2019 Annual Report9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233(804) 934-9999www.cbtrustcorp.comNASDAQ Capital Market: ESXBEssexBank.com BOARD OF DIRECTORS
Gerald F. Barber
Consultant
Richard F. Bozard
Retired Transaction Services Partner, PricewaterhouseCoopers LLP
Retired Vice President and Treasurer, Owens & Minor, Inc.
Hugh M. Fain, III
President and Director, Spotts Fain PC
William E. Hardy
Founding Partner and Chief Executive Officer,
Harris, Hardy & Johnstone, P.C.
Gail L. Letts
President, Letts Consult, LLC
Eugene S. Putnam, Jr.
Chief Financial Officer,
EVO Transportation & Energy Services, Inc.
Retired President, American Civil War Museum Foundation
S. Waite Rawls III
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
Oliver L. Way
Retired Regional President, Fulton Bank, N.A.
Robin Traywick Williams
Writer
VIRGINIA
Bon Air
(804) 335-1127
Burgess
(804) 453-4268
Callao
(804) 529-5546
Centerville
(804) 784-4000
King William
(804) 769-2265
Louisa
(540) 967-5900
Tappahannock—Dillard
(804) 443-8500
Virginia Center
(804) 262-3991
Lynchburg—Loan Production Office
(434) 485-0090
West Point
(804) 843-4347
Lynchburg—Old Forest Road
(434) 385-1650
West Broad Marketplace
(804) 729-6844
Deep Run at Mayland
(804) 419-4329
Lynchburg—Timberlake
(434) 237-1323
Winterfield
(804) 419-4160
Flat Rock
(804) 598-6839
Mechanicsville
(804) 730-3222
Goochland Courthouse
(804) 556-6722
Midlothian—Stonehenge
(804) 476-3043
MARYLAND
Annapolis
(443) 569-7515
Bowie
(301) 850-5071
Crofton
(410) 721-7330
Edgewater
(410) 757-7777
Rockville
(301) 294-9350
Rosedale
(410) 574-3303
Timonium—Loan Production Office
(410) 574-3304
Customer Service Center
(800) 443-5524
www.EssexBank.com
Stock Transfer Agent
Continental Stock Transfer & Trust Company
Investor Relations
Corporate Secretary
1 State Street Plaza, New York, NY 10004
(212) 509-4000, extension 536
(212) 509-5150 fax
www.continentalstock.com
Community Bankers Trust Corporation
9954 Mayland Drive, Suite 2100
Richmond, VA 23233
(804) 934-9999
(804) 934-9299 fax
As we move forward,
our associates will
renew their efforts
to grow our business
through superior
The year 2019 was one of many positives for the Company, including another year of
our increasing shareholder value, and the information in this Annual Report tells that
story through all of our financial metrics and results. However, it is hard to look back
with what we are facing this spring. While the future is uncertain in different ways, our
goal is to protect the health and safety of our staff and our customers, and to continue
service. We believe that
to build the Company as best we can.
together we will get
through this difficult
time with more support
than ever.
This management team came into office at the depths of the recession from
2009 to 2011. We managed through that crisis and built tremendous value for the
shareholders. We will capitalize on that experience as we work through any issues
that come from the COVID-19 pandemic. The balance sheet, specifically our capital
position, remains strong, and we will continue our efforts to preserve it.
We are working hard with our regulators and government agencies to support our
customers and communities in many ways. Our well-designed business continuity
plan has allowed us to continue to operate and serve our customers. As we move
forward, our associates will renew their efforts to grow our business through superior
service. I am proud of what they are accomplishing and how they continue to support
each other and our customers. We believe that together we will get through this
difficult time with more support than ever.
We hope that you our shareholders are faring well and are following public health
advisories and recommendations from local, state and federal agencies. We will
continue to update you throughout the year as we navigate to better times. Thank
you for your ongoing support, and stay safe.
Sincerely,
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2019
or
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
Trading Symbol
ESXB
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 No
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 No
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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
No
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. $182,692,064
On February 29, 2020, there were 22,426,621 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
2020 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
TABLE OF CONTENTS
FORM 10-K
December 31, 2019
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
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 24 full-service
offices in Virginia and Maryland. The Bank also operates two loan production offices in Virginia.
The Bank was established in 1926. The Bank engages in a general commercial banking business and provides a
wide range of financial services primarily to individuals, small businesses and larger commercial companies, 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 cash
management services.
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 the Bank’s ownership interest in Bankers Insurance, LLC, an
independent insurance agency.
The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.
STRATEGY
The Company operates in some of the strongest growth markets in Virginia and Maryland. Its operating strategy
has been to provide the products and services of the larger financial institutions, but delivered with the individual service
focus of a small community bank. This strategy has allowed the Company to have organic growth in its core markets.
The Company’s markets are geographically diverse enough to spread economic risk throughout a number of
different customer bases. Operating under the individual community delivery philosophy, the Company seeks to
enhance customer relationships through superior products delivered with extraordinary service, while maintaining a
prudent approach to credit quality and risk controls. The Company’s associates are the most important element in its
strategy for success, and therefore there is significant focus on training and building a team-oriented environment. In a
constantly changing world, competition remains intense among community banks. One of the features that sets the
Company apart from other organizations is the ability and desire to give superior personal service to customers.
The Company continues to expand on its internal “Growing to Win” campaign and engage its associates to
determine and reflect on the core values that the Company wants to deliver to associates, customers and shareholders.
The Company’s mission statement is “To provide financial inspiration through intriguingly unique experiences that
educate and empower action”. What makes the Company intriguingly unique is the consistent delivery of core values to
the customers and the communities of which it is a part. The Company believes that this strategy not only gives a
competitive advantage over larger banks, but also over web-based financial technology companies.
Building a strong and cohesive culture for the Company is a primary objective of management. The Company’s
strategic focus on offering a broad array of products delivered with individual service has resulted in expanded market
presence, earnings growth and increased value for shareholders. Since this strategy has been historically successful,
management believes that it will continue to provide solid results. Additionally, the Company has been focused on
controlling risks and allowing growth in a safe and sound manner. The Company continues to build the capital strength
and growth capacities to execute its strategies to create superior 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 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
3
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 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.
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.
Many 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 such as financial technology companies, 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, financial technology 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.
4
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.
EMPLOYEES
As of December 31, 2019, the Company had 243 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’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 website is
www.cbtrustcorp.com, and the Bank’s website is www.essexbank.com.
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 Company 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
Bank holding companies, banks and their affiliates are extensively regulated under both federal and state law. The
following summary 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. This summary is not complete, and we refer you to the particular statutory or regulatory provisions or
proposals for more information
The Company
As a bank holding company, we are subject to the Bank Holding Company Act of 1956, as amended (the
“BHCA”), and regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal
Reserve”). Under the BHCA, the Federal Reserve has the power to order any bank holding company or its subsidiaries
to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has
reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial
soundness, safety or stability of any bank subsidiary of the bank holding company. The Federal Reserve and the Federal
Deposit Insurance Corporation (the “FDIC”) have adopted guidelines and released interpretative materials that establish
operational and managerial standards to promote the safe and sound operation of banks and bank holding
companies. These standards relate to the institution’s key operating functions, including but not limited to capital
management, internal controls, internal audit systems, information systems, data and cybersecurity, loan documentation,
credit underwriting, interest rate exposure and risk management, vendor management, executive management and its
compensation, corporate governance, asset growth, asset quality, earnings, liquidity and risk management.
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 non-bank acquisition, merger or consolidation, or the
establishment of any interstate de novo branches, proposed by a bank holding company.
5
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 is also subject to regulation and supervision by the Bureau of Financial Institutions of the Virginia
State Corporation Commission (the “Bureau”) under the financial institution holding company laws of Virginia.
The Bank
The Bank is subject to supervision, regulation and examination by the Bureau and its primary federal regulator, the
FDIC. The various laws and regulations issued and administered by the regulatory agencies affect corporate practices,
such as the payment of dividends, the incurrence of debt and the acquisition of financial institutions and other
companies, and affect business practices and operations, such as the payment of interest on deposits, the charging of
interest on loans, the types of business conducted, the products and terms offered to customers and the location of
offices. Prior approval of the applicable primary federal regulator and the Bureau is required for a Virginia chartered
bank or bank holding company to merge with another bank or bank holding company, to purchase the assets or assume
the deposits of another bank or bank holding company, or to acquire control of another bank or bank holding company.
The Dodd-Frank Act and the EGRRCPA
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has
significantly restructured the financial regulatory regime in the United States and has had a broad impact on the financial
services industry.
The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including
changes that have significantly affected the business of all bank holding companies and banks, including the Company
and the Bank. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank
Act's mandates are discussed further below. In May 2018, the Economic Growth, Regulatory Relief and Consumer
Protection Act (the “EGRRCPA”) was enacted to reduce the regulatory burden on certain banking organizations,
including community banks, by modifying or eliminating certain federal regulatory requirements. While the EGRRCPA
maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory
framework for small depository institutions with assets of less than $10 billion as well as for larger banks with assets
above $50 billion. In addition, the EGRRCPA included regulatory relief for community banks regarding regulatory
examination cycles, call reports, application of the Volcker Rule (proprietary trading prohibitions), mortgage disclosures,
qualified mortgages, and risk weights for certain high-risk commercial real estate loans. However, federal banking
regulators retain broad discretion to impose additional regulatory requirements on banking organizations based on safety
and soundness and U.S. financial system stability considerations.
The Company continues to experience ongoing regulatory reform. These regulatory changes could have a
significant effect on how the Company conducts its business. The specific implications of the Dodd-Frank Act, the
EGRRCPA, and other potential regulatory reforms cannot yet be fully predicted and will depend to a large extent on the
specific regulations that are to be adopted in the future. Certain aspects of the Dodd-Frank Act and the EGRRCPA are
discussed in more detail below.
6
Capital Requirements
Basel III Capital Framework. The Federal Reserve and the FDIC have adopted rules to implement the Basel III
capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-
weighted assets and risk-based capital measurements (collectively, the “Basel III Final Rules”) that apply to banking
institutions they supervise. For the purposes of these capital rules, (i) common equity tier 1 capital (“CET1”) consists
principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1
plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust
preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt
and preferred stock, and limited amounts of an institution’s allowance for loan losses. Each regulatory capital
classification is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules. The Basel III
Final Rules also establish risk weightings that are applied to many classes of assets held by community banks,
importantly including applying higher risk weightings to certain commercial real estate loans.
The Basel III Final Rules and minimum capital ratios required to be maintained by banks were effective January 1,
2015. The Basel III Final Rules also include a requirement that banks maintain additional capital (the “capital
conservation buffer”), which was phased in beginning January 1, 2016 and was fully phased in effective January 1,
2019. The Basel III Final Rules and fully phased in capital conservation buffer require banks to maintain (i) a minimum
ratio of CET1 to risk-weighted assets of at least 4.5 percent, plus a 2.5 percent capital conservation buffer (which is
added to the minimum CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7
percent), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the capital
conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5 percent), (iii) a minimum ratio of total
(that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0 percent, plus the capital conservation buffer
(effectively resulting in a required total capital ratio of 10.5 percent) and (iv) a minimum leverage ratio of 4 percent,
calculated as the ratio of Tier 1 capital to average total assets, subject to certain adjustments and limitations.
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily to
CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital
rules. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant
investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category
exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1.
Community Bank Leverage Ratio. As a result of the EGRRCPA, the federal banking agencies were required to
develop a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital to average total consolidated
assets) for banking organizations with assets of less than $10 billion, such as the Bank. On October 29, 2019, the federal
banking agencies issued a final rule that implements the Community Bank Leverage Ratio Framework (the
“CBLRF”). To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited
amounts of off-balance sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. A
bank that elects the CBLRF and has a leverage ratio greater than 9 percent will be considered to be in compliance with
Basel III capital requirements and exempt from the complex Basel III calculations and will also be deemed “well
capitalized” under Prompt Corrective Action regulations, discussed below. A bank that falls out of compliance with the
CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains
above 8 percent (a bank will be deemed “well capitalized” during the grace period). The CBLRF will be available for
banking organizations to use as of March 31, 2020 (with the flexibility for banking organizations to subsequently opt
into or out of the CBLRF, as applicable).
Small Bank Holding Company. The EGRRCPA also expanded the category of bank holding companies that may
rely on the Federal Reserve’s Small Bank Holding Company Policy Statement by raising the maximum amount of
assets a qualifying bank holding company may have from $1 billion to $3 billion. In addition to meeting the asset
threshold, a bank holding company must not engage in significant nonbanking activities, not conduct significant off-
balance sheet activities, and not have a material amount of debt or equity securities outstanding and registered with the
SEC (subject to certain exceptions). The Federal Reserve may, in its discretion, exclude any bank holding company
from the application of the Small Bank Holding Company Policy Statement if such action is warranted for supervisory
purposes.
In August 2018, the Federal Reserve issued an interim final rule to apply the Small Bank Holding Company
Policy Statement to bank holding companies with consolidated total assets of less than $3 billion. The policy statement,
7
which, among other things, exempts certain bank holding companies from minimum consolidated regulatory capital
ratios that apply to other bank holding companies. As a result of the interim final rule, which was effective August 30,
2018, the Company expects that it will be treated as a small bank holding company and will not be subject to regulatory
capital requirements. The comment period on the interim final rule closed on October 29, 2018 and, to date, the Federal
Reserve has not issued a final rule to replace the interim final rule. The Bank remains subject to the regulatory capital
requirements described above.
Dividends
The Company is a legal entity that is separate and distinct from the Bank. The Company’s ability to distribute cash
dividends will depend primarily on the ability of its banking subsidiary to pay dividends to it. The Bank is subject to
legal limitations on the amount of dividends that it is permitted to pay under Section 5199(b) of the Revised Statues (12
U.S.C. 60), and the approval of the Federal Reserve would be required if the total of all dividends declared by a state
member bank in any calendar year shall exceed the total of its net profits of that year combined with its retained net
profits of the preceding two years. Additionally, the Bank is further restricted by Regulation H, Section 208.5,
Dividends and Other Distributions, which requires pre-approval of dividends that exceed undivided profits.
Furthermore, neither the Company nor the Bank may declare or pay a cash dividend on any of its capital stock if it is
insolvent or if the payment of the dividend would render the entity insolvent or unable to pay its obligations as they
become due in the ordinary course of business.
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. 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 as an insured institution, 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 calculated based on average
consolidated total assets minus average tangible equity (defined as Tier 1 capital). As required by the Dodd-Frank Act,
the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more
detail below) of 2 percent for the DIF 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 is based on a statistical analysis of
financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s
weighted average CAMELS component rating, and is subject to further adjustments including those related to levels of
unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets). At December 31,
2019, total base assessment rates for institutions that have been insured for at least five years range from 1.5 to 30 basis
points applying to banks with less than $10 billion in assets.
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.” The FDIA requires that the FDIC consider the appropriate level
for the designated reserve ratio on at least an annual basis. As of December 31, 2019, the designated reserve ratio was
2.00 percent and the minimum designated reserve ratio was 1.35 percent.
Banks with less than $10 billion in total consolidated assets are eligible for credits to offset the portion of their
assessments that helped to raise the reserve ratio to 1.35 percent. The FDIC automatically applies these credits to reduce
an eligible bank’s regular DIF assessment up to the entire amount of the assessment. The FDIC will remit any such
8
remaining credits in a lump sum to the appropriate bank following application to the bank’s regular DIF assessment for
four quarterly assessment periods. The Bank was awarded credits of $365,000, of which $207,000 was used to offset its
DIF assessment in the third and fourth quarters of 2019. The Company expects that the remainder of the credits will be
utilized to offset the Bank’s DIF assessment during 2020.
Consumer Laws and Regulations
The Bank is subject to certain consumer laws and regulations that are designed to protect consumers in transactions
with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth-in-Lending Act,
the Truth-in-Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act, and regulations issued under such acts, among
others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits, making loans to or engaging in other types of transactions
with such customers.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the Consumer
Financial Protection Bureau (the “CFPB”), and giving it responsibility for implementing, examining, and enforcing
compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the
federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in
those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv)
non-depository companies that offer one or more consumer financial products or services.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks,
including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB can
issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also
institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or
injunction.
Community Reinvestment Act
The Bank is subject to the provisions of the Community Reinvestment Act (the “CRA”), which imposes a
continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of
entire communities where the bank accepts deposits, including low- and moderate-income neighborhoods. The Federal
Reserve’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA
rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming or remaining a
financial holding company. Federal CRA regulations require, among other things, that evidence of discrimination against
applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. The Bank
has a rating of “Satisfactory” in its most recent CRA evaluation.
Cybersecurity
The federal banking agencies have adopted guidelines for establishing information security standards and
cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors.
These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related
to information technology and the use of third parties in the provision of financial products and services. The federal
banking agencies expect financial institutions to establish lines of defense and ensure that their risk management
processes also address the risk posed by compromised customer credentials, and also expect financial institutions to
maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the
institution’s operations after a cyber-attack. If the Company or the Bank fails to meet the expectations set forth in this
regulatory guidance, the Company or the Bank could be subject to various regulatory actions and any remediation efforts
may require significant resources of the Company or the Bank. In addition, all federal and state bank regulatory
agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.
In October 2016, the federal banking agencies issued proposed rules on enhanced cybersecurity risk-management
and resilience standards that would apply to very large financial institutions and to services provided by third parties to
these institutions. The comment period for these proposed rules has closed and a final rule has not been published.
Although the proposed rules would apply only to bank holding companies and banks with $50 billion or more in total
9
consolidated assets, these rules could influence the federal banking agencies’ expectations and supervisory requirements
for information security standards and cybersecurity programs of smaller financial institutions, such as the Company and
the Bank.
Incentive Compensation
The federal banking agencies have issued regulatory guidance 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 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.” The findings will be included in reports of examination, and deficiencies will be incorporated
into the organization’s supervisory ratings. 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.
In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions
(including bank holding companies and banks) from establishing or maintaining incentive-based compensation
arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive
officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead
to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing
whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate
risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that
incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to
appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on
the boards of directors of covered financial institutions and impose additional record-keeping requirements. The
comment period for these proposed rules has closed and a final rule has not yet been published.
Prompt Corrective Action
The federal banking agencies have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in
question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.” These terms are defined under uniform regulations issued by each of the federal banking
agencies regulating these institutions. An insured depository institution which is less than adequately capitalized must
adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly restricted in
the scope of its permissible activities. As of December 31, 2019, the Bank was considered “well capitalized.”
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.
10
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, financial technology 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 deposit pricing. A significant decline in general economic conditions caused
by inflation, recession, unemployment, pandemic conditions, public health emergencies, 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
11
plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our branching
strategy.
Our liquidity needs could adversely affect results of operations and financial condition.
Our primary sources of funds 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.
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.
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
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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.
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.
In addition, the measure of our allowance for loan losses is dependent on the adoption and interpretation of
accounting standards. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments,” Under this ASU, the current incurred loss credit
impairment methodology will be replaced with the CECL model, a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
While this ASU is not effective for us until the fiscal year beginning after December 15, 2022, we expect that the
implementation of the CECL model will change our current method of setting an allowance and may result in material
changes in our accounting for credit losses on financial instruments. The CECL model may create more volatility in our
level of allowance for loan losses. If we are required to materially increase this level for any reason, such increase could
adversely affect our business, financial condition, and results of operations.
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 81.35% 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
13
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.
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 current
presidential and congressional administrations. The President 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 current 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 were phased-in over a four-year period until they were 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.
14
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.
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.
Major U.S. retailers continue to experience data system incursions resulting in the thefts of credit and debit
card information, online account information, and other financial data impacting 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 losses 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, 2019, we may need to raise additional capital in the future if we unexpectedly 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
15
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 $187.0 million at December 31, 2019. 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 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 (81.35% at December 31, 2019).
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.
16
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 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.
17
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 a 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,
2019, we recorded net deferred income tax assets of $4.3 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. The
Company does not currently have a valuation allowance; however, due to the uncertainty of estimates and projections, it
is possible that we will be required to establish a valuation allowance in future reporting periods.
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 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
18
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.
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.
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.
19
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
Deep Run at Mayland — 9954 Mayland Drive, Richmond, VA 23233
Flat Rock — 2320 Anderson Highway, Powhatan, VA 23139
Goochland Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063
King William — 4935 Richmond-Tappahannock Highway, Aylett, VA 23009
Louisa — 217 East Main Street, Louisa, VA 23093
Lynchburg–Old Forest Road — 3638 Old Forest Road, Lynchburg, VA 24501
Lynchburg–Timberlake — 21437 Timberlake Road, Lynchburg, VA 24502
Mechanicsville — 6315 Mechanicsville Turnpike, Mechanicsville, VA 23111
Midlothian–Stonehenge — 12640 Stone Village Way, Midlothian, VA 23113
Tappahannock–Dillard — 1325 Tappahannock Boulevard, Tappahannock, VA 22560
Virginia Center — 9951 Brook Road, Glen Allen, VA 23060
West Broad Marketplace — 12254 West Broad Marketplace, Henrico, VA 23233
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
Bowie — 6143 High Bridge Road, Bowie, MD 20720
Crofton — 2120 Baldwin Avenue, Crofton, MD 21114
Edgewater — 3062 Solomons Island Road, MD 21037
Rockville — 1101 Nelson Street, Rockville, MD 20850
Rosedale — 1230 Race Road, Rosedale, MD 21237
The Company owns all of the offices listed above, except that it leases its corporate headquarters and the
Midlothian–Stonehenge and West Broad Marketplace offices in the Virginia market and the Crofton, Edgewater and
Rockville offices in the Maryland market. The Company also has a loan production office in each of Lynchburg,
Virginia, and Timonium, Maryland, each of which it leases.
The Company closed its Fairfax (Virginia) branch office on May 31, 2019 and its Cumberland (Virginia) branch
office on August 2, 2019.
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.
20
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.
HOLDERS OF RECORD
As of December 31, 2019, there were 1,765 holders of record of the Company’s common stock, not including
beneficial holders of securities held in street name.
DIVIDENDS
The Company recommenced the payment of quarterly cash dividends in 2019. The payment of dividends 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 had suspended the payment of a quarterly cash dividend following a payment in February 2010.
During this suspension period, 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 2014, when the Company completed the
redemption of such funding, 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 until 2017, when the Company repaid such
loan, and for the payment of intercompany expenses and interest payments on trust preferred securities.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about common stock that may be issued upon the exercise of options,
warrants and rights under the Company’s two stock incentive plans as of December 31, 2019. There are no outstanding
warrants or rights under that plan, and the Company does not have any other plans that provide for the issuance of any
options, warrants or rights.
Plan Category
Equity Compensation Plans Approved by
Security Holders
2009 Stock Incentive Plan
2019 Stock Incentive Plan
Equity Compensation Plans Not Approved
by Security Holders
Total
Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
First Column)
$5.92
--
--
$5.18
--
2,486,331
--
2,486,331
1,593,750
--
--
1,593,750
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, 2014, to December 31, 2019, 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, 2014 in the Company’s common stock and in each of the comparable
indices and that dividends were reinvested.
Index
Community Bankers Trust Corporation
NASDAQ Composite Index
SNL Bank and Thrift Index
12/31/14
100.00
100.00
100.00
12/31/15
121.49
106.96
102.02
12/31/16
164.03
116.45
128.80
12/31/17
184.39
150.96
151.45
12/31/18
163.35
146.67
125.81
12/31/19
204.05
200.49
170.04
Period Ending
PURCHASES OF EQUITY SECURITES BY THE ISSUER
The Company did not repurchase any of its securities during the year ended December 31, 2019.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable
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, 2019 and results of operations for
the year ended December 31, 2019 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.
22
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 24 full-service offices, 18 of which are in
Virginia and six of which are in Maryland. The Bank also operates two loan production offices.
The Bank engages in a general commercial banking business and provides a wide range of financial services
primarily to individuals, small businesses and larger commercial companies, 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 cash management services.
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 mix and product type for both loans and deposits can have a significant effect on the
net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through
branch growth and targeted product types, with lenders and other employees directly involved with customer
relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost
on nonaccrual loans and the amount of additions to the allowance for loan losses.
The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-
based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other
sources of noninterest income can include gains or losses on securities transactions and income from bank owned life
insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and
employee benefits, occupancy and equipment costs, data processing expenses, professional fees, transactions involving
bank-owned property, and other operational expenses. The provision for loan losses and income taxes may also
materially affect net 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, future 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;
the interest rate environment;
competitive pressures among banks and financial institutions or from companies outside the banking
industry;
real estate values;
the demand for deposit, loan, 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;
levels of fraud in the banking industry;
the level of attempted cyber attacks in the banking industry;
23
the securities and credit markets;
costs associated with the integration of banking and other internal operations;
the soundness of other financial institutions with which the Company does business;
inflation;
technology; and
legislative and regulatory requirements.
These factors and additional risks and uncertainties are described in the “Risk Factors” discussion in Part I,
Item 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 Company’s critical accounting policies are discussed in detail in Note 1 - “Nature of Banking Activities and
Significant Accounting Policies” in Item 8 of this Form 10-K. 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 avoiding concentrations to
24
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 in 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 collateral value (or discounted cash flows 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 by
25
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 evaluated for impairment as a pool. Accordingly, the
Company does not separately analyze these individual loans for impairment disclosures.
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 “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 that 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 recorded. 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 losses. 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.
OVERVIEW
Total assets increased $38.1 million, or 2.7%, during 2019 to $1.431 billion at December 31, 2019. Total loans,
excluding PCI loans, were $1.058 billion at December 31, 2019, increasing $64.6 million, or 6.5%, from year end
2018. Total PCI loans were $32.5 million at December 31, 2019 versus $38.3 million at year end 2018.
The Company’s securities portfolio, excluding restricted equity securities, decreased $26.1 million, or 10.5%, since
year end 2018, to $222.7 million at December 31, 2019. State, county and municipal bonds, 55.8% of total securities,
decreased $20.3 million during the year and totaled $124.3 million at December 31, 2019. The Company actively
manages the portfolio to improve its liquidity and maximize the return within the desired risk profile. The fair value of
the AFS portfolio was $187.0 million and $206.7 million at December 31, 2019 and 2018, respectively. The Company
had a net unrealized gain of $3.7 million and a net unrealized loss of $792,000 in the AFS portfolio at December 31,
2019 and 2018, respectively.
26
Interest bearing deposits at December 31, 2019 were $984.9 million, a decrease of $15.0 million, or 1.5%, from
December 31, 2018. Time deposits over $250,000 declined by $9.5 million and were $119.5 million at December 31,
2019. Time deposits less than or equal to $250,000 decreased $7.7 million and totaled $477.5 million at December 31,
2019. Money market deposit accounts, $120.8 million at December 31, 2019, decreased by $6.1 million during 2019.
Offsetting these decreases to interest bearing deposits was an increase of $4.6 million in NOW accounts and an increase
of $3.7 million in savings accounts.
In other funding activity, noninterest bearing deposits were $178.6 million at December 31, 2019 and increased by
$13.5 million, or 8.2%, during 2019. Federal funds purchased were $24.4 million at December 31, 2019 and $19.4
million at December 31, 2018. FHLB advances were $68.5 million at December 31, 2019, compared with $59.4 million
at December 31, 2018.
Shareholders’ equity was $155.5 million at December 31, 2019, an increase of $18.0 million, or 13.1%, from
shareholders’ equity of $137.5 million at December 31, 2018. Shareholders’ equity to assets was 10.9% at December
31, 2019 compared with 9.9% at December 31, 2018.
RESULTS OF OPERATIONS
Net Income
Net income was $15.7 million for the year ended December 31, 2019 compared with $13.7 million for the same
period in 2018. This is an increase of $2.0 million, or 14.7%. Interest and dividend income increased by $6.2 million, or
10.5%, and noninterest income increased by $891,000, or 20.0%. Offsetting these increases to net income were increases
of $3.4 million, or 28.5%, in interest expense, $852,000, or 2.4%, in noninterest expense, $325,000 in provision for loan
losses and $467,000 in income tax expense. Earnings per share were $0.71 basic and $0.70 fully diluted for 2019
compared with $0.62 basic and $0.61 fully diluted for 2018.
Net Interest Income
The Company’s operating results depend primarily on its net interest income, which is the difference between
interest income on interest earning assets, including securities and loans, and interest expense incurred on interest
bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount
and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by
changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds,
referred to as a “rate change.”
Net interest income was $50.0 million for 2019, or an increase of $2.8 million, or 5.9%, when comparing 2018 and
2019. Net interest income on a tax-equivalent basis was $50.4 million for 2019 compared with $47.8 million for 2018,
an increase of $2.6 million. The yield on earning assets was 4.99% for 2019 compared with 4.71% for 2018. Interest and
fees on loans of $51.6 million in 2019 was an increase of $5.3 million compared with $46.3 million for 2018. Interest
and fees on PCI loans increased $820,000 over this same time frame. The PCI portfolio contains six separate pools, two
of which, due to the uncertain nature of the cash flows, have no carrying value. A $1.1 million payoff occurred in one of
those pools, the Acquisition, Development and Construction pool, resulting in the entire payment being interest income.
For 2019 compared with 2018, securities income increased $31,000. On a tax-equivalent basis, the change was a
decrease of $124,000. The average balance of tax-exempt securities declined $20.3 million, thus reducing the benefit
received on a tax-equivalent basis on these securities. The tax-equivalent yield on the portfolio increased and was 3.23%
for 2019 compared with 3.15% for 2018.
Interest expense of $15.5 million represented an increase of $3.4 million, or 28.5%, in 2019 compared with 2018.
Average interest bearing liabilities increased $15.1 million, or 1.4%. However, the cost of interest bearing liabilities
increased from 1.13% for 2018 to 1.44% for 2019. Driving this cost increase was growth of $46.3 million, or 8.0%, in
the average balance of time deposits, from $581.6 million for 2018 to $627.9 million for 2019. This growth in time
deposits, as a result of higher rates that the Company offered, came partly from a shift away from savings and money
market accounts, which experienced a decline of $8.8 million in average balances between the comparison periods.
Additionally, time deposit growth included a shift out of FHLB and other borrowings, which reflected an average
balance decline of $25.3 million, or 27.8%, over the two comparison periods.
27
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 3.58% for the year ended December 31, 2018 to 3.55% for the same period in 2019.
The tax equivalent yield (non-GAAP) on earning assets increased from 4.71% for the year ended December 31, 2018 to
4.99% for the year ended December 31, 2019. The yield on total loans increased from 5.14% for the year ended
December 31, 2018 to 5.44% for the year ended December 31, 2019. PCI loan yield rose from 12.85% to 16.99%, and
the yield on loans, excluding PCI loans, increased 21 basis points, from 4.82% to 5.03%. The tax-equivalent yield on
securities increased from 3.15% for 2018 to 3.23% for 2019, as the Company sold lower yielding securities during the
course of 2018 to fund loan demand.
The Company’s total loan to deposit ratio was 93.8% at December 31, 2019 versus 88.6% at December 31, 2018.
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, 2019 Year ended December 31, 2018 Year ended December 31, 2017
Average
Interest Rates
Income/ Earned/
Average
Interest Rates
Income/ Earned/
Average
Interest Rates
Income/ Earned/
Expense Paid
Expense Paid
Expense Paid
Average
Balance
Sheet
Average
Balance
Sheet
Average
Balance
Sheet
(Dollars in thousands)
ASSETS:
Loans
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
$ 1,023,861 $ 51,551
6,042
57,593
391
14
5,870
2,001
65,869
35,568
1,059,429
15,977
688
188,531
55,448
1,320,073
(8,821)
101,590
$ 1,412,842
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Demand - interest bearing
Savings and money market
Time deposits
$
157,876
221,817
627,913
346
1,268
12,422
1,007,606
4,422
65,673
14,036
113
1,343
5.03 % $
4.82 % $
16.99
5.44
2.45
2.16
3.11
3.61
4.99
960,978 $ 46,291
5,222
40,641
51,513
1,001,619
303
13,995
5
242
5,258
178,086
2,737
75,741
59,816
1,269,683
(9,198)
92,621
$ 1,353,106
12.85
5.14
2.16
2.03
2.95
3.61
4.71
870,258 $ 40,301
5,733
47,983
46,034
918,241
196
15,618
1
94
4,682
181,476
3,639
85,305
54,552
1,200,734
(9,431)
89,904
$ 1,281,207
4.63 %
11.95
5.01
1.26
1.11
2.58
4.27
4.54
0.22
0.57
1.98
1.39
2.56
2.04
$
156,541
230,637
581,619
325
1,187
8,745
968,797
2,856
90,966
10,257
65
1,732
0.21
0.51
1.50
1.06
2.28
1.90
$
139,620 $
216,149
574,630
260
880
6,757
0.19 %
0.41
1.18
930,399
1,556
85,127
7,897
25
1,277
0.85
1.58
1.50
15,492
1.44
1,077,701
174,163
13,235
1,265,099
147,743
12,054
1.13
1,062,619
155,003
6,219
1,223,841
129,265
9,199
0.90
1,017,082
136,674
5,550
1,159,306
121,901
$ 1,412,842
$ 1,353,106
$ 1,281,207
$ 50,377
$ 47,762
$ 45,353
3.55 %
3.82 %
3.58 %
3.76 %
3.64 %
3.78 %
$
420
$
576
$ 1,237
28
Total interest bearing
deposits
Short-term borrowings
FHLB and other borrowings
Total interest bearing
liabilities
Noninterest bearing deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest earnings
Interest spread
Net interest margin
Tax equivalent adjustment:
Securities
(1)
Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21% for each of 2019 and 2018 and 34%
for 2017.
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, 2019 AND 2018
(Dollars in thousands)
2019 compared to 2018
Increase (Decrease)
Rate
Volume
Total
2018 compared to 2017
Increase (Decrease)
Rate
Volume
Total
Interest Income:
Loans, including fees
PCI loans, including fees
Interest bearing bank balances and federal funds
sold
Securities
$
3,031 $
(652)
2,229 $
1,472
5,260 $
820
4,201 $
(877)
1,789 $
366
5,990
(511)
52
(288)
45
319
97
31
(18)
(344)
129
680
111
336
Total Earning Assets
2,143
4,065
6,208
2,962
2,964
5,926
Interest Expense:
Demand - interest bearing
Savings and money market
Time deposits
Total interest-bearing deposits
3
(45)
694
652
18
126
2,983
3,127
21
81
3,677
3,779
32
59
82
173
33
249
1,905
2,187
65
308
1,987
2,360
Other borrowed funds
(455)
113
(342)
107
388
495
Total interest-bearing liabilities
Net increase in net interest income
$
197
1,946 $
3,240
825 $
3,437
2,771 $
280
2,682 $
2,575
389 $
2,855
3,071
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.
Provision for loan losses for the year ended December 31, 2019 was $325,000, compared with no provision for
loan losses for the year ended December 31, 2018. The provision during 2019 was due to loan growth and an uptick in
delinquencies less than 90 days past due and still accruing interest. The Company records a separate provision for loan
29
losses for its loan portfolio and its PCI loan portfolio. There was no provision for the PCI loan portfolio for the years
ended December 31, 2019 and 2018. The absence of a provision during the year ended December 31, 2018 was the
direct result of nominal charge-offs and stable asset quality, coupled with the level of loan growth during the period.
The allowance for loan losses, excluding PCI loans, equaled 159.3% of nonaccrual loans at December 31, 2019
compared with 94.6% at December 31, 2018. The ratio of the allowance for loan losses to total loans, excluding PCI
loans, was 0.80% at December 31, 2019 compared with 0.90% at December 31, 2018. Net charge-offs were $879,000 in
2019 compared with net recoveries of $14,000 in 2018.
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 $5.4 million for 2019, an increase of $891,000, or 20.0%, compared with $4.5 million for
2018. Service charges and fees, driven by an increase in deposits, were $2.8 million for 2019, an increase of $321,000
compared with the same period in 2018. Other noninterest income was $1.1 million for 2019, an increase of $353,000
versus 2018. The 2019 period benefited from the receipt of life insurance proceeds of $120,000, dividends on an equity
investment of $159,000, compared with $30,000 in 2018, and swap fee income of $87,000. Mortgage loan income of
$486,000, driven by low interest rates and refinance activity, increased by $167,000 in 2019 compared with the same
period in 2018. Gain on securities transactions, net was $235,000 in 2019 compared with $70,000 for 2018. Gain on sale
of loans declined by $104,000 in 2019 compared with 2018.
Noninterest Expenses
Noninterest expenses were $35.7 million for 2019, as compared with $34.9 million for 2018. This is an increase of
$852,000, or 2.4%. Other real estate expenses, net increased $605,000 and were $718,000 for 2019, compared with
$113,000 for 2018. The major cause for the increase was the payment of $624,000 in past due taxes on a $3.8 million
construction and land development loan foreclosure. Occupancy expenses increased $265,000 in 2019 compared with
2018 and were $3.5 million. Data processing fees increased $207,000, or 9.8% and were $2.3 million for 2019. Other
operating expenses increased $223,000 and were $6.0 million for 2019. Offsetting these increases, the FDIC assessment
decreased $480,000 for 2019 compared with the same period in 2018.
Income Taxes
For the year ended December 31, 2019, income tax expense was $3.6 million compared with $3.1 million for 2018.
The effective tax rate was 18.4% for each of the years ended December 31, 2019 and 2018.
Loans
Total loans were $1.091 billion at December 31, 2019, increasing $58.9 million from $1.032 billion at
December 31, 2018. Total loans, excluding PCI loans, were $1.058 billion at December 31, 2019 versus $993.7 million
at December 31, 2018, an increase of $64.6 million, or 6.5%. Construction and land development loans increased by the
largest dollar amount during 2019, $26.2 million, or 21.7%, and were $146.6 million at December 31, 2019, or 13.9% of
total loans. Commercial mortgage loans, the largest category of loans, grew by $17.0 million during 2019 and were
$396.9 million at December 31, 2019, or 37.5% of total loans. Multifamily loans grew by $13.4 million during 2019 and
were $73.0 million, or 6.9% of total loans. Residential 1 – 4 family loans grew $7.3 million during 2019 and were
$223.5 million, or 21.1% of total loans at year end 2019. Commercial loans, 18.1% of total loans, were $191.2 million at
December 31, 2019 and grew by $2.5 million during 2019. PCI loans were $32.5 million at December 31, 2019, $5.8
million lower than at year end 2018.
30
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
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
Loans
2019
PCI Loans
Total Loans
$ 223,538
396,858
146,566
6,639
72,978
8,346
854,925
191,183
11,163
1,052
21.12 % $ 29,465
37.50
490
1,172
13.85
1,169
0.63
232
6.90
0.79
—
32,528
80.79
—
18.06
—
1.05
—
0.10
$ 1,058,323 100.00 % $ 32,528
90.58 % $ 253,003
397,348
1.51
147,738
3.60
7,808
3.59
73,210
0.72
8,346
—
887,453
100.00
191,183
—
11,163
—
1,052
—
100.00 % $ 1,090,851
23.19 %
36.42
13.54
0.72
6.71
0.77
81.35
17.53
1.02
0.10
100.00 %
Loans
2018
PCI Loans
Total Loans
$ 216,268
379,904
120,413
6,778
59,557
8,370
791,290
188,722
12,048
1,645
21.77 % $ 34,240
746
38.23
1,326
12.12
1,729
0.68
244
5.99
—
0.84
38,285
79.63
—
18.99
—
1.21
—
0.17
$ 993,705 100.00 % $ 38,285
89.43 % $ 250,508
380,650
1.95
121,739
3.46
8,507
4.52
59,801
0.64
8,370
—
829,575
100.00
188,722
—
12,048
—
1,645
—
100.00 % $ 1,031,990
24.27 %
36.89
11.80
0.82
5.79
0.81
80.38
18.29
1.17
0.16
100.00 %
Loans
2017
PCI Loans
Total Loans
$ 227,542
366,331
107,814
8,410
59,024
7,483
776,604
159,024
5,169
1,221
24.16 % $ 39,805
38.89
547
1,588
11.44
2,136
0.89
257
6.27
0.79
—
44,333
82.44
—
16.88
—
0.55
—
0.13
$ 942,018 100.00 % $ 44,333
89.79 % $ 267,347
366,878
1.23
109,402
3.58
10,546
4.82
59,281
0.58
7,483
—
820,937
100.00
159,024
—
5,169
—
1,221
—
100.00 % $ 986,351
27.10 %
37.20
11.09
1.07
6.01
0.76
83.23
16.13
0.52
0.12
100.00 %
31
Loans
2016
PCI Loans
Total Loans
Mortgage loans on real estate:
Residential 1‑4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total 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 % $ 46,623
649
40.63
1,969
11.75
2,453
0.95
270
4.67
—
0.86
83.72
15.46
0.67
0.15
89.72 % $ 254,486
340,453
1.25
100,251
3.79
10,364
4.72
39,354
0.52
7,185
—
752,093
51,964 100.00
129,300
—
5,627
—
1,243
—
100.00 % $ 51,964 100.00 % $ 888,263
—
—
—
28.64 %
38.33
11.29
1.17
4.43
0.81
84.67
14.56
0.63
0.14
100.00 %
Loans
2015
PCI Loans
Total Loans
Mortgage loans on real estate:
Residential 1‑4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Total 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 % $ 52,696
850
42.47
2,310
9
2,822
1.12
277
6.06
0.83
—
85.47
13.69
0.66
0.18
89.38 % $ 247,272
318,805
1.44
69,718
3.92
11,200
4.79
45,666
0.47
6,238
—
698,899
58,955 100.00
102,507
—
4,928
—
1,345
—
100.00 % $ 58,955 100.00 % $ 807,679
—
—
—
30.62 %
39.47
8.63
1.39
5.65
0.77
86.53
12.69
0.61
0.17
100.00 %
The following table indicates the contractual maturity of commercial and construction and land development loans
as of December 31, 2019 (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
Construction and
Commercial land development
98,061
$ 73,561 $
23,260
33,005
56,265
52,268
9,089
61,357
$ 191,183 $
26,156
10,997
37,153
11,276
1,248
12,524
147,738
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, 2019, nonperforming assets totaled $10.8 million and net charge-offs were
$879,000. Nonperforming assets totaled $10.6 million and net recoveries were $14,000 at December 31, 2018.
Nonperforming loans were $5.3 million at December 31, 2019 compared to $9.5 million at December 31, 2018.
The $4.2 million decrease in nonperforming loans since December 31, 2018, was the net result of $5.2 million in
additions to nonperforming loans and $9.4 million in reductions. The additions related mainly to two commercial loans
32
totaling $616,000, one multifamily real estate loan of $2.6 million, and one 1-4 family residential mortgage loan of
$764,000. Of the $9.4 million in reductions, there was one foreclosure of a construction and land development credit
totaling $3.8 million. In addition, there were $1.4 million in charge-offs, $1.6 million in pay-offs, $1.5 million in
payments to existing credits, and $1.1 million in loans returned to accruing status during the year.
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
Accruing troubled debt restructure loans
$
$
$
2019
5,292
946
6,238
4,527
10,765
$
2018
9,500
—
9,500
1,099
$ 10,599
$
2017
9,026
—
9,026
2,791
$ 11,817
2016
$ 10,243
—
10,243
4,427
$ 14,670
2015
$ 10,670
—
10,670
5,490
$ 16,160
4,593
$
8,359
$
5,271
$
4,653
$
4,596
Balances
Specific reserve on impaired loans
General reserve related to unimpaired loans
Total allowance for loan losses
584
7,845
8,429
2,246
6,737
8,983
959
8,010
8,969
1,130
8,363
9,493
1,144
8,415
9,559
Average loans during the year, net of unearned
income
1,023,861
960,978
870,258
787,245
687,463
Impaired loans
Non-impaired loans
Total loans, net of unearned income
9,885
1,048,438
1,058,323
17,859
975,846
993,705
14,297
927,721
942,018
18,541
817,758
836,299
15,266
733,476
748,742
Ratios
Allowance for loan losses to loans
Allowance for loan losses 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
0.80 %
159.28
0.75
0.50
1.01
0.09
0.90 %
94.56
0.69
0.96
1.07
(0.00)
0.95 %
99.37
0.86
0.96
1.25
0.12
1.14 %
92.68
1.02
1.22
1.74
0.07
1.28 %
89.59
1.15
1.43
2.14
(0.04)
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):
2019
2018
2017
2016
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
Total loans
Allowance for Loan Losses
$
$
1,378 $
1,006
376
—
2,463
—
5,223
62
7
5,292 $
1,257 $
2,123
4,571
—
—
—
7,951
1,549
—
9,500 $
1,962 $
1,498
4,277
—
—
68
7,805
1,214
7
4,562
1,508
4,509
13
—
—
10,592
—
78
9,026 $ 10,243 $ 10,670
2,893 $
1,758
5,495
—
—
—
10,146
53
44
The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable
losses inherent in the loan portfolio.
33
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
deemed to be stale or 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. 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
2019
$ 8,983
2018
$ 8,969
2017
$ 9,493
2016
$ 9,559
2015
$ 9,267
724
667
253
1,644
45
216
220
481
431
797
285
1,513
—
687
191
878
3
1,183
174
1,360
184
465
116
765
879
325
$ 8,429
49
234
212
495
(14)
—
$ 8,983
5
282
152
439
1,074
550
$ 8,969
11
245
106
362
516
450
$ 9,493
1,211
343
98
1,652
(292)
—
$ 9,559
0.80 %
0.90 %
0.09 % (0.00) %
1.14 %
0.07 %
159.28 % 94.57 % 99.37 % 92.68 %
0.95 %
0.12 %
1.28 %
(0.04)%
89.59 %
During 2019, the Company’s net charge-offs of $879,000 increased $893,000 from net recoveries of $14,000 in the
prior year and were primarily centered in commercial loans. Net charge-offs by loan category to total net charge-offs
were the following for 2019: 61.4% for commercial loans, 23.0% for real estate loans, and 15.6% for consumer loans.
During 2018, the Company’s net recoveries of $14,000 increased $1.1 million from net charge-offs of $1.1 million
in the prior year and were primarily centered in real estate loans. Net charge-offs (recoveries) by loan category to total
net recoveries were the following for 2018: (28.6%) for commercial loans, (128.6%) for real estate loans, and 57.2% for
consumer loans.
34
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):
Commercial
Construction and land
development
Real estate mortgage
Consumer and other
Unallocated
Total allowance
2019
2017
Amount % Amount % Amount % Amount % Amount %
$ 1,980 18.1 % $ 1,894 19.0 % $ 1,139 16.9 % $ 602 15.5 % $ 631 13.6 %
2016
2015
2018
1,044 13.9
5,246 66.9
1.1
—
1,161 12.1
4,499 67.5
1.4
—
1,247 11.4
6,423 71.0
0.7
—
2,195 11.7
5,068 72.0
0.8
—
1,298
9.0
6,914 76.4
1.0
—
100 %
118
598
100 % $ 9,559
142
1,486
100 % $ 9,493
113
47
100 % $ 8,969
164
1,265
100 % $ 8,983
121
38
$ 8,429
The allowance for loan losses for each of the periods presented above includes an amount that could not be related
to individual types of loans, and this is referred to as the unallocated component 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. Several factors justified the maintenance of the $1.3 million unallocated component at December 31, 2018.
Specifically, at December 31, 2018, in regards to the economic factors, there was significant uncertainty stemming from
recent stock market declines and the government shutdown, which ended in early 2019. The stock market suffered major
declines in the fourth quarter of 2018 due to concerns about a slowdown in worldwide growth and an increased
probability of recession. The Company believed the effects of the government shutdown, which had yet to be ultimately
determined, could have dampened economic growth and impeded the economy, specifically, as it related to our
government contractor customer base of $10.2 million in loans. While there was no direct impact to our government
contractor base during 2019, delinquencies increased $573,000, net charge-offs were $879,000 and the Company took a
provision of $325,000, all of which contributed to the reduction of the unallocated amount to $38,000 at December 31,
2019.
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 impairments 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, excluding restricted equity securities, decreased $26.1 million, or 10.5%, since
year end 2018, to $222.7 million at December 31, 2019. State, county and municipal bonds, 55.8% of total securities,
decreased $20.3 million during the year and totaled $124.3 million at December 31, 2019. Gains on securities
transactions, net totaled $235,000 during 2019 compared with $70,000 in 2018. The Company actively manages the
portfolio to improve its liquidity and maximize the return within the desired risk profile.
35
The following table summarizes the securities portfolio by contractual maturity and issuer, including weighted
average yields, excluding restricted stock, as of December 31, 2019 (dollars in thousands):
1 Year or Less
1‑5 Years 5‑10 Years Over 10 Years
Total
$
U.S. Treasury Issue and other
U.S. Government agencies
Amortized Cost
Fair Value
Weighted Avg Yield
State, county and municipal(1)
Amortized Cost
Fair Value
Weighted Avg Yield
Corporate and other bonds
Amortized Cost
Fair Value
Weighted Avg Yield
Mortgage Backed securities
Amortized Cost
Fair Value
Weighted Avg Yield
Total
Amortized Cost
Fair Value
Weighted Avg Yield
(1) Computed on a tax equivalent basis
47
47
2.33 %
$ 23,208
23,122
$
2.05 %
$
1,965
1,970
3.10 %
6,884
6,785
2.44 %
$ 32,104
31,924
2.19 %
14,992
15,139
39,680
40,944
54,660
56,865
11,868
12,289
121,200
125,237
3.95 %
3.66 %
3.49 %
3.47 %
3.60 %
1,499
1,512
3.20 %
5,602
5,647
3.00 %
9,556
9,547
2.96 %
996
995
2.77 %
17,653
17,701
2.98 %
4,707
4,702
1.36 %
18,147
18,323
23,992
24,509
2.42 %
2.86 %
1,199
1,206
3.45 %
48,045
48,740
2.56 %
21,245
21,400
86,637
88,036
90,173
92,891
20,947
21,275
219,002
223,602
3.32 %
2.93 %
3.26 %
3.10 %
3.12 %
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):
Securities Available for Sale
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total Securities Available for Sale
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total Securities Held to Maturity
December 31, 2019
Gross Unrealized
Amortized Cost
Gains
Losses
Fair Value
$
$
22,104 $
95,467
48,045
11,637
6,016
183,269 $
51 $
3,167
808
49
84
4,159 $
(219) $
(42)
(113)
(82)
(3)
21,936
98,592
48,740
11,604
6,097
(459) $ 186,969
$
$
10,000 $
25,733
35,733 $
— $
913
913 $
(12) $
(1)
(13) $
9,988
26,645
36,633
36
Amortized Cost
Gains
Losses
Fair Value
December 31, 2018
Gross Unrealized
Securities Available for Sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
$
Total Securities Available for Sale
$
13,460 $
24,689
112,465
46,877
5,342
4,685
207,518 $
— $
71
1,018
196
73
—
1,358 $
(336) $
(151)
(941)
(656)
(4)
(62)
13,124
24,609
112,542
46,417
5,411
4,623
(2,150) $ 206,726
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total Securities Held to Maturity
Securities Available for Sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total Securities Available for Sale
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Total Securities Held to Maturity
Deposits
$
$
10,000 $
32,108
42,108 $
— $
419
419 $
(210) $
(64)
(274) $
9,790
32,463
42,253
Amortized Cost
Gains
Losses
Fair Value
December 31, 2017
Gross Unrealized
$
$
$
$
14,963 $
34,757
124,032
22,536
7,072
251
203,611 $
— $
221
2,324
63
173
—
2,781 $
(319) $
(87)
(596)
(520)
(24)
(12)
14,644
34,891
125,760
22,079
7,221
239
(1,558) $ 204,834
10,000 $
35,678
468
46,146 $
— $
922
8
930 $
(155) $
(33)
—
(188) $
9,845
36,567
476
46,888
The Company’s lending and investing activities are funded primarily through its deposits. Interest bearing deposits
at December 31, 2019 were $984.9 million, a decrease of $15.0 million, or 1.5%, from December 31, 2018. Time
deposits less than $100,000 declined by $1.1 million and were $263.6 million at December 31, 2019. Time deposits over
$100,000 decreased $16.1 million and totaled $333.3 million at December 31, 2019. Money market deposit accounts,
$120.8 million at December 31, 2019, decreased by $6.1 million during 2019. Offsetting these decreases to interest
bearing deposits was an increase of $4.6 million in NOW accounts and an increase of $3.7 million in savings accounts.
Noninterest bearing deposits were $178.6 million at December 31, 2019 and increased by $13.5 million, or 8.2%, during
2019.
37
The following table summarizes deposits by product and percent of total deposits for the periods ended
December 31 of the years presented (dollars in thousands):
2019
Amount
% of
deposits
2018
% of
Amount
deposits
Amount
2017
% of
deposits
Noninterest bearing
Interest bearing:
NOW
MMDA
Savings
Time deposits less than $100,000
Time deposits $100,000 and over
Total interest bearing deposits
Total deposits
$
178,584
15.3 % $
165,086
14.2 % $ 153,028
14.0 %
170,532
120,841
96,570
263,619
333,302
984,864
$ 1,163,448
14.7
10.4
8.3
22.7
28.6
84.7
165,946
126,933
92,910
264,678
349,422
999,889
100.0 % $ 1,164,975
14.2
10.9
8.0
22.7
30.0
85.8
157,037
143,363
93,980
236,099
312,257
942,736
100.0 % $ 1,095,764 100.0 %
14.3
13.1
8.6
21.5
28.5
86.0
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, 2019 (dollars in thousands):
Within 3 months
3‑6 months
6‑12 months
over 12 months
Total
Borrowings
$
$
82,910
73,061
107,947
69,384
333,302
The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings
include overnight borrowings from correspondent banks (federal funds purchased) and funding from the Federal Home
Loan Bank (FHLB). The Company classifies all borrowings that will mature within a year from the date on which the
Company enters into them as short-term advances. The following information is provided for borrowings balances, rates,
and maturities as of December 31 of the years presented (dollars in thousands):
Federal Funds
Purchased
Short-term
Advances
As of December 31, 2019
Amount outstanding at year end
Maximum month-end outstanding balance
Average outstanding balance during the year
Average interest rate during the year
Average interest rate at year end
$
$ 20,000
50,000
35,123
24,437
24,437
4,422
2.56 %
2.26 %
FHLB Borrowings
Long-term notes
payable
$
48,500
48,667
26,426
Total
$ 68,500
2.45 %
1.74 %
1.76 %
1.45 %
Federal Funds
Purchased
Advances
FHLB Borrowings
Short-term Long-term notes
payable
Total
$
19,447
30,929
24,704
$ 59,447
$ 40,000
75,500
62,138
19,440
20,000
2,856
2.28 %
2.94 %
1.97 %
2.53 %
1.76 %
1.87 %
As of December 31, 2018
Amount outstanding at year end
Maximum month-end outstanding balance
Average outstanding balance during the year
Average interest rate during the year
Average interest rate at year end
$
38
Federal Funds
FHLB Borrowings
Short-term Long-term notes
Purchased
Advances
payable
Total
As of December 31, 2017
Amount outstanding at year end
Maximum month-end outstanding balance
Average outstanding balance during the year
Average interest rate during the year
Average interest rate at year end
$
Liquidity
4,849
14,878
1,556
1.58 %
1.85 %
$ 70,500
101,429
53,884
$
30,929
31,296
27,083
$ 101,429
1.34 %
1.45 %
1.37 %
1.62 %
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, 2019 and 2018 was as follows (dollars in thousands):
Cash and due from banks
Interest bearing bank deposits
Available for sale securities, at fair value, unpledged
Total liquid assets
December 31, 2019 December 31, 2018
18,292
$
15,927
174,842
209,061
16,976
11,708
157,225
185,909
$
$
$
Deposits and other liabilities
Ratio of liquid assets to deposits and other liabilities
$
1,275,361
$
14.58 %
1,255,689
16.65 %
Capital Resources
The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings,
growth trends and economic conditions. The Company seeks to maintain a strong capital base to support its growth and
expansion plans, provide stability to current operations and promote public confidence in the Company. The adequacy of
the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality
of the Company’s balance sheet. Moreover, capital levels are regulated and compared with industry standards. In
August 2018, the Federal Reserve Board (Board) issued an interim final rule that raises the asset size threshold for
determining applicability of the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy
Statement (Policy Statement) from $1 billion to $3 billion of total consolidated assets and makes related and conforming
revisions to the Board’s regulatory capital rule and requirements for bank holding companies. As such, the Company is
no longer required to report nor manage regulatory capital ratios on a consolidated basis. The Company is only required
to report these ratios for the Bank. 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 four 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
39
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 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 Bank does not maintain the full amount of the
buffer. The capital conservation buffer was 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%. The Bank had a capital conservation buffer of 5.86% and
5.34% at December 31, 2019 and 2018, respectively, well above the required buffer of 2.5% and 1.875% for 2019 and
2018, respectively.
The following table shows the Bank’s capital ratios at the dates indicated (dollars in thousands):
December 31, 2019
December 31, 2018
Amount
Ratio
Amount
Ratio
Total Capital to risk weighted assets
Tier 1 Capital to risk weighted assets
Common Equity Tier 1 Capital to risk weighted assets
Tier 1 Capital to adjusted average total assets
$ 164,783
156,541
156,541
156,541
13.86 % $ 149,085
13.16 % 140,289
13.16 % 140,289
11.03 % 140,289
13.34 %
12.55 %
12.55 %
10.22 %
All capital ratios exceed regulatory minimums for well capitalized institutions as referenced in Note 19 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, 2019 and 2018, was 5.45% and 5.19%, 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.
Off-Balance Sheet Arrangements
A summary of the contract amount of the Company’s exposure to off-balance sheet risk as of December 31, 2019
and 2018, 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, 2019 December 31, 2018
$
$
210,086 $
15,155
225,241 $
204,831
5,280
210,111
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.
40
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 clients. The Company holds certificates of deposit,
deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in
cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase
agreements, and brokered CDs. The Company had cash flow hedges with total notional amounts of $10 million and $30
million at December 31, 2019 and 2018, respectively. The Company recorded a fair value liability of $44,000 and a fair
value asset of $253,000 in other assets and other liabilities at December 31, 2019 and 2018, respectively. The
Company’s cash flow hedges are deemed to be highly effective. Therefore, the net gain (loss) was recorded as a
component of other comprehensive income (loss) recorded in the Company’s consolidated statements of comprehensive
income.
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. It is
computed by dividing dividends per share by net income per common share. The Company paid dividends to
shareholders of $2.9 million during the year ended December 31, 2019. The Company did not pay dividends to
shareholders during the years ended December 31, 2018 and 2017. 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:
Return on average assets
Return on average equity
Dividend payout
Leverage
Year Ended December 31
2018
2019
2017
1.11 %
10.63 %
18.31 %
10.46 %
1.01 %
10.59 %
—
9.55 %
0.56 %
5.91 %
—
9.51 %
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.
41
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 the 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, 2019, 2018 and 2017 (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
2019
2018
2017
%
$
%
$
%
$
4.4
3.5
2.6
1.2
—
(0.8)
(1.9)
(2.0)
(2.0)
2,211
1,775
1,286
605
—
(410)
(975)
(995)
(995)
3.8
3.1
2.3
1.3
—
(1.6)
(3.2)
(5.1)
(5.2)
1,807
1,441
1,087
623
—
(758)
(1,515)
(2,403)
(2,430)
4.7
3.6
2.6
1.4
—
(1.2)
(3.9)
(4.5)
(4.6)
2,132
1,637
1,185
632
—
(554)
(1,782)
(2,051)
(2,055)
At December 31, 2019, 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 4.4%. 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
2.0%. 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 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
42
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018
Consolidated Statements of Income for the years ended December 31, 2019 and December 31, 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019 and December 31,
2018
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019 and
December 31, 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and December 31, 2018
Notes to Consolidated Financial Statements
44
46
47
48
49
50
51
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
Community Bankers Trust Corporation
Richmond, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community Bankers Trust Corporation and its
subsidiary (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to
the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, 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 have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ YOUNT, HYDE & BARBOUR, P.C.
We have served as the Company’s auditor since 2018.
Winchester, Virginia
March 13, 2020
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
Community Bankers Trust Corporation
Richmond, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited Community Bankers Trust Corporation and its subsidiary's (the Company) internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, the related consolidated statements
of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related
notes to the consolidated financial statements of the Company and our report dated March 13, 2020 expressed an
unqualified opinion.
Basis for Opinion
The Company’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 in the accompanying 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 are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
March 13, 2020
45
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2019 AND DECEMBER 31, 2018
(dollars in thousands, except share data)
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 $36,633 and $42,253, 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 $8,429 and $8,983, respectively; PCI loans of $156 and
$156, respectively)
Net loans
Bank premises and equipment, net
Bank premises and equipment held for sale
Right-of-use lease assets
Other real estate owned
Bank owned life insurance
Other assets
Total assets
LIABILITIES
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Federal funds purchased
Federal Home Loan Bank borrowings
Trust preferred capital notes
Lease liabilities
Other liabilities
Total liabilities
December 31, 2019 December 31, 2018
$
16,976 $
11,708
28,684
186,969
35,733
8,855
231,557
18,292
15,927
34,219
206,726
42,108
7,800
256,634
501
146
1,058,323
32,528
1,090,851
(8,585)
1,082,266
29,472
1,589
6,472
4,527
29,340
16,432
1,430,840 $
178,584 $
984,864
1,163,448
24,437
68,500
4,124
6,737
8,115
1,275,361
993,705
38,285
1,031,990
(9,139)
1,022,851
31,488
1,252
—
1,099
28,834
16,627
1,393,150
165,086
999,889
1,164,975
19,440
59,447
4,124
—
7,703
1,255,689
$
$
SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,422,621 and 22,132,304
shares issued and outstanding, respectively)
Additional paid in capital
Retained earnings (deficit)
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
224
150,728
2,562
1,965
155,479
1,430,840 $
221
148,763
(10,244)
(1,279)
137,461
1,393,150
$
See accompanying notes to consolidated financial statements
46
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars and shares in thousands, except per share data)
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 borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges and fees
Gain on securities transactions, net
Gain on sale of other loans
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
Other real estate expense, net
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Net income per share — basic
Net income per share — diluted
Weighted average number of shares outstanding
Basic
Diluted
2019
2018
$
51,551 $
6,042
14
391
5,870
1,581
65,449
14,036
1,456
15,492
49,957
325
49,632
2,831
235
14
724
486
1,064
5,354
21,423
3,453
1,484
296
2,329
718
6,026
35,729
19,257
3,552
15,705 $
0.71 $
0.70 $
22,264
22,531
$
$
$
46,291
5,222
5
303
5,258
2,162
59,241
10,257
1,797
12,054
47,187
—
47,187
2,510
70
118
735
319
711
4,463
21,477
3,188
1,398
776
2,122
113
5,803
34,877
16,773
3,085
13,688
0.62
0.61
22,103
22,569
See accompanying notes to consolidated financial statements
47
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars in thousands)
Net income
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Change in unrealized gain (loss) on investment securities
Tax related to unrealized (gain) loss on investment securities
Reclassification adjustment for gain on securities sold
Tax related to realized gain on securities sold
Defined benefit pension plan:
Change in prior service cost
Change in unrealized (loss) gain on plan assets
Tax related to defined benefit pension plan
Cash flow hedge:
Change in unrealized (loss) gain on cash flow hedge
Tax related to cash flow hedge
Total other comprehensive income (loss)
Total comprehensive income
2019
$
15,705 $
2018
13,688
4,727
(1,039)
(235)
52
5
(41)
7
(297)
65
3,244
18,949 $
$
(1,946)
428
(70)
16
5
238
(52)
76
(17)
(1,322)
12,366
See accompanying notes to consolidated financial statements
48
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars and shares in thousands)
Balance December 31, 2017
Issuance of common stock
Exercise and issuance of employee
stock options
Net income
Other comprehensive loss
Balance December 31, 2018
Issuance of common stock
Exercise and issuance of employee
stock options
Net income
Dividends paid on common stock
($0.13 per share)
Other comprehensive income
Additional
Paid in
Shares Amount Capital
Common Stock
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
22,073 $ 221 $ 147,671 $ (23,932) $
18
—
166
—
43 $
—
124,003
166
41
—
—
—
—
—
926
—
—
—
13,688
—
22,132 $ 221 $ 148,763 $ (10,244) $
27
—
215
—
—
—
(1,322)
(1,279) $
—
264
—
—
—
3
—
—
—
1,750
—
—
15,705
—
—
—
—
(2,899)
—
2,562 $
—
3,244
1,965 $
(2,899)
3,244
155,479
926
13,688
(1,322)
137,461
215
1,753
15,705
Balance December 31, 2019
22,423 $ 224 $ 150,728 $
See accompanying notes to consolidated financial statements
49
COMMUNITY BANKERS TRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Lease assets amortization
Stock-based compensation expense
Tax benefit of exercised stock options
Amortization of purchased loan premium
Deferred tax expense
Provision for loan losses
Amortization of security premiums and accretion of discounts, net
Net gain on sale of securities
Net gain on sale and valuation of other real estate owned
Net loss on disposal of premises and equipment
Net gain on sale of loans
Originations of mortgages held for sale
Proceeds from sales of mortgages held for sale
Increase in bank owned life insurance investment
Changes in assets and liabilities:
Decrease (increase) in other assets
Increase in accrued expenses and other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities
Proceeds from calls/maturities/paydowns of held to maturity securities
Proceeds from sales of restricted equity securities
Purchase of available for sale securities
Purchase of restricted equity securities
Proceeds from sale of other real estate owned
Net increase in loans
Principal recoveries of loans previously charged off
Purchase of premises and equipment, net
Purchase small business investment company fund investment
Purchase of loans held for investment
Proceeds from bank owned life insurance investment
Proceeds from sale of loans
Net cash used in investing activities
Financing activities:
Net (decrease) increase in deposits
Net increase in federal funds purchased
Net decrease in short-term Federal Home Loan Bank borrowings
Proceeds from long-term Federal Home Loan Bank borrowings
Payments on long-term Federal Home Loan Bank borrowings
Proceeds from issuance of common stock
Cash dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents:
Beginning of the period
End of the period
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
Right-of-use lease assets in exchange for lease liability
December 31, 2019 December 31, 2018
$
15,705 $
13,688
2,039
936
1,075
(260)
311
420
325
1,170
(235)
(56)
7
(14)
(21,061)
20,706
(724)
686
(16)
21,014
94,371
6,290
1,511
(70,972)
(2,566)
826
(66,338)
587
(367)
(2,142)
—
218
1,516
(37,066)
(1,527)
4,997
(20,000)
40,000
(10,947)
893
(2,899)
10,517
(5,535)
$
$
34,219
28,684 $
15,465 $
3,145
4,198
337
7,408
1,985
—
946
(48)
258
772
—
1,543
(70)
(42)
(118)
(1,018)
872
(735)
(249)
1,905
19,689
47,811
3,929
2,005
(53,082)
(510)
2,129
(43,362)
514
(4,527)
(945)
(8,991)
—
5,635
(49,394)
69,211
14,591
(30,500)
—
(11,482)
146
—
41,966
12,261
21,958
34,219
11,540
2,198
396
1,252
—
See accompanying notes to consolidated financial statements
50
COMMUNITY BANKERS TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 24 full-service offices, 18 of which are in
Virginia and six of which are in Maryland. The Bank also operates two loan production offices.
The Bank engages in a general commercial banking business and provides a wide range of financial services
primarily to individuals, small businesses and larger commercial companies, 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 cash management services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Bank, its
wholly-owned subsidiary. All 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, 2019 and 2018. The Company issued subordinated debt to the Trust, which is
reflected as a liability on the Company’s consolidated balance sheet.
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. At December 31, 2019 and 2018, 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.
51
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or
estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to
income. Mortgage loans held for sale are sold with the mortgage servicing rights released by the Company.
The Company enters into commitments to originate certain mortgage loans whereby the interest rate on the
loans is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are
intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and
closing and the sale of the loan generally ranges from thirty to forty-five 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
52
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 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 in 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 that
could affect management’s estimate of probable losses.
53
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 Company does not separately identify individual consumer and residential loans for impairment disclosures.
Accounting for Certain Loans Acquired in a Transfer
FASB ASC 310, Receivables requires acquired loans to be recorded at fair value and prohibits carrying over
valuation allowances in the initial accounting for acquired impaired loans. Loans 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 “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 that 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 recorded. 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.
54
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 $4.5
million and $1.1 million in other real estate at December 31, 2019 and 2018, respectively.
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 $526,000 and
$613,000 for 2019 and 2018, 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 had no uncertain tax positions at each of December 31, 2019 and 2018. 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, 2019 or 2018. 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; therefore
no allowance is required.
The Company and its subsidiaries are subject to U. S. federal income tax as well as income tax for various
states. All years from 2016 through 2019 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 denominator. Diluted EPS gives effect to all dilutive potential
55
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. Dividends of
$2.9 million were declared and paid during the year ended 2019. There were no dividends declared or paid during the
year ended 2018.
Stock-Based Compensation
In April 2009, the Company adopted the Community Bankers Trust Corporation 2009 Stock Incentive Plan,
which was authorized to issue up to 2,650,000 shares of common stock. The 2009 Plan terminated June 17, 2019. In
2019, the Company adopted the Community Bankers Trust Corporation 2019 Stock Incentive Plan, which is authorized
to issue up to 2,500,000 shares of common stock. See Note 13 for details regarding these plans.
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 of the cash flows of the hedged item with the cash flows from the derivative. The changes in the fair
value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income and is
subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The
Company’s cash flow hedge was deemed effective for each of the years ended 2019 and 2018.
Recent Accounting Pronouncements
Adopted in 2019
In February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU)
2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize the following for all leases (with
the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a
discounted basis; and
A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a
specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with
Customers. 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.
For public companies, the guidance was effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. 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 FASB made subsequent
amendments to Topic 842 in July 2018 through ASU 2018-10, Codification Improvements to Topic 842, Leases and
ASU 2018-11, Leases (Topic 842): Targeted Improvements. Among these amendments is the provision in ASU 2018-11
that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this
new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an
entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases
56
standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company has chosen to apply
the new transition method. The effect of adopting this standard on January 1, 2019 was an increase of $7.4 million and
$7.6 million in assets and liabilities, respectively, on the Company’s consolidated balance sheet.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of Topic 718 to include share-
based payments issued to non-employees for goods or services, which were previously excluded. The amendments will
align the accounting for share-based payments to nonemployees and employees more similarly. The amendments were
effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The
Company adopted this guidance with no material impact on its consolidated financial statements.
Adopted January 1, 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes, modifies, and
adds to existing fair value measurement disclosure requirements.
The following public company disclosure requirements are removed:
Transfers between Level 1 and Level 2 of the fair value hierarchy
The policy for determining when transfers between any of the three levels have occurred
The valuation processes used for Level 3 measurements
The following public company disclosure requirements are modified:
For certain investments that calculate the net asset value, timing of liquidation and redemption
restrictions lapsing if the latter has been communicated to the reporting entity
A clarification that the Level 3 measurement uncertainty disclosure should communicate information
about the uncertainty at the balance sheet date
The following public company disclosure requirements are new:
The changes in unrealized gains and losses for the period included in other comprehensive income for
recurring Level 3 instruments held at the balance sheet date
The range and weighted average of significant unobservable inputs used for Level 3 measurements.
For certain unobservable inputs, an option to disclose other quantitative information in place of the
weighted average is available to the extent that it would be a more reasonable and rational method to
reflect the distribution of unobservable inputs.
The ASU was effective for all entities in fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. Early adoption is permitted. In addition, an entity may early adopt any of the removed or
modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company chose
this early adoption option for the year ended December 31, 2018. The Company adopted the remaining guidance with no
material impact on its consolidated financial statements.
Issued But Not Yet Adopted
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial
Instruments – Credit Losses. This ASU addresses issues raised by stakeholders during the implementation of ASU No.
2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries.
“Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the
amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that
amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected
recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (PCD assets,
currently known as PCI loans). In response to this question, the ASU permits organizations to record expected
57
recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing
guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU
includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted
ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial
statements.
In June 2016, the FASB issued ASU 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.
As a smaller reporting company, the Company will be required to apply the guidance for fiscal years, and
interim periods within those years, beginning after December 15, 2022. 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 has
formed an implementation committee and is working with a third-party vendor to build a model which it plans to run
parallel with its current model in the months prior to implementation. The Company cannot yet determine the magnitude
of the one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results
of operations, as the final impact will be dependent, among other things, upon the loan portfolio composition and credit
quality at the adoption date, as well as economic conditions, financial models used and forecasts at the time.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—
General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plan.
This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income
expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement
to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for
the period. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The
Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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, 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.
58
Note 2. Securities
Amortized costs and fair values of securities available for sale and held to maturity as of December 31, 2019
and 2018 were as follows (dollars in thousands):
Securities Available for Sale
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total Securities Available for Sale
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total Securities Held to Maturity
Securities Available for Sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
December 31, 2019
Gross Unrealized
Amortized Cost
Gains
Losses
Fair Value
$
$
22,104 $
95,467
48,045
11,637
6,016
183,269 $
51 $
3,167
808
49
84
4,159 $
(219) $
(42)
(113)
(82)
(3)
21,936
98,592
48,740
11,604
6,097
(459) $ 186,969
$
$
10,000 $
25,733
35,733 $
— $
913
913 $
(12) $
(1)
(13) $
9,988
26,645
36,633
Amortized Cost
Gains
Losses
Fair Value
December 31, 2018
Gross Unrealized
$
13,460 $
24,689
112,465
46,877
5,342
4,685
207,518 $
— $
71
1,018
196
73
—
1,358 $
(336) $
(151)
(941)
(656)
(4)
(62)
13,124
24,609
112,542
46,417
5,411
4,623
(2,150) $ 206,726
Total Securities Available for Sale
$
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total Securities Held to Maturity
$
$
10,000 $
32,108
42,108 $
— $
419
419 $
(210) $
(64)
(274) $
9,790
32,463
42,253
The amortized cost and fair value of securities as of December 31, 2019 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.
Held to Maturity
Available for Sale
(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
3,052 $
Amortized Cost Fair Value Amortized Cost Fair Value
18,324
3,076 $
$
61,864
85,784
20,997
183,269 $ 186,969
25,571
6,859
251
35,733 $
26,172
7,107
278
36,633 $
18,193 $
61,066
83,314
20,696
$
Proceeds from sales and calls of securities available for sale were $64.6 million and $37.0 million during
the years ended December 31, 2019 and 2018, respectively. Gains and losses on the sale of securities are determined
59
using the specific identification method. Gross realized gains and losses on sales of securities available for sale during
the years ended December 31, 2019 and 2018 were as follows (dollars in thousands):
Gross realized gains
Gross realized losses
Net securities gain
2019
2018
$
$
507 $
(272)
235 $
187
(117)
70
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, 2019 and 2018.
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, 2019 and 2018 were as follows
(dollars in thousands):
Securities Available for Sale
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total
Securities Available for Sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total
Securities Held to Maturity
U.S. Government agencies
State, county and municipal
Total
Less than 12 Months
December 31, 2019
12 Months or More
Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
$ 6,396 $
7,088
11,001
4,861
248
$ 29,594 $
(102) $ 8,020 $
(32)
(40)
(74)
(3)
308
4,287
625
—
(251) $ 13,240 $
(117) $ 14,416 $
(10)
(73)
(8)
—
7,396
15,288
5,486
248
(208) $ 42,834 $
$
$
— $
31
31 $
— $ 9,988 $
—
— $ 10,610 $
622
(12) $ 9,988 $
(1)
653
(13) $ 10,641 $
(219)
(42)
(113)
(82)
(3)
(459)
(12)
(1)
(13)
Less than 12 Months
December 31, 2018
12 Months or More
Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
$ 1,480 $
6,959
7,918
11,513
537
3,661
$ 32,068 $
(1) $ 11,644 $
5,155
34,540
15,811
294
236
(47)
(81)
(94)
(1)
(47)
(271) $ 67,680 $
(335) $ 13,124 $
(104)
(860)
(562)
(3)
(15)
12,114
42,458
27,324
831
3,897
(1,879) $ 99,748 $
(336)
(151)
(941)
(656)
(4)
(62)
(2,150)
$
— $
2,452
$ 2,452 $
— $ 9,790 $
(20)
(20) $ 13,775 $
3,985
(210) $ 9,790 $
(44)
(254) $ 16,227 $
6,437
(210)
(64)
(274)
The unrealized losses (impairments) in the investment portfolio at December 31, 2019 and 2018 are generally a
result of market fluctuations that occur daily. Interest rates increased consistently across the United States Treasury yield
curve during 2018, thereby increasing unrealized losses on securities. Likewise, these interest rates consistently
decreased during 2019, thereby decreasing unrealized losses on the Company’s securities. The unrealized losses are from
66 securities at December 31, 2019. Of those, 59 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. Six investment grade asset-
backed securities comprised of student loan pools included in corporate obligations and one corporate bond make up the
60
remaining securities with unrealized losses at December 31, 2019. The Company considers the reason for impairment,
length of impairment, and 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 $47.3 million and $56.0 million at December 31, 2019 and 2018,
respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of
$5.8 million and $7.0 million at December 31, 2019 and 2018, respectively, were pledged to secure lines of credit at the
Federal Reserve discount window with a lendable collateral value of $5.7 million at December 31, 2019. At each of
December 31, 2019 and 2018, there were no securities purchased from a single issuer, other than U.S. Treasury
securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.
Note 3. Loans and Related Allowance for Loan Losses
The Company’s loans, net of deferred fees and costs, as of December 31, 2019 and 2018 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
2019
Amount
% of Loans Amount
2018
% of Loans
$
223,538
396,858
146,566
6,639
72,978
8,346
854,925
191,183
11,163
1,052
$ 1,058,323
21.12 % $ 216,268
379,904
37.50
120,413
13.85
0.63
6,778
59,557
6.90
8,370
0.79
791,290
80.79
188,722
18.06
12,048
1.05
1,645
0.10
100.00 % $ 993,705
21.77 %
38.23
12.12
0.68
5.99
0.84
79.63
18.99
1.21
0.17
100.00 %
The Company held $12.7 million and $17.4 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, 2019
and 2018, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These
loan balances included a purchase premium of $1.0 million and $1.2 million at December 31, 2019 and 2018,
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. Any unamortized purchase
premium remaining on loans prepaid by the borrower is written off.
At December 31, 2019 and 2018, the Company’s allowance for loan 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.
61
The following table summarizes information related to impaired loans as of December 31, 2019 and 2018
(dollars in thousands):
2019
2018
Recorded
Investment (1)
Unpaid
Principal
Balance (2)
Related
Allowance
Recorded
Investment (1)
Unpaid
Principal
Balance (2)
Related
Allowance
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family
Commercial
Construction and land development
Multifamily
Total real estate 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
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
Multifamily
Total real estate loans
Commercial loans
Consumer installment loans
Total impaired loans
—
—
—
—
—
—
349
482
515
1,346
900
—
$
1,483 $
3,226
328
2,463
7,500
1,850 $
3,966
328
2,463
8,607
— $
—
—
—
—
1,563 $
3,502
—
2,559
7,624
1,890 $
4,176
—
2,559
8,625
7,500
8,607
—
7,624
8,625
1,498
378
48
1,924
454
7
1,808
876
147
2,831
460
7
2,385
3,298
380
87
11
478
105
1
584
2,131
1,550
4,571
8,252
1,983
—
2,538
2,034
5,840
10,412
1,991
—
10,235
12,403
2,246
2,981
3,604
376
2,463
9,424
454
7
9,885 $
3,658
4,842
475
2,463
11,438
460
7
11,905 $
$
380
87
11
—
478
105
1
584 $
3,694
5,052
4,571
2,559
15,876
1,983
—
17,859 $
4,428
6,210
5,840
2,559
19,037
1,991
—
21,028 $
349
482
515
—
1,346
900
—
2,246
(1) The amount of the investment in a loan is not net of a valuation allowance, but does reflect any direct write-down of the investment
(2) The contractual amount due reflects paydowns applied in accordance with loan documents, but does not reflect any direct write-downs or
valuation allowance
The following table summarizes the average recorded investment of impaired loans for the years ended
December 31, 2019 and 2018 (dollars in thousands):
Mortgage loans on real estate:
Residential 1‑4 family
Commercial
Construction and land development
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
Total impaired loans
Average Investment Interest Recognized Average Investment Interest Recognized
2019
2018
$
$
3,395 $
4,096
2,709
2,519
—
12,719
1,386
5
14,110 $
87 $
145
—
—
—
232
16
—
248 $
3,993 $
4,822
4,839
1,535
27
15,216
1,175
3
16,394 $
124
164
—
123
—
411
19
—
430
62
Troubled debt restructures 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. A reconciliation of impaired loans to
nonaccrual loans as of December 31, 2019 and December 31, 2018 is set forth in the table below (dollars in thousands):
Nonaccrual loans
Trouble debt restructure and still accruing
Total impaired
$
$
2019
2018
5,292 $
4,593
9,885 $
9,500
8,359
17,859
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 years ended December 31, 2019 and
2018. For the years ended December 31, 2019 and 2018, estimated interest income of $345,000 and $634,000,
respectively, would have been recorded if all such loans had been accruing interest according to their original contractual
terms.
The following tables present an age analysis of past due status of loans by category as of December 31, 2019
and 2018 (dollars in thousands):
December 31, 2019
30‑89 Days 90+ Days Past
Total Past
Total Loans
Past Due
Due and
Accruing
Nonaccrual
Due
Current
Receivable
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
$ 1,308 $
552
166
229
—
—
2,255
1,085
41
—
— $
—
—
—
—
—
—
946
—
—
1,378 $
1,006
376
—
2,463
—
5,223
62
7
—
2,686 $
1,558
542
229
2,463
—
7,478
2,093
48
—
220,852 $ 223,538
396,858
395,300
146,566
146,024
6,639
6,410
72,978
70,515
8,346
8,346
854,925
847,447
191,183
189,090
11,163
11,115
1,052
1,052
1,058,32
3
Total loans
$ 3,381 $
946 $
5,292 $
9,619 $ 1,048,704 $
30‑89 Days 90+ Days Past
Past Due Due and Accruing Nonaccrual
Total Past
Due
Current
Total Loans
Receivable
December 31, 2018
— $
—
—
—
—
—
—
—
—
—
— $
1,257 $
2,123
4,571
—
—
—
7,951
1,549
—
—
1,752 $
2,674
4,630
—
2,559
—
11,615
1,629
10
—
9,500 $ 13,254 $
214,516 $ 216,268
379,904
377,230
120,413
115,783
6,778
6,778
59,557
56,998
8,370
8,370
791,290
779,675
188,722
187,093
12,048
12,038
1,645
1,645
980,451 $ 993,705
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
495 $
551
59
—
2,559
—
3,664
80
10
—
$ 3,754 $
63
Activity in the allowance for loan losses on loans by segment for the years ended December 31, 2019 and 2018
is presented in the following tables (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
Unallocated
Total loans
December 31, 2018 Allocation Charge-offs Recoveries December 31, 2019
Year Ended December 31, 2019
Provision
$
$
2,281 $
1,810
1,161
20
371
17
5,660
1,894
152
12
1,265
8,983 $
315 $
583
24
53
(164)
21
832
626
99
(5)
(1,227)
325 $
(178) $
(277)
(212)
—
—
—
(667)
(724)
(253)
—
—
(1,644) $
267 $
80
71
6
41
—
465
184
116
—
—
765 $
2,685
2,196
1,044
79
248
38
6,290
1,980
114
7
38
8,429
December 31, 2017 Allocation Charge-offs Recoveries December 31, 2018
Year Ended December 31, 2018
Provision
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
$
$
3,466 $ (1,252) $
2,423
1,247
24
496
14
7,670
1,139
110
3
47
8,969 $
(647)
3
(10)
(125)
3
(2,028)
751
53
6
1,218
— $
(89) $
—
(127)
—
—
—
(216)
(45)
(220)
—
—
(481) $
156 $
34
38
6
—
—
234
49
209
3
—
495 $
2,281
1,810
1,161
20
371
17
5,660
1,894
152
12
1,265
8,983
The following tables present information on the loans evaluated for impairment in the allowance for loan losses
as of December 31, 2019 and 2018 (dollars in thousands):
December 31, 2019
Allowance for Loan Losses
Recorded Investment in Loans
Individually Collectively
Evaluated for Evaluated for
Impairment
Impairment
Individually Collectively
Evaluated for Evaluated for
Impairment
Impairment
Total
Total
Mortgage loans on real estate:
$
Residential 1‑4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Unallocated
Total loans
$
380 $
87
11
—
—
—
478
105
1
—
—
584 $
2,305 $ 2,685 $
2,109
1,033
79
248
38
5,812
1,875
113
7
38
2,196
1,044
79
248
38
6,290
1,980
114
7
38
7,845 $ 8,429 $
2,981 $ 220,557 $ 223,538
396,858
393,254
3,604
146,566
146,190
376
6,639
6,639
—
72,978
70,515
2,463
8,346
8,346
—
854,925
845,501
9,424
191,183
190,729
454
11,163
11,156
7
1,052
1,052
—
—
—
—
9,885 $ 1,048,438 $ 1,058,323
64
Allowance for Loan Losses
Recorded Investment in Loans
December 31, 2018
Individually Collectively
Evaluated fo
r
Impairment
Evaluated for
Impairment
Individually
Collectively
Evaluated for Evaluated for
Total
Impairment
Impairment
Total
Mortgage loans on real estate:
$
Residential 1‑4 family
Commercial
Construction and land development
Second mortgages
Multifamily
Agriculture
Total real estate loans
Commercial loans
Consumer installment loans
All other loans
Unallocated
Total loans
$
349 $
482
515
—
—
—
1,346
900
—
—
—
2,246 $
1,932 $
1,328
646
20
371
17
4,314
994
152
12
1,265
6,737 $
2,281 $
1,810
1,161
20
371
17
5,660
1,894
152
12
1,265
8,983 $
3,694 $
5,052
4,571
—
2,559
—
15,876
1,983
—
—
—
17,859 $
212,574 $ 216,268
379,904
374,852
120,413
115,842
6,778
6,778
59,557
56,998
8,370
8,370
791,290
775,414
188,722
186,739
12,048
12,048
1,645
1,645
—
—
975,846 $ 993,705
Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as
follows:
Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification.
This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $12.7 million and
$17.4 million at December 31, 2019 and 2018, 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 distinct possibility of loss if
the deficiencies are not corrected.
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.
65
The following tables present the composition of loans by credit quality indicator as of December 31, 2019 and
2018 (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
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, 2019
Special
Pass
Mention Substandard Doubtful
Total
$
219,210 $ 2,964 $
391,251
145,782
6,096
70,515
8,098
840,952
185,123
11,140
1,052
3,188
408
543
—
248
7,351
2,770
16
—
$ 1,038,267 $ 10,137 $
1,364 $
2,419
376
—
2,463
—
6,622
3,290
7
—
9,919 $
223,538
— $
396,858
—
146,566
—
6,639
—
72,978
—
8,346
—
854,925
—
191,183
—
11,163
—
—
1,052
— $ 1,058,323
December 31, 2018
Special
Pass
Mention Substandard Doubtful
Total
$ 211,832 $ 3,179 $
372,745
115,650
6,686
56,802
8,312
772,027
184,004
12,042
1,645
3,551
192
92
196
58
7,268
1,798
6
—
1,257 $
3,608
4,571
—
2,559
—
11,995
2,920
—
—
$ 969,718 $ 9,072 $ 14,915 $
— $ 216,268
379,904
—
120,413
—
6,778
—
59,557
—
8,370
—
791,290
—
188,722
—
12,048
—
—
1,645
— $ 993,705
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 24 and 25 loans that met the
definition of a TDR at December 31, 2019 and 2018, respectively.
The Company had no loan modifications considered to be TDRs during the year ended December 31, 2019.
During the year ended December 31, 2018, the Company modified one multifamily loan, one commercial real estate
loan, and one commercial loan that were considered to be TDRs, which had total pre- and post-modification balances of
$2.6 million, $126,000, and $233,000 respectively. The Company restructured the terms for the multifamily and
commercial loans to interest only payments for six months and extended the maturity for the commercial real estate
loan.
A loan is considered to be in default if it is 90 days or more past due. During the year ended December 31,
2019, one loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily
real estate loan had a recorded investment of $2.5 million. During the year ended December 31, 2018, the Company had
no loans that went into default that had been restructured in the 12 month period prior to the time of default.
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.
66
At December 31, 2019 the Company had 1-4 family mortgages in the amount of $107.0 million pledged as
collateral to the Federal Home Loan Bank for a total borrowing capacity of $90.4 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, 2019 and 2018, the outstanding contractual balance of the PCI loans was $53.2 million and
$62.2 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
2019
Amount
% of PCI
Loans
2018
% of PCI
Amount
Loans
$ 29,465
490
1,172
1,169
232
32,528
$ 32,528
90.58 % $ 34,240
746
1.51
1,326
3.60
1,729
3.59
244
0.72
100.00
38,285
100.00 % $ 38,285
89.43 %
1.95
3.46
4.52
0.64
100.00
100.00 %
There was no activity in the allowance for loan losses on PCI loans for the year ended December 31, 2019.
During the year ended December 31, 2018, the Company recorded charge-offs of $62,000 and recoveries of $18,000 on
PCI loans in the residential 1-4 family loan category.
The following table presents information on the PCI loans collectively evaluated for impairment in the
allowance for loan losses as of December 31, 2019 and 2018 (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
2019
2018
Allowance Recorded
Allowance Recorded
for loan
losses
investment in
loans
for loan
losses
investment in
loans
$
$
156 $
—
—
—
—
156
156 $
29,465 $
490
1,172
1,169
232
32,528
32,528 $
156 $
—
—
—
—
156
156 $
34,240
746
1,326
1,729
244
38,285
38,285
67
The change in the accretable yield balance for the years ended December 31, 2019 and 2018 is as follows
(dollars in thousands):
Balance, January 1, 2018
Accretion
Reclassification to nonaccretable difference
Balance, December 31, 2018
Accretion
Reclassification from nonaccretable difference
Balance, December 31, 2019
$ 44,126
(5,219)
(800)
$ 38,107
(6,010)
1,369
$ 33,466
The PCI loans were not classified as nonperforming assets as of December 31, 2019 or 2018, 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. Bank Premises and Equipment Held for Sale
Bank premises and equipment held for sale includes two buildings relating to branch closures, which are
currently listed for sale. The Prince Street branch in Tappahannock, Virginia closed in 2018. The book value of
$552,000 reflects the lower of cost or fair market value at each of December 31, 2019 and 2018. The Cumberland branch
in Cumberland, Virginia closed in 2019. The book value of $337,000 reflects the lower of cost or fair market value at
December 31, 2019.
Also included in bank premises and equipment held for sale is a piece of land the Company had been holding as
a possible future branch site. The Company has decided not to pursue that location and is marketing the property. The
book value of $700,000 reflects the lower of cost or fair market value at each of December 31, 2019 and 2018.
Note 6. Premises and Equipment
A summary of the bank premises and equipment is as follows (dollars in thousands):
Land
Land improvements and buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less accumulated depreciation and amortization
Bank premises and equipment, net
December 31
2019
7,797 $
21,248
3,739
11,652
222
44,658
(15,186)
29,472 $
2018
7,991
21,405
3,908
11,422
65
44,791
(13,303)
31,488
$
$
Depreciation expense was $2.0 million and $1.9 million for the years ended December 31, 2019 and 2018,
respectively.
Note 7. Other Real Estate Owned
The following table presents the balances of other real estate owned as of December 31, 2019 and 2018 (dollars
in thousands):
Residential 1‑4 family
Commercial
Construction and land development
Total other real estate owned
2019
2018
$
$
21 $
—
4,506
4,527 $
314
15
770
1,099
68
At December 31, 2019, the Company had $455,000 in residential 1-4 family loans and PCI loans that were in
the process of foreclosure.
Note 8. Deposits
The following table provides interest bearing deposit information, by type, as of December 31, 2019 and 2018
(dollars in thousands):
NOW
MMDA
Savings
Time deposits less than or equal to $250,000
Time deposits over $250,000
Total interest bearing deposits
2019
2018
$
$
170,532 $
120,841
96,570
477,461
119,460
984,864 $
165,946
126,933
92,910
485,155
128,945
999,889
The scheduled maturities of time deposits at December 31, 2019 are as follows (dollars in thousands):
2020
2021
2022
2023
2024
Total
$ 470,281
74,490
25,941
13,143
13,066
$ 596,921
Brokered deposits totaled $11.6 million and $16.4 million at December 31, 2019 and 2018, respectively.
Note 9. Borrowings
The Company uses borrowings in conjunction with deposits to fund lending and investing activities.
Borrowings include overnight borrowings from correspondent banks (federal funds purchased) and funding from the
Federal Home Loan Bank (FHLB). The Company classifies all borrowings that will mature within a year from the date
on which the company enters into them as short-term advances.
The following table presents the Company’s borrowings as of December 31, 2019 and 2018 (dollars in
thousands):
Federal funds purchased
FHLB:
Short-term advances
Long-term notes payable
Total
2019
2018
$
24,437 $
19,440
$
$
20,000 $
48,500
68,500 $
40,000
19,447
59,447
The average interest rate of federal funds purchased during the years ended December 31, 2019 and 2018 was
2.56% and 2.28%, respectively.
The Company has an available line of credit with the FHLB of Atlanta which allows the Company to borrow on
a collateralized basis. As of December 31, 2019, the Company had residential 1-4 family mortgages in the amount of
$107.0 million pledged as collateral to the FHLB for a total borrowing capacity of $90.4 million. FHLB advances are
considered short-term borrowings and are used to manage liquidity as needed. The average interest rate of FHLB
advances during the years ended December 31, 2019 and 2018 was 2.45% and 1.97%, respectively. Long-term notes
payable have interest rates ranging from 0.85% to 2.07% with maturities ranging from 2022-2024. The Company had $0
and $8.3 million in variable LIBOR rate long-term notes payable at December 31, 2019 and 2018, respectively.
69
Maturities of long-term debt at December 31, 2019 are as follows (dollars in thousands):
2022
2024
Total
$ 28,500
20,000
$ 48,500
The Company had unsecured lines of credit with correspondent banks available for overnight borrowing
totaling $55.0 million at December 31, 2019.
Note 10. Accumulated Other Comprehensive Income (Loss)
The following tables present activity net of tax in accumulated other comprehensive income (loss) (AOCI) for
the years ended December 31, 2019 and 2018 (dollars in thousands):
Year ended December 31, 2019
Unrealized
Gain (Loss) on
Securities
Defined
Benefit
Pension Plan
Gain (Loss) on Total Other
Cash Flow
Hedge
Comprehensive
Income (Loss)
Beginning balance
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive income (loss)
Ending balance
$
(618) $
(857) $
196 $
(1,279)
3,688
(183)
3,505
2,887 $
(33)
4
(29)
(886) $
(232)
—
(232)
(36) $
3,423
(179)
3,244
1,965
$
Year ended December 31, 2018
Unrealized
Gain (Loss) on
Securities
Defined
Benefit
Pension Plan
Gain (Loss) on Total Other
Cash Flow
Hedge
Comprehensive
Income (Loss)
Beginning balance
Other comprehensive (loss) income before
reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive (loss) income
Ending balance
$
954 $
(1,048) $
137 $
43
(1,518)
(54)
(1,572)
$
(618) $
188
3
191
(857) $
59
—
59
196 $
(1,271)
(51)
(1,322)
(1,279)
The Company releases the income tax effects included in AOCI when income or loss from the related items has
been recognized in earnings. The following tables present the effects of reclassifications out of AOCI on line items of
consolidated income (loss) for the years ended December 31, 2019 and 2018 (dollars in thousands):
Details about AOCI Components
Amount Reclassified from AOCI
Year ended
2019
2018
Affected Line Item in the Unaudited Consolidated
Statement of Income
Securities available for sale:
Unrealized gains on securities
available for sale
Related tax expense
Defined benefit plan
Amortization of prior service cost
Related tax benefit
Total reclassifications for the period
$
$
$
$
$
(70) Gain on securities transactions, net
16 Income tax expense
(54) Net of tax
5 Salaries and employee benefits
(2) Income tax expense
3 Net of tax
(51)
(235) $
52
(183) $
5 $
(1)
4 $
(179) $
70
Note 11. Income Taxes
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, 2019 and 2018 are as follows (dollars in thousands):
$
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Unrealized loss on available for sale securities
Pension adjustment
Purchase accounting adjustment(1)
OREO
Leased assets
Other
Deferred tax liabilities:
Accrued pension
Unrealized gain on available for sale securities
Depreciation premises and equipment
Lease liabilities
Other
Net deferred tax asset
$
2019
2018
1,852 $
762
—
249
2,625
59
1,481
185
7,213
226
813
399
1,422
12
2,872
4,341 $
1,974
675
174
242
3,113
59
—
168
6,405
256
—
408
—
67
731
5,674
(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.
Allocation of the income tax expense between current and deferred portions is as follows (dollars in thousands):
Current tax provision
Deferred tax expense
Income tax expense
2019
3,132 $
420
3,552 $
2018
2,313
772
3,085
$
$
The following is a reconciliation of the expected income tax expense (benefit) with the reported expense for
each year:
Statutory federal income tax rate
(Reduction) increase in taxes resulting from:
Municipal interest
Bank owned life insurance income
Stock compensation
Other, net
Effective tax rate
Note 12. Employee Benefit Plans
2019
2018
21 %
21 %
(1.5)
(0.8)
(0.4)
0.1
18.4 %
(2.5)
(0.9)
0.7
0.1
18.4 %
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, which are included in salaries and employee benefits in
71
the consolidated statement of income, in accordance with the funding provisions of the Employee Retirement Income
Security Act.
The Company froze the plan benefits for all defined benefit plan participants effective December 31, 2010.
Information pertaining to the activity in the plan for the years ended December 31, 2019 and 2018 is as follows (dollars
in thousands):
Change in Benefit Obligation
Benefit obligation, beginning of year
Interest cost
Actuarial loss/(gain)
Benefits paid
Settlement loss
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 assets
Other liabilities
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
Net loss
Prior service cost
Deferred tax
Total amount recognized
Accumulated benefit obligation
Components of net periodic cost (income)
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net loss due to settlement
Recognized net actuarial loss
Net periodic cost (income)
2019
2018
$
$
$
$
4,112 $
162
473
(635)
2
4,114 $
4,180 $
461
(635)
4,006
(108) $
$
— $
(108)
$
$
$
1,095 $
40
(249)
886 $
4,114 $
4,560
158
(507)
(99)
—
4,112
4,369
(90)
(99)
4,180
68
68
—
1,054
45
(242)
857
4,112
$
$
162 $
(214)
5
140
47
140 $
158
(238)
5
—
60
(15)
Other changes in plan assets and benefit obligations recognized in other comprehensive
income
Net (gain) loss
Amortization of prior service cost
Total amount recognized
Total recognized in net periodic benefit (income) cost and accumulated other
comprehensive (loss) income
$
$
$
41 $
(5)
36 $
(238)
(5)
(243)
176 $
(258)
72
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
December 31
2019
4.25 %
3.25 %
5.50 %
2018
3.50 %
4.25 %
5.50 %
The estimated amounts that will amortize from accumulated other comprehensive income into net periodic
benefit cost in 2020 are as follows (dollars in thousands):
Prior service cost
Net loss
Total amount recognized
Long-Term Rate of Return
$
$
5
49
54
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 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, 2019 and 2018 by asset category
were as follows:
Asset Category
Mutual funds — fixed income
Mutual funds — equity
Cash and equivalents
Total
2019
2018
74.00 %
26.00
—
77.00 %
23.00
—
100.00 % 100.00 %
The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 21, “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.
73
The following table presents the fair value of plan assets as of December 31, 2019 and 2018 (dollars in
thousands):
Cash
Mutual funds:
Fixed income funds
International funds
Large cap funds
Mid cap funds
Small cap funds
Stock fund
Assets measured at Fair Value (Level 1)
2019
2018
$
4 $
6
2,956
272
364
137
79
194
4,006 $
3,205
269
342
125
76
157
4,180
$
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing
return, with a targeted asset allocation of 74% fixed income and 26% 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
2020
Expected Benefit Payments
2020
2021
2022
2023
2024
2025-2029
401(k) Plan
$
—
182
63
125
64
177
2,940
The Company maintains the Essex Bank 401(k) plan. 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, 2019 and 2018 were
$614,000 and $617,000, 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 $110,000 and $204,000 for the years ended December 31, 2019 and 2018,
respectively. The associated liabilities related to these agreements were $2.1 million at each of December 31, 2019 and
2018.
74
In 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. The
planned contributions were based on the same metrics that the Company used for its annual incentive plan for executive
officers. All contributions were 100% vested as of December 31, 2019. The expense related to this plan was $444,000
and $343,000 for the years ended December 31, 2019 and 2018, respectively, with an associated liability of $1.6 million
and $1.2 million at December 31, 2019 and 2018, respectively.
Note 13. Stock Option Plans
Stock Option Plan
In 2019, the Company adopted the Community Bankers Trust Corporation 2019 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 2,500,000 shares of common stock, all of which may be issued in connection with the
exercise of incentive stock options. Annual grants of stock options are limited to 200,000 shares for each participant,
except that each non-employee directors is limited to 20,000 shares.
The exercise price of a 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 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 terminate on May 16, 2029, unless terminated sooner by the Board of Directors.
The Company’s previously adopted 2009 Stock Incentive Plan terminated June 17, 2019. The 2009 Plan had
the same general terms as the newly adopted 2019 Plan. Outstanding awards under the 2009 Plan will be administered
in accordance with their terms under such plan.
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, 2019 and 2018:
Expected volatility
Expected term (years)
Risk free rate
2019
40 %
6.25
2.66 %
2018
40 %
6.25
2.54 %
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 minimal historical
exercise data exists.
The Company plans to issue new shares of common stock when options are exercised. The Company
recognizes forfeitures as they occur.
75
The Company issues equity grants to non-employee directors as payment for annual retainer fees. The fair 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, 2019 and 2018 is shown in the following table:
2019
2018
Month
March
June
July
September
December
Shares Issued Fair Value Shares Issued Fair Value
8.35
9.85
9.85
9.05
8.27
6,675
6,723
—
7,459
6,210
4,670
3,552
616
4,741
5,192
8.08
7.28
—
7.76
8.69
The Company granted 279,000 options in 2018 and 322,000 options in 2019 to employees which vest ratably
over the requisite service period of four years. A summary of options outstanding for the year ended December 31, 2019,
is shown in the following table:
Number of Shares
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
Outstanding at beginning of year
Granted
Forfeited
Expired
Exercised
Outstanding at end of year
Options outstanding and exercisable at end of year
1,574,250 $
322,000
(32,500)
(6,750)
(263,250)
1,593,750
886,500
5.18
7.70
7.56
8.37
3.39
5.92
4.56
Weighted average remaining contractual life for
outstanding and exercisable shares at year end
60 months
$
$
4,714,405
3,827,808
The weighted average fair value per option of options granted during the year was $3.34 and $3.65 for the years
ended December 31, 2019 and 2018, 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, 2019. This amount changes with changes in the market value of the Company’s
stock. The Company received $893,000 and $146,000 in cash related to option exercises with a total intrinsic value of
$1.2 million and $220,000 during the years ended December 31, 2019 and 2018, respectively. A tax benefit in
connection with the option exercises of $260,000 and $48,000 was recognized in income tax expense during 2019 and
2018, respectively.
The Company recorded total stock-based compensation expense of $1.1 million and $947,000 for the years
ended December 31, 2019 and 2018, respectively. Of the $1.1 million in expense that was recorded in 2019, $860,000
related to employee grants and is classified as salaries and employee benefits expense; $215,000 related to the non-
employee director grants and is classified as other operating expenses. Of the $947,000 in expense that was recorded in
2018, $781,000 related to employee grants and is classified as salaries and employee benefits expense; $166,000 related
to the non-employee director grants and is classified as other operating expenses.
76
The following table summarizes non-vested options outstanding as of December 31, 2019:
Non-vested at beginning of the year
Granted
Vested
Forfeited
Non-vested at end of year
Weighted Average
Number of Shares
Grant-Date
Fair Value
695,500 $
322,000
(277,750)
(32,500)
707,250
3.10
3.34
2.82
3.31
3.32
The unrecognized compensation expense related to non-vested options was $1.5 million at December 31, 2019
to be recognized over a weighted average period of 29 months. The total fair market value of shares vested during
the years ended December 31, 2019 and 2018 was $782,000 and $593,000, respectively.
Note 14. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income or loss by the weighted average number of
shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding
during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments. The
following table presents basic and diluted EPS for the years ended December 31, 2019 and 2018 (dollars and shares in
thousands, except per share data):
For the year ended December 31, 2019
Basic EPS
Effect of dilutive stock awards
Diluted EPS
For the year ended December 31, 2018
Basic EPS
Effect of dilutive stock awards
Diluted EPS
Net Income
(Numerator)
Weighted Average
Shares
(Denominator)
Per
Share Amount
$
$
$
$
15,705
—
15,705
13,688
—
13,688
22,264 $
267
22,531 $
22,103 $
466
22,569 $
0.71
(0.01)
0.70
0.62
(0.01)
0.61
There were no antidilutive exclusions from the computation of diluted earnings per share for the years ended
December 31, 2019 and 2018.
Note 15. 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 Bank had an insignificant amount of such loans
outstanding at December 31, 2019 and 2018, respectively.
The Bank held deposits of related parties in the amount of $2.5 million and $2.6 million as of December 31,
2019 and 2018, respectively.
Note 16. Cash Flow Hedge
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability
in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase
agreements, and brokered CDs. The Company had interest rate swaps designated as cash flow hedges with total notional
amounts of $10 million and $30 million at December 31, 2019 and 2018, respectively. The swaps were entered into with
a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the
77
at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had
$180,000 and $0 of cash pledged as collateral as of December 31, 2019 and 2018, 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
derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. 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 highly effective for the years ended 2019 and 2018.
The Company recorded a fair value liability of $44,000 and a fair value asset of $253,000 at December 31, 2019 and
2018, respectively. The net gain (loss) was recorded as a component of other comprehensive income net of associated
tax effects.
Note 17. Concentration of Credit Risk
At December 31, 2019 and 2018, the Company’s loan portfolio consisted of commercial, real estate and
consumer (installment) loans. Real estate secured loans represented the largest concentration at 81.35% and 80.38% of
the loan portfolio for 2019 and 2018, respectively.
The Company 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 $9.5 million and
$11.0 million at December 31, 2019 and 2018, respectively.
Note 18. Financial Instruments With Off-Balance Sheet Risk
The Company 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
Company has in particular classes of financial instruments.
The Company’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 Company uses the same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. A summary of the contract amounts of the Company’s exposure to off-balance
sheet risk as of December 31, 2019 and 2018, 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
2019
2018
$
$
210,086 $
15,155
225,241 $
204,831
5,280
210,111
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 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 Company is committed.
78
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 amount of collateral obtained, if
deemed necessary by the Company 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 19. Minimum Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of 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.
Quantitative measures established by regulation to ensure capital adequacy require 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, 2019 and 2018, that the Bank met all capital adequacy requirements
to which it is subject.
As of December 31, 2019, based on regulatory guidelines, 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.
The Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands).
Required in Order to be
Actual
Amount
Ratio
Required for Capital Well Capitalized Under Prompt
Adequacy Purposes
Amount Ratio
Corrective Action
Amount
Ratio
As of December 31, 2019:
Total Capital to risk weighted assets
Tier 1 Capital to risk weighted assets
Common Equity Tier 1 Capital to risk
weighted assets
Tier 1 Capital to adjusted average total
assets
As of December 31, 2018:
Total Capital to risk weighted assets
Tier 1 Capital to risk weighted assets
Common Equity Tier 1 Capital to risk
weighted assets
Tier 1 Capital to adjusted average total
assets
$ 164,783
156,541
13.86 % $ 95,137
13.16 % 71,353
8.00 % $ 118,922
95,137
6.00 %
10.00
8.00 %
156,541
13.16 % 53,515
4.50 %
77,299
6.50 %
156,541
11.03 % 56,750
4.00 %
70,937
5.00 %
$ 149,085
140,289
13.34 % $ 89,409
12.55 % 67,057
8.00 % $ 111,762
89,409
6.00 %
10.00 %
8.00 %
140,289
12.55 % 50,292
4.50 %
72,645
6.50 %
140,289
10.22 % 54,882
4.00 %
68,603
5.00 %
Under the Basel III regulatory capital framework, a capital conservation buffer of 2.5% above the minimum
risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Bank does
not maintain the full amount of the buffer. The capital conservation buffer was phased in between January 1, 2016 and
January 1, 2019. The Bank had a capital conservation buffer of 5.86% and 5.34% at December 31, 2019 and 2018,
respectively, above the required buffer of 2.5% and 1.875% for 2019 and 2018, respectively.
79
Note 20. 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 (an exit price) 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.
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, 2019.
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 the cash flow hedge 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):
Total
Level 1
Level 2
Level 3
December 31, 2019
$
— $
— $
21,936
98,592
48,740
11,604
6,097
186,969
— $
—
10,072
1,181
—
—
11,253
$ 186,969 $ 11,253 $ 175,716 $
$
$
21,936
88,520
47,559
11,604
6,097
175,716
— $
— $
44
44 $
44
44 $
—
—
—
—
—
—
—
—
—
—
Investment securities available for sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total investment securities available for sale
Total assets at fair value
Cash flow hedge liability
Total liabilities at fair value
80
Investment securities available for sale
U.S. Treasury securities
U.S. Government agencies
State, county and municipal
Mortgage backed securities
Asset backed securities
Corporate bonds
Total investment securities available for sale
Cash flow hedge asset
Total assets at fair value
Total liabilities at fair value
Investment securities available for sale
Total
Level 1
Level 2
Level 3
December 31, 2018
$ 13,124 $
24,609
112,542
46,417
5,411
4,623
206,726
253
$ 206,979 $
— $
$
1,479 $ 11,645 $
2,178
2,644
3,496
—
—
9,797
—
22,431
109,898
42,921
5,411
4,623
196,929
253
9,797 $ 197,182 $
— $
— $
—
—
—
—
—
—
—
—
—
—
Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement
is based upon quoted prices, if available (Level 1). 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 (Level
2).
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 reputable pricing companies for security market
data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement
on Standards for Attestation Engagements No. 18 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.
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, 2019 and 2018 (dollars in thousands):
Impaired loans
Loans held for sale
Bank premises and equipment held for sale
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Total
3,020 $
501
1,589
4,527
9,637 $
— $
$
$
$
December 31, 2019
Level 1
Level 2
Level 3
— $
—
—
—
— $
— $
— $
501
—
—
501 $
— $
3,020
—
1,589
4,527
9,136
—
81
Impaired loans
Loans held for sale
Bank premises and equipment held for sale
Other real estate owned
Total assets at fair value
Total liabilities at fair value
Impaired loans
$
Total
9,343 $
146
1,252
1,099
$ 11,840 $
— $
$
December 31, 2018
Level 1
Level 2
Level 3
— $
—
—
—
— $
— $
— $
146
—
—
9,343
—
1,252
1,099
146 $ 11,694
—
— $
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, 2019 and December 31, 2018, 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 deemed to be stale or 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 without further
adjustment for unobservable inputs, 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, due to such things as absorption rates and market conditions, 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 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.
Loans held for sale
The carrying amounts of loans held for sale approximate fair value (Level 2).
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.
82
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. Additionally, in accordance with FASB ASU 2016-01, which the Company
adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price
notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.
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):
Carrying Value
Estimated Fair
Value
Level 1
Level 2
Level 3
December 31, 2019
Financial assets:
Securities held to maturity
Loans, net of allowance
PCI loans, net of allowance
Financial liabilities:
Interest bearing deposits
Borrowings
Financial assets:
Securities held to maturity
Loans, net of allowance
PCI loans, net of allowance
Financial liabilities:
Interest bearing deposits
Borrowings
$
35,733 $
36,633 $
1,049,894
32,372
1,041,671
38,982
— $ 36,633 $
—
—
—
—
—
1,041,671
38,982
984,864
72,624
985,853
72,457
—
—
985,853
72,457
—
—
Carrying Value
Estimated Fair
Value
Level 1
Level 2
Level 3
December 31, 2018
$
42,108 $
42,253 $
984,722
38,129
978,778
42,674
— $
—
—
42,253 $
—
—
—
978,778
42,674
999,889
63,571
997,714
63,393
—
—
997,714
63,393
—
—
Note 21. Trust Preferred Capital Notes
On December 12, 2003, BOE Statutory Trust I, a wholly-owned unconsolidated 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, 2019 and 2018 was 5.45% and 5.19%, 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 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.
83
Note 22. Revenue Recognition
On January 1, 2018, the Company adopted FASB ASU 2014-09, Revenue from Contracts with Customers
(Topic 606), and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a
material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening
retained earnings was not deemed necessary. Topic 606 does not apply to revenue associated with financial instruments,
including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with
mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new
guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant
income, and brokerage fees and commissions. However, the recognition of these revenue streams did not change
significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with
customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service charges on deposit accounts
The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft
services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH
fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s
request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of
a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are
recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s
account balance.
Interchange and ATM fees
The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the
Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the
underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to
the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers,
related costs are netted against the fee income. These costs were included in other operating expenses prior to the
adoption of Topic 606.
Brokerage fees and commissions
Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of
mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The
Company receives commissions from the third-party service provider on a monthly basis based upon customer activity
for the month. The investment advisor fees are charged to the customer’s account in advance on the first month of the
quarter, and the revenue is recognized over the following three-month period.
The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of
Topic 606, for the years ended December 31, 2019 and 2018 (dollars in thousands):
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts
Interchange and ATM fees
Brokerage fees and commissions
Noninterest income (in-scope of Topic 606)
Noninterest income (out-of-scope of Topic 606)
Total noninterest income
2019
2018
$
$
1,833 $
999
399
3,231
2,123
5,354 $
1,646
864
364
2,874
1,589
4,463
84
Note 23. Leases
On January 1, 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-
cancellable operating leases and subleases of bank premises. The guidance was implemented using the modified
retrospective transition approach at the date of adoption with no cumulative effect adjustment to opening retained
earnings and no material impact on the measurement of operating lease costs. Prior period amounts were not adjusted
and continue to be reported in accordance with the Company’s historical accounting policies, resulting in a balance sheet
presentation that is not comparable to the prior period in the first year of adoption. The Company elected the practical
expedient package, which allowed it to not reassess (1) whether expired or existing contracts are or contain a lease, (2)
the lease classification of expired or existing leases, and (3) the initial direct costs for any existing leases. The Company
also elected the practical expedient to use hindsight in determining the lease term for existing leases, thereby including
renewal options that the Company is reasonably certain will be exercised in the lease term. The adoption of this ASU
resulted in the recognition of operating lease assets of $7.4 million and lease liabilities of $7.6 million at January 1,
2019.
The Company's leases have lease terms between five years and 20 years, with the longest lease term having an
expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease
commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering
various economic factors. Options that are reasonably certain of being exercised are factored into the determination of
the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability. The
Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate
implicit in a lease is not disclosed. None of the Company’s current leases contain variable lease payment terms. The
Company accounts for associated non-lease components separately.
The following table presents operating lease liabilities at December 31, 2019 (dollars in thousands):
Gross lease liability
Less: imputed interest
Present value of lease liability
December 31, 2019
9,278
(2,541)
6,737
$
$
The weighted average remaining lease term and weighted average discount rate for operating leases at
December 31, 2019 was 12.0 years and 4.63%, respectively. Maturities of the gross operating lease liability at December
31, 2019 are as follows (dollars in thousands):
2020
2021
2022
2023
2024
Thereafter
Total of future payments
$
$
1,231
1,191
600
630
573
5,053
9,278
Operating lease costs and sublease rental income for the year ended December 31, 2019 were $1.5 million and
$191,000, respectively. Included in operating lease costs was $138,000 for the year ended December 31, 2019, related
to the early termination of an unprofitable branch recognized on June 30, 2019. Rental expense and sublease rental
income under operating lease agreements for the year ended December 31, 2018 were $1.4 million and $109,000,
respectively.
85
Note 24. Other Operating Expenses
Other operating expenses 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 two years are stated
separately (dollars in thousands).
Bank franchise tax
Stationery, printing and supplies
Advertising expense
Credit expense
Outside vendor fees
Other expenses
Total other operating expenses
Note 25. Parent Corporation Only Financial Statements
$
$
2019
2018
880 $
625
526
617
673
2,705
6,026 $
574
586
613
501
631
2,898
5,803
PARENT COMPANY
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2019 and 2018
(dollars in thousands)
2019
2018
Assets
Cash
Other assets
Investments in subsidiaries
Total assets
Liabilities
Other liabilities
Balances due to non-bank subsidiary
Total liabilities
Shareholders’ Equity
$
811 $
286
158,506
2,324
252
139,010
$ 159,603 $ 141,586
$
— $
4,124
4,124
1
4,124
4,125
Common stock (200,000,000 shares authorized $0.01 par value; 22,422,621 and 22,132,304
shares issued and outstanding, respectively)
Additional paid in capital
Retained earnings (deficit)
Accumulated other comprehensive income (loss)
224
150,728
2,562
1,965
221
148,763
(10,244)
(1,279)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 155,479 $ 137,461
$ 159,603 $ 141,586
86
PARENT COMPANY
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars in thousands)
Income:
Dividends received from subsidiaries
Other operating income
Total income
Expenses:
Interest expense
Management fee paid to subsidiaries
Stock compensation expense
Professional and legal expenses
Other operating expenses
Total expenses
Equity in undistributed income of subsidiaries
Net income before income taxes
Income tax benefit
Net income
Comprehensive income
2019
2018
$
— $
7
7
228
242
90
79
55
694
—
8
8
217
186
64
59
51
577
16,252
15,565
140
15,705 $
14,144
13,575
113
13,688
$
$
18,949 $
12,366
PARENT COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Stock compensation expense
Undistributed equity in income of subsidiary
(Increase) decrease in other assets
Decrease in other liabilities
2019
2018
$
15,705 $
13,688
1,075
(16,252)
(34)
(1)
946
(14,144)
71
(90)
Net cash and cash equivalents provided by operating activities
493
471
Financing activities:
Proceeds from issuance of common stock
Cash dividends paid
Net cash and cash equivalents (used in) provided by financing activities
(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
Note 26. Subsequent Events
893
(2,899)
(2,006)
(1,513)
2,324
$
811 $
146
—
146
617
1,707
2,324
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.
87
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.
As of December 31, 2019, 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, 2019, the Company’s internal control
over financial reporting was effective based on the criteria set forth by COSO in its “Internal Control — Integrated
Framework.”
Yount, Hyde & Barbour, P.C., the independent registered public accounting firm that audited the consolidated
financial statements of the Company for the year ended December 31, 2019, has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. 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 2019 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.
88
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.
As of December 31, 2019, 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, 2019, the Company’s internal control
over financial reporting was effective based on the criteria set forth by COSO in its “Internal Control — Integrated
Framework.”
Yount, Hyde & Barbour, P.C., the independent registered public accounting firm that audited the consolidated
financial statements of the Company for the year ended December 31, 2019, has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. 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 2019 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.
89
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 2020 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 2020 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 2020 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 2020 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 2020 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K
covers.
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 43 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
No.
Description
3.1
3.2
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),
90
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
14.1
21.1
23.1
31.1
31.2
32.1
101
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)
Description of Securities*
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)
Community Bankers Trust Corporation 2019 Stock Incentive Plan, incorporated by reference to the Company’s
Registration Statement on Form S-8 filed on September 3, 2019 (File No. 333-233606)
Form of Non-Qualified Stock Option Agreement for Community Bankers Trust Corporation 2019 Stock
Incentive Plan*
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 20, 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 (Yount, Hyde & Barbour, P.C.)*
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, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of
Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements*
*
Filed herewith.
(b) Exhibits. See Item 15(a)3. above
(c) Financial Statement Schedules. See Item 15(a)2. above
ITEM 16. FORM 10-K SUMMARY
Not applicable.
91
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.
SIGNATURES
COMMUNITY BANKERS TRUST CORPORATION
By: /s/ Rex L. Smith, III
Rex L. Smith, III
President and Chief Executive Officer
Date: March 13, 2020
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
/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/ Hugh M. Fain, III
Hugh M. Fain, III
/s/ William E. Hardy
William E. Hardy
/s/ Gail L. Letts
Gail L. Letts
/s/ Eugene S. Putnam, Jr.
Eugene S. Putnam, Jr.
/s/ S. Waite Rawls III
S. Waite Rawls III
/s/ Oliver L. Way
Oliver L. Way
/s/ Robin Traywick Williams
Robin Traywick Williams
Title
President and Chief Executive Officer and Director
(principal executive officer)
Executive Vice President and Chief Financial Officer
(principal financial officer)
Senior Vice Presidentand Controller
(principal accounting officer)
Date
March 13, 2020
March 13, 2020
March 13, 2020
Chairman of the Board
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
92
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, 2019 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 13, 2020
/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, 2019 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 13, 2020
/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, 2019 (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 13, 2020
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BOARD OF DIRECTORS
Gerald F. Barber
Consultant
Retired Transaction Services Partner, PricewaterhouseCoopers LLP
Richard F. Bozard
Retired Vice President and Treasurer, Owens & Minor, Inc.
Hugh M. Fain, III
President and Director, Spotts Fain PC
William E. Hardy
Founding Partner and Chief Executive Officer,
Harris, Hardy & Johnstone, P.C.
Gail L. Letts
President, Letts Consult, LLC
Eugene S. Putnam, Jr.
Chief Financial Officer,
EVO Transportation & Energy Services, Inc.
S. Waite Rawls III
Retired 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
Oliver L. Way
Retired Regional President, Fulton Bank, N.A.
Robin Traywick Williams
Writer
Customer Service Center
(800) 443-5524
www.EssexBank.com
Timonium—Loan Production Office
(410) 574-3304
Stock Transfer Agent
Continental Stock Transfer & Trust Company
1 State Street Plaza, 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
(804) 934-9299 fax
King William
(804) 769-2265
Louisa
(540) 967-5900
Tappahannock—Dillard
(804) 443-8500
Virginia Center
(804) 262-3991
Lynchburg—Loan Production Office
West Point
(434) 485-0090
(804) 843-4347
Lynchburg—Old Forest Road
West Broad Marketplace
(434) 385-1650
(804) 729-6844
Winterfield
(804) 419-4160
Deep Run at Mayland
(804) 419-4329
Lynchburg—Timberlake
(434) 237-1323
Flat Rock
(804) 598-6839
Mechanicsville
(804) 730-3222
Goochland Courthouse
Midlothian—Stonehenge
(804) 556-6722
(804) 476-3043
VIRGINIA
Bon Air
(804) 335-1127
Burgess
(804) 453-4268
Callao
(804) 529-5546
Centerville
(804) 784-4000
MARYLAND
Annapolis
(443) 569-7515
Bowie
(301) 850-5071
Crofton
(410) 721-7330
Edgewater
(410) 757-7777
Rockville
(301) 294-9350
Rosedale
(410) 574-3303
2019 Annual Report9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233(804) 934-9999www.cbtrustcorp.comNASDAQ Capital Market: ESXBEssexBank.com 2
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2019 Annual Report9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233(804) 934-9999www.cbtrustcorp.comNASDAQ Capital Market: ESXBEssexBank.com