 2015 versus income tax expense of $2.7 million for
the year ended December 31, 2014. The effective tax rate for 2015 equaled 51.3% versus 26.6% in 2014. The change was the direct
result of the increase in tax-exempt securities.
Income tax expense was $2.7 million and $2.5 million for the years ended December 31, 2014 and 2013, respectively. The effective
tax rate for 2014 equaled 26.6% versus 29.7% in 2013. This decline was due to the increase in tax free municipal bonds purchased
during the yeaz and non-taxable bank owned life insurance proceeds of $406,000.
The Company has evaluated the need for a deferred tax valuation allowance for the years ended December 31, 2015 and 2014 in
accordance with FASB ASC 740, Income Taxes. Based on a three year taxable income projection, tax strategies that would result in
potential securities gains and the effects of off-setting deferred tax liabilities, the Company believes that it is more likely than not that
the deferred tax assets are realizable. Therefore, no allowance was required.
31
Loans
Total loans were $807.7 million at December 31, 2015, increasing $80.2 million from $727.5 million at December 31, 2014. Total
loans, excluding PCI loans, were $748.7 million at December 31, 2015 versus $660.0 million at December 31, 2014. Total loans,
excluding PCI loans, increased $88.7 million, or 13.4%, during 2015. Commercial mortgage loans exhibited the lazgest dollar volume
increase year-over-year and were up $35.8 million, or 12.7%, and ended the year at $318.0 million. This is also the largest category of
loans in the portfolio. Residential 1-4 family mortgage loans increased $27.4 million, or 16.4%, over this time frame and were $194.6
million at December 31, 2015. Multifamily loans increased $11.6 million, or 34.2%, and were $45.4 million at December 31, 2015.
Construction and land development loans of $67.4 million at December 31, 2015 reflected an increase of 18.2%, or $10.4 million, since
year end 2014. Commercial loans of $102.5 million at December 31, 2015 was an increase of $2.7 million over the balance at December
31, 2014. PCI loans were $59.0 million at December 31, 2015, $8.5 million lower than at year-end 2014.
The following tables indicate the total dollar amount of loans outstanding and the percentage of gross loans as of December 31
of the years presented (dollars in thousands):
Loans
2015
pCI Loans
Total Loans
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
89.38 % $247,272
$194,576
318,805
317,955
69,718
67,408
11,200
8,378
45,666
45,389
- - 6,238
6,238
698,899
639,944
- - 102,507
102,507
Commercial loans
- - 4,928
4,928
Consumer installment loans
All other loans 1,345 0.18 1,345
100.00 % $807,679
Total loans $748,724
25.99 % $52,696
850
42.47
2,310
9.00
2,822
1.12
277
6.06
0.83
85.47
13.69
0.66
1.44
3.92
4.79
0.4?
100.00 % $58,955
58,955
100.00
30.62 %
39.47
8.63
1.39
5.65
0.77
86.53
12.69
0.61
0.17
100.00 %
2014
Loans PCI Loans Total Loans
_ _
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
$167,171
282,127
57,027
5,997
33,812
7,163
553,297
99,783
Commercial loans
5,496
Consumer installment loans
All other loans 1,444
Total loans $660,020
25.33 % $60,171
1,148
42.75
2,456
8.64
3,409
0.91
5.12
276
1.08
83.83
15.12
0.83
0.22
1.70
3.64
5.05
0,41
89.20 % $227,342
283,275
59,483
9,406
34,088
- - 7,163
620,757
- - 99,783
- - 5,496
- - 1,444
100.00 % $727,480
67,460
100.00
100.00. % $67,460
31.25 %
38.94
8.18
129
4.69
0.98
8533
13.72
0.76
0.19
100.00 %
Loans
2013
PCI Loans
Total Loans
Mortgage loans on real estate:
Residential 1-4 family
247,106
Commercial
55,238
Construction and land development
6,849
Second mortgages
35,748
Multifamily
9,558
Agriculture
498,778
Total real estate loans
90,282
Commercial loans
5,667
Consumer installment loans
All other loans 1,446
Total loans $596,173
$144,279 ' '~" 24.20 % $64,610
1,389
41.45
2,940
9.27
3,898
1.15
266
6.00
172
1.60
83.67
73,275
15.14
0.95
0.24
100.00 % $73,2'75
1.90
4.01
5.32
0.36
0.23
100.00
88.18 % $208,889
248,495
58,178
10,747
36,014
9,730
572,053
- - 90,282
- - 5,667
- - 1,446
100.00 % $669,448
31.20 %
37.12
8.69
1.61
538
1.45
85.45
13.49
0.85
021
100.00 %
32
Loans
~~
PCI Loans
Total Loans
Mortgage loans on real estate:
Residential 1-4 family
$135,339
246,372
Commercial
Construction and land development
61,090
Second mortgages
7,226
28,666
Multifamily
10,353
Agriculture
Total real estate loans
489,046
77,911
Commercial loans
6,986
Consumer installment loans
All other loans
1,539
Total loans $575,482
87.47 °lo
2.35
3.86
5.75
0.36
_ 172_. __x.20
99.99
84,636
$209,385
23.52 % $74,046
248,358
1,986
42.80
64,354
3,264
10.62
12,090
4,864
1.26
28,970
304
4.98
.__10_,525
1.80
573,682
84.9$
- - 77,911
13.54
6,987
1
1.21
1,539
__ .0.27
_ ______-
100.00 % $660,119
100.00 % $84,637
0.01
___-
31.72 %
37.63
9.75
1.83
4.39
_ 1,59_
86.91
11.80
1.06
0.23
100.00 %
Loans
2011
PCI Loans
-
Total Loans
Mortgage loans on real estate:
$127,099
Residential 1-4 family
220,296
Commercial
75,631
Construction and land development
8,123
Second mortgages
Multifamily
19,730
11,435
Agriculture
462,314
Total real estate loans
72,188
Commercial loans
8,541
Consumer installment loans
All other loans 1,675
Total loans $544,718
23.34 % $84,734
2,17()
40.44
4,260
13.88
5,894
1.49
316
3.62
179
2.10
97,553
84.87
13.25
1.57
0.31
2.22
4.38
6.04
0.32
0.18
99.99
86.85 % $211,833
222,466
79,891
14,017
20,046
11,614
559,867
- - 72,188
8,549
8
- - 1,675
100.00 % $642,279
100.00 % $97,561
0.01
32.98 %
34.64
12.44
2.18
3.12
1.81
87.17
11.24
1.33
0.26
100.00 %
The following table indicates the contractual maturity of commercial and construction and land development loans as of
December 31, 2015 (dollars in thousands):
Within 1 year
Variable Rate
COMIDC~CIBI
$
41,406
13,780
One to Five Years
After Five Years 9,429
23,209
$
$
Total
Fixed Rate
One to Five Yeazs
After Five Years
Total
Total Maturities
-
$
$
$
32,217
5,675
---
37,892
102,507
Construction and land
development _
$
$
$
$
$
$
35,712
3,002
9,032
12,034
19,739
2,233
21,972
69,718
Asset Quality -Assets, Excluding PCA Lw~ai:s
The allowance for loan losses represents management's estimate of the amount appropriate to provide for probable losses inherent
in the loan portfolio.
Loan quality is continually monitored, and the Company's management has established an allowance for loan losses that it believes
is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company's historical loss
experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming
loans and current and anticipated economic conditions. There aze additional risks of future loan losses, which cannot be precisely
quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions
33
affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations
and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance
and size of the allowance in comparison to peer companies identified by regulatory agencies. See Allowance for Loan Losses on Loans
in the Critical Accounting Policies section above for further discussion.
The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This nonperforming
loan list is used to monitor such loans and is used in the detemunation of the appropriateness of the allowance for loan losses. At
December 31, 2015, nonperforming assets totaled $16.2 million and net recoveries were $292,000. Nonperforming assets totaled $24.3
million and net charge-offs were $1.2 million for the year ended December 31, 2014.
Nonperforming loans were $10.7 million at December 31, 2015 compared to $16.6 million at December 31, 2014, a $5.9 million
decrease. Additions to nonaccrual loans during 2015 totaled $4.8 million. The increase related to one $1.2 million commercial property
relationship and several small residential property relationships, all of which are secured by real estate. There were $1.2 million in
charge-offs taken during 2015 mainly centered in real estate loans. There were $1.4 million in pay-downs during the year, $7.7 million
in pay-offs, and $292,000 in loans returned to accruing status. Of the pay-offs during the year, $7.5 million related to one commercial
relationship. Foreclosures for the period totaled $81,000.
The following table sets forth selected asset quality data and ratios with respect to assets excluding PCI loans at December 31 of
the years presented (dollars in thousands):
2012
$21,048
Nonaccrual loans
Loans past due 90 days and accruing interest - - - 509
21,557
10,793
$32,350
Total nonperforming loans
10,670
OREO 5,490
Total nonperforming assets $16,160
16,571
7,743
$24,314
12,105
6,244
$18,349
2013
$12,105
2015
$10,670
2014
$16,571
2011
$28,542
2,005
30,547
10,252
$40,799
Accruing troubled debt restructure loans
$4,596
$6,195
$9,922
$9,990
$5,946
Balances
Specific reserve on impaired loans
General reserve related to unimpaired loans
Total allowance for loan losses
Average loans during the year, net of unearned income
Impaired loans
Non-impaired loans
Total loans, net of unearned income
Ratios
Allowance for loan losses, excluding PCI loans, to loans
Allowance for loan losses to nonperforming assets
Allowance for loan losses, excluding PCI loans, to nonaccrual loans
General reserve to non-impaired loans
Nonaccrual loans to loans
Nonperforming assets to loans and OREO
Net (recoveries) charge-offs to average loans
1,039
8,520
9,559
1,694
7,573
9,267
1,604
8,840
10,444
2,656
2,765
10,264 12,070
14,835
12,920
687,463
621,213
585,343
556,113
510,940
10,670
738,054
748,724
16,852
643,168
660,020
13,801
582,372
596,173
22,365
553,117
575,482
35,158
509,560
544,718
1.28 % 1.40 % 1.75 % 2.25 % 2.72%
36.36
56.92
51.98
86.28
2.37
1.52
5.24
2.03
7.35
3.05
0.42
2.39
39.94
61.38
1.86
3.66
5.52
0.60
40.10
55.92
1.18
2.51
3.64
0.19
62.15
89.59
1.15
1.43
2.14
(0.04)
At December 31, 2015, the Company had six construction and land development credit relationships in nonaccrual status. The
borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be
developed, and all of such projects are in the Company's central Virginia market. The total amount of the credit exposure outstanding
at December 31, 2015 was $4.5 million. These loans have either been charged down or sufficiently reserved against to equate to the
current expected realizable value.
The total amount of the allowance for loan losses attributed to all six relationships was $574,000 at December 31, 2015, or 12.73%
of the total credit exposure outstanding. The Company establishes its reserves as described above in Allowance for Loan Losses on Non-
covered Loans in the "Critical Accounting Policies" section. In conjunction with the impairment analysis the Company performs as part
of its allowance methodology, the Company frequently orders appraisals for all loans with balances in excess of $250,000 unless there
existed an appraisal that was not older than 18 months and/or deemed to be invalid. A ratio analysis is used for all loans with balances
34
less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal
purposes and for review by its regulators.
T'he Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be
restructured into multiple new loans. The Company had 171oans for each of the years ended December 31, 2015 and 2014, that met the
definition of a TDR, which are loans that for reasons related to the debtor's financial difficulties have been restructured on terms and
conditions that would otherwise not be offered or granted. There were four loans for each of the years ended December 31, 2015 and
2014 that were restructured using multiple new loans. At December 31, 2015 and 2014, the aggregated outstanding principal of all
TDRs was $6.5 million and $7.0 million, respectively, of which $1.9 million and $757,000, respectively, were classified as nonaccrual.
The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan
into a "good loan" (the A loan) and a "bad loan" (tl~e B loan). The impact on interest is positive because the Bank is collecting interest
on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to
the Bank's standard requirements and graded accordingly. The B loan is classified as either "doubtful" or "loss". An impanment analysis
is performed on the B loan, and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is
established.
The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms.
At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on
nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is
placed on nonaccrual. Under the terms of each loan, the borrower's payment is contractually due.
The following table presents the composition of the Company's nonaccrual loans, excluding PCI loans, as of December 31 of the
yeazs presented (dollars in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
2015
2014 2013 2012
2011
$4,562
1,508
4,509
13
—
$3,342
607
4,920
61
—
10,592
8,930
—
7,521
78 120
$16,571
$4,229
1,382
5,882
225
205 _
11,923
127
55
$12,105
$5,562
5,818
8,815
141
250
20,586
385
77
$21,048
$5,320
9,187
12,718
l89
53
27,467
1,003
72
$28,542
Total loans $10,670
As of December 31, 2015 and 2014, total impaired loans, excluding PCI loans, equaled $10.7 million and $16.9 million,
respectively.
Asset Ouality — PCI assets
Loans accounted for under FASB ASC 310-30 aze generally considered accruing and performing loans as the loans accrete interest
income over the estimated life of the loan. Accordingly, acquired impaired loans that aze contractually past due are still considered to
be accnung and performing loans.
The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which include
undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected
to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairment in
the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any
existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an
adjustment to the yield over the remaining life of the pool.
35
Allowance fbr Credit Losses on I~~ans
The following table indicates the dollar amount of the allowance for loan losses, excluding PCI loans, including charge-offs and
recoveries by loan type and related ratios as of December 31 of the years presented (dollars in thousands):
Balance, beginning of year
Loans charged-off:
Commercial
Real estate
Consumer and other loans
Total loans charged-off
Recoveries:
Commercial
Real estate
Consumer and other loans
Total recoveries
Net charge-offs (recoveries)
Provision for loan losses
Balance, end of year
Allowance for loan losses to loans
Net (recoveries) charge-offs to average loans
Allowance to nonperfornung loans
2015
2014
2013
2012
2011
$
9,267 $
10,444 $ 12,920 $ 14,835 $ 25,543
3
1,183
174
1,360
1,21 1
343
98
1,652
(292)
1,217
1,179
134
2,530
1,065
178
110
1,353
1,177
325
2,999
167
3,491
82
857
76
1,015
2,476
__ _-
$
9,559 $
1.28 %
(0.04)%
89.59 %a
9,267 $
1.40 %
0.19 %
55.92 %
10,444
1.75 %
0.42 %
86.28 %
695
4,582
220
5,497
242
1,807
83
2,132
3,365
1,450
$ 12,920 $
3,615
8,891
288
12,794
207
176
205
588
12,206
1,498
14,835
2.25 %
0.61 %
59.93 %
2.72 %
2.39 %
48.56 %
During 2015, the Bank's net recoveries increased $1.5 million from the prior yeaz and were primarily centered in commercial
loans. Net charge-offs by loan category to total net recoveries were the following for 2015: 413.7% for commercial loans, (287.7%) for
real estate loans, and (26.0%) for consumer loans.
During 2014, the Bank's net charge-offs decreased $1.3 million from the prior year and were primarily centered in real estate. Net
chazge-offs by loan category to total net chazge-offs were the following for 2014: 12.9% for commercial loans, 85.1% for real estate
loans, and 2.0% for consumer loans.
While the entire allowance is available to cover charge-offs from all loan types, the following table indicates the dollar amount
allocation of the allowance for loan losses by loan type, as well as the ratio of the related outstanding loan balances to loans, excluding
PCI loans, as of December 31 of the yeazs presented (dollars in thousands):
Commercial
Conswction and land
development
Real estate mortgage
Consumer and other
Total allowance
2015
Amount %
2014
Amount %
2013
2012
2011
Amount % Amount %
$ 727
13.6 9b $ 1,212
15.2 % $ 1,54E
15.1 °do $ 1,961
Amount
13.5 °lo $ 1,810
°lo
13.2 %
1,353
7,371
108
$ 9,559
1,930
9.0
5,983
76.4
112
1.0
100 %a $ 9,267
3,773
8.6
6.973
75.2
213
1.0
100 °la $ 10,444 100 % $ 12,920
2,252
6,519
127
9.3
74.4
1.2
5,729
10.6
7,044
74.4
252
1.5
100 % $ 14,835
13.9
71.0
1.9
100
Allowance for Credit /w~sses on PCI Loans
The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that
they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an
estimate of the total cash flows it expects to collect from a pool of PCI loans, which includes undiscounted expected principal and
interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases
in cash flows expected to be collected over the life of the pool are recognized as impairment in the current period through the allowance
for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or
pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life
of the pool.
Securities
The Company's securities portfolio decreased $31.4 million, or 9.8%, from $319.6 million at December 31, 2014 to $288.2 million
at December 31, 2015. This decrease is the result of a shift in assets to higher yielding loans. At December 31, 2015, the Company had
$243.3 million in securities available for sale and $36.5 million of securities held to maturity. Equity securities totaled $8.4 million.
Realized gains of $472,000 occurred during 2015 through sales and call activity.
The Company's securities portfolio increased $16.9 million, or 5.6%, from $302.7 million at December 31, 2013 to $319.6 million
at December 31, 2014. At December 31, 2014, the Company had $274.6 million in securities available for sale and $36.2 million of
securities held to maturity. Equity securities totaled $8.8 million. Realized gains of $1.1 million occurred during 2014 through sales
and call activity.
The following table summarizes the securities portfolio by contractual maturity and issuer, including weighted average yields,
excluding restricted stock, as of December 31, 2015 (dollars in thousands):
1 Year or Less
1-5 Years
5-10 Years
Over 10 Years
Total
U.S. Treasury Issue and other
U.S. Government agencies
Amortized Cost
Fair Value
Weighted Avg Yield
$
State, county and municipal
- $ 22,356 $ 15,653 $ 13,337 $ 51,346
50,683
- 22,053
1.07%
- (0.07%)
15,495
2.05%
13,135
1.84%
Amortized Cost
Fair Value
Weighted Avg Yield
1,936
1,956
4.27%
52,476
54,393
3.47%
Corporate bonds and other securities
Amortized Cost
Fair Value
Weighted Avg Yield
Mortgage Backed securities
Total
Amortized Cost
Fair Value
Weighted Avg Yieid
Amortized Cost
Fair Value
Weighted Avg Yield
93,618
95,003
3.28%
8,447
8,047
1.09%
15,291
15,004
2.37%
26,391
26,703
3.21%
2,486
2,213
1.10%
6,909
6,857
2.92%
49,123
48,908
2.69%
174,421
178,055
3.34°!0
14,997
14,296
1.27%
38,313
37,847
2.28%
279,077
280,881
2.66%
- 4,064
- 4,036
- 1.739h
- 16,113
- 15,986
- 1.92%
1,936
1,956
4.27%
95,009
96,468
2.30%
133,009
133,549
2.89%
The amortized cost and fair value of securities available for sale and held to maturity as of December 31 of the yeazs presented
aze as follows (dollars in thousands):
Amortized Cost
December 31, 2015
Gross Unrealized
Gains Losses
Fair Value
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov't agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Available for Sale
Securities Held to Maturity
State, county and municipal
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Held to Maturity
$
11
-
$ 50,590 $
(660) $ 49,941
(14)
742
3,400
(867)
141,498
(711)
14,296
10
8,496
(167)
9
22 (362) 28,297
$ 242,599 $ 3,452 $ (2,781) $ 243,270
756
138,965
14,997
8,654
28,637
$ 35,456 $ 1,136 $
1,022
32
(35) $ 36,557
- I ,054
$
36,478 $
1,168
$
(35) $ 37,6
37
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov't agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Available for Sale
Securities Held to Maturity
State, county and municipal
MoRgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Held to Maturity
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov't agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Available for Sale
Securities Held to Maturity
State, county and municipal
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Held to Maturity
Deposits
Amortisxd Cost
Gains
Losses
Fair Vatue
December 31, 2014
Groan Unrealized
$ 99,608 $
134,405
11,921
2,338
242096 _
3,926
17
18
174_
113 $ (1,014) $ 98,707
137,477
(854)
11,883
(55)
2,258
(98)
24,243
(27)
(2.048) $ 274,568
$ 272,368 $ 4,248 $
$ 31,677 $ 1,103 $ - $ 32,780
- 4,531
228
- $ 37,539
1 -
4,293
227
36,197 $
1,342 $
238
$
Amortlzed Cost
Gains
Losses
Fair Value
December 31, 2013
Gross Unr~.ed
$ 99,789 $
165 $
-
(967) $ 98,987
486
134,096
6,349
3,439
22,420
$ 271,768 $ 1,587 $ (7,578) $ 265,777
487
138,884
6,369
3,608
_ _ 22,631
(1)
(6,085)
(47)
(198)
(2~
1,297
27
29
69
_
$
$
9,385 $
6,604
_ 12,574
71..8
398
626
28,563 $ 1,742
$
$
- $ 10,103
- 7,002
13,200
__-
- $ 30,305
The Company's lending and investing activities are funded primarily through its deposits. The following table summarizes the
average balance and average rate paid on deposits by product for the periods ended December 31 of the years presented (dollars in
thousands):
2015
2014
2013
Average
Balance
0.22 % $128,965
NOW
109,580
0.37
MMDA
81,368
0.33
Savings
287,908
0.93
Time deposits less than $100,000
Time deposits $100,000 and over 289,942 0.98 304,601 0.89 258,880
$866,701
Average
Balance
0.21 % $109,272
95,115
0.41
0.31
77,138
248,107
0.94
Average
Balance
$121,329
107,891
83,614
233,784
Total deposits
$836,560
$834,233
0.72
0.70
Average
Rate
Paid
Average
Rate
Paid
Average
Rate
Paid
0.21 ~i~
0.43
0.34
1.00
0.95
0.73
The Company derives a significant amount of its deposits through time deposits, and certificates of deposit specifically. The
following table summarizes the contractual maturity of time deposits $100,000 or more, as of December 31, 2015 (dollazs in thousands):
$
Within 3 months
3-6 months
6-12 months
over 12 months
Total $
64,591
122,325
49,883
68,1 19
304,918
Short-term Borrowings
The Company uses short-term borrowings in conjunction with deposits to fund lending and investing activities. Short-term funding
includes overnight borrowings from correspondent banks. The following information is provided for borrowings balances, rates, and
maturities as of December 31 of the yeazs presented (dollars in thousands):
As of December 31
Short-term:
Federal Funds purchased
Maximum month-end outstanding balance
Average outstanding balance during the year
Average interest rate during the year
Average interest rate at end of year
Liquidity
$
$
$
2015
-- -
-
18,921
—
$
zo14
14,500
18,921
1,516
0.76 %
1.28 %
$
$
14,500
1,855
0.57 %
0.51
Liquidity represents the Company's ability to meet present and future financial obligations through either the sale or maturity of
existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits
with banks, federal funds sold and certain investment securities. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to
satisfy its depositors' requirements and meet its customers' credit needs.
The Company's results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and
maturity of its interest earning assets and interest bearing liabilities. A summary of the Company's liquid assets at December 31, 2015
and 2014 was as follows (dollazs in thousands):
Cash and due from banks
Interest bearing bank deposits
Available for sale securities, at fair value, unpledged
Total liquid assets
$
December 31, 2015
December 31, 2014
7,393 $
9,576
8,329
14,024
189,692 199,067
206.661 $ 221,420
Deposits and other liabilities
Ratio of liquid assets to deposits and other liabilities
1,076,070 $
19.21%
1,048,084
21.13%
Caaital Resources
The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends
and economic conditions. The Company seeks to maintain a strong capital base to support its growth and expansion plans, provide
stability to current operations and promote public confidence in the Company. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to size, composition, and quality of the Company's balance sheet. Moreover, capital
levels are regulated and compared with industry standards. Management seeks to maintain a capital level exceeding regulatory statutes
of "well capitalized" that is consistent to its overall growth plans, yet allows the Company to provide the optimal return to its
shareholders.
Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective
January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based
on three definitions of capital. "Common equity tier 1 capital" is defined as common equity, retained earnings, and accumulated other
comprehensive income (AOCI), less certain intangibles. "Tier 1 capital" is defined as common equity tier 1 capital plus qualifying
perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. "Tier 2 capital" is defined as specific
subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited
amount of the allowance for loan losses. "Total capital" is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are
computed using the above capital definitions, total assets and risk-weighted assets, and the ratios aze measured against regulatory
minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and
assigned arisk-weighting and the resulting total is risk-weighted assets. "Common equity tier 1 capital ratio" is common equity tier 1
39
capital divided by risk-weighted assets. "Tier 1 risk-based capital ratio" is tier 1 capital divided by risk-weighted assets. "Total risk-
based capital ratio" is total capital divided by risk-weighted assets. The leverage ratio is tier 1 capital divided by total average assets.
Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend
and executive compensation restrictions begin if the Company does not maintain the full amount of the buffer. The capital conservation
buffer will be phased in between January 1, 2016 and January 1, 2019.
On its March 31, 2015 regulatory Call Report, the Bank made the one-time AOCI opt-out election, which allows banks under $250
billion in assets that make the one-time opt-out election to remove the impact of certain unrealized capital gains and losses from the
calculation of regulatory capital. There is no opportunity to change methodology in future periods.
The following table shows the Company's capital ratios at the dates indicated (dollazs in thousands):
December 31, 2015
Amount
Ratlo
December 31, 2014
Amount
Ratio
Total Capital to risk weighted assets
Company
Bank
Tier 1 Capital to risk weighted assets
Company
Bank
Common Equity Tier 1 Capital to risk weighted assets
Company
Bank
Tier 1 Capital to adjusted average total assets
Company
Bank
$ 118,157
119,683
13.16 % $ 115,805
117,395
13.34 %
108,457
109,983
104,333
109,983
108,457
109,983
12.08 %
12.26 %
11.62 %
12.26 %
9.38 %
9.55 %
14.72 %
14.92 %
13.52 %
13.73 %
106,397
107,987
n/a
n/a
n/a
n/a
106,397
107,987
9.36 %
9.50 %
All capital ratios exceed regulatory minimums for well capitalized institutions as referenced in Note 21 to the Consolidated
Financial Statements.
On December 12, 2003, BOE Statutory Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing
redeemable capital securities. On December 12, 2003, $4.124 million of trust preferred securities were issued through a direct placement.
The securities have aLIBOR-indexed floating rate of interest. The average interest rate at December 31, 2015, 2014 and 2013 was
3.28%, 3.24% and 3.28%, respectively. The securities have a mandatory redemption date of December 12, 2033 and are subject to
varying call provisions that began December 12, 2008. The principal asset of the Trust is $4.124 million of the Company's junior
subordinated debt securities with like maturities and like interest rates to the capital securities.
On December 19, 2008, the Company entered into a Purchase Agreement with the U.S. Treasury pursuant to which it issued
17,680 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000
per share, for a total price of $17.68 million. The issuance was made pursuant to the Treasury's Capital Purchase Plan under TARP. The
Preferred Stock paid a cumulative dividend at a rate of 5% per year during the fast five yeazs and thereafter at 9% per year. As part of
its purchase of the Series A Preferred Stock, the Treasury received a warrant to purchase 780,000 shazes of the Company's common
stock at an initial per shaze exercise price of $3.40.
During 2013, the Company repurchased 7,000 shares of the original 17,680 shares of Series A Preferred Stock. The Company
funded the repurchase through the earnings of its banking subsidiary. The form of the repurchase was a redemption under the terms of
the Series A Preferred Stock. The Company paid the Treasury $7.0 million, which represented 100% of the par value of the preferred
stock repurchased plus accrued dividends with respect to such shares.
On Apri123, 2014, the Company repurchased the remaining 10,680 shares of Series A Preferred Stock. The Company funded the
repurchase through an unsecured third-party term loan. The form of the repurchase was a redemption under the terms of the TARP
preferred stock. The Company paid the Treasury $10.9 million, which represented 100% of the paz value of the preferred stock
repurchased plus accrued dividends with respect to such shares.
On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the Series A
Preferred Stock. There aze no other investments from the Company's participation in TARP that remain outstanding.
40
01f-Balance Sheet Arrangements
A summary of the contract amount of the Bank's exposure to off-balance sheet risk as of December 31, 2015 and 2014, is as
follows (dollars in thousands):
Commitments with off-balance sheet risk:
Commitments to extend credit
Standby letters of credit
Total commitments with off-balance sheet risks
December 31, 2015
December 31.2014
$106,099
7,146
$113,245
__ _
_
$87,01?
7,358
--
$94,375
Commitments to extend credit are agreements to lend 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. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty.
Collateral held vanes but may include accounts receivable, inventory, property and equipment, and income-producing commercial
properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those
lines of credit may be drawn upon only to the total extent to which the Company is committed.
Standby letters of credit aze conditional commitments issued by the Company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper,
bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds certificates of deposit, deposit accounts and real estate as collateral supporting
those commitments for which collateral is deemed necessary.
On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million. 'The Company
designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated
variable rate borrowings. The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three
month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for
a term of five years. The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of
short term debt for five yeazs. The forecasted funding will be provided through one of the following wholesale funding sources: a new
FHI,B advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous
pricing at the time that pricing is fast initially determined for the effective date of the swap and each reset period thereafter. For the
avoidance of doubt, each quarter when the Company rolls over the three month debt it will decide at that time which funding source to
use for that quarterly period.
At December 31, 2015, the fair value of the Company's cash flow hedge was an unrealized loss of $199,000, which was recorded
in other liabilities. The Company's cash flow hedge is deemed to be effective. Therefore, the loss was recorded as a component of other
comprehensive income recorded in the Company's Consolidated Statements of Comprehensive (Loss) Income.
Coirtractual Ohli~alions
A summary of the Company's contractual obligations at December 31, 2015 is as follows (dollars in thousands):
Trust preferred debt
Federal Home Loan Bank advances
95,656
Long term debt
5,675
Operating leases 6,621
Total contractual obligations $
$
Total
Less Than 1 Ycar i-3 Years
4,124 $ - $ —
5,000
80,000
1,670
4,005
1,030 1,895
4-5 Years
$ —
10,656
—
1.855
112,076 $
85,035 $
8,565 $ 12,511 $
Mure Than 5
Years
$ 4,124
—
—
1,841
5,965
Fi~7ancial Ratios
Financial ratios give investors a way to compare companies within industries to analyze financial performance. Return on average
assets is net income as a percentage of average total assets. It is a key profitability ratio that indicates how effectively a bank has used
41
its total resources. Return on average equity is net income as a percentage of average stockholders' equity. It provides a measure of how
productively a Company's equity has been employed. Dividend payout ratio is the percentage of net income paid to common
shazeholders as cash dividends during a given period. The Company did not pay dividends to common shareholders during the yeazs
ended December 31, 2015, 2014 and 2013. It is computed by dividing dividends per share by net income per common share. The
Company utilizes leverage within guidelines prescribed by federal banking regulators as described in the "Capital Requirements"
section. Leverage is average shazeholders' equity divided by average total assets.
The following table shows the Company's financial ratios at the dates indicated:
Return on average assets
Return on average equity
Dividend payoutrado
Leverage
Non GAAP Measures
2015
--
(0.22) %
(231)°!0
n/a
9.40 %
Year Ended December 31
2014
--- - —
0.67 %
7.09 %
n/a
9.50 %
2013
0.53 °70
5.22 %
n/a
10.10 %
Beginning January 1, 2009, business combinations must be accounted for under FASB ASC 805, Business Combinations, using
the acquisition method of accounting. The Company has accounted for its previous business combinations under the purchase method
of accounting. The original merger between the Company, TFC and BOE as well as the SFSB transaction were business combinations
accounted for using the purchase method of accounting. TCB transaction was accounted for as an asset purchase. At December 31,
2015, 2014 and 2013, core deposit intangible assets totaled $2.8 million, $4.7 million and $6.6 million, respectively. Goodwill was zero
at December 31, 2015, 2014 and 2013.
In reporting the results of 2015, 2014 and 2013 in Item 6 above, the Company has provided supplemental performance measures
on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit
intangibles. The Company believes these measures aze useful to investors as they exclude non-operating adjustments resulting from
acquisition activity and allow investors to see the combined economic results of the organization. Non-GAAP operating earnings (loss)
per share were $(0.06) for the yeaz ended December 31, 2015 compared with $0.40 in 2014 and $0.33 in 2013. Non-GAAP return on
average tangible common equity and assets for the yeaz ended December 31, 2015 was (1.19)% and (0.11)%, respectively, compazed
with 9.09% and 0.79%, respectively, in 2014 and 838% and 0.66%, respectively, in 2013.
These measures are a supplement to GAAP used to prepaze the Company's financial statements and should not be viewed as a
substitute for GAAP measures. In addition, the Company's non-GAAP measures may not be comparable to non-GAAP measures of
other companies. The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years
ended December 31, 2015, 2014 and 2013 (dollars in thousands):
Net (loss) income
Plus: core deposit intangible amortization, net of tax
Non-GAAP operating earnings $
$
2ois 2oia 'o i 3
(2,497) $
I ,?59
(1,237) $
7,516
_ 1,259
8,775
S
5,906
_ _ 1.~~
$
7,359
Shareholders' equity
Preferred stock (net)
Core deposit intangible (net)
Common tangible book value $
Shares outstanding
Common tangible book value per share
$
$
$
104.487
—
? KOS
101,682 $
$
107.650
—
106,659
11,717
4,7 13 6,621
_
__
88,321
102,937 $
21,867
4.65
21,792
$
4.72 $
$ 1,115,490
Average assets
Less: average core deposit intangibles 3,797 5,707
$ 1,109,783
Average tangible assets
$ 1,149,796
$ 1,145,999
Average equity
Less: average core deposit intangibles
Less: average preferred equity
Average tangible common equity
$
$
108,110
3,797
—
104,313
$
$
105,965
5,707
3,715
96,543
42
$
$
$
-
$
21,709
4.07
1,120,952
9,020
1,111,932
113,165
9,020
16,304
87,841
_- --
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. The Company's primary market risk exposure is interest rate risk.
The ongoing monitoring and management of interest rate risk is an important component of the Company's asset/liability management
process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the
Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company's asset/liability management related activities,
based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.
Interest rate risk represents the sensitivity of earnings to changes in mazket interest rates. As interest rates change, the interest
income and expense streams associated with the Company's financial instruments also change, affecting net interest income, the primary
component of the Company's earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated
exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income
sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on
all assets and liabilities reflected on the Company's balance sheet. The simulation model is prepared and results are analyzed at least
quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income
exposure over aone-yeaz horizon, assuming no balance sheet growth, given a 400 basis point upwazd shift and a 400 basis point
downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in
our current rate environment, because all results aze monitored regazdless of likelihood. A pazallel shift in rates over a 12-month period
is assumed.
T'he following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400
basis points at December 31, 2015, 2014 and 2013 (dollars in thousands):
Change in Yield curve
+400 by
+300 by
+200 by
+100 by
most likely
- ] 00 by
-200 by
-300 by
-400 by
2015 _
_ _
2014
2013
% $ % $ % ~
(7.7) % (3,100)
(6.2) % (2,479)
(4.2) % (1,677)
(924)
(2.3) %
— %
—
1,054
2.6 %
437
1.1 %
376
0.9 %
374
0.9 %
0.5 %
(0.3) %
(0.2) °lo
(0.5) %
— %
1.6 %
(0.3) %
(0.6) %
(0.6) %
183
(131)
(96)
(207)
—
624
(132)
(222)
(225)
(0.1) %
(1.1) %
(1.0) %
(0.9) %
(4)
(442)
(404)
(374)
— % -
478
1.2 %
(249)
(0.6) %
(565)
(1.4) %
(640)
(1.6) %
At December 31, 2015, the Company's interest rate risk model indicated that, in a rising rate environment of 400 basis points over
a 12 month period, net interest income could decrease by 7.7%. For the same time period, the interest rate risk model indicated that in a
declining rate environment of 400 basis points, net interest income could increase by 0.9%. While these percentages aze subjective based
upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to
changes in interest rates.
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected
operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate
levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits,
reinvestment or replacement of asset and liability cash flows. While assumptions aze developed based upon current economic and local
market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer
preferences or competitor influences might change.
Also, as mazket conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as
prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on
adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor eazly
withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not
reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014
Consolidated Statements of (Loss) Income for the yeazs ended December 31, 2015, December 31, 2014 and December 31,
2013
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, December 31, 2014,
and December 3 ] , 2013
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2015, December 31, 2014
and December 31, 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, December 31, 2014 and December 31,
2013
Notes to Consolidated Financial Statements
45
48
49
50
S1
52
54
-l-t
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Community Bankers Trust Corporation
Richmond, Virginia
We have audited the accompanying consolidated balance sheet of Community Bankers Trust Corporation as of December 31, 2015 and
the related consolidated statements of (loss) income, comprehensive (loss) income, changes in shareholders' equity, and cash flows for
the yeaz ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standazds require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements aze free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Community Bankers Trust Corporation at December 31, 2015, and the results of its operations and its cash flows for the year ended
December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Community
Bankers Trust Corporation's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated March 11, 2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Richmond, Virginia
March 11, 2016
~15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Community Bankers Trust Corporation
Richmond, Virginia
We have audited Community Bankers Trust Corporation's internal control over financial reporting as of December 31, 2015, based on
criteria established in Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Community Bankers Trust Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A, Management's Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standazds require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the prepazation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to pernut preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company aze being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Community Bankers Trust Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Community Bankers Trust Corporation as of December 31, 2015 and the related consolidated statements
of (loss) income, comprehensive (loss) income, changes in shazeholders' equity, and cash flows for the yeaz ended December 31, 2015,
and our report dated March 11, 2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Richmond, Virginia
March 11, 2016
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Boazd of Directors and Stockholders
Community Bankers Trust Corporation
Richmond, Virginia
We have audited the accompanying consolidated balance sheet of Community Bankers Trust Corporation and subsidiary (the
"Company") as of December 31, 2014, and the related consolidated statements of income, comprehensive (loss) income, changes in
shareholders' equity and cash flows for each of the two years in the period then ended. These consolidated financial statements aze the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that aze appropriate in the circumstances. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that ow audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Community Bankers Trust Corporation and subsidiary as of December 31, 2014, and the results of their operations and their cash flows
for each of the two years in the period then ended in conformity with U.S. generally accepted accounting principles.
/s/ Elliott Davis Decosimo, LLC
Greenville, South Carolina
March 13, 2015
47
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2015 AND DECEMBER 31, 2014
(dollars in thousands)
ASSETS
Cash and due from banks
Interest bearing bank deposits
Total cash and cash equivalents
Securities available for sale, at fair value
Securities held to maturity, at cost (fair value of $37,611 and $37,539, respectively)
Equity securities, restricted, at cost
Total securities
Loans held for sale
Loans
Purchased credit impaired (PCI) loans
Total loans
Allowance for loan losses (loans of $9,559 and $9,267, respectively; PCI loans of $484 and
$484, respectively)
Net loans
FDIC indemnification asset
Bank premises and equipment, net
Bank premises and equipment held for sale
Other real estate owned
Bank owned life insurance
FDIC receivable under shazed-loss agreements
Core deposit intangibles, net
Other assets
Total assets
LIABILITIES
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Federal funds purchased
Federal Home Loan Bank advances
Long-term debt
Trust preferred capital notes
Other liabilities
Total liabilities
SHAREHOLDERS'EQUITY
Common stock (200,000,000 shazes authorized, $0.01 paz value; 21,866,944 and 21,791,523
shares issued and outstanding, respectively)
Additional paid in capital
Retained deficit
Accumulated other comprehensive (loss) income
Total shazeholders' equity
Total liabilities and shareholders' equity
2015
2014
$
7,393 $
9,576
16,969
8,329 I
14,024
22,353
243,270
36,478
8,423
288,171
2,101
748,724
58,955
807,679
(10,043)
797,636
-
27,378
110
5,490
21,620
-
2,805
1 &,277
1,180,557 $
$
96,216
849,303
945,519
18,921
95,656
5,675
4,124
6,175
1,076>070
274,568
36,197
8,816
319,581
200
660,020
67,460
727,480
(9,751)
717,729
18,609
29,702
465
7,743
21,004
669
4,713
12,966
1,155,734
84,564 I
834,381
91.$,945 ~
14,500
96,401
9,680
4,124
4,434
1,048,084
$
$
219
145,907
(41,050)
218
145,321
(38,553)
__ (589) 664
107,650
1,155,734
1,180,557 $
104,487
$
See accompanying notes to consolidated financial statements
48
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(dollars and shares in thousands, except per share data)
2015
2014
2013
$
31,99U $
Interest and dividend income
Interest and fees on loans
Interest and fees on PCI loans
Interest on federal funds sold
Interest on deposits in other banks
Interest and dividends on securities
Taxable
Nonta~cable
Total interest and dividend income
Interest expense
Interest on deposits
Interest on other borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan I~ses
Noninterest income
Service charges on deposit accounts
Gain on securities transactions, net
Gain (loss) on sale of loans, net
Income on bank owned life insurance
Mortgage loan income
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy expenses
Equipment expenses
FDIC assessment
Data processing fees
FDIC indemnification asset amortization
Amortization of intangibles
Other real estate expense
Other operating expenses
Total noninterest expense
(Loss) income before income taxes
Income tax (benefit) expense
Net pons) income
Dividends paid on preferred stock
Accretion of discount on preferred stock
Net (loss) income available to common shareholders
Net (loss) income per share -basic
Net (loss) income per share -diluted
Weighted average number of shares outstanding
basic
diluted
$
$
$
7,875
2
59
5,469
2,157
47,552
5,983
1,514 "
40,055
40,055
2,269
472
69
751
784
736
5,081
18,141
2,592
1,035
938
1,709
16,195
1,9(1$
1,275
6,467
50,260
(5,124)
(2,627)
(2,497)
-
(2,497) $
(0.11) $
(0.11) $
21,827
21,827
29,635 $
11,228
-
61
6,835
956
48,725
5,858
1,075
6,933
41,792
41,792
2,200
1,089
201
769
211
799
5,269
16,136
2,597
957
805
1,732
5,795
1,908
540
6,347
36,817
10,2fW
2,728
7,516
247
-
7,269 ~
0.33 $
0.33 $
21,755
21,981
29,696
11,936
3
58
7,693
659
50,045
6,370
708
42,967
2,739
518
(359)
747
313
766
4,724
15,981
2,717
1,038
843
2,078
6,449
2>202
2,034
5,946
39,288
8,403
2,497
5,906
885
234
4,787
0.22
0.22
21,700
21,922
See accompanying notes to consolidated financial statements
49
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(dollars in thousands)
Net (loss) income
Other comprehensive (loss) income:
Unrealized (loss) gain on investment securities:
Change in unrealized (loss) gain in investment securities
Ta~c related to unrealized loss (gain) in investment securities
Reclassification adjustment for gain in securities sold
Tax related to realized gain in securities sold
Defined benef t pension plan:
Change in prior service cost
Change in unrealized (loss) gain in plan assets
Tax related to defined benefit pension plan
Cash flow hedge:
Change in unrealized (loss) gain in cash flow hedge
Tax related to cash flow hedge
Total other comprehensive (loss) income
Total comprehensive (loss) income
2015
2014 2013
$
{2,49'7)- $
7,516
$
5,90b
(1,056)
354
(472)
l60
5
(142)
47
(234}
80
(1,2~_
(3,750)
-
$
- $ -
9,280
(3,155)
(1,089)
310
4
(997)
337
35
(12)
4,773
12,289
$
(11,386)
3,871
(518)
176
(68)
1,462
(474)
—
-
~_ (6,937)
(1,031)
See accompanying notes to consolidated financial statements
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(dollars and shares in thousands)
Discount
nn
Additional
Preferred
Stcek
H'arrants
Pmferred Common Stock Paid in
Amount Capital
Stock S6eres
Accumulated
Other
Comprehensive
Retaiced
Deficit Loss Income
Total
Balance December 31, 2012
$ 17,680 $ 1,037 $ (234)
21,670 $ 217 $ 144,398 $ (50,609) $ 2,828 $ 115,317
Amortization of preferred stock
warrants
Issuance of common stock
Dividends paid on preferred
stock
Stock-based compensation
expense
Redemption of preferred stock
Net income
Other comprehensive loss
Balance December 31, 2013
Issuance of common stock
Dividends paid on preferred
stock
Stock-based compensation
expense
Redemption of preferred stock
Redemption of warrants on
preferred stock
Net income
Other comprehensive income
Balance December 31, 2014
Issuance of common stock
Stock-based compensation
expense
Net loss
Other comprehensive loss
Balance December 31, 2015
(7,000)
—
—
I O,b80
—
_
_
(10,680)
_
—
—
—
_
—
$
Z34
—
—
—
39
_
_
_
_
—
—
—_
1,037
—
_
_
—
(1,037)
—
_—
—
_
—
—
—
—
—
—
— 21,709
83
—
_
_
---
_
—
—
_
—
—
—
—
—
—
— 21,792
75
_
_
123
_
135
—
—
(234)
—
(885)
—
—
5,906
144.656
?'7
(45,822)
—
(247)
—
—
7,516
—
(38,553)
l g~
—
257
—
—
145,321
276
—
—
—
—
—
(6,937)
(4.109)
—
—
123
(885)
135
(7.~~)
5,906
(6,937).
106,659
228
(247)
181
— (10,680)
—
—
4,773
664
(780)
7,516
4,773
107,650
277
310
—
—
310
—
_
—
—
—
217
I
_
_
—
—
—
—
218
1
—
(2,497)
(1.,253)
$ — $ 21,867 $ 219 $ 145.907 $ 4( I,O50) $ (589) $ 10,487
— (2,497)
—
—
—
(1,253j
—
—
—
—
—
—
See accompanying notes to consolidated financial statements
51
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(Dollars in thousands)
2015 2014
2013
7,516 $
$
3,494
-
(2,497) $
Operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization
Non-cash contribution of property
Stock-based compensation expense
Amortization of purchased loan premium
Deferred t~ (benefit) expense
Amortization of security premiums and accretion of discounts, net
Net gain on sale of securities
Net loss on sale and valuation of other real estate owned
Net (gain) loss on sale of loans
Gain on bank owned life insurance investment
Originations of mortgages held for sale
Proceeds from sales of mortgages held for sale
Income on bank owned life insurance
Loss on termination of FDIC shared-loss agreement
Changes in assets and liabilities:
3,156
Decrease in other assets
Increase in other liabilities 1,488 1,155
19,600
Net cash provided by operating activities
3,461
(1,089)
407
(201)
(405)
(6,973)
6,873
769
467
304
(6,077)
2,546
(472)
1,1 I 1
(55,465)
53,564
751
13,084
3,484
68
332
1,087
-
15,285
3,056
(69)
(40)
_
-
__
Investing activities:
Proceeds from available for sale securities
Proceeds from held to maturity securities
Proceeds from equity securities
Purchase of available for sale securities
Purchase of held to maturity securities
Purchase of equity securities
Proceeds from sale of other real estate owned
Improvements of other real estate, net of insurance proceeds
Net increase in loans
Principal recoveries of loans previously charged off
Purchase of premises and equipment, net
Purchase of bank owned life insurance investment
Proceeds from bank owned life insurance investment
3,100
Proceeds from termination of FDIC shared-loss agreement
Proceeds from sale of loans
3,380
Proceeds from sale of premises and equipment 2,120
Net cash (used in) provided by investing activities
146,906
4,583
1,845
(121,854)
(2,221)
(1,452)
2,900
(516)
(85,675)
1,652
(1,768)
(47;000)
-
-
109,983
16,415
587
(121,228)
(15,777)
(1,045)
4,667
(509)
(78,169)
1,353
(3,875)
-
840
-
13,284
-
(73,474)
26,604
Financing activities:
Net increase in deposits
Net increase in federal funds purchased and securities sold under agreements to
repurchase
Net (decrease) increase in Federal Home Loan Bank borrowings
Proceeds from issuance of common stock
Cash dividends paid
Proceeds from long-term debt
Redemption of preferred stock and related warrants
Payment from sale of deposits
Payments on long-term debt
Net cash provided by (used in) financing activities 26,331
26,574
(4,005)
4,421
8,500
(745)
19,276
86
39
-
(247)
-
10,680
- (11,460)
___(1,000)
52,392
Net decrease in cash and cash equivalents
(5,384)
(1,482)
Cash and cash equivalents:
Beginning of the period
End of the period
`6
22,353
16,969 $
23,835
22,353 $
24,137 I
23,835
~~~
. ~~.
,__.,,_,. ,~.. ~„
Supplemental disclosures of cash flow information:
..., _,:.. u_.. _.
Interest paid.
Income takes paid
Transfers of loans to other real estate owned
Transfer of building premises and equipment to held for sale
Transfer of deposits to held for sale
Transfer of loans held for investment to loans held for sale
~,-~ __
2015
2014
_
2013
7,533 $
1,995
821
2,118
—
—
6.760 g ~
3,134
3,436
465
—
—
~ ;,~,
—
3,351
5,174
193,1'
30,228
See accompanying notes to consolidated financial statements
53
Note 1. Nature of Banking Activities and Significant Accounting Policies
Organization
Community Bankers Trust Corporation (the "Company") is a bank holding company that was originally incorporated in
2005. On January 1, 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to
Virginia. The form of the reincorporation was the merger of the then existing Delaware corporation into a newly created
Virginia corporation. The Company retained the same name and conducts business in the same manner as before the
reincorporation.
The Company is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the "Bank"), a
Virginia state bank with 21 full-service offices in Virginia and Maryland. The Bank also operates two loan production offices
in Virginia.
The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to
individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and
industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile
banking products, and safe deposit box facilities.
Prior to November 8, 2013, the Bank also had four full-service offices in Georgia. The Bank sold those offices and related
deposits to Community &Southern Bank on November 8, 2013. See Note 30 for additional information.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Bank, its wholly-
owned subsidiary. All material intercompany balances and transactions have been eliminated in consolidation. Financial
Accounting Standards Boazd (FASB) Accounting Standards Codification (ASC) 810, Consolidation, requires that the Company
no longer eliminate through consolidation the equity investment in BOE Statutory Trust I, which was $124,000 at each of
December 31, 2015 and 2014. The subordinated debt of the Trust is reflected as a liability of the Company.
Cash and Cash Eouivalents
For purposes of the consolidated statements of cash flows, the Company has defined cash and cash equivalents as cash
and due from banks and interest-bearing bank balances.
Restricted Cash
The Bank is required to maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve
Act. For the final weekly reporting period, the aggregate amount of daily average required reserves was $0 and $10.7 million
for the yeazs ended December 31, 2015 and 2014, respectively. The reduction in restricted cash is due to a change in the
reservable deposit mix whereby the Bank's levels of vault cash sufficiently cover the reserve requirement.
Securities
Debt securities that management has the positive intent and ability to hold to maturity aze classified, as "held to maturity"
and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily
detemunable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the
securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses,
management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities
are determined using the specific identification method.
Restricted Securities
The Company is required to maintain an investment in the capital stock of the Federal Reserve Bank, the Federal Home
Loan Bank, and Community Bankers Bank. The Company's investment in these securities is recorded at cost.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carved at the lower of cost or estimated
market in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage
loans held for sale are sold with the mortgage servicing rights released by the Company.
The Company enters into commitments to originate certain mortgage loans whereby the interest rate on the loans is
determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold
are considered to be derivatives. The period of time between issuance of a loan commitment and closing and the sale of the
loan generally ranges from thirty to ninety days. The Company protects itself from changes in interest rates through the use of
best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to
an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed
to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation
between the rate lock commitments and the best efforts contracts is very high due to their similarity. Because of Uus high
correlation, the gain or loss that occurs on the rate lock commitments is immaterial.
Loans
The Bank grants mortgage, commercial and consumer loans to customers. A significant portion of the loan portfolio is
represented by 1-4 family residential and commercial mortgage loans. The ability of the Bank's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in the Bank's mazket azea.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally
aze reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective
interest method.
T'he accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past
due. In all cases, loans are placed on nonaccrual or charged-off at an eazlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest
income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to
accrual status. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance for Loan Losses on loans
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
chazged to earnings. Loan losses aze chazged against the allowance when management believes the uncollectability of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
T'he allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically
identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the
collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. This evaluation does not include the effects of expected losses on
specific loans or groups of loans that aze related to future events or expected changes in economic conditions. While
management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary
if there aze significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses, and may require the Bank to make additions to the allowance
based on their judgment about information available to them at the time of their examinations.
55
The allowance consists of specific, general and unallocated components. For loans that aze also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. The unallocated component is maintained to cover uncertainties that could affect
management's estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company 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 tt~e loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of the expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans aze collectively evaluated for impairment. Accordingly, the Bank
does not separately identify individual consumer and residential loans for impairment disclosures.
Accounting for Certain Loans Acquired in a Transfer
FASB ASC 310, Receivables requires acquired loans to be recorded at fair value and prohibits carrying over valuation
allowances in the initial accounting for acquired impaired loans. Loans carved at fair value, mortgage loans held for sale, and
loans to borrowers under revolving credit arrangements are excluded from the scope of FASB ASC 310 which limits the yield
that may be accreted to the excess of the undiscounted expected cash flows over the investor's initial investment in the loan.
The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent
increases in cash flows to be collected are recognized prospectively through an adjustment of the loan's yield over its remaining
life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.
The Company's acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the "PCI loans"), subject
to FASB ASC Topic 805, Business Combinations (formerly SFAS 141(R)), aze recorded at fair value and no sepazate valuation
allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securiries Acquired with Deteriorated
Credit Quality (formerly SOP 03-3), applies to loans acquired in a transfer with evidence of deterioration of credit quality for
which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable.
The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company
has grouped loans together based on common risk characteristics including product type, delinquency status and loan
documentation requirements among others.
T'he PCI loans are subject to credit review standards described above for loans. If and when credit deterioration occurs
subsequent to the acquisition date, a provision for credit loss for PCI loans will be chazged to earnings.
The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes
undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable
yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also
determines each pool's contractual principal and contractual interest payments. The excess of that amount over the total cash
flows that it expects to collect from the pool is refereed to as nonaccretable difference, which is not accreted into income.
Judgmental prepayment assumptions aze applied to both contractually required payments and cash flows expected to be
collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected.
Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the
current period through the allowance for loan loss. Subsequent increases in expected or actual cash flows aze first used to
reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected
is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of
the pool.
56
Bmik Premises and Eouinment
Bank premises and equipment are stated at cost less accumulated depreciation. Land is cazried at cost. Depreciation of
bank premises and equipment is computed on the straight-line method over estimated useful lives of 10 to 50 years for premises
and 3 to 20 years for equipment, furniture and fixtures.
Costs of maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale
or retirement of depreciable properties, the cost and related accumulated depreciation are eliminated from the accounts and the
resulting gain or loss is included in the determination of income.
Other Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value of the
real estate acquired at the date of foreclosure net of estimated selling costs, establishing a new cost basis. Subsequent to
foreclosure, valuations aze periodically performed by management and the assets aze carried at the lower of the carrying amount
or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance aze included
in other operating expenses. Costs to bring a property to salable condition aze capitalized up to the fair value of the property
while costs to maintain a property in salable condition aze expensed as incurred. The Company had $5.5 million and $7.7
million in other real estate at December 31, 2015 and 2014, respectively.
Other IntanPibles
T'he Company is accounting for other intangible assets in accordance with FASB ASC 350, Intangibles -Goodwill and
Others. Under FASB ASC 350, acquired intangible assets (such as core deposit intangibles) are sepazately recognized if the
benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The costs of
purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being
amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC
350.
Advertising Costs
The Company follows the policy of expensing advertising costs as incurred, which totaled $651,000, $475,000 and
$384,000 for 2015, 2014 and 2013, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method,
the net deferred ta~c asset or liability is determined based on the tax effects of the temporary differences between the book and
tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in talc rates and laws.
Positions taken in the Company's tax returns may be subject to challenge by the taxing authorities upon examination.
Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the
position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the
tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some
cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in
the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the
position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the
consolidated statement of income. The Company had no interest or penalties during the years ended December 31, 2015, 2014
or 2013. Under FASB ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. In management's opinion, based on a three yeaz taxable income projection,
tax strategies that would result in potential securities gains and the effects ofoff-setting deferred ta~c liabilities, it is more likely
than not that the deferred ta~c assets are realizable.
The Company and its subsidiaries aze subject to U. S. federal income tax as well as Virginia and Maryland state income
takes. All yeazs from 2012 through 2015 are open to examination by the respective tax authorities.
57
EarniitQs Per Share
Basic earnings per shaze (EPS) is computed based on the weighted average number of shares outstanding and excludes
any dilutive effects of options, warrants and convertible securities. Diluted EPS is computed in a manner similar to basic EPS,
except for certain adjustments to the numerator and the denominator. Diluted EPS gives effect to all dilutive potential common
shazes that were outstanding at the end of the period. Potential common shares that may be issued by the Company relate solely
to outstanding stock options and are deternuned using the treasury stock method. There were no dividends declared or paid in
2015. The Company declared and paid $247,000 and $885,000 in dividends on preferred stock in 2014 and 2013, respectively.
Stock-Based Compensation
In April 2009, the Company adopted the Community Bankers Trust Corporation 2009 Stock Incentive Plan which is
authorized to issue up to 2,650,000 shazes of common stock. See Note 14 for details regarding these plans.
Derivatives -Cash Flow HedPe
The Company uses interest rate derivatives to manage certain amounts of its exposure to interest rate movements. To
accomplish this objective, the Company is a party to interest rate swaps whereby the Company pays fixed amounts to a
counterparty in exchange for receiving variable payments over the life of an underlying agreement without the exchange of
underlying notional amounts.
Derivatives designated as cash flow hedges aze used primarily to minimize the variability in cash flows of assets or
liabilities caused by interest rates. Cash flow hedges are periodically tested for effectiveness, which measures the correlation
of the cash flows of the hedged item with the cash flows from the derivative. The effective portion of changes in the fair value
of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive (loss) income and is
subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The ineffective
portion of the change in fair value of the derivative is recognized directly in earnings.
Recent Accountine Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued its new lease accounting guidance in
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date:
• A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a
discounted basis; and
Aright-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset
for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where
necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must
recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal yeazs (i.e., January 1, 2019, for a calendar year entity). Early application is
permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must
apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the eazliest
compazative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the eazliest comparative period presented. Lessees and lessors may not apply a full
retrospective transition approach. The Company is evaluating what impact adopting this guidance will have on its consolidated
financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments —Overall (Subtopic 825-10): Recognirion
and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and
measurement of financial instruments. The new guidance makes targeted improvements to eacisting U.S. generally accepted
accounting principles by:
58
• Requiring equity investments (except those accounted for under the equity method of accounting, or those that result
in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes;
Requiring sepazate presentation of financial assets and financial liabilities by measurement category and form of
financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial
statements;
• Eliminating the requirement for public business entities to disclose the methods) and significant assumprions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet; and
Requiring a reporting organization to present sepazately in other comprehensive income the portion of the total change
in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own
credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option
for financial instruments.
The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
In Apri12015, the FASB issued ASU No. 2015-05, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic
350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. Existing U.S. generally accepted
accounting principles does not include explicit guidance about a customer's accounting for fees paid in a cloud computing
arrangement. Examples of cloud computing arrangements include: (a) softwaze as a service; (b) platform as a service; (c)
infrastructure as a service; and (d) other similar hosting arrangements. The ASU provides guidance to customers about whether
a cloud computing arrangement includes a softwaze license. If a cloud computing arrangement includes a software license, then
the customer should account for the software license element of the arrangement consistent with the acquisition of other
software licenses. If a cloud computing arrangement does not include a softwaze license, the customer should account for the
arrangement as a service contract. As a result of the ASU, all softwaze licenses within the scope of Subtopic 350-40 will be
accounted for consistent with other licenses of intangible assets.
For public business entities, the ASU will be effective for annual periods, including interim periods within those annual
periods, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this
guidance to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined
Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) - I. Fully Benefit-Responsive
Investment Contracts; II. Plan Investment Disclosures, and IIL Measurement Date Practical Expedient. This Update reduces
complexity in employee benefit plan accounting, which is consistent with the FASB's Simplification initiative. Parts I and III
aze not applicable to the Company. Regazding Part II, as new disclosure requirements have been issued or amended, employee
benefit plan financial statements have been affected. Specifically, the interaction between Topic 820, Fair Value Measurement,
and Topics 960, 962, and 965 on employee benefit plan accounting sometimes requires aggregation, or organization of similar
investment information, in multiple ways. The objective of Part II of this Update is to simplify and make more effective the
investment disclosure requirements under Topic 820 and under Topics 960, 962, and 965 for employee benefit plans. The
amendments are effective for fiscal years beginning after December 15, 2015, and should be applied prospectively. Early
application is pernutted. The Company does not expect the adoption of the guidance to have a material impact on its
consolidation financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of 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. Management estimates that aze particularly susceptible to significant change in the neaz term relate to the
59
determination of the allowance for loan losses, the valuation of other real estate owned, projected cash flows relating to certain
acquired loans, the value of the indemnification asset, and the valuation of deferred tax assets.
Rec[assiticaiions
Certain reclassifications have been made to prior period balances to conform to the current yeaz presentations. See Notes
3, 4, 5 and 7 for details regarding reclassifications resulting from the termination of the Company's shared-loss agreement with
the Federal Deposit Inswance Corporation (FDIC).
Note 2. Securities
Amortized costs and fair values of securities available for sale and held to maturity at December 31, 2015 and 2014 were
as follows (dollazs in thousands):
--- Gross Unrealized
December 31, 2015
Amortized Cost
Gains
I.osges
Fair Value
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov't agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Available for Sale
Securities Held to Maturity
State, county and municipal
Mortgage backed - U.S. Gov't agencies
Total3ecurides Held to Maturity
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov't agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S.. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Available for Sale
Securities Held to Maturity
State, county and municipal
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total Securities Held to Maturity
$ 50,590 $
(660) $ X9,9-11
7-l?
141,498
14,296
8,496
28,297
$ 242,599 $ 3,452 $ (2,781) $ 243,270
11 $
- (14)
(867)
(711)
(167)
(362)
756
138,965
14,997
8,654
28,637
3,400
10
9
22
$ 35,456 $ 1,136 $
1,022
32
$ 36,478 $ 1,168 $
(35) $ 36,557
- 1,054
(35) $ 37,611
December 31, 2014
Gross Unrealized
Amortized Cost
Gains
Losses
Fair Value
$ 99,608 $
ll3 $ (1,014) $ 98,707
134,405
11,921
2,338
24,096
137,477
11,883
2,258
24,243
$ 272,368 $ 4,248 $ (2,048) $ 274,568
(854)
(55)
(98)
(27)
3,926
17
18
174
$ 31,677 $ 1,103 $ - $ 32,780
- 4,531
228
-
$ - $ 37,539
238
1
$ 36,197 $ 1,342
4,293
227
60
The amortized cost and fair value of securities at December 31, 2015 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any
penalties.
(dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total securities
Held W Maturity
Available for Sale
Amortized Cost
Fair Value
Amortized Cost
Fair Value
$
$
1,396
11,061
14,403
9,618
36,478
$
$
1,415 $
11,538
14,799
9,859
37,611 $
540
83,949
118,607
39,03
242,599
$
$
541
84,930
118,752
39,047
243,270
Proceeds from sales of securities available for sale were $105.8 million, $79.6 million and $77.8 million during the years
ended December 31, 2015, 2014 and 2013, respectively. Gains and losses on the sale of securities are determined using the
specific identification method. Gross realized gains and losses on sales of securities available for sale during the yeazs ended
December 31, 2015, 2014 and 2013 were as follows (dollars in thousands):
Gross realized gains
Gross realized losses
Net securities gains
$
$
2015
2014
2013
974
(502)
472
$
$
1,584
(495)
1,089
$
$
64S
(127)
518
In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to
which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and
ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments
held that had OT"TI losses for the yeazs ended December 31, 2015, 2014 and 2013.
The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have
been in a continuous gross unrealized loss position, at December 31, 2015 and 2014 were as follows (dollars in thousands):
Less than 12 Months
December 31, 2015
12 Months or More
Total
Securities Available for Sale
U.S. Treasury issue and other U.S. Godt agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total
Securities Held to Maturity
State, county and municipal
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value
(84) $ 28,063 $
$ 20,408 $
(14)
(252)
(669)
(88)
(360)
-
10,270
3.?90
1,919
175
-
(615)
(42)
(79)
(2)
742
34,003
12,286
8,305
24,304
742
23,733
8,996
6,386
24,129
$ 84,394 $
(1,467) $ 43.717 $
(1,314) $ 128,111 $
(576) $ 48.471 $
(660)
(14)
(867)
(711)
(167)
(362)
(2,781)
Unrealized
$ 3.889 $
(35) g
- $
3,889 $
(35)
Less than 12 Months
December 31, 2014
12 Months or More
Total
Securities Available for Sale Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
(1,014)
U.S. Treasury issue and other U.S. Gov't agencies
(854)
State, county and municipal
(55)
Corporate and other bonds
(98)
Mortgage backed - U.S. Gov't agencies
(27)
Mortgage backed - U.S. Gov't sponsored agencies
(2,048)
(576) $ 83,105 $
(846)
(34)
(98)
(l 1)
32,348
3,113
- 1,899
712
$ 47,475 $
3,673
5,756
(16)
(483) $ 73,70? $
36,021
8,869
1,899
3,263
(1,565) $ 133,157 $
(438) $ 35,630 $
2,551
59,455 $
(8)
(21)
-
Total
$
The unrealized losses (impairments) in the investment portfolio at December 31, 2015 and 2014 aze generally a result of
market fluctuations that occur daily. The unrealized losses are from 151 securities at December 31, 2015. Of those, 130 are
investment grade, have U.S. government agency guarantees, or aze backed by the full faith and credit of local municipalities
61
throughout the United States. Twenty-one investment grade corporate obligations comprise the remaining securities with
unrealized losses at December 31, 2015. The Company considers the reason for impairment, length of impairment, intent, and
ability to hold until the full value is recovered in deternuning if the impairment is temporary in nature. Based on this analysis,
the Company has determined these impairments to be temporary in nature. The Company does not intend and it is more likely
than not that the Company will not be required to sell these securities until they recover in value or reach maturity.
Mazket prices are affected by conditions beyond the control of the Company. Investment decisions are made by the
management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company.
Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the
Company's income statement and balance sheet.
Securities with amortized costs of $88.7 million and $111.3 million at December 31, 2015 and 2014, respectively, were
pledged to secure the cash flow hedge and public deposits as required or permitted by law. At each of December 31, 2015 and
2014, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government
agencies that comprised more than 10% of the consolidated shareholders' equity.
Note 3. Loans and Related Allowance for Loan Losses
During the third quarter of 2015, the Company terminated the shared-loss agreement with the FDIC relating to the single
family, residential 1-4 family mortgage assets. As a result of this temunation, the Company reclassified the purchased credit
impaired (PCI) loans related to the shared-loss agreement that expired Mazch 2014, which had been reported as non-covered
loans, as PCI loans for all periods presented. Consequently, loans previously referred to as non-covered loans are referred to as
loans. See Notes 4 and 5 for more information.
T'he Company's loans at December 31, 2015 and 2014 were comprised of the following (dollazs in thousands):
Mortgage loans on real estate:
December 31, 2015 December 31, 2014
Amount
96 of Loans
Amount
% o[ Loam
Residential 1-4 family
25.99 % $ 167,171
282,127
42.47
Commercial
57,027
Construction and land development
9.00
5,997
1.12
Second mortgages
Multifamily
33,812
6.Ob
Agriculture 6,238 0.83 7,163
Total real estate loans
553,297
99,783
5,496
1,444
100.00 % $ 660,020
85.47
Commercial loans
13.69
Consumer installment loans
0.66
All other loans 1,345 0.18
$ 194,576
317,955
67,408
8,378
45,389
Total loans $ 748,724
639,944
102,507
4,928
25.33 %
42.75
8.64
0.91
5.12
1.08
83.83
15.12
0.83
0.22
100.00 Flo
Loans previously reported
$ 664,736
Loans previously reported as PCI (4,716)
Total loans $ 660,020
The Company held $13.4 million and $18.3 million in balances of loans guazanteed by the United States Department of
Agriculture (USDA), which are included in various categories in the table above, at December 31, 2015 and 2014, respectively.
As these loans are 100% guaranteed by the USDA, no loan loss provision is required. These loan balances included an
unamortized purchase premium of $586,000 and $922,000 at December 31, 2015 and 2014, respectively. Unamortized
purchase premium is recognized as an adjustment of the related loan yield on a straight line basis, which is substantially
equivalent to the results obtained using the effective interest method.
At December 31, 2015 and 2014, the Company's allowance for credit losses was comprised of the following: (i) specific
valuation allowances calculated in accordance with FASB ASC 310, Receivables, (ii) general valuation allowances calculated
in accordance with FASB ASC 450, Contingencies, based on economic conditions and other qualitative risk factors, and (iii)
historical valuation allowances calculated using historical loan loss experience. Management identified loans subject to
impairment in accordance with ASC 310.
62
The following table summarizes information related to impaired loans as of December 31, 2015 (dollazs in thousands):
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Total real estate loans
Consumer installment loans
Subtotal impaired loans with a valuation allowance
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total real estate loans
Subtotal impaired loans without a valuation allowance
Total:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Total real estate loans
Consumer installment loans
Total impaired loans
Recorded
Investment ~"
Unpaid Prinapal
Balance ~Z~
Related
Allowance
$
2,777 $
3,034 $
205
4,509
13
7,504
78
7,582
407
6,179
14
9,634
84 _
9,718
414
35
574
2
1,025
14
1,039
1,7 $5
1,303
3,088
3,088 ----- 3,760 - -
2,260
-
1,500 —
3,760 —
—
_
4,562
1,508
4,509
13
10,592
5,294
1,907
6,179
14
13,394
78 84
414
35
574
2
-
1,Q25
14__~
13,478 $ 1,039
10,670 $
-
(1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the
investment
(2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any duect write-
downs
63
The following table summarizes information related to impaired loans as of December 31, 2014 (dollazs in thousands):
With an allowance recorded:
Mortgage loans on real estate:
Residential I-4 family
Commercial
Construction and land development
Second mortgages
Total real estate loans
Commercial loans
Consumer installment loans
Subtotal impaired loans with a valuation allowance
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Conshvction and land development
Total real estate loans
Consumer installment loans
Subtotal impaired loans without a valuation allowance
Total:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Total real estate loans
Commercial loans
Consumer installment loans
Total impaired loans
Recorded
Investment ~'~
Unpaid Principal
Balance ~Z~
Related
Allowance
$
2,754 $ _~
-.__..
308
4,903
61
8,026
7,521
118
15,665
588
418
179
1,185
2
1,187
3,342
726
5,082
61
9,211
7,521
120
2,895 $
470
7,643
63
l 1,071
8,721
120
463
53
627
11
1,154
520
20
19,912 1,694
__
-
626
550
-
21'L -
-
-
-
I ,388
3
1,391
3,521
1,020
7,855
63
12,459
8,721
123
463
53
627
11
1,154
520
20
1,694
$
16,85? $
21,303 $
(1) The amount of the investrnent in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the
investment
(2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-
downs
The following table summarizes the average recorded investment of impaired loans for the years ended December 31,
2015, 2014 and 2013 (dollars in thousands):
2015
2014
2013
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
Total impaired loans
$
$
3,952
1.117
4,795
37
9,901
3,761
100
13,762
$
$
4,008
1,680
5,482
143
102
1 I ,415
3,824
89
15,328
$
5,607
4,225
7,436
198
- -- - - 227
17,693
318
72
18,083
$
The majority of impaired loans were also nonaccruing for which no interest income was recognized during each of the
yeazs ended December 31, 2015, 2014 and 2013. No significant amounts of interest income were recognized on accruing
impaired loans for each of the years ended December 31, 2015, 2014 and 2013.
64
Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. Cash basis
income of $465,000 and $612,000 was recognized during the yeaz ended December 31, 2015 and 2014, respectively. There
were no significant amounts recognized during the year ended December 31, 2013. For the years ended December 31, 2015,
2014 and 2013, estimated interest income of $734,000, $890,000 and $980,000, respectively, would have been recorded if all
such loans had been accruing interest according to their original contractual terms.
The following table presents nonaccrual loans, excluding PCI loans, by loan category as of December 31, 2015 and 2014
(dollars in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Total real estate loans
Commercial loans
Consumer installment loans
Total loans
December 31, ZO15
December 31, 2014
4,562
1,508
4,509
13
10,592
78
10,670
$
$
_..
$
3,342
607
4,920
61
8>930
7,521
120
16,571
-..__
Troubled debt restructures and some special mention loans still accruing interest are loans that management expects to
ultimately collect all principal and interest due, but not under the terms of the original contract. All impaired loans at December
31, 2015 were also nonaccrual loans. Impaired loans of $16.9 million at December 31, 2014 consisted of $16.6 million in
nonaccrual loans, in addition to $118,000 in troubled debt restructures and $163,000 in special mention loans, both of which
were still accruing.
The following tables present an age analysis of past due status of loans, excluding PCI loans, by category as of December
31, 2015 and 2014 (dollars in thousands):
December 31, 2015
30-89
Days
Past
Due Past Due Past Due Curtent
90 Days
Total
Recorded
Investment 90
Days Past Due
and Accruing
Total Loans
Receivable
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
1,508
4,509
13
$ 811 $ 4,562 $ 5,373 $ 189,203 $ 194,576 $ -
-
-
-
-
-
-
-
-
-
$ 2,527 $ 10,670 $13,197 $ 735,527 $ 748,724 $ -
2,979 314,976
1,471
62,848
4,560
51
8,230
148
135
- - - 45,389
- - - 6,238
10,592 13,060 626,884
102,491
4,840
1,312
317,955
67,408
8,378
45,389
6,238
639,944
102,507
4,928
1,345
2,468
16 - 16
Commercialloans
Consumer installment loans
88
78
10
All other loans 33 - 33
Total loans
65
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
December 31, 2014
30-89
llays
Past
Due
Total
90 Days
Past Due Past Due Current
Recorded
Investment 90
Total Loans Days Past Due
and Accruing_
Receivable
$ 298 $ 3,342 $ 3,640 $ 163,531 $ 167,171 $
5,048
87
607
4,920
61
282,127
57,027
5,997
33,812
-
807 281,320
200
-
51,979
128
-
5,910
26
- - - 33,812
-
- - - 7,163 7,163 -
-
9,582 543,715
652
-
92,196
7,587
66
-
5,366
10
130 '
-
- - - 1,444
$ 728 $ 1b,571 $17,299 $642,721 $ 660,020 $ -
553,297
99,783
5,496
1,444
8,930
7,521
120
Activity in the allowance for loan losses on loans, excluding PCI loans, by segment for the years ended December 31,
2015, 2014 and 2013 is presented in the following tables (dollars in thousands):
December 31, 2014
ProvlsIon
Allocation
Charge-offs
Recoveries
December 31, 2015
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construcrion and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
$
348 $
(490) $
-
1,371
(114)
43
42
(39)
3,041
4,022
1,353
103
178
- -
27
-
-
8,724
343
1,211
727
97
98
- 11
$ 9,267 $ - $ (1,360) $ 1,652 $ 9,559
3,100 $
2,618
1,930
63
136
66
7,913
1,242
85
27
83 $
33
130
97
{1,1$3)
(3)
(174)
1,b51
(1,723)
8$
(16) -
(593)
(100)
December 31, 2013
Provision
Allocation
Cbar~e-offs
Recoveries
llecember 31, 2014
$ ~~
(733) $
(446)
3,:100
2,618
1,930
63
136
66
7,913
1,242
85
27
$ 10,444 $ - $ (2,530) $ 1,353 $ 9,267
(98) $ '~
3,853 $
636
2,333
(323)
2,252
(42)
101
151
(15)
81 (15)
143
(152)
8
I
-
-
- -
-
-
178
1,065
110
78 $
95
1
4
8,771
1,546
101
26
(1,179)
(1,217)
(134)
- -
..
December 31, 2012
Provision
Allocation
Charge-offs
Recoveries
December 31, 2013
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
$
$
3,985 $
2,482
3,773
142
303
61
10 746
1,961
195
18
244
1,411
(1,338)
16
(152)
(14)
167
(172)
(3)
8
12,920 $ -
$
(432) $
(1,580)
($77)
(1.05)
56 $
20
694
48
3,853
2,333
2,252
101
151
81
8,771
1,546
101
26
$ (3,491) $ 1,015 $ 10,444
- -
(5)
(2,999)
(325)
(167)
39
857
82
76
- -
Included in chazge-offs for the year ended December 31, 2013 was a $500,000 writedown arising from the transfer of a
loan from loans to loans held for sale.
The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of
December 31, 2015 and 2014 (dollazs in thousands):
December 31, 2015
Allowance for Loan Losses Recorded Investment in Loaos
Individually
Evaluated for
Impairment "'
Collectively
E~~aluated for
[m~rment _Total
Individually
Evaluated for
Lnpairment ~~~
Collectively
Evaluated for
Impairment
Total
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Const~vction and land development
Second mortgages
Muldfamity
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
$
450 $
6,972 $
6,362
4,509
13
187,604 $ 194,576
317,955
311,593
67,408
62,899
8,378
8,365
45,389
- 45,389
6,238
- 6,238
639,944
622,088
102,507
102,449
4,928
4,850
1,345
1,345
$ 1,083 $ 8,476 $ 9,559 $ 17,992 $ 730,732 $ 748,724
2,591 $ 3,041 $
4,022
3,967
55
564
1,353
789
2
103
101
-
178
178
-- 27
27
8,724
7,653
727
727
85
97
11 11
17,856
58
78
-
-
12
1,07 (
December 31, 2014
Allowance for Loan Losses
Recorded Investment in Loans
Individually
Evaluated for
Impairment ~'~
Collectively
Evaluated for
Impairment
Total
Individually
Evaluated for
Impairment ~`~
Collectively
Evaluated for
Impairment
Total
$
7,307 $ 159,864 $ 167,171
282,127
277,005
5,122
57,027
51,931
5,096
5,997
61
5,936
33,812
- 33,812
7,163
- 7, l63
553,297
535,711
17,586
99,783
92,026
7,757
124
5,496
5,372
1,444
- 1,444
$ 1,840 $ 7,427 $ 9,267 $ 25,467 $ 634,553 $ 660,020
2,502 $
3,100 $
598 $
2,564
54
2,618
1,302
628
1,930
] 1
63
52
-
136
136
- 66
66
6,622
7,913
1,242
713
65
85
27 27
1,291
529
20
-
~l~ The category "Individually Evaluated for ImpairmenP' includes loans individually evaluated for impairment and determined not to be impaired. These
loans totalled $7.3 million and $8.6 million at December 31, 2015 and 2014, respectively. The allowance for loans losses allocated to these loans was $44,000
and $146,000 at December 31, 2015 and 2014, respectively.
67
Loans are monitored for credit quality on a recurring basis. 'These credit quality indicators aze defined as follows:
Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This
category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $13.4 million and $183 million
at December 31, 2015 and 2014, respectively.
Special Mention - A special mention loan has potential weaknesses that deserve managements close attention. If left
uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some
future date. Special mention loans aze not adversely classified and do not warrant adverse classification.
Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that
jeopardize the liquidation of the debt. These loans are characterized by the possibility of loss if the deficiencies are not
corrected.
Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandazd with the added chazacteristics
that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing
facts, conditions, and values. The possibility of loss is extremely high.
The following tables present the composition of loans, excluding PCI loans, by credit quality indicator at December 31,
2015 and 2014 (dollars in thousands):
December 31, 2015
Special
-
Pass Mentlon _ Substandard
Doabtful Total
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total loans
8,520
434
1,239
$ 182,394 $ 6,b12 $
5,570 $ - $ 194,576
- 317,955
3> 168
- 67,408
4,583
- 8,378
l3
- - 45,389
6,238
- 639,944
13,334
- 102,507
58
- 4,928
79
- - 1,345
$ 713,777 $ 21,476 $ 13,471 $ - $ 748,724
306,267
62,391
7,126
45,389
6,113
609,680
98,159
4,593
1,345
-
125
16,930
4,290
256
-
December 31, 2014
Special
Pass Mention Substandard
Doubtful
Total
10,363
620
1,300
$ 153,699 $ 7,540 $
5,932 $ - $ 167,171
- 282,127
3,373
- 57,027
4,934
- 5,997
6l
- - 33,812
- - 7,163
- 553,297
- 99,783
- 5,496
- - 1,444
$ 616,004 $ 21,835 $ 22,1.81 $ - $ 660,020
268,391
51,473
4,636
33,812
7,163
519,174
90,035
5,351
1,444
19,823
1,991
21
-
14,300
7,757
124
-
-
In accordance with FASB ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a
Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whetter they are
considered troubled debt resmzcturings (TDRs) under the guidance. The Company had 17 loans for each of the years ended
December 31, 2015 and 2014 that met the definition of a TDR.
68
During the year ended December 31, 2015, the Company modified one residential 1-4 family loan that was considered to
be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had apre- and post-modification
balance of $68,000. During the year ended December 31, 2014, the Company modified one commercial real estate loan that
was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre-
and post-modification balance of $69,000. During the year ended December 31, 2013, the Company modified one residential
1-4 family loan and one commercial real estate loan that were considered to be TDR's. The Company extended the terms and
lowered the interest rate for these loans, which had apre-and post-modification balance of $863,000.
A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured
during the previous 12 months that resulted in default during the year ended December 31, 2015 and 2014. There was one
TDR that had been restructured during the previous 12 months that resulted in default during the year ended December 31,
2013. This residential 1-4 family loan had a recorded investment of $173,000.
In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these
restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement.
At December 31, 2015 the Company had 1-4 family mortgages in the amount of $141 A million pledged as collateral to
the Federal Home Loan Bank for a total borrowing capacity of $123.5 million.
Note 4. PCI Loans and Related Allowance for Loan Losses
On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of
the deposits and certain other liabilities and acquire substantially all assets of SFSB. The Company is applying the provisions
of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB
transaction. Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans,
consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans
acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of
this portfolio revealed that SFSB utilized weak underwriting and documentation standazds, which led the Company to believe
that significant losses were probable given the economic environment at the time. The Purchase and Assumption Agreement
included two shared-loss agreements with respect to certain covered loans and foreclosed real estate assets. The shared-loss
agreement related to loans other than those secured by single family, residential 1-4 family mortgages expired March 31, 2014.
These loans, which had an outstanding principal balance of $10.0 million and a carrying value of $5.5 million at March 31,
2014, aze being accounted for in accordance with FASB ASC 310-30, aze commonly referred to as purchased credit impaired
loans, and were classified as non-covered loans, effective April 1, 2014 (the "PCI" loans).
During the third quarter of 2015, the Company terminated the shared-loss agreement relating to tt~e single family,
residential 1-4 family mortgage assets. As a result of this termination, the Company reclassified the related loans (the "loans
previously reported as covered by the FDIC"), as well as the PCI loans related to the shazed-loss agreement that expired March
2014, which had been reported as non-covered loans, as PCI loans for all periods presented. These loans continue to be
accounted for under the provisions of FASB ASC 310-30. Additionally, the Company has reclassified all interest income related
to these loans as interest income on PCI loans for all periods presented.
As of December 31, 2015 and 2014, the outstanding contractual balance of the PCI loans was $91.3 million and $94.9
million, respectively. The cazrying amount, by loan type, as of these dates is as follows (dollars in thousands):
Mortgage loans on zeal estate:
Residential 1-4 family
Commercial
Construction and band development
Second mortgages
Multifamily
Total real estate loans
Total PCI loans
PCI loans previously reported
PCI loans previously reported as covered by the FDIC
Total PCI loans
December 31, 2015
December 31, 2014
Amount
~ of PCI
Loans
Amount
~ of PCI
Loans
$ 52,696
850
2,310
2,822
277
58,955
$ 58,955
89.38 °Io
1.44
3.92
4.79
0.47
100.00
100.00 %
89.20 %
1.70
3.64
5.05
0.41
100.00
100.00 °Io
$ 60,171
1,148
2,456
3,409
276
..67,460
$ 67,460
$ 4,716
62,744
$ 67,460
69
The following table is a summary of interest income on PCI loans for the years ended December 31, 2015, 2014 and 2013
(dollars in thousands):
2014
Interest income on PCI loans
$ 556
Interest income on PCI loans previously reported as covered by the FDIC - 10,672
$ 11,228
Total interest income on PCI loans $ 7,875
2015
$ 7,875
2013
$ -
11,936
$ 11,936
The allowance for loan losses related to the PCI loans of $98,000 was transferred to the allowance for loan losses effective
April 1, 2014, and was related to commercial real estate loans. The remaining allowance for loan losses on loans previously
reported as covered by the FDIC of $386,000 at December 31, 2014 related to residential 1-4 family loans. All balances have
been reclassified to the allowance for loan losses on PCI loans for all periods presented. There was no activity in the allowance
for loan losses on PCI loans for the yeazs ended December 31, 2015, 2014 and 2013.
The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan
losses at December 31, 2015 and 2014 (dollars in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Consttvcrion and land development
Second mortgages
Multifamily
Total real estate loans
Total PCI loans
PCI loans previously reported
PCI loans previously reported as covered by the FDIC
Total PCI loans
December 31, 2015
Allowance for
loan losses
,Recorded
investment 1n
loans
December 31, 2014
Allowance
[or loan
Recorded
investment in
$ 484 $ 52,696
- 850
- 2,310
- 2,822
-- - 27'7
58,955
$ 484 $ 58,955
484
$ 386 $ 60,171
98
1,148
- 2,456
- 3,409
- 276
67,460
$ 484 $ 67,460
484
$ 98 $ 4,716
62,744
$ 484 $ 67,460
386
The change in the accretable yield balance for the years ended December 31, 2015, 2014 and 2013 is as follows (dollars
in thousands):
Balance, January 1, 2013
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2013
PCI loans
Accretion
Reclassification from nonaccretable yield
PCI loans previously reported as covered by the FDIC
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2014
PCI loans
PCI loans previously reported as covered by the FDIC
Balance, December 31, 2014
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2015
70
$ 54,144
(11,936)
9,307
51,515
___
(554)
852
(10,650)
9,919
$ 51,082
5,071
~
46,011
51,082
(7,811)
5_R57
~ 4y,i~a
The PCI loans were not classified as nonperfornung assets as of December 31, 2015, as the loans are accounted for on a
pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected
cash flows, is being recognized on all PCI loans.
Note 5. FDIC Agreements and FDIC Indemnif'cation Asset
On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of
the deposits and certain other liabilities and acquire substantially all assets of SFSB. Under the shared-loss agreements that are
part of that agreement, the FDIC reimbursed the Bank for 80% of losses arising from the acquired loans and foreclosed real
estate assets, on the first $118 million in losses on such loans and foreclosed real estate assets, and for 95% of losses on acquired
loans and foreclosed real estate assets thereafter. Under the shared-loss agreements, a "loss" on an acquired loan or foreclosed
real estate was defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or
restructuring of the acquired loan or foreclosed real estate. The reimbursements for losses on single family, residential 1-4
family mortgage assets were to be made quarterly through Mazch 2019 for losses incurred through January 2019, and the
reimbursements for losses on other assets were made quarterly through Mazch 2014. The shared-loss agreements provided for
indemnification from the fast dollar of losses without any threshold requirement. The reimbursable losses from the FDIC were
based on the book value of the relevant loan as determined by the FDIC at the date of the transaction, January 30, 2009. New
loans made after that date were not covered by the shared-loss agreements. The fair value of the shared-loss agreements is
detailed below.
The Company accounted for the shared-loss agreements with the FDIC as an indemnification asset pursuant to the
guidance in FASB ASC 805, Business Combinations. The FDIC indemnification asset was required to be measured in the same
manner as the asset or liability to which it related. The FDIC indemnification asset was measured separately from the acquired
loans and other real estate owned assets (OREO) because it was not contractually embedded in the acquired loan and OREO
and was not transferable had the Company chosen to dispose of them. Fair value was estimated using projected cash flows
available for loss sharing based on the credit adjustments estimated for each loan pool and other real estate owned and the loss
sharing percentages outlined in the shazed-loss agreements. These cash flows were discounted to reflect the uncertainty of the
timing and receipt of the loss sharing reimbursement from the FDIC.
During the third quarter of 2015, the Company terminated the shazed-loss agreement relating to the single family,
residential 1-4 family mortgage assets. As part of this termination, the FDIC paid the Company $3.1 million as consideration
for the early termination of the shared-loss agreement. All rights and obligations of the parties under the shared-loss agreements,
including the provision to reimburse recoveries received related to the agreement that terminated in Mazch 2014, have been
eliminated under the termination agreement. The proceeds from the FDIC were first applied to the outstanding FDIC receivable
of $775,000. The remaining FDIC indemnification asset balance of $13.1 million was chazged-off as additional FDIC
indemnification asset amortization expense.
71
The following table presents the balances of the FDIC indemnification asset at December 31, 2015, 2014 and 2013 (dollars
in thousands):
January 1, 2013
Increases:
Anticipated
Expected Losses
23,205
$
Amortizable
Premium
(Discount) at
Estimated Loss
Sharing Value Present Value
15,273
$
$
Writedown of OREO property to FMV
344
275
FDIC
Indemnification
Asset Total
$
33,837
275
(6,449)
(6,449)
Decreases:
Net amortization of premium
Reclassifications to FDIC receivable:
Net loan charge-offs and recoveries
OREO sales
Reimbursements requested from FDIC
Reforecasted Change in Mticipated Expected Losses
December 31, 2013
Increases:
(1,268)
(1,180)
(370)
(1,014)
(944)
(296)
(7,217) (5,774)
10,811
13,514
(1,014)
(944)
(296)
5,774 -
25,409
14,598
34
Writedown of OREO property to FMV
Decreases:
Net amortization of premium
Reclassifications to FDIC receivable:
(69)
Net loan chazge-offs and recoveries
(868)
OREO sales
Reimbursements requested from FDIC
(95)
Reforecasted Change in Anticipated Expected Losses (6,707) (5,365)
December 31, 2014
4,441
Increases:
(87)
(1,085)
(118)
5,551
27
Writedown of OREO property to FMV
-
-
Decreases:
Net amortization oFpremium
Chazge-off due to termination of shazed-loss agreement
Reclassifications to FDIC receivable:
34
Net loan chazge-offs and recoveries
(131)
OREO sales
Reimbursements requested from FDIC
(2,920)
Reforecasted Change in Anticipated Expected Losses (2,534)
27
(105)
(2,336)
(2,027)
(5,795)
5,365
14,168
(3,104)
(13,091)
2,027
December 31, 2015 $
- $
- $
- $
Note 6. Premises and Equipment
A summary of the bank premises and equipment is as follows (dollazs in thousands):
27
(5,795)
(69)
(868)
(95)
-
18,609
-
(3,104)
(13,091)
27
(105)
(2,336)
-
-
Land
Land improvements and buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less accumulated degreciadon and amortization
Bank premises and equipment, net
December 31, 2015
$
8,060
19,815
315
8,211
171
36,572
(9,194)
27,378
December 31, 2014
8,171
$
21,468
257
7,199
1,792
- -- -38,887
(9,185)
29,702
$
- -
$
Depreciation expense was $1.6 million for each of the years ended December 31, 2015, 2014 and 2013.
72
Note 7.Other Real Estate Owned
During the third quarter of 2015, the Company terminated the shazed-loss agreement with the FDIC relating to the single
family, residential 1-4 family mortgage assets. As a result of this ternunation, the Company reclassified its other real estate
owned previously reported as covered by the FDIC to other real estate owned, which was previously reported as other real
estate owned, non-covered, for all periods presented.
The following table presents the balances of other real estate owned at December 31, 2015 and December 31, 2014
(dollazs in thousands):
December 31, 2015
Other real estate
owned
December 31, 2014
Other real estate
owned
Residential 1-4 family
1,407
Commercial
634
Construction and land development 3,449
$
Total other real estate owned
Other real estate owned vreviously reported as non-covered
Other real estate owned previously reported as covered by the FDIC
Total other real estate owned
$
2,339
1,868
3,536
$ 5,490 $ 7,743
5,724
2,019
$ 7,743
At December 31, 2015, the Company had $1.4 million in residential 1-4 family loans and PCI loans that were in the
process of foreclosure.
Note 8. Other Inta~~gibles
Core deposit intangibles are recognized, amortized and evaluated for impairment as required by FASB ASC 350,
Intangibles. As a result of the mergers with TransCommunity Financial Corporation (T'FC), and BOE Financial Services of
Virginia, Inc. (BOE) on May 31, 2008, the Company recorded $15.0 million in core deposit intangible assets, which are being
amortized over 9 years. Core deposit intangibles resulting from the Georgia and Maryland transactions, in 2008 and 2009,
respectively, equaled $3.2 million and $2.1 million, respectively, and aze being amortized over 9 years. The core deposit
intangible related to the Georgia transaction was written off in conjunction with the sale of the branches in that market (See
Note 30). The Company estimates that it will recognize amortization expense of $1.9 million in the yeaz ended December 31,
2016 and the final $898,000 in the year ended December 31, 2017.
Other intangible assets aze presented in the following table (dollazs in thousands):
Core deposit intangibles
Accumulated amortization
Reduction due to sale of deposits
Balance
Note 9. Deposits
December 31, 2015
December 31, 2014
~
$
Zo,z90
(16,012)
(1,473}
2,805
~
$
ao,290
(14,104)
(X,473)
4,713
The following table provides interest bearing deposit information, by type, as of December 31, 2015 and 2014 (dollars in
thousands):
December 31, 2015
December 31, 2014
~
,; °'
~ _ .~
NOW
MMDA
Savings
- ~~~
Time deposits less than or equal to $250,000
Time deposits over $250,000
~ ~
-
~
Total interest bearing deposits
~.~~~~ ~,. ,~.~ ~ ~~ -
,F,, $ ~ ~:~~ -
-
~
~~;
$
73
128,761 $
108,810
84,047
409,085
118,600
849,303
$
123,68?
101,784
78,478
416,628
1 13,809
834,381
The scheduled maturities of time deposits at December 31, 2015 are as follows (dollars in thousands):
$ ""'
2016
2017
2018
2019
2020
Total $
404,536
68,046
21,955
15,684
17,464
527,685
Note 10. Borrowings
The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings include
funding of a short-term and long-term nature. Short-term funding includes overnight borrowings from correspondent banks and
securities sold under agreements to repurchase. The following information is provided for short-term borrowings balances,
rates, and maturities (dollars in thousands):
Short-term:
Federal Funds parchased $
18,921
$ 14,500
As of December 31
2015
2014
Maximum month-end outstanding balance $
18,921
Average outstanding balance during the year
Average interest rate during the year
Average interest rate at end of yeaz
$
1,516
O.76 ~I~
1.28 %
$
$
14,5(X)
1,855
0.57 ~l~
0.51
Long-term borrowings aze obtained through the FHLB of Atlanta. As of December 31, 2015, the Company had residential
1-4 family mortgages in the amount of $141.0 million pledged as collateral to the FHLB for a total borrowing capacity of
$123.5 million. The Company had $10.7 million and $11.4 million in variable rate long-term borrowings at December 31,
2015 and 2014, respectively.
On Apri123, 2014, the Company repurchased the then outstanding 10,680 shazes of Series A Preferred Stock (see Note
28). The Company funded the repurchase through an unsecured third-party term loan. The term loan, which has a maturity
date of April 21, 2017, requires that the Company make quarterly payments of 7.5% of the initial outstanding principal, plus
accrued interest, during asix-quarter period beginning with the quarter ending December 31, 2014, quarterly payments of 10%
of the initial outstanding principal, plus accrued interest, during the subsequent four-quarter period and the remaining principal
amount and accrued interest at maturity. The interest rate resets quarterly based on three-month LIBOR plus 3.50°Io per annum.
The Company made an unscheduled principal payment of $1.0 million during the third quarter leaving a balance of $9.7 million
as of December 31, 2014. The terms of the loan require the Company to be in compliance with certain covenants, such as
maintenance of minimum regulatory capital ratios, minimum return on assets, minimum cash on hand, minimum dividend
capacity, and subsidiary dividend restrictions.
The termination of the shared-loss arrangement in September 2015 adversely impacted the specific covenants related to
return on average assets and dividend capacity. Accordingly, effective as of September 10, 2015, the lender waived non-
compliance with the return on average assets covenant for the quarter ended September 30, 2015 and amended the definition
of return on average assets to provide adjustments to balance the impact of the temrination of the shared-loss arrangement
through June 30, 2016. In addition, the lender amended and combined the covenants with respect to minimum cash and
dividend capacity of the borrower, also to balance the impact of such termination, and waived non-compliance with the dividend
capacity covenant during the period from September 30, 2015 through and including March 30, 2016. The Company was in
compliance with all other covenants at December 31, 2015.
74
The following information is provided for long-term borrowings balances, rates, and maturities (dollazs in thousands):
As of December 31
Long-term:
Federal Home Loan Bank advances
Long-term debt
Totallong-termbonowings
201 ~ 2014
Interest hates Maturities
$ 95,656
$ 96,401
0.35-1.80 % 2016 — 2019
x,675 9,680 3.82 % 2017
$ 101,331
$ 106,081
Maturities of long-term debt at December 31, 2015 aze as follows (dollars in thousands):
2016
2017
2018
2019
Total
$
84,005
6,670
—
10,656
$ 101,331
The Company had unsecured lines of credit with correspondent banks available for overnight borrowing totaling $45.0
million at December 31, 2015.
Note 11. Accumulated Other Comprehensive (Loss) Income
The following tables present activity net of tax in accumulated other comprehensive (loss) income (AOCI) for the years
ended December 31, 2015, 2014 and 2013 (dollazs in thousands):
December 31, 2015
Unrealized Gain
(Loss on Securities
Defined Benefit
Pension Plan
GairJLoss on
Cash Flow Hedge
Total Other
Comprehensive
(Loss) Income
Beginning balance
664
(944)
Other comprehensive loss before reclassificapons
Amounts reclassified from AOCI (312)_ 3 (309)
(90) (154) ___ (1,253)
(589)
(901) $
Net current period other comprehensive loss (1,009)
Endmg balance $
1,452 $
(697)
(SI1) $
(93)
(131) $
443 $
23 $
(154)
$ _
Beginning balance
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive income (loss)
Ending balance $
December 31, 2014
Unrealized Gain
(Loss) on Securities
Defined Benefit
Pension Plan Cash Flow Hedge
Gsin/I.oss on
Total Offier
Comprehensive
(boss) Income
$
(3,954) $
(155) $
— $
(4,109)
6,1?5
(719)
(659)
3
_ 5,406 (656)
1,452 $
(81 ]) $
_
23
—
23
23 ~
5,489
(716)
__ 4,773
664
75
Beginning balance
Other comprehensive (loss) income before
reclassifications
Amounts reclassified from AOCI
Net current period other comprchcnivc (loss) income
Ending balance $
(3,954) $
(155) $
December 31, 2013
Unrealized Gain
(Loss) on Securities
Defined Benefit
Pension men
Gaidl.oss on
Cash Flow Hedge
Total Other
Comprehensive
(Loss) Income
$
3,903 $
(1,075) $
— $
2,828
(7,515)
965
~ (45)
(7,R57) _
920
—
(6,550)
— (387)
(6,937)
—
— ~
(4,109)
The followin tables resent the effects of reclassifications out of AOCI on line items of consolidated (loss) income for
S
P
the years ended December 31, 2015, 2014 and 2013 (dollazs in thousands):
Details about AOCI
Securities available for sale
Amount Reclassified from AOCI
Year ended December 31
2015
2014
2013
Affected Line Item in the
Consolidated Statement of Income
Unrealized gains on securities
available for sale
Related tax expense 160
(472)
$
Defined benefit plan
Amortization of prior service cost
Related tax (benefit) expense
(312)
5
(2)
3
$
(1,089) $
370
(719)
(518)
Gain on securities transactions,
net
1"76 Income tax (benefit) expense
(342) Net of tax
4
(l) 23 Income tax (benefit) expensr
(6$) ~i~
3
(45) Net of tax
Total reclassifications for the period $
(-~~~y)
$
(~ ~~) $
(3g7)
~l~
This other comprehensive (loss) income component is included in the computation of net periodic pension cost (see Note 13 for
details).
76
Note 12. Income Taxes
The ta~c effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows (dollars in thousands):
2015
December 31
2014
2013
Deferred tau assets:
Allowance for loan losses
Deferred compensation
Nonaccrual loan interest
Unrealized loss on available for sale securities
FAS 158 adjustment pension
Stock based compensation
Purchase accounting adjustment ~t~
Depreciation premises and equipment
OREO
Other
Deferred tax liabilities:
$
_
661
464
493
—
—
3,415 $ 3,315 $ 3,715
633
— 931
— 2,037
81
— 205
—
—
118
618
146
8,484
180
667
392
11,077 5,632
5,696
—
569
440
417
—
Accrued pension
Purchase accounting adjustment <<~
Unrealized gain on available for sale securities
Depreciation premises and equipment
Other
355
2,257
—
—
56
959 2,223 2,668
Net deferred tax asset $ 10,118 $ 3,409 $ 5,816
411
942
747
—
123
228
287
1$
426
—
(1) Purchase accounting adjustment includes timing differences related to PCI loans, purchased fixed assets, and differences in income recognition
on the purchase transactions.
The Company has analyzed the tau positions taken or expected to be taken in its ta~c returns and concluded that it has no
liability related to uncertain tax positions in accordance with FASB ASC 740, Income Taxes.
The Company has evaluated the need for a deferred t~ valuation allowance for the year ended December 31, 2015 in
accordance with FASB ASC 740. Based on a three yeaz income projection of taxable income and tax strategies that would
result in potential securities gains and the effects of off-setting deferred talc liabilities, the Company believes that it is more
likely than not that the deferred ta~c assets are realizable. Therefore, no allowance is required. Years 2012 through 2015 are
subject to audit by taxing authorities.
Allocation of the income tax expense between current and deferred portions is as follows (dollazs in thousands):
December 31
2015
2014
2013
Current tax provision
Deferred tax expense (benefit)
Income tax expense (benefit)
$
3,450 $ 2,768 $ —
_ 2,497
(40)
(6,077)
_
$
(2,627) $ 2,728 $ 2,497
The following is a reconciliation of the expected income ta~c (benefit) expense with the reported expense for each year:
Statutory federal income tax rate
(Reduction) Increase in taxes resulting from:
Municipal interest
Bank owned life insurance income
Other, net
Effective tax rate
77
2015
December 31
2014
2013
(34.0 )%
34.0 %
34.0 %
(13.6)
(4.9)
1.2
(51.3)%
(3.1)
(3.8)
(0.5)
26.6%
(2.6)
(3.0)
1.3
29.7%
Note 13. Employee Benefit Plans
The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank
of Essex employees over 21 years of age. Benefits aze generally based upon years of service and the employees' compensation.
The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security
Act.
The Company has frozen the plan benefits for all the Defined Benefit Plan participants effective December 31, 2010. The
following table provides a reconciliation of the changes in the plan's benefit obligations and fair value of assets for the year
ended December 31, 2015 and 2014 (dollars in thousands):
December 31
2015
2014
Change in Benefit Obligation
Benefit obligation, beginning of year
Interest cost
Actuarial (gain)/loss
Benefits paid
Settlement gain 41
4,836
Benefit obligation, ending
5,154
189
(143)
(405)
$
$
Change in Plan Assets
Fair value of plan assets, beginning of yeaz
Actual return on plan assets
Benefits paid
Fair value of plan assets, ending
Funded Status
Amounts Recognized in the Balance Sheet
Other liabilities
Amounts Recognized in Accumulated Other Comprehensive Income
Net loss
Prior service cost
Deferred tax
Total amount recognized
$
~
$
$
$
$
$
$
$
4,662
223
845
(583)
7
5,154
5,485
233
(583)
5,13.5
(19)
5,135
(5)
(405)
4.725
~i i i~
(111)
$
(19)
$
1,307
58
1,165
63
(464) (417)
$
901
811
The accumulated benefit obligation for the defined benefit pension plan at December 31, 2015 and 2014 was $4.8 million
and $5.2 million, respectively.
The following table provides the components of net periodic benefit cost for the plan for the yeazs ended December 31,
2015, 2014 and 2013 (dollars in thousands):
Components of net periodic benefit cost:
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net loss due to settlement
Recognized net actuarial loss
Net periodic (benefit) cost
December 31
2015 2014
$ 223
$ 189
(396)
(353)
4
5
19
70
43 -
$ (46)
$ (150)
2013
$ 224
(405)
147
69
$ 35
Total recognized in net periodic benefit cost and
accumulated other comprehensive income (loss)
$ 92
$ 842
$ (1,359)
78
The weighted-average assumptions used in the measurement of the Company's benefit obligation and net periodic benefit
cost are shown in the following table:
Discount rate used for net periodic pension cost
Discount rate used for disclosure
Expected return on plan assets
2015
4.00°k
4.25%
7.50%
December 31
2014
5.00%
4.00%
7.50%
2013
4.00%
5.00%
8.00%
Other changes in plan assets and benefit obligations recognized in other comprehensive income during 2015 are as follows
(dollars in thousands):
Net loss
Amortization of prior service cost
Total amount recognized
$
$
142
(5)
137
The estimated amounts that will amortize from accumulated other comprehensive income into net periodic benefit cost
in 2016 are as follows (dollazs in thousands):
Prior service cost
Net loss due to settlement
$ 5
53
Total amount recognized $ 58
Long-Term Rate of Return
The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with its investment
advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested
or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net
of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not
given to recent experience that may not continue over the measurement period, with higher significance placed on current
forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns aze not reduced for taxes. Further, solely for this purpose,
the plan is assumed to continue in force and not terminate during the period during which assets aze invested. However,
consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and
expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly
estimated within periodic cost).
Asset Allocation
The pension plan's weighted-average asset allocations as of December 31, 2015 and 2014 by asset category were as
follows:
Asset Category
Mutual funds —fixed income
Mutual funds —equity
Cash and equivalents
Total
December 31
2015 2014
40.OQ%
60.00
0.00
40.00%a
60.00
0.00
100.00% ~QQ%
The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 22, "Fair Values of Assets
and Liabilities", to the Consolidated Financial Statements. The valuations are based on third party data received as of the
balance sheet date. All plan assets are considered Level 1 assets, as quoted prices exist in active markets for identical assets.
79
The following table presents the fair value of plan assets as of December 31, 2015 and 2014 (dollars in thousands):
Cash
Mutual funds:
Fixed income funds
International funds
Large cap funds
Mid cap funds
Small cap funds
Stock fund
Assets measured at Fair Value (Level 1)
December 31, 2015
December 31, 2014
$ 7
$ 6
1,903
686
1,117
550
219
243
2,031
772
801
S46
181
798
4 72 ~_5 135
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with
a targeted asset allocation of 40% fixed income and 60% equities. The investment manager selects investment fund managers
with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of
the plan's investment strategy. The investment manager will consider both actively and passively managed investment
strategies and will allocate funds across the asset classes to develop an efficient investment structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being cazeful to
avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction
costs and other administrative costs chargeable to the trust.
Estimated future contributions and benefit payments, which reflect expected future service, as appropriate, are as follows
(dollars in thousands):
Expected Employer Contributions
2016
Expected Benefit Payments
2016
2017
2018
2019
202
2021-2025
$`
—
756
99
217
606
200
651
401 (k) Plan
T'he Company combined the acquired BOE 401(k) and TFC 401(k) plans into the Essex Bank 401(k) plan effective
October 1, 2010. The employee may contribute up to 100% of compensation, subject to statutory limitations. The Company
matches 100% of employee contributions on the first 3% of compensation, then the Company matches 50% of employee
contributions on the next 2% of compensation.
The amounts charged to expense under these plans for the years ended December 31, 2015, 2014 and 2013 were
$584,000, $475,000 and $472,000, respectively.
Deferred Compensation Agreements
The Company has deferred compensation agreements with certain key employees and the Boazd of Directors. The
retirement benefits to be provided aze fixed based upon the amount of compensation earned and deferred. Deferred
compensation expense amounted to $154,000, $165,000 and $124,000 for the years ended December 31, 2015, 2014 and 2013,
respectively. The expense associated with these agreements is offset by increased cash surrender value of life insurance policies
on the individuals.
80
Note 14. Stock Option Plans
2009 Stock Ovtion Plan
In 2009, the Company adopted the Community Bankers Trust Corporation 2009 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to further the long-term stability and financial success of the Company by attracting and retaining
employees and directors through the use of stock incentives and other rights that promote and recognize the financial success
and growth of the Company. The Company believes that ownership of company stock will stimulate the efforts of such
employees and directors by further aligning their interests with the interest of the Company's shareholders. The Plan is to be
used to grant restricted stock awards, stock options in the form of incentive stock options and nonstatutory stock options, stock
appreciation rights and other stock-based awards to employees and directors of the Company for up to 2,650,000 shazes of
common stock. No more than 1,500,000 shares may be issued in connection with the exercise of incentive stock options.
Annual grants of stock options are limited to 500,000 shares for each participant.
The exercise price of an incentive stock option cannot be less than 100% of the fair market value of such shares on the
date of grant, provided that if the pazticipant owns, directly or indirectly, stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, the exercise price of an incentive stock option shall not be less than 110%
of the fair mazket value of such shazes on the date of grant. The exercise price of nonstatutory stock option awards cannot be
less than 100% of the fair market value of such shazes on the date of grant. The option exercise price may be paid in cash or
with shares of common stock, or a combination of cash and common stock, if pernutted under the participant's option
agreement. The Plan will expire on June 17, 2019, unless terminated sooner by the Boazd of Directors.
The fair value of each option granted is estimated on the date of grant using the "Black Scholes Option Pricing" method
with the following assumptions for the years ended December 31, 2015, 2014 and 2013:
F~acpected volatility
Expected dividend
Expected term (yeazs)
Risk free rate
201
SOA%
1.0°l0
6.25
1.67%
2014
50.0%
1.0%
6.25
2.00%
2013
50.0%o
2.0%
6.25
1.38%
The expected volatility is an estimate of the volatility of the Company's shaze price based on historical performance. The
risk free interest rates for periods within the contractual life of the awazds aze based on the U. S. Treasury Zero Coupon implied
yield at the time of the grant correlating to the expected term. The expected term is based on the simplified method as provided
by the Securities and Exchange Commission Staff Accounting Bulletin No 110 (SAB 110). In accordance with SAB 110, the
Company has chosen to use the simplified method, as this is the first plan issued by the Company as Community Bankers Trust
Corporation; therefore, minimal historical exercise data e~cists. The dividend yield assumption is based on the Company's
history and expectation of dividend payouts over the life of the options at the time of the grant.
The Company plans to issue new shares of common stock when options are exercised.
In January 2013, the Company granted 25,000 restricted shares of common stock to an executive officer in accordance
with the minimum rules for long-term equity grants for companies participating in the Department of the Treasury's TARP
Capital Purchase Program. These rules require that for each 25% of total financial assistance repaid, 25% of the total restricted
stock may become transferrable. Following the Company's repayment of such financial assistance, 25% of this awazd vested
and became transferable in January 2014 and January 2015. The remaining 50% of ttris awazd will vest (and will become
transferable) in January 2016 and January 2017 in accordance with the terms of the award. See Note 28 for further information
related to the Company's participation in the TARP Capital Purchase Program.
81
The Company issues equity grants to non-employee directors as payment for annual retainer fees. The fair market value
of these grants was the closing price of the Company's stock at the grant date. A summary of these grants for the years ended
December 31, 2015, 2014 and 2013 is shown in the following table:
2015
For the Year Ended
2014
2013
Month Issued Value
March
June
September ~
December
8,882
8,862
7,722
7,205
~ - ~ m ~ .~~
~~ ~ ~
"n~
4.39
4.40
5.05
5.41
~ r ~ ~
_' f
Shares
Fair Market
Shares Fair Market
Issued Value
Shares Fair Market
Issued
Value
7,375
9,954
8,901
8,697
4.00
4.16
4.38
4.48
8,751
),096
8,073
7,965
3.37
3.24
3.65
3.70
The Company granted 230,000 options in 2013, 175,000 options in 2014 and 320,000 options in 2015 to employees which
vest ratably over the requisite service period of four yeazs. A summary of options outstanding for the year ended December
31, 2015, is shown in the following table:
Options
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
Number of Shares
707,750
Outstanding at beginning of yeaz
320,000
Granted
(38,750)
Forfeited
Expired
-
(36,500)
Exercised
Outstanding at end of year 952,500
Options outstanding and exercisable at end of year 406,000
$ 2.54
4.37
3.77
235
3.11
2.25
$ 2,152,710
$ 1,267,816
Weighted average remaining contractual life for
outstanding and exercisable shazes at year end
72 months
The weighted average fair value per option of options granted during the yeaz was $1.97, $1.73 and $1.16 for the years
ended December 31, 2015, 2014 and 2013, respectively. The aggregate intrinsic value of a stock option in the table above
represents the aggregate pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds
the exercise price of the option) that would have been received by option holders had all option holders exercised their options
on December 31, 2015. This amount changes with changes in the market value of the Company's stock. The Company received
$86,000, $39,000 and $6,000 in cash related to option exercises with a total intrinsic value of $93,000, $74,000 and $11,000
during the years ended December 31, 2015, 2014 and 2013, respectively. A taac benefit of $34,000 and $38,000 was recognized
in additional paid-in-capital in connection with the option exercises and issuances of restricted stock during 2015 and 2014,
respectively.
The Company recorded total stock-based compensation expense of $467,000, $330,000 and $253,000 for the years ended
December 31, 2015, 2014 and 2013, respectively. Of the $467,000 in expense that was recorded in 2015, $310,000 related to
employee grants and is classified as personnel expense; $157,000 related to the non-employee director grants and is classified
as other operating expenses. Of the $330,000 in expense that was recorded in 2014, $181,000 related to employee grants and
is classified as personnel expense; $149,000 related to the non-employee director grants and is classified as other operating
expenses. Of the $253,000 in expense that was recorded in 2013, $135,000 related to employee grants and is classified as
personnel expense; $118,000 related to the non-employee director grants and is classified as other operating expenses.
82
The following table summarizes non-vested options and restricted stock outstanding at December 31, 2015:
Options
Restricted Stock
Number of Shares
Weighted
Average
Grant-Date
Number of Shares
Weighted
Average
Grant-Date
Fair Value Fair Value
Non-vested at begAnning of the year
Granted
Vested
Forfeited
Non-vested at end of year 546,500 l .66
401,750. ~
320,000
(136,500)
(38,750)
$ 2.86
$ 1.22 _
—
1.97
2.86
1.08
L66 — —
2.86
—
(6,250)
12,500
18,750
;_
The unrecognized compensation expense related to non-vested options and restricted stock was $620,000 at December
31, 2015 to be recognized over a weighted average period of 31 months. The total fair mazket value of shares vested during
the yeazs ended December 31, 2015, 2014 and 2013 was $148,000, $101,000 and $42,000, respectively.
TFC and BOE Stock Option Plans
Prior to the mergers, both TFC and BOE maintained stock option plans as incentives for certain officers and directors.
During 2007, TFC replaced its stock option plan with an equity compensation plan that issued restricted stock awards. Under
the terms of these plans, all options and awazds were fully vested and exercisable, and any unrecognized compensation expenses
were accelerated. Due to the mergers on May 31, 2008, these plans were terminated and the Company issued replacement
options amounting to 332,351 and 161,426 to former employees of TFC and BOE, which represented exchange rates of 1.42
and 5.7278, respectively.
The options were valued at $1.488 million using the Black-Scholes model at the time of acquisition of TFC and BOE by
the Company. The options were considered part of the acquisition price and, therefore, were not expensed by the Company.
Assumptions were for a discount rate of 4.06% and 25% volatility with a remaining term of 4.83 years for TFC options and
5.25 years for BOE options.
All remaining outstanding TFC options expired during the year ended December 31, 2013, and all remaining outstanding
BOE options expired during the yeaz ended December 31, 2014.
The aggregate intrinsic value of the options outstanding and exercisable was zero for each of the years ended December
31, 2014, and 2013.
83
Note 15. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share (EPS) is computed by dividing net income or loss available to common
shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using
the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive
common shares outstanding attributable to stock instruments (dollars and shares in thousands, except per share data):
For the year ended December 31, 2015
Net (Loss) Income
Weighted Average
Available to Common
Commun Shares
Shareholders
(Numerator) (Denominator)
Per Common
Share Amomt
Basic EPS
Effect of dilutive stock awards
DilutedEPS $ (2,497)
$ (2,497)
— —
21,827 ~ '~~~- $ (0.11)
—
$ (0.11)
21,827
For the yeaz ended December 31, 2014
Basic EPS
Effect of dilutive stock awards
Diluted EPS $ 7,269
$ 7,269
—
21,755
226
21,981
$ 0.33
—
0.33
$
For the year ended December 31, 20l 3
21,689
Shares issued
Unissued vested restricted stock 11
$ 0.22
Basic EPS
Effect of dilutive stock awards — 222 —
$ 0.22
Diluted EP5
- $ 4,787
$ 4,787
21,700
21,922
Antidilutive common shares issuable under awazds or options of 953,000 and 40,000 were excluded from the computation
of diluted earnings per common shaze for the years ended 2015 and 2013, respectively. There were no antidilutive exclusions
from the computation of diluted earnings per common share for the yeaz ended 2014.
Note 16. Related Party Transactions
In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with
its executive officers, directors, and their affiliates. The table below presents the activity for both direct and indirect loans at
December 31, 2015 and 2014 (dollars in thousands).
Balance, beginning of year
Principal additions
Repayments and reclassifications
Balance, end of year
December 31
2015
2014
$ 2,301
2,081
1,384
5,517
(1,604)
(871)
6,727 $ 2,081
$
$
Indirect loans at December 31, 2015 and 2014 were $6.7 million and $2.1 million, respectively.
At December 31, 2015 and 2014, the Bank held deposits of related parties in the amount of $2.0 million and $976,000,
respectively.
84
Note 17. Cash Flow Hedge
On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million. The
Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows
on the designated variable rate borrowings. The swap hedges the interest rate risk, wherein the Company will receive an interest
rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty
calculated on the notional amount for a term of five years. The Company intends to sequentially issue a series of three month
fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through
one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered
CDs, based on whichever mazket offers the most advantageous pricing at the time that pricing is first initially deternuned for
the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month
debt, it will decide at that time which funding source to use for that quarterly period.
The swap was entered into with a counterparty that met the Company's credit standazds, and the agreement contains
collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not
significant. The Company had $440,000 and $150,000 of cash pledged as collateral as of December 31, 2015 and 2014,
respectively.
Amounts receivable or payable aze recognized as accrued under the terms of the agreements. In accordance with FASB
ASC 815, Derivatives and Hedging, the Company has designated the swap as a cash flow hedge, with the effective portions of
the derivatives' unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions
of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the
effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The
Company's cash flow hedge was deemed to be effective for the year end 2015 and 2014. The fair value of the Company's cash
flow hedge was an unrealized loss of $199,000 at December 31, 2015 and an unrealized gain of $23,000 at December 31, 2014,
and was recorded in other liabilities and other assets, respectively. Unrealized gains and losses were recorded as a component
of other comprehensive income.
Note 18. Dividend Limitations on Affiliate Bank
Transfers of funds from the banking subsidiary to the parent corporation in the form of loans, advances and cash dividends
are restricted by federal and state regulatory authoriries. All transfers of funds from the banking subsidiary to the parent
corporation require prior approval from federal and state regulatory authorities as a result of the retained deficit at the banking
subsidiary. However, there aze guidelines that exist that guide the bank as to amounts that may be transferred with appropriate
prior approval. As of December 31, 2015, 2014 and 2013, the aggregate amount of funds that could be transferred from the
banking subsidiary to the parent corporation, with prior regulatory approval, totaled $0, $1.1 million and $3.5 million,
respectively.
Note 19. Concentration of Credit Risk
At December 31, 2015 and 2014, the Bank's loan portfolio consisted of commercial, real estate and consumer
(installment) loans. Real estate secured loans represented the largest concentration at 86.53% and 8533% of the loan portfolio
for 2015 and 2014, respectively.
The Bank maintains a portion of its cash balances with several financial institutions located in its market area. Accounts
at each institution aze secured by the FDIC up to $250,000. Uninsured balances were $4.5 million and $5.1 million at
December 31, 2015 and 2014, respectively.
Note 20. Financial Instruments With Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
85
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments. A summary of the contract amounts of the Bank's exposure to off-balance sheet risk as of December 31, 2015 and
2014, is as follows (dollars in thousands):
Commitments with off-balance sheet risk:
Commitments to extend credit
Standby letters of credit
Total commitments with off-balance sheet risks
December 31, 2015
December 31, 2014
~
$
106,099
7,146
113,245
$
$
87,017
7,358
94,375
Commitments to extend credit are agreements to lend 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held vanes but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements aze
commitments for possible future extensions of credit to existing customers. These lines of credit aze generally uncollateralized
and usually do not contain a specified maturity date and may be drawn upon only to the total extent to which the Bank is
committed.
Standby letters of credit are condirional commitments issued by the Bank to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's evaluation of the counterparty. Since most of the letters of credit
are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Note 21. Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are 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 Company's and
Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital (as defined in the regulations) to
risk weighted assets (as defined), and of tier 1 capital (as defined) to adjusted average total assets (as defined). The December
31, 2015 ratios reflect changes to capital and asset risk-weighting in accordance with BASEL III, which became effective
January 1, 2015. BASEL III introduced the common equity tier 1 ratio (as defined). Management believes, as of December 31,
2015 and 2014, that the Company and Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2015, based on regulatory guidelines, the Company believes that it is well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must
maintain minimum total risk-based, tier 1 risk-based, common equity tier 1, and tier 1 leverage ratios as set forth in the table
below. There are no conditions or events since that date that management believes have changed the Bank's category.
86
The Company's and the Bank's actual capital amounts and ratios are presented in the following table (dollars in
thousands).
As of December 31, 2015:
Total Capital to risk weighted assets
Company
Bank
Tier 1 Capital to risk weighted assets
Company
Bank
Common Equity Tier 1 Capital to risk weighted
assets
Company
Bank
Tier 1 Capital to adjusted average total assets
Company
Bank
As of December 31, 2014:
Total Capital to risk weighted assets
Company
Bank
Tier 1 Capital to risk weighted assets
Company
Bank
Tier 1 Capital to adjusted average total assets
Company
Bank
Required for Capital
Required in Order to be
Actual
Adequacy Purposes
~V'ell Capitalized User P
rompt Corrective Action
Amount
Ratio
Amounl
Ratio
Amount
Retlo
$ 118,157 13.16 % $ 71,831
71,790
119,683 13.34
8.00 %
8.00
NA
$ 89,737
NA
10.00 %
108,457 12.08
109,983 12.26
53,873
53,842
6.00
6.00
NA
71,790
NA
8.00
104,333 11.62
12.26
109,983
40,405
40,382
4.50
4.50
108,457
109,983
9.38
9.55
46,241
46,088
4.00
4.00
NA
58,329
NA
57,611
NA
6.50
NA
5.00
115,805 14.72
14.92
117,395
62,950
62,930
8.00
8.00
NA
78,66?
NA
10.00
106,397 13.52
107,987 13.73
31,475
31,465
4.00
4.00
106,397
107,987
9.36
9.50
45,487
45,478
4.00
4.00
NA
47,197
NA
56,847
NA
6.00
NA
5.00
Note 22. Fair Values of Assets and Liabilities
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize
the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that
prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels,
based on the markets in which the assets and liabilities aze traded and the reliability of the assumptions used to determine fair
value. These levels are:
• Level 1-Valuation is based upon quoted prices for identical instruments traded in active mazkets.
• Leve12-Valuation is based upon quoted prices for similar instruments in active mazkets, quoted prices for identical or
similar instruments in mazkets that aze not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
• Level 3-Valuation is determined using model-based techniques with significant assumptions not observable in the
mazket. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants
would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option
pricing models, discounted cash flow models and similar techniques.
FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on acontract-by-contract basis. The Company has not made
any material FASB ASC 825 elections as of December 31, 2015.
87
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures.
Securities available for sale and loans held for sale are recorded at fair value on a recurring basis. The tables below present the
recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
December 31, 2015
Total
Levell
Leve12
Level3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov't agencies
U.S. Gov't sponsored agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total investment securities available for sale
Total assets at fair value
Cash flow hedge`
Total liabilities at fair value
$ 49,941
742
141,498
14,296
8,496
28,297
243,270
$ ?43,270
$ 39,748
-
687
-
-
-
40,435
$ 40,435
$
~1~ ~
(199) $
__ -
-
$ 10,193
742
140,811
14,296
8,496
28,297
202,835
$ 202,835
$
$
(199)
(199)
$
$
$
-
-
-
Total
Levell
Leve12
Level 3
December 31, 2014
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov't agencies
State, county and municipal
Corporate and other bonds
Mortgage backed - U.S. Gov't agencies
Mortgage backed - U.S. Gov't sponsored agencies
Total investment securities available for sale
Cash flow hedge
Total assets at fair value
Total liabilities at fair value
Investment securities available for sale
$ 98,707 $ 94,464 $ 4,243 $
5,596
-
-
137,477
11,883
2,258
24,243
274,568
23
$ 274,591
$
100,060
-
$ 100,060
-
- $
131,881
11,883
2,258
24,243
174,508
-
-
-
-
-
-
23 -
-
$
$
$ 174,531
-
$
Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based
upon quoted prices, if available. If quoted prices are not available, fair values aze measured using independent pricing models
or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit
rating, prepayment assumptions and other factors such as credit loss assumptions.
The Company utilizes a thud party vendor to provide fair value data for purposes of deternuning the fair value of its
available for sale securities portfolio. The third party vendor uses a reputable pricing company for security market data. The
third party vendor has controls and edits in place for month-to-month market checks and zero pricing, and a Statement on
Standazds for Attestation Engagements No. 16 report is obtained from the third party vendor on an annual basis. The Company
makes no adjustments to the pricing service data received for its securities available for sale.
Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.
Cash f Iow hedge
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted
future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash
88
payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market
interest rate curves.
Assets and Liabilities Measured at Fair Value on a Nonrecurrin¢ Basis
The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis
on the consolidated balance sheet. The following table presents assets measured at fair value on a nonrecurring basis for the
years ended December 31, 2015 and 2014 (dollars in thousands):
Total
December 31, 2015
Levell
Leve12
I,eve13
Impaired loans
Bank premises held for sale
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Impaired loans
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Impaired loans
110
5,490
$ 8,737 $ — $ l ,982 $ 6,755
110
5,459
$ 14,337 $ — $ 2,013 $ 12,324
— $ — $ — $ —
$
—
—
—
31
Total
December 31.2014
Levell
Level2
Leve13
7,743
$ 14,286 $ — $ — $ 14,286
7,743
$ 22,029 $ — $ — $ 22,029
$ — $ — $ — $ —
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures
the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of
several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such
loans. At December 31, 2015 and December 31, 2014, a majority of total impaired loans were evaluated based on the fair value
of the collateral. The Company frequently obtains appraisals prepazed by external professional appraisers for classified loans
greater than $250,000 when the most recent appraisal is greater than 18 months old and /or deemed to be invalid. When the
fair value of the collateral is based on an observable market price or a current appraised value, the Company records the
impaired loan within Leve12.
The Company may also identify collateral deterioration based on current mazket sales data, including price and absorption,
as well as input from real estate sales professionals and developers, county or city ta~c assessments, market data and on-site
inspections by Company personnel. Internally prepared estimates generally result from current market data and actual sales
data related to the Company's collateral or where the collateral is located. When management determines that the fair value of
the collateral is further impaired below the appraised value and there is no observable mazket price, the Company records the
impaired loan as nonrecurring Leve13. In instances where an appraisal received subsequent to an internally prepared estimate
reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for
impairment using the present value of expected future cash flows discounted at the loan's effective interest rate. The
measurement of impaired loans using future cash flows discounted at the loan's effective interest rate rather than the market
rate of interest rate is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews
of classified loans are performed by management on a quarterly basis.
Bank premises and equipment held for sale
The fair value of bank premises and equipment held for sale was deterrnined using the adjusted appraisal methodology
described in the other real estate owned (OREO) asset section below.
Other real estate owned
Other real estate owned (OREO) assets are recorded at the fair value of the real estate acquired at the date of foreclosure
net of estimated selling costs upon transfer of the related loans to OREO property. Subsequent to the transfer, valuations are
89
periodically performed by management and the assets are carried at the lower of carrying value or fair value less estimated
selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation
of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised
value, the Company records the foreclosed asset within Level 2. When an appraised value is not available or management
deternunes that the fair value of the collateral is further impaired below the appraised value due to such things as absorption
rates and market conditions, the Company records the foreclosed asset within Leve13 of the fair value hierarchy.
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities,
including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or
nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value
of the Company.
The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet,
at fair value measures by level of valuation assumptions used for those assets. This table excludes financial instruments for
which the carrying value approximates fair value (dollazs in thousands):
Financial assets:
Securities held to maturity
Loans, net of allowance
PCI loans, net of allowance
Financial liabilities:
Interest bearing deposits
Long-term borrowings
Financial assets:
Securities held to maturity
Loans, net of allowance
PCI loans, net of allowance
FDIC indemnification asset
Financial liabilities:
Interest bearing deposits
Long-term borrowings
Carrying Value
Estimated Fair
Value
December 31, 2015
Level 1
I,eve12
Leve13
$ 36,478
739,165
58,471
$ 37,611
739,367
62,902
$ - $ 37,611
- 733,026
-
$ -
6>341
- 62,902
849,303
105,455
850,770
105,476
- 850,770
- 105,476
-
-
Carrying Value
Estimated Fair
Value
Level 1
Leve12
Leve13
December 31, 2014
$ 36,197
650,753
66,976
18,609
$ 37,539
656,931
74,358
4,242
$ - $ 37,539
- 642,645
-
-
$ -
14,286
- 74,358
- 4,242
834,381
110,205
836,658
110,218
- 836,658
- 110,218
-
-
The following methods were used to estimate the fair value of all other financial instruments recognized in the
accompanying balance sheets at amounts other than fair value as of December 31, 2015. T'he Company applied the provisions
of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at
fair value. The provisions requiring the Company to ma~cimize the use of observable inputs and to measure fair value using a
notion of exit price were factored into the Company's selection of inputs into its established valuation techniques.
Financial Assets
Cash and cash equivalents
The cazrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair
value (Level 1).
90
Securities held for investment
For securities held for investment, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).
Restricted securities
The cazrying value of restricted securities approximates their fair value based on the redemption provisions of the
respective issuer (Level 2).
Loans held for sale
The carrying amounts of loans held for sale approximate fair value (Leve12).
Loans
T'he fair value of loans is esrimated by discounting the future cash flows using the current rates at which similaz loans
would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans
is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring
basis presented above.
PCI loans
Fair values for PCI loans are based on a discounted cash flow methodology that considers various factors including the
type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were
pooled together according to similaz characteristics and were treated in the aggregate when applying various valuation
techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on mazket rates for
new originations of compazable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash
flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows
is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.
FDIC indemnification asset
During the third quarter of 2015, the Company ternunated the shared-loss agreement relating to the single family,
residential 1-4 family mortgage assets. See Note 5 for more details.
Loss sharing assets were measured sepazately from the related PCI assets as they were not contractually embedded in the
PCI assets and were not transferable with the assets should the Company had chosen to dispose of them. Fair value was
estimated using projected cash flows related to the obligations under the shared-loss agreements based on the expected
reimbursements for losses and the applicable loss sharing percentages. These expected reimbursements did not include
reimbursable amounts related to future expenditures. These cash flows were discounted to reflect the uncertainty of the timing
and receipt of the loss sharing reimbursement from the FDIC. A reduction in loss expectations resulted in the estimated fair
value of the FDIC indemnification asset being lower than its carrying value. This created a premium that was amortized over
the life of the asset.
Accrued interest receivable
The carrying amounts of accrued interest receivable appro~cimate fair value (I.eve12).
Financial Liabilities
Noninterest bearing deposits
The carrying amount of noninterest bearing deposits approximates fair value (Leve12).
Interest bearing deposits
The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
91
Federal funds purchased
The carrying amount of federal funds purchased approximates fair value.
Long-term borrowings
The fair values of the Company's long-term borrowings, such as FHLB advances and long-term debt, are estimated using
discounted cash flow analyses based on the Company's current incremental borrowing rates for similaz types of borrowing
arrangements.
Accrued interest payable
The carrying amounts of accrued interest payable approximate fair value (Leve12).
Off-balance sheet financial instruments
The fair value of commitments to extend credit is estimated using the fees currently chazged to enter into similar
agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the
committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company's
off-balance sheet commitments are funded at current market rates at the date they aze drawn upon. It is management's opinion
that the fair value of these commitments would appro~cimate their carrying value, if drawn upon.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal
operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change,
and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations aze less likely to
prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates aze more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in
a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's
overall interest rate risk.
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted
future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash
payments (or receipts) aze based on an expectation of future interest rates (forward curves) derived from observable mazket
interest rate curves.
Note 23. Tivst Preferred Capital Notes
On December 12, 2003, BOE Statutory Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose
of issuing redeemable capital securities. On December 12, 2003, $4.124 million of trust preferred securities were issued through
a direct placement. The securities have aLIBOR-indexed floating rate of interest. The average interest rate at December 31,
2015, 2014 and 2013 was 3.28%, 3.24% and 3.28%, respectively. The securities have a mandatory redemption date of
December 12, 2033 and aze subject to varying call provisions which began December 12, 2008. The principal asset of the Trust
is $4.124 million of the Company's junior subordinated debt securities with the like maturities and like interest rates to the
capital securities.
The trust preferred notes may be included in tier 1 capital for regulatory capital adequacy deternunation purposes up to
25% of tier 1 capital after its inclusion. The portion of the trust preferred not considered as tier 1 capital may be included in
tier 2 capital. At December 31, 2015, all trust preferred notes were included in tier 1 capital.
T'he obligations of the Company with respect to the issuance of the capital securities constitute a full and unconditional
guarantee by the Company of the Trust's obligations with respect to the capital securities.
Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the
junior subordinated debt securities, which would result in a defenal of distribution payments on the related capital securities.
The Company is current in its obligations under the trust preferred notes.
92
Note 24. Lease Commitments
The following table represents a summary of non-cancelable operating leases for bank premises that have initial or
remaining terms in excess of one year as of December 31, 2015 (dollars in thousands):
$
2016
2017
2018
2019
2020
Thereafter
Total of future payments
$
1,030
950
945
934
92]
841
6,621
Rent expense for the years ended December 31, 2015, 2014 and 2013 was $790,0(X), $783,000 and $621,000,
respectively.
Note 25.Other Noninterest Expense
Other noninterest expense totals are presented in the following tables. Components of these expenses exceeding 1.0% of
the aggregate of total net interest income and total noninterest income for any of the past three years are stated separately
(dollazs in thousands).
Bank franchise tax
Telephone and Internet line
Stationery, printing and supplies
Exam fees
Marketing expense
Credit expense
Outside vendor fees
Other expenses
Total other operating expenses
2015
2014
2013
$
$
574
714
446
398
651
745
532
2,407
6,467
$
$
544
739
449
567
475
635
388
2,550
6,347
$
$
513
699
453
529
384
707
322
2,339
5,946
93
Note 26. Parent Corporation Only Financial Statements
PARENT COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 2015 and 2014
(dollars in thousands)
Assets
Cash
Other assets
Investments in subsidiaries
Total assets
Liabilities
Other liabilities
Balances due to non-bank subsidiary
Long term debt
Total liabilities
Shareholders' Equity
Common stock (200,000,000 shares authorized $0.01 paz value;
21,866,944 and 21,791,523 shares issued and outstanding, respectively)
Additional paid in capital
Retained deficit
Accumulated other comprehensive (loss) income
Total shareholders' equity
$
$
$
2015
2oia
3,680 $
518
110,135
114,333 $
47 $
4,124
5,675
9,846
219
145,907
(41,050)
(589)
104,487
7,910
252
113,364
121,526
72
4,124
9,680
13,876
218
145,321
(38,553)
664
107,650
Total liabilities and shareholders' equity
$
114,333
$
121,526
94
PARENT COMPANY
STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 and 2013
(dollars in thousands)
2015
2014
2013
Income:
Dividends received from subsidiaries
Other operating income
Total income
Expenses:
Interest expense
Management fee paid to subsidiaries
Stock option expense
State taxes
Professional and legal expenses
Other operating expenses
Total expenses
Equity in loss of subsidiaries
Net (loss) income before income taxes
Income tax benefit
Net (loss) income
Comprehensive (loss) income
$ — $ 8,250 $ 7,820
4 4
7,824
4
4
8,254
423
461
164
175
7
13
—
IS
121
61
80 84
814
790
137
144
5
236
112
74
708
(1,975)
(198)
(1,449)
(2,761)
264
$ (2,497)
7,242
5,667
~ i,~io
~ ~,7vo
$ (3,750)
$ 12,289
$(1,031)
PARENT COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 and 2013
(dollars in thousands)
Operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense
Undistributed equity in loss of subsidiary
(Increase) decrease in other assets
(Decrease) increase in other liabilities, net
2ois
2014
2013
$ (2,497)
$ 7,516 $ 5,906
467
1,975
(231)
(25)
332
198
1,497
32
252
1,449
(241)
(2)
Net cash and cash equivalents (used in) provided by operating activities
X311)
9,575
7,364
Financing activities:
Proceeds from long-term debt
Payment on long-term debt
Redemption of preferred stock and related warrants
Cash dividends paid
Proceeds from issuance of common stock
(4,005 )
86
10,680
(1,000)
(11,460)
(247)
39
—
—
(7,000)
(885)
6
Net cash and cash equivalents used in financing activities
(3,919)
(1,988)
(7,879)
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
95
(4,230)
7,910
(515)
838
$ 3,680 $ 7,910 $ 323
7,587
323
Note 27. Subsequent Events
On January 11, 2016, the Company entered into a Purchase Agreement for the sale of the property related to its
Catonsville branch office to JP Properties for a purchase price of $160,000. The transaction is expected to close on or about
March 18, 2016. The Company plans to close the office on March 4, 2016. Loans and deposits will be serviced by the
Company's Rosedale branch office.
The Catonsville branch office was classified as held for sale at December 31, 2015 at an estimated fair market value of
$110,000. After estimated closing costs of $15,000, the Company expects to recognize a gain of $35,000.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or
disclosure through the date the financial statements were issued noting no additional items to be disclosed.
Note 28. Preferred Stcek
On December 19, 2008, under the Department of the Treasury's TARP Capital Purchase Program, the Company issued
to the U.S. Treasury 17,680 shazes of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (Series A Preferred Stock),
and a 10-year warrant to purchase up to 780,000 shares of common stock at an exercise price of $3.40 per share. Cumulative
dividends on the Series A Preferred Stock were payable at 5% per annum through the February 2014 payment, and at a rate of
9% per annum thereafter. The warrant was exercisable at any time until December 19, 2018, and the number of shares of
common stock underlying the warrant and the exercise price was subject to adjustment for certain dilutive events.
The Company received proceeds of $17.68 million for the Series A Preferred Stock and the Warrant. The Company
allocated the proceeds based on a relative fair value basis between the Series A Preferred Stock and the Warrant, recording
$16.64 million and $1.04 million, respectively. Fair value of the preferred stock was estimated based on a discounted cash flow
model using an estimated life of 50 years and a discount rate of 12%. Fair value of the stock warrant was estimated using a
Black-Scholes model assuming stock price volatility of 27.5%, a dividend yield of 0.5%, a risk-free rate of 1.35% and an
expected life of five yeazs. The $16.64 million of Series A Preferred Stock is net of a discount of $1.04 million. The discount
was accreted to the $17.68 million redemption price over a five year period. The accretion of the discount and dividends on the
preferred stock reduce retained earnings.
Each share of Series A Preferred Stock issued and outstanding had no par value, had a liquidation preference of $1,000
and was redeemable at the Company's option, subject to approval of the Federal Reserve, at a redemption price equal to $1,000
plus accrued and unpaid dividends. The Series A Preferred Stock had a preference over the Company's common stock upon
liquidation. Dividends on the preferred stock, if declazed, were payable quarterly in arreazs. The Company's ability to declare
or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event
that the Company fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.
During 2013, the Company repurchased 7,000 shazes of the original 17,680 shazes of Series A Preferred Stock. The
Company funded the repurchase through the earnings of its banking subsidiary. T'he form of the repurchase was a redemption
under the terms of the Series A Preferred Stock. The Company paid the Treasury $7.0 million, which represented 100% of the
par value of the preferred stock repurchased plus accrued dividends with respect to such shares.
On Apri123, 2014, the Company repurchased the remaining 10,680 shares of Series A Preferred Stock. The Company
funded the repurchase through an unsecured third-party term loan (See Note 10). T'he form of the repurchase was a redemption
under the terms of the TARP preferred stock. The Company paid the Treasury $10.9 million, which represented 100% of the
paz value of the preferred stock repurchased plus accrued dividends with respect to such shazes.
On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the
Series A Preferred Stock. There are no other investments from the Company's participation in TARP that remain outstanding.
96
Note 29. Quarterly Data (unaudited)
zois
ioia
First
Second
$ 11,650 $ 12,333 $ 11,723
1,878
1,865
1870
Third
Fourth
First
Second
Third
Fourth
$ 11,846 $ 11,879 $ 12,455 $ 12,665 $ 11,726
1,883
1,570 ___ 1,697
1,84
1,783
9,785 10,463
9,845
9,962
10,309
10,758
10,882
9,843
Income (loss) before income taxes
Income tax expense (benefit)
1,663
_. _ 351
2,226 (11,931)
(4215)
533
1,312
1,693
(7,716)
2,214
9,785 10,463
9,845
l ,253
1,397
1,206
9,519 _ 9443 23,029
9,962
1,225
8,269
2,918
704
9,843
1U,309
1,832
1,301
9,177 __. 9,359 __9538 8,743
10,758
970
10,88?
1, 166
2,433
709 __:
2,369
649
2,510
2,932
697__ 673
1,724
65
1,720
2,259
1,813
182 - -
$ 1,312 $ 1,693 $ (7,716) $ 2,214 $ 1,659 $ 1,538 $ 1,813 $ 2,259
$ 0.06 $ 0.08 $ (0.35) $ 0.10 $ 0.08 $ 0.07 $ 0.08 $ 0.10
$ 0.06 $ 0.08 $ (0.35) $ U.10 $ 0.08 $ 0.07 $ 0.08 $ 0.10
Interest aid dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
Net income (loss)
Dividends paid on preferred stock
Net income (loss) available to
common shazeholders
Earnings (loss) per common
share, basic
Earnings (loss) per common
shaze, diluted
Note 30. Branch Sale
On November 6, 2015, the Company sold its branch office in Crofton, Maryland in a sale/leaseback transaction. In
accordance with FASB ASC 360, Property, Plant and Equipment, the net book value of the branch office, excluding furniture
and equipment, of $2.5 million was written down by $383,000 to reflect the fair market value of $2.1 million classified as held
for sale at September 30, 2015. As part of the contract, the Company entered into a five year lease of the branch space, which
is approximately 14% of the total office space, for approximately $105,000 per year and a one year lease of an additional 11%
of the office space for $45,000 per year.
On November 8, 2013, the Company sold the four branches located in Georgia and related deposits to Community &
Southern Bank, headquartered in Atlanta, Georgia (the `Branch Sale"). The Branch Sale resulted in the transfer of $193.2
million of deposits and $20,000 of consumer loans associated with such deposits to Community &Southern Bank in exchange
for the payment of a deposit premium of $2.6 million. Certain fixed assets with a fair value of $5.2 million (cost, net of
accumulated depreciation of $1.2 million) were also sold. In addition, $1.5 million of remaining unamortized intangible assets
related to customers and deposits were associated with the Branch Sale.
The following table summarizes deposits related to tt~e Branch Sale (dollazs in thousands):
Deposits
Noninterest bearing
Interest bearing
Total deposits
$ 15,869
177,301
$ 193 17Q
97
On October 25, 2013 the Company sold $24.3 million in loans held by the Georgia branches to Pinnacle Bank,
headquartered in Elberton, Georgia (the "Loan Sale"), at a premium of 1.0%.
The following summarizes the loans related to the Loan Sale (dollazs in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
$ 2,240
15,762
2,895
41
1,802
—
22,740
1,147
Commercial loans
424
Consumer installment loans
All other loans —
Gross loans 24,311
Net deferred costs 34
Totat loans $ 24,345
Total real estate loans
Based on the premiums outlined above, the Company recorded a net gain on the combined transactions of $255,000. This
gain is net of the deposit premium of $2.6 million, a write off of $1.5 million of e~sting core deposit intangibles, a $827,000
loss on the sale of fixed assets, a $243,000 gain on the sale of loans and $258,000 in transaction related costs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, the Company's management, with the participation of the
Company's chief executive officer and chief financial officer ("the Certifying Officers"), conducted evaluations of the
Company's disclosure controls and procedures. As defined under Section 13a-15(e) of the Securiries Exchange Act of 1934,
as amended (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions
regarding required disclosures.
Based on this evaluation, the Certifying Officers have concluded that the Company's disclosure controls and procedures
were effective to ensure that material information is recorded, processed, summarized and reported by management of the
Company on a timely basis in order to comply with the Company's disclosure obligations under the Exchange Act and the rules
and regulations promulgated thereunder.
Management's Report on Internal Control over Financial Reporting
The management of the Company is responsible for establistung and maintaining adequate internal control over financial
reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Certifying
Officers to provide reasonable assurance regarding the reliability of financial reporting and the prepazation of the Company's
financial statements for external purposes in accordance with generally accepted accounring principles.
As of December 31, 2015, management assessed the effectiveness of the Company's internal control over financial
reporting based on the criteria for effective internal control over financial reporting established in "Internal Control —
98
Integrated Framework (2013)," issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in
accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to
meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act.
Based on its assessment, management concluded that, as of December 31, 2015, the Company's internal control over
financial reporting was effective based on the criteria set forth by COSO in its "Internal Control —Integrated Framework."
BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements of
the Company for the year ended December 31, 2015, has issued an attestation report on management's assessment of the
effectiveness of the Company's internal control over financial reporting as of December 31, 2015. The report is included in
Item 8, "Financial Statements and Supplementary Data", above under the heading "Report of Independent Registered Public
Accounting Fum."
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting identified in connection with the
evaluation of internal controls that occurred during the fourth quarter of 2015 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the
2016 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the
2016 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the
2016 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal yeaz that this Form 10-K covers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the
2016 Annual Meeting of Shazeholders, to be filed within 120 days after the end of the fiscal yeaz that this Form 10-K covers.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the
2016 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal yeaz that this Form 10-K covers.
99
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
T'he following documents aze filed as part of this Form 10-K:
PART IV
1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the
report thereon and the notes thereto, with respect to the Company, commencing at page 44 of this Form 10-K.
2. Financial Statement Schedules. All supplemental schedules aze omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or notes thereto.
3. E~thibits
No.
Description
2.1
2.2
2.3
3.1
3.2
3.3
4.1
4.2
10.1
10.2
Purchase and Assumption Agreement, dated as of January 30, 2009, by and among the Federal Deposit Insurance
Corporation, Receiver of Suburban Federal Savings Bank, Crofton, Maryland, Bank of Essex and the Federal
Deposit Insurance Corporation, incorporated by reference to the Company's Current Report on Form 8-K filed
on February 5, 2009 (File No. 001-32590)
Purchase and Assumption Agreement, dated August 19, 2013, between Community &Southern Bank and Essex
Bank, incorporated by reference to the Company's Current Report on Form 8-K filed on August 23, 2013 (File
No. 001-32590)
Agreement and Plan of Reincorporation and Merger, dated as of May 13, 2013, by and between Community
Bankers Trust Corporation, a Delaware corporation, and Community Bankers Trust Corporation, a Virginia
corporation (formerly known as CBTC Virginia Corporation), incorporated by reference to the Company's
Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)
Amended and Restated Articles of Incorporation of Community Bankers Trust Corporation, a Virginia
corporation (formerly known as CBTC Virginia Corporation), incorporated by reference to the Company's
Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)
Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Community Bankers
Trust Corporation, a Virginia corporation (formerly known as CBTC Virginia Corporation), incorporated by
reference to the Company's Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)
Amended and Restated Bylaws of Community Bankers Trust Corporation, a Virginia corporation (formerly
known as CBTC Virginia Corporation), incorporated by reference to the Company's Current Report on Form 8-
K filed on January 7, 2014 (File No. 001-32590)
Specimen Common Stock Certificate, incorporated by reference to the Company's Registration Statement on
Form S-1 or amendments thereto (File No. 333-124240)
Warrant to Purchase 780,000 Shares of Common Stock, incorporated by reference to the Company's Current
Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)
TARP Merger Side Letter Agreement, dated January 1, 2014, between Community Bankers Trust Corporation, a
Virginia corporation, Community Bankers Trust Corporation, a Delawaze corporation, and the United States
Department of the Treasury), incorporated by reference to the Company's Current Report on Form 8-K filed on
January 7, 2014 (File No. 001-32590)
Letter Agreement, dated December 19, 2008, including the Securities Purchase Agreement —Standard Terms
incorporated by reference therein, between Community Bankers Trust Corporation, a Delawaze corporation, and
the United States Department of the Treasury, incorporated by reference to the Current Report on Form 8-K filed
on December 23, 2008 (File No. 001-32590)
100
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
ARRA Side Letter Agreement, dated January 1, 2014, between Community Bankers Trust Corporation, a Virginia
corporation, and the United States Department of the Treasury), incorporated by reference to the Company's
Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)
Form of Waiver, executed by Rex L. Smith, III, Bruce E. Thomas, Jeff R. Cantrell, John M. Oakey, III, and W.
Thomas Townsend), incorporated by reference to the Company's Current Report on Form 8-K filed on January
7, 2014 (File No. 001-32590)
Employment Agreement between Community Bankers Acquisition Corp. and Bruce E. Thomas, incorporated by
reference to the Company's Current Report on Form 8-K/A filed on July 28, 2008 (File No. 001-32590)
Form of Letter Agreement, executed by Bruce E. Thomas with the Company, incorporated by reference to the
Company's Current Report on Form 8-K filed on December 23, 2008 (File No. 001-32590)
Term Loan Agreement, dated as of Apri122, 2014, among Community Bankers Trust Corporation as Borrower,
the Lenders from Time to Time Party Hereto and SunTrust Bank as Administrative Agent, incorporated by
reference to the Company's Current Report on Form 8-K filed on Apri128, 2014 (File No. 001-32590)
Community Bankers Trust Corporation 2009 Stock Incentive Plan, incorporated by reference to the Company's
Current Report on Form S-K filed on June 24, 2009 (File No. 001-32590)
Form of Non-Qualified Stock Option Agreement for Community Bankers Trust Corporation 2009 Stock Incentive
Plan, incorporated by reference to the Company's Annual Report on Form 10-K filed on Mazch 30, 2012 (File
No. 001-32590)
Termination Agreement among Federal Deposit Insurance Corporation, as Receiver of Suburban Federal Savings
Bank, Crofton, Maryland, Federal Deposit Insurance Corporation and Essex Bank (formerly known as Bank of
Essex), Richmond, Virginia, dated as of September 10, 2015, incorporated by reference to the Company's Current
Report on Form 8-K filed on September 16, 2015 (File No. 001-32590)
10.11
Letter Amendment to Tenn Loan Agreement, dated December 28, 2015, between Community Bankers Trust
Corporation as Borrower and SunTrust Bank as Lender and Administrative Agent
14.1
21.1
23.1
23.2
31.1
31.2
32.1
101
Code of Business Conduct and Ethics, dated Apri125, 2013, incorporated by reference to the Company's Annual
Report on Form 10-K filed on Mazch 13, 2015 (File No. 001-32590)
Subsidiaries of Community Bankers Trust Corporation, incorporated by reference to the Company's Annual
Report on Form 10-K filed on March 13, 2015 (File No. 001-32590)
Consent of Independent Registered Public Accounting Firm (BDO USA, LLP)*
Consent of Independent Registered Public Accounting Firm (Elliott Davis Decosimo, LLC)*
Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
Secrion 1350 Certifications*
Interactive Data File with respect to the following materials from the Company's Annual Report on Form 10-K
for the period ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of (Loss) Income, (iii) the Consolidated Statement
of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Changes in Shareholders' Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements*
*
Filed herewith.
(b) Exhibits. See Item 15(a)3. above
(c) Financial Statement Schedules. See Item 15(a)2. above
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANKERS TRUST CORPORATION
By:
/s/ Rex L. Smith. III
Rex L. Smith, III
President and Chief Executive Officer
Date: March 11, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Tide
Date
/s/ Rex L. Smith, III
Rex L. Smith, III
President and Chief Executive Officer
and Director
(principal executive officer)
March 1 I , ?016
/s/ Bruce E. Thomas Executive Vice President and
March 11, 2016
Bruce E. Thomas
Chief Financial Officer
(principal financial officer)
/s/ Laureen D. Trice Senior Vice President
March 11, 2016
Laureen D. Trice
and Controller
(principal accounting officer)
/s/ John C. Watkins Chairman of the Board
March 11, 2016
John C. Watkins
/s/ Gerald F. Bazber Director
March 11, 2016
Gerald F. Barber
/s/ Richard F. Bozard Director
March 11, 2016
Richard F. Bozazd
/s/ Glenn J. Dozier Duector
March 11, 2016
Glenn J. Dozier
/s/ P. Emerson Hughes, Jr.
P. Emerson Hughes, Jr.
/s/ Troy A. Peery, Jr.
Tmy A. Peery, Jr.
Director
March 11, 2016
Director
March 11, 2016
102
>.016
'016
!016
103
Eslubit 31.1
I, Rex L. Smith, III, certify that:
CERTIFICATIONS
1. I have reviewed this Annual Report on Form 10-K for the yeaz ended December 31, 2015 of Community Bankers Trust
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the regish~ant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I aze responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(~ and 15d-15(x) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particulazly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regazding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the registrants boazd of directors (or persons
perfornung the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which aze reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: Mazch 11, 2016
/s/ Rex L. Smith. III
Rex L. Smith, III
President and Chief Executive Officer
104
Exhibit 31.2
I, Bruce E. Thomas, certify that:
CERTIFICATIONS
1. I have reviewed this Annual Report on Form 10-K for the yeaz ended December 31, 2015 of Community Bankers Trust
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(fl and 15d-15(x) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's boazd of directors (or persons
perfornung the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 11, 2016
/s/Bruce E. Thomas
Bruce E. Thomas
Executive Vice President and Chief Financial Officer
105
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K for the yeaz ended December 31, 2015 (the "Report") of Community
Bankers Trust Corporation (the "Company"), the undersigned President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to their knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company and its subsidiaries as of, and for, the periods presented in the Report.
/s/ Rex L. Smith, III
Rex L. Smith, III
President and Chief Executive Officer
/s/ Bruce E. Thomas
Bruce E. Thomas
Executive Vice President and Chief Financial Officer
Date: March 11, 2016
1.
BOARD OF DIRECTORS
Gerald F. Barber
Consultant
Retired Transaction Services Partner, PricewaterhouseCoopers LLP
Richard F. Bozard
Retired Vice President and Treasurer, Owens &Minor, lnc.
Glenn J. Dozier
Consultant
Retired Financial Executive
P. Emerson Hughes, Jr.
Chairman, Holiday Barn Pet Resorts
Troy A. Peery, Jr.
President Peery Enterprises
Eugene 5. Putnam, Jr.
Presidentand Chief Financial Officer, Universal Technicallnstitute, lnc.
5. Waite Rawis III
Co-Chief Executive Officer, American Civil War Museum
Rex L. Smith, III
President and Chief Executive Officer,
Community Bankers TrustCorporation and Essex Bank
John C. Watkins
Managerand Development Director, Watkins Land, LLC
Robin Traywick Williams
Writer
Stock Transfer Agent
Continental Stock Transfer &Trust Company
17 Battery Place, New York, NY 10004
(212) 509-4000, extension 536
(212) 509-5150 fax
www.conti nentalstock.com
Investor Relations
Corporate Secretary
Community Bankers Trust Corporation
9954 Mayland Drive, Suite 2100
Richmond, VA 23233
(804) 934-9999 fax (804) 934-9299
ssex an
EssexBank.com
FDIC =
ommun it a ers
1~ Trust Corporation
9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233
(804) 934-9999
www.cbtrustcorp.com
NASDAQ Capital Market: ESXB