~o~ z8(os
KS ES
C O R P O R A T I O N
.,_
r''
~:c ~`
. .
-,-
l
.— j
`:,
BOARD OF DIRECTORS
Front Row: C. Bryan Stott, James E. Burton, N, (Chairman), Aubrey H. Hall, III, A. Patricia Merryman
Back Row: Robert L. Johnson, II, Robert L. Finch, Jr., Michael E. Watson, Thomas F. Hall, Judson H. Dalton,
Carroll E. Shelton, James O. Watts, N, Fsq., Elton W. Blackstock, Jr.
SENIOR MANAGEMENT
Front Row: Vivian S. Brown, Aubrey H. Hall, III (President and CEO), Judith A, Clements
Back Row: Thomas R. Burnett, Jr., Tony J. Bowling, Bryan M. L.emley, William J. Sydnor, II
On the cover: Branch locatioru Old Forest Road and Timberlake. Projects expected to be completed by July of 2016.
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
First National Bank Office Locations
...............................................................................................
2
Page
Officers and Managers ..........................................................................................
President's Letter ..............................................................................................................................
Selected Consolidated Financial Information ...................................................................................
Results of Operations ........................................................................................................................
Consolidated Balance Sheets ............................................................................................................
Consolidated Statements of Income ..................................................................................................
Consolidated Statements of Comprehensive Income ......................................................
Consolidated Statements of Changes in Stockholders' Equity .........................................................
Consolidated Statements of Cash Flows ...........................................................................................
Notes to Consolidated Financial Statements .....................................................................................
3
4
6
7
12
13
14
15
16
17
Management's Report on Internal Control over Financial Reporting ...........................................
49
Report of Independent Auditor .........................................................................................................
Shareholder Information ...................................................................................................................
50
52
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
First National Bank Office Locations
ALTAVISTA
MAIN OFFICE
622 Broad Street
Altavista, Virginia 24517
Telephone: (434) 369-3000
VISTA OFFICE
1303 Main Street
Altavista, Virginia 24517
Telephone: (434) 369-3001
LYNCHBURG
AIRPORT OFFICE
14580 Wards Road
Lynchburg, Virginia 24502
Telephone: (434) 237-3788
TIMBERLAKE OFFICE
20865 Timberlake Road
Lynchburg, Virginia 24502
Telephone: (434) 237-7936
OLD FOREST ROAD OFFICE
3309 Old Forest Road
Lynchburg, Virginia 24501
Telephone: (434)385-4432
FOREST
FOREST OFFICE
14417 Forest Road
Forest, Virginia 24551
Telephone: (434) 534-0451
AMHERST
AMHERST OFFICE
130 South Main Street
Amherst, Virginia 24521
Telephone: (434)946-7814
RUSTBURG
RUSTBURG OFFICE
1033 Village Highway
Rustburg, Virginia 24588
Telephone: (434) 332-1742
2
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Officers of Pinnacle Bankshares Corporation
Aubrey H. Hall, III
Bryan M. Lemley
William J. Sydnor, II
Officers and Managers of First National Bank
Aubrey H. Hall, III
Bryan M. Lemley
William J. Sydnor, II
Judith A. Clements
Thomas R. Burnett, Jr.
Vivian S. Brown
Tony J. Bowling
Lucy H. Johnson
Pamela R. Adams
James M. Minear
Shawn D. Stone
Daniel R. Wheeler
George D. Vaughan, IV
Penelope P. Wallace
Trade A. Callahan
John E. Tucker
Lisa M. Landrum
Tarry R. Pribble
Vicki G. Greer
Melissa T. Campbell
Jeffrey S. Walker
Janet H. Whitehead
M. Amanda Ramsey
Andria C. Smith
Kathleen P. Morgan
Arin L. Brown
AnnMarie W. King
Patricia D. Canada
Christine A. Hunt
Dianna C. Hamlett
Romonda F. Davis
Allison G. Daniels
Ann L. Dalton
Cathy C. Simms
Monica L. Woody
Tammie W. Griffin
Cheria B. Taylor
Nickolas R. Gillan
Scott W. Martin
Alison N. Ayers
LaDonna S. Davis
Sophie M. Lovell
Brandy M. Marcum
Helen J. Rasnake
Jean W. Clay
Jennifer T. Edgell
Kenneth M. Selmer
Shirley B. Brooks
Brandi N. Evans
Robert L. Warren
Courtney M. Woody
John Kovack
Robert A. Sears, Jr.
Ruby C. Smith
President &Chief Executive Officer
Secretary, Treasurer &Chief Financial Officer
Vice President
President, Chief Executive Officer &Trust Officer
Senior Vice President, Cashier &Chief Financial Officer
Senior Vice President &Chief Credit Officer
Senior Vice President &Director of Human Resources
Senior Vice President &Chief Lending Officer
Senior Vice President &Branch Administration Officer
Senior Vice President &Chief Operating Officer
Senior Vice President &Data Processing Manager
Vice President &Loan Operations Manager
Vice President &Commercial Officer
Vice President &Commercial Officer
Vice President &Commercial Officer
Vice President &Commercial Officer
Vice President &Commercial Officer
Vice President &Mortgage Division Manager
Vice President &Investment Consultant
Vice President &Dealer Finance Officer
Vice President &Collections and Recovery Manager
Vice President &Financial Analyst
Assistant Vice President &Branch Operations Manager
Assistant Vice President &Branch Manager (Main)
Assistant Vice President &Branch Manager (Airport)
Assistant Vice President &Branch Manager (Amherst)
Assistant Vice President &Branch Manager (Rustburg)
Assistant Vice President &Branch Manager (Forest)
Assistant Vice President &Branch Manager (Vista)
Assistant Vice President &Branch Manager (Timberlake)
Assistant Vice President &Branch Manager (Old Forest Road)
Assistant Vice President &Internal Auditor
Assistant Vice President, Compliance &Bank Secrecy Act Officer
Assistant Vice President & E-Commerce Sales Representative
Assistant Vice President &Loan Quality Control Officer
Assistant Vice President &Real Estate Loan Portfolio Manager
Assistant Vice President &Dealer Finance Officer
Human Resources Manager
E-commerce Sales Representative
Retail Business Development Officer (Main)
Retail Business Development Officer (Timberlake)
Retail Business Development Officer (Airport)
Retail Business Development Officer (Rustburg)
Retail Business Development Officer (Vista)
Retail Business Development Officer (Airport)
Retail Business Development Officer (Forest)
Retail Business Development Officer (Amherst)
Retail Business Development Officer (Main)
Bank Officer &Credit Analyst
Bank Officer &Credit Analyst
Collections Officer
Collections Officer
Bank Officer &Construction Loan Administrator
Bank Officer &Mortgage Loan Originator
Network Administrator
Facilities Manager
Customer Support Manager
PINNACI.F
BEAN KSHARES
C O R P O R A T I O N
DEAR SHAREHOLDERS,
I am pleased to report to you that Pinnacle Bankshares Corporation, the one-bank holding company for First National
Bank, increased core operating net income in 2015 for the seventh straight year and improved your returns in terms of
annual cash dividends and share price appreciation. Your Company also made significant progress in executing
growth plans aimed at expanding First National's presence across Central Virginia. These achievements combined
with strengthened asset quality and better efficiency demonstrate our commitment to enhancing the value of your
investment over the long term.
For 2015 Pinnacle generated net income of $2,740,000, which included $234,000 of after tax income resulting from
our conversion to the equity method of accounting for First National Bank's investment in Bankers Insurance, LLC.
The change aligns us with other community bank owners of the full service, independent insurance agency. Future
returns are expected from commissions on insurance referrals provided by the Bank and growth of the agency across
Virginia and North Carolina.
Core net income, excluding the accounting change, was $2,506,000 in 2015, which was a 17% increase as compared
to 2014. Profitability as commonly measured by return on average assets and return on average equity improved to
0.68% and 7.44%, respectively, net of the change. Net interest income growth of $449,000 was the catalyst for
improvement, which was primarily driven by a decline in our cost of funds as the Bank experienced further growth of
demand deposits and other transaction accounts. Additionally, noninterest income increased $215,000, net of the
accounting change, due to increased interchange fees derived from check card usage and a rebound in income
generated from our Investment and Mortgage Divisions prior to related expenses.
The provision for loan losses was $129,000 for the year, an increase of only $38,000 compared to 2014, as improved
credit quality helped to offset material loan growth experienced during the second half of 2015. In fact,
nonperforming loans (loans in nonaccrual status or past due greater than ninety days) were less than 0.50% of total
loans as of year-end due in part to payoffs received on several long term problem credits. Our allowance for loans
losses was $2,889,000 as of December 31, 2015, which represented 0.94% of total loans outstanding. The allowance
balance was 208% of nonperforming loans as of year-end, which we believe provides appropriate reserves for
potential future losses associated with our loan portfolio.
Noninterest expense was well controlled, increasing only $53,000 during 2015 despite higher salaries and employee
benefits as a result of adding several new sales positions associated with First National's expansion in Lynchburg.
Two new Commercial Officers along with an additional E-Commerce Officer have been brought on board in an effort
to boost loan production and further increase business deposits through utilization of electronic delivery channels,
including merchant bankcard services and remote deposit capture.
Pinnacle's total assets as of December 31, 2015 were $371,261,000, an increase of $9,073,000 or 3% as compared to
the end of the prior year. While overall asset growth was modest, loan growth for the year was more robust with total
loans increasing $22,569,000 or 8% to $306,088,000. The growth was led by strong performances from the Bank's
Retail Branch Network and Dealer (Indirect-Auto) Division. Additionally, volume was boosted from several non-
organic sources including loan participations, medical loans purchased from Bankers Healthcare Group and
municipal funding. The increased loan volume, which occurred primarily during the second half of the year,
combined with only a slight decline in the Bank's investment portfolio to $27,148,000 resulted in better utilization of
available funds and an $83,000 increase in interest income despite declining asset yields.
Total liabilities, consisting primarily of deposits, were $336,479,000 as of year-end, which was an increase of
approximately 2%. Demand deposits, savings and NOW accounts (interest checking) grew $18,976,000 or 9%
during 2015 to $230,326,000 and reflect our continued focus on the expansion of core deposit relationships, which
4
have driven the Company's lower cost of funds. This increase was partially offset by a decrease in time deposits of
$11,777,000 or approximately 10%. While we have intentionally grown our checking accounts to become less time
deposit dependent, we would like to maintain our current deposit base composition of approximately 18% demand
accounts, 52%savings and NOW accounts and 30% time deposits.
Stockholders' equity as of December 31, 2015 was $34,782,000, representing an increase of $2,128,000 or 7% as
compared to the prior year end. Pinnacle and First National Bank remain "well capitalized" per all current regulatory
definitions and meet applicable Basel III capital standards. Capital requirements to support future growth are
anticipated to be generated internally through increased retained earnings resulting from improved profitability.
Operating banks of all sizes requires constant attention to ever changing technology. We continue to expand our
electronic product lineup and have been pleased with the growth of online bill pay and mobile banking users since the
adoption of new platforms in 2014. Always remaining mindful of protecting our clients, First National Bank has
implemented a comprehensive cyber security program based on guidelines establish by federal agencies.
Your Board and Management Team are extremely pleased that a return has been paid to you in the form of a cash
dividend over the last fourteen quarters and that the amount of annual cash dividends paid increased 6% from $0.32
per share in 2014 to $0.34 per share in 2015. We are also encouraged by the increase in the trading price of
Pinnacle's stock, which ended the year up 11% at $19.70. While the trading price of our stock continues to improve,
we believe that it still does not fully reflect the true value of your Company. For this reason the Company remains
willing to utilize its Share Repurchase Program when appropriate to potentially increase trading volume in our stock
and provide liquidity in the market.
First National Bank's Lynchburg Market Plan, which is intended to increase the Bank's presence and visibility across
Central Virginia, is well under way with construction commencing during 2015 on the renovation and expansion of
the Timberlake Road Branch and the relocation of the Old Forest Road Branch to a new facility on the same corridor.
These projects are now expected to be completed by July of 2016. The plan also includes the construction of a new
branch /Lynchburg headquarters building on Odd Fellows Road. Planning is under way for this new facility with
construction expected to commence in mid-2016. Completion of the project will allow positions currently housed in
the Bank's Wyndhurst Administrative Office to be moved to Odd Fellows Road and alleviate space shortages at
several branches. First National Bank's Altavista Main Office will remain the Company's corporate headquarters
with the functions performed there remaining in place.
In closing, 2015 signified a breakout year for your Company from a financial performance, loan growth and asset
quality perspective. Our Board, Management and team of dedicated financial professionals look forward to further
improvement as we continue to set our sights on being recognized as the premier community banking organization in
Central Virginia.
To hear more about the performance and direction of Pinnacle Bankshares Corporation, please plan to attend our
Annual Meeting of Shareholders to be held at 11:00 a.m., Tuesday, April 12, 2016 in the Fellowship Hall of
Altavista Presbyterian Church, located at 707 Broad Street, Altavista, Virginia. We are hopeful that you will be able
to join us for this occasion.
As always, thank you for your support, confidence and the opportunity to serve your interests as President and Chief
Executive Officer of Pinnacle Bankshares Corporation.
Sincerely,
~- • ~~-t~
Aubrey H. Hall, lIl "Todd"
President &Chief Executive Officer
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Selected Consolidated Financial Information
(In thousands, except ratios, share and per share data)
Years ended December 31
Income Statement Data:
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income tax expense
Net income
Per Share Data:
Basic net income
Diluted net income
Cash dividends
Book value
Weighted-Average Shares Outstanding:
Basic
Diluted
Balance Sheet Data:
Assets
Loans, net
Securities
Cash and cash equivalents
Deposits
Stockholders' equity
Performance Ratios:
Return on average assets
Return on average equity
Dividend payout
Asset Quality Ratios:
Allowance for loan losses to total
loans, net of unearned income and
fees
Net chazge-offs to average loans,
20t~
2014
2013
2012
2011
$
12,505
129
3,730
12,060
1,306
2,740
1.80
1.79
0.34
22.88
S
12,056
91
3,162
12,008
970
2,149
1.42
1.40
032
21.60
11,709
143
4,554
12,228
1,241
2,651
1.75
1.74
0.23
21.08
11,601
1,177
3,443
11,910
619
1,338
0.89
0.89
0.05
18.63
12,091
2,227
3,253
11, 544
510
1,063
0.71
0.71
0.00
18.01
1,519,159
1,531,436
1,512,661
1,530,831
1,512,545
1,523,105
1,503,952
1,496,260
1,503,952
1,496,260
$
371,261
303,199
27,148
16,739
332,403
34,782
0.74%
8.12%
18.96%
362,188
280,449
29,277
29,451
325,204
32,654
0.60%
6.59%
22.48%
358,601
274,349
29,125
35,457
322,130
31,942
0.75%
8.96%
12.86%
348,694
273,672
22,206
35,790
315,157
28,089
0.39%
4.83%
5.61%
342,484
267,123
24,769
37,547
310,393
26,947
0.31%
3.95%
0.00%
0.94%
1.08%
1.23%
1.31%
1.48%
net of unearned income and fees
0.11°/a
0.15%
0.12%
0.57%
0.84%
Capital Ratios:
Leverage
Risk-based:
Tier I capital
Total capital
Average equity to average assets
9.68%
9.25%
8.88%
8.49%
8.12%
11.37%
1232%
9.17%
10.96%
11.98%
9.11%
10.84%
12.03%
8.33%
10.15%
11.39%
8.04%
9.99%
11.24%
7.93%
6
Results of Operations
(in thousands, except ratios, share and per share data)
Cautionary Statement Regarding Forward-Looking Statements
The following discussion is qualified in its entirety by the more detailed information and the consolidated
financial statements and accompanying notes appearing elsewhere in this Annual Report. In addition to the
historical information contained herein, this Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are not
statements of historical fact and are based on certain assumptions and describe future plans, strategies, and
expectations of management, are generally identifiable by use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "may," "will" or similar expressions. These forward-looking statements
may include, but are not limited to, anticipated future financial performance, impairment of goodwill, funding
sources including cash generated by banking operations, loan portfolio composition, trends in asset quality
and strategies to address nonperforming assets and nonaccrual loans, adequacy of the allowance for loan
losses and future provisions for loan losses, securities portfolio composition and future performance, interest
rate environments, deposit insurance assessments, and strategic business initiatives.
Although we believe our plans, intentions and expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability
to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results,
performance or achievements could differ materially from those contemplated. Factors that could have a
material adverse effect on our operations and future prospects include, but are not limited to, changes in: the
effectiveness of management's efforts to maintain asset quality and control operating expenses; the quality,
composition and growth of the loan and investment portfolios; interest rates; decrease in net interest margin;
declining collateral values, especially in the real estate market; general economic conditions, including
stagnation in general business and economic conditions and in the financial markets; unemployment levels;
the legislative/regulatory climate, including the impact of any policies or programs implemented pursuant to
the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank AcY') or other laws;
monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of
Governors of the Federal Reserve System; demand for loan products; deposit flows; competition; demand for
financial services in our market area; regulatory compliance costs; accounting principles, policies and
guidelines; and an increase in shareholders that would require the Company to be subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended. These risks and uncertainties should be
considered in evaluating forward-looking statements contained herein. We base our forward-looking
statements on management's beliefs and assumptions based on information available as of the date of this
report. You should not place undue reliance on such statements, because the assumptions, beliefs,
expectations and projections about future events on which they are based may, and often do, differ materially
from actual results. We undertake no obligation to update any forward-looking statement to reflect
developments occurring after the statement is made.
Company Overview
Pinnacle Bankshares Corporation, a Virginia corporation (the "Company" or "Bankshares"), was organized in
1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as
amended. Bankshares is headquartered in Altavista, Virginia. Bankshares conducts all of its business
activities through the branch offices of its wholly owned subsidiary bank, First National Bank (the "Bank").
Bankshares exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other
subsidiaries as it may acquire or establish.
First National Bank was organized in 1908 and currently maintains a total of eight offices to serve its
customers. The Main Office and Vista Branch are located in the Town of Altavista, the Airport Branch,
Timberlake Branch and Rustburg Branch in Campbell County, the Old Forest Road Branch in the City of
Lynchburg, the Forest Branch in Bedford County and the Amherst Branch in the Town of Amherst. The
Bank also maintains an administrative and training facility in the Wyndhurst section of the City of
Lynchburg.
First National Bank has developed a Lynchburg Market Plan in an effort to increase its presence and visibility
in Central Virginia. The plan includes renovation and expansion of the Bank's Timberlake Branch and
relocation of its Old Forest Road Branch to a new facility on Old Forest Road. Both of these projects are well
under way and are expected to be completed by July of 2016. The plan also includes the construction of a new
branch /Lynchburg headquarters building on Odd Fellows Road. Planning is under way for this new facility
with construction expected to commence in 2016. Completion of the project will allow positions currently
housed in the Wyndhurst administrative and training facility to be moved to Odd Fellows Road and alleviate
space shortages at several branches. First National Bank's Altavista Main Office will remain the Company's
corporate headquarters.
A total ofone-hundred tin full and part-time staff members serve the Bank's customers.
With an emphasis on personal service, the Bank today offers a broad range of commercial and retail banking
products and services including checking, savings and time deposits, individual retirement accounts, merchant
bankcard processing, residential and commercial mortgages, home equity loans, consumer installment loans,
agricultural loans, investment loans, small business loans, commercial lines of credit and letters of credit. The
Bank also offers a full range of investment, insurance and annuity products through its association with
Infinex Investments, Inc. and Banker's Insurance, LLC. The Bank has two wholly-owned subsidiaries: FNB
Property Corp., which holds title to future Bank premises real estate as needed; and First Properties, Inc.,
which holds title to other real estate owned acquired through foreclosures.
Results of Operations
The Company had net income of $2,740 for the year ended December 31, 2015, compared to net income of
$2,149 for the yeaz ended December 31, 2014, an increase of 27.50%. This increase in net income was driven
mainly by a $449, or 3.72% increase in net interest income and a $569 or 17.99% increase in noninterest
income. These positive factors that contributed to the increase in net income were partially offset by a $53, or
0.44% increase in noninterest expense and a $38 or 41.76% increase in provision for loan losses.
Net interest income increased as net interest margin grew from 3.60% in 2014 to 3.63% in 2015. Noninterest
income increased mainly due to the recognition of $354 in Bankers Insurance income as the Company
adopted the equity method of accounting for the investment in the limited liability corporation that had
previously been accounted for under the cost method as an investment. See note 1(e) "Change in Accounting
Method" of the "Notes to Consolidated Financial Statements for additional information. The Company also
saw increases in service charges, commissions, mortgage loan fees, interchange fees and other recoveries.
Noninterest expense increased as salaries and commissions increased by $301 and defined benefit plan
expense increased by $117 to $128 in 2015. The defined benefit plan expense is expected to increase to $200
in 2016. Provision for loan losses increased due to an increase in loan volume.
We expect continued gains in net income for 2016 due to loan growth and the December 2015 interest rate
increase as well as the continued success of our Lynchburg Market Plan. The Company is well positioned if
interest rates continue to increase in 2016, which we would expect to result in a further increase in net interest
margin. We expect an increase in noninterest income in 2016 with additional sales staff. Finally, we expect
an increase in noninterest expense in 2016 due to additional personnel and an increase in our defined benefit
plan expense as referenced previously.
Profitability as measured by the Company's return on average assets ("ROA") was 0.74% in 2015, compared
to 0.60% in 2014. Return on average equity ("ROE"), was 8.12% for 2015, compared to 6.59% for 2014.
Total assets as of December 31, 2015 were $371,261, up 2.51% from $362,188 as of December 31, 2014. The
principal components of the Company's assets at the end of the year were $16,739 in cash and cash
equivalents, $27,148 in securities and $303,199 in net loans. During the year ended December 31, 2015, gross
loans increased 7.96% or $22,568. The Company's lending activities are a principal source of income.
Total liabilities as of December 31, 2015 were $336,479, up 2.11% from $329,534 as of December 31, 2014,
due to an increase in total deposits of $7,199 or 2.21%, to $332,403 as of December 31, 2015 from $325,204
as of December 31, 2014. Noninterest-bearing demand deposits increased $8,094 or 15.93% and represented
17.72% of total deposits as of December 31, 2015, compared to 15.62% as of December 31, 2014. Savings
and NOW accounts increased $10,882 or 6.78% and represented 51.57% of total deposits as of December 31,
2015, compared to 49.37% as of December 31, 2014. Time deposits decreased $11,777 or 10.34% and
represented 30.71 % of total deposits as of December 31, 2015, compared to 35.01 % as of December 31, 2014.
The Company's deposits are provided by individuals and businesses primarily located within the communities
served. The Company had no brokered deposits as of December 31, 2015 and December 31, 2014.
Total stockholders' equity as of December 31, 2015 was $34,782, including $30,442 in retained earnings. As
of December 31, 2014, stockholders' equity totaled $32,654, including $28,219 in retained earnings. The
increase in stockholders' equity resulted mainly from the Company's net income of $2,740 partially offset by
dividends of $517 paid to shareholders.
Net Interest Income. The net interest spread increased to 3.50% for the year ended December 31, 2015 from
3.47% for the year ended December 31, 2014. Yield on earning assets was 4.09% and cost of funds was
0.59% for the year ended December 31, 2015 as compared to a yield on earning assets of 4.19% and a cost of
funds of 0.72% for the year ended December 31, 2014. The net interest margin increased to 3.63% for the
year ended December 31, 2015 from 3.60% for the year ended December 31, 2014 as the cost to fund earning
assets was 0.46% for the year ended December 31, 2015 as compared to the cost to fund earning assets of
0.59% for the year ended December 31, 2014. Net interest income was $12,505 for the year ended
December 31, 2015, compared to $12,056 for the year ended December 31, 2014, and is attributable to
interest income from loans, federal funds sold and securities exceeding the cost associated with interest paid
on deposits and other borrowings. In 2015, the Company's deposits repriced at lower rates more rapidly than
its loans in the low interest rate environment, and the Company's higher-cost time deposits declined while
lower-cost demand, savings and NOW deposits grew, causing the Company's interest rate spread to increase.
Provision for Loan Losses. The provisions for loan losses for the years ended December 31, 2015 and 2014
were $129 and $91, respectively. The provision for loan losses increased slightly in 2015 but has remained at
a low level since 2013, as the Company continues to strengthen its asset quality. The provision for loan
losses increased $38 from 2014 to 2015 due to loan volume growth as criticized and classified loans declined
due to the continued success of an aggressive asset quality improvement plan implemented in 2011. The
Company expects to maintain the quality of its loan portfolio in 2016.
Noninterest Income. Total noninterest income for the year ended December 31, 2015 increased $569, or
17.99%, to $3,731 from $3,162 in 2014 mainly due to $354 in income from Bankers Insurance recognized
using the equity method in 2015. See Note 1(e) "Change in Accounting Method" of the "Notes to
Consolidated Financial Statements" for additional information. The Company's principal sources of
noninterest income are service charges and fees on deposit accounts, particularly transaction accounts,
interchange fees from debit cards, fees on sales of mortgage loans, and commissions and fees from
investment, insurance, annuity and other bank products. Noninterest income exclusive of equity method
income increased $214, or 6.77% to $3,376. The increase in 2015 is primarily attributable to a $44 or 2.70%
increase in service charge on deposit accounts, a $46 or 12.20% increase in commissions and fees, a $38 or
9.69% increase in mortgage loan fees and an $87 or 16.63% increase in other operating income as recoveries
from nonperforming problem assets increased by $39.
Noninterest Expense. Total noninterest expense for the year ended December 31, 2015 increased $53, or
0.44%, to $12,061 from $12,008 in 2014. The increase in noninterest expense is primarily due to a $411, or
6.85%, increase in salary and employee benefits as salaries and commissions increased $301 or 6.14% and
defined benefit plan expense increased $117 to $128 in 2015 from $11 in 2014 These increases were
partially offset by a $63 or 8.32% decrease in occupancy expense, a $92 or 11.59% decrease in furniture and
equipment, a $23 or 10.70% decrease in office supplies and printing, a $25 or X0.08% decrease in capital
stock tax, a $13 or 6.37% decrease in advertising expense and $162 or 4.56% decrease in other operating
expenses. Other operating expenses declined due to a $180 decrease in losses on sales of nonperforming
assets.
Income Tax Expense. Applicable income taxes on 2015 earnings amounted to $1,306, resulting in an
effective tax rate of 32.28% compared to $970, and an effective tax rate of 31.10%, in 2014.
G]
Investment Portfolio
Investment securities as of December 31, 2015 totaled $27,148, a decrease of $2,129, or 7.27% from $29,277
as of December 31, 2014. Investment securities held-to-maturity decreased to $5,073 as of December 31,
2015 from $5,680 as of December 31, 2014, a decrease of $607 or 10.69%. Available-for sale investments
decreased to $22,075 as of December 31, 2015 from $23,597 as of December 31, 2014, a decrease of $1,522
or 6.45%. Investments decreased in 2015 as funds from pay downs and maturing and called bonds were used
to fund loan growth.
Loan Portfolio
The Company's net loans were $303,199 as of December 31, 2015, an increase of $22,750, or 8.11 %, from
$280,449 as of December 31, 2014. This increase resulted from a $14,741 increase in commercial loans, a
$6,982 increase consumer loans and an $875 increase in real estate loan originations during 2015. The
Company's ratio of net loans to total deposits was 91.21% as of December 31, 2015 compared to 86.24% as
of December 31, 2014.
Bank Premises and Equipment
Bank premises and equipment increased $338, or 4.01% in 2015 due in part to the renovations in progress of
our Timberlake Branch and the construction in progress of our new Old Forest Road Branch. The projects are
expected to be completed by July 2016. The Company plans to start the construction of its Odd Fellows Road
location in mid-2016 which will house its Lynchburg headquarters and branch office. The Odd Fellows Road
office will not replace our Altavista headquarters, but will relocate our administrative and training facility
currently leased in the Wyndhurst section of Lynchburg.
Deposits
Average deposits were $331,013 for the year ended December 31, 2015, an increase of $9,859 or 3.07% from
$321,154 of average deposits for the year ended December 31, 2014. As of December 31, 2015, total deposits
were $332,403 representing an increase of $7,199, or 2.21%, from $325,204 in total deposits as of
December 31, 2014. The change in deposits during 2015 was primarily due to increased deposit balances in
previously existing deposit accounts, new deposit accounts opened as a result of new banking relationships,
growth at the Company's branch locations and competitive pricing of the Company's products and services.
Capital Resources
The Company's financial position as of December 31, 2015 reflects liquidity and capital levels currently
adequate to support anticipated funding needs and budgeted growth of the Company. Capital ratios are in
excess of required regulatory minimums fora "well-capitalized" institution. The assessment of capital
adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing
competitive conditions and economic forces. The adequacy of the Company's capital is reviewed by
management on an ongoing basis. Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and to absorb potential losses.
In July 2013, the Federal Reserve Board approved and published the final Basel III Capital Rules establishing
a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel
Committee's December 2010 framework ("Basel III") for strengthening international capital standards as well
as certain provisions of the Dodd Frank Act. The Basel III Capital Rules, among other things, (i) introduce a
new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of
CET1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) define CET1
narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and
not to the other components of capital and (iv) expand the scope of the deductions from and adjustments to
capital as compared to existing regulations. The Basel III Capital Rules were effective for Bankshares and the
Bank on January 1, 2015 (subject to a phase in period for certain components). CET1 capital for the
Bankshares and the Bank consists of common stock, related paid in capital, and retained earnings. In
10
connection with the adoption of the Basel III Capital Rules, we elected to opt out of the requirement to
include most components of accumulated other comprehensive income in CET1. CETI for Bankshares and
the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and
subject to transition provisions.
Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does
not hold a "capital conservation buffer" consisting of 2.50% of CET1 capital, Tier 1 capital and total capital
to risk weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.
The capital conservation buffer will be phased in beginning January 1, 2016, at 0.625% of risk weighted
assets, increasing each year until fully implemented at 2.50% on January 1, 2019. When fully phased in on
January 1, 2019, Basel III will require (i) a minimum ratio of CET1 capital to risk weighted assets of at least
4.50%, plus a 2.50% capital conservation buffer, (ii) a minimum ratio of Tier lcapital to risk weighted assets
of at least 6.00%, plus the capital conservation buffer, (iii) a minimum ratio of total capital to risk weighted
assets of at least 8.00%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.00%.
Bankshares and the Bank continue to be well capitalized under the Basel III rules. See Note 12 "Dividend
Restrictions and Capital Requirements" of the "Notes to Consolidated Financial Statements" for additional
information.
The Company's CET1 and Tier 1 Risk-based Capital Ratio was 11.45% of December 31, 2015. The Total
Risk-based Capital Ratio was 12.41 %and the Company's Tier 1 Leverage Ratio was 9.68% as of December
31, 20]5.
Stockholders' equity was $34,782 as of December 31, 2015 compared to $32,654 as of December 31, 2014.
Dividends paid to shareholders were $0.34 per share paid in 2015 as compared to the $0.32 per share paid in
2014.
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
(In thousands of dollazs, except shaze data)
(Audited)
Assets
2015
2014
Cash and cash equivalents (note 2):
Cash and due from banks
Certificates of deposits
Securities (note 3):
Available-for-sale, at fair value
Held-tamaturity, at amortized cost
Federal Reserve Bank stock, at cost (note 1(d))
Federal Home Loan Bank stock, at cost (note 1(d))
Loans, net (notes 4, 9 and 11)
Bank premises and equipment, net (note 5)
Accrued interest receivable
Bank owned life insurance
Goodwill
Other real estate owned
Other assets (notes 7 and 8)
$
16,739 $
985
22,075
5,073
144
325
303,199
8,770
962
6,459
539
1,733
4,258
28,466
985
23,597
5,680
144
322
280,449
8,432
887
6,288
539
1,107
5,292
Total assets $
371,261 $
362,188
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6):
Demand
Savings and NOW accounts
Time
58,895 $
171,431
102,077
Total deposits 332,403
$
1,091
Note payable under line of credit (note 1(~)
Accrued interest payable
121
Other liabilities (note 7) 2,864
50,801
160,549
113,854
325,204
1,368
169
2,793
Total liabilities
336,479
329,534
Stockholders' equity (notes 7, 12 and IS):
Common stock, $3 par value. Authorized 3,000,000 shares,
issued and outstanding 1,520,221 shares in 2015 and
1,511,970 shares in 2014
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity
Commitments, contingencies and other matters (notes 9, 10 and 1 I )
4,508
1,065
30,442
(1,233)
34,782
4,497
1,004
28,219
(1,066)
32,654
Total liabilities and stcekholders' equity $
371,261 $
,62,1825
See accompanying notes to consolidated financial statements.
12
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2015 and 2014
(In thousands of dollazs, except per shaze data)
(Audited)
2015
2014
$
13,530 $
13,463
309
73
107
96
3
267
79
122
100
4
14,118
14,035
440
794
379
1,613
12,505
129
12,376
1,671
423
430
249
958
731
6,412
694
702
192
255
223
191
3,392
12,061
4,046
1,306
~
441
1,024
514
1,979
12,056
91
11,965
1,627
377
392
249
517
3,162
6,001
757
794
215
235
248
204
3,554
12,008
3,119
970
$ 2,740 $ 2,149
$
$
1.80 $
1.79 $
1.42
1.40
Interest income:
Interest and fees on loans
Interest on securities:
U.S. Government agencies
States and political subdivisions (taxable)
States and political subdivisions (tax-exempt)
Other
Interest on federal funds sold
Total interest income
Interest expense:
Interest on deposits:
Savings and NOW accounts
Time -under $100,000
Time - $100,000 and over
Total interest expense
Net interest income
Provision for loan losses and unfunded commitments (note 4)
Net interest income after provision for loan losses
Nonioterest income:
Service chazges on deposit accounts
Commissions and fees
Mortgage loan fees
Service charges on loan accounts
Other operating income
Total noninterest income
Noninterest expense:
Salaries and employee benefits (note 7)
Occupancy expense
Furniture and equipment expense
Office supplies and printing
Federal deposit insurance premiums
Capital stock tax
Advertising expense
Oiher operating expenses
Total noninterest expense
Income before income tax expense
Income taac expense (note 8)
Net income
Basic net income per share (note 1(r))
Diluted net income per share (notel(t))
See accompanying notes to consolidated financial statements
13
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2015 and 2014
(In thousands of dollars)
(Audited)
Net income
Other comprehensive income (losses), net of related income taxes:
Unrealized gains on availabile-for-sale securities
Before tax
Income tax expense
Changes in plan assets and benefit obligation of defined benefit pension plan
Before tax
Income tax expense
Total other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
2015
2014
$
2,740 $
2,149
133
(45)
88
(30)
(1,469)
499
(912)
$ 2,573 $ 1,237
(386)
131
(167)
14
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2015 and 2014
(In thousands of dollars, except share and per share data)
(Audited)
Balances, December 31, 2013 (As Restated)
1,515,007 $
4.507 S
1.035 S 26.554 $ (154) ~ 31,942
Common Stock Capital
Shares
Par Value
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Net income
Other Comprehensive Loss
Issuance of restricted stcek and related expense
Stcek options exercised
Repurchased stcek
Cash dividends declazed by
Bankshares ($032 per shaze)
Balances, December 31, 2014
Net income
Other Comprehensive Loss
Issuance of restricted stock and related expense
Stock options exercised
Repurchased stock
Cash dividends declared by
Bankshares ($0.34 per share)
Balances, December 31, 2015
See accompanying notes to consolidated financial statements.
8,400
628
(12,065)
26
138
(36)
(169)
2, 149
(484)
1912)
2,149
(912)
164
(205)
(484)
1,511,970 $ 4,497
S
1,004 5
28.'19 S
(1.066) 5
32,654
5,971
4,680
~~.4~)
18
~~)
98
(3~)
?,740
(517)
(167)
2,740
Q67)
116
~~)
(517)
1,5?0,22I ~
4,508 ~
1,065 $
30,442 $ (1,233) $ 34,782
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2015 and 2014
(In thousands of dollars)
(Audited)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of bank premises and equipment
Accretion of unearned fees, net
Net amortization of premiums and
discounts on securities
Provision for loan losses
Provision for deferred income taaces
Stock based compensation expense
Increase in cash value of bank owned life insurance
Valuation loss on OREO
Net decrease (increase) in:
Accrued interest receivable
Other assets
Net increase (decrease)in:
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases ofavailable-for-sale securities
Proceeds from maturities and calls ofheld-to-maturity securities
Proceeds from maturities and calls of available-for-sale securities
Proceeds from paydowns and maturities ofavailable-for-sale
mortgage-backed secwities
Proceeds from the sale of OREO
Purchase of Federal Reserve Stock
Sale of Federal Home Loan Bank stock
Net increase in loans made to customers
Purchases of bank premises and equipment
Purchase of bank owned life insurance
Additions to foreclosed assets
Net cash used in investing activities
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits
Net decrease in time deposits
Repurchase of common stock
Repayment of line of credit
Cash dividends paid
Net cash provided by financing activities
Net decrease in cash and cash equivalents
2015
2014
$
2,740 $
2,149
409
29
57
129
57
116
(171)
43
(75)
1,063
(48)
(315)
458
30
50
91
56
164
(175)
235
91
(340)
(54)
128
4,034
2,883
(13,504)
570
14,849
290
],003
(3)
-
(24,524)
(747)
-
(56)
(4,450)
-
4,067
161
222
(2)
96
(6,512)
(1,594)
(3,000)
(3)
(22,122)
(11,012)
18,976
(11,777)
(44)
(277)
(517)
9,678
(6,604)
(205)
(262)
(484)
6,361
2,123
(11,727)
(6,006)
Cash and cash equivalents, beginning of yeaz 28,466
34,472
Cash and cash equivalents, end of year
$
16,739 $
28,466
Supplemental disclosure of cash flows information
Cash paid during the yeaz for:
Income taxes
Interest
Supplemental schedule of noncash investing and
financing activities:
Transfer from loans to foreclosed assets
Loans chazged against the allowance for loan losses
Unrealized gains on available-for-sale securities
Defined benefit plan adjushnent per ASC topic Compensation-Retirement Benefrts
See accompanying notes to consolidated financial statements.
16
$
$
875 $
1,661
990
2,033
1,616 $
639
133
(386)
263
630
88
(1,469)
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except ratios, share and per share data)
(1) Summary of Significant Accounting Policies and Practices
Pinnacle Bankshares Corporation, a Virginia corporation (the "Company" or "Bankshares"), was
organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. Bankshares is headquartered in Altavista, Virginia. Bankshares conducts all of
its business activities through the branch offices of its wholly owned subsidiary bank, First National
Bank (the Bank). Bankshares exists primarily for the purpose of holding the stock of its subsidiary, (the
"Bank"), and of such other subsidiaries as it may acquire or establish. The Company has a single
reportable segment for purposes of segment reporting.
The accounting and reporting policies of Bankshares and its wholly owned subsidiary (collectively, the
"Company"), conform to generally accepted accounting principles in the United States of America
("GAAP") and general practices within the banking industry. The following is a summary of the more
significant accounting policies and practices:
(a) Consolidation
The consolidated financial statements include the accounts of Bankshares and the Bank. All
material intercompany balances and transactions have been eliminated.
(b) Use of Estimates
In preparing the consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated balance sheets and revenues and expenses for the
years ended December 31, 2015 and 2014. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan losses, payments/obligations under benefit and
pensions plans, other real estate owned and fair value of investments.
(c) Securities
The Company classifies its securities in three categories: (1) debt securities that the Company
has the positive intent and ability to hold to maturity are classified as "held-to-maturity
securities" and reported at amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as "trading securities"
and reported at fair value, with unrealized gains and losses included in net income; and (3) debt
and equity securities not classified as either held-to-maturity securities or trading securities are
classified as "available-for-sale securities" and reported at fair value, with unrealized gains and
losses excluded from net income and reported in accumulated other comprehensive income, a
separate component of stockholders' equity, net of deferred taxes. Fair value is determined from
quoted prices obtained and reviewed by management. Held-to-maturity securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts on a basis, which
approximates the level yield method. As of December 31, 2015 and 2014, the Company does not
maintain trading securities. Gains or losses on disposition are based on the net proceeds and
adjusted carrying values of the securities called or sold, using the specific identification method
on a trade date basis.
Management evaluates securities for other-than-temporary impairment ("OTTI") on a least a
quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation. For securities in an unrealized loss position, management considers the extent and
duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.
The Company assesses OTTI based upon whether it intends to sell a security or if it is likely that
it would be required to sell the security before recovery of the amortized cost basis of the
17
investment, which may be maturity. For debt securities, if the Company intends to sell the
security or it is likely that the Company will be required to sell the security before recovering its
cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the
Company does not intend to sell the security and it is not likely that the Company will be
required to sell the security but we do not expect to recover the entire amortized cost basis of the
security, only the portion of the impairment loss representing credit losses would be recognized
in earnings. The credit loss on a security is measured as the difference between the amortized
cost basis and the present value of the cash flows expected to be collected. Projected cash flows
are discounted by the original or current effective interest rate depending on the nature of the
security being measured for potential OTTI. The remaining impairment related to all other
factors, the difference between the present value of the cash flows expected to be collected and
fair value, is recognized as a charge to other comprehensive income ("OCI"). Impairment losses
related to all other factors are presented as separate categories within OCI. For investment
securities held to maturity, this amount is accreted over the remaining life of the debt security
prospectively based on the amount and timing of future estimated cash flows. The accretion of
the amount recorded in OCI increases the carrying value of the investment and does not affect
earnings. If there is an indication of additional credit losses the security is re-evaluated according
to the procedures described above.
(d) Restricted Equity Investments
As a member of the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank of Atlanta
("FHLB"), the Company is required to maintain certain minimum investments in the common
stock of the FRB and FNLB, which are carried at cost. Required levels of investment are based
upon the Company's capital and a percentage of qualifying assets.
In addition, the Company is eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans, and the Company's capital stock
investment in the FHLB.
Management's determination of whether these investments are impaired is based on its
assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in
value. The determination of whether a decline affects the ultimate recoverability of cost is
influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as
compared to the capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or regulation and the
level of such payments in relation to the operating performance of the FHLB, (3) the impact of
legislative and regulatory changes on institutions and, accordingly, the customer base of the
FHLB, and (4) the liquidity position of the FHLB.
(e) Change in Accounting Method
During the year ended December 31, 2015, the Company elected to adopt the equity method of
accounting for an investment in a limited liability corporation that had previously been accounted
for as a cost method investment. During the year ended December 31, 2015, the Company
determined that it had the ability to exercise significant influence over the investee, as the
Company's president was elected to the board of directors of the limited liability corporation. In
conjunction with the change in accounting method, the Company has reported a $354 gain on the
investment in noninterest income for the year ended December 31, 2015.
(~ Borro►~~iirgs
As of December 31, 2015, the Company's available borrowing limit with the FHLB was
approximately $48,637. The Company had $0 in borrowings from the FHLB outstanding at
December 31, 2015 and 2014. The Company also has a $3,000 line of credit commitment with
no outstanding balance secured by the authorized capital stock of the Bank with a correspondent
bank. The Company has a term loan with the same correspondent bank with $1,091 outstanding
as of December 31, 2015 and $1,368 outstanding as of December 31, 2014 with a 5.00% interest
rate that matures on June 30, 2017.
[E:3
(;) Loans and Allowance. for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income and fees on
loans, and an allowance for loan losses. Income is recognized over the terms of the loans using
methods that approximate the level yield method. The allowance for loan losses is a cumulative
valuation allowance consisting of an annual provision for loan losses, plus any amounts recovered
on loans previously charged off, minus loans charged off. The provision for loan losses charged
to operations is the amount necessary in management's judgment to maintain the allowance for
loan losses at a level it believes adequate to absorb probable losses inherent in the loan portfolio.
Management determines the adequacy of the allowance based upon reviews of individual credits,
recent loss experience, delinquencies, current economic conditions, the risk characteristics of the
various categories of loans and other pertinent factors. Management uses historical loss data by
loan type as well as current economic factors in its calculation of allowance for loan loss.
Management also uses qualitative factors such as changes in lending policies and procedures,
changes in national and local economies, changes in the nature and volume of the loan portfolio,
changes in experience of lenders and the loan department, changes in volume and severity of past
due and classified loans, changes in quality of the Company's loan review system, the existence
and effect of concentrations of credit and external factors such as competition and regulation in
its allowance for loan loss calculation. Each qualitative factor is evaluated and applied to each
type of loan in the Company's portfolio and a percentage of each loan is reserved as allowance.
A percentage of each loan type is also reserved according to the loan type's historical loss data.
Larger percentages of allowance are taken as the risk for a loan is determined to be greater.
Loans are charged against the allowance for loan losses when management believes the principal
is uncollectible.
While management uses available information to recognize losses on loans, future additions to
the allowance for loan losses may be necessary based on changes in economic conditions or the
Company's recent loss experience. It is reasonably possible that management's estimate of loan
losses and the related allowance may change materially in the near term. However, the amount of
change that is reasonably possible cannot be estimated. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to the allowance for
loan losses based on their judgments about information available to them at the time of their
examinations.
Loans are charged against the allowance when, in management's opinion, they are deemed
doubtful, although the Company continues to aggressively pursue collection. The Company
considers a number of factors to determine the need for and timing of charge-offs including the
following: whenever any commercial loan becomes past due for 120 days for any scheduled
principal or interest payment and collection is considered unlikely; whenever foreclosure on real
estate collateral or liquidation of other collateral does not result in full payment of the obligation
and the deficiency or some portion thereof is deemed uncollectible, the uncollectible portion shall
be charged-off; whenever any installment loan becomes past due for 120 days and collection is
considered unlikely; whenever any repossessed vehicle remains unsold for 60 days after
repossession; whenever a bankruptcy notice is received on any installment loan and review of the
facts results in an assessment that all or most of the balance will not be collected, the loan will be
placed in non-accrual status; whenever a bankruptcy notice is received on a small, unsecured,
revolving installment account; and whenever any other small, unsecured, revolving installment
account becomes past due for 180 days.
Loans are generally placed in non-accrual status when the collection of principal and interest is
90 days or more past due, unless the obligation relates to a consumer or residential real estate loan
or is both well-secured and in the process of collection. 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. Generally, loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured, which
usually requires a minimum of six months of sustained repayment performance.
Impaired loans are required to be presented in the financial statements at net realizable value of
the expected future cash flows or at the fair value of the loan's collateral. Homogeneous loans
such as real estate mortgage loans, individual consumer loans and home equity loans are
evaluated collectively for impairment. Management, considering current information and events
regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it
is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment losses are included in the allowance for loan
losses through a charge to the provision for loan losses. Cash receipts on impaired loans
receivable are applied first to reduce interest on such loans to the extent of interest contractually
due and any remaining amounts are applied to principal.
Troubled debt restructurings are separately identified for impairment disclosures and are
measured at the present value of estimated future cash flows using the loan's effective rate at
inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan
is reported at the fair value of the collateral less cost to sell. For troubled debt restructurings that
subsequently default, the Company determines the amount of reserve in accordance with the
accounting policy for the allowance for loan losses.
(h) Loan Origination and Commitment Fees and Certain Related Direct Costs
Loan origination and commitment fees and certain direct loan origination costs charged by the
Company are deferred and the net amount amortized as an adjustment of the related loan's yield.
The Company amortizes these net amounts over the contractual life of the related loans or, in the
case of demand loans, over the estimated life. Fees related to standby letters of credit are
recognized over the commitment period.
(i) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is
computed by the straight-line and declining-balance methods over the estimated useful lives of
the assets. Depreciable lives include 15 years for land improvements, 39 years for buildings, and
3 to 7 years for equipment, furniture and fixtures. The cost of assets retired and sold and the
related accumulated depreciation are eliminated from the accounts and the resulting gains or
losses are included in determining net income. Expenditures for maintenance and repairs are
charged to expense as incurred, and improvements and betterments are capitalized.
(j) Bank Owned Life I»sirrance
The Company has purchased life insurance policies on certain key members of management.
Bank owned life insurance is recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
(k) Goodwill
The Company performs a goodwill impairment analysis on an annual basis as of December 31st.
Additionally, the Company performs a goodwill impairment evaluation on an interim basis when
events or circumstances indicate impairment potentially exists. During 2015, the Company
reviewed its goodwill for impairment and determined that goodwill is not impaired. Management
will continue to monitor the relationship of Bankshares' market capitalization to both its book
value and tangible book value, which management attributes to both financial services industry-
wide and Company-specific factors, and to evaluate the carrying value of goodwill.
(1) Other Real Estate Owned
Foreclosed properties consist of properties acquired through foreclosure or deed in lieu of
foreclosure. At time of foreclosure, the properties are recorded at the fair value less costs to sell.
Subsequently, these properties are carried at the lower of cost or fair value less estimated costs to
20
i
~
''
~'
sell. Losses from the acquisition of property in full or partial satisfaction of loans are charged
against the allowance for loan losses. Subsequent write-downs, if any, are charged to expense.
Gains and losses on the sales of foreclosed properties are included in determining net income in
the year of the sale.
(nr) /mpnirment or Disposal of Long-Lived Assets
The Company's long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used, such as bank premises and equipment, is measured
by a comparison of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of, such as foreclosed properties, are
reported at the lower of the carrying amount or fair value less costs to sell.
(n) Pension Plan
The Company maintains a noncontributory defined benefit pension plan, which covers
substantially all of its employees. The net periodic pension expense includes a service cost
component, interest on the projected benefit obligation, a component reflecting the actual return
on plan assets, the effect of deferring and amortizing certain actuarial gains and losses, and the
amortization of any unrecognized net transition obligation on a straight-line basis over the
average remaining service period of employees expected to receive benefits under the plan. The
Company's funding policy is to make annual contributions in amounts necessary to satisfy the
Internal Revenue Service's funding standards, to the extent that they are tax deductible.
ASC Topic 715, Defined Benefit Pension Plans requires a business entity to recognize the
overfunded or underfunded status of asingle-employer defined benefit postretirement plan as an
asset or liability in its statement of financial position and to recognize changes in that funded
status in comprehensive income in the year in which the changes occur. Defined Benefit Pension
Plans also requires a business entity to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions.
(o) Advertising
The Company recognizes advertising expenses as incurred.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method, whereby deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
net income in the period that includes the enactment date.
Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. When
tax returns are filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit of
a tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
21
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.
(q) Stock Options and Restricted Stock
The Company accounts for its stock based compensation plan by recognizing expense for options
and restricted stock granted equal to the grant date fair value of the unvested amounts over their
remaining vesting periods. There were 6,250 shares of restricted stock granted in 2015 compared
to 8,400 shares of restricted stock granted in 2014. There were 43,000 stock options outstanding
as of December 31, 2015 compared to 58,000 stock options outstanding as of December 31,
2014. Future levels of compensation cost recognized related to share-based compensation awards
may be impacted by new awards and/or modification, repurchases and cancellations of existing
awards after the adoption of this standard.
(r) Net Income per Share
Basic net income per share excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock that are not anti-dilutive were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the
Company.
The following is a reconciliation of the numerators and denominators of the basic and diluted net
income per share computations for the periods indicated:
Year ended December 31, 2015
Basic net income per share
Effect of dilutive stock options
Diluted net incorre per share
$
$
Net income
(numerator)
2,740
Shares
(denominator)
Per share
amount
1,519,159 $ 1-~u
2,740
1,531,436 $ IJ~~
12,277
Year ended December 31, 2014
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
Net income
(numerator)
2,149
$
Shares
(denominator)
Per share
amount
1,512,661 $
18,170
I.-t?
1.-1U
$ 2,149
1,530,831 $
(s) ('nnsolidnted Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash
on hand, amounts due from banks (with original maturities of three months or less), and federal
funds sold. Generally, federal funds are purchased and sold for one-day periods.
(t)
Comprehensive Income
ASC Topic 220 Comprehensive Income, requires the Company to classify items of "Other
Comprehensive Income" (such as net unrealized gains (losses) on available-for-sale securities) by
their nature in a financial statement and present the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company's other comprehensive income consists of net
income, and net unrealized gains (losses) on securities available-for-sale, net of income taxes, and
adjustments relating to its defined benefit plan, net of income taxes.
~a
(u) Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures establishes a framework for using
fair value. It defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants as of the measurement
date.
In accordance with Fair Value Measurements and Disclosures, the Company groups its financial
assets and financial liabilities 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. The most
significant instruments that the Company measures at fair value are available-for-sale securities.
All available-for-sale securities fall into Level 2 fair value hierarchy. Valuation methodologies
for the fair value hierarchy are as follows:
Level 1 —Valuations are based on quoted prices for identical assets and liabilities traded in active
exchange markets, such as the New York Stock Exchange.
Level 2 —Valuations for assets and liabilities are obtained from readily available pricing sources
via independent providers for market transactions involving similar assets or liabilities, model-
based valuation techniques, or other observable inputs.
Level 3 — Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and similar
techniques, and are not based on market exchange, dealer, or broker traded transactions. Leve13
valuations incorporate certain assumptions and projections in determining fair value assigned to
such assets and liabilities.
(v) Current Accounting Developments
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with
Customers. " ASU 2014-09 requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09
will replace most existing revenue recognition guidance in GAAP when it becomes effective. The
standard permits the use of either the retrospective or cumulative effect transition method. The
Company is evaluating the effect that ASU 2014-09 will have on its financial statements and
related disclosures. The Company has not yet selected a transition method nor has it determined
the effect of the standard on its ongoing financial reporting. In August 2015, the FASB issued
ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, "which deferred the effective date of ASU 2014-09 to annual and interim periods beginning
after December 15, 2017. Early application is not permitted.
In June 2014, the FASB issued ASU 2014-12, "Compensation-Stock Compensation (Topic 718):
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period. " ASU 2014-12 will be effective for
annual and interim periods beginning after December 15, 2015. ASU 2014-12 applies to all
reporting entities that grant their employees share-based payments in which the terms of the
award provide for a performance target that affects vesting could be achieved after the requisite
service period. That is the case when an employee is eligible to retire or otherwise terminate
employment before the end of the period in which a performance target (for example, an initial
public offering or a profitability target) could be achieved and still be eligible to vest in the award
if and when the performance target is achieved. We do not currently have outstanding
performance-based awards and, as a result, ASU 2014-12 would not impact our financial
statements and its related disclosures.
In January 2015, the FASB issued ASU 2015-01, "Income Statement -Extraordinary and
Unusual Items (Subtopic 225-20): Simpl~ing Income Statement Presentation by Eliminating the
23
Concept of Extraordinary Items," which eliminates the concept of extraordinary items from U.S.
GAAP as part of its simplification initiative. Under ASU 2015-01, an entity will no longer
separate out an extraordinary item from the results of ordinary operations and separately present
this extraordinary item on its income statement, nor will related income tax and earnings-per-
share data applicable to an extraordinary item need to be disclosed. Despite these simplifications,
ASU 2015-01 does not affect disclosure guidance for events or transactions that are unusual in
nature or infrequent in their occurrence. ASU 2015-01 is effective for annual periods beginning
after December 15, 2015, and interim periods within those annual periods. The Company does
not expect the effect of ASU 2015-01 to have a material impact on its financial statements and
related disclosures.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to
the Consolidation Analysis, " which changes the way reporting enterprises evaluate whether (a)
they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker
or service provider are variable interests in a variable interest entity (VIE), and (c) variable
interests in a VIE held by related parties of the reporting enterprise require the reporting
enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on
majority exposure to variability that applied to certain investment companies and similar entities.
ASU 2015-2 is effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including
adoption in an interim period. The Company does not expect the effect of ASU 2015-02 to have a
material impact on its financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-
30): Simpl~ing the Presentation of Debt Issuance Costs" to modify the presentation of debt
issuance costs. Prior to ASU 2015-03, issuance costs were presented as an asset on the statement
of financial position, which the FASB concluded was inconsistent with both IFRS as well as
FASB Concept Statement No. 6. This ASU requires that issuance costs be presented as a direct
deduction of debt balances on the statement of financial position, similar to the presentation of
debt discounts. ASU 2015-03 is effective for public companies for years beginning after
December I5, 2015, and interim periods within those fiscal periods. For all other entities, ASU
2015-03 is effective for years beginning after December 15, 2015 and interim periods within
annual periods beginning after December 15, 2016, while early adoption is permitted for financial
statements that have not already been issued. Additionally, the provisions should be applied on a
retrospective basis as a change in accounting principle. ASU 2015-03 will not have an impact on
the Company's financial statements and related disclosures.
Subsequent to the issuance of ASU 2015-03, the Securities and Exchange ("SEC") staff made an
announcement regarding the presentation and subsequent measurement of debt issuance costs
associated with line-of-credit arrangements, which were not addressed in ASU 2015-03. In
August 2015, the FASB codified the SEC announcement in the issuance of ASU 2015-15,
"Interest -Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements." Per ASU 2015-15, for
debt issuance costs related to line-of-credit arrangements, the SEC would not object to an entity
deferring and presenting such costs as an asset and subsequently amortizing the costs ratably over
the term of the line-of-credit arrangement, regardless of whether there were any outstanding
borrowings on the line-of-credit arrangement. The SEC Staff guidance is effective upon adoption
of ASU 2015-03. ASU 2015-15 will not have an impact on the Company's financial statements
and related disclosures.
In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing
Arrangement." Under ASU 2015-05, a customer should determine whether the arrangement
includes a software license. If so, the customer should account for the software license component
in a manner consistent with the accounting for other software licenses. If the arrangement does
not include a software license, the arrangement should be accounted for as a service contract. The
24
provisions of ASU 2015-OS must be applied by public entities to annual periods beginning after
December 15, 2015 as well as interim periods within those annual periods. The Company does
not expect the effect of ASU 2015-OS to have a material impact on its financial statements and
related disclosures.
In May 2015, the FASB issued ASU 2015-08, "Business Combinations, Pushdown Accounting
(Topic 805): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 11 S"
which revised the requirement for recognition and disclosure of a new basis of accounting (or
pushdown accounting) for certain business combination situations. The Company does not expect
ASU 2015-08 to have any impact on its financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 80S):
Simplifying the Accounting for Measurement-Period Adjustments," which eliminates the
requirement for an acquirer to retrospectively adjust the financial statements for measurement-
period adjustments that occur in periods after a business combination is consummated. ASU
2015-16 will be effective for annual and interim periods beginning after December 15, 2015.
Early adoption is permitted. The Company does not expect ASU 2015-16 to have any impact on
its financial statements and related disclosures.
The FASB has issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Tazes, which changes how deferred taxes are classified on organizations' balance
sheets. ASU 2015-17 eliminates the current requirement for organizations to present deferred tax
liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations
will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments
apply to all organizations that present a classified balance sheet. For private companies, the
amendments are effective for financial statements issued for annual periods beginning after
December 15, 2017.
The FASB has issued ASU 2016-01, Financial Instruments —Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is
intended to improve the recognition and measurement of financial instruments. ASU 2016-01
affects public and private companies, not-for-profit organizations, and employee benefit plans
that hold financial assets or owe financial liabilities. The new guidance makes targeted
improvements to existing U.S. GAAP by 1) requiring equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) to
be measured at fair value with changes in fair value recognized in net income; 2) requiring
separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the
accompanying notes to the financial statements; 3) eliminating the requirement to disclose the fair
value of financial instruments measured at amortized cost for organizations that are not public
business entities; and 4) requiring a reporting organization to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from
a change in the instrument-specific credit risk (also referred to as "own credit") when the
organization has elected to measure the liability at fair value in accordance with the fair value
option for financial instruments. The new guidance is effective for private companies for fiscal
years beginning after December 15, 2018, and for interim periods within fiscal years beginning
after December 15, 2019.
(2) Restrictions on Cash
To comply with Federal Reserve regulations, the Company is required to maintain certain average
reserve balances. The daily average reserve requirements were approximately $3,043 and $3,258 for the
weeks including December 31, 2015 and 2014, respectively.
25
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of
December 31, 2015 and 2014 are as follows:
Available-for-Sale
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities — govemrrent
Total available-for-sale
2015
Amortized
Gross
unrealized
costs wins
Gross
unrealized
losses
$
$
18,677
1,741
1,486
21,904
84
117
22
»;
(43)
—
(9)
~52~
Helc~to-Maturity
Obligations of states and political subdivisions $
2015
Gross
unrealized
gains
121
Gross
unrealized
losses
—
Amortized
costs
5,073
Fair
values
18,718
1,858
1,499
,,,(~7~
Fair
values
5.19-1
Available-for-Sale
2014
Amortized
Gross
unrealized
costs wins
Gross
unrealized
losses
Hair
values
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $
Obligations of states and political subdivisions
Mortgage-backed securities —government
20,538
1,746
1,275
Total available-for-sale
$ '_3.SS~
Helc~to-Maturtty
Obligations of states and political subdivisions $
Amortized
costs
5,680
62
126
~2
(181)
1 I)
20,419
1,872
1,306
~ ~~ i (I tip) 23,597
__ o
2014
Gross
unrealized
gains
148
Gross
unrealized
losses
I~.~i ~-
vilueti
(6)
~.~~~
The following table shows the gross unrealized losses and fair value of the Company's investments,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, as of December 31, 2015:
Fair
Description of Securiries value
U.S. Treasury securities and oblip~tions of
Less than l2 months
Gross
unrealized
losses
Tot:~l
Fair
value
Gruss
unrealized
losses
U.S. Government corporations and agencies $ 11,867
Mortgpge-backed securities-government 1,219
43
9
11,867
4R2
Total temporarily
impaired
securities
$ 13,086 52
I ~.~~s~~
43
1
~~
(~
There were no securities that have been in a continuous unrealized loss position for over 12 months as
of December 31, 2015.
The following table shows the gross unrealized losses and fair value of the Company's investments,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, as of December 31, 2014:
Descriprion of Securities
U.S. Treasury securities and obli~tions of
Less than 12 months
Gross
unrealized
losses
Fair
value
Total
Fair
value
Gross
unrealized
losses
U.S. Government corporations and agencies
Morta~ee-backed securities-government
$ 3,462
482
25
1
3,462
482
25
I
Total temporarily
impaired
securities
Description of Securities
U.S. Treasury securities and obligations of
$ 3,944
26
3,944
26
More than 12 months
~ otal
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
U.S. Government corporations and agencies
$ 16, 156
162 ] 6,156
162
Total temporazily
imp aced
securities
$ 16,156
~~~
16,156
162
162
The Company does not consider the unrealized losses other-than-temporary losses based on the
volatility of the securities market price involved, the credit quality of the securities, and the Company's
ability, if necessary, to hold the securities until maturity. For 2015, the securities include 16 bonds that
have continuous losses for less than 12 months and no bonds that have continuous losses for more than
12 months. For 2014, the securities include 4 bonds that had continuous losses for less than 12 months
and 19 bonds that had continuous losses for more than 12 months. There were no gross realized gains
or losses on securities sold in 2015 and 2014.
The amortized costs and fair values of available-for-sale and held-to-maturity securities as of
December 31, 2015, by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
$
Mortgage-backed securities
2015
Available-for-Sale
Fair
values
Amortized
costs
Helc~to-Maturity
Amortized
costs
Fair
values
2,311
16,646
1,461
20,418
1,486
2,310
16,730
1,537
20,577
1,498
1,308
3,765
—
5,073
1,319
3,875
—
5,194
Totals
$
21.9 (~
Securities with amortized costs of approximately $5,807 and $4,312 (fair values of $5,925 and $4,404,
respectively) as of December 31, 2015 and 2014, respectively, were pledged as collateral for public
deposits and to the FRB for overdraft protection.
27
(4) Loans, Allowance for Loan Losses and Credit Quality
A summary of loans as of December 31, 2015 and 2014 follows:
Real estate loans:
Res idential-mortgage
Res idential-construction
Cottn~r~ercial
$
Loans to individuals for household, family and other
consumer e~enditures
Corrnnercial and industrial loans
Total loans, gross
Less unearned income and fees
Loans, net of unearned income and fees
Less allowance for loan losses
Loans, net
$
2015
2014
106,474
6,468
86,013
60,854
46,376
306,185
(97)
306,088
(2,889)
303,199
108,128
8,927
81,025
53,872
31,635
283,587
(68)
283,519
(3,070)
280,449
In the normal course of business, the Bank has made loans to executive officers and directors. As of
December 31, 2015 and 2014, loans to executive officers and directors totaled $210 and $197,
respectively. During 2015, new loans made to executive officers and directors totaled $144, advances
totaled $76 and repayments amounted to approximately $203. There were no loans to companies in
which executive officers and directors have an interest as of December 31, 2015 and 2014. All such
loans were made in the ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time for comparable transactions
with unrelated persons, and, in the opinion of management, do not involve more than normal risk of
collectability or present other unfavorable features.
The fair value of loans, net of unearned income and fees, was $307,151 as of December 31, 2015 and
$287,399 as of December 31, 2014.
The following table presents information on the Company's allowance for loan losses and recorded
investment in loans:
Allowance f'or Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2015
Commercial
Commercial
Real Estate
Consumer
Residential
Total
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision for loan losses
$264
(20)
29
39
Ending Balance $312
$795
(13)
7
(94)
$695
$520
(434)
215
322
$623
$1,491
(172)
88
(148)
$1,259
$3,070
(639)
339
119
$2,889
Allowance:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated
for impairment
$-
$-
$-
$-
$-
$314
676
650
1,249
2,889
28
Commercial
Commercial
Real Estate
Consumer
Kesidentixl
Total
Loans:
Total loans ending balance
$46,376
86,013
60,854
112,942
306,185
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$12
984
25
1,835
2,856
$46,364
85,029
60,829
111,107
303,329
For the Year Ended December 31, 2014
Commercial
Commercial
Real Estate
Consumer
Residential
Total
$211
(23)
5
71
$264
$1,697
(97)
2
(807)
$795
$434
(374)
189
271
$520
$1,067
(136)
8
552
$3,409
(630)
204
87
$1,491
$3,070
$-
$-
$-
~-
~-
$264
795
520
1,491
3,070
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision for loan losses
Ending Balance
Allowance:
Ending balance individually
evaluated for impairment
Ending balance: collectively
evaluated
for impairment
Loans:
Total loans ending balance
$31,635
81,025
53,872
117,055
283,587
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$-
2,125
4
2,155
4,284
$31,635
78,900
53,868
114,900
279,303
The Company utilizes a risk rating matrix to assign a risk grade to each of its loans. A description of
the general characteristics of the risk grades is as follows:
Pass -These loans have minimal and acceptable credit risk.
Special Mention -These loans have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects for the loan at some future date.
Substandard -These loans are inadequately protected by the net worth or paying capacity of
the obligor or collateral pledged, if any. Loans classified as substandard must have a well-
29
defined weakness, or weaknesses, that jeopardize the liquidation of the debt. A substandard
loan is characterized by the distinct probability that the Company will sustain some loss if the
deficiencies are not corrected.
Doubtful -These loans have all of the weakness inherent in one classified as substandard with
the added characteristic that the weaknesses make collection liquidation in full, on the basis of
the currently existing facts, conditions and values, highly questionable and improbable.
The following table illustrates the Company's credit quality indicators:
Credit Quality Indicators
As of December 31, 2015
Credit Exposure
$46,360
Pass
-
Special Mention
Substandard
16
Doubtful -
Total $46,376
Commercial
Commercial Real Estate Consumer
$60,432
-
422
-
60,854
$84,205
1,492
316
-
86,013
Credit Exposure
$30,844
Pass
450
Special Mention
Substandard
341
Doubtful -
$31,635
Total
As of December 31, 2014
Commercial
Commercial Real Estate Consumer
$53,454
76
342
-
53,872
$77,824
1,352
1,849
-
81,025
Residential
$111,605
2
1,335
-
112,942
Total
$302,602
1,494
2,089
-
306,185
Residential
$113,846
1,641
1,568
-
1 17,055
Total
$275,968
3,519
4,100
283,587
The following table represents an age analysis of the Company's past due loans:
Age Analysis of Past Due Loans
As of December 31, 2015
30-59
Days
60-89
Days
Greater
Than
Total
Past
Recorded
Investment
90 Days
and
I otal
Past Due Past Due
90 Days
Due
('urrcnt
Loans
Accruin¢
Commercial
Commercial real estate
Consumer
$-
-
211
Residential 276
Total $487
-
111
22
-
133
12
-
25
1,350
1,387
12
46,364
46,376
111
85,902
86,013
258
60,596
60,854
1,626 111,316 1]2,942
2,007 304,178 306,185
-
-
-
-
-
30
Age Analysis of Past Due Loans
As of December 31, 2014
30-59
Days
60-89
Days
Greater
Than
Total
Past
Recorded
Investment
90 Days
and
Total
Past Due Past Due
90 Days
Due
Current Loans
Accruing
Commercial
Commercial real estate
Consumer
Residential
$27
-
53
123
Total $203
-
-
41
124
165
-
27
31,608
31,635
2,125
2,125
87,827
89,952
4
98
53,774
53,872
2,155
4,284
2,402 105,726 108,128
4,652 278,935 283,587
-
-
-
-
-
As of December 31, 2015 and 2014, the recorded investment in loans for which impairment has been
identified totaled approximately $2,856 and $4,284, respectively, with no corresponding valuation
allowances for either year. The average recorded investment in impaired loans receivable during 2015
and 2014 was approximately $3,571 and $3,436, respectively. Interest income recognized on a cash
basis on impaired loans during 2015 and 2014 was approximately $21 and $64, respectively.
The following table presents information on the Company's impaired loans and their related allowance
for loan losses:
Impaired Loans
For the Year Ended December 31, 2015
Unpaid
Average
Recorded
Principal
Related
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ 12
984
25
12
984
25
1,835
1,835
12
984
25
$1,835
$2,856
12
984
25
1,835
2,856
-
-
-
-
-
-
-
-
-
6
1,555
15
1,995
6
1,555
IS
-
-
1
20
-
-
1
20
1,995
3,571 21
With no related allowance recorded
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
31
For the Year Ended December 31, 2014
Unpaid
Average
Recorded
Principal
Related
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
RecoEnized
$ -
2,125
4
-
2,125
4
2,155
2,155
-
-
2,125
2,125
4
$2,155
$4,284
4
2,155
4,284
-
-
-
-
-
-
-
-
-
33
1,528
59
1,816
33
1,528
59
1,816
3,436
-
9
-
55
9
-
55
64
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
The following presents information on the Company's nonaccrual loans:
Loans in Nonaccrual Status
As of December 31, 2015 and 2014
2015
$12
Commercial
-
Commercial real estate
25
Consumer
Residential 1,350
Total $1,387
2014
$-
678
4
1,446
$2,128
The Company had six restructured loans totaling $1,895 as of December 31, 2015 and had eight
restructured loans totaling $2,608 as of December 31, 2014. All of these restructured loans constituted
troubled debt restructurings as of December 31, 2015 and 2014.
The Company offers a variety of modifications to borrowers. The modification categories offered can
generally be described in the following categories.
Rate Modification is a modification in which the interest rate is changed.
Term Modification is a modification in which the maturity date, timing of payments or frequency of
payments is changed.
Interest Only Modification is a modification in which the loan is converted to interest only payments for
a period of time.
Payment Modification is a modification in which the dollar amount of the payment is changed, other
than an interest only modification described above.
Combination Modification is any other type of modification, including the restructuring of two or more
loan terms through the use of multiple categories above.
32
There were no additional commitments to extend credit related to these troubled debt restructurings that
were outstanding as of December 31, 2015 or December 31, 2014.
The following tables present troubled debt restructurings as of December 31, 2015 and 2014:
December 31, 2015
Accrual
Non-Accrual
Total
Status
Status
Modifications
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
984
-
485
5 I ,469
-
-
-
426
426
-
984
-
911
1,895
December 31, 2014
Accrual
Non-Accrual
Total
Status
Status
Modifications
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
1,448
-
?08
$ 2,156
-
26
-
426
452
1,474
-
1,134
2,608
For 2015, there was one commercial real estate loan that was considered a combination modification
that had apre-modification balance of $970 and a post modification balance of $990. There were also
two residential loans that were considered combination modifications that had apre-modification
balance of $310 and a post modification balance of $323. For loans modified and classified as troubled
debt restructurings, one experienced a payment default and is currently listed as other real estate owned
at $1,075. During 2014, there were two commercial real estate loans that were considered combination
modifications that had apre-modification balance of $138 and a post modification balance of $138.
There were also two residential loans that were considered combination modifications that had a pre-
modification balance of $387 and a post modification balance of $390 in 2015. For loans modified and
classified as troubled debt restructurings in 2014, none experienced payment defaults.
33
(5) Bank Premises and Equipment
Bank premises and equipment, net were comprised of the following as of December 31, 2015 and 2014:
2015
2014
Land improvements
Buildings
Equipment, furniture and fiadures
Construction in progress
Less accumulated depreciation
Land
Bank premises and equipment, net
$
571
7,289
5,294
648
13,802
(7,664)
6,138
2,632
8,770
571
7,270
5,214
-
13,055
(7,255)
5,800
2,632
8,432
(6) Deposits
A summary of deposits as of December 31, 2015 and 2014 follows:
2015
2014
Noninterest-bearing demand deposits
Interest-bearing:
Savings and money market accounts
NOW accounts
Tirre deposits -under $100,000
Time deposits - $100,000 and over
Total interest-bearing deposits
Total deposits
$
$
58,895
95,650
75,781
70,766
31,311
273,508
33?.4~3
50,801
89,127
71,422
77,697
36,157
274,403
325.x(14
At December 31, 2015, the scheduled maturity of time deposits is as follows: $37,050 in 2016; $7,864
in 2017; $24,404 in 2018, $16,004 in 2019 and $16,755 in 2020.
In the normal course of business, the Bank has received deposits from executive officers and directors.
As of December 31, 2015 and 2014, deposits from executive officers and directors were approximately
$1,547 and $906, respectively. All such deposits were received in the ordinary course of business on
substantially the same terms and conditions, including interest rates, as those prevailing at the same
time for comparable transactions with unrelated persons.
The fair value of deposits was $330,676 as of December 31, 2015 and $323,888 as of December 31,
2014.
(7) Employee Benefit Plans
The Bank maintains a noncontributory defined benefit pension plan that covers substantially all of its
employees. Benefits are computed based on employees' average final compensation and years of
credited service. Pension expense amounted to approximately $128 and $11 in 2015 and 2014,
respectively. The change in benefit obligation, change in plan assets and funded status of the pension
plan as of December 31, 2015 and 2014 and pertinent assumptions are as follows:
34
Change in Benefit Obligation
Benefit obligation at beginning ofyear
Service cost
Interest cost
Actuarial income (loss)
Benefits paid
Settlement Loss
zui~
?oia
ti
8,029
446
307
(249)
(641)
Benefit obligation at end of year
$
7,892
Change in Plan Assets
Fair value of plan assets at beginning ofyear
Actualretum on plan assets
Fanployer contribution
Benefits paid
Projected fair value of plan assets at end ofyear $
Funded Status at the Frd of the Year
Amounts Recognized in the Balance Sheet
Other liabilities, accrued pension
Amounts Recognized in Accumul.itcd Othcr ('omprchcnsi~
Income Net of Taac F~'fect
Unrecognized net actuarial loss
8,828
(9)
180
(642)
8,357
465
465
1,345
Benefit obligation included in accunailated
other comprehensive income
$ 1,345
6,506
361
314
1,239
(391)
8>029
8,786
433
—
(391
8,828
799
799
1,090
I.i~~+~i
Ftinded Status
Benefit obligation
Fair value ofassets
Unrecognized net actuarial loss
Prepaid benefit cost included in the balance sheet
(7,892)
8,358
2,038
(8,029)
8,828
1,653
Pension BeneTits
WeightedA~+erage Assumptions as of December 31, 2015 and
'
2014: 2015
Discount rate
Expected long-termretum on plan assets
Rate of compensation increase
4.25%
7.75%
3.00%
2014
4.00%
7.75%
3.00%
Pension Benefits
Net (gain)/loss
Prior service cost
Amortization of prior service cost
Net obligation at transition
Amortization of net obligation at transition
Total recognized in other comprehensive income
2015
2014
$
$
255
-
-
-
-
255
970
-
-
-
970
Total Recognized in Net Periodic Benefit Cost and
Other Comprehensive Income
$
514
1,480
The estimated portion of prior service cost and net transition obligation included in accumulated other
comprehensive income that will be recognized as a component of net periodic pension cost over the
next fiscal year is $199.
35
The Company 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 return 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, which may not continue over the measurement period, and higher significance is 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).
The components of net pension benefit cost under the plan for the years ended December 31, 2015 and
2014 is summarized as follows:
Pension Benefits
2015
2014
Service cost
Interest cost
Eag~ected return on plan assets
Recognized net (gain)/loss due to settlement
Net armrtization
Recognized net actuarial loss
Net pension benefit cost
$
446
308
(672)
46
128
360
314
(663)
11
Projected Benefit Payments
The projected benefit payments under the plan are summarized as follows for the years ending
December 31:
2016
2017
2018
2019
2020
2021-2025
$ 405
1,061
324
34
311
3,449
Plan Asset Allocation
Plan assets are held in a pooled pension trust fund administered by the Virginia Bankers Association.
The pooled pension trust fund is sufficiently diversified to maintain a reasonable level of risk without
imprudently sacrificing return, with a targeted asset allocation of 39% fixed income and 61 %equities.
The Investment Manager selects investment fund managers with demonstrated experience and
expertise, and funds with demonstrated historical performance, for the implementation of the pension
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 Virginia Bankers Association to administer the investments of the pooled
pension trust fund 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.
36
The asset or liability's fair value measurement level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following
is a description of the valuation methodologies used for assets measured at fair value.
Mutual funds-fixed income and equity funds: Valued at the net asset value of shares held at year-end.
Cash and equivalents: Valued at cost which approximates fair value.
The preceding methods described may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, although the Company believes its
valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine fair value of certain financial instruments could result in a
different fair value measurement as of December 31, 2015 and 2014.
The following table presents the fair value of the assets, by asset category, as of December 31, 2014 and
2013.
Mutual funds-fixed income $
Mutual funds-equity
Total assets at fair value
2015
3,260
5,098
$ 8,358
2014
2,207
6,621
8,828
The following table sets forth by level, within the fair value hierarchy, the assets carried at fair value as
of December 31, 2015 and 2014.
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
Assets at Fair Value as of December 31, 2015
L.evell
$ 3,260
5,098
$ 8,358
L.eve12
-
-
-
L.eve13
-
-
-
3,260
5,098
8,358
Total
Assets at Fair Value as of December 31, 2014
I.evell
$ 2,207
6,621
$ 8,828
Level3
-
-
-
L.evel2
-
-
-
2,207
6,621
8,828
Total
Contributions
The Company expects to contribute $0 to its pension plan in 2016.
The Company also has a 401(k) plan under which the Company matches employee contributions to the
plan. In 2015 and 2014, the Company matched 100% of the first 1 % of salary deferral and 50% of the
next 5% of salary deferral to the 401(k) plan. The amount expensed for the 401(k) plan was $124
during the year ended December 31, 2015 and $109 during the year ended December 31, 2014.
~8) Income Taxes
Income tax expense attributable to income before income tax expense for the years ended December 31,
2015 and 2014 is summarized as follows:
2015
2111-1
Current
Deferred
$
Total incorre taxe~ense
$
1,249
57
1,306
914
56
970
37
Reported income tax expense for the years ended December 31, 2015 and 2014 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax
expense as a result of the following:
Computed at statutory Federal taxrate
Increase (reduction) in income tax expense
resulting from:
Tax exempt interest
Disallowance of interest expense
Other, net
Reported income taxe~ense
$
2015
2014
$
1,376
1,060
(42)
1
(29)
L ;(~r,
(41)
2
(51)
~»( ~
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, 2015 and 2014 are as follows:
2015
2014
$
Deferred tax assets:
Loans, principally due to allowance for loan losses
Defined benefit plan valuation adjustments
Loans, due to unearned fees, net
Other
Total gross deferred tax assets
Deferred tax liabilities:
Bank premises and equipment, due to differences
in depreciation
Accrued pension, due to actual pension contributions
in excess of accrual for financial reporting purposes
Net unrealized gains on available-for-sale securities
Other
Total gross deferred tax liabilities
Net deferred tax liability, included in other liabilities
$
590
693
4
171
1,458
(457)
(852)
(58)
(192)
(1,559)
(101)
585
562
8
250
1,405
(514)
(833)
(13)
(176)
(1,53
(131)
The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary as
of December 31, 2015 and 2014, since realization of the entire gross deferred tax assets can be
supported by the amounts of taxes paid during the carry back periods available under current tax laws.
The Company did not recognize any interest or penalties related to income tax during the years ended
December 31, 2015 and 2014. The Company does not have an accrual for uncertain tax positions as
deductions taken and benefits accrued are based on widely understood administrative practices and
procedures and are based on clear and unambiguous tax law. Tax returns for all years 2012 and
thereafter are subject to future examination by tax authorities.
(9) Financial Instruments with Off-Balance-Sheet Risk
The Company is a 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 mortgage
sale lock commitments, commitments to extend credit and standby letters of credit. These instruments
may involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets.
The contract amounts of these instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial
instrument fail to perform in accordance with the terms of the contract. The Company's maximum
exposure to credit loss under commitments to extend credit and standby letters of credit is represented
by the contractual amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.
The Company requires collateral to support financial instruments when it is deemed necessary. The
Bank evaluates such customers' creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of the counterparty.
38
Collateral may include deposits held in financial institutions, U.S. Treasury securities, other marketable
securities, real estate, accounts receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
Corrnrritrrents to eadend credit
$ 73,122
Standby letters ofcredit
$
3,677
61,953
3,~7~
December 31,
2015
2014
In the ordinary course of business, the Company may enter into mortgage rate lock commitments that
are subsequently funded by the Company. The Company then sells the mortgage loan to a secondary
market bank that had underwritten the mortgage loan before the Company funded the loan. The
secondary market bank pays a fee that was agreed upon on the lock commitment date to the Company
and buys the loan within five days of the initial funding by the Company. As of December 31, 2015
the Company had $265 in outstanding mortgage rate lock commitments and no outstanding mortgage
rate lock commitments as of December 31, 2014.
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.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. These guarantees are primarily issued to support public and private
borrowing arrangements, including bond financing and similar transactions. Unless renewed,
substantially all of the Company's standby letters of credit commitments as of December 31, 2015 will
expire within one year. Management does not anticipate any material losses as a result of these
transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
(10) Leases
The Company leases premises and equipment under various operating lease agreements. Generally,
operating leases provide for one or more renewal options on the same basis as current rental terms.
Certain leases require increased rentals under cost-of-living escalation clauses. The following are
future minimum lease payments as required under the agreements:
Year
Payments
2016
2017
2018
2019
2020
$154
152
152
152
160
Thereafter 1,289
Total $2,059
The Company entered into a lease of the Amherst branch facility, with an entity in which a director of
the Company has a 50% ownership interest, in 2009. The original term of the lease is twenty years and.
may be renewed at the Company's option for two additional terms of five years each. The Company's
current rental payment under the lease is $141 annually.
39
(11) Concentrations of Credit Risk and Contingencies
The Company grants commercial, residential and consumer loans to customers primarily in the central
Virginia area. As a whole, the portfolio is affected by general economic conditions in the central
Virginia region.
The Company's commercial and real estate loan portfolios are diversified, with no significant
concentrations of credit other than the geographic focus on the central Virginia region. The installment
loan portfolio consists of consumer loans primarily for automobiles and other personal property.
Overall, the Company's loan portfolio is diversified and is not concentrated within a single industry or
group of industries, the loss of any one or more of which would generate a materially adverse impact on
the business of the Company.
The Company has established operating policies relating to the credit process and collateral in loan
originations. Loans to purchase real and personal property are generally collateralized by the related
property. Credit approval is primarily based on the creditworthiness of the borrower, the ability to repay
and the value of the collateral pledged.
At times, the Company may have cash and cash equivalents at a financial institution in excess of
insured limits. The Company places its cash and cash equivalents with high credit quality financial
institutions whose credit rating and financial condition is monitored by management to minimize credit
risk.
In the ordinary course of business, various claims and lawsuits are brought by and against the
Company. In the opinion of management, there is no pending or threatened proceeding in which an
adverse decision could result in a material adverse change in the Company's consolidated financial
condition or results of operations.
(12) Dividend Restrictions and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends received from its subsidiary
Bank. For the years ended December 31, 2015 and 2014, dividends from the subsidiary Bank totaled
$993 and $1,016, respectively.
Substantially all of Bankshares' retained earnings consist of undistributed earnings of its subsidiary
Bank, which are restricted by various regulations administered by federal banking regulatory agencies.
Under applicable federal laws, the Comptroller of the Currency restricts, without prior approval, the
total dividend payments of the Bank in any calendar year to the net profits of that year, as defined,
combined with the retained net profits for the two preceding years. As of December 31, 2015, retained
net profits of the Bank that were free of such restriction approximated $6,466
Bankshares and the Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on Bankshares' consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Bankshares and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. Bankshares and the Bank's
capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Beginning January 1, 2015, banks became subject to new Basel III Capital Rules. As a result, certain
items in the risk-based capital calculation have changed. In addition, a new ratio, Common Equity Tier
for "CET 1" Risk-Based Capital Ratio, is now measured and monitored. For Bankshares and the Bank
and given its capital structure, the Common Equity Tier 1 Risk-Based Capital Ratio and the Tier 1 Risk-
Based Capital Ratio are identical. Bankshares and the Bank's actual regulatory capital amounts and
ratios as of December 31, 2015 are listed on the following page:
40
Re~„ulator~ Capital Ratios as of December 31, 2015
Total Risk-Based Capital Ratio (to Risk Weighted Assets)
CET 1 Risk Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Leverage Capital Ratio (to Average Assets)
Bankshares
consolidated
Bank
Amount
$38,440
$35,475
$35,475
$35,475
Amount Ratio
Ratio
1232% $38,602 12.41%
$35,637 11.45%
11.37%
$35,637 11.45%
11.37%
9.75%
$35,637
9.68%
Basel III limits capital distributions and certain discretionary bonus payments if the banking
organization does not hold a "capital conservation buffer" consisting of 2.50% of CET1 capital, Tier 1
capital and total capital to risk weighted assets in addition to the amount necessary to meet minimum
risk-based capital requirements. The capital conservation buffer will be phased in beginning January 1,
2016, at 0.625% of risk weighted assets, increasing each year until fully implemented at 2.50% on
January 1, 2019. When fully phased in on January 1, 2019, Basel III will require (i) a minimum ratio of
CET1 capital to risk weighted assets of at least 4.50%, plus a 2.50% capital conservation buffer, (ii) a
minimum ratio of Tier 1 capital to risk weighted assets of at least 6.00%, plus the capital conservation
buffer, (iii) a minimum ratio of total capital to risk weighted assets of at least 8.00%, plus the 2.50%
capital conservation buffer and (iv) a minimum leverage ratio of 4.00%.
As of December 31, 2015, the most recent notification from Office of the Comptroller of the Currency
categorized Bankshares and the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification that management believes
have changed Bankshares and the Bank's category.
Bankshares and the Bank's actual capital amounts and ratios as of December 31, 2014 using the former
capital measurements before the implementation of Basel III are presented in the table below.
~c~ual
mount
atio
For Capital
Adequacy Purposes
~o
oun
To Be "Well
Capitalized" Under
Prompt Corrective
Action Provisions
too
ount
As of December 31, 2014:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 36,521
36,828
Bank
11.98% $ 24,379
24,310
12.12%
8.0% $ N/A
8.0%
30,387
N/A
10.0%
Tier 1 Capital
(to Risk Weighted Assets):
Bankshazes consolidated
Battk
33,385
33,692
10.96%
17.09%
12,189
12,155
4.0%
4.0%
N/A
18,232
N/A
6.0%
Tier 1 Capital (L.everage)
(to Average Assets):
Bankshares consolidated
Bank
33,385
33,692
9.25%
936%
14,434
14,399
4.0%
4.0%
N/A
17,999
N/A
5.0%
(13) Disclosures about Fair Value of Financial Instruments
Generally accepted accounting principles require the Company to disclose estimated fair values of its
financial instruments.
The following methods and assumptions were used to estimate the approximate fair value of each class
of financial instrument for which it is practicable to estimate that value.
(u) Securities
The fair value of securities is estimated based on bid prices as quoted on national exchanges or
bid quotations received from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer quotations; so fair
value estimates are based on quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued.
41
(b) Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type such as commercial, real estate -residential, real estate -commercial, loans to
individuals and other loans. Each loan category is further segmented into fixed and adjustable rate
interest terms.
The fair value of fixed rate loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan as well as estimates for prepayments. The estimate of maturity is based
on the Company's historical experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending conditions.
(c) Deposits
The fair value of demand deposits, NOW accounts, and savings deposits is the amount payable on
demand. The fair value of fixed maturity time deposits, certificates of deposit is estimated by
discounting scheduled cash flows through the estimated maturity using the rates currently offered
for deposits or borrowings of similar remaining maturities.
(~ Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and standby letters of credit are the
deferred fees arising from these unrecognized financial instruments. These deferred fees are not
deemed significant as of December 31, 2015 and 2014, and as such, the related fair values have
not been estimated.
Fair value estimates are made at a specific point in time, based on relevant market information
and information about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated funding needs and the value of assets and
liabilities that are not considered financial instruments. Significant assets that are not considered
financial assets include deferred tax assets and premises and equipment and other real estate
owned. In addition, the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been considered in the
estimates.
(g) Fair Value Methodologies
The following is a description of valuation methodologies used for assets and liabilities recorded
at fair value.
Available-for-Sale Securities
Available-for-sale securities are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available, and would in such case be included as a
Level 1 asset. The Company currently carries no Level 1 securities. If quoted prices are not
available, valuations are obtained from readily available pricing sources from independent
providers for market transactions involving similar assets or liabilities. The Company's principal
market for these securities is the secondary institutional markets, and valuations are based on
observable market data in those markets. These would be classified as Level 2 assets. The
Company's entire available-for-sale securities portfolio is classified as Level 2 securities. The
42
Company currently carries no Level 3 securities for which fair value would be determined using
unobservable inputs.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to
time, a loan is considered impaired and a specific allowance for loan losses is established for that
loan. 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 impairment in accordance with
ASC Topic 360, "Impairment of a Loan. " The fair value of impaired loans is estimated using one
of several methods, including collateral value, market value of a similar debt, liquidation value
and discounted cash flows. Those impaired loans not requiring an allowance represent loans at
which fair value of the expected repayments or collateral exceed the recorded investments in such
loans. As of December 31, 2015, substantially all of the impaired loans were evaluated based on
the fair value of the collateral. In accordance with "Impairment of a Loan," impaired loans where
an allowance is established based on the fair value of the collateral require classification in the
fair value hierarchy. When the fair value of the collateral is based on an observable market price
or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2
asset. When an appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no observable market price,
the Company records the impaired loan as a nonrecurring Level 3 asset. For substantially all of
the Company`s impaired loans as of December 31, 2015 and December 31, 2014, the valuation
methodology utilized by the Company was collateral based measurements such as a real estate
appraisal and the primary unobservable input was adjustments for differences between the
comparable real estate sales. The discount to reflect current market conditions and ultimately
collectability ranged from 0% to 25% for each of the respective periods.
Other Real Estate Owned
Other real estate owned is adjusted to fair value less estimated selling costs upon transfer of the
loans to foreclosed assets. Subsequently, other real estate owned is carried at the lower of
carrying value or fair value less estimated selling costs. Fair value is based upon independent
market prices, appraised values of the collateral or management's estimation of the value of the
collateral. When the fair value of the collateral is based on observable market price or a current
appraised value, the Company records the foreclosed asset as a nonrecurring Leve12 asset. When
an appraised value is not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market price, the Company
records the other real estate owned as a nonrecurring Level 3 asset. For substantially all of the
Company's other real estate owned as of December 31, 2015 and December 31, 2014, the
valuation methodology utilized by the Company was collateral based measurements such as a real
estate appraisal and the primary unobservable input was adjustments for differences between the
comparable real estate sales. The discount to reflect current market conditions ranged from 0% to
25% for each of the respective periods.
43
The following tables present information about certain assets and liabilities measured at fair
value:
Fair Value Measurements on December 31, 2015
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant ~
Other
Observable
Inputs
(Leve12)
Significant
Unobservable
Inputs
(Level 3)
$22,075
$22,075
$-
$22,075
$-
$2,856
$2,856
$-
$1,733
$1,733
$-
$-
$-
$2,856
$1,733
Fair Value Measurements on December 31, 2014
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
$23,597
$23,597
$-
$23,597
$ -
$4,284
$4,284
$-
$-
$4,284
$1,107
$1,107
$-
$-
$1,107
Ucscription
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
44
The following table sets forth a summary of changes in the fair value of the Company's
nonrecurring Leve13 assets for the year ended December 31, 2015:
Leve13 Assets
Year Faded December 31, 2015
Impaired
Other Real
Loans
Estate Owned
Balance, beginning ofthe year
Purchases, sales, issuances,
and settlements (net)
Balance, end ofyear
$
4,284
$
(1,428)
2,856
1,107
626
1,733
There were no transfers between Level 1 and Level 2 investments during the year ended
December 31, 2015.
The following table sets forth a summary of changes in the fair value of the Company's
nonrecurring Leve13 assets for the year ended December 31, 2014:
Leve13 Assets
Year Ended December 31, 2014
Other Real
Impaired
Loans
Estate Owned
Balance, beginning ofthe year
Purchases, sales, issuances,
and settlements (net)
Balance, end ofyear
$
2,586
$
1,698
4,284
1,297
(190)
1,107
There were no transfers between Level 1 and Level 2 investments during the year ended
December 31, 2014.
45
(14) Parent Company Financial Information
Condensed financial information of Bankshares ("Parent") is presented below:
Condensed Balance Sheets
December 31,
2015
2014
Assets
Cash due &omsubsidiary
Investment in subsidiary, at equity
Other assets
Total assets
Liabilities and stockholders' equity
Notes payable
Other liabilities
Total liabilities
Stockholders' equity
Common stock of $3 par value, authorized 3,000,000
shares; issued and outstanding 1,520,221 shares
in 2015 and 1,511,970 in 2014
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
22
34,946
929
35,897
1,091
24
1,115
$
4,508
1,065
30,442
(1,233)
$ 34,782
16
33,165
865
34,046
1,367
25
1,392
4,497
1,004
28,219
(1,066)
32,654
Condensed Statements of Income
Years ended December 31,
2015
2014
Income:
Dividends from subsidiary
$
Equity in undisVibuted net income of subsidiary
Totallncome
Expenses:
Other expenses
Income before income tax benefit
Applicable income tax benefit
992
1,874
2,866
191
2,675
65
Net income
$
2,740
1,016
1,302
2,318
257
2.061
88
2,149
46
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiary
Increase in other assets
Net cash provided by operating activities
Cash flows from financing activities
Cash dividends paid
Repayment of line of credit
Increase (decrease) in other liabilities
Net cash used in financing activities
Net increase in cash due from subsidiary
Cash due fromsubsidiary, beginning ofyear
Cash due fromsubsidiary, end ofyear
(15) Stock-based Compensation
Years ended
December 31,
2015
2014
$
2,740
2,149
(1,874)
(64)
802
(517)
(278)
(I)
(796)
6
16
22
~
$
(1,302)
(89)
758
(484)
(264)
1
(747)
11
5
16
The Company's 2004 Incentive Stock Plan (the "2004 Plan"), pursuant to which the Company's Board
of Directors may grant stock options and other equity-based awards to officers and key employees, was
approved by shareholders on April 13, 2004 and became effective as of May 1, 2004. The 2004 Plan
authorized grants of up to 100,000 shares of the Company's authorized, but unissued common stock.
All stock options were granted with an exercise price equal to the stock's fair market value at the date
of the grant. As of December 31, 2014, the 2004 Plan has expired and no additional awards may be
granted under this plan.
Stock options granted under the 2004 Plan generally have 10-year terms, vest at the rate of 25% per
year, and become fully exercisable four years from the date of grant.
Under the 2004 Plan during 2014, 23,500 options for shares were granted, and in 2013 no stock options
were granted. On May 1, 2013, 10,000 shares, of restricted stock were granted to employees. The 2013
grants will vest on the third anniversary of the grant date.
At December 31, 2015, options for 20,500 shares were exercisable at an exercise price of $9.00 per
share and options for 5,750 shares were exercisable at an exercise price of $18.10 per share under the
2004 Plan.
On April 8, 2014, shareholders approved the 2014 Incentive Stock Plan (the "2014 Plan"), pursuant to
which the Company's Board of Directors may grant stock options and other equity-based awards to
officers and key employees. The 2014 Plan authorizes grants of up to 150,000 shares of the Company's
authorized, but unissued common stock. All stock options are granted with an exercise price equal to
the stock's fair market value at the date of the grant. As of December 31, 2015, there were 128,222
shares available for grant under the 2014 Plan.
On May 1, 2015, 6,250 shares of restricted stock were granted to employees pursuant to the 2014 Plan.
On May 1, 2014, 8,400 shares of restricted stock were granted to employees pursuant to the 2014 Plan.
The 2014 restricted stock grants will vest on the third anniversary of the grant date.
At December 31, 2015, no options for shares were exercisable under the 2014 Plan.
The Company expensed $0 in 2015 and $3 in 2014 in compensation expense as a direct result of the
issuance of the 34,750 incentive stock options with tandem stock appreciation rights in previous years
and recognized $37 in compensation expense related to 23,125 unvested stock options. For the 2004
Plan stock options granted May 1, 2010, the fair value of $3.96 per share of each option grant is
estimated on the grant date using the Black-Scholes option-pricing model with the following weighted
average assumptions used: dividend yield of 2.065%, expected volatility of 45.61 %, a risk-free interest
47
rate of 4.63%, and expected lives of 9 years. For the 2004 Plan stock options granted February 11,
2014, the fair value of $5.45 per share of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted average assumptions used: dividend
yield of 4.00%, expected volatility of 44.70%, arisk-free interest rate of 2.69%, and expected lives of 9
years.
The Company also expensed $116 in 2015 in compensation expense as a direct result of the granting of
11,000 shares of restricted stock in 2012, 10,000 shares of restricted stock in 2013, 8,400 shares of
restricted stock in 2014 and 6,250 shares of restricted stock in 2015 and will recognize $102 in 2016
and $70 in 2017 and $12 in 2018 on such restricted stock.
Stock option activity during the years ended December 31, 2015 and 2014 is as follows:
Balance as of December 31, 2013
Forfeited
Exercised
Granted
Balance as of December 31, 2014
Forfeited
Exercised
Granted
Balance as of December 31, 2015
Number
Weighted
of
Shares
Average
Exercise Price
37,000
250
2,000
23,500
58,250
375
15,000
0
42,875
$9.00
$9.00
$9.00
$18.10
$12.67
18.10
9.00
-
13.91
The following table summarizes information about stock options outstanding as of December 31, 2015:
Options Outstanding
Options F~cercisable
Exercise
Price
Number
Outstanding
at 12/31/15
Weighted-
Average
Remaining Weighted-
Contractual
Life
(in years)
Average
Exercise
Price
Number
Exercisable at
12/31/2015
W eighted-
Average
Eacercise
Price
$ 9.00
18.10
19,750
23,125
5.4
8.4
$
9.00
18.10
19,750 $
5,750
9.00
18.10
The aggregate intrinsic value of options outstanding was $223, of options exercisable was $206, and of
options unvested and expected to vest was $17 as of December 31, 2015. The aggregate intrinsic value
of restricted stock granted was $119 for 2015 and $150 for 2014. The total intrinsic value (market value
on date of exercise less exercise price) of options exercised was $127 for the year ended December 31,
2015 and $19 for the year ended December 31, 2014.
48
The following table summarizes information about stock options outstanding at December 31, 2014:
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life
(in years)
Weighted-
Average
Exercise
Price
F~cercise
Price
Number
Outstanding
at 12/31/14
Options Exercisable
Number
F.~cercisable at
12/31/2014
Weighted-
Average
Exercise
Price
9.00
15.10
34,750
23,500
5.4
9.4
$
9.00
18.10
34,750 $
-
9.00
-
(16) Share Repurchase Program
On November 12, 2013, the Board of Directors adopted a resolution authorizing the repurchase of up
to $500 worth of shares of the Company's common stock. The Board of Directors extended this
resolution on May 13, 2014, November 11, 2014, May 12, 2015 and December 8, 2015. Purchases
are made, as conditions warrant, from time to time in the open market. The current resolution expires
June 30, 2016 and the timing of future purchases will depend on market conditions. As of December
31, 2015, the Company repurchased 14,465 shares of its common stock under the stock repurchase
program and expensed $249 for these repurchases. The timing and amount of future repurchases
will depend upon the market price for our common stock, securities laws restricting repurchases,
asset growth, earnings, and our capital plan.
(17) Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure in the December
31, 2015 consolidated financial statements through March 5, 2016, the date the consolidated financial
statements were available to be issued.
Management's Report on Internal Control over Financial Reporting.
The Company's management is responsible for establishing and maintaining adequate internal control over
financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control over financial reporting as of
December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control —Integrated
Framework. Based on this assessment, our management concluded that, as of December 31, 2015, the
Company's internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company's independent auditor regarding
internal control over financial reporting.
49
~'~ Cherry Bekaert
Report of Independent Auditor
To the Board of Directors and Stockholders
of Pinnacle Bankshares Corporation
Altavista, Virginia
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Pinnacle Bankshares Corporation and
Subsidiary (the "Company"), which comprise the consolidated balance sheets as of December 31, 2015 and 2014,
and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Pinnacle Bankshares Corporation and Subsidiary as of December 31, 2015 and 2014, and the
results of their operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
~ i~riu~ ~~~~~ < 150
x
a~
~ 130
110
90
70
50
12/31/10
12/31 / 11
12/31 / 12
12/31 / 13
12/31 /14
12/31 /15
Index
Pinnacle Bankshares Corporation
NASDAQ Market Index
S&P 500
SNL Bank and Thrift
12/31/10
100.00
100.00
100.00
100.00
12/31/11
92.73
99.21
102.11
77.76
12/31/12
94.99
116.82
118.45
104.42
12/31/13
175.73
163.75
156.82
142.97
12/31/14
210.95
188.03
178.28
159.60
12/31/15
237.96
201.40
180.75
162.83
Period Ending
52
Annual Meeting
Shareholder Information
The 2016 Annual Meeting of Shareholders will be held on April 12, 2016, at 11:00 a.m. at the Fellowship
Hall of Altavista Presbyterian Church, located at 707 Broad Street, Altavista, Virginia.
Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the OTC Bulletin Board. The following table presents the
high and low bid prices per share of the Common Stock, as reported on the OTCQX marketplace, and
dividend information of the Company for the quarters presented. The high and low bid prices of the
Common Stock presented below reflect inter-dealer prices and do not include retail markups, markdowns
or commissions, and may not represent actual transactions.
High
2015
Low
Dividends
High
2014
Low
Ditidends
First Quarter
$17.82
$17.51
$0.085
$17.00
$15.10
$0.075
Second Quarter
$17.70
$17.41
$0.085
$18.50
$17.00
$0.075
Third Quarter
$17.99
$17.41
$0.085
$18.40
$17.51
$0.085
Fourth Quarter
$19.70
$17.65
$0.085
$18.05
$17.52
$0.085
Each share of Common Stock is entitled to participate equally in dividends, which are payable as and
when determined by the Board of Directors after consideration of the earnings, general economic
conditions, the financial condition of the business and other factors as might be appropriate. The
Company's ability to pay dividends is dependent upon its receipt of dividends from its subsidiary. Prior
approval from the Comptroller of the Currency is required if the total of all dividends declared by a
national bank, including the proposed dividend, in any calendar year will exceed the sum of the bank's
net profits for that year and its retained net profits for the preceding two calendar years, less any required
transfers to surplus. This limitation has not had a material impact on the Bank's ability to declare
dividends during 2015 and 2014 and is not expected to have a material impact during 2016.
As of March 1, 2016, there were approximately 311 shareholders of record of Bankshares' Common
Stock.
Requests for Infor►nation
Requests for information about the Company should be directed to Bryan M. Lemley, Secretary,
Treasurer and Chief Financial Officer, P.O. Box 29, Altavista, Virginia 24517, telephone (434) 369-3000.
Shareholders seeking information regarding lost certificates and dividends should contact Computershare
Inc. in College Station, Texas, telephone (800) 368-5948. Please submit address changes in writing to:
Shareholder correspondence should be mailed to:
Computershare Shareholder Services
P.O. Box 30170
College Station, TX 77842-3170
Overnight correspondence should be mailed to:
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station TX 77845
PINNACLE
BAN KSHARES
C O R P O R A T I O N