2016 AN NUA L R EPO RT
B O A R D O F D I R E C T O R S
Front Row: Connie C. Burnette, James E. Burton, IV, (Chairman), Aubrey H. Hall, III, A. Patricia Merryman
Back Row: Robert L. Johnson, II, Robert L. Finch, Jr., Michael E. Watson, (Vice Chairman), Thomas F. Hall,
C. Bryan Stott, Judson H. Dalton, Carroll E. Shelton, James O. Watts, IV, Esq., Elton W. Blackstock, Jr.
S E N I O R M A N A G E M E N T
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. Lemley, William J. Sydnor, II
On the cover: Our new Odd Fellows Road Branch. Project expected to be completed by September 2017.
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
First National Bank Office Locations ................................................................................................
Page
2
Directors, Officers and Senior Management…..………….……………………………………..... 3
President’s Letter ...............................................................................................................................
Selected Consolidated Financial Information ....................................................................................
Results of Operations .........................................................................................................................
Consolidated Balance Sheets .............................................................................................................
Consolidated Statements of Income ..................................................................................................
4
6
7
12
13
Consolidated Statements of Comprehensive Income……………………………………………... 14
Consolidated Statements of Changes in Stockholders’ Equity..........................................................
Consolidated Statements of Cash Flows............................................................................................
Notes to Consolidated Financial Statements .....................................................................................
15
16
17
Management’s Report on Internal Control over Financial Reporting…………............................... 48
Report of Independent Auditor ..........................................................................................................
49
Shareholder Information ....................................................................................................................
50
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
3321 Old Forest Road
Lynchburg, Virginia 24501
Telephone: (434) 385-4432
ODD FELLOWS ROAD OFFICE
(Scheduled for completion in September 2017)
3401 Odd Fellows Road
Lynchburg, Virginia 24501
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
Board of Directors of Pinnacle Bankshares Corporation and First National Bank
James E. Burton, IV Chairman
Michael E. Watson Vice Chairman
Elton W. Blackstock, Jr.
Connie C. Burnette
Judson H. Dalton
Robert L. Finch, Jr.
Aubrey H. Hall, III
Thomas F. Hall
Robert L. Johnson, II
A. Patricia Merryman
Carroll E. Shelton
C. Bryan Stott
James O. Watts IV, Esq.
Officers of Pinnacle Bankshares Corporation
Aubrey H. Hall, III President & Chief Executive Officer
Bryan M. Lemley Secretary, Treasurer & Chief Financial Officer
William J. Sydnor, II Vice President
Senior Management of First National Bank
Aubrey H. Hall, III
President, Chief Executive Officer & Trust Officer
Bryan M. Lemley Senior Vice President, Cashier & Chief Financial Officer
William J. Sydnor, II
Judith A. Clements
Thomas R. Burnett, Jr.
Vivian S. Brown
Tony J. Bowling
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
3
DEAR SHAREHOLDERS,
I am pleased to report to you that Pinnacle Bankshares Corporation, the one-bank holding company for First
National Bank, completed a very successful year during 2016, generating the highest core operating net
income in the history of the Company and experiencing significant improvement in the trading price of our
stock. Our ability to enhance performance during 2016 hinged on growth and I am proud of the way our team
of dedicated financial professionals delivered. Commitment to processes, attention to details, focus on vision
and a desire to continually improve have positioned First National to be recognized as the premier community
bank across Central Virginia.
Pinnacle’s overall net income for 2016 was $3,004,000, including a $266,000 gain derived from our sale of the
Bank’s prior Old Forest Road Branch. Core net income for 2016 was $2,829,000, excluding the gain, which
represents a $323,000 or 13% increase as compared to core net income generated in 2015. This level of
earnings surpasses the Company’s previous high of $2,600,000, achieved in 2007 prior to the great recession,
and marks the eighth straight year of core net income improvement. Profitability as measured by the
Company’s return on average assets was 0.76% for 2016, which is a 2 basis points increase as compared to
2015, and was achieved while growing assets 19%.
Net interest income was the driver of improved financial performance, increasing $1,130,000 in 2016 as a
result of over $35,000,000 in loan growth. Our Commercial, Dealer and Retail Divisions all contributed to the
increase in loan production, enabling the Bank to maintain appropriate diversification within the loan portfolio
and remain well below regulatory guidance regarding concentrations of construction, acquisition and
development, and non-owner occupied commercial real estate loans.
Even more impressive was our deposit growth of over $67,000,000 during 2016, consisting primarily of
demand deposits and other transaction accounts, which enabled the Bank to fund its loan growth at a low cost
while preserving desired liquidity. We continue to focus on the expansion of core deposit relationships,
including consumer and small business, and were successful in attracting larger commercial depositors during
2016 due to our electronic delivery channels and cash management expertise. Our deposit gathering success is
also attributed to the trust and confidence that the Central Virginia market has in our institution.
Asset quality further strengthened during 2016 with all major indicators moving in a positive direction. Non-
performing loans to total loans and non-performing assets to total assets were both below .50% as of December
31, 2016, resulting in a provision for loan losses of only $87,000 for the year even with our robust loan growth.
The allowance for loan losses balance as of year-end was $2,898,000, which was 377% of non-performing
loans as compared to 208% of non-performing loans as of the end of 2015. This level of allowance is viewed
as being sufficient to cushion the Bank from potential future losses associated with problem loans.
Non-interest income totaled $3,896,000 with core non-interest income increasing $191,000 in 2016, net of
gains recognized on the sale of real estate and investments, as compared to 2015’s non-interest income, net of
income derived from an accounting change that year. As a percentage of year-end assets, non-interest income
was .89% with First National continuing to rank favorably as compared to other peer community banks in
regard to this revenue stream. Our diverse sources of non-interest income include interchange fees from check
card activity, nonsufficient funds and overdraft fees, fees generated from the sale of mortgage loans, and
commissions and fees from investments and insurance sales.
Higher net interest income and non-interest income combined with a relatively low provision offset a $983,000
increase in non-interest expense for the year, which was primarily due to an 11% increase in salaries and
employee benefits driven by increased salaries and pension expenses and an employee bonus paid during
December. New positions added during 2015 to facilitate growth in 2016 contributed to the increase; however,
we do not anticipate additional personnel will be required to meet near term growth objectives. The bonus was
the first incentive plan payout since 2008 and was approved by the Board based on its assessment of the
Company’s financial performance, strategic progress and overall risk profile.
4
Pinnacle’s total assets as of December 31, 2016 were $440,104,000, an increase of approximately 19% as
compared to the end of 2015. As mentioned, loans grew over $35,000,000 or 11% to $341,321,000, while
cash and cash equivalents grew $31,000,000 or 188% to $48,174,000. The Bank’s securities portfolio totaled
$27,569,000 as of December 31, 2016, which was relatively unchanged compared to the prior year-end.
However, trading activity was elevated as we restructured the portfolio with an objective of increasing its yield
without materially increasing credit or interest rate risk. Total liabilities were $403,555,000 as of year-end and
were almost entirely comprised of deposits, which grew 20% to $399,743,000.
Stockholders’ equity as of December 31, 2016 was $36,549,000, representing an increase of $1,767,000 or 5%
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. Our Total Risk Based Capital Ratio fell
to 11.67% as of December 31, 2016 as compared to 12.41% as of the prior year-end due to our material
growth. It is our current objective to support future growth through improved profitability and retained
earnings.
We are pleased to be on schedule with our Lynchburg Market Plan, which is intended to increase First
National Bank’s presence and visibility across Central Virginia to facilitate growth of assets and enhance
shareholder returns. The Bank opened its newly renovated Timberlake Branch on May 18, 2016 and its newly
relocated Old Forest Road Branch on July 6, 2016. Response from the community regarding these projects has
been extremely positive with both offices experiencing increased loans and deposits during 2016.
Additionally, construction of the new Odd Fellows Road Branch/Lynchburg Headquarters building began in
third quarter of 2016 and is scheduled to be completed in September of 2017. This facility will contain our
ninth branch office and allow us to vacate leased office space in the Wyndhurst area of Lynchburg. Our
Altavista Main Office will remain the Company’s corporate headquarters with the functions performed there
remaining in place. In fact, we recently started a planned renovation of our Altavista Main Office lobby to
give it a more modern look and feel.
Your Board and Management Team are extremely pleased that our hard work and efforts have resulted in
improved returns to our shareholders. Pinnacle has paid a cash dividend for eighteen straight quarters and the
amount of annual cash dividends paid increased 12% to $0.38 per share in 2016 as compared to $0.34 per
share in 2015. We are even more excited that the trading price of Pinnacle’s stock ended the year at $28.88,
representing an increase of 47% compared to the end of 2015 and the highest share price in ten years.
Pinnacle’s total return for 2016 was 49.38% as compared to the SNL U.S. Bank Index’s total return of 26.35%.
The index is comprised of over 250 banks across the nation, including a number of Virginia community
banking organizations. While financial stocks as a whole have benefited from the anticipated impact of
President Trump’s expected pro-business agenda and the potential for further interest rate increases, we believe
Pinnacle’s year-end price, at approximately 122% of tangible book value per share, is just beginning to reflect
your Company’s underlying value.
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 11, 2017 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,
Aubrey H. Hall, III “Todd”
President & Chief Executive Officer
5
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
2016
2015
2014
2013
2012
$
$
13,635
87
3,896
13,044
1,396
3,004
1.97
1.96
0.38
24.21
12,505
129
3,731
12,060
1,306
2,740
1.80
1.79
0.34
22.88
12,056
91
3,162
12,008
970
2,149
1.42
1.40
0.32
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
1,524,271
1,541,518
1,519,159
1,531,436
1,512,661
1,530,831
1,512,545
1,523,105
1,503,952
1,503,952
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 charge-offs to average loans,
440,104
338,423
27,569
48,174
399,743
36,549
0.76%
8.38%
19.34%
0.85%
net of unearned income and fees
0.02%
Capital Ratios:
Leverage
Risk-based:
Tier 1 capital
Total capital
Average equity to average assets
8.96%
10.83%
11.68%
9.08%
6
371,261
303,199
27,148
16,739
332,403
34,782
0.74%
8.12%
18.96%
0.94%
0.11%
9.68%
11.37%
12.32%
9.17%
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%
1.08%
1.23%
1.31%
0.15%
0.12%
0.57%
9.25%
8.88%
8.49%
10.96%
11.98%
9.11%
10.84%
12.03%
8.33%
10.15%
11.39%
8.04%
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 in any forward-looking statements.
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; real estate values in our market area; general economic and financial market conditions; levels of
unemployment in our market area; the legislative/regulatory climate, including regulatory initiatives with respect to
financial institutions, products and services in accordance with the Dodd Frank Wall Street Reform Act (the “Dodd
Frank Act”) and otherwise; the Consumer Financial Protection Bureau and its regulatory and enforcement
activities; and the application of the Basel III capital standards to the Company and the Bank; 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; our ability to timely implement the Lynchburg Market Plan; demand for loan products; deposit
flows; competition and 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 events and, in many cases,
are outside of our control. 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.
7
In 2014, the Bank developed a Lynchburg Market Plan in an effort to increase its presence and visibility in Central
Virginia. The plan included 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. The Bank opened its newly renovated Timberlake
Branch on May 18, 2016 and its newly relocated Old Forest Road Branch on July 6, 2016. The plan also included
the construction of a new branch / Lynchburg headquarters building on Odd Fellows Road. Construction is under
way for this new facility with an expected completion date of September 2017. 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 of one-hundred five 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 $3,004 for the year ended December 31, 2016, compared to net income of $2,740
for the year ended December 31, 2015, an increase of 9.64%. This increase in net income was driven mainly by a
$1,130, or 9.04% increase in net interest income, a $165 or 4.42% increase in noninterest income and a $42, or
32.56% decrease in provision for loan losses. These positive factors that contributed to the increase in net income
were partially offset by a $983, or 8.15% increase in noninterest expense.
Net interest income increased as net interest margin grew from 3.63% in 2015 to 3.70% in 2016. Noninterest
income increased mainly due to a gain of $266 on the sale of property, a $77 increase in mortgage loan fees and a
gain of $62 on the sale of securities. The Company also experienced small increases in commissions and loan fees.
In 2015, the Company recognized $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. Noninterest expense increased as salaries and commissions
increased by $509. This increase included an employee bonus payment of $151. The defined benefit plan expense
increased by $67 to $206 in 2016. The defined benefit plan expense is expected to increase to $330 in 2017.
Provision for loan losses decreased due to an improvement in asset quality.
We expect continued gains in net income for 2017 due to growth of earning assets and the December 2016 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 2017, which would improve our yield on earnings assets. We expect an
increase in noninterest income in 2017 with the increase in assets that was realized in 2016. Finally, we expect an
increase in noninterest expense in 2017 due to depreciation on new facilities, expected normal increases in salaries
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 0.76% in 2016, compared to
0.74% in 2015. Return on average equity (“ROE”), was 8.38% for 2016, compared to 8.12% for 2015.
Total assets as of December 31, 2016 were $440,104, up 18.54% from $371,261 as of December 31, 2015. The
principal components of the Company’s assets at the end of the year were $48,174 in cash and cash equivalents,
$27,569 in securities and $338,423 in net loans. During the year ended December 31, 2016, net loans increased
11.62%, or $35,224 and securities increased $421, or 1.55%.
Total liabilities as of December 31, 2016 were $403,555, up 19.93% from $336,479 as of December 31, 2015, due
to an increase in total deposits of $67,340, or 20.26%, to $399,743 as of December 31, 2016 from $332,403 as of
8
December 31, 2015. Noninterest-bearing demand deposits increased $25,216, or 42.82% and represented 21.04%
of total deposits as of December 31, 2016, compared to 17.72% as of December 31, 2015. Savings and NOW
accounts increased $43,568, or 25.41% and represented 53.78% of total deposits as of December 31, 2016,
compared to 51.57% as of December 31, 2015. Time deposits decreased $1,444 or 1.41% and represented 25.17%
of total deposits as of December 31, 2016, compared to 30.71% as of December 31, 2015. 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, 2016 and December 31, 2015.
Total stockholders’ equity as of December 31, 2016 was $36,549, including $32,865 in retained earnings. As of
December 31, 2015, stockholders’ equity totaled $34,782, including $30,442 in retained earnings. The increase in
stockholders’ equity resulted mainly from the Company’s net income of $3,004 partially offset by dividends of
$581 paid to shareholders.
Net Interest Income. The net interest spread increased to 3.58% for the year ended December 31, 2016 from
3.50% for the year ended December 31, 2015. Yield on earning assets was 4.10% and cost of funds was 0.52% for
the year ended December 31, 2016 as compared to a yield on earning assets of 4.09% and a cost of funds of 0.59%
for the year ended December 31, 2015. In 2016, the Company’s yield on earning assets increased slightly due to
higher loan volume and the Company’s cost of funds declined as deposits repriced at lower rates due to the further
decline in volume of higher-cost time deposits and the increase in volume of lower-cost demand, savings and
NOW deposits.
The net interest margin increased to 3.70% for the year ended December 31, 2016 from 3.63% for the year ended
December 31, 2015 as the cost to fund earning assets was 0.40% for the year ended December 31, 2016 as
compared to the cost to fund earning assets of 0.46% for the year ended December 31, 2015. Net interest income
was $13,635 for the year ended December 31, 2016, compared to $12,505 for the year ended December 31, 2015,
and is attributable to interest income from loans, interest from correspondent banks and the Federal Reserve and
securities exceeding the cost associated with interest paid on deposits and other borrowings.
Provision for Loan Losses. The provisions for loan losses for the years ended December 31, 2016 and 2015 were
$87 and $129, respectively. The provision for loan losses decreased in 2016 and has remained at a low level since
2013, as the Company continues to strengthen its asset quality. The provision for loan losses decreased $42 from
2015 to 2016 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
2017.
Noninterest Income. Total noninterest income for the year ended December 31, 2016 increased $165, or 4.42%,
to $3,896 from $3,731 in 2015 mainly due to a gain of $266 on the sale of property, a $77 increase in mortgage
loan fees and a gain of $62 on the sale of securities. The Company also experienced small increases in
commissions, loan fees and interchange fees. In 2015, the Company recognized $354 in income from Bankers
Insurance using the equity method. 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 the gains on sale of property and securities and the equity method
income recognized in 2015 increased $191, or 5.66% to $3,568. The increase in 2016 is primarily attributable to a
$77, or 17.91% increase in mortgage loan fees, a $19, or 4.49% increase in commissions and fees, and a $39, or
15.66% increase in service charges on loan accounts.
Noninterest Expense. Total noninterest expense for the year ended December 31, 2016 increased $983, or 8.15%,
to $13,044 from $12,061 in 2015. The increase in noninterest expense is primarily due to a $692, or 10.79%,
increase in salary and employee benefits as salaries and commissions increased $509, or 9.75% and defined benefit
plan expense increased $67 to $206 in 2016 from $139 in 2015. Salaries included an employee bonus payment of
$151 in 2016. Also, occupancy expense increased $42, or 6.05%, capital stock tax increased $14, or 6.28%,
furniture and equipment increased $7, or1.00% and advertising expense increased $4, or 2.09%. Other operating
expenses increased $251, or 7.40% due to increases in fees paid to directors, dealer contract purchase expense,
core system provider expenses and loan fees paid. These increases were partially offset by a $10, or 5.21%
decrease in office supplies and printing and a $17, or 6.67% decrease in Federal Deposit Insurance Premiums.
9
Income Tax Expense. Applicable income taxes on 2016 earnings amounted to $1,396, resulting in an effective tax
rate of 31.73% compared to $1,306, and an effective tax rate of 32.28%, in 2015.
Investment Portfolio
Investment securities as of December 31, 2016 totaled $27,569, an increase of $421, or 1.55% from $27,148 as of
December 31, 2015. Investment securities held-to-maturity decreased to $3,727 as of December 31, 2016 from
$5,073 as of December 31, 2015, a decrease of $1,346, or 26.53%. Available-for sale investments increased to
$23,842 as of December 31, 2016 from $22,075 as of December 31, 2015, an increase of $1,767, or 8.00%.
Investments increased slightly as purchases outpaced sales, maturities and paydowns in 2016.
Loan Portfolio
The Company’s net loans were $338,423 as of December 31, 2016, an increase of $35,224, or 11.62%, from
$303,199 as of December 31, 2015. This increase resulted from a $13,324 increase in commercial loans, a $9,067
increase consumer loans, and a $12,906 increase in real estate loan originations during 2016. The Company’s ratio
of net loans to total deposits was 85.39% as of December 31, 2016 compared to 91.21% as of December 31, 2015
as deposit growth exceeded loan growth by $32,116.
Bank Premises and Equipment
Bank premises and equipment increased $2,925, or 33.35% in 2016 due in part to the completion of our
Timberlake Branch renovations, the completion of our new Old Forest Road Branch and the construction in
progress of our new Odd Fellows Road Branch and Lynchburg Headquarters. The Odd Fellows Road project is
expected to be completed by September 2017. 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 $356,380 for the year ended December 31, 2016, an increase of $25,367, or 7.66% from
$331,013 of average deposits for the year ended December 31, 2015. As of December 31, 2016, total deposits
were $399,743 representing an increase of $67,340, or 20.26%, from $332,403 in total deposits as of December 31,
2015. The change in deposits during 2016 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, 2016 reflects liquidity and capital levels management
believes to be currently adequate to support anticipated funding needs and budgeted growth of the Company.
Capital ratios are in excess of required regulatory minimums for a “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 Bankshares and the Bank consists of common stock,
related paid in capital, and retained earnings. In 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
10
CET1. CET1 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 1capital 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 10.83% of December 31, 2016. The Total Risk-
based Capital Ratio was 11.68% and the Company’s Tier 1 Leverage Ratio was 8.94% as of December 31, 2016.
For comparison, the Company’s CET1 and Tier 1 Risk-based Capital Ratio was 11.37% of December 31, 2015.
The Total Risk-based Capital Ratio was 12.32% and the Company’s Tier 1 Leverage Ratio was 9.68% as of
December 31, 2015. While still considered “well capitalized”, capital levels have decreased due to the 18.66%
growth of the Bank’s assets in 2016.
Stockholders’ equity was $36,549 as of December 31, 2016 compared to $34,782 as of December 31, 2015.
Dividends paid to shareholders were $0.38 per share paid in 2016 as compared to the $0.34 per share paid in 2015.
11
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(In thousands of dollars, except share data)
(Audited)
Assets
2016
2015
Cash and cash equivalents (note 2):
Cash and due from banks
Certificates of deposits
Securities (note 3):
Available-for-sale, at fair value
Held-to-maturity, 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)
Total assets
Liabilities:
Liabilities and Stockholders' Equity
Deposits (note 6):
Demand
Savings and NOW accounts
Time
Total deposits
Note payable under line of credit (note 1(f))
Accrued interest payable
Other liabilities (note 7)
$
$
$
48,174 $
495
23,842
3,727
146
333
338,423
11,695
1,054
6,620
539
642
4,414
440,104 $
84,111 $
214,999
100,633
399,743
801
135
2,876
16,739
985
22,075
5,073
144
325
303,199
8,770
962
6,459
539
1,733
4,258
371,261
58,895
171,431
102,077
332,403
1,091
121
2,864
Total liabilities
403,555
336,479
Commitments, contingencies and other matters (notes 9, 10 and 11)
Stockholders' equity (notes 7, 12 and 15):
Common stock, $3 par value. Authorized 3,000,000 shares,
issued and outstanding 1,522,351 shares in 2016 and
1,520,221 shares in 2015
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity
4,506
1,050
32,865
(1,872)
36,549
Total liabilities and stockholders' equity
$
440,104 $
4,508
1,065
30,442
(1,233)
34,782
371,261
12
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2016 and 2015
(In thousands of dollars, except per share data)
(Audited)
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
Interest on federal funds purchased
Total interest expense
Net interest income
Provision for loan losses and unfunded commitments (note 4)
Net interest income after provision for loan losses
Noninterest income:
Service charges 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
Other operating expenses
Total noninterest expense
Income before income tax expense
Income tax expense (note 8)
Net income
Basic net income per share (note 1(r))
Diluted net income per share (note1(r))
2016
2015
$
14,602 $
13,530
261
68
92
129
1
309
73
107
96
3
15,153
14,118
478
1,038
2
1,518
13,635
87
13,548
1,658
442
507
288
1,001
3,896
7,104
736
709
182
238
237
195
3,643
13,044
4,400
1,396
440
1,173
-
1,613
12,505
129
12,376
1,671
423
430
249
958
3,731
6,412
694
702
192
255
223
191
3,392
12,061
4,046
1,306
2,740
1.80
1.79
$
$
$
3,004 $
1.97
1.96
$
$
13
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2016 and 2015
(In thousands of dollars)
(Audited)
Net income
Other comprehensive income (losses), net of related income taxes:
Unrealized (losses) gains on availabile-for-sale securities
Before tax
Income tax (benefit) expense
Changes in plan assets and benefit obligation of defined benefit pension plan
Before tax
Income tax benefit
Total other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
2016
2015
3,004 $
2,740
(515)
175
(452)
153
(639)
2,365 $
133
(45)
(386)
131
(167)
2,573
$
$
14
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2016 and 2015
(In thousands of dollars, except share and per share data)
(Audited)
Common Stock
Shares
1,511,970 $
Par Value
4,497
Capital
Surplus
Retained
Earnings
$
1,004 $
28,219 $
2,740
5,971
4,680
(2,400)
18
(7)
98
(37)
1,520,221 $
4,508
$
1,065 $
(517)
30,442 $
3,004
8,912
1,410
(8,192)
23
(25)
131
(146)
Accumulated
Other
Comprehensive
Income (Loss)
(1,066) $
(167)
(1,233) $
(639)
1,522,351 $
4,506
$
1,050 $
(581)
32,865 $
(1,872) $
Total
32,654
2,740
(167)
116
(44)
(517)
34,782
3,004
(639)
154
(171)
(581)
36,549
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
Net income
Other Comprehensive Loss
Issuance of restricted stock and related expense
Stock options exercised
Repurchased stock
Cash dividends declared by
Bankshares ($0.38 per share)
Balances, December 31, 2016
See accompanying notes to consolidated financial statements.
15
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2016 and 2015
(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
Gain on sale of equipment
Amortization of unearned fees, net
Net amortization of premiums and
discounts on securities
Provision for loan losses
Provision for deferred income taxes
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:
Proceeds from maturities of certificates of deposits
Purchases of available-for-sale securities
Sale of available-for-sale securities
Proceeds from maturities and calls of held-to-maturity securities
Proceeds from maturities and calls of available-for-sale securities
Proceeds from paydowns and maturities of available-for-sale
mortgage-backed securities
Proceeds from the sale of of OREO
Purchase of Federal Reserve Stock
Purchase of Federal Home Loan Bank Stock
Net increase in loans made to customers
Additions to foreclosed assets
Disposals of bank premises and equipment
Purchases of bank premises and equipment
2016
2015
$
3,004
$
2,740
416
(266)
64
116
87
(150)
154
(161)
55
(92)
307
14
(440)
3,108
490
(17,916)
6,292
1,305
8,531
736
1,683
(2)
(8)
(35,759)
(248)
929
(4,004)
409
-
29
57
129
57
116
(171)
43
(75)
1,063
(48)
(315)
4,034
-
(13,504)
-
570
14,849
290
1,003
(3)
-
(24,524)
(56)
-
(747)
Net cash used in investing activities
(37,971)
(22,122)
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
68,784
(1,444)
(171)
(290)
(581)
66,298
31,435
16,739
18,976
(11,777)
(44)
(277)
(517)
6,361
(11,727)
28,466
Cash and cash equivalents, end of year
$
48,174
$
16,739
Supplemental disclosure of cash flows information
Cash paid during the year for:
Income taxes
Interest
Supplemental schedule of noncash investing and
financing activities:
$
1,715
1,504
$
875
1,661
Transfer from loans to foreclosed assets
Loans charged against the allowance for loan losses
Unrealized (losses) gains on available-for-sale securities
Defined benefit plan adjustment per ASC topic Compensation-Retirement Benefits
$
436
405
(515)
(452)
$
1,616
639
133
(386)
See accompanying notes to consolidated financial statements.
16
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,
2016 and 2015. 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, 2016 and 2015, 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 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
17
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 FHLB, 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 determined that it had the ability to exercise
significant influence over a limited liability corporation, as the Company’s president was elected to the
Board of Directors of the investee, therefore, the Company elected to adopt the equity method of
accounting for the investment that had previously been accounted for as a cost method investment. In
conjunction with the change in accounting method, the Company reported a $354 gain on the
investment in noninterest income for the year ended December 31, 2015. There are no such changes in
accounting methods during the year end December 31, 2016.
(f) Borrowings
As of December 31, 2016, the Company’s available borrowing limit with the FHLB was
approximately $104,635. The Company had $0 in borrowings from the FHLB outstanding at
December 31, 2016 and 2015. 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 $801 outstanding as of
December 31, 2016 and $1,091 outstanding as of December 31, 2015 with a 5.00% interest rate that
matures on June 30, 2017.
(g) 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
18
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
19
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 Insurance
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 2016, 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.
(l) 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 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.
(m)
Impairment 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
20
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 a single-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. Advertising expenses totaled $195 in 2016
compared to $191 in 2015.
(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 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 8,500 shares of restricted stock granted in 2016 compared to 6,250 shares
of restricted stock granted in 2015. There were 37,000 stock options outstanding as of December 31,
2016 compared to 42,875 stock options outstanding as of December 31, 2015. Future levels of
21
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, 2016
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
Year ended December 31, 2015
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
$
$
$
$
Net income
(numerator)
Shares
(denominator)
Per share
amount
3,004
—
3,004
1,524,271 $
11,361
1,535,632 $
1.97
1.96
Net income
(numerator)
Shares
(denominator)
Per share
amount
2,740
—
2,740
1,519,159 $
12,277
1,531,436 $
1.80
1.79
(s) Consolidated 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.
(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.
22
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. Level 3 valuations incorporate
certain assumptions and projections in determining fair value assigned to such assets and liabilities.
(v) Current Accounting Developments
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. ASU 2015-02 did not have a material impact on the Company’s financial
statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30):
Simplifying 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 15, 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 did 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 Commission (“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 does
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 provisions of
ASU 2015-05 must be applied by public entities to annual periods beginning after December 15, 2015
as well as interim periods within those annual periods. ASU 2015-05 does not have a material impact
on the Company’s financial statements and related disclosures.
23
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. 115" which revised
the requirement for recognition and disclosure of a new basis of accounting (or pushdown accounting)
for certain business combination situations. ASU 2015-08 does not have any impact on the Company’s
financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): 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. ASU
2015-16 does not have any impact on the Company’s financial statements and related disclosures.
In January 2016, 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. The Company is currently evaluating the impact of adopting the new guidance
on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The FASB issued this ASU
to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet by lessees for those leases classified as operating leases under current
U.S. GAAP and disclosing key information about leasing arrangements. The core principle is that a
lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its
balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For leases with a term of twelve
months or less, a lessee is permitted to make an accounting policy election by class of underlying asset
not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize
lease expense for such leases generally on a straight-line basis over the lease term. The amendments
in this ASU are effective for private companies for fiscal years beginning after December 15, 2019,
and interim periods beginning after December 15, 2020. Early application of this ASU is permitted for
all entities. The Company is currently evaluating the impact of adopting the new guidance on its
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify several
aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. ASU 2016-09 is effective for private companies for fiscal years beginning after
December 15, 2017, and interim periods beginning after December 15, 2018. Early application of this
ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new
guidance on its consolidated financial statements.
24
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments,” which sets forth a "current expected credit
loss" ("CECL") model requiring the Company to measure all expected credit losses for financial
instruments held at the reporting date based on historical experience, current conditions and reasonable
supportable forecasts. This replaces the existing incurred loss model and is applicable to the
measurement of credit losses on financial assets measured at amortized cost and applies to some off-
balance sheet credit exposures. ASU 2016-13 is effective for private companies for fiscal years
beginning after December 15, 2020. Early application of this ASU is permitted for all entities. The
Company is currently assessing the potential impact of this ASU and collecting loan data needed to
measure the required calculation.
In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15),” to address
diversity in how certain cash receipts and cash payments are presented and classified in the statement
of cash flows. The amendments provide guidance on the following nine specific cash flow issues: 1)
debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate
of the borrowing; 3) contingent consideration payments made after a business combination; 4)
proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned
life insurance policies, including bank-owned; 6) life insurance policies; 7) distributions received from
equity method investees; 8) beneficial interests in securitization transactions; and 9) separately
identifiable cash flows and application of the predominance principle. The amendments are effective
for private companies for fiscal years beginning after December 15, 2018, and interim periods with
fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an
interim period. The Company does not expect the adoption of this guidance to be material to the
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” The amendments in the ASU are intended to simplify
the subsequent quantitative measurement of goodwill by eliminating step two from the goodwill
impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an
impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair
value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting
unit to determine if the quantitative step one impairment test is necessary. This amendment is effective
for annual or interim goodwill impairment tests of private companies in fiscal years beginning after
December 15, 2021. Entities should apply the amendment prospectively. Early adoption is permitted,
including in an interim period, for impairment tests performed after January 1, 2017. The Company is
currently evaluating the impact of adopting the new guidance on its consolidated financials.
(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 $3,556 and $3,043 for the weeks
including December 31, 2016 and 2015, respectively.
25
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of
December 31, 2016 and 2015 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 – government
Total available-for-sale
2016
Gross
Gross
Amortized
unrealized
unrealized
costs
gains
losses
$
$
7,319
4,818
12,049
24,186
22
96
20
138
(82)
(160)
(240)
(482)
2016
Gross
Gross
Amortized
unrealized
unrealized
Held-to-Maturity
Obligations of states and political subdivisions
costs
3,727
$
gains
68
losses
—
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 – government
Total available-for-sale
2015
Gross
Gross
Amortized
unrealized
unrealized
costs
gains
losses
$
$
18,677
1,741
1,486
21,904
84
117
22
223
(43)
—
(9)
(52)
Held-to-Maturity
Obligations of states and political subdivisions
costs
5,073
$
gains
121
losses
—
2015
Gross
Gross
Amortized
unrealized
unrealized
Fair
values
7,259
4,754
11,829
23,842
Fair
values
3,795
Fair
values
18,718
1,858
1,499
22,075
Fair
values
5,194
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, 2016:
Description of Securities
U.S. Treasury securities and obligations of
Less than 12 months
Total
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
U.S. Government corporations and agencies $
Obligations of states and political subdivisions
Mortgage-backed securities-government
4,908
3,562
10,718
82
160
240
4,908
3,562
10,718
82
160
240
Total temporarily
impaired
securities
$
19,188
482
19,188
482
26
There were no securities that have been in a continuous unrealized loss position for over 12 months as of
December 31, 2016.
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:
De scription of Se curitie s
U.S. Treasury securities and obligations of
Le ss than 12 months
Total
Fair
value
Gross
unre alize d
losse s
Fair
value
Gross
unre alize d
losse s
U.S. Government corporations and agencies $ 11,867
1,219
Mortgage-backed securities-government
43
9
11,867
482
43
1
Total temporarily
impaired
securities
$ 13,086
52
13,086
52
There were no securities that have been in a continuous unrealized loss position for over 12 months as of
December 31, 2015.
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 2016, the securities included 30 bonds that had
continuous losses for less than 12 months and no bonds that had continuous losses for more than 12 months.
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. There were $62 in net realized gains on securities sold
in 2016 and no gross realized gains or losses on securities sold in 2015.
The amortized costs and fair values of available-for-sale and held-to-maturity securities as of December 31,
2016, 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.
2016
Available -for-Sale
Fair
value s
Amortize d
costs
He ld-to-Maturity
Fair
value s
Amortize d
costs
Due in one year or less
Due after one year through five years
Due after five years through ten years
$
2,001
6,294
3,842
2,000
6,267
3,746
1,102
2,625
—
1,102
2,693
—
Mortgage-backed securities
12,049
11,829
—
—
Totals
$
24,186
23,842
3,727
3,795
12,137
12,013
3,727
3,795
Securities with amortized costs of approximately $10,266 and $5,807 (fair values of $10,344 and $5,925,
respectively) as of December 31, 2016 and 2015, respectively, were pledged as collateral for public deposits,
loans 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, 2016 and 2015 follows:
Real estate loans:
Residential-mortgage
Residential-construction
Commercial
$
Loans to individuals for household, family and other
consumer expenditures
Commercial 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
$
2016
2015
113,883
6,904
91,074
69,921
59,700
341,482
(161)
341,321
(2,898)
338,423
106,474
6,468
86,013
60,854
46,376
306,185
(97)
306,088
(2,889)
303,199
In the normal course of business, the Bank has made loans to executive officers and directors. As of
December 31, 2016 and 2015, loans to executive officers and directors totaled $393 and $210, respectively.
During 2016, new loans made to executive officers and directors totaled $191, advances totaled $122 and
repayments amounted to approximately $130. There were no loans to companies in which executive officers
and directors have an interest as of December 31, 2016 and 2015. 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 $341,365 as of December 31, 2016 and
$307,151 as of December 31, 2015.
The following table presents information on the Company’s allowance for loan losses and recorded
investment in loans:
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2016
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision for (recovery of) loan losses
Ending Balance
Allowance:
Ending balance: individually
evaluated for impairment
Ending balance: collectively evaluated
for impairment
Commercial
Commercial Real Estate
Consumer
Residential
Total
$312
(1)
1
103
$415
$695
(16)
3
96
$778
$623
(384)
298
115
$652
$1,259
(4)
23
(225)
$1,053
$2,889
(405)
325
89
$2,898
$-
$-
$-
$-
$-
$415
778
652
1,053
2,898
28
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
Commercial
Commercial Real Estate
Consumer
Residential
Total
$59,700
91,074
69,921
120,787
341,482
$-
92
-
1,024
1,116
Ending balance: collectively evaluated for
impairment
$59,700
90,982
69,921
119,763
340,366
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2015
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision for (recovery of)loan losses
Ending Balance
Allowance:
Ending balance: individually
evaluated for impairment
Ending balance: collectively evaluated
for impairment
Commercial
Commercial Real Estate
Consumer
Residential
Total
$264
(20)
29
39
$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
$-
$-
$-
$-
$-
$312
695
623
1,259
2,889
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
Commercial
Commercial Real Estate
Consumer
Residential
Total
$46,376
86,013
60,854
112,942
306,185
$12
984
25
1,835
2,856
Ending balance: collectively evaluated for
impairment
$46,364
85,029
60,829
111,107
303,329
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.
29
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-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, 2016
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Commercial
Commercial Real Estate Consumer
$69,722
-
199
-
69,921
$59,600
82
18
-
$59,700
$88,916
851
1,307
-
91,074
As of December 31, 2015
Commercial
Commercial Real Estate Consumer
$60,432
-
422
-
60,854
$84,205
1,492
316
-
86,013
$46,360
-
16
-
$46,376
Residential
$119,930
-
857
-
120,787
Residential
$111,605
2
1,335
-
112,942
Total
$338,168
933
2,381
-
341,482
Total
$302,602
1,494
2,089
-
306,185
The following table represents an age analysis of the Company’s past due loans:
Age Analysis of Past Due Loans
As of December 31, 2016
30-59
Days
60-89
Days
Past Due Past Due
-
-
-
-
-
$-
236
97
193
$526
Greater
Than
90 Days
-
92
-
677
769
Total
Past
Due
Total
Current Loans
59,700
59,700
-
91,074
90,746
328
97
69,921
69,824
870 119,917 120,787
1,295 340,187 341,482
Commercial
Commercial real estate
Consumer
Residential
Total
Recorded
Investment
90 Days
and
Accruing
-
-
-
-
-
30
Age Analysis of Past Due Loans
As of December 31, 2015
30-59
Days
60-89
Days
Past Due Past Due
-
111
22
-
133
$-
-
211
276
$487
Greater
Than
90 Days
12
-
25
1,350
1,387
Commercial
Commercial real estate
Consumer
Residential
Total
Total
Past
Due
Total
Current Loans
46,376
46,364
86,013
85,902
60,854
60,596
1,626 111,316 112,942
2,007 304,178 306,185
12
111
258
Recorded
Investment
90 Days
and
Accruing
-
-
-
-
-
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, 2016
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ -
92
-
1,024
-
92
-
-
92
-
1,024
-
92
-
-
-
-
-
-
-
-
6
538
13
1,430
6
538
13
-
3
-
19
-
3
-
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
19
Total $1,116 1,116 - 1,987 22
$1,024
1,024
1,430
-
Impaired Loans
For the Year Ended December 31, 2015
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ 12
984
25
1,835
12
984
25
12
984
25
1,835
12
984
25
-
-
-
-
-
-
-
6
1,555
15
1,995
6
1,555
15
-
-
1
20
-
-
1
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
20
Total $2,856 2,856 - 3,571 21
$1,835
1,995
1,835
-
31
The following presents information on the Company’s nonaccrual loans:
Loans in Nonaccrual Status
As of December 31, 2016 and 2015
2016
2015
Commercial
Commercial real estate
Consumer
Residential
Total
$-
92
-
677
$769
$12
-
25
1,350
$1,387
The Company had four restructured loans totaling $533 as of December 31, 2016 and had six restructured
loans totaling $1,895 as of December 31, 2015. All of these restructured loans constituted troubled debt
restructurings as of December 31, 2016 and 2015.
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.
There were no additional commitments to extend credit related to these troubled debt restructurings that were
outstanding as of December 31, 2016 or December 31, 2015.
The following tables present troubled debt restructurings as of December 31, 2016 and 2015:
December 31, 2016
Accrual
Status
Non-Accrual
Status
Total
Modifications
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
347
$347
-
-
-
186
186
-
-
-
533
533
32
December 31, 2015
Accrual
Status
Non-Accrual
Status
Total
Modifications
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
984
-
485
$ 1,469
-
-
-
426
426
-
984
-
911
1,895
For 2016, there were no new troubled debt restructures. No troubled debt restructures experienced payment
defaults in 2016. During 2015, there was one commercial real estate loan that was considered a combination
modification that had a pre-modification balance of $970 and a post modification balance of $990. There
were also two residential loans that were considered combination modifications that had a pre-modification
balance of $310 and a post modification balance of $323.
(5) Bank Premises and Equipment
Bank premises and equipment, net were comprised of the following as of December 31, 2016 and 2015:
2016
2015
Land improvements
Buildings
Equipment, furniture and fixtures
Construction in progress
Less accumulated depreciation
$
Land
Bank premises and equipment, net $
622
9,748
5,808
959
17,137
(7,993)
9,144
2,551
11,695
(6) Deposits
A summary of deposits as of December 31, 2016 and 2015 follows:
Noninterest-bearing demand deposits
Interest-bearing:
Savings and money market accounts
NOW accounts
Time deposits – under $250,000
Time deposits – $250,000 and over
Total interest-bearing deposits
Total deposits
$
2016
84,111
$
139,333
75,666
94,901
5,732
315,632
399,743
571
7,289
5,294
648
13,802
(7,664)
6,138
2,632
8,770
2015
58,895
95,650
75,781
95,618
6,459
273,508
332,403
At December 31, 2016, the scheduled maturity of time deposits is as follows: $29,978 in 2017; $27,034 in
2018; $15,101 in 2019, $16,119 in 2020 and $12,401 in 2021.
In the normal course of business, the Bank has received deposits from executive officers and directors. As of
December 31, 2016 and 2015, deposits from executive officers and directors were approximately $1,998 and
$1,547, 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 $352,379 as of December 31, 2016 and $330,676 as of December 31, 2015.
33
(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 expenses amounted to approximately $199 and $128 in 2016 and 2015, respectively. The
change in benefit obligation, change in plan assets and funded status of the pension plan as of December 31,
2016 and 2015 and pertinent assumptions are as follows:
Change in Benefit Obligation
2016
2015
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial income (loss)
Benefits paid
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
$
$
Projected fair value of plan assets at end of year $
Funded Status at the End of the Year
Amounts Recognized in the Balance Sheet
7,892
412
327
464
(146)
8,949
8,358
551
—
(146)
8,763
(186)
8,029
446
307
(249)
(641)
7,892
8,828
(9)
180
(642)
8,357
465
(Other liabilities) Other Assets, accrued pension
Amounts Recognized in Accumulated Other Comprehensive
(186)
465
Income Net of Tax Effect
Unrecognized actuarial loss
Income tax effect
Benefit obligation included in accumulated
other comprehensive income
$
Funded Status
Benefit obligation
Fair value of assets
Unrecognized net actuarial loss
Prepaid benefit cost included in the balance sheet
$
(2,490)
847
(1,643)
(8,949)
8,763
2,490
2,304
(2,038)
693
(1,345)
(7,892)
8,358
2,038
2,504
Weighted Average Assumptions as of December 31, 2016 and
2015 :
2016
2015
Pension Benefits
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
4.00%
7.50%
3.00%
4.25%
7.75%
3.00%
34
Pension Benefits
2016
2015
Gross 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
Total Recognized in Net Periodic Benefit Cost and
Other Comprehensive Income
$
$
$
452
-
-
-
-
452
652
386
-
-
-
-
386
514
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 $330.
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, 2016 and 2015
is summarized as follows:
Pension Benefits
2016
2015
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
$
Net pension benefit cost
$
412
327
(612)
73
200
446
308
(672)
46
128
Projected Benefit Payments
The projected benefit payments under the plan are summarized as follows for the years ending December 31:
2017
2018
2019
2020
2021
2022-2026
$ 1,509
326
26
314
1,425
2,787
35
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.
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, 2016 and 2015.
The following table presents the fair value of the assets, by asset category, as of December 31, 2016 and
2015.
Mutual funds-fixed income $
Mutual funds-equity
Total assets at fair value
$
3,433
5,330
8,763
3,259
5,098
8,357
2016
2015
The following table sets forth by level, within the fair value hierarchy, the assets carried at fair value as of
December 31, 2016 and 2015.
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
$
$
$
$
Asse ts at Fair Value as of De ce mbe r 31, 2016
Level 1
3,433
5,330
8,763
Level 3
-
-
-
Level 2
-
-
-
3,433
5,330
8,763
Total
Asse ts at Fair Value as of De ce mbe r 31, 2015
Level 1
3,259
5,098
8,357
Level 3
-
-
-
Level 2
-
-
-
3,259
5,098
8,357
Total
36
Contributions
The Company expects to contribute $0 to its pension plan in 2017.
The Company also has a 401(k) plan under which the Company matches employee contributions to the plan.
In 2016 and 2015, 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 $143 during the year ended
December 31, 2016 and $124 during the year ended December 31, 2015.
(8)
Income Taxes
Income tax expense attributable to income before income tax expense for the years ended December 31,
2016 and 2015 is summarized as follows:
Current
Deferred
Total income tax expense
2016
1,546
(150)
1,396
$
$
2015
1,249
57
1,306
Reported income tax expense for the years ended December 31, 2016 and 2015 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 tax rate
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest
Disallowance of interest expense
Other, net
2016
2015
$
1,496
1,376
(68)
3
(35)
(42)
1
(29)
Reported income tax expense
$
1,396
1,306
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and
deferred tax liabilities as of December 31, 2016 and 2015 are as follows:
2016
2015
$
Deferred tax assets:
Loans, principally due to allowance for loan losses
Defined benefit plan valuation adjustments
Loans, due to unearned fees, net
Net unrealized losses on available-for-sale securities
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 asset (liability), included in other assets $
659
847
—
118
223
1,847
(502)
(784)
—
(183)
(1,469)
378
590
693
4
—
171
1,458
(457)
(852)
(58)
(192)
(1,559)
(101)
The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary as of
December 31, 2016 and 2015, 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, 2016 and 2015. 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
37
procedures and are based on clear and unambiguous tax law. Tax returns for all years 2013 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. 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:
Commitments to extend credit
Standby letters of credit
$
$
Contract amounts at
December 31,
2016
67,898
6,595
2015
73,122
3,677
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, 2016 the Company had $2,647 in
outstanding mortgage rate lock commitments and $265 in outstanding mortgage rate lock commitments as of
December 31, 2015.
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, 2016 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.
38
(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
2017
2018
2019
2020
2021
Thereafter
Total
Payments
$201
156
152
161
164
1,125
$1,959
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 $152 annually.
(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, 2016 and 2015, dividends from the subsidiary Bank totaled $1,017 and
$992, 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
39
retained net profits for the two preceding years. As of December 31, 2016, retained net profits of the Bank
that were free of such restriction approximated $6,220
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 1or “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, 2016 and December 31, 2015 are listed on the following page:
Regulatory Capital Ratios as of December 31, 2016
Bankshares consolidated
Bank
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)
Amount
$40,854
$37,882
$37,882
$37,882
Ratio
11.68%
10.83%
10.83%
8.94%
Amount
$40,690
$37,719
$37,719
$37,719
Ratio
11.67%
10.81%
10.81%
8.96%
Regulatory Capital Ratios as of December 31, 2015
Bankshares consolidated
Bank
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)
Amount
$38,440
$35,475
$35,475
$35,475
Ratio
12.32%
11.37%
11.37%
9.68%
Amount Ratio
$38,602
$35,637
$35,637
$35,637
12.41%
11.45%
11.45%
9.75%
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 1capital 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, 2016, 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.
40
(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.
(a) 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.
(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.
(f) 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, 2016 and 2015, 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.
41
(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 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, 2016,
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, 2016 and
December 31, 2015, 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 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 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, 2016 and December 31, 2015, 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.
42
The following tables present information about certain assets and liabilities measured at fair value:
Fair Value Measurements on December 31, 2016
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
$23,842
$23,842
$1,116
$1,116
$642
$642
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
$-
$-
$-
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$23,842
$-
$-
$-
$1,116
$642
Fair Value Measurements on December 31, 2015
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)
$22,075
$22,075
$2,856
$2,856
$1,733
$1,733
$-
$-
$-
$22,075
$-
$-
$-
$2,856
$1,733
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
The following table sets forth a summary of changes in the fair value of the Company’s nonrecurring
Level 3 assets for the year ended December 31, 2016:
Level 3 Assets
Year Ended December 31, 2016
Impaired
Loans
$
2,856
Other Real
Estate Owned
1,733
(1,740)
1,116
$
(1,091)
642
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
There were no transfers between Level 1 and Level 2 investments during the year ended December 31,
2016.
43
The following table sets forth a summary of changes in the fair value of the Company’s nonrecurring
Level 3 assets for the year ended December 31, 2015:
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
Level 3 Assets
Year Ended December 31, 2015
Impaired
Loans
$
4,284
Other Real
Estate Owned
1,107
(1,428)
2,856
$
626
1,733
There were no transfers between Level 1 and Level 3 investments during the year ended December 31,
2015.
(14) Parent Company Financial Information
Condensed financial information of Bankshares (“Parent”) is presented below:
Condensed Balance Sheets
Assets
Cash due from subsidiary
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 1,522,351 shares
in 2016 and 1,520,221 in 2015
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders' equity
$
Total liabilities and stockholders' equity $
$
December 31,
2016
2015
18
36,386
987
37,391
801
41
842
4,506
1,050
32,865
(1,872)
36,549
37,391
22
34,946
929
35,897
1,091
24
1,115
4,508
1,065
30,442
(1,233)
34,782
35,897
44
Condensed Statements of Income
Income:
Dividends from subsidiary
Equity in undistributed net income of subsidiary
Total Income
Expenses:
Other expenses
Income before income tax benefit
Applicable income tax benefit
Net income
Years ended December 31,
2016
2015
$
$
1,017
2,096
3,113
166
2,947
57
3,004
992
1,874
2,866
191
2,675
65
2,740
Condensed Statements of Cash Flows
Years ended December 31,
2016
2015
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
$
3,004
2,740
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 (decrease) increase in cash due from subsidiary
Cash due from subsidiary, beginning of year
Cash due from subsidiary, end of year
(2,096)
(58)
850
(581)
(290)
17
(854)
(4)
22
18
(1,874)
(64)
802
(517)
(278)
(1)
(796)
6
16
22
$
(15) Stock-based Compensation
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.
At December 31, 2016, options for 16,500 shares were exercisable at an exercise price of $9.00 per share
and options for 10,250 shares were exercisable at an exercise price of $15.70 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
45
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, 2016, there were 115,724 shares available for grant under
the 2014 Plan.
On May 1, 2016, 8,500 shares of restricted stock were granted to employees pursuant to 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
restricted stock grants will vest on the third anniversary of the grant date.
On January 10, 2017, 3,998 shares of restricted stock were granted to the Company’s Directors in lieu of
cash for 2016 director fees. On January 12, 2016, 3,818 shares of restricted stock were granted to the
Company’s Directors in lieu of cash for 2015 director fees. On January 13, 2015, 3,310 shares of restricted
stock were granted to the Company’s Directors as payment in lieu of cash for 2014 director fees.
At December 31, 2016, no options for shares were exercisable under the 2014 Plan.
The Company expensed $0 in 2016 and 2015 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
$20 in compensation expense related to 10,250 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 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%, a
risk-free interest rate of 2.69%, and expected lives of 9 years.
The Company expensed $154 in 2016 in compensation expense as a direct result of the granting of 11,000
shares of restricted stock to employees in 2012, 10,000 shares of restricted stock to employees in 2013, 8,400
shares of restricted stock to employees in 2014, 6,250 shares of restricted stock to employees in 2015 and
8,500 shares of restricted stock to employees in 2016 and will recognize $108 in 2017, $66 in 2018 and $18
in 2019 on such restricted stock.
Stock option activity during the years ended December 31, 2016 and 2015 is as follows:
Number Weighted
Average
Exercise
Price
of
Shares
Balance as of December 31, 2014
Forfeited
Exercised
Granted
Balance as of December 31, 2015
Forfeited
Exercised
Granted
Balance as of December 31, 2016
58,250
375
15,000
0
42,875
1,000
5,000
0
37,000
$11.70
15.70
9.00
-
12.61
15.70
11.01
-
$12.71
46
The following table summarizes information about stock options outstanding as of December 31, 2016:
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining Weighted-
Contractual
Life
(in years)
Average
Exercise
Price
Number
Outstanding
at 12/31/16
Number
Exercisable at
12/31/2016
Weighted-
Average
Exercise
Price
16,500
20,500
4.4
7.1
$
9.00
15.70
16,500
10,250
$
9.00
15.70
Exercise
Price
$
9.00
15.70
The following table summarizes information about stock options outstanding at December 31, 2015:
Options Outstanding
Weighted-
Average
Remaining Weighted-
Average
Contractual
Exercise
Life
Price
(in years)
Number
Outstanding
at 12/31/15
Options Exercisable
Number
Exercisable at
12/31/2015
Weighted-
Average
Exercise
Price
19,750
23,125
5.4
8.1
$
9.00
15.70
19,750
5,750
$
9.00
15.70
Exercise
Price
$
9.00
15.70
The aggregate intrinsic value of options outstanding was $598, of options exercisable was $463, and of
options unvested and expected to vest was $135 as of December 31, 2016. 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 total intrinsic value (market value on date of exercise less exercise
price) of options exercised was $41 for the year ended December 31, 2016 and $127 for the year ended
December 31, 2015.
(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, December 8, 2015 and June 14, 2016. Purchases are made, as
conditions warrant, from time to time in the open market. The current resolution expired on December 31,
2016. As of December 31, 2016, the Company repurchased 22,647 shares of its common stock under the
stock repurchase program and expensed $420 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, 2016 consolidated financial statements through March 3, 2017, the date the consolidated financial
statements were available to be issued.
47
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, 2016. 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, 2016, 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.
48
Report of Independent Auditor
To the Board of Directors and Stockholders
of Pinnacle Bankshares Corporation
Altavista, Virginia
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, 2016 and 2015, 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, 2016 and 2015, 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.
Raleigh, North Carolina
March 2, 2017
49
Shareholder Information
PERFORMANCE GRAPH
The graph below compares total returns assuming reinvestment of dividends of Pinnacle Bankshares Corporation
Common Stock, the NASDAQ Market Index, and S&P 500 and the SNL U.S. Bank Index. The graph assumes
$100 invested on January 1, 2011 in Pinnacle Bankshares Corporation Common Stock and in each of the indices.
Pinnacle Bankshares Corporation
Index
Pinnacle Bankshares Corporation
NASDAQ Market Index
S&P 500
SNL U.S. Bank Index
12/31/11
100.00
100.00
100.00
100.00
12/31/12
102.44
117.45
116.00
134.95
12/31/13
189.51
164.57
153.57
185.28
12/31/14
227.50
188.84
174.60
207.12
12/31/15
256.63
201.98
177.01
210.65
12/31/16
383.35
219.89
198.18
266.16
50
Annual Meeting
Shareholder Information
The 2017 Annual Meeting of Shareholders will be held on April 11, 2017, 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
2016
Low Dividends
High
2015
Low
Dividends
First Quarter
$20.00
$18.30
$0.09
$17.82
$17.51
$0.085
Second Quarter
$20.75
$18.60
$0.09
$17.70
$17.41
$0.085
Third Quarter
$20.44
$18.85
$0.10
$17.99
$17.41
$0.085
Fourth Quarter
$28.88
$19.90
$0.10
$19.70
$17.65
$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 2016 and 2015 and is not expected to have a material impact
during 2017.
As of March 1, 2017, there were approximately 299 shareholders of record of Bankshares’ Common Stock.
Requests for Information
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
51
B R A N C H L O C AT I O N S
New Old Forest Road Branch
Opened July 6, 2016
Timberlake Road Branch – Renovation & Expansion
Re-Opened May 12, 2016
622 Broad Street • Post Office Box 29 • Altavista, Virginia 24517 • (434) 369-3000
2016 ANN UAL REPORT