Community Bankers Trust Corporation
2016 Annual Report
Growing to Win.
9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233(804) 934-9999www.cbtrustcorp.comNASDAQ Capital Market: ESXBEssexBank.com2016 ANNUAL REPORT COMMUNITY BANKERS TRUST CORPORATION ESSEX BANK VIRGINIA
MARYLAND
BOARD OF DIRECTORS
Bon Air
(804) 335-1127
Burgess
(804) 453-4268
Callao
(804) 529-5546
Centerville
(804) 784-4000
Cumberland
(804) 482-8111
Deep Run at Mayland
(804) 934-9999
Fairfax
(703) 385-4596
Flat Rock
(804) 598-6839
Goochland Courthouse
(804) 556-6722
King William
(804) 769-2265
Louisa
(540) 967-5900
Lynchburg
Opening in June, 2017
Lynchburg Loan Production Office
(434) 485-0090
Mechanicsville
(804) 730-3222
Prince Street
(804) 443-8510
Tappahannock
(804) 443-8500
Virginia Center
(804) 262-3991
West Point
(804) 843-4347
West Broad Marketplace
Opening in May, 2017
Winterfield
(804) 419-4160
ON THE COVER:
Essex Bank’s new West Broad Marketplace branch
office under construction in the fast-growing Short
Pump area of metropolitan Richmond, Virginia.
Below is the architect’s rendering of the finished
building, which will open in May, 2017.
Annapolis
(443) 596-7515
Arnold
(410) 757-7777
Bowie
(301) 850-5071
Crofton
(410) 721-8444
Rockville
(301) 294-9350
Rosedale
(410) 574-3303
Gerald F. Barber
Consultant
Retired Transaction Services Partner, PricewaterhouseCoopers LLP
Richard F. Bozard
Retired Vice President and Treasurer, Owens & Minor, Inc.
William E. Hardy
Founding Partner and President,
Harris, Hardy & Johnstone, P.C.
P. Emerson Hughes, Jr.
Chairman, Holiday Barn Pet Resorts
Troy A. Peery, Jr.
President, Peery Enterprises
Eugene S. Putnam, Jr.
Past President and Chief Financial Officer,
Universal Technical Institute, Inc.
S. Waite Rawls III
President, American Civil War Museum Foundation
Rex L. Smith, III
President and Chief Executive Officer,
Community Bankers Trust Corporation and Essex Bank
John C. Watkins
Manager and Development Director, Watkins Land, LLC
Robin Traywick Williams
Writer
Customer Service Center
(800) 443-5524
www.EssexBank.com
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.continentalstock.com
Investor Relations
Corporate Secretary
Community Bankers Trust Corporation
9954 Mayland Drive, Suite 2100
Richmond, VA 23233
(804) 934-9999 fax (804) 934-9299
In 2016, we were able
to grow our noninterest
bearing deposits by
$32.6 million, or 34.0%.
Interest bearing deposits
increased by $59.1
It was surely an eventful year in the banking sector, from regulatory reform, monetary
policy changes, conversations about the repeal of the Dodd-Frank Act, and risks from
the demands of cyber banking, to increased competition in all of our markets. Through
it all, we have remained dedicated to our goal of creating shareholder value by con-
trolled and focused growth. 2016 was the second year of our “Growing to Win” cam-
paign, with a concentrated focus on customer service and delivery standards, and this
million, or 7.0%, bringing
strategy continues to be successful in driving increased value for the Company.
total deposit growth to
$91.8 million for the year.
We continued to expand our branch footprint, opening new retail offices in Fairfax and
The increase in deposit
growth helped fund
Cumberland, both in Virginia. For 2017, we have new offices planned in the Short Pump
area of Richmond as well as Lynchburg (where we have operated a loan production
double digit loan growth
office for several years). Both offices occupy prime locations in promising, dynamic mar-
for the year.
kets and are planned to be open for business before summer. We are excited for these
opportunities as these offices meet our criteria for market expansion, which includes
the ability to quickly gain market share of low-cost deposits. Our branch network has
allowed us to grow and change our deposit mix, which will lower our overall cost of
funds. In 2016, we were able to grow our noninterest bearing deposits by $32.6 million,
or 34.0%. Interest bearing deposits increased by $59.1 million, or 7.0%, bringing total
deposit growth to $91.8 million for the year.
The increase in deposit growth helped fund double digit loan growth for the year.
Loans excluding purchased credit impaired (PCI) loans grew $87.6 million, or 11.7% for
the year. Most of the growth occurred in variable rate loan types. The largest growth
categories were construction and development loans, which grew by $30.9 million, or
45.8%, and commercial and industrial loans which grew $26.8 million, or 26.1%. Total
PCI loans were $52.0 million at December 31, 2016 versus $59.0 million at year end
2015, a decrease in the portfolio that exceeded expectations.
The growth in the franchise and the balance sheet was accomplished while holding
operating expense relatively flat for the year. Total noninterest expenses were down
from 2015 to 2016, though most of the decrease was due to the absence of expense
from the amortization of the FDIC indemnification asset, which was terminated in 2015.
—continued
Our overriding priority
Noninterest expenses were $32.8 million for the year ended December 31, 2016, as
is to continue to
create value for our
shareholders. The
compared with $50.3 million for the year ended December 31, 2015.
All of these trends led to better-than-budgeted net income for the year. For the year
Company is poised to
ended December 31, 2016, net income was $9.9 million, or $0.45 per common share,
continue our growth
basic and fully diluted.
in the balance sheet, in
overall franchise value
Our overriding priority is to continue to create value for our shareholders. The Company
and in shareholder return.
is poised to continue our growth in the balance sheet, in overall franchise value and in
shareholder return. The Company continues to execute a strategy of controlled growth
tempered to the economy and the interest rate environment. The balance sheet is well
positioned for a rising rate environment, and we expect the value of the interest rate
swap to increase, as well as the weighted average life of the PCI portfolio, both of which
will enhance net income going forward.
These are exciting times for the Company, and we continue to explore all means
possible to create a value and a return that is better than any of our peers in the mid-
Atlantic region. We appreciate your continued support and confidence as we move
forward together.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)(cid:95)(cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2016
or
(cid:133)(cid:133)(cid:133)(cid:133) 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 Stock 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 (cid:133) No (cid:95)
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 (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
Indicate by check mark 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 (cid:95) No (cid:133)
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 (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)
Accelerated filer (cid:95)
Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:95)
State the aggregate market value of the voting and non-voting common equity held by non-affiliates 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 quarter. $109,426,941
On February 28, 2017, there were 21,959,468 shares of the registrant’s common stock, par value $0.01, outstanding, which is the only class of
the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be used in conjunction with the registrant’s
2017 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K
December 31, 2016
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART III
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
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ITEM 1.
BUSINESS
GENERAL
PART I
The Company is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 23 full-service offices in Virginia
and Maryland. The Bank also operates one loan production office 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.
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.
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 Market under the symbol “ESXB”.
STRATEGY
The Company operates under a community banking philosophy that seeks to develop strong relationships by being recognized as
the premier provider of complete financial services and delivering those products with unsurpassed service to the customer. The
Company will accomplish this goal while operating in a safe and sound manner to provide a competitive return to its investors.
The Company believes that its community bank framework and philosophy provide a competitive advantage, particularly with
regard to larger national and regional institutions, allowing the Company to compete effectively and expand market share. During 2016,
the Company expanded in its core markets by increasing loan and deposit production and adding two new retail banking offices, in
Fairfax and Cumberland, Virginia. Additionally, the Company’s loan portfolio continues to become more diverse through the expansion
of the commercial and industrial and small business lending groups. The Company expects to continue this growth through a
combination of internal growth, de novo branching, expansion of loan production offices and the acquisition of other community
banks that are accretive in value in a reasonable time frame.
Historically, the Company has been able to accomplish its growth goals while controlling risk and adding shareholder value.
Management believes that it has the ability, the capacity and the capital strength to successful execute its strategies and to continue to
enhance the major profit drivers of the Company. The implementation of these strategies will lead to an increase in profitability and
value 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 areas around 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 are 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.
3
Commercial and Industrial Banking
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 are not targeted by larger 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 portfolio and add income producing property loans and builders and other development loans to the 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 areas 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 market. 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 largest banks in the country, have offices in the Company’s market 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 market, 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.
CORPORATE HISTORY
The Company was initially formed as a special purpose acquisition company under the name “Community Bankers Acquisition
Corp.” As a “Targeted Acquisition Corporation”SM or “TAC,”SM 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.
4
In connection with the May 2008 mergers, each of the Bank, then a wholly-owned subsidiary of BOE, and TransCommunity Bank,
N.A., a wholly-owned subsidiary of TFC, became a wholly-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 separate 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 are now governed by Virginia law. The purpose of the reincorporation
to Virginia was annual cost savings of over $175,000 that the Company realizes from the difference between Delaware’s franchise tax
and Virginia’s annual corporate fee. 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. 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 share equal to $1,000. The Series A Preferred Stock paid
cumulative dividends at a rate of 5% per year for the first five years 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% 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 are no other investments from the Company’s participation in the Capital Purchase Program that remain outstanding.
EMPLOYEES
As of December 31, 2016, the Company had 232 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.
AVAILABLE 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
5
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 charge 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 declare and pay to
us. Our bank subsidiary is also subject to various consumer and compliance laws. As a state-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 subsidiary 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
regarding 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 permits 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 shareholders
in the event that a receiver is appointed to distribute the assets of the Bank.
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
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly restructures the
financial regulatory regime in the United States and has a broad impact on the financial services industry. 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 years 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 were grandfathered for banking entities with less than $15 billion of assets, such as
the Company. The Dodd-Frank Act permanently raised deposit insurance levels to $250,000. Pursuant to modifications under the Dodd-
Frank Act, deposit insurance assessments are 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
6
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 2011, the Federal Reserve adopted regulations setting the maximum 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 regarding covered transactions must be maintained. 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. 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 behaviour.
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 are 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.
In 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 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 are:
• 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.
7
Under pre-Basel III Rule regulations, a bank was considered:
•
•
•
•
•
“Well capitalized” if it had a Total Capital Ratio 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%; 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, CET1 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 Ratio 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
(%)
(cid:149) 10
(cid:149) 10
(cid:149) 8
(cid:149) 8
< 8
< 8
< 6
< 6
(cid:149) 6
(cid:149) 8
(cid:149) 4
(cid:149) 6
< 4
< 6
< 3
< 4
N/A
(cid:149) 6.5
N/A
(cid:149) 4.5
N/A
< 4.5
N/A
< 3
(cid:149) 5
(cid:149) 5
(cid:149) 4
(cid:149) 4
< 4
< 4
< 3
< 3
Critically undercapitalized (prior)
Critically undercapitalized (Basel III)
GAAP tangible equity (cid:148) 2% of average quarterly assets
Basel III tangible equity (Tier 1 Capital plus non-tier 1 perpetual
preferred stock) (cid:148) 2% of total assets
The new required capital conservation buffer is comprised of an additional 2.5% above the minimum risk-based capital ratios.
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 minimum ratios described above.
A table illustrating these limitations on the ratio which can be paid out (defined in the Basel III Rule as “maximum payout ratio”) is set
forth below.
Capital Conservation Buffer
Greater than 2.5%..............................................................................
(cid:148) 2.5% and > 1.875%........................................................................
(cid:148) 1.875% and > 1.25%......................................................................
(cid:148) 1.25% and > 0.625%......................................................................
(cid:148) 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 are more than 90 days past due or are on nonaccrual status and for certain commercial real
8
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 tier 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 declared in any given year 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 are insured by the DIF of the FDIC up to the standard 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 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 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 regard 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 annual basis. In 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.
9
Incentive Compensation
In 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 Board of Directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that are 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, 2016, 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 permitted for
banking organizations that are financial in nature and those that are not permitted 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 parties 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 are periodically examined for compliance with CRA and are periodically assigned
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
10
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 institutions 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 determine 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 are 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 time 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 Regulations
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by
regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository
institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking
statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation
will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of
operations of the Company or the Bank.
ITEM 1A. 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 non-bank 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.
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 margin 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 market 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 markets.
Changes in the local economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio, and loan and
11
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 areas, 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 are unable to identify attractive markets, locations or
opportunities to expand in the future, or if we are subject to regulatory restrictions on growth or expansion of our operations. In addition,
we compete with our companies for acquisition and expansion opportunities, and many of those competitors have greater financial
resources than us and thus may be able to pay more for such an opportunity than we can.
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.
We may incur losses if we are unable to successfully manage interest rate risk.
Our profitability depends in substantial 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 market 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-performing assets or a decrease in loan originations, either of which could have a material and negative effect on our
results of operations.
Our operations may be adversely affected by cyber security risks.
In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally
identifiable information of our customers and employees in systems and on networks. The secure processing, maintenance, and use of
this information is critical to our operations and business strategy. In addition, we rely heavily on communications and information
systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in
failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. We have invested in
accepted technologies, and we continually review processes and practices that are designed to protect our networks, computers and data
from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to
attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems,
and the information stored there could be accessed, damaged or disclosed. A breach in security or other failure could result in legal
claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners and damage to our
reputation, which could adversely affect our business and financial condition. Furthermore, as cyber threats continue to evolve and
increase, we may be required to expend significant additional financial and operational resources to modify or enhance our protective
measures, or to investigate and remediate any identified information security vulnerabilities.
12
Our liquidity needs could adversely affect results of operations and financial condition.
Our primary sources of funds are 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-market 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
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 charge-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 are concentrated to borrowers who, as a group,
may be uniquely or disproportionately affected by economic or market conditions. Approximately 84.67% of our loans are secured by
real estate, both residential and commercial, substantially all of which are located in our market area. A major change in the region’s
real estate market, 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.
If our concentration in commercial real estate increases significantly, we may have to take certain actions that could impact our
balance sheet.
Regulators have been paying close attention to banks with higher commercial real estate concentrations, due to concerns about
credit risk building in the industry. Concentration levels of concern include commercial real estate loans making up at least 300% of a
bank’s total risk-based capital, construction, land development and other land loans comprising 100% or more of total risk-based capital
and construction and total commercial real estate growth of 50% or more over the prior 36 months. While we currently are below all of
these levels, if we exceed one or more of them, we may have to take certain actions to minimize the risk associated with higher
concentration levels and otherwise bolster our balance sheet. These actions include ensuring robust risk management practices, including
conducting regular appraisals, analyzing borrowers’ ability to repay credits, evaluating local economic conditions and operating with
enhanced reporting and systems. At an extreme, these actions can also include curtailing our lending in these areas and raising capital.
13
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 a customer-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 are covered by agreements not to compete or to solicit their existing customers if they were to leave their
current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is
competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.
The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government
policy.
At this time, it is difficult to predict the legislative and regulatory changes that will result from the combination of a new President
of the United States and the first year since 2010 in which both Houses of Congress and the White House have majority memberships
from the same political party. The new administration and/or Congress may change existing financial services regulations or enact new
policies affecting financial institutions, specifically community banks. Such changes may include amendments to the Dodd-Frank Act
and structural changes to the CFPB. The new administration and Congress also may cause broader economic changes due to changes in
governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary
policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation,
regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in
ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which
existing statutes and regulations are interpreted or applied by courts and government agencies.
We are subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and
the Dodd-Frank Act, which could adversely affect our return on equity and otherwise affect our business.
We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital
that we must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the
Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank
holding companies that are based on the Basel III regulatory capital reforms. These stricter capital requirements will be phased-in over
a four-year period, which began on January 1, 2015, until they are fully-implemented on January 1, 2019. See “Business − Supervision
and Regulation – Capital Requirements” for further information about the requirements.
The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the
raising of additional capital and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the
imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term
of our funding, restructure our business models and/or increase our holdings of liquid assets. Implementation of changes to asset risk
weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital
conservation buffers could result in management modifying its business strategy and could limit our ability to use its capital for strategic
opportunities. If we fail to meet these minimum capital guidelines and/or other regulatory requirements, our financial condition would
be materially and adversely affected.
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 in
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.
14
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, internet connections and network access. While we have selected these third party vendors
carefully, 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 which we 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 cards issued and deposit accounts maintained by many banks, including us. Although our systems are not breached in
retailer incursions, these events can cause us to reissue a significant number of cards and take other costly steps to avoid significant theft
loss to us and our customers. In some cases, we may be required to reimburse customers for the losses they incur. Other possible points
of intrusion or disruption not within our 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, 2016, 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 are 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 $216.1 million at December 31, 2016. The measurement of the
fair value of these securities involves significant judgment due to the complexity of the factors contributing to the measurement. Market
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 charge to our earnings in the quarter during which such determination is made, and our capital
ratios could be adversely affected.
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 are 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 cards. 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
15
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
similar proceedings, we are required to mark the related loan to the then fair market 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 operations and financial condition.
In addition, the resolution of nonperforming 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 (84.67% at December 31, 2016). 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,
reflecting 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 extensive 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
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.
The banking industry continues to be faced with new and complex regulatory requirements and enhanced supervisory oversight.
Banking regulators are increasingly concerned about, among other things, growth, commercial real estate concentrations, underwriting
of commercial real estate and commercial and industrial loans, capital levels and cyber security. These factors are exerting downward
pressure on revenues and upward pressure on required capital levels and the cost of doing business.
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
16
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 standards, including the Financial Accounting Standards Board and Securities and
Exchange Commission, periodically change the financial accounting and reporting standards that govern the preparation of the
Company’s consolidated financial statements. These changes are 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
standard 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 are 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 are met. These inherent limitations 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 tax asset will not become impaired in the future. At December 31, 2016, we recorded
net deferred income tax assets of $10.4 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 determine 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 taxable 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 are
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.
Any future action by Congress lowering the federal corporate income tax rate and/or eliminating the federal corporate
alternative minimum tax could negatively affect our deferred tax asset valuation and our tax-qualified municipal securities.
The President of the United States and the majority political party in Congress have announced plans to lower the federal corporate
income tax rate from its current level of 35% and to eliminate the corporate alternative minimum tax. If these plans ultimately result in
the enactment of new laws lowering the corporate income tax rate by a material amount and/or eliminating the corporate alternative
minimum tax, our deferred tax asset would need to be re-measured to evaluate the impact that the lower tax rate and/or the elimination
of the corporate alternative minimum tax will have on the currently expected full utilization of the deferred tax asset. If the lower tax
rate and/or the elimination of the corporate alternative minimum tax makes it more likely than not that some portion or all of the deferred
tax asset will not be realized, a valuation allowance will need to be recognized and this would result in a corresponding charge against
the Company’s earnings.
In addition, a meaningful part of our securities portfolio consists of tax-qualified municipal bonds. If there is a decrease in the
corporate income tax rate, and bank-qualified municipal bonds are not excluded from that action, the tax equivalent yield from those
securities will decrease. Such a decrease will result in an increase in the effective tax rate of those securities and may hurt the resale
value of those securities. Thus, while we expect that a decrease in the corporate income tax rate will be an overall benefit to us, the
effect of it on this part of our securities portfolio will result in an overall lower net interest margin and a lower liquidity value from these
securities.
Deterioration in the soundness of other financial institutions could adversely affect us.
Our 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
17
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 indirectly affected by changes in market conditions. Market 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,
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 market 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 are 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 interpretation and application of them by regulators, are 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 institutions, 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 are intended to protect depositors, and should not be assumed to protect the interest
of shareholders. 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 are 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 are generally unable to control the amount of premiums that we are required to pay for FDIC insurance.
If there are 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 Board regulates the supply of money and credit
in the United States and its policies determine in large 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 are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy
are beyond our control and hard to predict.
Our profitability and the value of any equity investment in us may suffer because of rapid and unpredictable changes in the
highly 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 regulations, which are generally intended to protect depositors and not our shareholders,
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.
18
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 market
having the desired characteristics 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
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 shareholders to call special meetings.
Similarly, 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 are opposed by the current board.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The Company operates the following offices:
Corporate Headquarters:
Deep Run at Mayland — 9954 Mayland Drive, Suite 2100, 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
Cumberland – 1496 Anderson Highway, Cumberland, VA 23040
Goochland Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063
Deep Run at Mayland — 9954 Mayland Drive, Richmond, VA 23233
Fairfax -- 10509 Judicial Drive, Fairfax, VA 22030
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
Crofton — 2120 Baldwin Avenue, Crofton, MD 21114
Rockville — 1101 Nelson Street, Rockville, MD 20850
Rosedale — 1230 Race Road, Rosedale, MD 21237
19
The Company owns all of the offices listed above, except that it leases its corporate headquarters, its Fairfax and Winterfield
offices in the Virginia market and the Arnold, Crofton and Rockville offices in the Maryland market. The Company also has a loan
production office in Lynchburg, Virginia, which it leases.
The Company opened its Fairfax branch office on March 30, 2016. The Company opened its Cumberland branch office on August
15, 2016. The Company expects to open a branch office in the West Broad Marketplace development in Henrico, Virginia (12254-
12256 West Broad Street) in May 2017 and a branch office in Lynchburg (21437 Timberlake Road) in June 2017.
The Company closed its branch office in Catonsville, Maryland (1000 Ingleside Avenue) on March 4, 2016.
All of the Company’s properties are in good operating condition and are adequate for the Company’s present and anticipated needs.
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 years ended December 31, 2016 and 2015:
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
3
$
2016
High
Low
5.45 $ 4.45
4.72
5.30
5.10
5.50
5.35
7.25
$
2015
High
Low
4.52 $ 4.12
4.30
5.09
4.77
5.18
4.88
5.50
HOLDERS OF RECORD
As of December 31, 2016, there were 2,539 holders of record of the Company’s common stock, not including beneficial holders
of securities held in street name.
DIVIDENDS
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
20
its obligations as they become due in the ordinary course of business. For additional information on these limitations, see “Supervision
and Regulation — Dividends” in Item 1 above.
In addition, until January 2017, the ability of each of the Company and the Bank to distribute cash dividends was subject to
restrictions in a third-party term loan that the Company obtained in April 2014 to repurchase its then outstanding Series A Preferred
Stock. Specifically, neither the Company nor the Bank could have declared or made a dividend if there existed a default, or such action
would have created a default, under the term loan, which required 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
Department of the Treasury until April 2014, when the Company completed the redemption of such funding. Until January 2017, the
Company primarily utilized 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 shareholder 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, 2016.
21
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, 2011, to December 31, 2016, as compared with (i) an overall stock market index, the NASDAQ
Composite Index, and (ii) a published industry index, the SNL Bank and Thrift Index. The graph assumes that $100 was invested on
December 31, 2011 in the Company’s common stock and in each of the comparable indices and that dividends were reinvested.
Total Return Performance
Community Bankers Trust Corporation
NASDAQ Composite
SNL Bank and Thrift
700
600
500
400
300
200
e
u
l
a
V
x
e
d
n
I
100
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Period Ending
Index
Community Bankers Trust Corporation
NASDAQ Composite
SNL Bank and Thrift
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
466.96
326.96
201.98
164.57
209.39
183.86
100.00
100.00
100.00
230.43
117.45
134.28
384.35
188.84
205.25
12/31/16
630.43
219.89
264.35
22
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.
(cid:3)
(cid:3) (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Year Ended December 31
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
2016
2015
2014
2013
2012
(dollars in thousands, except for per share amounts)
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 expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Financial Condition
Assets
FDIC indemnification asset
PCI loans
Loans
Deposits
Stockholders’ 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 deposits
Average tangible common equity / average tangible assets (1)
Asset Quality
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 per share, basic
Earnings per share, diluted
Non-GAAP earnings per share, diluted (1)
Market value per share
Book value per tangible common share (1)
Price to earnings ratio, diluted
Price to book value ratio
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
48,725
6,933
41,792
—
41,792
5,269
36,817
10,244
2,728
7,516
$
$
1,155,734 $
18,609
67,460
660,020
918,945
107,650
0.67%
7.09%
0.79%
9.09%
78.23%
9.31%
79.16%
8.70%
9,267 $
1.40%
40.10%
55.92%
3.64%
50,045 $
7,078
42,967
—
42,967
4,724
39,288
8,403
2,497
5,906 $
53,719
9,692
44,027
1,200
42,827
6,206
41,303
7,730
2,148
5,582
1,089,532 $
1,153,288
25,409
73,275
596,173
892,341
106,659
0.53%
5.22%
0.66%
8.38%
82.38%
9.79%
75.02%
7.90%
33,837
84,637
575,482
974,318
115,317
0.50%
4.85%
0.65%
8.31%
82.22%
10.00%
67.75%
7.77%
10,444 $
12,920
1.75%
56.92%
86.28%
3.05%
0.22 $
0.22
0.33
3.76
4.07
17.09
86.0%
2.25%
39.94%
61.38%
5.52%
0.21
0.21
0.33
2.65
3.92
12.62
59.3%
21,699,964
21,647,372
21,922,132
21,717,499
—
58,955
748,724
945,519
104,487
(0.22%)
(2.31%)
(0.11%)
(1.19%)
111.35%
8.86%
85.42%
9.10%
9,559 $
1.28%
62.15%
89.59%
2.14%
(0.11) $
(0.11)
(0.06)
5.37
4.65
(48.82)
112.4%
21,826,845
21,826,845
0.33 $
0.33
0.40
4.42
4.72
13.39
89.5%
21,755,448
21,980,979
(cid:3) (cid:3)
$
$
$
49,295 $
7,820
41,475
166
41,309
5,179
32,750
13,738
3,816
9,922 $
47,552
7,497
40,055
—
40,055
5,081
50,260
(5,124)
(2,627)
(2,497)
$
$
1,249,816 $
1,180,557 $
—
51,964
836,299
1,037,294
114,536
0.83%
8.92%
0.94%
10.23%
70.20%
9.15%
85.63%
9.16%
$
9,493 $
1.14%
66.07%
92.68%
1.74%
$
0.45 $
0.45
0.50
7.25
5.17
16.11
139.2%
21,914,270
22,161,221
23
Capital Ratios
Leverage Ratio
Common equity tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
2016
2015
2014
2013
2012
Year Ended December 31
9.60%
11.78%
12.20%
13.16%
9.38%
11.62%
12.08%
13.16%
9.36%
n/a
13.52%
14.72%
9.52%
n/a
15.62%
16.82%
9.41%
n/a
15.79%
16.87%
(1) Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, section “Non GAAP Measures” for a reconciliation.
(2) The efficiency ratio is calculated by dividing noninterest expense over the sum of net interest income plus noninterest income.
(3) Excludes PCI loans.
ITEM 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, 2016 and results of operations for the year ended
December 31, 2016 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 headquartered in Richmond, Virginia and is the holding company for
Essex Bank (the “Bank”), a Virginia state bank with 23 full-service offices in Virginia and Maryland. The Bank also operates one loan
production office 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.
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 charges 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 forward-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 strategy, 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 similar import.
These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors,
including, without limitation, the effects of and changes in the following:
•
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;
•
• competitive pressures among banks and financial institutions or from companies outside the banking industry;
• real estate values;
the interest rate environment;
24
the demand for deposit, loan, and 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 similar 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;
•
•
•
• 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.
levels of fraud in the banking industry;
the level of attempted cyber attacks in the banking industry;
the securities and credit markets;
These factors and additional risks and uncertainties are described in the “Risk Factors” discussion in Part I, Item 1A, of this report.
Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable
assumptions within the bounds of its knowledge 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.
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 are estimated to have occurred through a provision for loan losses charged
to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are 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 are
related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of
each loan portfolio:
• Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The
carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower,
changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company
manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic
regions.
• Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the
successful operations of the principal business operated on the property securing the loan or the successful operation of the real
estate project securing the loan. General market conditions and economic activity may impact the performance of these loans.
In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by
25
avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as
retail, office, office warehouse, industrial and hotel.
• Construction and land development loans are generally made to commercial and residential builders/developers for specific
construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics
of construction projects, changes in interest rates, the long-term financing market and state and local government regulations.
The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding
concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic
regions and in various sales or rental price points.
• Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower,
changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position.
The Company manages risk by using specific underwriting policies and procedures.
• Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and
economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding
concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.
• Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate
collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and
economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding
concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle,
dairy, etc.).
• Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate
collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may
be subject to various risks including obsolescence. General market conditions and economic activity may also impact the
performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the
Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.
• Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly
depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely
affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting
policies and procedures for these types of loans.
• All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of
business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and
economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.
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 Company’s allowance for loan losses, and may require the Company 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 covers uncertainties the could affect management’s estimate of probable
losses.
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 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.
26
Accounting for Certain Loans Acquired in a Transfer
Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 in good standing 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 purchased credit impaired or
“PCI loans”), subject to FASB ASC Topic 805, Business Combinations, were 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,
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.
The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs
subsequent to the date the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.
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
are 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 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.
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 at the date of
foreclosure net of estimated disposal 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 are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed
as incurred.
Other Intangibles
The 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 separately 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.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net
deferred tax 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 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 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
27
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, 2016, 2015 or 2014. 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 tax. All
years from 2013 through 2016 are open to examination by the respective tax authorities.
OVERVIEW
Total assets increased $69.3 million, or 5.9%, to $1.250 billion at December 31, 2016 as compared with $1.181 billion at December
31, 2015. Total loans were $836.3 million at December 31, 2016, increasing $87.6 million, or 11.7%, from year end 2015. Total PCI
loans were $52.0 million at December 31, 2016 versus $59.0 million at year end 2015.
The Company’s securities portfolio, excluding equity securities, declined $17.0 million, or 6.1%, from $279.7 million at December
31, 2015 to $262.7 million at December 31, 2016. Net realized gains of $634,000 were recognized during 2016 through sales and call
activity, as compared with $472,000 recognized during 2015. The decline in the volume of securities was a strategic decision by
management to fund strong loan growth with securities sales, normal securities amortization, call activity, sales and maturities.
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 $216.1 million and $243.3 million
at December 31, 2016 and 2015, respectively. The Company had a net unrealized loss of $621,000 and a net unrealized gain of $671,000
in the AFS portfolio at December 31, 2016 and 2015, respectively.
Noninterest bearing deposits increased $32.7 million, or 34.0%, from $96.2 million at December 31, 2015 to $128.9 million at
December 31, 2016. Interest bearing deposits at December 31, 2016 were $908.4 million, an increase of $59.1 million, or 7.0%, from
December 31, 2015. NOW, MMDA and savings account balances increased $8.6 million, $2.5 million and $6.3 million, respectively,
since December 31, 2015. Time deposits less than or equal to $250,000 increased $31.6 million, or 7.7%, during 2016 while time
deposits over $250,000 increased $10.1 million, or 8.5%, during 2016.
FHLB advances were $81.9 million at December 31, 2016, compared with $95.7 million at December 31, 2015. The decrease in
FHLB advances was offset by the decline in securities.
Long term debt totaled $1.7 million at December 31, 2016, declining by $4.0 million, or 70.6%, since December 31, 2015. This
borrowing, initially in the amount of $10.7 million, was obtained in April 2014, and the proceeds were used to redeem the Company’s
remaining outstanding TARP preferred stock. The Company had paid down this debt by $9.0 million at December 31, 2016, and the
loan, which was scheduled to be fully paid on April 21, 2017, was fully paid on January 9, 2017.
Shareholders' equity was $114.5 million at December 31, 2016 and $104.5 million at December 31, 2015.
RESULTS OF OPERATIONS
Net Income
For the year ended December 31, 2016, net income was $9.9 million, or $0.45 per common share, basic and fully diluted, compared
with a net loss of $2.5 million, or ($0.11) per common share, for the year ended December 31, 2015.
Net income in 2015 was affected by the third quarter termination of the Bank’s FDIC shared-loss agreements in order to improve
profitability beginning in the fourth quarter of 2015. As part of the termination of the shared-loss agreements, the FDIC paid $3.1
million in cash to the Bank, and the remaining $13.1 million of the FDIC indemnification asset related to the agreements was charged
off. This transaction eliminated future indemnification asset amortization expense, which had totaled $5.2 million for the 12-month
period from July 1, 2014 through June 30, 2015.
In addition to the shared-loss termination charge, the Company had write-downs totaling $1.1 million with respect to two bank
buildings held for sale and one parcel in other real estate owned in the third quarter of 2015. Also contributing to the increase in net
income for the year ended 2016 was an increase in net interest income of $1.4 million, or 3.5%, as compared to the year ended 2015.
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. The $10.0 million, or 133.2%, reduction year over year
28
was primarily driven by a $13.4 million increase in noninterest expense. Of this $13.4 million increase, $13.1 million related to the
termination of the shared-loss agreement mentioneds above. Earnings (loss) per common share, basic and fully diluted, were $(0.11)
for the year ended December 31, 2015 versus $0.33 for the same period in 2014.
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.”
For the 2016 year, net interest income increased $1.4 million, or 3.6%, and was $41.5 million. The tax equivalent yield on earning
assets was 4.50% for 2016 compared with 4.57% for 2015. Interest and fees on loans of $36.0 million in 2016 was an increase of $4.0
million, or 12.5%, compared with $32.0 million for 2015. Interest and fees on PCI loans declined $1.6 million over this same time
frame. Of that decline, $475,000 related to cash payments on ADC loans related to pools previously written down to a zero carrying
value received in 2015 versus no such payments in 2016. Securities income declined $681,000 for 2016 compared 2015, as securities
balances have been liquidated to fund loan growth.
Interest expense of $7.8 million for 2016 represented an increase of $323,000, or 4.31%, compared with 2015. Total average
interest bearing liabilities increased $21.4 million, as loan growth has been fueled by this increase and an average balance increase of
23.0%, or $21.7 million, in noninterest bearing deposits, coupled with a decline in the average balance of securities of $36.3 million
during 2016.
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 3.77% for the year ended December 31, 2015 to 3.69% for the same period in 2016. The tax-equivalent yield on
earning assets declined from 4.57% for the year ended December 31, 2015 to 4.50% for the year ended December 31, 2016. The yield
on total loans declined 30 basis points, from 5.31% in 2015 to 5.01% in 2016. PCI loan yield fell from 12.39% to 11.29%, and the yield
on loans, excluding PCI loans, declined 8 basis points, from 4.65% to 4.57%. The tax-equivalent yield on securities increased from
2.94% for 2015 to 3.11% for 2016, as the Company sold lower yielding securities during the course of 2016 to fund loan demand, thus
leaving the portfolio with a higher yield as a result of these transactions.
Net interest income was $40.1 million for the year ended December 31, 2015 versus $41.8 million for the year 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
million in 2015 compared with 2014, the income derived from PCI loans dropped by $3.4 million. Cash payments on zero carrying
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 a tax-equivalent basis increased 5.3%, or
$439,000, during the same time frame as more of the portfolio was shifted to tax-exempt municipals with higher tax equivalent yield.
The Company’s total loan to deposit ratio was 85.63% at December 31, 2016 versus 85.42% at December 31, 2015. The
Company’s total loan to deposit ratio was 85.42% at December 31, 2015 versus 79.16% at December 31, 2014.
29
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 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014
Average
Balance
Sheet
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
Sheet
$
$
ASSETS:
Loans, including fees
PCI loans
Total loans
Interest bearing bank balances
Federal funds sold
Securities (taxable)
Securities (tax exempt)(1)
Total earning assets
Allowance for loan losses
Non-earning assets
Total assets
$
$
787,245
55,178
842,423
17,922
27
178,833
82,045
1,121,250
(9,967)
85,779
1,197,062
LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand - interest bearing
Savings
Time deposits
Total deposits
Short-term borrowings
FHLB and other borrowings
Long-term debt
Total interest bearing liabilities
Noninterest bearing deposits
Other liabilities
Total liabilities
Shareholders' equity
$
235,571
86,499
530,531
852,601
1,776
105,455
4,257
964,089
116,215
5,543
1,085,847
111,215
35,998
6,230
42,228
122
-
4,696
3,407
50,453
4.57 %
11.29
5.01
0.68
0.49
2.63
4.15
4.50
636
236
5,510
6,382
16
1,210
212
7,820
0.27 %
0.27
1.04
0.75
0.88
1.15
4.97
0.81
$
687,463
63,552
751,015
14,551
1,852
220,525
76,644
1,064,587
(9,981)
95,190
$ 1,149,796
$
229,220
83,614
523,726
836,560
1,516
96,937
7,707
942,720
94,476
4,490
1,041,686
108,110
Average
Interest Rates
Income/ Earned/
Expense
Paid
Average
Balance
Sheet
Average
Rates
Interest
Income/ Earned/
Expense
$ 31,990
7,875
39,865
59
2
5,469
3,268
48,663
4.65 % $
12.39
5.31
0.41
0.10
2.48
4.26
4.57
621,213 $
70,421
691,634
19,103
389
268,324
32,237
1,011,687
(10,742)
114,545
$ 1,115,490
29,635
11,228
40,863
61
-
6,835
1,463
49,222
Paid
4.77 %
15.94
5.91
0.32
0.10
2.55
4.54
4.87
$
698
260
5,025
5,983
12
1,179
323
7,497
0.30 % $
0.31
0.96
0.72
0.76
1.22
4.20
0.80
595
253
5,010
5,858
11
776
288
6,933
0.29 %
0.33
0.91
0.70
0.59
0.91
4.07
0.75
204,386 $
77,138
552,709
834,233
1,855
85,661
7,077
928,826
76,515
4,184
1,009,525
105,965
Total liabilities and
shareholders' equity
Net interest earnings
Interest spread
Net interest margin
Tax equivalent adjustment:
Securities
$
1,197,062
$ 1,149,796
$ 1,115,490
$
42,633
$ 41,166
$
42,289
3.69 %
3.80 %
3.77 %
3.87 %
4.12 %
4.18 %
$
1,158
$
1,111
$
497
(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.
30
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, 2016 AND 2015
(Dollars in thousands)
2016 compared to 2015
2015 compared to 2014
Volume
Increase (Decrease)
Rate
Total
Volume
Rate
Total
Increase (Decrease)
Interest Income:
Loans, including fees
PCI loans
Interest bearing bank balances and federal funds sold
Securities
$
$
4,643
(1,038)
12
(931)
(635) $
(607)
49
250
4,008
(1,645)
61
(681)
$
3,161 $
(1,095)
(13)
(205)
(806) $
(2,258)
13
30
2,355
(3,353)
—
(175)
Total Earning Assets
2,686
(943)
1,743
1,848
(3,021)
(1,173)
Interest Expense:
Demand deposits
Savings deposits
Time deposits
Total deposits
Other borrowed funds
19
9
65
93
76
(80)
(34)
420
306
(152)
(61)
(25)
485
399
(76)
72
21
(263)
(170)
131
30
(14)
279
295
308
102
7
16
125
439
Total interest bearing liabilities
Net increase (decrease) in net interest income
169
2,517
$
154
(1,097) $
323
1,420
(39)
1,887 $
603
(3,624) $
564
(1,737)
$
$
Provision for Loan Losses
Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for
loan losses are 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 provision for loan losses was $166,000 for the year ended December 31, 2016 compared with $0 for each of the years ended
December 31, 2015 and 2014. The Company records a separate provision for loan losses for its loan portfolio and its PCI loan
portfolio. The provision for loan losses on loans, excluding PCI loans, was $450,000 for the year ended December 31, 2016 compared
with $0 for the years ended December 31, 2015 and 2014. The provision for loan losses on PCI loans was a $284,000 credit for the year
ended December 31, 2016, which was the result of improvement in expected losses on the Company’s PCI portfolio, which the Company
recognized in the fourth quarter of the year. There was no provision for the PCI loan portfolio for the years ended December 31, 2015
and 2014. With respect to the loan portfolio, the provision was taken as additional general reserves to support current period loan growth.
The allowance for loan losses, excluding PCI loans, equaled 92.7% of nonaccrual loans at December 31, 2016 compared with
89.6% at December 31, 2015. The ratio of the allowance for loan losses to total nonperforming assets was 66.1% at December 31, 2016
compared with 62.2% at December 31, 2015. The ratio of the allowance for loan losses to total loans, excluding PCI loans, was 1.14%
at December 31, 2016 compared with 1.28% at December 31, 2015. Net charge-offs were $516,000 in 2016 compared with net
recoveries of $292,000 in 2015.
31
One loan relationship, aggregating $8.7 million, already identified as “substandard” 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.
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 $5.2 million for the year ended December 31, 2016, an increase of $98,000, or 1.9%, over $5.1 million
for the year ended December 31, 2015. Securities gains of $634,000 in 2016 compared with $472,000 for 2015. Likewise, service
charges on deposit accounts increased by $151,000 and were $2.4 million for 2016. Income on bank owned life insurance of $870,000
in 2016 is an increase of $119,000, or 15.9%. Offsetting these increases for 2016 compared with 2015 were decreases of $178,000 in
mortgage loan income, which was $606,000 in 2016, $87,000 in other noninterest income, which was $649,000 in 2016, and $69,000
in gain on sale of loans in 2015, which was zero in 2016.
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%. Gains on sales of securities decreased $617,000 in 2015 compared with 2014 and was
$472,000 in the current year 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 year-over-year 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.
Noninterest Expenses
Noninterest expenses were $32.8 million for the year ended December 31, 2016 compared with $50.3 million for the year ended
December 31, 2015. This is a decrease of $17.5 million, or 34.8%. FDIC indemnification asset amortization was $0 for 2016 and $16.2
million for 2015, as a result of the termination of the shared-loss agreements and associated write-off. Other real estate expenses
improved $1.1 million in 2016 and were $175,000. The expense in this category in 2015 was primarily from the write-down of $1.1
million in the two bank owned properties and other real estate owned noted previously. Other operating expenses declined $444,000
over the comparison period. Salaries and employee benefits increased $271,000, or 1.5%, in 2016 compared with 2015. FDIC
assessment decreased $115,000 and occupancy expenses increased $145,000 in 2016, the result of the Bank’s new branches in Fairfax
and Cumberland, Virginia.
Noninterest expenses were $50.3 million for the year ended December 31, 2015. This compares 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 year ended December 31, 2015 increased $120,000, or 1.9%, over the same
period in 2014.
Income Taxes
For the year ended December 31 2016, income tax expense of $3.8 million represented an effective tax rate of 27.8% compared
with an income tax benefit of $2.6 million for the year ended December 31, 2015. The benefit for the year ended 2015 was the result of
the net loss for the year generated by the accounting for the termination of the shared-loss agreements.
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 the 2015 income tax benefit equaled 51.3% versus a 26.6% effective tax
rate in 2014.
The Company has evaluated the need for a deferred tax valuation allowance for the years ended December 31, 2016 and 2015 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.
32
Loans
Total loans were $888.3 million at December 31, 2016, increasing $80.6 million from $807.7 million at December 31, 2015. Total
loans, excluding PCI loans, were $836.3 million at December 31, 2016 versus $748.7 million at December 31, 2015. Total loans,
excluding PCI loans, increased $87.6 million, or 11.7%, during 2016. Construction and land development loans exhibited the largest
dollar volume increase year-over-year and were up $30.9 million, or 45.8%, and ended the year at $98.3 million. Commercial mortgage
loans of $339.8 million at December 31, 2016 reflected an increase of 6.9%, or $21.8 million, since year end 2015. This is also the
largest category of loans in the portfolio. Residential 1-4 family mortgage loans increased $13.3 million, or 6.8%, over this time frame
and were $207.9 million at December 31, 2016. Commercial loans of $129.3 million at December 31, 2016 was an increase of $26.8
million over the balance at December 31, 2015. PCI loans were $52.0 million at December 31, 2016, $7.0 million lower than at year-
end 2015.
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):
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
(cid:3)
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
Loans
2016
PCI Loans
Total Loans
(cid:3)
(cid:3)
$ 207,863
339,804
98,282
7,911
39,084
7,185
700,129
129,300
5,627
1,243
$ 836,299
24.86 %
40.63
11.75
0.95
4.67
0.86
83.72
15.46
0.67
0.15
100.00 %
$ 46,623
649
1,969
2,453
270
—
51,964
—
—
—
$ 51,964
89.72 % (cid:3) $ 254,486
1.25
340,453
100,251
3.79
4.72
10,364
39,354
0.52
7,185
—
752,093
100.00
129,300
—
5,627
—
1,243
—
100.00 % (cid:3) $ 888,263
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
28.64 %
38.33
11.29
1.17
4.43
0.81
84.67
14.56
0.63
0.14
100.00 %
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2015
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Loans
PCI Loans
$194,576
317,955
67,408
8,378
45,389
6,238
639,944
102,507
4,928
1,345
$748,724
25.99 %
42.47
9.00
1.12
6.06
0.83
85.47
13.69
0.66
0.18
100.00 %
$52,696
850
2,310
2,822
277
—
58,955
—
—
—
$58,955
(cid:3)
(cid:3)
89.38 % (cid:3)
(cid:3)
1.44
(cid:3)
3.92
(cid:3)
4.79
(cid:3)
0.47
(cid:3)
—
(cid:3)
100.00
(cid:3)
—
(cid:3)
—
(cid:3)
—
100.00 % (cid:3)
Total Loans
$247,272
318,805
69,718
11,200
45,666
6,238
698,899
102,507
4,928
1,345
$807,679
30.62 %
39.47
8.63
1.39
5.65
0.77
86.53
12.69
0.61
0.17
100.00 %
33
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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
(cid:3)
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
(cid:3)
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
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2013
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Loans
PCI Loans
(cid:3)
(cid:3)
89.20 % (cid:3)
(cid:3)
1.70
(cid:3)
3.64
(cid:3)
5.05
(cid:3)
0.41
(cid:3)
—
(cid:3)
100.00
(cid:3)
—
(cid:3)
—
(cid:3)
—
100.00 % (cid:3)
(cid:3)
(cid:3)
88.18 % (cid:3)
(cid:3)
1.90
(cid:3)
4.01
(cid:3)
5.32
(cid:3)
0.36
(cid:3)
0.23
(cid:3)
100.00
(cid:3)
—
(cid:3)
—
(cid:3)
—
100.00 % (cid:3)
(cid:3)
(cid:3)
87.47 % (cid:3)
(cid:3)
2.35
(cid:3)
3.86
(cid:3)
5.75
(cid:3)
0.36
(cid:3)
0.20
(cid:3)
99.99
(cid:3)
—
(cid:3)
0.01
(cid:3)
—
100.00 % (cid:3)
Total Loans
$227,342
283,275
59,483
9,406
34,088
7,163
620,757
99,783
5,496
1,444
$727,480
31.25 %
38.94
8.18
1.29
4.69
0.98
85.33
13.72
0.76
0.19
100.00 %
Total Loans
$208,889
248,495
58,178
10,747
36,014
9,730
572,053
90,282
5,667
1,446
$669,448
31.20 %
37.12
8.69
1.61
5.38
1.45
85.45
13.49
0.85
0.21
100.00 %
Total Loans
$209,385
248,358
64,354
12,090
28,970
10,525
573,682
77,911
6,987
1,539
$660,119
31.72 %
37.63
9.75
1.83
4.39
1.59
86.91
11.80
1.06
0.23
100.00 %
Loans
2014
PCI Loans
$167,171
282,127
57,027
5,997
33,812
7,163
553,297
99,783
5,496
1,444
$660,020
25.33 %
42.75
8.64
0.91
5.12
1.08
83.83
15.12
0.83
0.22
100.00 %
$60,171
1,148
2,456
3,409
276
—
67,460
—
—
—
$67,460
$144,279
247,106
55,238
6,849
35,748
9,558
498,778
90,282
5,667
1,446
$596,173
24.20 %
41.45
9.27
1.15
6.00
1.60
83.67
15.14
0.95
0.24
100.00 %
$64,610
1,389
2,940
3,898
266
172
73,275
—
—
—
$73,275
$135,339
246,372
61,090
7,226
28,666
10,353
489,046
77,911
6,986
1,539
$575,482
23.52 %
42.80
10.62
1.26
4.98
1.80
84.98
13.54
1.21
0.27
100.00 %
$74,046
1,986
3,264
4,864
304
172
84,636
—
1
—
$84,637
34
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2012
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Loans
PCI Loans
The following table indicates the contractual maturity of commercial and construction and land development loans as of
December 31, 2016 (dollars in thousands):
Within 1 year
Variable Rate
One to Five Years
After Five Years
Total
Fixed Rate
One to Five Years
After Five Years
Total
Total Maturities
Commercial
$
37,755
$
$
$
$
$
18,477
5,288
23,765
60,505
7,275
67,780
129,300
Construction and land
development
$
$
$
$
$
$
46,417
1,664
12,270
13,934
36,883
3,017
39,900
100,251
Asset Quality – Assets, Excluding PCI Loans
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 determination of the appropriateness of the allowance for loan losses. At
December 31, 2016, nonperforming assets totaled $14.7 million and net charge-offs were $516,000. Nonperforming assets totaled $16.2
million and net recoveries were $292,000 at December 31, 2015.
Nonperforming loans were $10.2 million at December 31, 2016 compared to $10.7 million at December 31, 2015, a $427,000
decrease. Additions to nonaccrual loans during 2016 totaled $2.6 million. The increase mainly related to several small residential
property relationships, all of which are secured by real estate. There were $699,000 in charge-offs taken during 2016 mainly centered
in real estate loans. There were $532,000 in pay-downs during the year, $727,000 in pay-offs and $674,000 in loans returned to accruing
status. Foreclosures for the period totaled $377,000.
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):
Nonaccrual loans
Loans past due 90 days and accruing interest
Total nonperforming loans
OREO
Total nonperforming assets
2016
2015
$ 10,243 $ 10,670
—
10,670
5,490
$ 14,670 $ 16,160
—
10,243
4,427
2014
$16,571
—
16,571
7,743
$24,314
2013
$12,105
—
12,105
6,244
$18,349
2012
$21,048
509
21,557
10,793
$32,350
Accruing troubled debt restructure loans
$ 4,653 $ 4,596
$ 6,195
$ 9,922
$ 9,990
Balances
Specific reserve on impaired loans
General reserve related to unimpaired loans
Total allowance for loan losses
Average loans during the year
Impaired loans
Non-impaired loans
Total loans, net of unearned income
1,130
8,363
9,493
787,245
18,541
817,758
836,299
1,144
8,415
9,559
687,463
15,266
733,476
748,742
1,761
7,506
9,267
621,213
22,929
637,091
660,020
1,636
8,808
10,444
585,343
2,733
10,187
12,920
556,113
22,027
574,146
596,173
31,508
543,974
575,482
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 charge-offs (recoveries) to average loans
1.14 %
66.07
92.68
1.02
1.22
1.74
0.07
1.28 %
1.40 %
1.75 %
2.25 %
62.15
89.59
1.15
1.43
2.14
(0.04)
40.10
55.92
1.18
2.51
3.64
0.19
56.92
86.28
1.53
2.03
3.05
0.42
39.94
61.38
1.87
3.66
5.52
0.60
35
At December 31, 2016, 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, 2016 was $5.5 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 $730,000 at
December 31, 2016, or 13.29% of the total credit exposure outstanding.
The 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 17 loans for each of the years ended December 31, 2016 and 2015, 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 seven loans totaling $4.1 million and four loans totaling $3.9
million for the years ended December 31, 2016 and 2015, respectively, that were restructured using multiple new loans. At December
31, 2016 and 2015, the aggregated outstanding principal of all TDRs was $6.7 million and $6.5 million, respectively, of which $2.0
million and $1.9 million, 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” (the 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 impairment 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
years presented (dollars in thousands):
(cid:3)
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 loans
Allowance for Credit Losses on Loans
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2016
2015
2014
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2013
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2012
$ 2,893
1,758
5,495
—
—
10,146
53
44
$ 10,243
$ 4,562 $ 3,342 (cid:3) $ 4,229 (cid:3) $ 5,562
5,818
8,815
141
250
20,586
385
77
$ 10,670 $ 16,571 (cid:3) $ 12,105 (cid:3) $ 21,048
1,382 (cid:3)
5,882 (cid:3)
225 (cid:3)
205 (cid:3)
11,923 (cid:3)
127 (cid:3)
55 (cid:3)
1,508
4,509
13
—
10,592
—
78
607 (cid:3)
4,920 (cid:3)
61 (cid:3)
—(cid:3)
8,930 (cid:3)
7,521 (cid:3)
120 (cid:3)
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 are 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
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.
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 when the most recent appraisal is greater than 18 months old and /or
deemed to be invalid. The Company may also utilize internally prepared estimates that generally result from current market data and
36
actual sales data related to the Company’s collateral. A ratio analysis is used for all loans with balances 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.
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 charge-offs (recoveries) to average loans
Allowance to nonperforming loans
2016
2015
2014
$
9,559 $
9,267 $
10,444 $
2013
12,920 $
2012
14,835
-
687
191
878
11
245
106
362
516
450
9,493 $
1.14 %
0.07 %
92.68 %
3
1,183
174
1,360
1,211
343
98
1,652
(292)
-
9,559 $
1.28 %
(0.04) %
89.59 %
1,217
1,179
134
2,530
1,065
178
110
1,353
1,177
-
9,267 $
1.40 %
0.19 %
55.92 %
325
2,999
167
3,491
82
857
76
1,015
2,476
-
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
2.25 %
0.61 %
59.93 %
$
During 2016, the Bank’s net charge-offs increased $808,000 from a net recovery in the prior year and were primarily centered in
real estate loans. Net charge-offs (recoveries) by loan category to total net charge-offs were the following for 2016: (2.1%) for
commercial loans, 85.7% for real estate loans, and 16.4% for consumer loans.
During 2015, the Bank’s net recoveries increased $1.5 million from a net charge-off in the prior year and were primarily centered
in commercial loans. Net charge-offs (recoveries) 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.
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 years presented (dollars in thousands):
2016
Amount %
$
602
15.5 % $
2015
Amount
2014
2013
2012
Amount
%
13.6 % $
977
%
15.2 % $
Amount
1,554
%
Amount %
1,961
13.5 %
15.1 % $
Commercial
Construction and land
development
Real estate mortgage
Consumer and other
Unallocated
2,195
5,068
142
1,486
11.7
72
0.8
—
631
1,298
6,914
118
598
Total allowance
$ 9,493
100.00 % $ 9,559
100.00 % $ 9,267
100.00 % $ 10,444
100.00 % $ 12,920
9.0
76.4
1.0
—
1,792
4,822
131
1,545
8.6
75.2
1.0
—
2,163
6,065
160
502
9.3
74.4
1.2
—
3,773
6,973
213
—
10.6
74.4
1.5
—
100.00 %
The allowance for loan losses for each of the periods presented includes an amount that could not be related to individual types of
loans and thus is referred to as the unallocated portion of the allowance. The Company recognizes the inherent imprecision in the
estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the provision of $450,000 taken
during the year ended 2016 primarily due to loan growth resulted in an elevated unallocated amount of $1.5 million at year end. Several
factors justify the maintenance of this unallocated amount:
(cid:882) The Company experienced an unusually low level of delinquencies at December 31, 2016 which it believes is unsustainable
over the next several quarters and is not reflective of the Company’s experience (i.e., not reflective of the actual credit quality
of the loan portfolio at December 31, 2016).
37
(cid:882) Coverage ratios at December 31, 2016 relating to the allowance to loans and the allowance to nonaccrual loans, as noted in the
table above, are in line with peers and are consistent for the Company with prior periods which have proven to be adequate and
produce provisions and allowances for loan losses that are directionally consistent with the credit quality of the loan portfolio.
This is an indication that the allowance, in the aggregate, is reasonably stated when considering total loans as well as loans
with some doubt regarding ultimate collectability.
(cid:882) The Company believes reducing the allowance is not indicative of the credit risks of the loan portfolio at December 31, 2016.
The $450,000 in provision recorded during 2016 were appropriate at the time they were recorded, and the credit quality of the
portfolio at December 31, 2016, ignoring the temporary decline in delinquencies, is generally consistent with the credit quality
of the portfolio throughout the year. The Company does not feel that such an adjustment is appropriate given the growth in the
portfolio and the consistency of nonaccrual loans.
(cid:882) The Company feels that, if the portfolio continues to show improvement and the calculation continues to yield a significant
unallocated component, it will make adjustments as considered appropriate in that reporting period(s).
Asset Quality and Allowance for Credit Losses – PCI assets
Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest
income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to
be accruing and performing 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 $17.2 million, or 6.0%, from $288.2 million at December 31, 2015 to $271.0 million
at December 31, 2016. This decrease is the result of a shift in assets to higher yielding loans. At December 31, 2016, the Company had
$216.1 million in securities available for sale and $46.6 million of securities held to maturity. Equity securities totaled $8.3 million.
Realized gains of $634,000 occurred during 2016 through sales and call activity.
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.
38
The following table summarizes the securities portfolio by contractual maturity and issuer, including weighted average yields,
excluding restricted stock, as of December 31, 2016 (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
$ 9,998
9,995
0.37%
$ 39,726
39,250
1.35%
$ 18,014
17,636
1.73%
$ 4,438
4,277
2.58%
$ 72,176
71,158
1.38%
State, county and municipal(1)
Amortized Cost
Fair Value
Weighted Avg Yield
Corporate bonds and other securities
Amortized Cost
Fair Value
Weighted Avg Yield
Mortgage Backed securities
Total
Amortized Cost
Fair Value
Weighted Avg Yield
Amortized Cost
Fair Value
Weighted Avg Yield
(1) Computed on a tax equivalent basis
2,663
2,646
4.62%
-
-
-
-
-
-
62,728
64,276
4.02%
2,576
2,544
1.67%
7,942
7,904
1.49%
75,745
75,780
3.89%
13,360
12,959
1.67%
8,147
7,813
2.03%
12,661
12,641
1.26%
112,972
113,974
2.85%
115,266
114,188
3.17%
16,397
16,301
4.51%
-
-
-
1,616
1,598
3.07%
22,451
22,176
4.02%
157,533
159,003
4.02%
15,936
15,503
1.67%
17,705
17,315
1.88%
263,350
262,979
3.01%
The amortized cost and fair value of securities available for sale and held to maturity as of December 31 of the years presented
are as follows (dollars in thousands):
Amortized Cost
Gains
Losses
Fair Value
December 31, 2016
Gross Unrealized
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
U.S. Treasury issue and other U.S. Gov’t agencies
State, county and municipal
Mortgage backed – U.S. Gov’t agencies
Total Securities Held to Maturity
58,724
3,452
121,686
15,936
3,614
13,330
216,742
10,000
35,847
761
46,608
(cid:3)
$
$
$
$
15
—
2,247
—
—
21
2,283
(cid:3)
—
568
21
589
$
$
$
$
(763)
(116)
(1,160)
(433)
(119)
(313)
(2,904)
(154)
(185)
—
(339)
(cid:3)
$
$
$
$
57,976
3,336
122,773
15,503
3,495
13,038
216,121
9,846
36,230
782
46,858
$
$
$
$
(cid:3)
39
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
(cid:3)
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
Mortgage backed – U.S. Gov’t agencies
Mortgage backed – U.S. Gov’t sponsored agencies
Total Securities Held to Maturity
Deposits
Amortized Cost
Gains
Losses
Fair Value
December 31, 2015
Gross Unrealized
$
$
$
$
(cid:3)
(cid:3)
50,590
756
138,965
14,997
8,654
28,637
242,599
35,456
1,022
—
36,478
(cid:3)
$
$
$
$
(cid:3)
(cid:3)
11
—
3,400
10
9
22
3,452
1,136
32
—
1,168
(cid:3)
$
$
$
$
(cid:3)
(660)
(14)
(867)
(711)
(167)
(362)
(2,781)
(35)
—
—
(35)
(cid:3)
49,941
742
141,498
14,296
8,496
28,297
243,270
36,557
1,054
—
37,611
$
$
$
$
(cid:3)
(cid:3)
(cid:3)
December 31, 2014
Gross Unrealized
Amortized Cost
Gains
Losses
Fair Value
$
$
$
$
99,608
134,405
11,921
2,338
24,096
272,368
31,677
4,293
227
36,197
$
$
$
$
113
3,926
17
18
174
4,248
1,103
238
1
1,342
$
$
$
$
(1,014)
(854)
(55)
(98)
(27)
(2,048)
—
—
—
—
$
$
$
$
98,707
137,477
11,883
2,258
24,243
274,568
32,780
4,531
228
37,539
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):
NOW
MMDA
Savings
Time deposits less than $100,000
Time deposits $100,000 and over
Total deposits
2016
Average
2015
Average
2014
Average
Average
(cid:3)Balance(cid:3)
$ 127,723
107,848
86,499
222,475
308,056
$ 852,601
Average
(cid:3)Balance(cid:3)
Rate
Paid
0.18 % $ 121,329
107,891
0.38
83,614
0.27
233,784
1.00
1.07
289,942
0.75 % $ 836,560
Average
(cid:3)Balance(cid:3)
Rate
Paid
0.21 % $ 109,272
95,115
0.41
77,138
0.31
248,107
0.94
0.98
304,601
0.72 % $ 834,233
Rate
Paid
0.22 %
0.37
0.33
0.93
0.89
0.70 %
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, 2016 (dollars in thousands):
Within 3 months
3-6 months
6-12 months
over 12 months
Total
$
$
40
53,440
44,272
145,121
95,433
338,266
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 years presented (dollars in thousands):
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
2016
2015
$
$
$
4,714
12,301
1,776
0.88 %
1.10 %
$
$
$
18,921
18,921
1,516
0.76 %
1.28 %
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, 2016
and 2015 was as follows (dollars in thousands):
Cash and due from banks
Interest bearing bank deposits
Federal funds sold
Available for sale securities, at fair value, unpledged
Total liquid assets
Deposits and other liabilities
Ratio of liquid assets to deposits and other liabilities
Capital Resources
(cid:3)
$
$
December 31, 2016
13,828 (cid:3)
7,244 (cid:3)
— (cid:3)
170,898 (cid:3)
191,970 (cid:3)
1,135,280
16.91 %
$
$
(cid:3)
(cid:3)
December 31, 2015
(cid:3)
7,393 (cid:3)
9,576 (cid:3)
— (cid:3)
189,692 (cid:3)
206,661 (cid:3)
(cid:3)
1,076,070 (cid:3)
19.21 %
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 are 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 a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1
41
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. “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 as follows: 2016 - 0.625%, 2017 – 1.25%, 2018 – 1.875% and
2019 – 2.5%.
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 (dollars in thousands):
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
(cid:3)
$
December 31, 2016
Amount
Ratio
128,877
127,606
119,527
118,256
115,403
118,256
119,527
118,256
13.16 %
13.03 %
12.20 %
12.07 %
11.78 %
12.07 %
9.60 %
9.50 %
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
December 31, 2015
(cid:3)
(cid:3)
Amount
Ratio
$
118,157
119,683
13.16 %
13.34 %
108,457
109,983
12.08 %
12.26 %
104,333
109,983
11.62 %
12.26 %
108,457
109,983
9.38 %
9.55 %
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 a LIBOR-indexed floating rate of interest. The average interest rate at December 31, 2016, 2015 and 2014 was
3.68%, 3.28% and 3.24%, 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 first five years 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 shares of the Company’s common
stock at an initial per share 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 April 23, 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 par 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 are no other investments from the Company's participation in TARP that remain outstanding.
42
Off-Balance Sheet Arrangements
A summary of the contract amount of the Bank’s exposure to off-balance sheet risk as of December 31, 2016 and 2015, 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, 2016
December 31, 2015
$ 134,517
7,151
$ 141,668
$ 106,099
7,146
$ 113,245
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 varies 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 are 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 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 market offers the most advantageous
pricing at the time that pricing is first initially determined 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.
At December 31, 2016, the fair value of the Company’s cash flow hedge was an unrealized loss of $70,000, 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 loss recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss).
Contractual Obligations
A summary of the Company’s contractual obligations at December 31, 2016 is as follows (dollars in thousands):
Total
Less Than 1
Year
1-3 Years
4-5 Years
More Than 5
Years
Time deposits
Trust preferred debt
Federal Home Loan Bank advances
Long term debt
Operating leases
Total contractual obligations
$
$
$
569,389
4,124
81,887
1,670
10,428
667,498 $
395,474
—
60,000
1,670
1,180
458,324
$
143,540
—
21,887
—
3,754
169,181
$
30,375
—
—
—
1,247
31,622
—
4,124
—
—
4,247
8,371
43
Financial 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
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
shareholders as cash dividends during a given period. The Company did not pay dividends to common shareholders during the years
ended December 31, 2016, 2015 and 2014. 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 shareholders’ equity divided by average total assets.
The following table shows the Company’s financial ratios at the dates indicated:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Return on average assets
Return on average equity
Leverage
Non GAAP Measures
2016
0.83 %
8.92 %
9.29 %
Year Ended December 31
2015
2014
(0.22) %
(2.31) %
9.40 %
0.67 %
7.09 %
9.50 %
The Company accounts for business combinations under FASB ASC 805, Business Combinations, using the acquisition 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. The TCB transaction was accounted for as an asset purchase. At December 31,
2016, 2015 and 2014, core deposit intangible assets totaled $898,000, $2.8 million and $4.7 million, respectively.
In reporting the results of 2016, 2015 and 2014 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 are 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 $0.50 for the year ended December 31, 2016 compared with $(0.06) in 2015 and $0.40 in 2014. Non-GAAP return on
average tangible common equity and assets for the year ended December 31, 2016 was 10.23% and 0.94%, respectively, compared with
(1.19)% and (0.11)%, respectively, in 2015 and 9.09% and 0.79%, respectively, in 2014.
These measures are a supplement to GAAP used to prepare 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, 2016, 2015 and 2014 (dollars in thousands):
Net (loss) income
Plus: core deposit intangible amortization, net of tax
Non-GAAP operating earnings
(cid:3)
Total shareholders' equity
Preferred stock (net)
Core deposit intangible (net)
Common tangible book value
Shares outstanding
Common tangible book value per share
(cid:3)
Average assets
Less: average core deposit intangibles
Average tangible assets
(cid:3)
Average equity
Less: average core deposit intangibles
Less: average preferred equity
Average tangible common equity
(cid:3)
(cid:3)
2016
2015
2014
9,922 $
1,259
11,181 $
(2,497)
1,259
(1,237)
114,536 $
—
898
113,638 $
21,960
5.17 $
104,487
—
2,805
101,682
21,867
4.65
1,197,062 $
1,893
1,195,169 $
1,149,796
3,797
1,145,999
111,215 $
1,893
—
109,322 $
108,110
3,797
—
104,313
$
$
$
$
$
$
$
$
$
7,516
1,259
8,775
107,650
—
4,713
102,937
21,792
4.72
1,115,490
5,707
1,109,783
105,965
5,707
3,715
96,543
$
$
$
$
$
$
$
$
$
44
Weighted average shares outstanding, diluted
Non-GAAP earnings per share, diluted
Average tangible common equity/average tangible assets
Non-GAAP return on average tangible assets
Non-GAAP return on average tangible common equity
$
(cid:3)
(cid:3)
22,161
0.50 $
9.15 % (cid:3)
0.94 % (cid:3)
10.23 %
21,827
(0.06)
9.10 %
(0.11) %
(1.19) %
$
(cid:3)
(cid:3)
21,981
0.40
8.70 %
0.79 %
9.09 %
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 market 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 a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward 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 are monitored regardless of likelihood. A parallel shift in rates over a 12-month period
is assumed.
The 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, 2016, 2015 and 2014 (dollars in thousands):
Change in Yield curve
+400 bp
+300 bp
+200 bp
+100 bp
most likely
-100 bp
-200 bp
-300 bp
-400 bp
2016
2015
2014
%
$
%
$
%
$
4.6
3.3
2.2
0.9
—
0.1
(1.4)
(1.5)
(1.6)
1,931
1,369
897
390
—
45
(585)
(644)
(648)
(7.7) %
(6.2) %
(4.2) %
(2.3) %
— %
2.6 %
1.1 %
0.9 %
0.9 %
(3,100)
(2,479)
(1,677)
(924)
—
1,054
437
376
374
0.5 %
(0.3) %
(0.2) %
(0.5) %
— %
1.6 %
(0.3) %
(0.6) %
(0.6) %
183
(131)
(96)
(207)
—
624
(132)
(222)
(225)
At December 31, 2016, 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 increase by 4.6%. 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 decrease by 1.6%. While these percentages are 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 are 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 market 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
45
adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early
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.
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, 2016 and December 31, 2015
Consolidated Statements of Income (Loss) for the years ended December 31, 2016, December 31, 2015 and December 31,
2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, December 31, 2015,
and December 31, 2014
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, December 31, 2015
and December 31, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and December 31,
2014
Notes to Consolidated Financial Statements
46
49
50
51
52
53
55
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 sheets of Community Bankers Trust Corporation as of December 31, 2016
and 2015 and the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and
cash flows for each of the years then ended. 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are 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 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 as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the
years then ended, 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, 2016, 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 15, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Richmond, Virginia
March 16, 2017
46
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, 2016, 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
standards 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 preparation 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 permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are 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, 2016, 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, 2016 and 2015, and the related consolidated
statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and
our report dated March 15, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Richmond, Virginia
March 16, 2017
(cid:3)
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board 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 are 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 are 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 our 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
48
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND DECEMBER 31, 2015
(dollars in thousands)
2016
(cid:3)
2015
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 $46,858 and $37,611, 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 $9,493 and $9,559, respectively; PCI loans of $200 and $484,
respectively)
Net loans
Bank premises and equipment, net
Bank premises and equipment held for sale
Other real estate owned (OREO)
Bank owned life insurance
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 shares authorized, $0.01 par value; 21,959,648 and 21,866,944 shares
issued and outstanding, respectively)
Additional paid in capital
Retained deficit
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
$
(cid:3)
(cid:3)
$
13,828 (cid:3)
7,244 (cid:3)
21,072 (cid:3)
216,121 (cid:3)
46,608 (cid:3)
8,290 (cid:3)
271,019 (cid:3)
— (cid:3)
836,299 (cid:3)
51,964 (cid:3)
888,263 (cid:3)
(9,693) (cid:3)
878,570 (cid:3)
28,357 (cid:3)
— (cid:3)
4,427 (cid:3)
27,339 (cid:3)
898 (cid:3)
18,134 (cid:3)
1,249,816 (cid:3)
(cid:3)
(cid:3)
128,887 (cid:3)
908,407 (cid:3)
1,037,294 (cid:3)
4,714 (cid:3)
81,887 (cid:3)
1,670 (cid:3)
4,124 (cid:3)
5,591 (cid:3)
1,135,280 (cid:3)
(cid:3)
(cid:3)
(cid:3)
220
(cid:3)
146,667
(31,128) (cid:3)
(1,223) (cid:3)
114,536 (cid:3)
1,249,816 (cid:3)
$
7,393
9,576
16,969
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
18,277
1,180,557
96,216
849,303
945,519
18,921
95,656
5,675
4,124
6,175
1,076,070
219
145,907
(41,050)
(589)
104,487
1,180,557
See accompanying notes to consolidated financial statements
49
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(dollars and shares in thousands, except per share data)
2016
2015
2014
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
Nontaxable
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 losses
Noninterest income
Service charges on deposit accounts
Gain on securities transactions, net
Gain 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, net
Other operating expenses
Total noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Dividends paid on preferred stock
Net income (loss) available to common shareholders
Net income (loss) per share — basic
Net income (loss) per share — diluted
Weighted average number of shares outstanding
basic
diluted
$
$
$
$
$
$
$
$
$
$
35,998
6,230
—
122
4,696
2,249
49,295
6,382
1,438
7,820
41,475
166
41,309
2,420
634
—
870
606
649
5,179
18,412
2,737
999
823
1,674
—
1,907
175
6,023
32,750
13,738
3,816
9,922
—
9,922
0.45
0.45
21,914
22,161
$
$
$
$
$
31,990
7,875
2
59
5,469
2,157
47,552
5,983
1,514
7,497
40,055
—
40,055
2,269
472
69
751
784
736
5,081
18,141
2,592
1,035
938
1,709
16,195
1,908
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
966
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
10,244
2,728
7,516
247
7,269
0.33
0.33
21,755
21,981
See accompanying notes to consolidated financial statements
50
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(dollars in thousands)
Net income (loss)
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Change in unrealized (loss) gain in investment securities
Tax related to unrealized loss (gain) in investment securities
Reclassification adjustment for gain in securities sold
Tax related to realized gain in securities sold
Defined benefit pension plan:
Change in prior service cost
Change in unrealized gain (loss) in plan assets
Tax related to defined benefit pension plan
Cash flow hedge:
Change in unrealized gain (loss) in cash flow hedge
Tax related to cash flow hedge
Total other comprehensive (loss) income
Total comprehensive income (loss)
(cid:3)
2016
2015
2014
$
9,922
$
(2,497)
$
7,516
(658)
224
(634)
215
4
199
(69)
129
(44)
(634)
9,288
(cid:3)
$
(cid:3)
(cid:3)
(1,056)
359
(472)
160
5
(142)
47
(234)
80
(1,253)
(3,750)
(cid:3)
$
(cid:3)
(cid:3)
9,280
(3,155)
(1,089)
370
4
(997)
337
35
(12)
4,773
12,289
(cid:3)
$
(cid:3)
(cid:3)
See accompanying notes to consolidated financial statements
51
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(dollars and shares in thousands)
Preferred
Common Stock
Paid in
Retained
Comprehensive
Stock
Warrants
Shares (cid:3) Amount
Capital
Deficit
Income (Loss)
Total
Additional
Other
Accumulated
(cid:3)
(cid:3)
Balance December 31, 2013
Issuance of common stock
Dividends paid on preferred stock
Exercise and issuance of employee
stock options
Redemption of preferred stock
Redemption of warrants on preferred
stock
Net income
Other comprehensive income
Balance December 31, 2014
Issuance of common stock
Exercise and issuance of employee
stock options
Net loss
Other comprehensive loss
Balance December 31, 2015
Issuance of common stock
Exercise and issuance of employee
stock options
Net income
Other comprehensive loss
Balance December 31, 2016
$
10,680 $
—
—
—
(10,680)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
1,037
—
—
—
—
(1,037)
—
—
—
—
—
—
—
—
—
—
—
—
—
21,709 $
35
—
217 $
1
—
144,656 $
227
—
(45,822)
—
(247)
$
(4,109) $
—
—
106,659
228
(247)
181
—
257
—
—
—
$
$
—
—
145,321 $
276
7,516
—
(38,553)
—
310
—
—
—
145,907 $
155
(2,497)
—
(41,050)
—
605
—
$
$
48
—
—
—
—
21,792 $
42
33
—
—
21,867 $
29
64
—
—
21,960 $
—
—
—
—
—
218
1
—
—
—
219
1
—
—
—
220
—
—
—
—
4,773
664
—
$
—
—
(1,253)
(589)
—
$
—
—
181
(10,680)
(780)
7,516
4,773
107,650
277
310
(2,497)
(1,253)
104,487
156
605(cid:3)
9,922
(634)
114,536
—
—
146,667 $
9,922
—
(31,128)
$
(634)
(1,223)
$
$
See accompanying notes to consolidated financial statements
52
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(Dollars in thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
2016
2015
2014
$
9,922
$
(2,497) $
7,516
Depreciation and intangibles amortization
Non-cash contribution of property
Stock-based compensation expense
Amortization of purchased loan premium
Deferred tax expense (benefit)
Provision for loan losses
Amortization of security premiums and accretion of discounts, net
Net gain on sale of securities
Net (gain) loss on sale and valuation of OREO and bank premises
Net gain 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
Increase in bank owned life insurance investment
Loss on termination of FDIC shared-loss agreement
Changes in assets and liabilities:
Decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
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
Proceeds from termination of FDIC shared-loss agreement
Proceeds from sale of loans
Proceeds from bank owned life insurance investment
Purchase of bank owned life insurance investment
Proceeds from sale of premises and equipment
Net cash used in investing activities
Financing activities:
Net increase in deposits
Net (decrease) increase in federal funds purchased
Net (decrease) increase in Federal Home Loan Bank advances
Proceeds from issuance of common stock
Cash dividends paid
Proceeds from long-term debt
Redemption of preferred stock and related warrants
Payments on long-term debt
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of the period
End of the period
53
3,447
—
566
243
—
166
1,691
(634)
(122)
—
—
(49,185)
51,286
(719)
—
467
(189)
16,939
108,226
10,484
3,961
(83,357)
(20,683)
(3,828)
2,376
(34)
(83,115)
362
(2,524)
—
224
—
(5,000)
145
(72,763)
91,775
(14,207)
(13,769)
133
—
—
—
(4,005)
59,927
4,103
3,494
—
467
304
(6,077)
—
2,546
(472)
1,111
(69)
—
(55,465)
53,564
(751)
13,084
4,558
1,488
15,285
146,906
4,583
1,845
(121,854)
(2,221)
(1,452)
2,900
(516)
(85,675)
1,652
(1,768)
3,100
3,380
—
—
2,120
(47,000)
26,574
4,421
(745)
86
—
—
—
(4,005)
26,331
(5,384)
3,484
68
332
1,087
(40)
—
3,461
(1,089)
407
(201)
(405)
(6,973)
6,873
(769)
—
4,694
1,155
19,600
109,983
16,415
587
(121,228)
(15,777)
(1,045)
4,667
(509)
(78,169)
1,353
(3,875)
—
13,284
840
—
—
(73,474)
26,604
8,500
19,276
39
(247)
10,680
(11,460)
(1,000)
52,392
(1,482)
$
$
16,969
21,072
$
$
22,353
16,969
$
$
23,835
22,353
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Transfers of loans to other real estate owned
Transfers of building premises and equipment to held for sale
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
$
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2016
2015
2014
(cid:3)
$
7,706
4,784
1,187
(cid:3)
(cid:3)
—(cid:3) (cid:3)
(cid:3)
$
7,533
(cid:3)
1,995
821
(cid:3)
2,118 (cid:3) (cid:3)
6,760
3,134
3,436
465
See accompanying notes to consolidated financial statements
54
Note 1. Nature of Banking Activities and Significant Accounting Policies
Organization
Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding
company for Essex Bank (the “Bank”), a Virginia state bank with 23 full-service offices in Virginia and Maryland. The Bank
also operates one loan production office 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Bank, its wholly-
owned subsidiary (and subsidiaries of the Bank). All material intercompany balances and transactions have been eliminated in
consolidation. Financial Accounting Standards Board (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, 2016 and 2015. The subordinated debt of the Trust is reflected as a liability of the
Company.
Cash and Cash Equivalents
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 for each of the years
ended December 31, 2016 and 2015, respectively, as the Bank’s levels of vault cash sufficiently covered the reserve
requirement.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity”
and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily
determinable 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 certain correspondent banks. 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 carried 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.
55
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 this 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 market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally
are 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.
The 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 earlier 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
charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan
balance is confirmed. Subsequent recoveries, if any, are 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 are related to future events or expected changes in economic conditions. The evaluation
also considers the following risk characteristics of each loan portfolio:
• Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens.
The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the
borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from
tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding
concentrations in geographic regions.
• Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated
with the successful operations of the principal business operated on the property securing the loan or the successful
operation of the real estate project securing the loan. General market conditions and economic activity may impact
the performance of these loans. In addition to using specific underwriting policies and procedures for these types of
loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the
lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.
• Construction and land development loans are generally made to commercial and residential builders/developers for
specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans
due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and
56
local government regulations. The Company manages risk by using specific underwriting policies and procedures for
these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to
various lines of businesses, in various geographic regions and in various sales or rental price points.
• Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the
borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the
inferior lien position. The Company manages risk by using specific underwriting policies and procedures.
• Multifamily loans carry risks associated with the successful operation of the property, general real estate market
conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company
manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes,
tenant profiles and rental rates.
• Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real
estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor,
regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures,
as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of
business (i.e., crops, cattle, dairy, etc.).
• Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real
estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory
values that may be subject to various risk including obsolescence. General market conditions and economic activity
may also impact the performance of these loans. In addition to using specific underwriting policies and procedures
for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids
geographic concentrations.
• Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value
of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly
and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using
specific underwriting policies and procedures for these types of loans.
• All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material
source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the
obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures
for these types of loans.
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 Company’s allowance for loan losses, and may require the Company 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 covers uncertainties that could affect
management’s estimate of probable losses.
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 separately identify individual consumer and residential loans for impairment disclosures.
57
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 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, were 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, 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.
The 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 loan loss for PCI loans will be charged 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 referred to as nonaccretable difference, which is not accreted into income.
Judgmental prepayment assumptions are 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 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.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Land is carried 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 10 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 at the
date of foreclosure net of estimated disposal 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 are capitalized up to the fair value of the property while costs to maintain
a property in salable condition are expensed as incurred. The Company had $4.4 million and $5.5 million in other real estate at
December 31, 2016 and 2015, respectively.
Other Intangibles
The 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 separately 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
58
amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC
350.
Bank Owned Life Insurance
The Company is the owner and beneficiary of bank owned life insurance (BOLI) policies on certain current and former
Bank employees. These policies are recorded at their cash surrender value and can be liquidated, if necessary, with associated
tax costs. Income generated from these policies is recorded as noninterest income. The Bank is exposed to credit risk to the
extent an insurance company is unable to fulfill its financial obligations under a policy.
Advertising Costs
The Company follows the policy of expensing advertising costs as incurred, which totaled $499,000, $651,000 and
$475,000 for 2016, 2015 and 2014, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method,
the net deferred tax 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 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 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, 2016, 2015
or 2014. 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
tax. All years from 2013 through 2016 are open to examination by the respective tax authorities.
Earnings Per Share
Basic earnings per share (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
shares 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 determined using the treasury stock method. There were no dividends declared or paid in
each of the years 2016 and 2015. The Company declared and paid $247,000 in dividends on preferred stock in 2014.
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 shares of common stock. See Note 14 for details regarding this plan.
Derivatives - Cash Flow Hedge
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 are 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
59
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 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. The Company’s cash flow hedge was deemed effective
for each of the years ended 2016 and 2015.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic
805): Clarifying the Definition of a Business, clarifying the definition of a business. The amendments affect all companies and
other reporting organizations that must determine whether they have acquired or sold a business.
(cid:3)
The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and
consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to
use in determining when a set of assets and activities is a business. They also provide more consistency in applying the guidance,
reduce the costs of application, and make the definition of a business more operable.
(cid:3)
For public companies, this ASU will be effective for annual periods beginning after December 15, 2017, including interim
periods within those periods. The Company does not expect the adoption of the guidance to have a material impact on its
consolidated financial statements due to the nature of the entities that it may reasonably be expected to enter into business
combinations with.(cid:3)
(cid:3)
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement
of cash flows. The amendments address diversity in practice that exists in the classification and presentation of changes in
restricted cash on the statement of cash flows.
(cid:3)
The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide
a definition of restricted cash or restricted cash equivalents.
(cid:3)
For public business entities, this ASU will be effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. The Company does not expect the adoption of the guidance to have a material impact on its
consolidated financial statements.(cid:3)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of
credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires
the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use
forward-looking information in developing their credit loss estimates. Many of the loss estimation techniques applied today
will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.
Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.
The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant
estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an
organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information
about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets with credit deterioration.
(cid:3)
For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently
evaluating the impact this guidance will have on its accounting, but it expects to recognize a one-time cumulative-effect
adjustment to its allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective,
consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet
determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our
financial condition or results of operations.
(cid:3)
60
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-
based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the
accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The only amendment
to potentially impact earnings is the one relating to income tax consequences, which refers to a change in the recording of the
related tax effects of share-based compensation awards. Currently, an entity must determine for each award whether the
difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results
in either an excess tax benefit or a tax deficiency. Excess tax benefits are recognized in additional paid-in capital while tax
deficiencies are recognized as income tax expense. Under the amendment, all excess tax benefits and tax deficiencies should
be recognized as income tax benefit or expense in the income statement.
For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The
Company expects that the adoption of this guidance will not have a material impact on its consolidated financial statements, as
stock based compensation has not, and is not expected to be material to its financial statements.
In February 2016, the FASB issued its new lease accounting guidance in 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:
(cid:3)
• A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a
discounted basis; and(cid:3)(cid:3)
• A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term.(cid:3)
(cid:3)
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.
(cid:3)
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.
(cid:3)
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 years (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 earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full
retrospective transition approach. The Company is currently evaluating the impact that the standard will have on its
consolidated financial statements. The Company’s preliminary finding is that the new pronouncement will not have a
significant impact on its consolidated financial statements as the projected minimum lease payments under existing leases
subject to the new pronouncement are less than one percent of its current total assets.
(cid:3)
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and
measurement of financial instruments. The new guidance makes targeted improvements to existing U.S. generally accepted
accounting principles by:
(cid:3)
• 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;(cid:3)
• Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes;(cid:3)
• Requiring separate 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;(cid:3)
• Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet; and(cid:3)
61
• Requiring a reporting organization to present separately 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.(cid:3)
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, as the Company currently methodology approximates the guidance above. (cid:3)
In 2014 - 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers; ASU 2015-14, Deferral of the
Effective Date; ASU 2016-08, Principal versus Agent Considerations; ASU 2016-10, Identifying Performance Obligations
and Licensing; ASU 2016-12, Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These ASUs supersede the revenue
recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry
Topics of the Codification. The core principle of the ASUs is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The ASUs may be adopted either retrospectively or on a modified retrospective basis
to new contracts and existing contracts, with remaining performance obligations as of the effective date. For public companies,
the ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early
adoption is permitted beginning January 1, 2017.
The Company is evaluating the anticipated effects of these ASUs on its consolidated financial statements and related
disclosures. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASUs are not applicable
to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including net interest income.
Preliminary analysis indicates that service charges on deposit accounts and certain components within other noninterest income
contain revenue streams that are in scope of these updates; however, the Company does not expect a material change in the
timing or measurement of these revenues. The Company plans to adopt the standards beginning January 1, 2018 and expects
to use the modified retrospective method of adoption.
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 are particularly susceptible to significant change in the near term relate to the
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.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current year presentations. Such
reclassifications had no impact on net income or shareholders’ equity.
Note 2. Securities
Amortized costs and fair values of securities available for sale and held to maturity at December 31, 2016 and 2015 were
as follows (dollars in thousands):
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
Amortized Cost
Gains
Losses
Fair Value
December 31, 2016
Gross Unrealized
$
$
58,724
3,452
121,686
15,936
3,614
13,330
216,742
$
$
15
—
2,247
—
—
21
2,283
$
$
(763)
(116)
(1,160)
(433)
(119)
(313)
(2,904)
$
57,976
3,336
122,773
15,503
3,495
13,038
$ 216,121
62
Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies
State, county and municipal
Mortgage backed – U.S. Gov’t agencies
Total Securities Held to Maturity
(cid:3)
$
$
10,000
35,847
761
46,608
$
(cid:3)
$
—
568
21
589
(cid:3)
$
$
(154)
(185)
—
(339)
(cid:3)
$
$
9,846
36,230
782
46,858
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
Total Securities Held to Maturity
Amortized Cost
Gains
Losses
Fair Value
December 31, 2015
Gross Unrealized
$
$
$
$
50,590
756
138,965
14,997
8,654
28,637
242,599
$
$
11
—
3,400
10
9
22
3,452
35,456
1,022
36,478
$
$
1,136
32
1,168
$
$
$
$
(660)
(14)
(867)
(711)
(167)
(362)
(2,781)
$
49,941
742
141,498
14,296
8,496
28,297
$ 243,270
(35)
—
(35)
$
$
36,557
1,054
37,611
The amortized cost and fair value of securities at December 31, 2016 by final contractual maturity are shown below.
Expected maturities may differ from final 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 to Maturity
Available for Sale
Amortized Cost
Fair Value
Amortized Cost
Fair Value
1,561
21,315
14,856
8,876
46,608
$
$
1,542 $
21,381
15,023
8,912
46,858 $
11,100 $
91,657
100,409
13,576
216,742 $
11,099
92,594
99,162
13,266
216,121
Proceeds from sales of securities available for sale were $103.7 million, $105.8 million and $79.6 million during the years
ended December 31, 2016, 2015 and 2014, 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 years ended
December 31, 2016, 2015 and 2014 were as follows (dollars in thousands):
Gross realized gains
Gross realized losses
Net securities gains
$
$
2016
2015
2014
1,265
(631)
634
$
$
974 $
(502)
472 $
1,584
(495)
1,089
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 OTTI losses for the years ended December 31, 2016, 2015 and 2014.
63
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, 2016 and 2015 were as follows (dollars in thousands):
(cid:3)
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
Less than 12 Months
(cid:3)
(cid:3) (cid:3)
December 31, 2016
12 Months or More
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
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 Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies
State, county and municipal
Total
(cid:3)
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
$
$
(cid:3)
$
Total
$
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value
$
29,756 $
-
39,713
6,864
1,598
9,247
87,178 $
(324) $
-
(848)
(103)
(18)
(313)
(1,606) $
25,155 $
2,523
3,885
8,639
1,897
-
42,099 $
(439) $
(116)
(312)
(330)
(101)
-
(1,298) $
Total
Unrealized Loss
(763)
(116)
(1,160)
(433)
(119)
(313)
(2,904)
54,911 $
2,523
43,598
15,503
3,495
9,247
129,277 $
9,846 $
8,052 (cid:3)
17,898 $
(154) $
(185) (cid:3)
(339) $
- $
- (cid:3)
- $
-(cid:3) $
- (cid:3)
-(cid:3) $
9,846(cid:3) $
8,052 (cid:3)
17,898(cid:3) $
(154)
(185)
(339)
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
Less than 12 Months
(cid:3)
(cid:3) (cid:3)
December 31, 2015
12 Months or More
(cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3)
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value
$
20,408 $
742
23,733
8,996
6,386
24,129
84,394 $
(84) $
(14)
(252)
(669)
(88)
(360)
(1,467) $
28,063 $
-
10,270
3,290
1,919
175
43,717 $
(576) $
-
(615)
(42)
(79)
(2)
(1,314) $
Total
Unrealized Loss
(660)
(14)
(867)
(711)
(167)
(362)
(2,781)
48,471 $
742
34,003
12,286
8,305
24,304
128,111 $
Securities Held to Maturity
State, county and municipal
$
3,889 $
(35) $
- $
- $
3,889 $
(35)
The unrealized losses (impairments) in the investment portfolio at December 31, 2016 and 2015 are generally a result of
market fluctuations that occur daily. The unrealized losses are from 177 securities at December 31, 2016. Of those, 155 are
investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities
throughout the United States. Twenty-two investment grade asset-backed securities comprised of student loan pools included
in corporate obligations make up the remaining securities with unrealized losses at December 31, 2016. The Company
considers the reason for impairment, length of impairment, intent, and ability to hold until the full value is recovered in
determining 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.
Market 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 $80.2 million and $88.7 million at December 31, 2016 and 2015, respectively, were
pledged to secure the cash flow hedge and public deposits as required or permitted by law. At each of December 31, 2016 and
2015, 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.
64
Note 3. Loans and Related Allowance for Loan Losses
The Company’s loans, net of deferred fees and costs, at December 31, 2016 and 2015 were comprised of the following
(dollars in thousands):
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, 2016
December 31, 2015
Amount
% of Loans
Amount
% of Loans
$ 207,863
339,804
98,282
7,911
39,084
7,185
700,129
129,300
5,627
1,243
$ 836,299
24.86 %
40.63
11.75
0.95
4.67
0.86
83.72
15.46
0.67
0.15
100.00 %
$ 194,576
317,955
67,408
8,378
45,389
6,238
639,944
102,507
4,928
1,345
$ 748,724
25.99 %
42.47
9.00
1.12
6.06
0.83
85.47
13.69
0.66
0.18
100.00 %
The Company held $15.8 million and $13.4 million in balances of loans guaranteed by the United States Department of
Agriculture (USDA), which are included in various categories in the table above, at December 31, 2016 and 2015, respectively.
As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase
premium of $749,000 and $586,000 at December 31, 2016 and 2015, respectively. The purchase premium is amortized 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, 2016 and 2015, the Company’s allowance for credit losses was comprised of the following: (i) a specific
valuation component calculated in accordance with FASB ASC 310, Receivables, (ii) a general valuation component calculated
in accordance with FASB ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and
other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate
of probable losses. Management identified loans subject to impairment in accordance with ASC 310.
65
The following table summarizes information related to impaired loans as of December 31, 2016 and 2015 (dollars in
thousands):
With no related allowance recorded:
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
Subtotal impaired loans with no valuation
allowance
With an allowance recorded:
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
Subtotal impaired loans with 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
December 31, 2016
December 31, 2015
Recorded
Investment (1)
Unpaid
Principal
Balance (2)
Related
Allowance
Recorded
Investment (1)
Unpaid
Principal
Balance (2)
Related
Allowance
$
$
1,704 $
6,570
—
—
8,274
1,200
—
1,931 $
7,078
—
—
9,009
1,200
—
— $
—
—
—
—
—
—
2,749 $
4,327
—
—
7,076
—
—
3,274 $
4,814
—
—
8,088
—
—
9,474
10,209
—
7,076
8,088
2,621
617
5,495
—
8,733
53
281
9,067
4,325
7,187
5,495
—
17,007
1,253
281
18,541 $
3,062
1,051
6,746
—
10,859
53
285
11,197
4,993
8,129
6,746
—
19,868
1,253
285
21,406 $
283
73
730
—
1,086
7
37
1,130
283
73
730
—
1,086
7
37
1,130 $
3,215
375
4,508
13
8,111
—
79
8,190
5,964
4,702
4,508
13
15,187
—
79
15,266 $
3,619
699
6,179
14
10,511
—
84
10,595
6,893
5,513
6,179
14
18,599
—
84
18,683 $
—
—
—
—
—
—
—
—
490
64
574
2
1,130
—
14
1,144
490
64
574
2
1,130
—
14
1,144
(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 direct write-
downs
The following table summarizes the average recorded investment of impaired loans for the years ended December 31,
2016, 2015, and 2014 (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
Total impaired loans
2016
Average
Interest
2015
Average
Interest
(cid:3)
(cid:3)
(cid:3)
(cid:3) Average
(cid:3)
2014
Interest
$ 5,301 $ 78 $ 5,544 $ 73 $ 5,430 $ 87
228
5,066
8
5,054
—
42
—
—
323
15,706
—
2,987
—
92
$ 16,331 $ 415 $ 18,785 $ 246 $ 19,965 $ 323
5,217
5,178
86
—
15,782
283
266
7,230
5,431
191
41
18,323
1,550
92
284
—
—
—
362
49
4
173
—
—
—
246
—
—
66
Troubled debt restructures and some substandard 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.(cid:2)A reconciliation of impaired
loans to nonaccrual loans at December 31, 2016 and December 31, 2015 is set forth in the table below (dollars in thousands):
Nonaccruals
Trouble debt restructure and still accruing
Substandard and still accruing
Total impaired
(cid:3)
(cid:3)
(cid:3)
December 31, 2016
$ 10,243 (cid:3)
4,653
3,645 (cid:3)
$ 18,541 (cid:3)
December 31, 2015
$ 10,670
4,596
—
$ 15,266
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an
insignificant amount of cash basis income recognized during the year ended December 31, 2016. Cash basis income of $465,000
and $612,000 was recognized during the years ended December 31, 2015 and 2014, respectively. For the years ended
December 31, 2016, 2015 and 2014, estimated interest income of $681,000, $734,000 and $890,000, respectively, would have
been recorded if all such loans had been accruing interest according to their original contractual terms.
There were no loans greater than 90 days old and still accruing interest for each of the years ended December 31, 2016
and 2015. The following tables present an age analysis of past due status of loans, excluding PCI loans, by category as of
December 31, 2016 and 2015 (dollars in thousands):
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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
December 31, 2016
30-89 Days
Past Due
Nonaccrual
Total Past
Due
Current
Total Loans
Receivable
296 $
—
54
—
—
—
350
—
3
—
353 $
2,893 $
1,758
5,495
—
—
—
10,146
53
44
—
10,243 $
3,189 $ 204,674 $
1,758
5,549
—
—
—
10,496
53
47
—
338,046
92,733
7,911
39,084
7,185
689,633
129,247
5,580
1,243
10,596 $ 825,703 $
207,863
339,804
98,282
7,911
39,084
7,185
700,129
129,300
5,627
1,243
836,299
December 31, 2015
30-89 Days
Past Due
Nonaccrual
Total Past
Due
Current
Total Loans
Receivable
811 $
1,471
51
135
—
—
2,468
16
10
33
2,527 $
4,562 $
1,508
4,509
13
—
—
10,592
—
78
—
10,670 $
5,373 $ 189,203 $
2,979
4,560
148
—
—
13,060
16
88
33
314,976
62,848
8,230
45,389
6,238
626,884
102,491
4,840
1,312
13,197 $ 735,527 $
194,576
317,955
67,408
8,378
45,389
6,238
639,944
102,507
4,928
1,345
748,724
$
$
$
$
Activity in the allowance for loan losses on loans, excluding PCI loans, by segment for the years ended December 31,
2016, 2015 and 2014 is presented in the following tables (dollars in thousands):
67
December 31, 2015
Provision
Allocation
Charge-offs
Recoveries
December 31, 2016
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
Unallocated
Total loans
(cid:3)
(cid:3)
$
$
(cid:3)
(cid:3)
(cid:3)
2,884 $
3,769
1,298
96
141
24
8,212
631
93
25
598
9,559 $
303 $
(1,772)
886
(34)
119
(9)
(507)
(40)
127
(18)
888
450 $
(560) $
(112)
(15)
—
—
—
(687)
—
(191)
—
—
(878) $
142 $
67
26
10
—
—
245
11
106
—
—
362 $
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2,769
1,952
2,195
72
260
15
7,263
602
135
7
1,486
9,493
December 31, 2014
Provision
Allocation
Charge-offs
Recoveries
December 31, 2015
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
Unallocated
Total loans
(cid:3)
$
$
(cid:3)
(cid:3)
2,698 $
1,963
1,792
49
54
58
6,614
977
72
59
1,545
9,267 $
(cid:3)
(cid:3)
593 $
1,773
(31)
50
87
(34)
2,438
(1,554)
97
(34)
(947)
— $
(cid:3)
(cid:3)
(490) $
—
(593)
(100)
—
—
(1,183)
(3)
(174)
—
—
(1,360) $
(cid:3)
(cid:3)
83 $
33
130
97
—
—
343
1,211
98
—
—
1,652 $
(cid:3)
(cid:3)
2,884
3,769
1,298
96
141
24
8,212
631
93
25
598
9,559
December 31, 2013
Provision
Allocation
Charge-offs
Recoveries
December 31, 2014
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
Unallocated
Total loans
$
$
3,813 $
1,992
2,163
88
101
71
8,228
1,554
93
67
502
10,444 $
(460) $
322
(372)
(43)
(47)
(13)
(613)
(425)
3
(8)
1,043
— $
(733) $
(446)
—
—
—
—
(1,179)
(1,217)
(134)
—
—
(2,530) $
78 $
95
1
4
—
—
178
1,065
110
—
—
1,353 $
2,698
1,963
1,792
49
54
58
6,614
977
72
59
1,545
9,267
The provision for loan losses on Consolidated Statement of Income (Loss) includes a credit of $284,000 related to the
PCI loans. See Note 4 for more details.
68
The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of
December 31, 2016 and 2015 (dollars in thousands):
Allowance for Loan Losses
Recorded Investment in Loans
December 31, 2016
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
(cid:3)
(cid:3)
Total
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
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
Unallocated
Total loans
$
$
283 $
73
730
—
—
—
1,086
7
37
—
—
1,130 $
2,486 $ 2,769 $
1,879
1,465
72
260
15
6,177
595
98
7
1,486
8,363 $ 9,493 $
1,952
2,195
72
260
15
7,263
602
135
7
1,486
(cid:3)
4,325 $
7,187
5,495
—
—
—
17,007
1,253
281
—
—
18,541 $
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Allowance for Loan Losses
Recorded Investment in Loans
December 31, 2015
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
(cid:3)
(cid:3)
Total
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
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
Unallocated
Total loans
$
$
490 $
64
574
2
—
—
1,130
—
14
—
—
1,144 $
2,394 $
3,705
724
94
141
24
7,082
631
79
25
598
8,415 $
2,884 $
3,769
1,298
96
141
24
8,212
631
93
25
598
9,559 $
(cid:3)
5,964 $
4,702
4,508
13
—
—
15,187
—
79
—
—
15,266 $
Total
(cid:3)
(cid:3)
(cid:3)
203,538 $ 207,863
339,804
332,617
98,282
92,787
7,911
7,911
39,084
39,084
7,185
7,185
700,129
683,122
129,300
128,047
5,627
5,346
1,243
1,243
—
—
817,758 $ 836,299
Total
(cid:3)
(cid:3)
(cid:3)
188,612 $ 194,576
317,955
313,253
67,408
62,900
8,378
8,365
45,389
45,389
6,238
6,238
639,944
624,757
102,507
102,507
4,928
4,849
1,345
1,345
—
—
733,458 $ 748,724
Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:(cid:2)
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 $15.8 million and $13.4 million
at December 31, 2016 and 2015, respectively.
Special Mention - A special mention loan has potential weaknesses that deserve management’s 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 are 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.
69
Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics
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,
2016 and 2015 (dollars in thousands):
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
(cid:3)
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, 2016
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
(cid:3)
(cid:3)
199,973 $
330,851
92,556
7,474
36,474
7,067
674,395
122,129
5,563
1,243
803,330 $
(cid:3)
(cid:3)
4,612 $
3,168
234
437
—
118
8,569
5,879
20
—
14,468 $
3,278 $
5,785
5,492
—
2,610
—
17,165
1,292
44
—
18,501 $
(cid:3)
(cid:3)
(cid:3)
December 31, 2015
(cid:3)
— $ 207,863
— 339,804
98,282
—
7,911
—
39,084
—
7,185
—
— 700,129
— 129,300
5,627
—
1,243
—
— $ 836,299
(cid:3)
(cid:3)
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
182,394 $
306,267
62,391
7,126
45,389
6,113
609,680
98,159
4,593
1,345
713,777 $
6,612 $
8,520
434
1,239
—
125
16,930
4,290
256
—
21,476 $
5,570 $
3,168
4,583
13
—
—
13,334
58
79
—
13,471 $
— $ 194,576
— 317,955
67,408
—
8,378
—
45,389
—
—
6,238
— 639,944
— 102,507
4,928
—
—
1,345
— $ 748,724
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 whether they are
considered troubled debt restructurings (TDRs) under the guidance. The Company had 17 loans for each of the years ended
December 31, 2016 and 2015 that met the definition of a TDR.
During the year ended December 31, 2016, the Company modified four loans that were considered to be TDRs. The
Company extended the terms for all four loans and the interest rate was lowered for three of these loans. The following table
presents information relating to loans modified as TDRs during the year ended December 31, 2016 (dollars in thousands):
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Year ended December 31, 2016
Number of
Contracts
Pre-Modification Outstanding
Recorded Investment
Post-Modification Outstanding
Recorded Investment
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Total real estate loans
Consumer loans
Total loans
1
1
1
3
1
4
$ 81
298
217
596
248
$ 844
$ 93
298
217
608
248
$ 856
70
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 a pre- 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.
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 years ended December 31, 2016, 2015 and 2014.
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, 2016 the Company had 1-4 family mortgages in the amount of $155.3 million pledged as collateral to
the Federal Home Loan Bank for a total borrowing capacity of $142.2 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 (the “PCI” loans). 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 standards, which led the
Company to believe that significant losses were probable given the economic environment at the time.
As of December 31, 2016 and 2015, the outstanding contractual balance of the PCI loans was $81.1 million and $91.3
million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Total real estate loans
Total PCI loans
$ 46,623
649
1,969
2,453
270
51,964
$ 51,964
December 31, 2016
Amount
% of PCI
Loans
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
December 31, 2015
Amount
% of PCI
Loans
(cid:3)
(cid:3)
(cid:3)
(cid:3)
89.72 %
1.25 (cid:3)
3.79 (cid:3)
4.72 (cid:3)
0.52 (cid:3)
100.00 (cid:3)
100.00 %
$ 52,696
850
2,310
2,822
277
58,955
$ 58,955
89.38 %
1.44 (cid:3)
3.92 (cid:3)
4.79 (cid:3)
0.47 (cid:3)
100.00 (cid:3)
100.00 %
There was no activity in the allowance for loan losses on PCI loans for the years ended December 31, 2015 and 2014.
The only activity in the allowance for the year ended December 31, 2016 was a $284,000 credit to the provision for loan losses
on PCI loans, which was the result of an increase in expected cash flows in the Company’s PCI loan portfolio.
The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan
losses at December 31, 2016 and 2015 (dollars in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Total real estate loans
Total PCI loans
December 31, 2016
December 31, 2015
Allowance for
loan losses
Recorded
investment in
loans
Allowance
for loan
losses
Recorded
investment in
loans
$ 200 $ 46,623
649
1,969
2,453
270
51,964 (cid:3)
$ 200 $ 51,964 (cid:3)
—
—
—
—
200
$ 484 $ 52,696
850
2,310
2,822
277
58,955
$ 484 $ 58,955
—
—
—
—
484
71
The change in the accretable yield balance for the years ended December 31, 2016, 2015 and 2014 is as follows (dollars
in thousands):
Balance, January 1, 2014
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2014
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2015
Accretion
Reclassification from nonaccretable yield
Balance, December 31, 2016
$ 51,515
(11,204)
10,771
$ 51,082
(7,811)
5,857
$ 49,128
(6,206)
5,433
$ 48,355
The PCI loans were not classified as nonperforming assets as of December 31, 2016 or 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 Indemnification 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 March 2019 for losses incurred through January 2019, and the
reimbursements for losses on other assets were made quarterly through March 2014. The shared-loss agreements provided for
indemnification from the first 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 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.
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 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 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 charged-off as additional FDIC
indemnification asset amortization expense.
72
The following table presents the balances of the FDIC indemnification asset at December 31, 2015 and 2014 (dollars in
thousands):
Anticipated
Expected Losses
$ 13,514
Estimated Loss
Sharing Value
$ 10,811
34
27
(87)
(1,085)
(118)
(6,707)
5,551
(69)
(868)
(95)
(5,365)
4,441
—
—
34
(131)
(2,920)
(2,534)
$ —
27
(105)
(2,336)
(2,027)
$ —
Amortizable
Premium
(Discount) at
Present Value
$ 14,598
FDIC
Indemnification
Asset Total
$ 25,409
(5,795)
5,365
14,168
(3,104)
(13,091)
2,027
$ —
27
(5,795)
(69)
(868)
(95)
—
18,609
—
(3,104)
(13,091)
27
(105)
(2,336)
—
$ —
January 1, 2014
Increases:
Writedown of OREO property to FMV
Decreases:
Net amortization of premium
Reclassifications to FDIC receivable:
Net loan charge-offs and recoveries
OREO sales
Reimbursements requested from FDIC
Reforecasted Change in Anticipated Expected Losses
December 31, 2014
Increases:
Writedown of OREO property to FMV
Decreases:
Net amortization of premium
Charge-off due to termination of shared-loss agreement
Reclassifications to FDIC receivable:
Net loan charge-offs and recoveries
OREO sales
Reimbursements requested from FDIC
Reforecasted Change in Anticipated Expected Losses
December 31, 2015
Note 6. Premises and Equipment
A summary of the bank premises and equipment is as follows (dollars in thousands): (cid:2)(cid:2)(cid:2)(cid:2)
Land
Land improvements and buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less accumulated depreciation and amortization
Bank premises and equipment, net
2016
2015
$
$
8,035
20,048
762
8,797
892
38,534
(10,177)
28,357
$
$
8,060
19,815
315
8,211
171
36,572
(9,194)
27,378
Depreciation expense was $1.5 million, $1.6 million and $1.6 million for the years ended December 31, 2016, 2015 and
2014, respectively.
Note 7. Other Real Estate Owned
The following table presents the balances of other real estate owned at December 31, 2016 and December 31, 2015
(dollars in thousands):
Residential 1-4 family
Commercial
Construction and land development
Total other real estate owned
December 31, 2016
December 31, 2015
$
$
1,276
643
2,508
4,427
$
$
1,407
634
3,449
5,490
At December 31, 2016, the Company had $2.4 million in residential 1-4 family loans and PCI loans that were in the
process of foreclosure.
73
Note 8. Other Intangibles
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 (TFC), 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 are 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 in 2013.
The Company estimates that it will recognize amortization expense of $898,000 in the year ended December 31, 2017, which
is the final year of amortization.
Other intangible assets are presented in the following table (dollars in thousands):
(cid:3)
Core deposit intangibles
Accumulated amortization
Reduction due to sale of deposits
Balance
Note 9. Deposits
(cid:3)
(cid:3)
(cid:3)
(cid:3)
December 31, 2016
December 31, 2015
$ 20,290
(17,919)
(1,473)
$ 898
$ 20,290
(16,012)
(1,473)
$ 2,805
The following table provides interest bearing deposit information, by type, as of December 31, 2016 and 2015 (dollars in
thousands):
December 31, 2016
December 31, 2015
NOW
MMDA
Savings
Time deposits less than or equal to $250,000
Time deposits over $250,000
Total interest bearing deposits
$
$
137,332
111,346
90,340
440,699
128,690
908,407
$
$
128,761
108,810
84,047
409,085
118,600
849,303
The scheduled maturities of time deposits at December 31, 2016 are as follows (dollars in thousands):
2017
2018
2019
2020
2021
$
$
395,474
90,004
53,536
16,408
13,967
569,389
Brokered deposits totaled $53.4 million and $62.3 million at December 31, 2016 and 2015, respectively.
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
74
securities sold under agreements to repurchase. The following information is provided for short-term borrowings balances,
rates, and maturities (dollars in thousands):
(cid:3)
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
(cid:3)
(cid:3)
(cid:3)
2016
(cid:3)
(cid:3)
As of December 31
(cid:3)
$
$
$
4,714
12,301
1,776
0.88 %
1.10 %
(cid:3)
$
$
$
(cid:3)
2015
18,921
18,921
1,516
0.76 %
1.28 %
Long-term borrowings are obtained through the FHLB of Atlanta. As of December 31, 2016, the Company had residential
1-4 family mortgages in the amount of $155.3 million pledged as collateral to the FHLB for a total borrowing capacity of
$142.2 million. The Company had $11.6 million and $10.7 million in variable LIBOR rate long-term borrowings at December
31, 2016 and 2015, respectively.
On April 23, 2014, the Company repurchased the then outstanding 10,680 shares 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 a six-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% per annum.
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.
In January 2017, the Company paid the then remaining outstanding balance of $1.7 million. There were no prepayment
penalties related to this transaction.
The following information is provided for long-term borrowings balances, rates, and maturities (dollars in thousands):
(cid:3)
(cid:3)
(cid:3)
Long-term:
Federal Home Loan Bank advances
Long-term debt
Total long-term borrowings
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
$
$
(cid:3)
2016
(cid:3)
81,887 (cid:3)
1,670 (cid:3)
83,557 (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
As of December 31
(cid:3)
2015
(cid:3)
(cid:3)
$ 95,656 (cid:3)
5,675 (cid:3)
$ 101,331 (cid:3)
Interest Rates
(cid:3)
(cid:3)
(cid:3)
0.56-1.80% 2017 - 2019
Maturities
4.20 %
2017
(cid:3)
Maturities of long-term debt at December 31, 2016 are as follows (dollars in thousands):
2017
2018
2019
Total
$
$
61,670
10,000
11,887
83,557
The Company had unsecured lines of credit with correspondent banks available for overnight borrowing totaling $45.0
million at December 31, 2016.
75
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, 2016, 2015 and 2014 (dollars in thousands):
December 31, 2016
Unrealized Gain
(Loss) on Securities
Defined Benefit
Pension Plan
Gain (Loss) on
Cash Flow Hedge
Total Other
Comprehensive
(Loss) Income
Beginning balance
$
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive (loss) income
Ending balance
(cid:3)
(cid:3)
$
(cid:3) (cid:3)
(cid:3) (cid:3)
(cid:3)
(cid:3)
443 $
(434)
(419)
(853)
(410) $
(901) $
131
3
134
(767) $
(131) $
85
—
85
(46) $
(589)
(218)
(416)
(634)
(1,223)
(cid:3) (cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3) (cid:3)
December 31, 2015
(cid:3) (cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
Unrealized Gain
(Loss) on Securities
Defined Benefit
Pension Plan
Gain (Loss) on
Cash Flow Hedge
Total Other
Comprehensive
(Loss) Income
Beginning balance
$
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive (loss) income
Ending balance
$
1,452 $
(697)
(312)
(1,009)
443 $
(811)
(93)
3
(90)
(901)
$
$
23 $
(154)
—
(154)
(131) $
664
(944)
(309)
(1,253)
(589)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
(cid:3)
(cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
December 31, 2014
Unrealized Gain
(Loss) on Securities
Defined Benefit
Pension Plan
Gain (Loss) on
Cash Flow Hedge
Total Other
Comprehensive
(Loss) Income
Beginning balance
$
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive (loss) income
Ending balance
$
(3,954) $
6,125
(719)
5,406
1,452 $
(155)
(659)
3
(656)
(811)
$
$
— $
23
—
23
23 $
(4,109)
5,489
(716)
4,773
664
76
The following tables present the effects of reclassifications out of AOCI on line items of consolidated (loss) income for
the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
Details about AOCI
Amount Reclassified from AOCI
Affected Line Item in the
Consolidated Statement of Income
December 31, 2016
December 31, 2015
December 31, 2014
Year ended
Securities available for sale
Unrealized gains on securities
available for sale
Related tax expense
(cid:3)
Defined benefit plan
Amortization of prior service cost
(cid:3)
Related tax benefit
(cid:3)
(cid:3)
Total reclassifications for the period (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
$
(cid:3)
(cid:3)
Note 12. Income Taxes
$
(634)
$
(472)
$
215
(419)
(cid:3)
4
(1)
3
(416)
(cid:3)
(cid:3)
$
(cid:3)
(cid:3)
(cid:3)
160
(312)
(cid:3)
(cid:3) (cid:3) (cid:3)
5
(2)
3
(309) $
(cid:3) (cid:3) (cid:3)
(cid:3)
(1,089)
Gain on securities transactions,
net
370 Income tax expense (benefit)
(719) Net of tax
(cid:3)(cid:3)
4 (cid:3)Salaries and employee benefits
(1) (cid:3)Income tax expense (benefit)
3 (cid:3)Net of tax
(716)
(cid:3)
The tax 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):
(cid:3)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Unrealized loss on available for sale securities
Pension adjustment
Purchase accounting adjustment (1)
Depreciation premises and equipment
OREO
Other
Deferred tax liabilities:
Accrued pension
Purchase accounting adjustment (1)
Unrealized gain on available for sale securities
Depreciation premises and equipment
Other
Net deferred tax asset
(cid:3)
(cid:3)
(cid:3)
2016
(cid:3)
$
$
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
$
3,228
761
211
395
5,730
—
608
392
11,325
367
$
(cid:3)
—
—
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2015
(cid:3)
3,415 $
493
—
464
5,696
—
569
440
11,077 $
(cid:3)
426
—
228
287
18
$
$
959 $
10,118 $
2014
3,315
661
—
417
—
180
667
392
5,632
411
942
747
—
123
2,223
3,409
496
18
881
10,444
$
$
(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 tax positions taken or expected to be taken in its tax 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 tax valuation allowance for the year ended December 31, 2016 in
accordance with FASB ASC 740. Based on its historical levels of taxable income, a three year income projection of taxable
income and 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 is required.
Years 2013 through 2016 are subject to audit by taxing authorities.
77
Allocation of the income tax expense between current and deferred portions is as follows (dollars in thousands):
Current tax provision
Deferred tax expense (benefit)
Income tax expense (benefit)
2016
2015
2014
3,816
—
$
3,450
(6,077)
$
2,768
(40)
3,816
$
(2,627)
$
2,728
$
$
The following is a reconciliation of the expected income tax expense (benefit) with the reported expense for each year:
(cid:3)
Statutory federal income tax rate
(Reduction) Increase in taxes resulting from:
Municipal interest
Bank owned life insurance income
Other, net
Effective tax rate
Note 13. Employee Benefit Plans
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2016
34.0 %
2015
(34.0) %
2014
34.0 %
(5.3)
(1.9)
1.0
27.8 %
(13.6)
(4.9)
1.2
(51.3) %
(3.1)
(3.8)
(0.5)
26.6 %
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 are 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, 2016 and 2015 (dollars in thousands):
Change in Benefit Obligation
Benefit obligation, beginning of year
Interest cost
Actuarial (gain)/loss
Benefits paid
Settlement gain
Benefit obligation, ending
Change in Plan Assets
Fair value of plan assets, beginning of year
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 Loss
Net loss
Prior service cost
Deferred tax
Total amount recognized
78
December 31
2016
2015
4,836
190
29
(1,068)
10
3,997
4,725
258
(1,068)
3,915
(82)
$
$
$
$
5,154
189
(143)
(405)
41
4,836
5,135
(5)
(405)
4,725
(111)
(82)
$
(111)
1,108
54
(395)
767
$
$
1,307
58
(464)
901
$
$
$
$
$
$
$
The accumulated benefit obligation for the defined benefit pension plan at December 31, 2016 and 2015 was $4.0 million
and $4.8 million, respectively.
The following table provides the components of net periodic benefit cost (income) for the plan for the years ended
December 31, 2016, 2015 and 2014 (dollars in thousands):
(cid:3)
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
(cid:3)
(cid:3)
(cid:3)
2016
(cid:3)
2015
(cid:3)
$ 190
(326)
4
253
54
$ 175
$ 189
(353)
5
70
43
$ (46)
Total recognized in net periodic benefit cost
(income) and accumulated other comprehensive
(loss) income
$ (29)
$ 92
2014
$ 223
(396)
4
19
—
$ (150)
$ 842
(cid:3)
(cid:3)
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 to determine obligation
Expected return on plan assets
2016
4.25%
4.00%
7.50%
December 31
2015
4.00%
4.25%
7.50%
2014
5.00 %
4.00 %
7.50 %
Other changes in plan assets and benefit obligations recognized in other comprehensive income during 2016 are as follows
(dollars in thousands):
Net gain
Amortization of prior service cost
Total amount recognized
$
$
(199)
(4)
(203)
The estimated amounts that will amortize from accumulated other comprehensive income into net periodic benefit cost
in 2017 are as follows (dollars in thousands):
Prior service cost
Net loss
Total amount recognized
$
4
47
$ 51
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 are 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 are invested. However,
consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and
79
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, 2016 and 2015 by asset category were as
follows:
Asset Category
Mutual funds — fixed income
Mutual funds — equity
Cash and equivalents
Total
December 31
2016
2015
39.00%
61.00
0.00
100.00%
40.00 %
60.00
0.00
100.00 %
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.
The following table presents the fair value of plan assets as of December 31, 2016 and 2015 (dollars in thousands):
(cid:3)
Cash
Mutual funds:
Fixed income funds
International funds
Large cap funds
Mid cap funds
Small cap funds
Stock fund
(cid:3)
(cid:3)
(cid:3)
Assets measured at Fair Value (Level 1)
December 31, 2016
December 31, 2015
$ —
1,517
568
807
412
185
426
$3,915
$7
1,903
686
1,117
550
219
243
$4,725
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with
a targeted asset allocation of 39% fixed income and 61% 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 careful 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
2017
Expected Benefit Payments
2017
2018
2019
2020
2021
2022-2026
80
$ —
75
95
597
180
74
1,662
401(k) Plan
The 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, 2016, 2015 and 2014 were
$568,000, $584,000 and $475,000, respectively.
Deferred Compensation Agreements
The Company has deferred compensation agreements with certain key employees and the Board of Directors. The
retirement benefits to be provided are fixed based upon the amount of compensation earned and deferred. Deferred
compensation expense amounted to $290,000, $154,000 and $165,000 for the years ended December 31, 2016, 2015 and 2014,
respectively. The associated liabilities related to these agreements were $2.4 million and $1.9 million at December 31, 2016
and 2015, respectively. During 2016, the Company changed the discount rate related to these plans from 6% to 5%. This
resulted in an expense of $134,000 for the year ended December 31, 2016.
Effective June 1, 2016, the Company commenced a non-qualified defined contribution retirement plan for certain key
executive officers. The purpose of the plan is to enhance the retirement benefits that the Company provides to each officer and
to recognize each officer for overall performance through additional incentive-based compensation. For 2016, the planned
contributions were based on the same metrics that the Company used for its annual incentive plan for executive officers. The
metrics were net income, the amount of non-performing assets as a percentage of total assets, a job-related discretionary
component and non-interest-bearing deposit growth, which were assigned weights of 75%, 10%, 10% and 5%,
respectively. Initial contributions are 50% vested as of December 31, 2016 and will be 100% vested as of December 31,
2017. All subsequent contributions will be fully vested when credited. The expense related to this plan was $345,000 for the
year ended December 31, 2016 with an associated liability of the same amount.
Note 14. Stock Option Plans
2009 Stock Option 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 shares 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 participant 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 market value of such shares 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 shares 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 permitted under the participant’s option
agreement. The Plan will expire on June 17, 2019, unless terminated sooner by the Board of Directors.
81
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, 2016, 2015 and 2014:
Expected volatility
Expected dividend
Expected term (years)
Risk free rate
2016
50.0%
—
6.25
1.70%
2015
50.0%
1.0%
6.25
1.67%
2014
50.0%
1.0%
6.25
2.00%
The expected volatility is an estimate of the volatility of the Company’s share price based on historical performance. The
risk free interest rates for periods within the contractual life of the awards are 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 exists. 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 award vested
and became transferable in January 2014, January 2015 and January 2016. The remaining 25% of this award will vest (and will
become transferable) in 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.
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, 2016, 2015 and 2014 is shown in the following table:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
For the Year Ended
Month
March
June
September
December
Value
2016
Shares Issued Fair Market
4.90
5.27
5.44
6.30
7,956
7,400
7,166
6,182
2015
2014
Shares
Issued
Fair Market
Value
Shares
Issued
Fair Market
Value
8,882
8,862
7,722
7,205
4.39
4.40
5.05
5.41
7,375
9,954
8,901
8,697
4.00
4.16
4.38
4.48
82
The Company granted 175,000 options in 2014, 320,000 options in 2015, and 263,000 options in 2016 to employees
which vest ratably over the requisite service period of four years. A summary of options outstanding for the year ended
December 31, 2016, is shown in the following table:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Options
(cid:3)
(cid:3)
Outstanding at beginning of year
Granted
Forfeited
Expired
Exercised
Outstanding at end of year
Options outstanding and exercisable at end of year
Weighted average remaining contractual life for
outstanding and exercisable shares at year end
Number of Shares
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
$ 3.11
5.07
4.20
—
2.31
3.58
2.60
$ 4,161,910
$ 2,561,453
952,500
263,000
(22,750)
—
(57,750)
1,135,000
551,000
68 months
The weighted average fair value per option of options granted during the year was $2.52, $1.97, and $1.73 for the years
ended December 31, 2016, 2015 and 2014, 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, 2016. This amount changes with changes in the market value of the Company’s stock. The Company received
$133,000, $86,000 and $39,000 in cash related to option exercises with a total intrinsic value of $167,000, $93,000 and $74,000
during the years ended December 31, 2016, 2015 and 2014, respectively. A tax benefit of $62,000, $34,000 and $38,000 was
recognized in additional paid-in-capital in connection with the option exercises and issuances of restricted stock during 2016,
2015 and 2014, respectively.
The Company recorded total stock-based compensation expense of $566,000, $467,000 and $332,000 for the years ended
December 31, 2016, 2015 and 2014, respectively. Of the $566,000 in expense that was recorded in 2016, $410,000 related to
employee grants and is classified as salaries and employee benefits expense; $156,000 related to the non-employee director
grants and is classified as other operating expenses. Of the $467,000 in expense that was recorded in 2015, $310,000 related to
employee grants and is classified as salaries and employee benefits expense; $157,000 related to the non-employee director
grants and is classified as other operating expenses. Of the $332,000 in expense that was recorded in 2014, $182,000 related
to employee grants and is classified as salaries and employee benefits expense; $149,000 related to the non-employee director
grants and is classified as other operating expenses.
The following table summarizes non-vested options and restricted stock outstanding at December 31, 2016:
Options
Restricted Stock
Non-vested at beginning of the year
Granted
Vested
Forfeited
Non-vested at end of year
Weighted
Average
Grant-Date
Fair Value
$ 1.66
2.52
1.40
1.92
2.13
Number of Shares
12,500
—
(6,250)
—
6,250
Weighted
Average
Grant-Date
Fair Value
$ 2.86
—
2.86
—
2.86
Number of Shares
546,500
263,000
(202,750)
(22,750)
584,000
83
The unrecognized compensation expense related to non-vested options and restricted stock was $822,000 at December
31, 2016 to be recognized over a weighted average period of 30 months. The total fair market value of shares vested during
the years ended December 31, 2016, 2015 and 2014 was $284,000, $148,000 and $101,000, respectively.
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. The following table presents basic and diluted EPS for the years
ended December 31, 2016, 2015 and 2014 (dollars and shares in thousands, except per share data):
For the year ended December 31, 2016
Basic EPS
Effect of dilutive stock awards
Diluted EPS
For the year ended December 31, 2015
Basic EPS
Effect of dilutive stock awards
Diluted EPS
For the year ended December 31, 2014
Basic EPS
Effect of dilutive stock awards
Diluted EPS
Net Income (Loss)
(Numerator)
Weighted Average
Common Shares
(Denominator)
$ 9,922
—
$ 9,922
21,914
247
22,161
Per Common
Share Amount
$ 0.45
—
$ 0.45
$ (2,497)
21,827
—
$ (2,497)
21,827
—
$ (0.11)
—
$ (0.11)
$ 7,269
—
$ 7,269
21,755
226
21,981
$ 0.33
—
$ 0.33
Antidilutive common shares issuable under awards or options of 953,000 were excluded from the computation of diluted
earnings per common share for the year ended 2015. There were no antidilutive exclusions from the computation of diluted
earnings per common share for the years ended 2016 and 2014, respectively.
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, 2016 and 2015 (dollars in thousands).
Balance, beginning of year
Principal additions
Repayments and reclassifications
Balance, end of year
December 31
$
$
2016
6,727
1,481
(1,684)
6,524
2015
$ 2,081
5,517
(871)
$ 6,727
Indirect loans at December 31, 2016 and 2015 were $6.5 million and $6.7 million, respectively.
The Bank held deposits of related parties in the amount of $2.0 million at December 31, 2016 and 2015.
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
84
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 market offers the most advantageous pricing at the time that pricing is first initially determined 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 standards, 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 $390,000 and $440,000 of cash pledged as collateral as of December 31, 2016 and 2015,
respectively.
Amounts receivable or payable are 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 years ended 2016 and 2015. The fair value of the Company’s
cash flow hedge was an unrealized loss of $70,000 and $199,000 at December 31, 2016 and 2015, respectively, and was
recorded in other liabilities. The loss was recorded as a component of other comprehensive income net of associated tax effects.
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 authorities. 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 are guidelines that exist that guide the bank as to amounts that may be transferred with appropriate
prior approval. As of December 31, 2016, 2015 and 2014, the aggregate amount of funds that could be transferred from the
banking subsidiary to the parent corporation, with prior regulatory approval, totaled $5.7 million, $0 and $1.1 million,
respectively.
Note 19. Concentration of Credit Risk
At December 31, 2016 and 2015, the Bank’s loan portfolio consisted of commercial, real estate and consumer
(installment) loans. Real estate secured loans represented the largest concentration at 84.67% and 86.53% of the loan portfolio
for 2016 and 2015, respectively.
The Bank maintains a portion of its cash balances with several financial institutions located in its market area. Accounts
at each institution are secured by the FDIC up to $250,000. Uninsured balances were $10.8 million and $4.5 million at
December 31, 2016 and 2015, 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.
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
85
instruments. A summary of the contract amounts of the Bank’s exposure to off-balance sheet risk as of December 31, 2016 and
2015, 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, 2016
December 31, 2015
$ 134,517
7,151
$ 141,668
$ 106,099
7,146
$ 113,245
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 varies 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 are
commitments for possible future extensions of credit to existing customers. These lines of credit are 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 conditional 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, tier 1 and common equity 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). Management believes, as of December 31, 2016 and 2015, that the Company and Bank met all capital adequacy
requirements to which they are subject.
As of December 31, 2016, based on regulatory guidelines, the Company believes that the Bank is well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, tier 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).
Required for Capital
Actual
Adequacy Purposes
Required in Order to be
Well Capitalized Under Prompt
Corrective Action
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2016:
Total Capital to risk weighted assets
Company
Bank
$ 128,877 13.16 % $ 78,369
78,355
127,606 13.03 %
8.00 %
8.00 %
NA
97,943
NA
10.00 %
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, 2015:
Total Capital to risk weighted assets
119,527 12.20 %
118,256 12.07 %
58,777
58,766
6.00 %
6.00 %
NA
78,354
NA
8.00 %
115,403 11.78 %
118,256 12.07 %
44,083
44,074
4.50 %
4.50 %
NA
63,663
NA
6.50 %
119,527
118,256
9.60 %
9.50 %
49,823
49,815
4.00 %
4.00 %
NA
62,269
NA
5.00 %
Company
Bank
$ 118,157 13.16 % $ 71,831
71,790
119,683 13.34 %
8.00 %
8.00 %
NA
89,737
NA
10.00 %
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
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 %
109,983 12.26 %
40,405
40,382
4.50 %
4.50 %
NA
58,329
NA
6.50 %
Company
Bank
108,457
109,983
9.38 %
9.55 %
46,241
46,088
4.00 %
4.00 %
NA
57,611
NA
5.00 %
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. At December 31, 2016, the
Company had a capital conservation buffer of 5.02%, well above the 2016 required buffer of 0.625%.
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 are 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 markets.
• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are 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.
87
• Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the
market. 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 a contract-by-contract basis. The Company has not made
any material FASB ASC 825 elections as of December 31, 2016.
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):
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
December 31, 2016
(cid:3)
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
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
Loans held for sale
Total assets at fair value
Cash flow hedge
Total liabilities at fair value
Investment securities available for sale
Total
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
57,976
3,336
122,773
15,503
3,495
13,038
216,121
216,121
(70)
(70)
Total
49,941
742
141,498
14,296
8,496
28,297
243,270
2,101
245,371
(199)
(199)
$
$
$
$
$
$
$
$
11,055
952
2,345
-
-
-
14,352
14,352
-
-
$
$
$
$
46,921
2,384
120,428
15,503
3,495
13,038
201,769
201,769
(70)
(70)
December 31, 2015
Level 1
Level 2
39,748
-
687
-
-
-
40,435
-
40,435
-
-
$
$
$
$
10,193
742
140,811
14,296
8,496
28,297
202,835
2,101
204,936
(199)
(199)
$
$
$
$
$
$
$
$
Level 3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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 are 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 third party vendor to provide fair value data for purposes of determining 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
Standards 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.
88
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 flow 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
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 Nonrecurring 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 tables present assets measured at fair value on a nonrecurring basis for the
years ended December 31, 2016 and 2015 (dollars in thousands):
December 31, 2016
Impaired loans
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Impaired loans
Bank premises held for sale
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Impaired loans
Total
$ 9,536
4,427
$ 13,963
$ —
Total
$ 8,737
110
5,490
$ 14,337
$ —
Level 3
Level 1
Level 2
$ — $ 2,168 $ 7,368
1,019
$ — $ 5,576 $ 8,387
$ — $ — $ —
— 3,408
December 31, 2015
Level 3
Level 1
Level 2
$ — $ 1,982 $ 6,755
110
5,459
$ — $ 2,013 $ 12,324
$ — $ — $ —
—
31
—
—
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, 2016 and December 31, 2015, a majority of total impaired loans were evaluated based on the fair value
of the collateral. The Company frequently obtains appraisals prepared 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. The Company
may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the
Company’s collateral. 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 Level 2.
The Company may also identify collateral deterioration based on current market sales data, including price and absorption,
as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site
inspections by Company personnel. When management determines that the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
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.
89
Bank premises and equipment held for sale
The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology
described in the other real estate owned (OREO) asset section below.
Other real estate owned
OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO property
establishing a new cost basis. Subsequent to the transfer, valuations are periodically performed by management and the assets
are carried at the lower of carrying value or fair value less estimated disposal 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 determines 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 Level 3 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. These tables exclude financial instruments for
which the carrying value approximates fair value (dollars 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
Financial liabilities:
Interest bearing deposits
Long-term borrowings
Carrying Value
Estimated Fair
Value
Level 1
Level 2
Level 3
December 31, 2016
$ 46,608
826,806
51,764
$ 46,858
829,349
57,100
$ 1,093
—
—
$ 45,765
821,981
—
$ —
7,368
57,100
908,407
87,681
909,627
87,611
—
—
909,627
87,611
—
—
Carrying Value
Estimated Fair
Value
Level 1
Level 2
Level 3
December 31, 2015
$ 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
—
—
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, 2016. The 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 maximize 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.
90
Financial Assets
Cash and cash equivalents
The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair
value (Level 1).
Securities held to maturity
For securities held to maturity, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).
Restricted securities
The carrying 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 (Level 2).
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar 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 similar 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 market rates for
new originations of comparable 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.
Accrued interest receivable
The carrying amounts of accrued interest receivable approximate fair value (Level 2).
Financial Liabilities
Noninterest bearing deposits
The carrying amount of noninterest bearing deposits approximates fair value (Level 2).
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 (Level 2).
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 similar types of borrowing
arrangements.
Accrued interest payable
The carrying amounts of accrued interest payable approximate fair value (Level 2).
Off-balance sheet financial instruments
The fair value of commitments to extend credit is estimated using the fees currently charged 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 are drawn upon. It is management’s opinion
that the fair value of these commitments would approximate their carrying value, if drawn upon.
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) are based on an expectation of future interest rates (forward curves) derived from observable market
interest rate curves.
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 are 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 are 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.
Note 23. Trust 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 a LIBOR-indexed floating rate of interest. The average interest rate at December 31,
2016, 2015 and 2014 was 3.68%, 3.28% and 3.24%, respectively. The securities have a mandatory redemption date of
December 12, 2033 and are 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 determination 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, 2016, all trust preferred notes were included in tier 1 capital.
The 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 deferral 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, some with renewal options, as of December 31, 2016 (dollars in thousands):
$
2017
2018
2019
2020
2021
Thereafter
Total of future payments
$
1,150
1,242
1,177
1,155
839
4,572
10,135
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $1.1 million, $790,000 and $783,000,
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
(dollars 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
(cid:3)
2016
$ 587
647
562
370
499
442
536
2,380
$ 6,023
(cid:3)
Year Ended
2015
$ 574
714
446
398
651
745
532
2,407
$ 6,467
2014
$ 544
739
449
567
475
635
388
2,550
$ 6,347
93
Note 26. Parent Corporation Only Financial Statements
PARENT COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 2016 and 2015
(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 par value;
21,959,648 and 21,866,944 shares issued and outstanding, respectively)
Additional paid in capital
Retained deficit
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
2016
2015
$
$
$
2,521
443
117,389
120,353
23
4,124
1,670
5,817
220
146,667
(31,128)
(1,223)
114,536
120,353
$
$
3,680
518
110,135
114,333
47
4,124
5,675
9,846
219
145,907
(41,050)
(589)
104,487
114,333
$
$
$
$
$
PARENT COMPANY
STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014
(dollars in thousands)
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 undistributed income (loss) of subsidiaries
Net income (loss) before income taxes
Income tax benefit
Net income (loss)
2016
2015
2014
$
$ 2,500
5
2,505
— $ 8,250
4
4
8,254
4
366
179
19
—
62
76
702
461
175
13
—
61
80
790
423
164
7
15
121
84
814
7,887
9,690
232
$ 9,922
(1,975)
(2,761)
264
$ (2,497)
(198)
7,242
274
$ 7,516
Comprehensive income (loss)
$ 9,288
$ (3,750)
$ 12,289
94
PARENT COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014
(dollars in thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
$ 9,922
$ (2,497) $
7,516
2016
2015
(cid:3)
2014
Stock-based compensation expense
Undistributed equity in income (loss) of subsidiary
Decrease (increase) in other assets
(Decrease) increase in other liabilities, net
566
(7,887)
135
(23)
467
1,975
(231)
(25)
332
198
1,459
32
Net cash and cash equivalents provided by (used in) operating activities
2,713
(311)
9,575
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)
—
—
133
—
(4,005)
—
—
86
10,680
(1,000)
(11,460)
(247)
39
Net cash and cash equivalents used in financing activities
(3,872)
(3,919)
(1,988)
(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
(1,159)
3,680
$ 2,521
(4,230)
7,910
$ 3,680
$
7,587
323
7,910
Note 27. Subsequent Events
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 items to be disclosed.
Note 28. Preferred Stock
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 shares 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.
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 April 23, 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). 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
par 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 are no other investments from the Company's participation in TARP that remain outstanding.
95
Note 29. Quarterly Data (unaudited)
2016
(cid:3)
(cid:3)
2015
(dollars in thousands)
Interest and dividend income
Interest expense
First
Second
(cid:3)
$ 12,038 $ 12,133 $ 12,407 $ 12,717 (cid:3) $ 11,650 $ 12,333 $ 11,723 $ 11,846
1,884
1,865 1,870
1,900
1,925
1,878
1,904
Second
Fourth
Fourth
Third
Third
First
2,091 (cid:3)
Net interest income
Provision for loan losses
10,113
—
10,233
200
10,503
250
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
10,113
1,321
8,031
10,033 10,253
1,345
8,278
1,395
8,229
Income (loss) before income
Income tax expense (benefit)
3,403 3,199
881
983
3,320
862
10,626 (cid:3)
(284) (cid:3)
(cid:3)
9,785 10,463
—
—
9,845
—
9,962
—
10,910 (cid:3)
1,118 (cid:3)
8,212 (cid:3)
(cid:3)
3,816 (cid:3)
1,090 (cid:3)
(cid:3)
9,785 10,463
1,397 1,206
9,519 9,443
9,845
1,253
23,029
1,663
351
2,226
533
(11,931)
(4,215)
9,962
1,225
8,269
2,918
704
Net income (loss)
$ 2,420 $ 2,318 $
2,458 $ 2,726 (cid:3) $ 1,312
$ 1,693 $ (7,716) $ 2,214
Net income (loss) per common
share, basic
Net income (loss) per common
share, diluted
$
$
0.11 $
0.11 $
0.11 $
0.12 (cid:3)
$
0.06
$
0.08 $
(0.35) $
0.10
0.11 $
0.11 $
0.11 $
0.12 (cid:3)
$
0.06
$
0.08 $
(0.35) $
0.10
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 Securities 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 establishing 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 preparation of the Company’s
financial statements for external purposes in accordance with generally accepted accounting principles.
96
As of December 31, 2016, 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 —
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, 2016, 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, 2016, has issued an attestation report on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2016. The report is included in Item 8, “Financial Statements and
Supplementary Data”, above under the heading “Report of Independent Registered Public Accounting Firm.”
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 2016 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
2017 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
2017 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
2017 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year 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
2017 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year 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
2017 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.
97
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are 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 46 of this Form 10-K.
2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
Description
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)
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)
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)
Term Loan Agreement, dated as of April 22, 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 April 28, 2014 (File No. 001-32590)
Letter Amendment to Term Loan Agreement, dated December 28, 2015, between Community Bankers Trust
Corporation as Borrower and SunTrust Bank as Lender and Administrative Agent*
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)
Community Bankers Trust Corporation 2009 Stock Incentive Plan, incorporated by reference to the Company’s
Current Report on Form 8-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 March 30, 2012 (File
No. 001-32590)
98
No.
2.1
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
14.1
21.1
23.1
23.2
31.1
31.2
32.1
101
Form of Performance Driven Retirement Agreement (Rex L. Smith, III, Bruce E. Thomas, Jeff R. Cantrell, John
M. Oakey, III and Patricia M. Davis), incorporated by reference to the Company’s Current Report on Form 8-K
filed on July 7, 2016 (File No. 001-32590)
Form of Change in Control Employment Agreement (Rex L. Smith, III, Bruce E. Thomas, Jeff R. Cantrell, John
M. Oakey, III and Patricia M. Davis), incorporated by reference to the Company’s Current Report on Form 8-K
filed on October 25, 2016 (File No. 001-32590)
Code of Business Conduct and Ethics (amended as of November 18, 2016), incorporated by reference to the
Company’s Current Report on Form 8-K filed on November 25, 2016 (File No. 001-32590)
Subsidiaries of Community Bankers Trust Corporation*
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*
Section 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, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statement
of Comprehensive Income (Loss), (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
ITEM 16. FORM 10-K SUMMARY
Not applicable.
99
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 16, 2017
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
Title
Date
/s/ Rex L. Smith, III
Rex L. Smith, III
/s/ Bruce E. Thomas
Bruce E. Thomas
/s/ Laureen D. Trice
Laureen D. Trice
/s/ John C. Watkins
John C. Watkins
/s/ Gerald F. Barber
Gerald F. Barber
/s/ Richard F. Bozard
Richard F. Bozard
/s/ P. Emerson Hughes, Jr.
P. Emerson Hughes, Jr.
/s/ Troy A. Peery, Jr.
Troy A. Peery, Jr.
/s/ Eugene S. Putnam, Jr.
Eugene S. Putnam, Jr.
/s/ S. Waite Rawls III
S. Waite Rawls III
/s/ Robin Traywick Williams
Robin Traywick Williams
President and Chief Executive Officer
and Director
(principal executive officer)
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Senior Vice President
and Controller
(principal accounting officer)
March 16, 2017
March 16, 2017
March 16, 2017
Chairman of the Board
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
Director
Director
Director
Director
Director
Director
Director
100
Exhibit 31.1
I, Rex L. Smith, III, certify that:
CERTIFICATIONS
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 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 registrant’s 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(f) and 15d-15(f)) 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
registrant’s 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 board of directors (or persons
performing 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 16, 2017
/s/ Rex L. Smith, III
Rex L. Smith, III
President and Chief Executive Officer
Exhibit 31.2
I, Bruce E. Thomas, certify that:
CERTIFICATIONS
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 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 registrant’s 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(f) and 15d-15(f)) 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
registrant’s 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 board of directors (or persons
performing 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 16, 2017
/s/ Bruce E. Thomas
Bruce E. Thomas
Executive Vice President and Chief Financial Officer
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 year ended December 31, 2016 (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 16, 2017
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VIRGINIA
MARYLAND
BOARD OF DIRECTORS
Bon Air
(804) 335-1127
Burgess
(804) 453-4268
Callao
(804) 529-5546
Centerville
(804) 784-4000
Cumberland
(804) 482-8111
Deep Run at Mayland
(804) 934-9999
Fairfax
(703) 385-4596
Flat Rock
(804) 598-6839
Goochland Courthouse
(804) 556-6722
King William
(804) 769-2265
Louisa
(540) 967-5900
Lynchburg
Opening in June, 2017
Lynchburg Loan Production Office
(434) 485-0090
Mechanicsville
(804) 730-3222
Prince Street
(804) 443-8510
Tappahannock
(804) 443-8500
Virginia Center
(804) 262-3991
West Point
(804) 843-4347
West Broad Marketplace
Opening in May, 2017
Winterfield
(804) 419-4160
ON THE COVER:
Essex Bank’s new West Broad Marketplace branch
office under construction in the fast-growing Short
Pump area of metropolitan Richmond, Virginia.
Below is the architect’s rendering of the finished
building, which will open in May, 2017.
Annapolis
(443) 596-7515
Arnold
(410) 757-7777
Bowie
(301) 850-5071
Crofton
(410) 721-8444
Rockville
(301) 294-9350
Rosedale
(410) 574-3303
Gerald F. Barber
Consultant
Retired Transaction Services Partner, PricewaterhouseCoopers LLP
Richard F. Bozard
Retired Vice President and Treasurer, Owens & Minor, Inc.
William E. Hardy
Founding Partner and President,
Harris, Hardy & Johnstone, P.C.
P. Emerson Hughes, Jr.
Chairman, Holiday Barn Pet Resorts
Troy A. Peery, Jr.
President, Peery Enterprises
Eugene S. Putnam, Jr.
Past President and Chief Financial Officer,
Universal Technical Institute, Inc.
S. Waite Rawls III
President, American Civil War Museum Foundation
Rex L. Smith, III
President and Chief Executive Officer,
Community Bankers Trust Corporation and Essex Bank
John C. Watkins
Manager and Development Director, Watkins Land, LLC
Robin Traywick Williams
Writer
Customer Service Center
(800) 443-5524
www.EssexBank.com
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.continentalstock.com
Investor Relations
Corporate Secretary
Community Bankers Trust Corporation
9954 Mayland Drive, Suite 2100
Richmond, VA 23233
(804) 934-9999 fax (804) 934-9299
Community Bankers Trust Corporation
2016 Annual Report
Growing to Win.
9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233(804) 934-9999www.cbtrustcorp.comNASDAQ Capital Market: ESXBEssexBank.com2016 ANNUAL REPORT COMMUNITY BANKERS TRUST CORPORATION ESSEX BANK